<PAGE> 1
Registration No. 811-2753
Registration No. 2-59353
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Post-Effective Amendment No. 34
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Post-Effective Amendment No. 34
(Check appropriate box or boxes)
SBL FUND
(Exact Name of Registrant as Specified in Charter)
700 HARRISON STREET, TOPEKA, KANSAS 66636-0001
(Address of Principal Executive Offices/Zip Code)
Registrant's Telephone Number, including area code:
(785) 431-3127
Copies To:
John D. Cleland, President
SBL Fund Amy J. Lee, Secretary
700 Harrison Street SBL Fund
Topeka, KS 66636-0001 700 Harrison Street
(Name and address of Agent for Service) Topeka, KS 66636-0001
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 15, 1997, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on October 15, 1997, pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on October 15, 1997, pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
--------------------
Pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940, the
Registrant has elected to register an indefinite number of its shares of Common
Stock. The Registrant filed the Notice required by 24f-2 on February 28, 1997.
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SBL FUND
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Caption
- ----------- -------
Part A PROSPECTUS
- ------ ----------
<S> <C>
1. Cover Page
2. Table of Contents
2a. Not Applicable
3. Financial Highlights; Performance Information
4. Investment Objectives and Policies of the Series
5. Management of the Fund; Portfolio Management;
Custodian, Transfer Agent and Dividend-Paying
Agent
6. General Information; Organization;
Contractowner Inquiries; Distributions and
Federal Income Tax Considerations; Foreign
Taxes
7. Sale and Redemption of Shares; Determination of
Net Asset Value; Trading Practices and
Brokerage
8. Sale and Redemption of Shares
9. Not Applicable
This Post-Effective Amendment No. 34 ("the
Amendment") to the Registrant's Registration
Statement on Form N-1A (File Nos. 2-59353 and
811-2753) is being filed solely for the purpose
of updating the financial statements of Series
V of the Registrant in accordance with the
undertaking filed as part of the Series'
initial Registration Statement. As a result,
the Amendment does not affect the Registrant's
currently effective prospectus for Series A, B,
C, D, E, J, K, M, N, O, and S, which prospectus
is hereby incorporated by reference as most
recently filed pursuant to Rule 497 under the
Securities Act of 1933, as amended.
<CAPTION>
Part B STATEMENT OF ADDITIONAL INFORMATION
- ------ -----------------------------------
<S> <C>
10. Cover Page
11. Table of Contents
12. What is SBL Fund?
13. Investment Objectives and Policies of the
Series; Investment Policy Limitations
14. Officers and Directors; Ownership and Management
15. Remuneration of Directors and Others
16. Investment Management; Portfolio Management;
Custodian, Transfer Agent and Dividend-Paying
Agent
17. Portfolio Transactions; Portfolio Turnover
</TABLE>
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<TABLE>
<CAPTION>
Part B (Continued) STATEMENT OF ADDITIONAL INFORMATION
- ------------------ -----------------------------------
<S> <C>
18. Capital Stock and Voting
19. Sale and Redemption of Shares; Determination of
Net Asset Value
20. Distributions and Federal Income Tax
Considerations; Foreign Taxation
21. Not Applicable
22. Performance Information
23. Financial Statements; Independent Auditors
</TABLE>
<PAGE> 4
SBL FUND
Member of the Security Benefit Group of Companies
700 Harrison, Topeka, Kansas 66636-0001
PROSPECTUS
OCTOBER 15, 1997
SBL Fund (the "Fund") is an open-end, diversified series management
investment company offering portfolios with different investment objectives and
strategies.
SERIES A (GROWTH SERIES) seeks long-term capital growth by investing in a
broadly-diversified portfolio of common stocks, securities convertible into
common stocks, preferred stocks and bonds and other debt securities.
SERIES B (GROWTH-INCOME SERIES) seeks long-term growth of capital with
secondary emphasis on income. Series B seeks these objectives by investing in
various types of securities, including common stocks, convertible securities,
preferred stocks and debt securities which may include higher yielding, higher
risk securities ordinarily characteristic of securities in the lower rating
categories of the recognized rating services.
SERIES C (MONEY MARKET SERIES) seeks as high a level of current income as
is consistent with preservation of capital by investing in money market
securities with varying maturities.
SERIES D (WORLDWIDE EQUITY SERIES) seeks long-term growth of capital
primarily through investment in common stocks and equivalents of companies
domiciled in foreign countries and the United States.
SERIES E (HIGH GRADE INCOME SERIES) seeks to provide current income with
security of principal by investing in a broad range of debt securities,
including U.S. and foreign corporate debt securities and securities issued by
U.S. and foreign governments.
SERIES J (EMERGING GROWTH SERIES) seeks capital appreciation by investing
in a diversified portfolio of securities which may include common stocks,
preferred stocks, debt securities and securities convertible into common
stocks.
SERIES K (GLOBAL AGGRESSIVE BOND SERIES) seeks high current income and, as
a secondary objective, capital appreciation by investing in a combination of
foreign and domestic high-yield, lower rated debt securities (commonly known as
"junk bonds").
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) seeks high total return,
consisting of capital appreciation and current income. The Series seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors, including
equity and debt securities of domestic and foreign issuers.
SERIES N (MANAGED ASSET ALLOCATION SERIES) seeks a high level of total
return by investing primarily in a diversified portfolio of debt and equity
securities.
SERIES O (EQUITY INCOME SERIES) seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend-paying
common stocks of established companies.
SERIES P (HIGH YIELD SERIES) seeks high current income and as a secondary
objective, capital appreciation by investing in a combination of domestic and
foreign high-yield, lower rated debt securities (commonly known as "junk
bonds").
SERIES S (SOCIAL AWARENESS SERIES) seeks capital appreciation by investing
in various types of securities, including common stocks, convertible
securities, preferred stocks and debt securities that meet certain social
criteria established for the Series.
SERIES V (VALUE SERIES) seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks, securities convertible
into common stocks, preferred stocks, and warrants which the Investment Manager
believes are undervalued.
SERIES X (SMALL CAP SERIES) seeks long-term growth of capital by investing
primarily in domestic and foreign equity securities of small capitalization
companies (defined as companies with a market capitalization of less than $1
billion at the time of purchase).
AN INVESTMENT IN THE FUND, INCLUDING AN INVESTMENT IN SERIES C, IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. IN ADDITION TO OTHER RISKS, THE
HIGH YIELD, HIGH RISK BONDS IN WHICH SERIES B, SERIES K, SERIES N, SERIES O,
SERIES P AND SERIES X MAY INVEST ARE SUBJECT TO GREATER FLUCTUATIONS IN VALUE
AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE ISSUER THAN ARE
LOWER YIELDING, HIGHER RATED BONDS.
The Fund's shares are sold to Security Benefit Life Insurance Company
("SBL") for allocation to one or more separate accounts established for funding
variable life insurance policies and variable annuity contracts issued by SBL.
This Prospectus sets forth concisely the information that a prospective
investor should know about SBL Fund. It should be read and retained for future
reference. A Statement of Additional Information about the Fund, dated October
15, 1997, has been filed with the Securities and Exchange Commission. The
Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference in this Prospectus. It is available at no
charge by writing Security Distributors, Inc., 700 Harrison Street, Topeka,
Kansas 66636-0001, or by calling (785) 431-3127 or (800) 888-2461.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS
NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY ANY BANK. THE FUND IS NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
1
<PAGE> 5
SBL FUND CONTENTS
Page
Financial Highlights ....................................................... 3
SBL Fund ................................................................... 6
Investment Objectives and Policies of the Series ........................... 6
Series A (Growth Series) .............................................. 6
Series B (Growth-Income Series) ....................................... 6
Series C (Money Market Series) ........................................ 7
Series D (Worldwide Equity Series) .................................... 8
Series E (High Grade Income Series) ................................... 9
Series J (Emerging Growth Series) ..................................... 10
Series K (Global Aggressive Bond Series) .............................. 11
Series M (Specialized Asset Allocation Series) ........................ 13
Series N (Managed Asset Allocation Series) ............................ 14
Series O (Equity Income Series) ....................................... 17
Series P (High Yield Series) .......................................... 18
Series S (Social Awareness Series) .................................... 19
Series V (Value Series) ............................................... 20
Series X (Small Cap Series) ........................................... 21
Investment Methods and Risk Factors ........................................ 22
Management of the Fund ..................................................... 34
Portfolio Management ....................................................... 35
Sale and Redemption of Shares .............................................. 37
Distributions and Federal Income Tax Considerations ........................ 38
Foreign Taxes .............................................................. 38
Determination of Net Asset Value ........................................... 38
Trading Practices and Brokerage ............................................ 39
Performance Information .................................................... 39
General Information ........................................................ 40
Organization .......................................................... 40
Custodian, Transfer Agent and Dividend-Paying Agent ................... 40
Contractowner Inquiries ............................................... 40
2
<PAGE> 6
SBL FUND
FINANCIAL HIGHLIGHTS
The following financial highlights for each of the years presented, except
the six-month period ended June 30, 1997 and the four-month period ended August
31, 1997 for Series V, have been audited by Ernst & Young LLP. Such information
for each of the five years in the period ended December 31, 1996, should be
read in conjunction with the financial statements of the Fund and the report of
Ernst & Young LLP, the Fund's independent auditors, appearing in the December
31, 1996 Annual Report which is incorporated by reference in this Prospectus.
The Fund's Annual Report also contains additional information about the
performance of the Fund and may be obtained without charge by calling Security
Distributors, Inc. at 1-800-888-2461. The information for each of the years
preceding and including the period ended December 31, 1991, the six-month
period ended June 30, 1997, and the four-month period ended August 31, 1997, is
not covered by the report of Ernst & Young LLP.
<TABLE>
<CAPTION>
NET TOTAL
ASSET NET NET GAIN FROM DIVIDENDS DISTRI-
FISCAL VALUE INVEST- (LOSS) ON INVEST- (FROM NET BUTIONS
YEAR BEGIN- MENT SECURITIES MENT INVEST- (FROM RETURN TOTAL
ENDED NING OF INCOME (REALIZED & OPERA- MENT CAPITAL OF DISTRI-
DEC. 31 PERIOD (LOSS) UNREALIZED) TIONS INCOME) GAINS) CAPITAL BUTIONS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SERIES A
1987(a) $12.73 $0.29 $0.711 $1.001 $(0.458) $(2.083) $--- $(2.541)
1988 11.19 0.36 0.776 1.136 --- (0.006) --- (0.006)
1989 12.32 0.40 3.90 4.30 (0.37) --- --- (0.37)
1990 16.25 0.30 (1.95) (1.65) (0.64) (1.06) --- (1.70)
1991 12.90 0.29 4.34 4.63 (0.27) --- --- (0.27)
1992 17.26 0.23 1.615 1.845 (0.242) (0.533) --- (0.775)
1993 18.33 0.39 2.076 2.466 (0.224) (0.752) --- (0.976)
1994 19.82 0.20 (0.442) (0.242) (0.38) (3.198) --- (3.578)
1995(i) 16.00 0.18 5.648 5.828 (0.153) (0.645) --- (0.798)
1996(i) 21.03 0.18 4.495 4.675 (0.194) (1.201) --- (1.395)
1997(k) 24.31 0.09 3.99 4.08 --- --- --- ---
SERIES B
1987(a) $16.45 $0.63 $0.08 $0.71 $(0.937) $(0.513) $--- $(1.45)
1988 15.71 1.14 1.888 3.028 --- (0.008) --- (0.008)
1989 18.73 0.65 4.61 5.26 (1.03) (0.51) --- (1.54)
1990 22.45 0.70 (1.70) (1.00) (0.67) (0.57) --- (1.24)
1991 20.21 0.58 6.953 7.533 (0.66) (0.233) --- (0.893)
1992 26.85 0.65 0.999 1.649 (0.583) (0.156) --- (0.739)
1993 27.76 0.64 2.009 2.649 (0.679) --- --- (0.679)
1994 29.73 0.51 (1.34) (0.83) (0.680) (1.68) --- (2.36)
1995(i) 26.54 0.79 7.16 7.95 (0.540) --- --- (0.540)
1996(i) 33.95 0.83 5.16 5.99 (0.778) (3.762) --- (4.54)
1997(k) 35.40 0.41 5.06 5.47 --- --- --- ---
SERIES C
1987(a) $12.08 $0.76 $ --- $0.76 $(1.43) $--- $--- $(1.43)
1988 11.41 0.822 --- 0.822 (0.002) --- --- (0.002)
1989(a) 12.23 1.09 --- 1.09 (0.53) --- --- (0.53)
1990(a) 12.79 1.00 --- 1.00 (1.05) --- --- (1.05)
1991(a) 12.74 0.69 0.01 0.70 (0.92) --- --- (0.92)
1992 12.52 0.43 (0.03) 0.40 (0.71) --- --- (0.71)
1993 12.21 0.29 0.027 0.317 (0.437) --- --- (0.437)
1994 12.09 0.41 0.035 0.445 (0.265) --- --- (0.265)
1995(i) 12.27 0.74 (0.085) 0.655 (0.585) --- --- (0.585)
1996(a)(i) 12.34 0.61 0.01 0.62 (0.40) --- --- (0.40)
1997(k) 12.56 0.316 0.004 0.32 --- --- --- ---
SERIES D
1987(a) $11.62 $1.41 $(2.012) $(0.692) $(2.888) $--- $--- $(2.888)
1988 8.13 1.22 (0.82) 0.40 --- --- --- ---
1989 8.53 1.14 (1.81) (0.67) (1.33) --- --- (1.33)
1990 6.53 1.00 (2.30) (1.30) (1.26) --- --- (1.26)
1991(a)(b) 3.97 0.15 0.34 0.49 (0.55) --- --- (0.55)
1992(a) 3.91 0.02 (0.122) (0.102) (0.048) --- --- (0.048)
1993(a) 3.76 0.02 1.166 1.186 (0.006) --- --- (0.006)
1994(a) 4.94 0.02 1.115 0.135 (0.005) --- --- (0.005)
1995 5.07 0.05 0.4989 0.5489 (0.0009) (0.058) --- (0.0589)
1996 5.56 0.03 0.93 0.96 (0.20) (0.18) --- (0.38)
1997(k) 6.14 0.04 0.74 0.78 --- --- --- ---
<CAPTION>
RATIO AVERAGE
NET RATIO OF OF NET COMMISSION
FISCAL ASSET NET ASSETS EXPENSES INCOME PAID PER
YEAR VALUE TOTAL END OF TO (LOSS) TO PORTFOLIO INVESTMENT
ENDED END OF RETURN PERIOD AVERAGE AVERAGE TURNOVER SECURITY
DEC. 31 PERIOD (d) (THOUSANDS) NET ASSETS NET ASSETS RATE TRADED(j)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SERIES A
1987(a) $11.19 6.2% $ 127,627 0.64% 1.94% 249% $ N/A
1988 12.32 10.2% 113,111 0.66% 2.47% 211% N/A
1989 16.25 35.9% 144,576 0.79% 2.34% 113% N/A
1990 12.90 (9.8%) 165,554 0.85% 2.31% 98% N/A
1991 17.26 36.1% 235,115 0.87% 1.97% 95% N/A
1992 18.33 11.1% 296,548 0.86% 1.46% 77% N/A
1993 19.82 13.7% 317,407 0.86% 2.01% 108% N/A
1994 16.00 (1.7%) 332,288 0.84% 1.13% 90% N/A
1995(i) 21.03 36.8% 519,891 0.83% 1.13% 83% N/A
1996(i) 24.31 22.7% 714,591 0.83% 0.90% 57% 0.0598
1997(k) 28.39 16.8% 841,910 0.81% 0.71% 69% 0.0600
SERIES B
1987(a) $15.71 3.6% $ 84,601 0.62% 3.31% 28% $ N/A
1988 18.73 19.3% 106,620 0.64% 6.50% 33% N/A
1989 22.45 28.4% 163,155 0.79% 4.03% 52% N/A
1990 20.21 (4.4%) 197,472 0.87% 4.32% 62% N/A
1991 26.85 37.7% 348,969 0.86% 3.39% 62% N/A
1992 27.76 6.3% 467,208 0.86% 3.22% 56% N/A
1993 29.73 9.6% 583,599 0.86% 2.63% 95% N/A
1994 26.54 (3.0%) 595,154 0.84% 2.07% 43% N/A
1995(i) 33.95 30.1% 795,113 0.83% 2.70% 94% N/A
1996(i) 35.40 18.3% 956,586 0.84% 2.56% 58% 0.0602
1997(k) 40.87 15.5% 1,097,414 0.83% 2.19% 54% 0.0600
SERIES C
1987(a) $11.41 6.4% $ 44,463 0.66% 6.37% --- $ N/A
1988 12.23 7.2% 82,904 0.65% 7.17% --- N/A
1989(a) 12.79 9.0% 94,560 0.63% 8.58% --- N/A
1990(a) 12.74 8.0% 73,599 0.60% 7.66% --- N/A
1991(a) 12.52 5.6% 86,610 0.61% 5.42% --- N/A
1992 12.21 3.2% 87,246 0.61% 3.19% --- N/A
1993 12.09 2.6% 99,092 0.61% 2.65% --- N/A
1994 12.27 3.7% 118,668 0.61% 3.70% --- N/A
1995(i) 12.34 5.4% 105,436 0.60% 5.27% --- N/A
1996(a)(i) 12.56 5.1% 128,672 0.58% 4.89% --- N/A
1997(k) 12.88 2.5% 138,376 0.58% 5.00% --- N/A
SERIES D
1987(a) $ 8.13 (5.9%) $ 12,651 0.77% 12.71% 111% $ N/A
1988 8.53 4.9% 12,310 0.67% 13.27% 108% N/A
1989 6.53 (8.9%) 10,270 0.80% 13.97% 111% N/A
1990 3.97 (22.7%) 5,522 0.93% 14.11% 96% N/A
1991(a)(b) 3.91 12.7% 11,688 1.58% 3.95% 113% N/A
1992(a) 3.76 (2.6%) 25,183 1.62% 0.50% 81% N/A
1993(a) 4.94 31.6% 98,252 1.42% 0.38% 70% N/A
1994(a) 5.07 2.7% 147,033 1.34% 0.50% 82% N/A
1995 5.56 10.9% 177,781 1.31% 0.90% 169% N/A
1996 6.14 17.5% 247,026 1.30% 0.74% 115% 0.0276
1997(k) 6.92 12.7% 303,379 1.24% 1.50% 141% 0.0100
</TABLE>
3
<PAGE> 7
<TABLE>
<CAPTION>
NET TOTAL
ASSET NET NET GAIN FROM DIVIDENDS DISTRI-
FISCAL VALUE INVEST- (LOSS) ON INVEST- (FROM NET BUTIONS
YEAR BEGIN- MENT SECURITIES MENT INVEST- (FROM RETURN TOTAL
ENDED NING OF INCOME (REALIZED & OPERA- MENT CAPITAL OF DISTRI-
DEC. 31 PERIOD (LOSS) UNREALIZED) TIONS INCOME) GAINS) CAPITAL BUTIONS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SERIES E
1987(a) $11.87 $ 0.93 $(0.658) $ 0.272 $(1.662) $ --- $ --- $(1.662)
1988 10.48 1.02 (0.26) 0.76 --- --- --- ---
1989 11.24 0.73 0.59 1.32 (0.91) --- --- (0.91)
1990 11.65 0.82 (0.07) 0.75 (0.73) --- --- (0.73)
1991 11.67 0.76 1.17 1.93 (0.78) --- --- (0.78)
1992 12.82 0.78 0.168 0.948 (0.748) --- --- (0.748)
1993 13.02 0.64 1.02 1.66 (0.79) (0.11) --- (0.90)
1994 13.78 0.76 (1.713) (0.953) (0.69) (0.617) --- (1.307)
1995(i) 11.52 0.74 1.36 2.10 (0.76) --- --- (0.76)
1996(i) 12.86 0.75 (0.853) (0.103) (0.757) --- --- (0.757)
1997(k) 12.00 0.55 (0.22) 0.33 --- --- --- ---
SERIES J
1992(c) $10.00 $ 0.01 $ 2.46 $ 2.47 $ --- $ --- $ --- $ ---
1993 12.47 (0.01) 1.711 1.701 (0.001) --- --- (0.001)
1994 14.17 (0.01) (0.713) (0.723) --- (0.007) --- (0.007)
1995(i) 13.44 0.04 2.58 2.62 --- --- --- ---
1996(i) 16.06 (0.04) 2.93 2.89 (0.029) (0.671) --- (0.700)
1997(k) 18.25 (0.02) 1.11 1.09 --- --- --- ---
SERIES S
1991(c) $10.00 $ 0.05 $ 0.50 $ 0.55 $ --- $ --- $ --- $ ---
1992(a) 10.55 0.03 1.691 1.721 (0.021) --- --- (0.021)
1993 12.25 0.02 1.432 1.452 (0.012) --- --- (0.012)
1994 13.69 0.08 (0.595) (0.515) (0.02) (0.185) --- (0.205)
1995(i) 12.97 0.09 3.507 3.597 (0.077) --- --- (0.077)
1996(i) 16.49 0.03 3.073 3.103 (0.083) (0.43) --- (0.513)
1997(k) 19.08 0.10 2.000 2.100 --- --- --- ---
SERIES K
1995(a)(e)(h) $10.00 $ 0.54 $ 0.22 $ 0.76 $(0.466) $(0.044) $(0.03) $(0.540)
1996(h) 10.22 0.90 0.50 1.40 (0.77) (0.13) --- (0.90)
1997(h)(k) 10.72 0.48 (0.22) 0.26 --- --- --- ---
SERIES M
1995(a)(e) $10.00 $ 0.169 $ 0.541 $ 0.71 $ --- $ --- $ --- $ ---
1996 10.71 0.150 1.364 1.514 (0.119) (0.055) --- (.174)
1997(k) 12.05 0.09 0.80 0.89 --- --- --- ---
SERIES N
1995(a)(e) $10.00 $ 0.156 $ 0.574 $ 0.73 $ --- $ --- $ --- $ ---
1996 10.73 0.193 1.175 1.368 (0.065) (0.013) --- (0.078)
1997(k) 12.02 0.150 1.250 1.400 --- --- --- ---
SERIES O
1995(a)(e) $10.00 $ 0.166 $ 1.534 $ 1.70 $ --- $ --- $ --- $ ---
1996 11.70 0.169 2.173 2.342 (0.03) (0.002) --- (0.032)
1997(k) 14.01 0.08 1.95 2.03 --- --- --- ---
SERIES P
1996(a)(f)(h) $15.00 $ 0.51 $ 0.48 $ 0.99 $ --- $ --- $ --- $ ---
1997(h)(k) 15.99 0.714 0.276 0.99 --- --- --- ---
SERIES V
1997(a)(g)(h)(m) $10.00 $ 0.044 $ 2.346 $ 2.390 --- --- --- ---
<CAPTION>
RATIO AVERAGE
NET RATIO OF OF NET COMMISSION
FISCAL ASSET NET ASSETS EXPENSES INCOME PAID PER
YEAR VALUE TOTAL END OF TO (LOSS) TO PORTFOLIO INVESTMENT
ENDED END OF RETURN PERIOD AVERAGE AVERAGE TURNOVER SECURITY
DEC. 31 PERIOD (d) (THOUSANDS) NET ASSETS NET ASSETS RATE TRADED(j)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SERIES E
1987(a) $10.48 2.4% $ 22,025 0.75% 7.86% 138% $ N/A
1988 11.24 7.3% 23,338 0.65% 9.17% 68% N/A
1989 11.65 11.9% 34,811 0.78% 9.00% 56% N/A
1990 11.67 6.7% 43,908 0.85% 8.83% 28% N/A
1991 12.82 17.0% 63,602 0.86% 8.24% 24% N/A
1992 13.02 7.4% 81,440 0.86% 7.41% 76% N/A
1993 13.78 12.6% 112,900 0.86% 6.21% 151% N/A
1994 11.52 (6.9%) 107,078 0.85% 6.74% 185% N/A
1995(i) 12.86 18.6% 125,652 0.85% 6.60% 180% N/A
1996(i) 12.00 (0.7%) 134,041 0.83% 6.77% 232% N/A
1997(k) 12.33 2.8% 119,934 0.83% 6.90% 151% N/A
SERIES J
1992(c) $12.47 24.7% $ 7,113 1.06% 0.22% 4% $ N/A
1993 14.17 13.6% 42,096 0.91% (0.14%) 117% N/A
1994 13.44 (5.1%) 76,940 0.88% (0.11%) 91% N/A
1995(i) 16.06 19.5% 93,379 0.84% 0.26% 202% N/A
1996(i) 18.25 18.0% 148,421 0.84% (0.21%) 123% 0.0601
1997(k) 19.34 6.0% 202,220 0.82% (0.05%) 79% 0.0600
SERIES S
1991(c) $10.55 5.5% $ 2,711 1.00% 1.49% 162% $ N/A
1992(a) 12.25 16.4% 9,653 0.92% 0.24% 110% N/A
1993 13.69 11.9% 19,490 0.90% 0.23% 105% N/A
1994 12.97 (3.7%) 24,539 0.90% 0.75% 67% N/A
1995(i) 16.49 27.7% 36,830 0.86% 0.75% 122% N/A
1996(i) 19.08 18.8% 57,497 0.84% 0.30% 67% 0.0602
1997(k) 21.18 11.0% 74,079 0.82% 0.48% 57% 0.0600
SERIES K
1995(a)(e)(h) $10.22 7.6% $ 5,678 1.63% 11.03% 127% $ N/A
1996(h) 10.72 13.7% 12,720 0.84% 10.79% 86% N/A
1997(h)(k) 10.98 2.4% 15,785 0.60% 9.56% 107% N/A
SERIES M
1995(a)(e) $10.71 7.1% $ 15,976 1.94% 3.2% 181% $ N/A
1996 12.05 14.2% 38,396 1.34% 2.73% 40% 0.0266
1997(k) 12.94 7.4% 47,680 1.27% 2.23% 123% 0.0452
SERIES N
1995(a)(e) $10.73 7.3% $ 10,580 1.90% 2.8% 26% $ N/A
1996 12.02 12.8% 23,345 1.45% 2.67% 41% 0.0393
1997(k) 13.42 11.7% 26,428 1.47% 2.77% 64% 0.0296
SERIES O
1995(a)(e) $11.70 17.0% $ 13,528 1.40% 3.0% 3% $ N/A
1996 14.01 20.0% 62,377 1.15% 2.62% 22% 0.0385
1997(k) 16.04 14.5% 105,087 1.09% 2.49% 49% 0.0314
SERIES P
1996(a)(f)(h) $15.99 6.6% $ 2,665 0.28% 8.24% 151% $ N/A
1997(h)(k) 10.98 6.2% 2,830 0.29% 8.78% 59% N/A
SERIES V
1997(a)(g)(h)(m) $12.39 23.9% $ 1,896 0.55% 1.21% 48% 0.06000
</TABLE>
(a) Net investment income per share has been calculated using the weighted
monthly average number of capital shares outstanding.
(b) Effective May 1, 1991, the investment objective of Series D was changed
from high current income to long-term capital growth through investment in
common stocks and equivalents of companies domiciled in foreign countries
and the United States.
(c) The dates of inception for Series J and S were October 1, 1992 and May 1,
1991 respectively. On these dates the respective Series commenced
operations each with a net asset value of $10 per share. Percentage
amounts for the initial periods of each series have been annualized,
except for total return.
(d) Total return information does not take into account (i) any sales charges
paid at the time of purchase, (ii) expenses of the separate account, or
(iii) expenses of the related variable annuity or variable life insurance
contract. Inclusion of these charges would reduce the total return
information for all periods shown.
(e) Series K, M, N and O were initially capitalized on June 1, 1995 with net
asset values of $10 per share. Percentage amounts for the period have been
annualized, except for total return.
4
<PAGE> 8
(f) Series P was initially capitalized on August 5, 1996 with a net asset
value of $15 per share. Percentage amounts for the period have been
annualized, except total return.
(g) Series V was initially capitalized on May 1, 1997 with a net asset value
of $10 per share. Percentage amounts for the period, except total return,
have been annualized.
(h) Fund expenses were reduced by the Investment Manager during the periods,
and expense ratios absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Series K 2.03% 1.59% 1.35%
Series P --- 1.11% 1.25%
Series V --- --- 1.30%
</TABLE>
(j) Expense ratios were calculated without the reduction for custodian fees
earnings credits beginning February 1, 1995. The following Series' expense
ratios were reduced as a result of such credits and would have been as
follows had such credits been included.
1995
-----
Series J 0.83%
Series S 0.84%
(j) Brokerage commissions paid on portfolio transactions increase the cost of
securities purchased or reduce the proceeds of securities sold and are not
reflected in the Fund's statement of operations. Shares traded on a
principal basis, such as most over-the-counter and fixed-income
transactions, pay a "spread" or "mark-up" rather than a commission and are
therefore excluded from this calculation. Generally, non-U.S. commissions
are lower than U.S. commissions when expressed as cents per share but
higher when expressed as a percentage of transactions because of the lower
per-share prices of many non-U.S. securities. Prior to 1996, average
commission information was not required to be disclosed.
(k) Unaudited figures for the six-month period ended June 30, 1997. Percentage
amounts for the period, except total return, have been annualized.
(m) Unaudited figures for the period May 1, 1997 (date of inception) to August
31, 1997.
5
<PAGE> 9
SBL FUND
SBL Fund (the "Fund"), a Kansas corporation, was organized on May 26,
1977, to serve as the investment vehicle for certain of Security Benefit Life
Insurance Company's ("SBL") variable annuity and variable life separate
accounts. Shares of the Fund will be sold to SBL for allocation to such
separate accounts established for the purpose of funding variable annuity and
variable life insurance contracts issued by SBL. The Fund reserves the right to
expand the class of persons eligible to purchase shares of any Series of the
Fund.
The Fund is subject to certain investment policy limitations which may not
be changed without stockholder approval. Among these limitations, the more
important ones are that the Fund will not, with respect to 75 percent of its
total assets, invest more than 5 percent of the value of its assets in any one
issuer other than the U.S. Government or its agencies or instrumentalities, or
purchase more than 10 percent of the outstanding voting securities of any
issuer. In addition, no Series will invest more than 25 percent of its total
assets in any one industry. The full text of the investment policy limitations
is set forth in the Fund's "Statement of Additional Information."
It is conceivable that in the future it may be disadvantageous for
variable life insurance separate accounts and variable annuity separate
accounts to invest in the Fund simultaneously. Although neither SBL nor SBL
Fund currently foresee any such disadvantages, either to variable life
insurance policyowners or to variable annuity contractowners, the Fund's Board
of Directors intends to monitor events in order to identify any material
conflicts between such policyowners and contractowners resulting from changes
in state insurance law, changes in federal income tax regulation, changes in
the investment management of any portfolio of the underlying fund, and the
differences between voting instructions given by policyowners and
contractowners. The Board will determine what action, if any, should be taken
in response to any such conflicts. If the Board of Directors were to conclude
that separate funds should be established for variable life and variable
annuity separate accounts, SBL would bear the attendant expenses, but variable
life insurance policyowners and variable annuity contractowners would no longer
have the economies of scale resulting from a larger combined fund.
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
The investment objective of each Series is described below. There are
risks inherent in the ownership of any security and there can be no assurance
that such investment objective will be achieved. Some of the risks involved are
described below and in the Statement of Additional Information. The investment
objective and policies of each Series may be modified at any time without
stockholder approval. However, each of the Series is subject to certain
investment policy limitations set forth in the Statement of Additional
Information, which may not be changed without stockholder approval. Each of the
Series may borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the Series' investment objective and policies. See the discussion of
borrowing under "Investment Methods and Risk Factors." Pending investment in
other securities or to meet potential redemptions or expenses, each Series may
invest in certificates of deposit issued by banks, bank demand accounts,
repurchase agreements and high quality money market instruments.
SERIES A (GROWTH SERIES)
The investment objective of Series A is to seek long-term capital growth
by investing in those securities which, in the opinion of the Investment
Manager, have the most long-term capital growth potential. Series A seeks to
achieve its objective by investing primarily in a broadly diversified portfolio
of common stocks (which may include American Depositary Receipts (ADRs)) or
securities with common stock characteristics, such as securities convertible
into common stocks. Series A may also invest in preferred stocks, bonds and
other debt securities. Income potential will be considered to the extent doing
so is consistent with Series A's investment objective of long-term capital
growth. Series A may invest its assets temporarily in cash and money market
instruments for defensive purposes. Series A may invest up to 5 percent of its
assets in warrants (other than those attached to other securities). Series A
invests for long-term growth of capital and does not intend to place emphasis
upon short-term trading profits. From time to time, Series A may purchase
securities on a "when issued" or "delayed delivery" basis. For a detailed
discussion of ADRs and the purchase of securities on a "when issued" or
"delayed delivery" basis, see "Investment Methods and Risk Factors."
SERIES B (GROWTH-INCOME SERIES)
The investment objective of Series B is long-term growth of capital with
secondary emphasis on income. Series B seeks to achieve this objective through
investment in a diversified portfolio which will ordinarily consist principally
of common stocks, which may include ADRs, but may also include other securities
when deemed advisable. Such other securities may include (i) securities
convertible into common stocks; (ii) preferred stocks; (iii) debt securities
issued by U.S. corporations; (iv) securities issued by the U.S.
- -------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the "Statement of Additional Information," in connection with
the offer contained in this Prospectus, and, if given or made, such other
information or representation must not be relied upon as having been authorized
by the Fund, the investment adviser, or the distributor.
6
<PAGE> 10
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (v) securities issued by
foreign governments, their agencies, and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars;
(vi) higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); and (vii) zero coupon securities. In the selection of securities for
investment, the potential for appreciation and future dividends is given more
weight than current dividends. From time to time, Series B may purchase
government bonds or commercial notes on a temporary basis for defensive
purposes.
With respect to Series B's investment in debt securities, there is no
percentage limitation on the amount of its assets that may be invested in
securities within any particular rating classification. See the Statement of
Additional Information for a description of corporate bond ratings. Series B
may invest in securities which are at the time of purchase rated Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation
("S&P"). In addition, Series B may invest in higher yielding, longer-term
fixed-income securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). These
include securities which are at the time of purchase rated Ba or lower by
Moody's or BB or lower by S&P. However, the Investment Manager will not rely
principally on the ratings assigned by the rating services. Because Series B
will invest in lower rated securities and unrated securities of comparable
quality, the achievement of the Series' investment objective may be more
dependent on the Investment Manager's own credit analysis than would be the
case if investing in higher rated securities.
For the year ended December 31, 1996, the dollar weighted average of
Series B's holdings (excluding equities) had the following credit quality
characteristics.
Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 0%
Cash and Other Assets, Less Liabilities ... 5.8%
Rated Fixed Income Securities
A...................................... 0%
Baa/BBB ............................... 0.5%
Ba/BB ................................. 10.8%
B...................................... 8.0%
Caa/CCC ............................... 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Ba/BB ................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
------
Total...................................... 25.1%
The above table is intended solely to provide disclosure about the Series'
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
As discussed above, Series B may invest in foreign debt securities that
are denominated in U.S. dollars. Such foreign debt securities may include debt
of foreign governments, including Brady Bonds, and debt of foreign
corporations. The Series expects to limit its investment in foreign debt
securities, excluding Canadian securities, to not more than 15 percent of its
total assets and its investment in debt securities of issuers in emerging
markets, excluding Brady Bonds, to not more than 5 percent of its net assets.
See the discussion of the risks associated with investing in foreign securities
and Brady Bonds under "Investment Methods and Risk Factors" -- "Emerging
Markets Risks," "Foreign Investment Risks" and "Brady Bonds."
For a detailed discussion of risks associated with high yield investing,
zero coupon securities and ADRs, respectively, see "Investment Methods and Risk
Factors" -- "Risks Associated with Investments in High-Yield Lower-Rated Debt
Securities," "zero coupon securities" and "American Depositary Receipts
(ADRs)." The Series may purchase securities that are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 10 percent of its total assets will be invested in illiquid
securities. See "Investment Methods and Risk Factors" -- "Restricted
Securities."
SERIES C (MONEY MARKET SERIES)
The investment objective of Series C is to seek as high a level of current
income as is consistent with preservation of capital, similar to the objective
associated with a "money market" fund or series. The Series will attempt to
achieve its objective by investing at least 95 percent of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments (e.g., instruments rated Aaa or Prime-1 by
Moody's or AAA or A-1 by S&P or unrated securities that are determined to be of
equivalent quality by the Investment Manager under procedures adopted by the
Fund's Board of Directors). Series C may also invest up to 5 percent of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations
(e.g., instruments rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). Series
C will purchase only securities that the Investment Manager determines present
minimal credit risk under procedures adopted by the Fund's Board of Directors
and that satisfy the quality requirements of Rule 2a-7 under the Investment
Company Act of 1940 (the "1940 Act"). The Series may invest in money market
instruments with varying maturities (but not longer than thirteen months),
consisting of obligations issued or guaranteed (as to principal or interest) by
the United States Government or its agencies (such as the Federal Housing
Administration and Government National
7
<PAGE> 11
Mortgage Association), or instrumentalities (such as Federal Home Loan Banks
and Federal Land Banks) (see the Statement of Additional Information for a
description of the differing levels of guarantees associated with these types
of securities) and instruments fully collateralized with such obligations such
as repurchase agreements; obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation, and instruments
fully collateralized with such obligations such as repurchase agreements (the
additional risks involved in such agreements are discussed under "Investment
Methods and Risk Factors"); or commercial paper issued by corporations or other
corporate debt instruments, subject to the limitations on investment in
instruments in the second-highest rating category, discussed above. The
Statement of Additional Information contains a description of commercial paper
and corporate bond ratings.
Series C may invest in instruments having rates of interest that are
adjusted periodically according to a specified market rate for such investments
("Variable Rate Instruments"). The interest rate on Variable Rate Instruments
is ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate or the 91-day U.S. Treasury Bill rate.
Generally, the changes in the interest rate on Variable Rate Instruments reduce
the fluctuation in the market value of such securities. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Series C determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
1940 Act which allows the Series to consider the maturity date of such
instruments to be the period remaining until the next readjustment of the
interest rate rather than the maturity date on the face of the instrument.
Certain of the securities purchased by Series C may be restricted as to
disposition under the federal securities laws provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933 and subject to the Series' policy that not
more than 10 percent of total assets will be invested in illiquid securities.
See the description of such securities under "Investment Methods and Risk
Factors" -- "Restricted Securities."
Investment in Series C involves minimal market risk and, to reduce the
effect of fluctuating interest rates on the net asset value of its shares,
Series C intends to maintain a dollar weighted average maturity in its
portfolio of not more than 90 days. In addition to general market risks, Series
C investments in non-government obligations are subject to the ability of the
issuer to satisfy its obligations. The Statement of Additional Information
contains a description of the principal types of securities and instruments in
which Series C will invest.
SERIES D (WORLDWIDE EQUITY SERIES)
The investment objective of Series D is to seek long-term growth of
capital primarily through investment in common stocks and equivalents of
companies domiciled in foreign countries and the United States. Series D will
seek to achieve its objective through investment in a diversified portfolio of
securities which will consist primarily of various types of common stocks and
equivalents (the following constitute equivalents: convertible debt
securities, warrants and options). The Series may also invest in preferred
stocks, bonds and other debt obligations, which include money market
instruments of foreign and domestic companies and the U.S. Government and
foreign governments, governmental agencies and international organizations.
Series D will at all times invest at least 65 percent or more of its
assets in at least three countries, one of which may be the United States. The
Series is not required to maintain any particular geographic or currency mix of
its investments, nor is it required to maintain any particular proportion of
stocks, bonds or other securities in its portfolio. Series D may invest
substantially or primarily in foreign debt securities when it appears that the
capital appreciation available from investments in such securities will equal
or exceed the capital appreciation available from investments in equity
securities. Because the market value of debt obligations can be expected to
vary inversely to changes in prevailing interest rates, investing in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline. When a defensive position is deemed advisable in
the judgment of the Series' Sub-Adviser, Lexington Management Corporation
("Lexington"), Series D may temporarily invest up to 100 percent of its assets
in debt obligations consisting of repurchase agreements, money market
instruments of foreign or domestic companies and the U.S. Government and
foreign governments, governmental and international organizations. The Series
will be moved into a defensive position when, in the judgment of Lexington,
conditions in the securities markets would make pursuing the Series' basic
investment strategy inconsistent with the best interests of the shareholders.
Series D is intended to provide investors with the opportunity to invest
in a portfolio of securities of companies and governments located throughout
the world. In making the allocation of assets among the various countries and
geographic regions, Lexington ordinarily considers such factors as prospects
for relative economic growth between the U.S and other countries; expected
levels of inflation and interest rates; government policies influencing
business conditions; the range of investment opportunities available to
international investors; and other pertinent financial, tax, social and
national factors--all in relation to the prevailing prices of the securities in
each country or region.
Investments may be made in companies based in (or governments of or
within) such areas and countries as Lexington may determine from time to time.
Series D may
8
<PAGE> 12
invest in companies located in developing countries without limitation. See the
discussion of risks associated with investment in securities of foreign issuers
under "Investment Methods and Risk Factors" -- "Currency Risk," "Foreign
Investment Risks" and "Emerging Markets Risks."
Although the Series does not intend to invest for the purpose of seeking
short-term profits, the Series' investments may be changed whenever Lexington
deems it appropriate to do so, without regard to the length of time a
particular security has been held. Series D may enter into forward foreign
currency exchange contracts and may purchase or sell foreign currencies on a
"spot" (i.e., cash) basis. Series D may enter into such forward contracts to
hedge certain of its portfolio positions when Lexington deems it appropriate to
limit or reduce exposure in a foreign currency in order to moderate potential
changes in the United States dollar value of the portfolio. The Series may also
enter into forward currency exchange contracts to increase its exposure to a
foreign currency that Lexington expects to increase in value relative to the
United States dollar. Series D will not attempt to hedge all of its portfolio
positions. Series D intends to limit portfolio hedging transactions to not more
than 70 percent of its total assets. See the discussion of "Forward Currency
Transactions" under "Investment Methods and Risk Factors."
Series D may from time to time employ or enter into the following
investment practices. Series D may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments"), because new issues of securities are typically offered to
investors on that basis. See the discussion of forward commitments under
"Investment Methods and Risk Factors." Series D may write covered call options.
Such an option on an underlying portfolio security would obligate the Series to
sell, and give the purchaser of the option the right to buy, that security at a
stated exercise price at any time until the stated expiration date of the
option. The Series may purchase securities that are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 10 percent of its total assets will be invested in illiquid
securities. See the discussion of restricted securities under "Investment
Methods and Risk Factors." The Series may enter into repurchase agreements
which are described under "Investment Methods and Risk Factors." Series D may
also invest in real estate investment trusts (REITs) which are described under
"Investment Methods and Risk Factors."
SERIES E (HIGH GRADE INCOME SERIES)
The investment objective of Series E is to provide current income with
security of principal. In pursuing its investment objective, the Series will
invest in a broad range of debt securities, including (i) securities issued by
U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued
or guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and
foreign corporations, provided that such securities are denominated in U.S.
dollars; (v) higher yielding, high risk debt securities (commonly referred to
as "junk bonds"); (vi) certificates of deposit issued by a U.S. branch of a
foreign bank ("Yankee CDs"); (vii) investment grade mortgage backed securities
("MBSs") and (viii) zero coupon securities. Under normal circumstances, the
Series will invest at least 65 percent of its assets in U.S. Government
securities and securities rated A or higher by Moody's or S&P at the time of
purchase, or if unrated, of equivalent quality as determined by the Investment
Manager.
Series E may invest in corporate debt securities rated Baa or higher by
Moody's or BBB or higher by S&P at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager. See Appendix A to
the Fund's Statement of Additional Information for a description of corporate
bond ratings. Included in such securities may be convertible bonds or bonds
with warrants attached which are rated at least Baa or BBB at the time of
purchase, or if unrated, of equivalent quality as determined by the Investment
Manager. A "convertible bond" is a bond, debenture or preferred share which may
be exchanged by the owner for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics.
Series E also may invest up to 25 percent of its net assets in higher
yielding debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). Such
securities include securities rated Ba or lower by Moody's or BB or lower by
S&P and are regarded as predominantly speculative with respect to the ability
of the issuer to meet principal and interest payments. The Series will not
invest in junk bonds which are rated in default at the time of purchase. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with investing in such securities.
U.S. Government securities are obligations of or guaranteed by the U.S.
Government, its agencies or instrumentalities. These include bills,
certificates of indebtedness, notes and bonds issued by the Treasury or by
agencies or instrumentalities of the U.S. Government. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase
9
<PAGE> 13
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
Although U.S. Government securities are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Fund are not so guaranteed in any
way. The diversification rules under Section 817(h) of the Internal Revenue
Code limit the ability of Series E to invest more than 55 percent of its assets
in the securities of any one U.S. Government agency or instrumentality.
Series E may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or a province thereof, and Canadian corporate debt
securities. Canadian securities will not be purchased if subject to the foreign
interest equalization tax and unless payable in U.S. dollars. Series E may
invest in Yankee CDs which are certificates of deposit issued by a U.S. branch
of a foreign bank denominated in U.S. dollars and held in the U.S. Yankee CDs
are subject to somewhat different risks than are the obligations of domestic
banks. The Series also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Series'
investment in foreign securities, including Canadian securities, will not
exceed 25 percent of the Series' net assets. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with investing in foreign
securities.
Series E may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Series will hold less than 25 percent of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
For the year ended December 31, 1996, the dollar weighted average of
Series E's holdings (excluding equities) had the following credit quality
characteristics.
Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 17.1%
Cash and Other Assets, Less Liabilities ... 4.5%
Rated Fixed Income Securities
AAA.................................... 3.2%
AA..................................... 5.1%
A...................................... 35.7%
Baa/BBB................................ 14.6%
Ba/BB.................................. 12.9%
B...................................... 6.9%
Caa/CCC................................ 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
-----
Total...................................... 100%
The above table is intended solely to provide disclosure about the Series'
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The Series may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series' policy that not more than 15
percent of the Series' net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted
securities.
Series E may purchase securities on a "when issued" or "delayed delivery"
basis in excess of customary settlement periods for the types of security
involved. For a discussion of such securities, see "Investment Methods and Risk
Factors."
Series E may, for defensive purposes, invest part or all of its assets in
money market instruments such as those appropriate for investment by Series C.
SERIES J (EMERGING GROWTH SERIES)
The investment objective of Series J is to seek capital appreciation by
investing in a diversified portfolio of common stocks (which may include ADRs),
preferred stocks, debt securities, and securities convertible into common
stocks. On a temporary basis, there may be times when Series J may invest its
assets in cash or money market instruments for defensive purposes.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as
10
<PAGE> 14
securities convertible into common stocks. Securities will be selected on the
basis of their appreciation and growth potential. Current income will not be a
factor in selecting investments, and any such income should be considered
incidental. Securities considered to have capital appreciation and growth
potential will often include securities of smaller and less mature companies.
Such companies may present greater opportunities for capital appreciation
because of high potential earnings growth, but may also involve greater risk.
They may have limited product lines, markets or financial resources, and they
may be dependent on a limited management group. Their securities may trade less
frequently and in limited volume, and only in the over-the-counter market or on
smaller securities exchanges. As a result, the securities of smaller companies
may have limited marketability and may be subject to more abrupt or erratic
changes in value than securities of larger, more established companies.
Series J may also invest in larger companies where opportunities for
above-average capital appreciation appear favorable.
Series J may purchase securities on a "when issued" or "delayed delivery"
basis as described under "Investment Methods and Risk Factors." The Series may
enter into futures contracts (and options thereon) to hedge all or a portion of
its portfolio, or as an efficient means of adjusting its exposure to the stock
market. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. Futures contracts (and options
thereon) and the risks associated with such instruments are described in
further detail under "Investment Methods and Risk Factors."
In seeking capital appreciation, Series J may, during certain periods,
trade to a substantial degree in securities for the short term. That is, the
Series may be engaged essentially in trading operations based on short-term
market considerations, as distinct from long-term investments based on
fundamental evaluations of securities. This investment policy is speculative
and involves substantial risk.
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
The primary investment objective of Series K is to seek to provide high
current income. Capital appreciation is a secondary objective. As used herein,
the term "bond" is used to describe any type of debt security. Under normal
circumstances, the Series will invest at least 65 percent of its total assets
in bonds as defined herein. The Series under normal circumstances invests
substantially all of its assets in a portfolio of debt securities of issuers in
three separate investment areas: (i) the United States; (ii) developed foreign
countries; and (iii) emerging markets. The Series selects particular debt
securities in each sector based on their relative investment merits. Within
each area, the Series selects debt securities from those issued by governments,
their agencies and instrumentalities; central banks; commercial banks and other
corporate entities. Debt securities in which the Series may invest consist of
bonds, notes, debentures and other similar instruments. The Series may invest
up to 100 percent of its total assets in U.S. and foreign debt securities and
other fixed income securities that, at the time of purchase, are rated below
investment grade ("high yield securities" or "junk bonds"), which involve a
high degree of risk and are predominantly speculative. The Series may also
invest in securities that are in default as to payment of principal and/or
interest. See "Investment Methods and Risk Factors" -- "Risks Associated with
Investments in High-Yield Lower-Rated Debt Securities." Many emerging market
debt securities are not rated by United States rating agencies such as Moody's
and S&P. The Series' ability to achieve its investment objectives is thus more
dependent on the credit analysis of the Series' Sub-Advisers, Lexington and MFR
Advisors, Inc. ("MFR"), than would be the case if the Series were to invest in
higher quality bonds. Investors should purchase shares only as a supplement to
an overall investment program and only if willing to undertake the risks
involved.
For the year ended December 31, 1996, the dollar weighted average of
Series K's holdings (excluding equities) had the following credit quality
characteristics.
Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 5.3%
Cash and other Assets, Less Liabilities ... 0.1%
Rated Fixed Income Securities
AAA.................................... 15.6%
AA..................................... 7.3%
A...................................... 14.9%
Baa/BBB................................ 21.9%
Ba/BB.................................. 11.9%
B ..................................... 23.0%
Caa/CCC ............................... 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
-------
Total...................................... 100.0%
The foregoing table is intended solely to provide disclosure about Series K's
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and
markets. Currently, investing in many of the emerging countries and emerging
markets is not feasible or may involve political risks. Accordingly, Lexington
currently intends to consider investments only in those countries in which it
believes
11
<PAGE> 15
investing is feasible. The list of acceptable countries will be reviewed by
Lexington and MFR and approved by the Fund's Board of Directors on a periodic
basis and any additions or deletions with respect to such list will be made in
accordance with changing economic and political circumstances involving such
countries. An issuer in an emerging market is an entity: (i) for which the
principal securities trading market is an emerging market, as defined above;
(ii) that (alone or on a consolidated basis) derives 50 percent or more of its
total revenue from either goods produced, sales made or services performed in
emerging markets; or (iii) organized under the laws of, and with a principal
office in, an emerging market.
Because of the special risks associated with investing in emerging
markets, an investment in the Series should be considered speculative.
Investors are strongly advised to consider carefully the special risks involved
in emerging markets which are in addition to the usual risks of investing in
developed foreign markets around the world. See the discussion of the risks of
investing in emerging markets under "Investment Methods and Risk Factors" --
"Emerging Markets Risks."
The Series' investments in emerging market securities consist
substantially of high yield, lower-rated debt securities of foreign
corporations, "Brady Bonds" and other sovereign debt securities issued by
emerging market governments. "Sovereign debt securities" are those issued by
emerging market governments that are traded in the markets of developed
countries or groups of developed countries. The Series may invest in debt
securities of emerging market issuers without regard to ratings. Currently, the
substantial majority of emerging market debt securities are considered to have
a credit quality below investment grade. Series K also may acquire lower
quality debt securities during an initial underwriting or may acquire lower
quality debt securities which are sold without registration under applicable
securities laws. Such securities involve special considerations and risks. The
Series may invest in bank loan participations and assignments, which are fixed
and floating rate loans arranged through private negotiations between foreign
entities. For a more detailed discussion of these instruments and the risks
associated with investing therein, see "Sovereign Debt," "Loan Participations
and Assignments" and "Brady Bonds" under "Investment Methods and Risk Factors."
The Series intends to retain the flexibility to respond promptly to
changes in market and economic conditions. Accordingly, in the interest of
preserving shareholders' capital and consistent with the Series' investment
objectives, Lexington and MFR may employ a temporary defensive investment
strategy if they determine such a strategy to be warranted. Pursuant to such a
defensive strategy, the Series temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100 percent of
its assets in high quality debt securities or money market instruments of U.S.
or foreign issuers, and most or all of the Series' investments may be made in
the United States and denominated in U.S. dollars. For debt obligations other
than commercial paper, this includes securities rated, at the time of purchase,
at least AA by S&P or Aa by Moody's, or if unrated, determined to be of
comparable quality by Lexington or MFR. For commercial paper, this includes
securities rated, at the time of purchase, at least A-2 by S&P or Prime-2 by
Moody's, or if unrated, determined to be of comparable quality by Lexington or
MFR. It is impossible to predict whether, when or for how long the Series will
employ defensive strategies. To the extent the Series adopts a temporary
defensive investment posture, it will not be invested so as to achieve directly
its investment objectives. In addition, pending investment of proceeds from new
sales of Series shares or to meet ordinary daily cash needs, the Series
temporarily may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and may invest any portion of its assets in high quality
foreign or domestic money market instruments.
The Series invests in debt obligations allocated among diverse markets and
denominated in various currencies, including U.S. dollars, or in multinational
currency units such as European Currency Units. The Series may purchase
securities that are issued by the government or a company or financial
institution of one country but denominated in the currency of another country
(or a multinational currency unit). The Series is designed for investors who
wish to accept the risks entailed in such investments, which are different from
those associated with a portfolio consisting entirely of securities of U.S.
issuers denominated in U.S. dollars. See "Investment Methods and Risk Factors"
- -- "Currency Risk" and "Foreign Investment Risks."
Lexington and MFR will seek to allocate the assets of the Series in
securities of issuers in countries and in currency denominations where the
combination of fixed income market returns, the price appreciation potential of
fixed income securities and currency exchange rate movements will present
opportunities primarily for high current income and secondarily for capital
appreciation. In so doing, Lexington and MFR intend to take full advantage of
the different yield, risk and return characteristics that investment in the
fixed income markets of different countries can provide for U.S. investors.
Fundamental economic strength, credit quality and currency and interest rate
trends will be the principal determinants of the emphasis given to various
country, geographic and industry sectors within the Series. Securities held by
the Series may be invested in without limitation as to maturity. Lexington and
MFR evaluate currencies on the basis of fundamental economic criteria (e.g.,
relative inflation and interest rate levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data. If the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, if the exchange rate of the foreign currency declines, the dollar
value of the security will
12
<PAGE> 16
decrease. The Series may seek to protect itself against such negative currency
movements through the use of sophisticated investment techniques, although the
Series is not committed to using such techniques and may be fully exposed to
changes in currency exchange rates.
In seeking to protect against currency exchange rate or interest rate
changes that are adverse to its present or prospective positions, the Series
may employ certain risk management practices involving the use of forward
currency contracts and options contracts, futures contracts and options on
futures contracts on U.S. and foreign government securities and currencies. The
Series may purchase call and put options and write such options on a "covered"
basis. The Series also may enter into interest rate currency and index swaps
and purchase or sell related caps, floors and collars and other derivatives.
The Series may enter into derivatives securities transactions without limit.
See the discussion of "Forward Currency Transactions," "Options," "Futures
Contracts and Related Options," and "Swaps, Caps, Floors and Collars" under
"Investment Methods and Risk Factors." There can be no assurance that the
Series' risk management practices will succeed. Only a limited market, if any,
currently exists for forward currency contracts and options and futures
instruments relating to currencies of most emerging markets, to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such emerging markets.
The Series may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series policy that no more than 15
percent of the Series' net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted
securities. The Series may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis in order to
hedge against anticipated changes in interest rates and prices. See the
discussion of when-issued and forward commitment securities under "Investment
Methods and Risk Factors." The Series may enter into repurchase agreements,
reverse repurchase agreements and "dollar rolls" which are discussed under
"Investment Methods and Risk Factors." Series K may invest up to 5 percent of
its total assets in zero coupon securities. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
The investment objective of Series M is to seek high total return,
consisting of capital appreciation and current income. The Series seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors. The Series will
invest in the following investment categories: equity securities of domestic
and foreign issuers, including common stocks, ADRs, preferred stocks,
convertible securities and warrants; debt securities of domestic and foreign
issuers, including mortgage-related and other asset-backed securities;
exchange-traded real estate investment trusts (REITs); equity securities of
companies involved in the exploration, mining, development, production and
distribution of gold ("gold stocks"); zero coupon securities and domestic money
market instruments. See "Investment Methods and Risk Factors" for a discussion
of the additional risks associated with investment in foreign securities and
REITs and see the discussion of the risks associated with investment in gold
stocks below.
Investment in gold stocks presents risks, because the prices of gold have
fluctuated substantially over short periods of time. Prices may be affected by
unpredictable monetary and political policies, such as currency devaluations or
revaluations, economic and social conditions within an individual country,
trade imbalances, or trade or currency restrictions between countries. The
unstable political and social conditions in South Africa and unsettled
political conditions prevailing in neighboring countries may have disruptive
effects on the market prices of securities of South African companies.
The Series is not required to maintain a portion of its assets in each of
the permitted investment categories. The Series, however, under normal
circumstances will maintain a minimum of 35 percent of its total assets in
equity securities and 10 percent in debt securities. The Series will not invest
more than 55 percent of its total assets in money market instruments (except
when in a temporary defensive position), more than 80 percent of its total
assets in foreign securities, nor more than 20 percent of its total assets in
gold stocks.
The Series Sub-Adviser, Meridian Investment Management Corporation
("Meridian"), conducts quantitative investment research and uses the research
to strategically allocate the Series' assets among the investment categories
identified above, primarily on the basis of a quantitative asset allocation
model. With respect to equity securities, the model analyzes a large number of
equity securities based on the following factors: current earnings, earnings
history, long-term earnings projections, current price, and risk.
Meridian then determines which sectors within an identified investment
category are deemed to be the most attractive relative to other sectors. For
example, the model may indicate that a portion of the Series' assets should be
invested in the domestic equity category of the market and within this category
that pharmaceutical stocks represent a sector with an attractive total return
potential.
Meridian identifies sectors of the domestic and international economy in
which the Series will invest and then determines which equity securities to
purchase within the identified countries and/or sectors.
With respect to the selection of debt securities for the Series, the asset
allocation model provided by Meridian analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment Manager
13
<PAGE> 17
will determine the portion of the portfolio to allocate to debt securities and
the duration of those securities based on the model's interest rate
projections. Gold stocks and REITs will be analyzed in a manner similar to that
used for equity securities. Money market instruments will be analyzed based on
current returns and the current yield curve. The asset allocation model and
stock selection techniques used by the Series may evolve over time or be
replaced by other asset allocation models and/or stock selection techniques.
There is no assurance that the model will correctly predict market trends or
enable the Series to achieve its investment objective.
The debt securities in which the Series may invest will, at the time of
investment, consist of "investment grade" bonds, which are bonds rated BBB or
better by S&P or Baa or better by Moody's or that are unrated by S&P and
Moody's but considered by the Investment Manager to be of equivalent credit
quality. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments.
The Series may invest in investment grade mortgage-backed securities
(MBSs), including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series will not invest in an MBS if, as a result of
such investment, more than 25 percent of its total assets would be invested in
MBSs, including CMOs and mortgage pass-through securities. For a discussion of
MBSs and the risks associated with such securities, see "Investment Methods and
Risk Factors" -- "Mortgage-Backed Securities," below.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The Series may write covered call options and purchase put options on
securities, financial indices and foreign currencies, and may enter into
futures contracts. The Series may buy and sell futures contracts (and options
on such contracts) to manage exposure to changes in securities prices and
foreign currencies and as an efficient means of adjusting overall exposure to
certain markets. It is the Series' operating policy that initial margin
deposits and premiums on options used for non-hedging purposes will not equal
more than 5 percent of the Series' net assets. The total market value of
securities against which the Series has written call options may not exceed 25
percent of its total assets. The Series will not commit more than 5 percent of
its total assets to premiums when purchasing put options. Futures contracts and
options may not always be successful hedges and their prices can be highly
volatile. Using futures contracts and options could lower the Series' total
return and the potential loss from the use of futures can exceed the Series'
initial investment in such contracts. Futures contracts and options and the
risks associated with such instruments are described in further detail under
"Investment Methods and Risk Factors."
SERIES N (MANAGED ASSET ALLOCATION SERIES)
The investment objective of Series N is to seek a high level of total
return by investing primarily in a diversified portfolio of fixed income and
equity securities.
The Series is designed to balance the potential appreciation of common
stocks with the income and principal stability of bonds over the long term.
Over the long term, the Series expects to allocate its assets so that
approximately 40 percent of such assets will be in the fixed income sector (as
defined below) and approximately 60 percent in the equity sector (as defined
below). Under normal market conditions, this mix may vary over shorter time
periods within the ranges set forth below:
Range
------
Fixed Income Sector 30-50%
Equity Sector 50-70%
The primary consideration in varying from the 60-40 allocation will be the
outlook of the Series' Sub-Adviser, T. Rowe Price Associates, Inc. ("T. Rowe
Price"), for the different markets in which the Series invests. Shifts between
the fixed income and equity sectors will normally be done gradually and T. Rowe
Price will not attempt to precisely "time" the market. There is, of course, no
guarantee that T. Rowe Price's gradual approach to allocating the Series'
assets will be successful in achieving the Series' objective. The Series will
maintain cash reserves to facilitate the Series' cash flow needs (redemptions,
expenses and purchases of Series securities) and it may invest in cash reserves
without limitation for temporary defensive purposes.
Assets allocated to the fixed income portion of the Series will be
invested primarily in U.S. and foreign investment grade bonds, high yield
bonds, short-term investments and currencies, as needed to gain exposure to
foreign markets. Assets allocated to the equity portion of the Series primarily
will be invested in the common stocks of a diversified group of U.S. and
foreign large and small companies, currencies, as needed to gain exposure to
foreign markets, and futures contracts.
The Series' fixed income sector will be allocated among investment grade,
high yield, U.S. and non-dollar debt securities and currencies generally within
the ranges indicated below:
Range
------
Investment Grade 50-100%
High Yield 0-30%
Non-dollar 0-30%
Cash Reserves 0-20%
14
<PAGE> 18
Investment grade debt securities include long, intermediate and short-term
investment grade debt securities (e.g., AAA, AA, A or BBB by S&P or if not
rated, of equivalent investment quality as determined by T. Rowe Price). The
weighted average maturity for this portion (investment grade debt securities)
of the Series portfolio is generally expected to be intermediate (3-10 years),
although it may vary significantly. Non-dollar debt securities include
non-dollar denominated government and corporate debt securities or currencies
of at least three countries. See "Investment Methods and Risk Factors" --
"Foreign Investment Risks" and "Currency Risk" and the Statement of Additional
Information for a discussion of the risks involved in foreign investing.
High-yield securities include high-yielding, income-producing debt securities
in the lower rating categories (commonly referred to as "junk bonds") and
preferred stocks including convertible securities. High yield bonds may be
purchased without regard to maturity; however, the average maturity is expected
to be approximately 10 years, although it may vary if market conditions
warrant. Quality will generally range from lower-medium to low and the Series
may also purchase bonds in default if, in the opinion of T. Rowe Price, there
is significant potential for capital appreciation. Lower-rated debt obligations
are generally considered to be high risk investments. See "Investment Methods
and Risk Factors" -- "Risks Associated with High-Yield Lower-Rated Debt
Securities" and the Statement of Additional Information for a discussion of the
risks involved in investing in high-yield, lower-rated debt securities.
Securities which may be held as cash reserves include liquid short-term
investments of one year or less having the highest ratings by at least one
established rating organization, or if not rated, of equivalent investment
quality as determined by T. Rowe Price. The Series may use currencies to gain
exposure to an international market prior to investing in non-dollar
securities.
For the year ended December 31, 1996, the dollar weighted average of
Series N's holdings (excluding equities) had the following credit quality
characteristics.
Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 20.4%
Liabilities, Less Cash and other Assets ... (0.1)%
Rated Fixed Income Securities
AAA.................................... 3.0%
AA..................................... 1.5%
A...................................... 2.6%
Baa/BBB................................ 1.8%
Ba/BB.................................. 2.8%
B ..................................... 5.6%
Caa/CCC................................ 0.1%
Unrated Securities Comparable in Quality to
A...................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
------
Total...................................... 37.7%
The foregoing table is intended solely to provide disclosure about Series N's
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies and futures, generally within the ranges indicated
below:
Range
------
Large Cap 45-100%
Small Cap 0-30%
Non-dollar 0-35%
Large Cap securities generally include stocks of well-established
companies with capitalization over $1 billion which can produce increasing
dividend income.
Non-dollar securities include foreign currencies and common stocks of
established non-U.S. companies. Investments may be made solely for capital
appreciation or solely for income or any combination of both for the purpose of
achieving a higher overall return. T. Rowe Price intends to diversify the
non-dollar portion of the Series' portfolio broadly among countries and to
normally have at least three different countries represented. The countries of
the Far East and Western Europe as well as South Africa, Australia, Canada, and
other areas (including developing countries) may be included. Under unusual
circumstances, however, investment may be substantially in one or two
countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies may
also be held to gain exposure to an international market prior to investing in
a non-dollar stock.
15
<PAGE> 19
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may
trade less frequently and in limited volume and move more abruptly than
securities of larger companies. However, securities of smaller companies may
offer greater potential for capital appreciation since they are often
overlooked or undervalued by investors.
Until the Series reaches approximately $30 million in assets, the
composition of the Series' portfolio may vary significantly from the percent
limitations and ranges above. This might occur because, at lower asset levels,
the Series may be unable to prudently achieve diversification among the
described asset classes. During this initial period, the Series may use futures
contracts and purchase foreign currencies to a greater extent than it will once
the start-up period is over.
The Series may invest up to 35 percent of its total assets in U.S.
dollar-denominated and non-U.S. dollar-denominated securities issued by foreign
issuers. Some of the countries in which the Series may invest may be considered
to be developing and may involve special risks. For a discussion of the risks
involved in investment in foreign securities, including investment in emerging
markets, see "Investment Methods and Risk Factors" -- "Foreign Investment
Risks" and "Emerging Markets Risks."
The Series' foreign investments are also subject to currency risk
described under "Investment Methods and Risk Factors" -- "Currency Risk." To
manage this risk and facilitate the purchase and sale of foreign securities,
the Series may engage in foreign currency transactions involving the purchase
and sale of forward foreign currency exchange contracts. Although forward
currency transactions will be used primarily to protect the Series from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted and the Series' total return could
be adversely affected as a result. For a discussion of forward currency
transactions and the risks associated with such transactions, see "Investment
Methods and Risk Factors" -- "Forward Currency Transactions." Purchases by the
Series of currencies in substitution of purchases of stocks and bonds will
subject the Series to risks different from a fund invested solely in stocks and
bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or
as an efficient means of adjusting its exposure to the bond, stock, and
currency markets. The Series will not use futures contracts for leveraging
purposes. The Series will limit its use of futures contracts so that initial
margin deposits or premiums on such contracts used for non-hedging purposes
will not equal more than 5 percent of the Series' net asset value. The Series
may also write call and put options on a covered basis and purchase put and
call options on securities, financial indices, and currencies. The aggregate
market value of the Series' portfolio securities or currencies covering call or
put options will not exceed 25 percent of the Series' net assets. The Series
may enter into foreign futures and options transactions. See the discussion of
options and futures contracts under "Investment Methods and Risk Factors." As
part of its investment program and to maintain greater flexibility, the Series
may invest in instruments which have the characteristics of futures, options
and securities, known as "hybrid instruments." For a discussion of such
instruments and the risks involved in investing therein, see "Investment
Methods and Risk Factors" -- "Hybrid Instruments."
The Series may acquire illiquid securities in an amount not exceeding 15
percent of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 5 percent of its total assets in
restricted securities (other than securities eligible for resale under Rule
144A of the Securities Act of 1933). Series N may invest in securities on a
"when issued" or "delayed delivery basis" in excess of customary settlement
periods for the type of security involved. For a discussion of restricted and
when issued securities, see "Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full faith
and credit of the U.S. Treasury while others, such as Freddie Mac certificates,
are not. The Series may also invest in collateralized mortgage obligations
(CMOs) and stripped mortgage securities (a type of derivative). Stripped
mortgage securities are created by separating the interest and principal
payments generated by a pool of mortgage-backed bonds to create two classes of
securities, "interest only" (IO) and "principal only" (PO) bonds. There are
risks involved in mortgage-backed securities, CMOs and stripped mortgage
securities. See "Investment Methods and Risk Factors" for an additional
discussion of such securities and the risks involved therein.
16
<PAGE> 20
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
While the Series will remain invested in primarily common stocks and
bonds, it may, for temporary defensive purposes, invest in cash reserves
without limitation. The Series may establish and maintain reserves as T. Rowe
Price believes is advisable to facilitate the Series' cash flow needs. Cash
reserves include money market instruments, including repurchase agreements, in
the two highest categories. Short-term securities may be held in the equity
sector as collateral for futures contracts. These securities are segregated and
may not be available for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3 percent of its total assets to
broker-dealers, institutional investors, or other persons. Any such loan will
be continuously secured by collateral at least equal to the value of the
securities loaned. For a discussion of the limitations on lending and risks of
lending, see "Investment Methods and Risk Factors" -- "Lending of Portfolio
Securities." The Series may also invest in real estate investment trusts
(REITs). See "Investment Methods and Risk Factors" for a discussion of the
risks of investing in such securities.
SERIES O (EQUITY INCOME SERIES)
The investment objective of Series O is to seek to provide substantial
dividend income and also capital appreciation by investing primarily in
dividend-paying common stocks of established companies. In pursuing its
objective, the Series emphasizes companies with favorable prospects for
increasing dividend income, and secondarily, capital appreciation. Over time,
the income component (dividends and interest earned) of the Series' investments
is expected to be a significant contributor to the Series' total return. The
Series' income yield is expected to be significantly above that of the Standard
& Poor's 500 Stock Index ("S&P 500"). Total return will consist primarily of
dividend income and secondarily of capital appreciation (or depreciation).
The investment program of the Series is based on several premises. First,
the Series' Sub-Adviser, T. Rowe Price, believes that, over time, dividend
income can account for a significant component of the total return from equity
investments. Second, dividends are normally a more stable and predictable
source of return than capital appreciation. While the price of a company's
stock generally increases or decreases in response to short-term earnings and
market fluctuations, its dividends are generally less volatile. Finally, T.
Rowe Price believes that stocks which distribute a high level of current income
tend to have less price volatility than those which pay below average
dividends.
To achieve its objective, the Series, under normal circumstances, will
invest at least 65 percent of its assets in income-producing common stocks,
whose prospects for dividend growth and capital appreciation are considered
favorable by T. Rowe Price. To enhance capital appreciation potential, the
Series also uses a value-oriented approach, which means it invests in stocks it
believes are currently undervalued in the market place. The Series' investments
will generally be made in companies which share some of the following
characteristics: established operating histories; above-average current
dividend yields relative to the S&P 500; low price-earnings ratios relative to
the S&P 500; sound balance sheets and other financial characteristics; and low
stock price relative to the company's underlying value as measured by assets,
earnings, cash flow or business franchises.
The Series may also invest its assets in fixed income securities
(corporate, government, and municipal bonds of various maturities). The Series
would invest in municipal bonds when the expected total return from such bonds
appears to exceed the total returns obtainable from corporate or government
bonds of similar credit quality.
Series O may invest in debt securities of any type without regard to
quality or rating. Such securities would be purchased in companies which meet
the investment criteria for the Series. Such securities may include securities
rated below investment grade (e.g., securities rated Ba or lower by Moody's or
BB or lower by S&P). The Series will not purchase such a security (commonly
referred to as a "junk bond") if immediately after such purchase the Series
would have more than 10 percent of its total assets invested in such
securities. See "Investment Methods and Risk Factors" -- "Risks Associated with
Investment in High-Yield Lower-Rated Debt Securities" for a discussion of the
risks associated with investing in such securities.
Although the Series will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
convertible securities, real estate investment trusts (REITs) and warrants,
when considered consistent with the Series' investment objective and program.
See "Investment Methods and Risk Factors" -- "Real Estate Securities" for a
discussion of the risks of investing in such securities.
The Series' investments in foreign securities include non-dollar
denominated securities traded outside of the U.S. and dollar denominated
securities traded in the U.S. (such as ADRs). The Series may invest up to 25
percent of its total assets in foreign securities. See the discussion of the
risks associated with investing in foreign securities under "Investment Methods
and Risk Factors," "American Depositary Receipts (ADRs)," "Currency Risk" and
"Foreign Investment Risks."
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<PAGE> 21
The Series may also engage in a variety of investment management
practices, such as buying and selling futures and options. The Series may buy
and sell futures contracts (and options on such contracts) to manage its
exposure to changes in securities prices and foreign currencies and as an
efficient means of adjusting its overall exposure to certain markets. The
Series may purchase, sell, or write call and put options on securities,
financial indices, and foreign currencies. The Series may write call and put
options only on a "covered" basis. It is the Series' operating policy that
initial margin deposits and premiums on options used for non-hedging purposes
will not equal more than 5 percent of the Series' net asset value and, with
respect to options on securities, the total market value of securities against
which the Series has written call or put options may not exceed 25 percent of
its total assets. The Series will not commit more than 5 percent of its total
assets to premiums when purchasing call or put options. The Series may also
invest up to 10 percent of its total assets in hybrid instruments which are
described under "Investment Methods and Risk Factors" -- "Hybrid Instruments."
Also see the discussion of "Forward Currency Transactions," "Futures Contracts
and Related Options" and "Options" under "Investment Methods and Risk Factors."
The Series may also invest in restricted securities described under
"Investment Methods and Risk Factors." The Series' investment in such
securities, other than Rule 144A securities, is limited to 5 percent of its net
assets. Series O may invest in securities on a "when issued" or "delayed
delivery basis" as discussed in "Investment Methods and Risk Factors." The
Series may borrow money as described under "Investment Methods and Risk
Factors" -- "Borrowing." The Series may not purchase securities when borrowings
exceed 5 percent of its total assets. The Series may hold a certain portion of
its assets in money market securities, including repurchase agreements, in the
two highest rating categories, maturing in one year or less. For temporary,
defensive purposes, the Series may invest without limitation in such
securities. The Series may lend securities to broker-dealers, other
institutions, or other persons to earn additional income. The value of loaned
securities may not exceed 33 1/3 percent of the Series' total assets. See
"Investment Methods and Risk Factors" -- "Lending of Portfolio Securities" for
a discussion of the risks associated with securities lending.
SERIES P (HIGH YIELD SERIES)
The investment objective of Series P is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Series will seek its investment objective by investing primarily in a broad
range of income producing securities, including (i) higher yielding, higher
risk, debt securities (commonly referred to as "junk bonds"); (ii) preferred
stock; (iii) securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars; (iv) mortgage-backed securities ("MBSs"); (v)
asset-backed securities; (vi) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (vii) securities issued
or guaranteed by, the Dominion of Canada or provinces thereof; and (viii) zero
coupon securities. The Series also may invest up to 35 percent of its assets in
common stock (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65 percent of the Series' total assets will be invested
in high-yielding, high risk debt securities.
The Series may invest up to 100 percent of its assets in debt securities
that, at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. For a description of debt ratings and a discussion
of the risks associated with investing in junk bonds, see "Investment Methods
and Risk Factors" -- "Risks Associated With Investments In High-Yield Lower
Rated Debt Securities." Included in the debt securities which the Series may
purchase are convertible bonds, or bonds with warrants attached. A "convertible
bond" is a bond, debenture, or preferred share which may be exchanged by the
owner for common stock or another security, usually of the same company, in
accordance with the terms of the issue. A "warrant" confers upon the holder the
right to purchase an amount of securities at a particular time and price. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with such securities.
Series P may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Series also may invest in debt securities issued by foreign governments
(including Brady Bonds), their agencies and instrumentalities and foreign
corporations (including those in emerging markets), provided such securities
are denominated in U.S. dollars. The Series' investment in foreign securities,
excluding Canadian securities, will not exceed 25 percent of the Series' net
assets. See "Investment Methods and Risk Factors" for a discussion of the risks
associated with investing in foreign securities, Brady Bonds and emerging
markets.
The Series may invest in MBSs, including mortgage pass-through securities
and collateralized mortgage obligations (CMOs). The Series may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest only" (IO) and "principal only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. This
is due to the fact that such instruments are more sensitive to interest rate
changes and to the rate of principal prepayments than are most other MBSs. The
Series will hold less than 25 percent of its net assets in MBSs. For a
discussion of MBSs
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and the risks associated with such securities, see "Investment Methods and Risk
Factors."
The Series may also invest in asset-backed securities. These include
secured debt instruments backed by automobile loans, credit card loans, home
equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest payments. Asset-backed
securities are subject to risks similar to those discussed with respect to
MBSs. See "Investment Methods and Risk Factors."
The Series may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. For
a discussion of the varying levels of guarantee associated with particular
types of U.S. Government securities, see "Investment Methods and Risk Factors"
- -- "U.S. Government Securities."
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
For the period August 5, 1996 (date of inception) to December 31, 1996,
the dollar weighted average of Series P's holdings (excluding equities) had the
following credit quality characteristics.
Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 0%
Cash and other Assets, Less Liabilities ... 21.6%
Rated Fixed Income Securities
AAA.................................... 0%
AA..................................... 0%
A ..................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 29.4%
B...................................... 49.0%
Caa/CCC................................ 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
-------
Total.................................. 100.0%
The foregoing table is intended solely to provide disclosure about Series P's
asset composition for the period August 5, 1996 (date of inception) to December
31, 1996. The asset composition after this may or may not be approximately the
same as shown above.
The Series may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series' policy that not more than 15
percent of the Series' net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted
securities.
The Series may purchase securities on "when-issued" or "delayed delivery"
basis in excess of customary settlement periods for the type of security
involved. The Series may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Series may lend securities
to broker/dealers, other institutions or other persons to earn additional
income. The value of loaned securities may not exceed 33 1/3 percent of the
Series' total assets. In addition, the Series may purchase loans, loan
participations and other types of direct indebtedness. See "Investment Methods
and Risk Factors" for a discussion of the risks associated with these
investment practices.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Series will not use futures
contracts for leveraging purposes. The Series will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used
for non-hedging purposes will not equal more than 5 percent of the Series' net
asset value. The Series may purchase call and put options and write such
options on a "covered" basis. The Series may also enter into interest rate and
index swaps and purchase or sell related caps, floors and collars. The
aggregate market value of the Series' portfolio securities covering call or put
options will not exceed 25 percent of the Series' net assets. See the
discussion of "Options," "Futures Contracts and Related Options," "Futures and
Options Risk," and "Swaps, Caps, Floors and Collars" under "Investment Methods
and Risk Factors."
From time to time, the Series may invest part or all of its assets in U.S.
Government securities, commercial notes or money market instruments. It is
anticipated that the weighted average maturity of the Series' portfolio will
range from 5 to 15 years under normal circumstances.
SERIES S (SOCIAL AWARENESS SERIES)
The investment objective of Series S is to seek capital appreciation. In
seeking its objective, Series S will invest in various types of securities
which meet certain social criteria established for the Series. Series S will
invest in a diversified portfolio of common stocks, convertible securities,
preferred stocks and debt securities. From time to time, the Series may
purchase government bonds or commercial notes on a temporary basis for
defensive purposes.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as
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securities convertible into common stocks. Securities will be selected on the
basis of their appreciation and growth potential. Securities considered to have
capital appreciation and growth potential will often include securities of
smaller and less mature companies. Such companies may present greater
opportunities for capital appreciation because of high potential earnings
growth, but may also involve greater risk. They may have limited product lines,
markets or financial resources, and they may be dependent on a limited
management group. Their securities may trade less frequently and in limited
volume, and only in the over-the counter market or on smaller securities
exchanges. As a result, the securities of smaller companies may have limited
marketability and may be subject to more abrupt or erratic changes in value
than securities of larger, more established companies. The Series may also
invest in larger companies where opportunities for above-average capital
appreciation appear favorable and the Series' social criteria are satisfied.
Series S may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio or as an efficient
means of adjusting its exposure to the stock market. The Series will limit its
use of futures contracts so that initial margin deposits or premiums on such
contracts used for non-hedging purposes will not equal more than 5 percent of
the Series' net assets. The Series may also write call and put options on a
covered basis and purchase put and call options on securities and financial
indices. The aggregate market value of the Series' portfolio securities
covering call or put options will not exceed 25 percent of the Series' net
assets. See the discussion of options and futures contracts under "Investment
Methods and Risk Factors."
Series S will seek investments that comply with the Series' social
criteria and that offer investment potential. Because of the limitations on
investment imposed by the social criteria, the availability of investment
opportunities for the Series may be limited as compared to those of similar
funds which do not impose such restrictions on investment.
Series S will not invest in securities of companies that engage in the
production of nuclear energy, alcoholic beverages or tobacco products.
In addition, the Series will not invest in securities of companies that
significantly engage in: (1) the manufacture of weapon systems; (2) practices
that, on balance, have a detrimental effect on the environment; or (3) the
gambling industry. Series S will monitor the activities identified above to
determine whether they are significant to an issuer's business. Significance
may be determined on the basis of the percentage of revenue generated by, or
the size of operations attributable to, such activities. The Series may invest
in an issuer that engages in the activities set forth above, in a degree that
is not deemed significant by the Investment Manager. In addition, the Series
will seek out companies that have contributed substantially to the communities
in which they operate, have a positive record on employment relations, have
made substantial progress in the promotion of women and minorities or in the
implementation of benefit policies that support working parents, or have taken
notably positive steps in addressing environmental challenges.
The Investment Manager will evaluate an issuer's activities to determine
whether it engages in any practices prohibited by the Series' social criteria.
In addition to its own research with respect to an issuer's activities, the
Investment Manager will also rely on other organizations that publish
information for investors concerning the social policy implications of
corporate activities. The Investment Manager may rely upon information provided
by advisory firms that provide social research on U.S. corporations, such as
Kinder, Lydenberg, Domini & Co., Inc., Franklin Insight, Inc. and
Prudential-Bache Capital Funding. Investment selection on the basis of social
attributes is a relatively new practice and the sources for this type of
information are not well established. The Investment Manager will continue to
identify and monitor sources of such information to screen issuers which do not
meet the social investment restrictions of the Series.
If after purchase of an issuer's securities by Series S, it is determined
that such securities do not comply with the Series' social criteria, the
securities will be eliminated from the Series' portfolio within a reasonable
time. This requirement may cause the Series to dispose of a security at a time
when it may be disadvantageous to do so.
SERIES V (VALUE SERIES)
The investment objective of Series V is to seek long-term growth of
capital. Series V will seek to achieve its objective through investment in a
diversified portfolio of securities. Under normal circumstances the Series will
consist primarily of various types of common stock, which may include ADRs, and
securities convertible into common stocks which the Investment Manager believes
are undervalued relative to assets, earnings, growth potential or cash flows.
See the discussion of ADRs under "Investment Methods and Risk Factors." Under
normal circumstances, the Series will invest at least 65 percent of its assets
in the securities of companies which the Investment Manager believes are
undervalued.
Series V may also invest in (i) preferred stocks; (ii) warrants; and (iii)
investment grade debt securities (or unrated securities of comparable quality).
The Series may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. The Series may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 15 percent of its total assets will be invested in illiquid
securities. Series V reserves the right to invest its assets temporarily in
cash and money market instruments when, in the opinion of the Investment
Manager, it is advisable to do so on account of current or
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<PAGE> 24
anticipated market conditions. The Series may utilize repurchase agreements on
an overnight basis or bank demand accounts, pending investment in securities or
to meet potential redemptions or expenses. See the discussion of when-issued
securities, Rule 144A securities and repurchase agreements under "Investment
Methods and Risk Factors." The Series may borrow as set forth in the Statement
of Additional information. However, as an operating policy, the Series will not
purchase portfolio securities when borrowings exceed 5 percent of total Series
assets.
SERIES X (SMALL CAP SERIES)
The investment objective of Series X is to seek long-term growth of
capital. The Series invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Series
anticipates that under normal market conditions, the Series will invest at
least 65 percent of its assets in equity securities of domestic and foreign
companies with market capitalizations of less than $1 billion at the time of
purchase. The equity securities in which the Series may invest include common
stocks, preferred stocks (both convertible and non-convertible), warrants and
rights. It is anticipated that the Series will invest primarily in companies
whose securities are traded on foreign or domestic stock exchanges or in the
over-the-counter market ("OTC"). The Series also may invest in securities of
emerging growth companies, some of which may have market capitalizations over
$1 billion. Emerging growth companies are companies which have passed their
start-up phase and which show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time.
Under normal conditions, the Series intends to invest primarily in small
company stocks; however, the Series is also permitted to invest up to 35
percent of its assets in equity securities of domestic and foreign issuers with
a market capitalization of more than $1 billion at the time of purchase, debt
obligations and domestic and foreign money market instruments, including
bankers acceptances, certificates of deposit and discount notes of U.S.
Government securities. Debt obligations in which the Series may invest will be
investment grade debt obligations, although the Series may invest up to 5
percent of its assets in non-investment grade debt obligations which consist of
securities rated Ba or lower by Moody's or BB or lower by S&P. In addition, for
temporary or emergency purposes, the Series can invest up to 100 percent of
total assets in cash, cash equivalents, U.S. Government securities, commercial
paper and certain other money market instruments, as well as repurchase
agreements collateralized by these types of securities. The Series may also
invest in reverse repurchase agreements and shares of other non-affiliated
investment companies. See the discussion of such securities under "Investment
Methods and Risk Factors."
The Series may purchase an unlimited number of foreign securities,
including securities of companies in emerging markets. The Series may invest in
foreign securities, either directly or indirectly through the use of depositary
receipts. Depositary receipts, including American Depositary Receipts ("ADRs"),
European Depositary Receipts and American Depositary Shares are generally
issued by banks or trust companies and evidence ownership of underlying foreign
securities. The Series also may invest in securities of foreign investment
funds or trusts (including passive foreign investment companies). See the
discussion of foreign securities, emerging markets, currency risk and ADRs
under "Investment Methods and Risk Factors."
The Series may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options and futures transactions
for hedging or risk management purposes. See the discussion of currency risk
under "Investment Methods and Risk Factors."
At various times the Series may invest in derivative instruments for
hedging or risk management purposes or for any other permissible purpose
consistent with the Series' investment objective. Derivative transactions in
which the Series may engage include the writing of covered put and call options
on securities and the purchase of put and call options thereon, the purchase of
put and call options on securities indexes and exchange-traded options on
currencies and the writing of put and call options on securities indexes. The
Series may enter into spread transactions and swap agreements. The Series also
may buy and sell financial futures contracts which may include interest-rate
futures, futures on currency exchanges, and stock and bond index futures
contracts. The Series may enter into any futures contracts and related options
without limit for "bona fide hedging" purposes (as defined in the Commodity
Futures Trading Commission regulations) and for other permissible purposes,
provided that aggregate initial margin and premiums on positions engaged in for
purposes other than "bona fide hedging" will not exceed 5 percent of its net
asset value, after taking account unrealized profits and losses on such
contracts. See "Investment Methods and Risk Factors" -- "Options," "Futures
Contract and Related Options," "Regulatory Matters Related to Futures and
Options," and "Futures and Options Risk" below.
The Series may engage in short selling against the box, provided that no
more than 15 percent of the value of the Series' net assets is in deposits on
short sales against the box at any one time. The Series also may invest in real
estate investment trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. See the discussion of real
estate securities under "Investment Methods and Risk Factors."
The Series may invest in restricted securities, including Rule 144A
securities, subject to the Series' policy that it will invest no more than 15
percent of its net assets in illiquid securities. See the discussion of
restricted securities under
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<PAGE> 25
"Investment Methods and Risk Factors". The Series also may invest in securities
purchased on a when-issued or delayed delivery basis and in hard asset
securities as discussed under "Investment Methods and Risk Factors."
While there is careful selection and constant supervision by the Series'
Sub-Adviser, Strong Capital Management, Inc. ("Strong"), there can be no
guarantee that the Series' objective will be achieved. Strong invests in
companies whose earnings are believed to be in a relatively strong growth
trend, and, to a lesser extent, in companies in which significant further
growth is not anticipated but which are perceived to be undervalued. In
identifying companies with favorable growth prospects, Strong considers factors
such as prospects for above-average sales and earnings growth; high return on
invested capital; overall financial strength; competitive advantages, including
innovative products and services; effective research, product development and
marketing; and stable, capable management.
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in larger, more established issuers since
these securities may have limited marketability and, thus, they may be more
volatile than securities of larger, more established companies or the market
averages in general. Because small-sized companies normally have fewer shares
outstanding than larger companies, it may be more difficult for the Series to
buy or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies have limited production lines, markets
or financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for
larger, more established ones.
Securities of issuers in "special situations" also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in "special situations"
include, but are not limited to, companies involved in acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer, a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control.
Although investing in securities of emerging growth companies and issuers
in "special situations" offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Series may involve a greater degree of risk
than an investment in other mutual funds that seek long-term growth of capital
by investing in better-known, larger companies.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Series are described in the
"Investment Objectives and Policies" section of this Prospectus and in the
Fund's Statement of Additional Information. The following is a description of
certain additional risk factors related to various securities, instruments and
techniques. The risks so described only apply to those Series which may invest
in such securities and instruments or which use such techniques. Also included
is a general description of some of the investment instruments, techniques and
methods which may be used by one or more of the Series. The methods described
only apply to those Series which may use such methods. Although a Series may
employ the techniques, instruments and methods described below, consistent with
its investment objective and policies and any applicable law, no Series will be
required to do so.
INVESTMENT VEHICLES
CONVERTIBLE SECURITIES -- Each of the Series, except Series C, may invest
in convertible securities. A convertible security is a fixed income security or
a preferred stock that may be converted at either a stated price or stated rate
into underlying shares of common stock. Convertible securities have general
characteristics similar to both debt obligations and equity securities.
Although to a lesser extent than with debt obligations generally, the market
value of convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stock, and therefore, also will react to variations in the general market for
equity securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis, and so may not experience market
value declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide
for a stable stream of income with generally higher yields than common stocks.
Of course, like all debt obligations, there can be no assurance of current
income because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the
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potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible
securities.
WARRANTS -- Warrants are options to buy a stated number of shares of
common stock at a specified price any time during the life of the warrants
(generally two or more years).
U.S. GOVERNMENT SECURITIES -- Each Series may invest in U.S. Government
securities which include obligations issued or guaranteed (as to principal and
interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing Administration, and Government
National Mortgage Association), or instrumentalities (such as Federal Home Loan
Banks and Federal Land Banks), and instruments fully collateralized with such
obligations such as repurchase agreements. Some U.S. Government securities,
such as Treasury bills and bonds, are supported by the full faith and credit of
the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of
mortgage loans on which timely payment of interest and principal is guaranteed
by the full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Series are not so guaranteed in any way.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities (MBSs), including
mortgage pass-through securities and collateralized mortgage obligations
(CMOs), include certain securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one
of its agencies or instrumentalities; and securities issued by private issuers
that represent an interest in or are collateralized by mortgage loans. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. CMOs are obligations fully collateralized by a portfolio
of mortgages or mortgage-related securities.
Series E, N and P may invest in securities known as "inverse floating
obligations," "residual interest bonds," or "interest-only" (IO) and
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs. An inverse floating obligation is
a derivative adjustable rate security with interest rates that adjust or vary
inversely to changes in market interest rates. The term residual interest bond
is used generally to describe those instruments in collateral pools, such as
CMOs, which receive any excess cash flow generated by the pool once all other
bondholders and expenses have been paid. IOs and POs are created by separating
the interest and principal payments generated by a pool of mortgage-backed
bonds to create two classes of securities. Generally, one class receives
interest only payments (IO) and the other class principal only payments (PO).
MBSs have been referred to as "derivatives" because the performance of MBSs is
dependent upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's
average life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Series may
invest in CMOs which are subject to greater risk of prepayment. Market risk
reflects the chance that the price of the security may fluctuate over time. The
price of MBSs may be particularly sensitive to prevailing interest rates, the
length of time the security is expected to be outstanding and the liquidity of
the issue. In a period of unstable interest rates, there may be decreased
demand for certain types of MBSs, and a Series invested in such securities
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments. They are
very volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. Credit risk reflects the chance that
the Series may not receive all or part of its principal because the issuer
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or credit enhancer has defaulted on its obligations. Obligations issued by U.S.
Government-related entities are guaranteed by the agency or instrumentality,
and some, such as GNMA certificates, are supported by the full faith and credit
of the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities,
shares of the Series are not so guaranteed in any way. The performance of
private label MBSs, issued by private institutions, is based on the financial
health of those institutions. There is no guarantee a Series' investment in
MBSs will be successful, and a Series' total return could be adversely affected
as a result.
ASSET-BACKED SECURITIES -- Asset-backed securities represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, for example, automobile, credit card or trade
receivables. Asset-backed commercial paper, one type of asset-backed security,
is issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these
securities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If
the credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
HARD ASSET SECURITIES -- Hard asset securities are equity securities of
issuers which are directly or indirectly engaged to a significant extent in the
exploration development or distribution of one or more of the following:
precious metals; ferrous and non-ferrous metals; gas, petroleum, petrochemical
and/or other commodities (collectively, "Hard Assets"). The production and
marketing of Hard Assets may be affected by actions and changes in governments.
In addition, Hard Asset securities may be cyclical in nature. During periods of
economic or financial instability, the securities of some Hard Asset companies
may be subject to broad price fluctuations, reflecting the volatility of energy
and basic materials prices and the possible instability of supply of various
Hard Assets. In addition, some Hard Asset companies also may be subject to the
risks generally associated with extraction of natural resources, such as the
risks of mining and oil drilling, and the risks of the hazard associated with
natural resources, such as fire, drought, increased regulatory and
environmental costs, and others. Securities of Hard Asset companies may also
experience greater price fluctuations than the relevant Hard Asset. In periods
of rising Hard Asset prices, such securities may rise at a faster rate, and,
conversely, in times of falling Hard Asset prices, such securities may suffer a
greater price decline.
REAL ESTATE SECURITIES -- Certain Series may invest in equity securities
of real estate investment trusts ("REITs") and other real estate industry
companies or companies with substantial real estate investments and therefore,
such Series may be subject to certain risks associated with direct ownership of
real estate and with the real estate industry in general. These risks include,
among others: possible declines in the value of real estate; possible lack of
availability of mortgage funds; extended vacancies of properties; risks related
to general and local economic conditions; overbuilding; increases in
competition, property taxes and operating expenses; changes in zoning laws;
costs resulting from the clean-up of, and liability to third parties for
damages resulting from, environmental problems; casualty or condemnation
losses; uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirement of
the Internal Revenue Code, as amended ( the "Code"). Certain REITs may be
self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Purchase or sale of
securities on a "forward commitment" basis may be used to hedge against
anticipated changes in interest rates and prices. The price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date,
but the Series will enter into when-issued and forward commitments only with
the intention of actually receiving or delivering the securities, as the case
may be; however, a Series may dispose of a commitment prior to settlement if
the Investment Manager or relevant Sub-Adviser deems it appropriate to do so.
No income accrues on securities
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which have been purchased pursuant to a forward commitment or on a when-issued
basis prior to delivery of the securities. If a Series disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it may incur a gain
or loss. At the time a Series enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be
delivered and that the Series may incur a loss.
RESTRICTED SECURITIES -- Restricted securities are acquired through
private placement transactions, directly from the issuer or from security
holders, generally at higher yields or on terms more favorable to investors
than comparable publicly traded securities. However, the restrictions on resale
of such securities may make it difficult for a Series to dispose of such
securities at the time considered most advantageous, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. Restricted securities cannot be sold to the public without
registration under the Securities Act of 1933 ("1933 Act"). Unless registered
for sale, restricted securities can be sold only in privately negotiated
transactions or pursuant to an exemption from registration. Restricted
securities are generally considered illiquid and, therefore, subject to the
Series' limitation on illiquid securities.
Trading restricted securities pursuant to Rule 144A may enable a Series to
dispose of restricted securities at a time considered to be advantageous and/or
at a more favorable price than would be available if such securities were not
traded pursuant to Rule 144A. However, the Rule 144A market is relatively new
and liquidity of a Series' investment in such market could be impaired if
trading does not develop or declines. Risks associated with restricted
securities include the potential obligation to pay all or part of the
registration expenses in order to sell certain restricted securities. A
considerable period of time may elapse between the time of the decision to sell
a security and the time a Series may be permitted to sell it under an effective
registration statement. If, during a period, adverse conditions were to
develop, a Series might obtain a less favorable price than prevailing when it
decided to sell.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk which may result in
substantial losses. The securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Series. In particular, Rules 144A Securities may be
resold only to qualified institutional buyers in accordance with Rules 144A
under the Securities Act of 1933. Unregistered securities may also be sold
abroad pursuant to Regulation S under the 1933 Act. Companies whose securities
are not publicly traded are not subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. Acting pursuant to guidelines established by the Board of
Directors, some restricted securities and Rule 144A Securities may be
considered liquid.
The Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A
securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to the Investment Manager or relevant Sub-Adviser. In
making the determination regarding the liquidity of Rule 144A securities, the
Investment Manager or relevant Sub-Adviser will consider trading markets for
the specific security taking into account the unregistered nature of a Rule
144A security. In addition, the Investment Manager or relevant Sub-Adviser may
consider: (1) the frequency of trades and quotes; (2) the number of dealers
and potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A securities could have the effect of
increasing the amount of a Series' assets invested in illiquid securities to
the extent that qualified institutional buyers become uninterested, for a time,
in purchasing these securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- ADRs are dollar-denominated
receipts issued generally by U.S. banks and which represent the deposit with
the bank of a foreign company's securities. ADRs are publicly traded on
exchanges or over-the-counter in the United States. Investors should consider
carefully the substantial risks involved in investing in securities issued by
companies of foreign nations, which are in addition to the usual risks inherent
in domestic investments. See "Foreign Investment Risks," page 31.
BRADY BONDS -- Certain Series may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly issued
bonds. Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging
markets for new bonds in connection with debt restructuring under a debt
restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay and Venezuela, and are expected to be issued
by Ecuador and Poland and other emerging market countries. Approximately $150
billion in principal amount of Brady Bonds has been issued to date, the largest
proportion having been issued by Mexico and Venezuela. Investors should
recognize that Brady Bonds have been issued only recently and, accordingly, do
not
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have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the secondary market for Latin American debt. The
Salomon Brothers Brady Bond Index provides a benchmark that can be used to
compare returns of emerging market Brady Bonds with returns in other bond
markets, e.g., the U.S. bond market.
Series K may invest in either collateralized or uncollateralized Brady
Bonds denominated in various currencies, while Series B and Series P may invest
only in collateralized bonds denominated in U.S. dollars. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at the time and is adjusted at regular
intervals thereafter.
LOAN PARTICIPATIONS AND ASSIGNMENTS -- Certain Series may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a corporate or foreign entity and one or more financial institutions
("Lenders"). Certain Series may also invest in participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in a Series having a
contractual relationship only with the Lender, not with the borrower. The
Series will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In
connection with purchasing Participations, the Series generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the Loan ("Loan Agreement"), nor any rights of set-off
against the borrower, and the Series may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As
a result, the Series will assume the credit risk of both the borrower and the
Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Series may be treated as a general creditor of the Lender and may not benefit
from any set-off between the Lender and the borrower. The Series will acquire
Participations only if the Lender interpositioned between the Series and the
borrower is determined by the Investment Manager or relevant Sub-Adviser to be
creditworthy. When a Series purchases Assignments from Lenders, the Series will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Series as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Lender.
A Series may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Series anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Series' ability to dispose of particular
Assignments or Participations when necessary to meet the Series' liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Series to
assign a value to those securities for purposes of valuing the Series'
portfolio and calculating its net asset value.
ZERO COUPON SECURITIES -- Certain Series may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Certain Series
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a
portion of the original issue discount on zero coupon securities and the
"interest" on payment-in-kind securities will be included in the investing
Series' income. Accordingly, for a Series to qualify for tax treatment as a
regulated investment company and to avoid certain taxes (see "Distributions and
Federal Income Tax Considerations"), the Series may be required to distribute
an amount that is greater than the total amount of cash it actually receives.
These distributions must be made from the Series' cash assets or, if necessary,
from the proceeds of sales of portfolio securities. A Series will not be able
to purchase additional income-producing securities with cash used to make such
distributions and its current income ultimately may be reduced as a result.
Zero coupon and payment-in-kind securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest in cash.
SOVEREIGN DEBT -- Certain Series may invest in sovereign debt securities
of emerging market governments, including Brady Bonds (described above).
Investments in such securities involve special risks. The issuer of the debt or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance with
the terms of such debt. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt, and in turn the Series' net
asset value, to a greater extent than the volatility inherent in domestic fixed
income securities. A sovereign
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debtor's willingness or ability to repay principal and pay interest in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which a sovereign debtor
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may
be conditioned on a sovereign debtor's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due, may result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debt.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the Series'
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Manager or relevant Sub-Adviser intends to manage the Series in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Series to suffer a loss of
interest or principal on any of its holdings.
In recent years, some of the emerging market countries in which Series K
expects to invest have encountered difficulties in servicing their sovereign
debt obligations. Some of these countries have withheld payments of interest
and/or principal of sovereign debt. These difficulties have also led to
agreements to restructure external debt obligations--in particular, commercial
bank loans, typically by rescheduling principal payments, reducing interest
rates and extending new credits to finance interest payments on existing debt.
In the future, holders of emerging market sovereign debt securities may be
requested to participate in similar rescheduling of such debt. Certain emerging
market countries are among the largest debtors to commercial banks and foreign
governments. At times certain emerging market countries have declared a
moratorium on the payment of principal and interest on external debt; such a
moratorium is currently in effect in certain emerging market countries. There
is no bankruptcy proceeding by which a creditor may collect in whole or in part
sovereign debt on which an emerging market government has defaulted.
The ability of emerging market governments to make timely payments on
their sovereign debt securities is likely to be influenced strongly by a
country's balance of trade and its access to trade and other international
credits. A country whose exports are concentrated in a few commodities could be
vulnerable to a decline in the international prices of one or more of such
commodities. Increased protectionism on the part of a country's trading
partners could also adversely affect its exports. Such events could diminish a
country's trade account surplus, if any. To the extent that a country receives
payment for its exports in currencies other than hard currencies, its ability
to make hard currency payment could be affected.
Investors should also be aware that certain sovereign debt instruments in
which the Series may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be
the equivalent in terms of quality to securities rated below investment grade
by Moody's and S&P. Such securities are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Series may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- -- A repurchase agreement is a contract under which a Series would acquire a
security for a relatively short period (usually not more than 7 days) subject
to the obligation of the seller to repurchase and the Series to resell such
security at a fixed time and price. The resale price is in excess of the
purchase price and reflects an agreed-upon market rate unrelated to the coupon
rate of the purchased security. Repurchase agreements will be fully
collateralized including interest earned thereon during the entire term of the
agreement. If the institution defaults on the repurchase agreement, the Series
will retain possession of the underlying securities. If bankruptcy proceedings
are commenced with respect to the seller, realization on the collateral by the
Series may be delayed or limited and the Series may incur additional costs. In
such case, the Series will be subject to risks associated with changes in
market value of the collateral securities. Each of
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the Series intends to limit repurchase agreements to institutions believed by
the Investment Manager or relevant Sub-Adviser to present minimal credit risk.
Certain Series may also enter into reverse repurchase agreements with the
same parties with whom they may enter into repurchase agreements. Under a
reverse repurchase agreement, the Series would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Series may decline below the price of the securities the
Series has sold but is obligated to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Series' obligation to repurchase the
securities, and the Series' use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
Certain Series also may enter into "dollar rolls," in which the Series
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period,
the Series would forego principal and interest paid on such securities. The
Series would be compensated by the difference between the current sales price
and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale.
At the time a Series enters into reverse repurchase agreements or dollar
rolls, it will establish and maintain a segregated account with its custodian
containing cash or liquid securities having a value not less than the
repurchase price, including accrued interest. Reverse repurchase agreements and
dollar rolls will be treated as borrowings and will be deducted from a Series'
assets for purposes of calculating compliance with the Series' borrowing
limitation. See "Borrowing," below.
MANAGEMENT PRACTICES
CASH RESERVES -- Each Series may establish and maintain reserves as the
Investment Manager or relevant Sub-Adviser believes is advisable to facilitate
the Series' cash flow needs (e.g., redemptions, expenses and, purchases of
portfolio securities) or for temporary, defensive purposes. Such reserves may
be invested in domestic, and for certain Series, foreign money market
instruments rated within the top two credit categories by a national rating
organization, or if unrated, the Investment Manager or Sub-Adviser equivalent.
SHARES OF OTHER INVESTMENT COMPANIES -- Series K, M, N, O and X may invest
in shares of other investment companies. A Series' investment in shares of
other investment companies may not exceed immediately after purchase 10 percent
of the Series' total assets and no more than 5 percent of its total assets may
be invested in the shares of any one investment company. Investment in the
shares of other investment companies has the effect of requiring shareholders
to pay the operating expenses of two mutual funds.
BORROWING -- Each Series may borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Series' investment objective and program. Such
borrowings may be collateralized with Series assets. Borrowings will not exceed
5 percent of the total assets of each Series except Series K, M, N, O, P, V and
X, borrowings of which may not exceed 33 1/3 percent of total assets. To the
extent that a Series purchases securities while it has outstanding borrowings,
it is using leverage, i.e., using borrowed funds for investment. Leveraging
will exaggerate the effect on net asset value of any increase or decrease in
the market value of a Series' portfolio. Money borrowed for leveraging will be
subject to interest costs that may or may not be recovered by appreciation of
the securities purchased; in certain cases, interest costs may exceed the
return received on the securities purchased. A Series also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Series O may not purchase securities when borrowings exceed 5 percent of
its total assets.
LENDING OF PORTFOLIO SECURITIES -- Certain Series may lend securities to
broker-dealers, institutional investors, or other persons to earn additional
income. The principal risk is the potential insolvency of the broker-dealer or
other borrower. In this event, the Series could experience delays in recovering
its securities and possibly capital losses. Any loan will be continuously
secured by collateral at least equal to the value of the security loaned. Such
lending could result in delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially.
FORWARD CURRENCY TRANSACTIONS -- In seeking to protect against currency
exchange rate or interest rate changes that are adverse to their present or
prospective positions, certain Series may employ certain risk management
practices involving the use of forward currency contracts and options
contracts, futures contracts and options on futures contracts on U.S. and
foreign government securities and currencies. Series K also may enter into
interest rate, currency and index swaps and purchase or sell related caps,
floors and collars and other derivatives. See "Swaps, Caps, Floors and
Collars," page 28. There can be no assurance that such risk management
practices will succeed. Only a limited market, if any, currently exists for
forward currency contracts and options and futures instruments relating to
currencies of most emerging markets, to securities denominated in such
currencies or to securities of issuers domiciled or principally engaged in
business in such emerging markets. To the extent
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that such a market does not exist, a Sub-Adviser may not be able to effectively
hedge its investment in such emerging markets.
To attempt to hedge against adverse movements in exchange rates between
currencies, certain Series may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date. Such
contracts may involve the purchase or sale of a foreign currency against the
U.S. dollar or may involve two foreign currencies. Such Series may enter into
forward currency contracts either with respect to specific transactions or with
respect to the respective Series' portfolio positions. For example, when a
Series anticipates making a purchase or sale of a security, it may enter into a
forward currency contract in order to set the rate (either relative to the U.S.
dollar or another currency) at which a currency exchange transaction related to
the purchase or sale will be made. Further, if the Investment Manager or
relevant Sub-Adviser believes that a particular currency may decline compared
to the U.S. dollar or another currency, certain Series may enter into a forward
contract to sell the currency the Investment Manager or Sub-Adviser expects to
decline in an amount up to the value of the portfolio securities held by the
Series denominated in a foreign currency.
The Series' use of forward currency contracts or options and futures
transactions involve certain investment risks and transaction costs to which
they might not otherwise be subject. These risks include: dependence on the
Investment Manager or relevant Sub-Adviser's ability to predict movements in
exchange rates; imperfect correlation between movements in exchange rates and
movements in the currency hedged; and the fact that the skills needed to
effectively hedge against the Series' currency risks are different from those
needed to select the securities in which a Series invests. The Series also may
conduct foreign currency exchange transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market.
OPTIONS -- A call option on a security gives the purchaser of the option,
in return for a premium paid to the writer (seller), the right to buy the
underlying security at the exercise price at any time during the option period.
Upon exercise by the purchaser, the writer (seller) of a call option has the
obligation to sell the underlying security at the exercise price. When a Series
purchases a call option, it will pay a premium to the party writing the option
and a commission to the broker selling the option. If the option is exercised
by such Series, the amount of the premium and the commission paid may be
greater than the amount of the brokerage commission that would be charged if
the security were to be purchased directly. By writing a call option, a Series
assumes the risk that it may be required to deliver the security having a
market value higher than its market value at the time the option was written. A
Series will write call options in order to obtain a return on its investments
from the premiums received and will retain the premiums whether or not the
options are exercised. Any decline in the market value of the Series' portfolio
securities will be offset to the extent of the premiums received (net of
transaction costs). If an option is exercised, the premium received on the
option will effectively increase the exercise price.
The Series may write only covered call options. This means that the Series
will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash or liquid securities having a value equal to the
fluctuating market value of the optioned securities or currencies. During the
option period the writer of a call option has given up the opportunity for
capital appreciation above the exercise price should market price of the
underlying security increase, but has retained the risk of loss should the
price of the underlying security decline. Writing call options also involves
the risk relating to the Series' ability to close out options it has written.
A call option on a stock index is similar to a call option on an
individual security, except that the value of the option depends on the
weighted value of the group of securities comprising the index and all
settlements are made in cash. A call option may be terminated by the writer
(seller) by entering into a closing purchase transaction in which it purchases
an option of the same series as the option previously written.
A put option on a security gives the purchaser of the option, in return
for premium paid to the writer (seller), the right to sell the underlying
security at the exercise price at any time during the option period. Upon
exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. The Series may write
only covered put options, which means that the Series will maintain in a
segregated account cash or liquid securities in an amount not less than the
exercise price or the Series will own an option to sell the underlying security
or currency subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option at all times which the put
option is outstanding. By writing a put option, the Series assumes the risk
that it may be required to purchase the underlying security at a price in
excess of its current market value.
A put option on a stock index is similar to a put option on an individual
security, except that the value of the option depends on the weighted value of
the group of securities comprising the index and all settlements are made in
cash.
A Series may sell a call option or a put option which it has previously
purchased prior to purchase (in the case of a call) or the sale (in the case of
a put) of the underlying security. Any such sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the call or put which is sold.
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FUTURES CONTRACTS AND RELATED OPTIONS -- Certain Series may buy and sell
futures contracts (and options on such contracts) to manage exposure to changes
in securities prices and foreign currencies and as an efficient means of
adjusting overall exposure to certain markets. A financial futures contract
calls for delivery of a particular security at a certain time in the future.
The seller of the contract agrees to make delivery of the type of security
called for in the contract and the buyer agrees to take delivery at a specified
future time. A Series may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect the Series'
securities from a decrease in value. When a Series writes a call option on a
futures contract, it is undertaking the obligation of selling a futures
contract at a fixed price at any time during a specified period if the option
is exercised. Conversely, the purchaser of a put option on a futures contract
is entitled (but not obligated) to sell a futures contract at a fixed price
during the life of the option.
Financial futures contracts include interest rate futures contracts and
stock index futures contracts. An interest rate futures contract obligates the
seller of the contract to deliver, and the purchaser to take delivery of,
interest rate securities called for in a contract at a specified future time at
a specified price. A stock index assigns relative values to common stocks
included in the index and the index fluctuates with changes in the market
values of the common stocks included. A stock index futures contract is a
bilateral contract pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume
a position in the contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option.
REGULATORY MATTERS RELATED TO FUTURES AND OPTIONS -- In connection with
its proposed futures and options transactions, the Fund filed for the Series
with the CFTC a notice of eligibility for exemption from the definition of (and
therefore from CFTC regulation as) a "commodity pool operator" under the
Commodity Exchange Act. The Fund represents in its notice of eligibility that:
(i) it will not purchase or sell futures or options on futures contracts or
stock indices 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 percent of each
Series' assets; and (ii) with respect to each futures contract purchased or
long position in an option contract, each Series will set aside in a segregated
account cash or liquid securities in an amount equal to the market value of
such contract less the initial margin deposit.
The Staff of Securities and Exchange Commission ("SEC") has taken the
position that the purchase and sale of futures contracts and the writing of
related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies' issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section
18 if an investment company: (i) sells futures contracts to offset expected
declines in the value of the investment company's securities, provided the
value of such futures contracts does not exceed the total market value of those
securities (plus such additional amount as may be necessary because of
differences in the volatility factor of the securities vis-a-vis the futures
contracts); (ii) writes call options on futures contracts, stock indexes or
other securities, provided that such options are covered by the investment
company's holding of a corresponding long futures position, by its ownership of
securities which correlate with the underlying stock index, or otherwise; (iii)
purchases futures contracts, provided the investment company establishes a
segregated account consisting of cash or liquid securities in an amount equal
to the total market value of such futures contracts less the initial margin
deposited therefor; and (iv) writes put options on futures contracts, stock
indexes or other securities, provided that such options are covered by the
investment company's holding of a corresponding short futures position, by
establishing a cash segregated account in an amount equal to the value of its
obligation under the option, or otherwise.
Each Series will conduct its purchases and sales of any futures contracts
and writing of related options transactions in accordance with the foregoing.
SWAPS, CAPS, FLOORS AND COLLARS -- Certain Series may enter into interest
rate and index swaps, the purchase or sale of related caps, floors and collars
and other derivative instruments. Series K may also enter into currency swaps.
The Series 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 technique for managing the
portfolio's duration (i.e., the price sensitivity to changes in interest rates)
or to protect against any increase in the price of securities the Series
anticipates purchasing at a later date. The Series intends to use these
transactions as hedges and not as speculative investments, and will not sell
interest rate caps or floors if it does not own securities or other instruments
providing the income the Series may be obligated to pay at a later date.
Interest rate swaps involve the exchange by the Series with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the reference
indices.
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The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
HYBRID INSTRUMENTS -- These instruments (which are derivatives) can
combine the characteristics of securities, futures and options. For example,
the principal amount, redemption or conservation terms of a security could be
related to the market price of some commodity, currency or securities index.
The risks of such investments would reflect the risks of investing in futures,
options and securities, including volatility and illiquidity. Such securities
may bear interest or pay dividends at below market (or even relatively nominal)
rates. Under certain conditions, the redemption value of such an investment
could be zero. Hybrids can have volatile prices and limited liquidity and their
use by the Series may not be successful.
RISK FACTORS
GENERAL -- Each Series' net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions and, if applicable,
its net currency exposure. The value of fixed income securities generally
fluctuates inversely with interest rate movements. Longer term bonds held by a
Series are subject to greater interest rate risk. There is no assurance that
any Series will achieve its investment objective.
FUTURES AND OPTIONS RISK -- Futures contracts and options can be highly
volatile and could result in reduction of a Series' total return, and a Series'
attempt to use such investments for hedging purposes may not be successful.
Successful futures strategies require the ability to predict future movements
in securities prices, interest rates and other economic factors. Losses from
options and futures could be significant if a Series is unable to close out its
position due to distortions in the market or lack of liquidity. A Series' risk
of loss from the use of futures extends beyond its initial investment and could
potentially be unlimited.
The use of futures, options and forward contracts involves investment
risks and transaction costs to which a Series would not be subject absent the
use of these strategies. If the Investment Manager or relevant Sub-Adviser
seeks to protect a Series against potential adverse movements in the
securities, foreign currency or interest rate markets using these instruments,
and such markets do not move in a direction adverse to such Series, such Series
could be left in a less favorable position than if such strategies had not been
used. Risks inherent in the use of futures, options and forward contracts
include: (a) the risk that interest rates, securities prices and currency
markets will not move in the directions anticipated; (b) imperfect correlation
between the price of futures, options and forward contracts and movements in
the prices of the securities or currencies being hedged; (c) the fact that
skills needed to use these strategies are different from those needed to select
portfolio securities; (d) the possible absence of a liquid secondary market for
any particular instrument at any time; and (e) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. A
Series' ability to terminate option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to such Series.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of a hedge. Such correlation, particularly
with respect to options on stock indices and stock index futures, is imperfect,
and such risk increases as the composition of the Series diverges from the
composition of the relevant index. The successful use of these strategies also
depends on the ability of the Investment Manager or relevant Sub-Adviser to
correctly forecast interest rate movements and general stock market price
movements.
FOREIGN INVESTMENT RISKS -- Investment in foreign securities involves
risks and considerations not present in domestic investments. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The securities of non-U.S. issuers generally are not
registered with the SEC, nor are the issuers thereof usually subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers.
Foreign securities markets, while growing in volume, have for the most
part substantially less volume than United States securities markets and
securities for foreign companies are generally less liquid and at times their
prices may be more volatile than prices of comparable United States companies.
Foreign stock exchanges, brokers and listed companies generally are subject to
less government supervision and regulation than in the United States. The
customary settlement time for foreign securities may be longer than the
customary settlement time for United States securities.
A Series' income and gains from foreign issuers may be subject to non-U.S.
withholding or other taxes, thereby reducing its income and gains. In addition,
with respect to some foreign countries, there is the increased possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Series, political or social instability, or diplomatic
developments which could affect the investments of the Series in those
countries.
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Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, rate of savings and capital reinvestment, resource self-sufficiency
and balance of payments positions.
CURRENCY RISK -- Series that invest in securities denominated in
currencies other than the U.S. dollar, will be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rates
between such currencies and the U.S. dollar. Changes in currency exchange rates
will influence the value of a Series' shares, and also may affect the value of
dividends and interest earned by the Series and gains and losses realized by
the Series. In addition, the Series may incur costs in connection with the
conversion or transfer of foreign currencies. Currencies generally are
evaluated on the basis of fundamental economic criteria (e.g., relative
inflation and interest rate levels and trends, growth rate forecasts, balance
of payments status and economic policies) as well as technical and political
data. The exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, the
international balance of payments, governmental intervention, speculation and
other economic and political conditions. If the currency in which a security is
denominated appreciates against the U.S. dollar, the dollar value of the
security will increase. Conversely, a decline in the exchange rate of the
currency would adversely affect the value of the security expressed in U.S.
dollars.
EMERGING MARKETS RISKS -- Because of the special risks associated with
investing in emerging markets, an investment in a Series investing in such
markets should be considered speculative. Investors are strongly advised to
consider carefully the special risks involved in emerging markets, which are in
addition to the usual risks of investing in developed foreign markets around
the world. Investing in emerging markets involves risks relating to potential
political and economic instability within such markets and the risks of
expropriation, nationalization, confiscation of assets and property or the
imposition of restrictions on foreign investment and on repatriation of capital
invested. In the event of such expropriation, nationalization or other
confiscation in any emerging market, the Series could lose its entire
investment in that market. Many emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries. Economies in emerging markets generally are
dependent heavily upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be affected adversely by economic conditions
in the countries with which they trade.
The securities markets of emerging countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of
the United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. Emerging markets may include former communist countries. There is a
possibility that these countries may revert back to communism. In addition,
brokerage commissions, custodial services and other costs relating to
investment in foreign markets generally are more expensive than in the United
States, particularly with respect to emerging markets. Such markets have
different settlement and clearance procedures. In certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of the Series to make intended securities purchases due to settlement
problems could cause the Series to forego attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems
could result either in losses to the Series due to subsequent declines in value
of the portfolio security or, if the Series has entered into a contract to sell
the security, could result in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Series' portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any
period during which an emergency exists, as determined by the SEC. Accordingly,
when the Fund believes that appropriate circumstances warrant, it will promptly
apply to the SEC for a determination that an emergency exists within the
meaning of Section 22(e) of the 1940 Act. During the period commencing from the
Fund's identification of such conditions until the date of SEC action, the
portfolio securities of the Series in the affected markets will be valued at
fair value as determined in good faith by or under the direction of the Fund's
Board of Directors.
RISKS ASSOCIATED WITH INVESTMENTS IN HIGH-YIELD LOWER-RATED DEBT
SECURITIES -- Investment in debt securities rated below investment grade
involves a high degree of risk. Debt securities rated BB, B, CCC, CC and C by
S&P and Ba, B Caa, Ca and C by Moody's, are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. For S&P, BB
indicates the lowest degree of speculation and C the highest degree of
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speculation. For Moody's, Ba indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Similarly, debt
rated Ba or BB and below is regarded by the relevant rating agency as
speculative. Debt rated C by Moody's or S&P is the lowest quality debt that is
not in default as to principal or interest and such issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be
subject to greater risk than higher quality securities with regard to a
deterioration of general economic conditions. These securities are the
equivalent of high yield, high risk bonds. As noted above, certain Series may
invest in debt securities rated below C, which are in default as to principal
and/or interest. Ratings of debt securities represent the rating agency's
opinion regarding their quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit quality in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S
INVESTORS STANDARD & POOR'S
SERVICE, INC. CORPORATION DEFINITION
Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Lower medium grade/
speculative elements
B B Speculative
Caa CCC More speculative/
Ca CC possibly in or
C C high risk of default
--- D In default
Not rated Not rated Not rated
For a more complete description of the corporate bond ratings, see the
Appendix to the Fund's Statement of Additional Information.
The market value of lower quality debt securities tends to reflect
individual developments of the issuer to a greater extent than do higher
quality securities, which react primarily to fluctuations in the general level
of interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly
greater for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the
issuer. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Series. If an issuer exercises these provisions in a
declining interest rate market, the Series may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
In addition, the Series may have difficulty disposing of lower quality
securities because there may be a thin trading market for such securities.
There may be no established retail secondary market for many of these
securities, and the Series anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. The lack of a liquid
secondary market also may have an adverse impact on market prices of such
instruments and may make it more difficult for the Series to obtain accurate
market quotations for purposes of valuing the securities in the portfolio of
the Series.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Series will adversely impact
net asset value of the Series. See "Investment Methods and Risk Factors" in the
Statement of Additional Information. In addition to the foregoing, such factors
may include: (i) potential adverse publicity; (ii) heightened sensitivity to
general economic or political conditions; and (iii) the likely adverse impact
of a major economic recession. A Series also may incur additional expenses to
the extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings, and the Series may have
limited legal recourse in the event of a default. Debt securities issued by
governments in emerging markets can differ from debt obligations issued by
private entities in that remedies from defaults generally must be pursued in
the courts of the defaulting government, and legal recourse is therefore
somewhat diminished.
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Political conditions, in terms of a government's willingness to meet the terms
of its debt obligations, also are of considerable significance. There can be no
assurance that the holders of commercial bank debt may not contest payments to
the holders of debt securities issued by governments in emerging markets in the
event of default by the governments under commercial bank loan agreements.
MANAGEMENT OF THE FUND
The management of the Fund's business and affairs is the responsibility of
the Fund's Board of Directors. Security Management Company, LLC (the
"Investment Manager"), 700 SW Harrison, Topeka, Kansas 66636-0001, is
responsible for selection and management of the Fund's portfolio investments.
The Investment Manager is a limited liability company, which is ultimately
controlled by Security Benefit Life Insurance Company, a mutual life insurance
company. The Investment Manager also acts as investment adviser to Security
Growth and Income Fund, Security Ultra Fund, Security Income Fund, Security
Cash Fund, Security Equity Fund, and Security Tax-Exempt Fund. The Investment
Manager currently manages $3.5 billion in assets.
The Investment Manager has engaged Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
provide investment advisory services to Series D and Series K of the Fund.
Pursuant to the agreements, Lexington furnishes investment advisory,
statistical and research facilities, supervises and arranges for the purchase
and sale of securities on behalf of Series D and K and provides for the
compilation and maintenance of records pertaining to such investment advisory
services, subject to the control and supervision of the Board of Directors of
the Fund and the Investment Manager. Lexington is a wholly-owned subsidiary of
Lexington Global Asset Managers, Inc., a Delaware corporation with offices at
Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663. Descendants of
Lunsford Richardson, Sr., their spouses, trusts and other related entities have
a majority voting control of the outstanding shares of Lexington Global Asset
Managers, Inc. Lexington which was established in 1938 currently serves as an
investment adviser, Sub-adviser and/or sponsor to 21 investment companies with
varying objectives and manages over $3.8 billion in assets.
Lexington has entered into a sub-advisory contract with MFR Advisors, Inc.
("MFR"), One Liberty Plaza, New York, New York 10006, under which MFR will
provide Series K with investment and economic research services. MFR has been
an investment adviser since 1992 and currently acts as investment adviser to
Global High Yield Fund, Global Asset Allocation Fund and Emerging Markets Total
Return Fund, a sub-adviser to the Lexington Ramirez Global Income Fund and also
serves as an institutional manager for private clients. MFR is a subsidiary of
Maria Fiorini Ramirez, Inc. ("Ramirez"), which was established in August of
1992 to provide global economic consulting services. Ramirez owns 80 percent
and Security Benefit Group, Inc. ("SBG") owns 20 percent of the outstanding
common stock of MFR. Maria Fiorini Ramirez owns 100 percent of the outstanding
capital stock of Ramirez, and Security Benefit Life Insurance Company owns 100
percent of the outstanding common stock of SBG.
The Investment Manager has entered into a sub-advisory agreement with
Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe
Road, Tower II, 7th Floor, Englewood, Colorado 80112. Pursuant to the
agreement, Meridian furnishes investment advisory, statistical and research
facilities, supervises and arranges for the purchase and sale of equity
securities on behalf of Series M and provides for the compilation and
maintenance of records pertaining to such investment advisory services, subject
to the control and supervision of the Board of Directors of the Fund and the
Investment Manager. Meridian is a wholly-owned subsidiary of Meridian
Management & Research Corporation which is controlled by its two stockholders,
Michael J. Hart and Craig T. Callahan.
The Investment Manager has engaged T. Rowe Price Associates, Inc. ("T.
Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, organized in
1937 under the laws of the state of Maryland by the late Thomas Rowe Price,
Jr., to provide investment advisory services to Series N and Series O. Pursuant
to the agreements, T. Rowe Price furnishes investment advisory services,
supervises and arranges for the purchase and sale of securities on behalf of
Series N and O and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
T. Rowe Price is a publicly held company, which with its affiliates manages
over $95 billion in assets for over 4.5 million individual and institutional
investor accounts.
The Investment Manager has engaged Strong Capital Management, Inc.
("Strong"), 900 Heritage Reserve, Menomonee Falls, Wisconsin 53051, to provide
certain investment advisory services to Series X. Strong is a privately held
corporation which is controlled by Richard S. Strong. Strong was established in
1974 and currently manages over $27 billion in assets.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Manager manages the Fund's portfolios in accordance with each
Series' stated investment objective and policies and makes all investment
decisions, except that as to Series D and K of the Fund, the Investment Manager
supervises such management of those Series by Lexington, as to Series M,
supervises management of the Series by Meridian, as to Series N and O,
supervises management of those Series by T. Rowe Price, and as to Series X,
supervises management of the Series by Strong. As compensation for its
management services, the Investment Manager receives on an annual basis, an
amount equal to .75 percent of the average net assets of Series A, B, E, S, J,
K, P, and V; .50 percent of the average net assets of Series C;
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<PAGE> 38
and 1.00 percent of the average net assets of Series D, M, N, O, and X computed
on a daily basis and payable monthly.
The Investment Manager pays Lexington an annual fee equal to .50 percent
of the average net assets of Series D and .35 percent of the average net assets
of Series K, respectively, for management services provided to Series D and K.
For the services provided to Lexington by MFR, MFR, receives from Lexington, on
an annual basis, a fee equal to .15 percent of the average net assets of Series
K, calculated daily and payable monthly.
The Investment Manager pays T. Rowe Price an annual fee equal to .50
percent of the first $50,000,000 of average net assets of Series N and .40
percent of the average net assets of Series N in excess of $50,000,000 for
management services provided to that Series. Such fee is calculated daily and
payable monthly. The Investment Manager pays T. Rowe Price an annual fee equal
to .50 percent of the first $20,000,000 of average net assets of Series O and
.40 percent of such assets in excess of $20,000,000 for management services
provided to Series O. For any month in which the average daily net assets of
Series O exceeds $50,000,000, T. Rowe Price will waive .10 percent of its
investment management fee on the first $20,000,000 of average net assets of the
Series. Such fee is calculated daily and payable monthly.
The Investment Manager pays Meridian an annual fee equal to a percentage
of the average daily closing value of the net assets of Series M, computed on a
daily basis, according to the following schedule:
Average Daily Net Assets of the Series Annual Fee
- -------------------------------------- ----------
Less than $100 Million...................... .40%, plus
$100 Million, but less than $200 Million.... .35%, plus
$200 Million, but less than $400 Million.... .30%, plus
$400 Million or more........................ .25%
The Investment Manager pays Strong with respect to Series X, an annual fee
based on the combined average net assets of Series X and another fund to which
Strong provides advisory services. The fee is equal to .50 percent of the
combined average net assets under $150 million, .45 percent of the combined
average net assets at or above $150 million but less than $500 million, and .40
percent of the combined average net assets at or above $500 million.
The Investment Manager also acts as administrative agent for each Series
of the Fund, and as such performs administrative functions, bookkeeping,
accounting and pricing functions for the Fund. For providing these services,
the Investment Manager receives on an annual basis a fee of .045 percent of the
average daily net assets of the Fund except for Series X the Investment Manager
receives on an annual basis a fee of .09 percent of the average daily net
assets of the Series. For these services, the Investment Manager also receives,
with respect to Series D, K, M and N, an annual fee equal to the greater of .10
percent of each Series' average net assets or $60,000.
The expense ratio of each Series for the fiscal year ended December 31,
1996, was as follows: Series A - .83 percent; Series B - .84 percent; Series C
- - .58 percent; Series D - 1.30 percent; Series E - .83 percent; Series S - .84
percent; Series J - .84 percent; Series K - .84 percent; Series M - 1.34
percent; Series N - 1.45 percent; and Series O - 1.15 percent. The annualized
expense ratio of Series P for the period August 5, 1996 (date of inception) to
December 31, 1996, was .28 percent. The annualized expense ratio for Series V
for the period May 1, 1997 (date of inception) to August 31, 1997 was .55%.
The expense ratio for Series X is not yet available as it did not begin
operations until October of 1997. During the fiscal year ended December 31,
1996, the Investment Manager waived the management fee of Series K and P, and
during the fiscal year ending December 31, 1997, the Investment Manager will
waive the management fee of Series K, P, V and X. In the absence of such
waivers, the expense ratios for Series K , P and V would have been higher.
PORTFOLIO MANAGEMENT
SERIES A (GROWTH SERIES) is managed by the Large Capitalization Team of
the Investment Manager consisting of John Cleland, Chief Investment Strategist,
Terry Milberger, Jim Schier and Chuck Lauber. The Large Capitalization Team is
responsible for determining general investment strategy and monitoring
portfolio guidelines. Terry Milberger, Senior Portfolio Manager, has day-to-day
responsibility for managing Series A and has managed the Series since 1989. The
common stock portion of the SERIES B (GROWTH-INCOME SERIES) portfolio is
managed by the Investment Manager's Large Capitalization Team described above.
Mr. Milberger has day-to-day responsibility for managing the common stock
portion of the Series B portfolio and has managed this portion of the Series'
portfolio since 1995. The fixed income portion of the Series B portfolio is
managed by the Fixed Income Team of the Investment Manager consisting of John
Cleland, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison, David Eshnaur,
Elaine Miller and Paulette Schwerdt. The Fixed Income Team is responsible for
determining general investment strategy and monitoring portfolio guidelines.
Tom Swank, Portfolio Manager, has day-to-day responsibility for managing the
fixed income portion of Series B's portfolio and has managed this portion of
the portfolio since 1994. SERIES D (WORLDWIDE EQUITY SERIES) is managed by an
investment management team of Lexington. Richard T. Saler and Alan Wapnick have
the day-to-day responsibility for managing the investments of Series D and have
managed the Series since 1994. SERIES E (HIGH GRADE INCOME SERIES) is managed
by the Fixed Income Team described above. Tom Swank and Steve Bowser have
day-to-day responsibility for managing Series E and have managed the Series
since June 1997. SERIES J (EMERGING GROWTH SERIES) and SERIES S (SOCIAL
AWARENESS SERIES) are managed by the Investment Manager's Small Capitalization
Team and Social
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<PAGE> 39
Responsibility Team, respectively, each of which consists of John Cleland,
Chief Investment Strategist, Cindy Shields, Larry Valencia and Frank Whitsell.
The Small Capitalization Team and the Social Responsibility Team are
responsible for determining general investment strategy and monitoring
portfolio guidelines. Cindy Shields, Portfolio Manager, has day-to-day
responsibility for managing Series J and Series S and has managed the Series
since 1994. SERIES K (GLOBAL AGGRESSIVE BOND SERIES) is managed by an
investment management team of Lexington and MFR. Denis P. Jamison and Maria
Fiorini Ramirez have day-to-day responsibility for managing Series K and have
managed the Series since its inception in 1995. SERIES M (SPECIALIZED ASSET
ALLOCATION SERIES) is managed by an investment management team of portfolio
managers of the Investment Manager and Sub-Adviser. Jane Tedder, Senior
Economist of the Investment Manager, has day-to-day responsibility for managing
the fixed-income portion of the Series' portfolio and has had responsibility
for the Series since January 1996. Pat Boyle, Portfolio Manager of Meridian,
has day-to-day responsibility for managing the equity portion of the Series'
portfolio. He has had day-to-day responsibility for managing the equity portion
of the Series since August 1997. SERIES N (MANAGED ASSET ALLOCATION SERIES) is
managed by an Investment Advisory Committee of T. Rowe Price consisting of
Edmund M. Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark,
Peter Van Dyke, M. David Testa and Richard T. Whitney. Mr. Notzon has had
day-to-day responsibility for managing the Series since its inception in 1995.
SERIES O (EQUITY INCOME SERIES) is managed by an Investment Advisory Committee
of T. Rowe Price consisting of Brian C. Rogers, Chairman, Thomas H. Broadus,
Jr., Richard P. Howard and William J. Stromberg. Mr. Rogers has had day-to-day
responsibility for managing the Series since its inception in 1995. SERIES P
(HIGH YIELD SERIES) is managed by the Fixed Income Team described above. Tom
Swank and David Eshnaur have day-to-day responsibility for managing Series P.
Mr. Swank has managed the Series since its inception in 1996 and Mr. Eshnaur
has managed the Series since July 1997. SERIES V (VALUE SERIES) is managed by
the Large Capitalization Team described above. Jim Schier has day-to-day
responsibility for managing Series V and has managed the Series since its
inception in 1997. SERIES X (SMALL CAP SERIES) is managed by Ronald C. Ognar of
Strong. He has had day-to-day responsibility for managing Series X since its
inception in 1997.
Steve Bowser is Assistant Vice President and Portfolio Manager of the
Investment Manager. Prior to joining the Investment Manager in 1992, he was
Assistant Vice President and Portfolio Manager with Federal Home Loan Bank of
Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of Kansas
City in 1988 and began his career with the Farm Credit System from 1982 to
1987, serving as Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982. He is a Chartered Financial Analyst.
Pat Boyle is a Research Analyst and Portfolio Manager at Meridian. He has
four years of investment experience and is a Chartered Financial Analyst. Mr.
Boyle graduated from the University of Denver with a B.S.B.A. degree in
Finance.
John D. Cleland has been involved in the securities industry for more than
30 years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate
for approximately ten years. Mr. Cleland earned a Bachelor of Science degree
from the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
David Eshnaur is Assistant Vice president and Portfolio Manager of the
Investment Manager. Prior to joining the Investment Manager in 1997, he worked
at Waddell & Reed in the positions of assistant Vice President, Assistant
Portfolio Manager, Senior Analyst, Industry Analyst and Account Administrator.
Mr. Eshnaur earned a Bachelor of Arts degree in Business Administration from
Coe College and an M.B.A. degree in Finance from the University of Missouri -
Kansas City.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy, is responsible for fixed-income portfolio management for Lexington.
He is a member of the New York Society of Security Analysts. Mr. Jamison has
more than 20 years investment experience. Prior to joining Lexington in 1981,
Mr. Jamison had spent nine years at Arnold Bernhard & Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds.
Mr. Jamison is a graduate of the City College of New York with a B.A. in
Economics.
Terry A. Milberger is a Vice President and Senior Portfolio Manager of the
Investment Manager. Mr. Milberger has more than 20 years of investment
experience. He began his career as an investment analyst in the insurance
industry and from 1974 through 1978 he served as an assistant portfolio manager
for the Investment Manager. He was then employed as Vice President of Texas
Commerce Bank and managed its pension fund assets until he returned to the
Investment Manager in 1981. Mr. Milberger holds a bachelor's degree in business
and an M.B.A. from the University of Kansas and is a Chartered Financial
Analyst. His investment philosophy is based on patience and opportunity for the
long-term investor.
Edmund M. Notzon joined T. Rowe Price in 1989 and has been managing
investments since 1991. Prior to joining T. Rowe Price, Mr. Notzon was Director
of the Analysis and Evaluation Division at the U.S. Environmental Protection
Agency.
Ronald C. Ognar, Portfolio Manager of Strong, is a Chartered Financial
Analyst with more than 25 years of investment experience. Mr. Ognar joined
Strong in April
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<PAGE> 40
1993 after two years as a principal and portfolio manager with RCM Capital
Management. Prior to his position at RCM Capital Management, he was a portfolio
manager at Kemper Financial Services in Chicago. Mr. Ognar began his investment
career in 1968 at LaSalle National Bank. He is a graduate of the University of
Illinois with a bachelor's degree in accounting.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill
Lynch, serving as Vice President and Senior Money Market Economist. She joined
Becker Paribas in 1984 as Vice President and Senior Money Market Economist
before joining Drexel Burnham Lambert that same year as First Vice President
and Money Market Economist. She was promoted to Managing Director of Drexel in
1986. From April 1990 to August 1992, Ms. Ramirez was the President and Chief
Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of
John Hancock Freedom Securities Corporation. Ms. Ramirez established MFR in
August, 1992. She is known in international financial, banking and economic
circles for her assessment of the interaction between global economic policy
and political trends and their effect on investments. Ms. Ramirez holds a B.A.
in Business Administration/ Economics from Pace University.
Brian C. Rogers joined T. Rowe Price in 1982 and has been managing
investments since 1983.
Richard T. Saler is a Senior Vice President of Lexington and is
responsible for international investment analysis and portfolio management. He
has eleven years of investment experience. Mr. Saler has focused on
international markets since first joining Lexington in 1986. Most recently he
was a strategist with Nomura Securities and rejoined Lexington in 1992. Mr.
Saler is a graduate of New York University with a B.S. degree in Marketing and
an M.B.A. in Finance from New York University's Graduate School of Business
Administration.
James P. Schier, Portfolio Manager of the Investment Manager, has 13 years
experience in the investment field and is a Chartered Financial Analyst. While
employed by the Investment Manager, he also served as a research analyst. Prior
to joining the Investment Manager in 1995, he was a portfolio manager for
Mitchell Capital Management from 1993 to 1995. From 1988 to 1995 he served as
Vice President and Portfolio Manager for Fourth Financial. Prior to 1988, Mr.
Schier served in various positions in the investment field for Stifel
Financial, Josepthal & Company and Mercantile Trust Company. Mr. Schier earned
a bachelor of business degree from the University of Notre Dame and an M.B.A.
from Washington University.
Cindy L. Shields, Portfolio Manager of the Investment Manager, has eight
years experience in the securities field. Ms. Shields has been a portfolio
manager since 1994, and prior to that time, she served as a research analyst
for the Investment Manager. She is a Chartered Financial Analyst. Ms. Shields
graduated from Washburn University with a Bachelor of Business Administration
degree, majoring in finance and economics. She joined the Investment Manager in
1989.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years
of experience in the investment field. He is a Chartered Financial Analyst.
Prior to joining the Investment Manager in 1992, he was an Investment
Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from
1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United
Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company
examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank
graduated from Miami University in Ohio with a Bachelor of Science degree in
Finance in 1982 and earned a Master of Business Administration degree from the
University of Colorado.
Jane Tedder, Senior Economist of the Investment Manager, has 20 years of
experience in the investment field. Ms. Tedder has been a portfolio manager for
the Investment Manager since 1983. Prior to joining the Investment Manager in
1983, she served as Vice President and Trust Officer of Douglas County Bank in
Kansas. Ms. Tedder earned a bachelor's degree in education from Oklahoma State
University and advanced diplomas from National Graduate Trust School,
Northwestern University, and Stonier Graduate School of Banking, Rutgers
University. She is a Chartered Financial Analyst.
Alan Wapnick is a Senior Vice President of Lexington and is responsible
for equity analysis and portfolio management. He has 27 years investment
experience. Prior to joining Lexington in 1986, Mr. Wapnick was an equity
analyst with Merrill Lynch, J. & W. Seligman, Dean Witter and most recently
Union Carbide Corporation. Mr. Wapnick is a graduate of Dartmouth College and
received a Master's degree in Business Administration from Columbia University.
SALE AND REDEMPTION OF SHARES
Shares of the Fund will be sold to SBL for allocation to variable annuity
or variable life separate accounts. Shares are sold and redeemed at their net
asset value next determined after receipt of a purchase or redemption order. No
sales or redemption charge is made. The value of shares redeemed may be more or
less than the stockholder's cost, depending upon the market value of the
portfolio securities at the time of redemption. Payment for shares redeemed
will be made as soon as practicable after receipt, but in no event later than
seven days after tender, except that the Fund may suspend the right of
redemption during any period when trading on the New York Stock Exchange is
restricted or such Exchange is closed for other than weekends or holidays, or
any emergency is deemed to exist by the Securities and Exchange Commission.
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<PAGE> 41
DISTRIBUTIONS AND FEDERAL
INCOME TAX CONSIDERATIONS
Each Series intends to separately qualify and elects to be treated each
year as a "regulated investment company" under Subchapter M of the Internal
Revenue Code (the "Code") and, therefore, generally will not be liable for
federal income taxes to the extent its net investment income and capital gains
are distributed. The Fund expects to distribute, at least once a year,
substantially all of each Series' net investment income and net realized
capital gains. Such distributions will be reinvested on the payable date in
additional shares of the respective Series at the net asset value thereof as of
the record date (reduced by an amount equal to the amount of the distribution),
unless the shareholder elects to receive cash. Each Series will be treated
separately in determining the amounts of income and capital gains distributions
to the variable life insurance accounts and the variable annuity accounts. For
this purpose, each Series will reflect only the income and gains, net of
losses, of that Series.
To comply with regulations under Code section 817(h), each Series is
required to diversify its investments. Generally, a Series will be required to
diversify its investments so that on the last day of each quarter of the
calendar year no more than 55 percent of the value of the total assets is
represented by any one investment, no more than 70 percent is represented by
any two investments, no more than 80 percent is represented by any three
investments, and no more than 90 percent is represented by any four
investments. If a Series fails to meet the diversification requirements under
Code section 817(h), income with respect to life insurance policies and annuity
contracts invested in the Series at any time during the calendar quarter in
which the failure occurred could become currently taxable to the owners of such
policies and contracts and income for prior periods with respect to the
policies and contracts also could be taxable, most likely in the year of the
failure to achieve the required diversification. Other adverse tax consequences
could also ensue. If a Series fails to qualify as a regulated investment
company, the results would be substantially the same as a failure to meet the
diversification requirements under Code section 817(h).
Certain requirements relating to the qualification of a Series as a
regulated investment company and to the satisfaction of the Code section 817(h)
diversification requirements may limit the extent to which a Series will be
able to engage in certain investment practices, including transactions in
options, futures contracts, forwards, swaps and other types of derivative
securities transactions. In addition, if a Series were unable to dispose of
portfolio securities due to settlement problems relating to foreign investments
or due to the holding of illiquid securities, the Series' ability to qualify as
a regulated investment company and to satisfy the Code section 817(h)
diversification requirements might be affected.
See "Distributions and Federal Income Tax Considerations" in the Statement
of Additional Information for more information on taxes, including information
on the taxation of distributions from a Series. The federal tax consequences to
purchasers of SBL's variable annuity contracts and variable life insurance
policies registered under the Securities Act of 1933 are described in the
prospectus applicable to such contracts and such policies, respectively.
FOREIGN TAXES
Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally 10 to 15 percent) or to certain exemptions from
tax. The Fund intends to operate so as to qualify for such reduced tax rates or
tax exemptions whenever possible. While policyholders and contractowners will
indirectly bear the cost of any foreign tax withholding, they will not be able
to claim foreign tax credit or deduction for taxes paid by the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series is determined as of the close
of regular trading hours on the New York Stock Exchange on each day that the
Exchange is open for trading (normally 3:00 p.m. Central time). The
determination is made by dividing the value of the portfolio securities of each
Series, plus any cash or other assets, less all liabilities, by the number of
shares of each Series outstanding. Securities listed or traded on a recognized
securities exchange will be valued on the basis of the last sales price. If
there are no sales on a particular day, then the securities are valued at the
last bid price. If a security is traded on multiple exchanges, its value will
be based on prices from the principal exchange where it is traded. All other
securities for which market quotations are available are valued on the basis of
the last current bid price. If there is no bid price or if the bid price is
deemed unsatisfactory by the Board of Directors or by the Investment Manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair market value.
The Fund will generally value short-term securities at prices based on
market quotations for securities of similar type, yield, quality and duration,
except that securities with 60 days or less to maturity may be valued on the
basis of the amortized cost valuation technique. The amortized cost valuation
technique involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
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<PAGE> 42
impact of fluctuating interest rates on the market value of the instrument.
A similar procedure may be used for portfolio instruments when they reach
60 days to maturity, with the value of the instrument on the 61st day being
used rather than cost. While this method provides certainty in valuation, it
may result in periods during which value (as determined by amortized cost) is
higher or lower than the price the Fund would receive if the security were
sold.
Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities used in computing the net asset
value of the shares of Series investing in foreign securities generally are
determined as of the close of such foreign markets or the close of the New York
Stock Exchange if earlier. Foreign currency exchange rates are generally
determined prior to the close of the New York Stock Exchange. Trading on
foreign exchanges and in foreign currencies may not take place on every day the
New York Stock Exchange is open. Conversely trading in various foreign markets
may take place on days when the New York Stock Exchange is not open and on
other days when the Fund's net asset values are not calculated. Consequently,
the calculation of the net asset value may not occur contemporaneously with the
determination of the most current market prices for the securities included in
such calculation, and events affecting the value of such securities and such
exchange rates that occur between the times at which they are determined and
the close of the New York Stock Exchange will not be reflected in the
computation of net asset value. If during such periods, events occur that
materially affect the value of such securities, the securities will be valued
at their fair market value as determined in good faith by the Board of
Directors.
For purposes of determining the net asset value per share of the Fund, all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major
U.S. bank.
TRADING PRACTICES AND BROKERAGE
The annual portfolio turnover rate of Series A, S, J, M and V may exceed
100 percent, and at times may exceed 150 percent. The annual turnover rate of
Series E and K may exceed 100 percent. The annual turnover rate of Series B, D,
N, O and P generally will not exceed 100 percent. Since Series C's investment
policies require a maturity shorter than thirteen months, its portfolio
turnover rate will generally be 0 percent, although the portfolio will turn
over many times during a year as a result of security maturities. The portfolio
turnover of Series X is not expected to exceed 200 percent.
The portfolio turnover rates of the Series for the fiscal year ended
December 31, 1996 were as follows: Series A - 57 percent; Series B - 58
percent; Series D - 115 percent; Series E - 232 percent; Series S - 67 percent;
Series J - 123 percent; Series K - 86 percent; Series M - 40 percent; Series N
- - 41 percent; and Series O - 22 percent. The annualized portfolio turnover rate
for Series P for the period August 5, 1996 (date of inception) to December 31,
1996 was 151 percent. The annualized portfolio turnover rate for Series V for
the period May 1, 1997 (date of inception) to August 31, 1997 was 48 percent.
The portfolio turnover rates for Series A, B, D, E, S and J for the fiscal
year ended December 31, 1995 were 83 percent, 94 percent, 169 percent, 180
percent, 122 percent and 202 percent, respectively. The annualized portfolio
turnover rates for Series K, M, N and O for the period June 1, 1995 (date of
inception) to December 31, 1995 were 127 percent, 181 percent, 26 percent and 3
percent, respectively. Higher portfolio turnover subjects the Series to
increased brokerage costs and may in some cases, have adverse tax effects on
the Series or its stockholders. The portfolio turnover rate for Series X is not
yet available as it did not begin operations until October of 1997.
The rates of portfolio turnover may be substantially higher during any
period when changing market or economic conditions suggest a shift in portfolio
emphasis. Thus, a portfolio turnover rate in excess of 100 percent will not
necessarily indicate a variation from the stated investment policy.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interest of the Series. In selecting a broker to execute a
specific transaction, all relevant factors will be considered such as the
broker's ability to obtain the best execution of a particular transaction.
Portfolio transactions may be directed to brokers who furnish investment
information or research services to the Investment Manager or who sell shares
of the Series. Although the Investment Manager may consider sales of shares of
the Series in the selection of a broker, this will not be a qualifying or
disqualifying factor.
Securities held by the Fund may also be held by other investment advisory
clients of the Investment Manager, including other investment companies, and by
Security Benefit Life Insurance Company ("SBL"). Purchases or sales of the same
security occurring on the same day (which may include orders from SBL) may be
aggregated and executed as a single transaction, subject to the Investment
Manager's obligation to seek best execution. Aggregated purchases or sales are
generally effected at an average price and on a pro rata basis (transaction
costs will also be shared on a pro rata basis) in proportion to the amounts
desired to be purchased or sold. See the Fund's Statement of Additional
Information for a more detailed description of aggregated transactions and
allocation of portfolio brokerage.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the average annual total return
and total return of all Series in
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<PAGE> 43
advertisements or reports to stockholders or prospective investors. Quotations
of average annual total return for any Series will be expressed in terms of the
average annual compounded rate of return on a hypothetical investment in the
Series over a period of 1, 5, and 10 years (up to the life of the Series), and
will assume that all dividends and distributions are reinvested when paid.
Quotations of total return for any Series will be based on a hypothetical
investment in the Series for a certain period, and will assume that all
dividends and distributions are reinvested when paid. The net increase or
decrease in the value of the investment over the period will be divided by its
beginning value to arrive at total return for the period. Total return
calculated in this manner will differ from the average annual total return in
that it is not expressed in terms of an average rate of return.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) The Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), or other unmanaged indices so
that investors may compare a Series' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Series. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Quotations of average annual total return or total return for the Fund
will not take into account charges or deductions against the Separate Accounts
to which the Fund shares are sold or charges and deductions against the
Contracts issued by Security Benefit Life Insurance Company. Performance
information for any Series reflects only the performance of a hypothetical
investment in the Series during a particular time period on which the
calculations are based. Performance information should be considered in light
of the Series' investment objectives and policies, characteristics and quality
of the portfolios, and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future. For a description of the methods used to determine average annual total
return and total return for the Series, see the Statement of Additional
Information.
GENERAL INFORMATION
ORGANIZATION
SBL Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value. The Fund's shares are currently issued in
fourteen Series A, B, C, D, E, S, J, K, M, N, O, P, V and X. The shares of each
Series represent a pro rata beneficial interest in that Series' net assets and
in the earnings and profits or losses derived from the investment of such
assets.
Upon issuance and sale, such shares will be fully paid, nonassessable and
redeemable. These shares have no preemptive rights, but the shareholders of
each Series are entitled to receive dividends as declared for that Series by
the Board of Directors of the Fund.
The shares of each Series have cumulative voting rights for the election
of directors. On matters affecting a particular Series, each share of that
Series has equal voting rights with each other share and there are no
preferences as to conversion, exchange, retirement or liquidation. On other
matters, all shares (irrespective of Series) are entitled to one vote each.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, in certain instances a vote of the outstanding shares of the
combined Series may not modify the rights of holders of a particular Series
without the approval of a majority of the shares of that Series.
The Fund does not generally hold annual meetings of stockholders and will
do so only when required by law. Stockholders may remove directors from office
by votes cast in person or by proxy at a meeting of stockholders. Such a
meeting will be called at the written request of the holders of 10 percent of
the Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the
custodian for the portfolio securities of Series A, B, C, E, S, J, P, V and X.
The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York 11245
acts as custodian for the portfolio securities of Series D, K, M, N, and O,
including those held by foreign banks and foreign securities depositories which
qualify as eligible foreign custodians under rules adopted by the Securities
and Exchange Commission. Security Management Company, LLC acts as the Fund's
transfer and dividend-paying agent.
CONTRACTOWNER INQUIRIES
Contractowners who have questions concerning the Fund or wish to obtain
additional information, may write to SBL Fund at 700 SW Harrison St., Topeka,
Kansas 66636-0001, or call (785) 431-3127 or 1-800-888-2461, extension 3127.
40
<PAGE> 44
SBL FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 15, 1997
RELATING TO THE SBL FUND PROSPECTUS DATED OCTOBER 15, 1997
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(785) 431-3127
(800) 888-2461
INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
The Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE> 45
SBL FUND
A Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 15, 1997
(RELATING TO THE PROSPECTUS DATED OCTOBER 15, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)
This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the SBL Fund Prospectus dated October 15, 1997, as
it may be supplemented from time to time. A Prospectus may be obtained by
writing or calling the Fund, 700 SW Harrison, Topeka, Kansas 66636-0001, or by
calling (785) 431-3127 or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
What is SBL Fund?............................................ 1 Remuneration of Directors and Others.......... 54
Investment Objectives and Policies of the Series............. 1 Sale and Redemption of Shares................. 55
Series A (Growth Series)................................... 2 Investment Management......................... 55
Series B (Growth-Income Series)............................ 2 Portfolio Management........................ 58
Series C (Money Market Series)............................. 3 Code of Ethics.............................. 61
Series D (Worldwide Equity Series)......................... 5 Portfolio Turnover............................ 61
Series E (High Grade Income Series)........................ 7 Determination of Net Asset Value.............. 62
Series J (Emerging Growth Series).......................... 8 Portfolio Transactions........................ 63
Series K (Global Aggressive Bond Series)................... 9 Distributions and Federal Income Tax
Series M (Specialized Asset Allocation Series)............. 14 Considerations.............................. 64
Series N (Managed Asset Allocation Series)................. 15 Ownership and Management...................... 67
Series O (Equity Income Series)............................ 19 Capital Stock and Voting...................... 67
Series P (High Yield Series)............................... 21 Custodian, Transfer Agent and Dividend-Paying
Series S (Social Awareness Series)......................... 22 Agent....................................... 68
Series V (Value Series).................................... 23 Independent Auditors.......................... 68
Series X (Small Cap Series)................................ 24 Distribution of Variable Insurance Products... 68
Investment Methods and Risk Factors.......................... 25 Performance Information....................... 68
Investment Policy Limitations................................ 50 Financial Statements.......................... 69
Officers and Directors....................................... 52 Appendix...................................... 71
</TABLE>
<PAGE> 46
WHAT IS SBL FUND?
SBL Fund (the "Fund"), a Kansas corporation, was organized by Security
Benefit Life Insurance Company ("SBL") on May 26, 1977, and serves as the
investment vehicle for certain SBL variable annuity and variable life insurance
separate accounts. Shares of the Fund will be sold to SBL for allocation to
such separate accounts which are established for the purpose of funding
variable annuity and variable life insurance contracts issued by SBL. The Fund
reserves the right to expand the class of persons eligible to purchase shares
of any Series of the Fund or to reject any offer.
The Fund is a diversified, open-end management investment company of the
series type registered under the Investment Company Act of 1940, which
currently issues its shares in fourteen series: Series A, Series B, Series C,
Series D, Series E, Series J, Series K, Series M, Series N, Series O, Series P,
Series S, Series V and Series X ("Series"). The assets of each Series are held
separate from the assets of the other Series and each Series has investment
objectives which differ from those of the other Series.
SBL, organized originally as a fraternal benefit society under the laws of
the State of Kansas, commenced business February 22, 1892, and became a mutual
life insurance company under its present name on January 2, 1950. Its home
office is located at 700 Harrison Street, Topeka, Kansas. SBL is licensed in
the District of Columbia and all states except New York.
All investment companies are required to operate within the limitations
imposed by their fundamental investment policies. (See "Investment Objectives
and Policies of the Series," this page, and "Investment Policy Limitations,"
page 50.)
As an open-end investment company, the Fund provides an arrangement by
which investors may invest in a company which itself invests in securities.
Each Series represents a diversified securities portfolio under professional
management, and the value of shares held by SBL's separate accounts will
fluctuate with changes in the value of the Series' portfolio securities. As an
open-end company, the Fund is obligated to redeem its shares upon demand at
current net asset value. ( See "Sale and Redemption of Shares," page 55.)
Professional investment advice is provided to the Fund and to each Series
by Security Management Company, LLC (the "Investment Manager"), which is
ultimately controlled by SBL. The Investment Manager has engaged Lexington
Management Corporation ("Lexington") to provide certain investment advisory
services to Series D and Series K of the Fund. Lexington has entered into a
sub-advisory contract with MFR Advisors, Inc. ("MFR") to provide Series K with
investment and economic research services. The Investment Manager has engaged
T. Rowe Price Associates, Inc. ("T. Rowe Price") to provide certain investment
advisory services to Series N and O. The Investment Manager has engaged
Meridian Investment Management Corporation ("Meridian") to provide certain
investment advisory services to Series M and Strong Capital Management, Inc.
("Strong") to provide certain investment advisory services to Series X.
Pursuant to an investment advisory contract with the Fund, the Investment
Manager is paid an annual advisory fee of .75% of the average net assets of
Series A, Series B, Series E, Series S, Series J, Series K, Series P and Series
V; .5% of the average net assets of Series C; and 1.00% of the average net
assets of Series D, Series M, Series N, Series O and Series X, computed daily
and payable monthly, and the Investment Manager has agreed that the total
annual expenses of each Series (including the management compensation but
excluding brokerage commissions, interest, taxes and extraordinary expenses)
will not exceed any expense limitation imposed by any state. (See page for a
discussion of the Investment Manager and the Investment Advisory Contract.) The
Fund also receives administrative, accounting and transfer agency services from
the Investment Manager for which the Fund pays a fee.
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
The investment objective and policies of each Series are described below.
There are risks inherent in the ownership of any security and there can be no
assurance that such objectives will be achieved. The objectives and policies,
except those enumerated under "Investment Policy Limitations," page , may be
modified at any time without stockholder approval.
To comply with regulations under Section 817(h) of the Internal Revenue
Code, each Series of the SBL Fund is required to diversify its investments so
that on the last day of each quarter of a calendar year no more than 55% of the
value of its assets is represented by securities of any one issuer, no more
than 70% is represented by securities of any two issuers, no more than 80% is
represented by securities of any three issuers, and no more
1
<PAGE> 47
than 90% is represented by securities of any four issuers. As to U.S.
Government securities, each U.S. Government agency and instrumentality is to be
treated as a separate issuer.
SERIES A (GROWTH SERIES)
The investment objective of Series A is to seek long-term capital growth
by investing in those securities which, in the opinion of the Investment
Manager, have the most long-term capital growth potential. Series A seeks to
achieve its objective by investing primarily in a broadly diversified portfolio
of common stocks (which may include American Depositary Receipts (ADRs) or
securities with common stock characteristics, such as securities convertible
into common stocks. See the discussion of ADRs and the risks associated with
investing in ADRs under "Investment Methods and Risk Factors." Series A may
also invest in preferred stocks, bonds and other debt securities. Income
potential will be considered to the extent doing so is consistent with Series
A's investment objective of long-term capital growth. Series A may invest its
assets temporarily in cash and money market instruments for defensive purposes.
Series A invests for long-term growth of capital and does not intend to place
emphasis upon short-term trading profits.
From time to time, Series A may purchase securities on a "when-issued" or
"delayed delivery basis" in excess of customary settlement periods for the type
of security involved. Securities purchased on a when-issued basis are subject
to market fluctuation and no interest or dividends accrue to the Series prior
to the settlement date. Series A will establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities.
Series A may also invest up to 5% of its total assets in warrants (other than
those attached to other securities) which entitle the holder to buy equity
securities at a specific price during or at the end of a particular period. A
warrant ceases to have value if it is not exercised prior to its expiration
date.
SERIES B (GROWTH-INCOME SERIES)
The investment objective of Series B is to provide long-term growth of
capital with secondary emphasis on income. Assets of the Series may be
invested in various types of securities, which may include (i) securities
convertible into common stocks; (ii) preferred stocks; (iii) debt securities
issued by U.S. corporations; (iv) securities issued by the U.S. Government or
any of its agencies or instrumentalities, including Treasury bills,
certificates of indebtedness, notes and bonds; (v) securities issued by foreign
governments, their agencies, and instrumentalities, and foreign corporations,
provided that such securities are denominated in U.S. dollars; (vi) higher
yielding, high risk debt securities (commonly referred to as "junk bonds") and
zero coupon securities. In the selection of securities for investment, the
potential for appreciation and future dividends is given more weight than
current dividends. See the discussion of ADRs and the risks associated with
investing in ADRs under "Investment Methods and Risk Factors." From time to
time, Series B may purchase government bonds or commercial notes on a temporary
basis for defensive purposes.
With respect to its investment in debt securities, there is no percentage
limitation on the amount of Series B's assets that may be invested within any
particular rating classification. Series B may invest in higher yielding,
longer-term fixed-income securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). These include securities rated Ba or lower by Moody's Investors
Service, Inc. or BB or lower by Standard & Poor's Corporation. Securities
rated Ba or lower by Moody's or BB or lower by Standard & Poor's are regarded
as predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. (See the Appendix for a description of the
various bond ratings utilized by the rating services.) However, the Investment
Manager will not rely principally on the ratings assigned by the rating
services. Because Series B will invest in lower rated securities and unrated
securities of comparable quality, the achievement of the Series' investment
objective may be more dependent on the Investment Manager's own credit analysis
than would be true if investing in higher rated securities.
To the extent that Series B invests in the high yield, high risk bonds
described above, its share price and yield are expected to fluctuate more than
the share price and yield of a fund investing in higher quality, shorter-term
securities. High yield bonds may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
bonds. A projection of an economic downturn, or higher interest rates, for
example, could cause a decline in high yield bond prices because an advent of
such events could lessen the ability of highly leveraged companies to make
principal and interest payments on its debt securities. In addition,
2
<PAGE> 48
SERIES B (CONTINUED)
the secondary trading market for high yield bonds may be less liquid than the
market for higher grade bonds, which can adversely affect the ability of the
Series to dispose of its portfolio securities. Bonds for which there is only a
"thin" market can be more difficult to value inasmuch as objective pricing data
may be less available and judgment may play a greater role in the valuation
process. See the discussion of the risks associated with investing in high
yield bonds under "Investment Methods and Risk Factors" - "Special Risks
Associated with Low-Rated and Comparable Unrated Bonds." The Series may
purchase securities that are restricted as to disposition under the federal
securities laws, provided that such securities are eligible for resale to
qualified institutional investors pursuant to Rule 144A under the Securities
Act of 1933 and subject to the Series' policy that not more than 10% of its
total assets will be invested in illiquid securities. See "Investment Methods
and Risk Factors" - "Restricted Securities."
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
As discussed above, Series B may invest in foreign debt securities that
are denominated in U.S. dollars. Such foreign debt securities may include debt
of foreign governments, including Brady Bonds, and debt of foreign
corporations. The Series expects to limit its investment in foreign debt
securities, excluding Canadian securities, to not more than 15% of its total
assets and its investment in debt securities of issuers in emerging markets,
excluding Brady Bonds, to not more than 5% of its net assets. Many emerging
market debt securities are not rated by United States rating agencies such as
Moody's and S&P and the majority of emerging market debt securities are
considered to have a credit quality below investment grade. The Series'
ability to achieve its investment objective is thus more dependent on the
credit analysis of the Series' Investment Manager than would be the case if the
Series were to invest only in higher quality bonds. See the discussion of the
risks associated with investing in foreign securities, emerging markets, and
Brady Bonds under "Investment Methods and Risk Factors."
SERIES C (MONEY MARKET SERIES)
The investment objective of Series C is to seek as high a level of current
income as is consistent with preservation of capital. The Series will attempt
to achieve its objective by investing at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments. The Series may also invest up to 5% of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations.
The Series may invest in money market instruments with maturities of not
longer than thirteen months, consisting of the following:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration and
Government National Mortgage Association), or instrumentalities (such as
Federal Home Loan Banks and Federal Land Banks), and instruments fully
collateralized with such obligations, such as repurchase agreements.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
BANK OBLIGATIONS. Obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation, and instruments
fully collateralized with such obligations, such as repurchase agreements.
CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's Investors Service, Inc. or A-1 or A-2 by Standard
& Poor's Corporation, or other corporate debt instruments rated Aaa or Aa or
better by Moody's or AAA or AA or better by Standard & Poor's, subject to the
limitations on investment in instruments in the second-highest rating category,
discussed below. (See the Appendix for a description of the commercial paper
and corporate bond ratings.)
3
<PAGE> 49
SERIES C (CONTINUED)
Series C may invest in instruments having rates of interest that are
adjusted periodically according to a specified market rate for such investments
("Variable Rate Instruments"). The interest rate on a Variable Rate Instrument
is ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate or the 91-day U.S. Treasury Bill rate.
The Series does not purchase certain Variable Rate Instruments that have a
preset cap above which the rate of interest may not rise. Generally, the
changes in the interest rate on Variable Rate Instruments reduce the
fluctuation in the market value of such securities. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Series C determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
Investment Company Act of 1940 which allows the Series to consider the maturity
date of such instruments to be the period remaining until the next readjustment
of the interest rate rather than the maturity date on the face of the
instrument.
Certain of the securities acquired by Series C may be restricted as to
disposition under federal securities laws, provided that such restricted
securities are eligible for resale pursuant to Rule 144A under the Securities
Act of 1933. Rule 144A, adopted by the Securities and Exchange Commission in
1990, provides a nonexclusive safe harbor exemption from the registration
requirements of the Securities Act for the resale of certain securities to
certain qualified buyers. One of the primary purposes of the Rule is to create
resale liquidity for certain securities that would otherwise be treated as
illiquid investments. In accordance with its investment policies, the Fund is
not permitted to invest more than 10% of its total net assets in illiquid
securities. The Investment Manager, under procedures adopted by the Board of
Directors, will determine whether securities eligible for resale under Rule
144A are liquid or not. Investing in Rule 144A securities may have the effect
of increasing the amount of the Series' assets invested in illiquid assets.
See "Investment Methods and Risk Factors" - "Restricted Securities."
Series C may invest only in U.S. dollar denominated money market
instruments that present minimal credit risk and, with respect to 95% of its
total assets, measured at the time of investment, that are of the highest
quality. The Investment Manager will determine whether a security presents
minimal credit risk under procedures adopted by the Fund's Board of Directors.
A security will be considered to be highest quality (1) if rated in the highest
rating category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by Standard &
Poor's) by (i) any two nationally recognized statistical rating organizations
("NRSRO's") or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued
by an issuer that has short-term debt obligations of comparable maturity,
priority, and security and that are rated in the highest rating category by (i)
any two NRSRO's or, (ii) if rated by only one NRSRO, by that NRSRO; or (3) an
unrated security that is of comparable quality to a security in the highest
rating category as determined by the Investment Manager and whose acquisition
is approved or ratified by the Board of Directors. With respect to 5% of its
total assets, measured at the time of investment, the Series may also invest in
money market instruments that are in the second-highest rating category for
short-term debt obligations (e.g., rated Aa or Prime-2 by Moody's or AA or A-2
by S&P). A money market instrument will be considered to be in the
second-highest rating category under the criteria described above with respect
to instruments considered highest quality, as applied to instruments in the
second-highest rating category.
Series C may not invest more than 5% of its total assets, measured at the
time of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Series may exceed the 5% limitation
for up to three business days after the purchase of the securities of any one
issuer that are of the highest quality, provided that the Series has no more
than one such investment outstanding at any time. In the event that an
instrument acquired by the Series is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, (or the Board of Directors
itself if the Investment Manager becomes aware that a security has been
downgraded below the second-highest rating category and the Investment Manager
does not dispose of the security within five business days) shall promptly
reassess whether such security presents minimal credit risk and determine
whether or not to retain the instrument. In the event that an instrument is
acquired by the Series that ceases to be eligible for the Series, the
Investment Manager will promptly dispose of such security in an orderly manner,
unless the Board of Directors determines that this would not be in the best
interests of the Series.
While Series C does not intend to engage in short-term trading, portfolio
securities may be sold without regard to the length of time that they have been
held. A portfolio security could be sold prior to maturity to take advantage
4
<PAGE> 50
SERIES C (CONTINUED)
of new investment opportunities or yield differentials, or to preserve gains or
limit losses due to changed economic conditions or the financial condition of
the issuer, or for other reasons.
Series C will invest in money market instruments of varying maturities
(but no longer than 13 months) in an effort to earn as high a level of current
income as is consistent with preservation of capital and liquidity. While
investing only in high quality money market instruments, investment in Series C
is not without risk. The market value of fixed income securities is generally
affected by changes in the level of interest rates. An increase in interest
rates will generally reduce the market value of fixed income investments, and a
decline in interest rates will generally increase their value. Instruments
with longer maturities are subject to greater fluctuations in value from
general interest rate changes than are shorter term issues. Such market value
changes could cause changes in the net asset value per share. (See
"Determination of Net Asset Value," page .) To reduce the effect of fluctuating
interest rates on the net asset value of its shares, Series C intends to
maintain a weighted average maturity in its portfolio of not more than 90 days.
In addition to general market risks, Series C's investments in non-government
obligations are subject to the ability of the issuer to satisfy its
obligations. See the Appendix for a description of the principal types of
securities and instruments in which Series C will invest.
SERIES D (WORLDWIDE EQUITY SERIES)
The investment objective of Series D is to seek long-term growth of
capital primarily through investment in common stocks and equivalents of
companies domiciled in foreign countries and the United States. Series D will
seek to achieve its objective through investment in a diversified portfolio of
securities which will consist primarily of all types of common stocks, which
may include ADRs, and equivalents (the following constitute equivalents:
convertible debt securities, warrants and options). See "Investment Methods
and Risk Factors" - "American Depositary Receipts." Series D may also invest
in preferred stocks, bonds and other debt obligations, which include money
market instruments of foreign and domestic companies and U.S. Government and
foreign governments, governmental agencies and international organizations.
The Series may also invest in real estate investment trusts (REITs). For a
full description of the Series' investment objective and policies, see the
Prospectus.
Certain of the securities purchased by Series D may be restricted as to
disposition under the federal securities laws, provided that such restricted
securities are eligible for resale to qualified institutional investors
pursuant to Rule 144A under the Securities Act of 1933 and subject to the
Fund's policy that not more than 10% of total assets will be invested in
illiquid securities. The Investment Manager, under procedures adopted by the
Board of Directors, will determine whether securities eligible for resale under
Rule 144A are liquid or not. In making this determination, the Investment
Manager, under the supervision of the Board of Directors, will consider trading
markets for the specific security taking into account the unregistered nature
of a Rule 144A security. In addition, the Investment Manager may consider:
(1) the frequency of trades and quotes; (2) the number of dealers and potential
purchasers; (3) dealer undertakings to make a market; and (4) the nature of the
security and of the marketplace trades (e.g. the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). The
liquidity of Rule 144A securities will be monitored and if as a result of
changed conditions it is determined that a Rule 144A security is no longer
liquid, Series D's holdings of illiquid securities will be reviewed to
determine what, if any, steps are required to assure that it does not invest
more than 10% of its assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Series' assets
invested in illiquid securities, and there may be undesirable delays in selling
illiquid securities. See "Investment Methods and Risk Factors" - "Restricted
Securities."
In seeking to achieve its investment objective, Series D may from time to
time engage in the following investment practices:
TRANSACTION HEDGING. When Series D enters into contracts for purchase or
sale of a portfolio security denominated in a foreign currency, it may be
required to settle a purchase transaction in the relevant foreign currency or
receive the proceeds of a sale in that currency. In either event, Series D
will be obligated to acquire or dispose of such foreign currency as is
represented by the transaction by selling or buying an equivalent amount of
United States dollars. Furthermore, the Series may wish to "lock in" the
United States dollar value of the transaction at or near the time of a purchase
or sale of portfolio securities at the exchange rate or rates then prevailing
between the United States dollar and the currency in which the foreign security
is denominated.
5
<PAGE> 51
SERIES D (CONTINUED)
Therefore, Series D may, for a fixed amount of United States dollars, enter
into a forward foreign exchange contract for the purchase or sale of the amount
of foreign currency involved in the underlying securities transaction. In so
doing, Series D will attempt to insulate itself against possible losses and
gains resulting from a change in the relationship between the United States
dollar and the foreign currency during the period between the date a security
is purchased or sold and the date on which payment is made or received. This
process is known as "transaction hedging." To effect the translation of the
amount of foreign currencies involved in the purchase and sale of foreign
securities and to effect the "transaction hedging" described above, Series D
may purchase or sell foreign currencies on a "spot" (i.e. cash) basis or on a
forward basis whereby the Series purchases or sells a specific amount of
foreign currency, at a price set at the time of the contract, for receipt of
delivery at a specified date which may be any fixed number of days in the
future.
Such spot and forward foreign exchange transactions may also be utilized
to reduce the risk inherent in fluctuations in the exchange rate between the
United States dollar and the relevant foreign currency when foreign securities
are purchased or sold for settlement beyond customary settlement time (as
described below). Neither type of foreign currency transaction will eliminate
fluctuations in the prices of Series D's portfolio or securities or prevent
loss if the price of such securities should decline.
PORTFOLIO HEDGING. Some or all of Series D's portfolio will be
denominated in foreign currencies. As a result, in addition to the risk of
change in the market value of portfolio securities, the value of the portfolio
in United States dollars is subject to fluctuations in the exchange rate
between such foreign currencies and the United States dollar. When, in the
opinion of the Series' Sub-Adviser, Lexington Management Corporation
("Lexington"), it is desirable to limit or reduce exposure in a foreign
currency in order to moderate potential changes in the United States dollar
value of the portfolio, Series D may enter into a forward foreign currency
exchange contract by which the United States dollar value of the underlying
foreign portfolio securities can be approximately matched by an equivalent
United States dollar liability. This technique is known as "portfolio hedging"
and moderates or reduces the risk of change in the United States dollar value
of the Series' portfolio only during the period before the maturity of the
forward contract (which will not be in excess of one year). Series D, for
hedging purposes only, may also enter into forward currency exchange contracts
to increase its exposure to a foreign currency that Lexington expects to
increase in value relative to the United States dollar. Series D will not
attempt to hedge all of its foreign portfolio positions and will enter into
such transactions only to the extent, if any, deemed appropriate by Lexington.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Series D intends to limit transactions as
described in this paragraph to not more than 70% of total Series assets.
FORWARD COMMITMENTS. Series D may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as Series D, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of
Series D's other assets. Although the Series will enter into such contracts
with the intention of acquiring the securities, Series D may dispose of a
commitment prior to settlement if Lexington deems it appropriate to do so.
Series D may realize short-term profits or losses upon the sale of forward
commitments.
COVERED CALL OPTIONS. Call options may also be used as a means of
participating in an anticipated price increase of a security on a more limited
basis than would be possible if the security itself were purchased. Series D
may write only covered call options. Since it can be expected that a call
option will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, this strategy will
generally be used when Lexington believes that the call premium received by the
Series, plus anticipated appreciation in the price of the underlying security,
up to the exercise price of the call, will be greater than the appreciation in
the price of the security. Series D will not purchase put and call options
written by others. Also, Series D will not write any put options. Series D
intends to limit transactions as described in this paragraph to less than 5% of
total Series assets. See the discussion of writing covered call options under
"Investment Methods and Risk Factors."
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SERIES E (HIGH GRADE INCOME SERIES)
The investment objective of Series E is to provide current income with
security of principal. In pursuing its investment objective, the Series will
invest in a broad range of debt securities, including (i) securities issued by
U.S. and Canadian corporations; (ii) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); and (vii) investment grade mortgage-backed securities ("MBSs")
and (viii) zero coupon securities. Under normal circumstances, the Series will
invest at least 65% of its assets in U.S. Government securities and securities
rated A or higher by Moody's or S&P at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager.
Series E may invest in corporate debt securities rated Baa or higher by
Moody's or BBB or higher by S&P at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager. See Appendix A for
a description of corporate bond ratings. Included in such securities may be
convertible bonds or bonds with warrants attached which are rated at least Baa
or BBB at the time of purchase, or if unrated, of equivalent quality as
determined by the Investment Manager. A "convertible bond" is a bond,
debenture or preferred share which may be exchanged by the owner for common
stock or another security, usually of the same company, in accordance with the
terms of the issue. A "warrant" confers upon its holder the right to purchase
an amount of securities at a particular time and price. Securities rated Baa
by Moody's or BBB by S&P have speculative characteristics.
Series E may invest up to 25% of its net assets in higher yielding debt
securities in the lower rating (higher risk) categories of the recognized
rating services (commonly referred to as "junk bonds"). Such securities
include securities rated Ba or lower by Moody's or BB or lower by S&P and are
regarded as predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments. The Series will not invest in junk
bonds which are rated in default at the time of purchase. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with
investing in such securities.
U.S. Government securities are obligations of or guaranteed by the U.S.
Government, its agencies or instrumentalities. These include bills,
certificates of indebtedness, notes and bonds issued by the Treasury or by
agencies in instrumentalities of the U.S. Government. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury, others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. Although U.S. Government securities are
guaranteed by the U.S. Government, its agencies or instrumentalities, shares of
the Fund are not so guaranteed in any way. The diversification rules under
Section 817(h) of the Internal Revenue Code limit the ability of Series E to
invest more than 55% of its assets in the securities of any one U.S. Government
agency or instrumentality.
Series E may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof, and Canadian corporate debt
securities. Canadian securities would not be purchased if subject to the
foreign interest equalization tax and unless payable in U.S. dollars.
For fixed-income securities such as corporate debt securities or U.S.
Government securities, the market value is generally affected by changes in the
level of interest rates. An increase in interest rates will tend to reduce the
market value of fixed-income investments, and a decline in interest rates will
tend to increase their value. In addition, debt securities with longer
maturities, which tend to produce higher yields, are subject to potentially
greater capital appreciation and depreciation than obligations with shorter
maturities.
Series E may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
U.S. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Series also may invest in debt securities
issued by foreign governments, their agencies and instrumentalities and foreign
corporations, provided that such securities are denominated in U.S. dollars.
The Series' investments in foreign securities, including Canadian securities,
will not exceed 25% of the
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SERIES E (CONTINUED)
Series' net assets. See "Investment Methods and Risk Factors" for a discussion
of the risks associated with investing in foreign securities.
Series E may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Series will hold less than 25% of its net assets in MBSs. For a discussion of
MBSs and the risks associated with such securities, see "Investment Methods and
Risk Factors."
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
Series E may acquire certain securities that are restricted as to
disposition under the federal securities laws, including securities that are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933, subject to the Series' policy that not more
than 15 percent of the Series' net assets will be invested in illiquid assets.
See "Investment Methods and Risk Factors" for a discussion of restricted
securities.
Series E may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the types of security
involved. For a discussion of such securities, see "Investment Methods and
Risk Factors" - "When-Issued Securities."
Series E may, for defensive purposes, invest part or all of its assets in
money market instruments such as those appropriate for investment by Series C.
SERIES J (EMERGING GROWTH SERIES)
The investment objective of Series J is to seek capital appreciation by
investing in a diversified portfolio of common stocks (which may include ADRs),
preferred stocks, debt securities, and securities convertible into common
stocks. See "Investment Methods and Risk Factors" - "American Depositary
Receipts." On a temporary basis, there may be times when Series J may invest
its assets in cash or money market instruments for defensive purposes.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as securities convertible into common stocks. Securities
will be selected on the basis of their appreciation and growth potential.
Current income will not be a factor in selecting investments, and any such
income should be considered incidental. Securities considered to have capital
appreciation and growth potential will often include securities of smaller and
less mature companies. These companies often have a unique proprietary product
or profitable market niche and the potential to grow very rapidly. Such
companies may present greater opportunities for capital appreciation because of
high potential earnings growth, but may also involve greater risk. They may
have limited product lines, markets or financial resources, and they may be
dependent on a small or inexperienced management team. Their securities may
trade less frequently and in limited volume, and only in the over-the-counter
market or on smaller securities exchanges. As a result, the securities of
smaller companies may have limited marketability and may be subject to more
abrupt or erratic changes in value than securities of larger, more established
companies.
Series J may also invest in larger companies where opportunities for
above-average capital appreciation appear favorable.
Series J may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. Securities purchased on a when-issued basis are subject to market
fluctuation and no interest or dividends accrue to the Series prior to the
settlement date. Series J will establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities. See
"Investment Methods and Risk Factors" - "When-Issued Securities."
The Series may enter into futures contracts (or options thereon) to hedge
all or a portion of its portfolio, or as an efficient means of adjusting its
exposure to the stock market. The Series will not use futures contracts for
leveraging purposes. The Series will limit its use of futures contracts so
that initial margin deposits or premiums
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SERIES J (CONTINED)
on such contracts used for non-hedging purposes will not equal more than 5% of
the Series' net asset value. Futures contracts (and options thereon) and the
risks associated with such instruments are described in further detail under
"Investment Methods and Risk Factors."
In seeking capital appreciation, Series J may, during certain periods,
trade to a substantial degree in securities for the short term. That is, the
Series may be engaged essentially in trading operations based on short-term
market considerations, as distinct from long-term investments based on
fundamental evaluations of securities. This investment policy is speculative
and involves substantial risk.
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
The primary investment objective of Series K is to provide high current
income. Capital appreciation is a secondary objective. The Series, under
normal circumstances, invests substantially all of its assets in debt
securities of issuers in the United States, developed foreign countries and
emerging markets. For purposes of its investment objective, the Series
considers an emerging country to be any country whose economy and market the
World Bank or United Nations considers to be emerging or developing. The
Series may also invest in debt securities traded in any market, of companies
that derive 50% or more of their total revenue from either goods or services
produced in such emerging countries and emerging markets or sales made in such
countries. Determinations as to eligibility will be made by the Series'
Sub-Advisers, Lexington and MFR Advisors, Inc. ("MFR") based on publicly
available information and inquiries made to the companies. It is possible in
the future that sufficient numbers of emerging country or emerging market debt
securities would be traded on securities markets in industrialized countries so
that a major portion, if not all, of the Series' assets would be invested in
securities traded on such markets, although such a situation is unlikely at
present.
Currently, investing in many of the emerging countries and emerging
markets is not feasible or may involve political risks. Accordingly, Lexington
currently intends to consider investments only in those countries in which it
believes investing is feasible. The list of acceptable countries will be
reviewed by Lexington and MFR and approved by the Board of Directors on a
periodic basis and any additions or deletions with respect to such list will be
made in accordance with changing economic and political circumstances involving
such countries. Lexington is the Sub-Adviser of the Series. Lexington has
entered into a sub-advisory contract with MFR to provide Series K with
investment and economic research services. In determining the appropriate
distribution of investments among various countries and geographic regions for
the Series, Lexington and MFR ordinarily consider the following factors:
prospects for relative economic growth among the different countries in which
the Series may invest; expected levels of inflation; government policies
influencing business conditions; the outlook for currency relationships; and
the range of the individual investment opportunities available to international
investors.
Although the Series values assets daily in terms of U.S. dollars, the
Series does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Series will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Series at one rate, while offering a lesser rate of
exchange should the Series desire to sell that currency to the dealer.
The Series may invest in the following types of money market instruments
(i.e., debt instruments with less than 12 months remaining until maturity)
denominated in U.S. dollars or other currencies: (a) obligations issued or
guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental entities
to promote economic reconstruction or development; (c) finance company
obligations, corporate commercial paper and other short-term commercial
obligations; (d) bank obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances), subject to the restriction
that the Series may not invest more than 25% of its total assets in bank
securities; (e) repurchase agreements with respect to the foregoing; and (f)
other substantially similar short-term debt securities with comparable
characteristics.
SAMURAI AND YANKEE BONDS. Subject to its respective fundamental
investment restrictions, the Series may invest in yen-denominated bonds sold in
Japan by non-Japanese issuers ("Samurai bonds"), and may invest in
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of the
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SERIES K (CONTINUED)
Series to invest in Samurai or Yankee bond issues only after taking into
account considerations of quality and liquidity, as well as yield.
COMMERCIAL BANK OBLIGATIONS. For the purposes of the Series' investment
policies with respect to bank obligations, obligations of foreign branches of
U.S. banks and of foreign banks are obligations of the issuing bank and may be
general obligations of the parent bank. Such obligations, however, may be
limited by the terms of a specific obligation and by government regulation. As
with investment in non-U.S. securities in general, investments in the
obligations of foreign branches of U.S. banks and of foreign banks may subject
the Series to investment risks that are different in some respect from those of
investments in obligations of domestic issuers. Although the Series typically
will acquire obligations issued and supported by the credit of U.S. or foreign
banks having total assets at the time of purchase in excess of $1 billion, this
$1 billion figure is not a fundamental investment policy or restriction of the
Series. For the purposes of calculation with respect to the $1 billion figure,
the assets of a bank will be deemed to include the assets of its U.S. and
non-U.S. branches.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL
TRANSACTIONS. Although repurchase agreements carry certain risks not
associated with direct investments in securities, the Series intends to enter
into repurchase agreements only with banks and broker/dealers believed by
Lexington and MFR to present minimal credit risks in accordance with guidelines
approved by the Fund's Board of Directors. Lexington and MFR will review and
monitor the creditworthiness of such institutions, and will consider the
capitalization of the institution, Lexington and MFR's prior dealings with the
institution, any rating of the institution's senior long-term debt by
independent rating agencies and other relevant factors.
The Series will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued
interest. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase were less than the repurchase
price, the Series would suffer a loss. If the financial institution which is
party to the repurchase agreement petitions for bankruptcy or otherwise becomes
subject to bankruptcy or other liquidation proceedings there may be
restrictions on the Series' ability to sell the collateral and the Series could
suffer a loss. The Series will not enter into a repurchase agreement with a
maturity of more than seven days if, as a result, more than 15% of the value of
its total net assets would be invested in such repurchase agreements and other
illiquid investments and securities for which no readily available market
exists.
The Series may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Series transfers
possession of a security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to repurchase the security in the future at an
agreed upon price, which includes an interest component. The Series also may
engage in "roll" borrowing transactions which involve the Series' sale of fixed
income securities together with a commitment (for which the Series may receive
a fee) to purchase similar, but not identical, securities at a future date.
The Series will maintain, in a segregated account with a custodian, cash or
liquid securities in an amount sufficient to cover its obligation under "roll"
transactions and reverse repurchase agreements.
BORROWING. The Series' operating policy on borrowing provides that the
Series will not borrow money in order to purchase securities and the Series may
borrow up to 5% of its total assets for temporary or emergency purposes and to
meet redemptions. This policy may be changed by the Fund's Board of Directors.
Any borrowing by the Series may cause greater fluctuation in the value of its
shares than would be the case if the Series did not borrow.
SHORT SALES. The Series is authorized to make short sales of securities,
although it has no current intention of doing so. A short sale is a
transaction in which the Series sells a security in anticipation that the
market price of that security will decline. The Series may make short sales as
a form of hedging to offset potential declines in long positions in securities
it owns and in order to maintain portfolio flexibility. The Series only may
make short sales "against the box." In this type of short sale, at the time of
the sale, the Series owns the security it has sold short or has the immediate
and unconditional right to acquire the identical security at no additional
cost.
In a short sale, the seller does not immediately deliver the securities
sold and does not receive the proceeds from the sale. To make delivery to the
purchaser, the executing broker borrows the securities being sold short on
behalf of the seller. The seller is said to have a short position in the
securities sold until it delivers the securities sold, at which time it
receives the proceeds of the sale. To secure its obligation to deliver
securities sold short, the
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SERIES K (CONTINUED)
Series will deposit in a separate account with its custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities at no cost. The Series could close out a short position by
purchasing and delivering an equal amount of the securities sold short, rather
than by delivering securities already held by the Series, because the Series
might want to continue to receive interest and dividend payments on securities
in its portfolio that are convertible into the securities sold short.
The Series might make a short sale "against the box" in order to hedge
against market risks when Lexington and MFR believe that the price of a
security may decline, causing a decline in the value of a security owned by the
Series or a security convertible into or exchangeable for such security. In
such case, any future losses in the Series' long position should be reduced by
a gain in the short position. Conversely, any gain in the long position should
be reduced by a loss in the short position. The extent to which such gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the securities the Series owns,
either directly or indirectly, and, in the case where a Series owns convertible
securities, changes in the investment values or conversion premiums of such
securities. There will be certain additional transaction costs associated with
short sales "against the box," but the Series will endeavor to offset these
costs with income from the investment of the cash proceeds of short sales.
ILLIQUID SECURITIES. The Series may invest up to 15% of total net assets
in illiquid securities. Securities may be considered illiquid if the Series
cannot reasonably expect to receive approximately the amount at which the
Series values such securities within seven days. The sale of illiquid
securities, if they can be sold at all, generally will require more time and
result in higher brokerage charges or dealer discounts and other selling
expenses than will the sale of liquid securities, such as securities eligible
for trading on U.S. securities exchanges or in the over-the-counter markets.
Moreover, restricted securities, which may be illiquid for purposes of this
limitation often sell, if at all, at a price lower than similar securities that
are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Fund's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Board has delegated the
function of making day-to-day determinations of liquidity to Lexington and MFR
in accordance with procedures approved by the Fund's Board of Directors.
Lexington and MFR take into account a number of factors in reaching liquidity
decisions, including, but not limited to: (i) the frequency of trading in the
security; (ii) the number of dealers that make quotes for the security; (iii)
the number of dealers that have undertaken to make a market in the security;
(iv) the number of other potential purchasers; and (v) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Lexington
and MFR will monitor the liquidity of securities held by the Series and report
periodically on such decisions to the Board of Directors.
OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES
WRITING COVERED CALL OPTIONS. The Series may write (sell) covered call
options and purchase options to close out options previously written by the
Series. Covered call options generally will be written on securities and
currencies which in the opinion of Lexington and MFR are not expected to make
any major price moves in the near future but which, over the long term, are
deemed to be attractive investments for the Series. Lexington, MFR and the
Series believe that writing of covered call options is less risky than writing
uncovered or "naked" options, which the Series will not do. For more
information about writing covered call options, see the discussion under
"Investment Methods and Risk Factors."
WRITING COVERED PUT OPTIONS. The Series may write covered put options and
purchase options to close out options previously written by the Series. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any
time prior to its expiration date. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options. See the discussion of writing covered put options
under "Investment Methods and Risk Factors."
PURCHASING PUT OPTIONS. The Series may purchase put options. As the
holder of a put option, the Series would have the right to sell the underlying
security or currency at the exercise price at any time during the option
period. The Series may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. See the discussion of
purchases of put options under "Investment Methods and Risk Factors."
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SERIES K (CONTINUED)
The premium paid by the Series when purchasing a put option will be
recorded as an asset in the Series' statement of assets and liabilities. This
asset will be adjusted daily to the option's current market value, which will
be the latest sale price at the time at which the net asset value per share of
the Series is computed (at the close of regular trading on the NYSE), or, in
the absence of such sale, the latest bid price. The asset will be extinguished
upon expiration of the option, the writing of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
PURCHASING CALL OPTIONS. The Series may purchase call options. As the
holder of a call option, the Series would have the right to purchase the
underlying security or currency at the exercise price at any time during the
option period. The Series may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. Call options
may be purchased by the Series for the purpose of acquiring the underlying
security or currency for its portfolio. For a discussion of purchases of call
options, see "Investment Methods and Risk Factors."
The Series may attempt to accomplish objectives similar to those involved
in using Forward Contracts (defined below), as described in the Prospectus, by
purchasing put or call options on currencies. A put option gives the Series as
purchaser the right (but not the obligation) to sell a specified amount of
currency at the exercise price until the expiration of the option. A call
option gives the Series as purchaser the right (but not the obligation) to
purchase a specified amount of currency at the exercise price until its
expiration. The Series might purchase a currency put option, for example, to
protect itself during the contract period against a decline in the dollar value
of a currency in which it holds or anticipates holding securities. If the
currency's value should decline against the dollar, the loss in currency value
should be offset, in whole or in part, by an increase in the value of the put.
If the value of the currency instead should rise against the dollar, any gain
to the Series would be reduced by the premium it had paid for the put option.
A currency call option might be purchased, for example, in anticipation of, or
to protect against, a rise in the value against the dollar of a currency in
which the Series anticipates purchasing securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated
strike prices and expiration dates. The Securities and Exchange Commission
("SEC") staff considers OTC options to be illiquid securities. The Series will
not purchase an OTC option unless the Series believes that daily valuations for
such options are readily obtainable. OTC options differ from exchange-traded
options in that OTC options are transacted with dealers directly and not
through a clearing corporation (which guarantees performance). Consequently,
there is a risk of non-performance by the dealer. Since no exchange is
involved, OTC options are valued on the basis of a quote provided by the
dealer. In the case of OTC options, there can be no assurance that a liquid
secondary market will exist for any particular option at any specific time.
INTEREST RATE AND CURRENCY FUTURES CONTRACTS. The Series may enter into
interest rate or currency futures contracts ("Futures" or "Futures Contracts")
as a hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Series. The
Series' hedging may include sales of Futures as an offset against the effect of
expected increases in interest rates or currency exchange rates, and purchases
of Futures as an offset against the effect of expected declines in interest
rates or currency exchange rates.
The Series will enter only into Futures Contracts which are traded on
national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal interest rate and currency
Futures exchanges in the United States are the Board of Trade of the City of
Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are exchanged in London at the London
International Financial Futures Exchange.
Although techniques other than sales and purchases of Futures Contracts
could be used to reduce the Series' exposure to interest rate and currency
exchange rate fluctuations, the Series may be able to hedge exposure more
effectively and at a lower cost through using Futures Contracts.
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SERIES K (CONTINUED)
The Series will not enter into a Futures Contract if, as a result thereof,
more than 5% of the Series' total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
Futures Contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (debt
security or currency) for a specified price at a designated date, time and
place. Brokerage fees are incurred when a Futures Contract is bought or sold,
and margin deposits must be maintained at all times the Futures Contract is
outstanding. For a discussion of Futures Contracts and the risks associated
with investing in Futures Contracts, see "Investment Methods and Risk Factors."
In the case of a Futures Contract sale, the Series either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Series to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result,
the commitment of a significant portion of the Series' assets to cover could
impede portfolio management or the Series' ability to meet redemption requests
or other current obligations.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities or currencies except that options on Futures Contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a Futures Contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
Futures Contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the Futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's Futures
margin account which represents the amount by which the market price of the
Futures Contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the Futures
Contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing level of the securities, currencies or index upon which the Futures
Contracts are based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
As an alternative to purchasing call and put options on Futures, the
Series may purchase call and put options on the underlying securities or
currencies themselves. Such options would be used in a manner identical to the
use of options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Series, or to
reduce or eliminate the hedge position then currently held by the Series, the
Series may seek to close out an option position by selling an option covering
the same securities or contract and having the same exercise price and
expiration date. Trading in options on Futures Contracts began relatively
recently. The ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that this market will develop. For a discussion of
options on Futures Contracts and associated risks, see "Investment Methods and
Risk Factors."
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. A forward currency
contract ("Forward Contract") is an obligation, generally arranged with a
commercial bank or other currency dealer, to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Series may accept or make delivery of the currency at the
maturity of the Forward Contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. The
Series may enter into Forward Contracts either with respect to specific
transactions or with respect to the Series' portfolio positions. The Series
will utilize Forward Contracts only on a covered basis. See the discussion of
such contracts and related options under "Investment Methods and Risk Factors."
INTEREST RATE AND CURRENCY SWAPS. The Series usually will enter into
interest rate swaps on a net basis if the contract so provides, that is, the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Series receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as swaps, caps,
floors and collars are entered into for good faith hedging purposes, Lexington,
MFR and the Series believe that they do not constitute senior securities under
the 1940 Act if appropriately covered and, thus, will not treat them as being
subject to the Series' borrowing restrictions. Interest rate swaps involve the
exchange by the Series with another party of their respective commitments to
pay or
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SERIES K (CONTINUED)
receive interest (for example, an exchange of floating rate payments for
fixed rate payments) with respect to a notional amount of principal. A
currency swap is an agreement to exchange cash flows on a notional amount based
on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles
the purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and
a floor that preserves a certain return within a predetermined range of
interest rates or values.
The Series will not enter into any swap, cap, floor, collar or other
derivative transaction unless, at the time of entering into the transaction,
the unsecured long-term debt rating of the counterparty combined with any
credit enhancements is rated at least A by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or has an equivalent
rating from a nationally recognized statistical rating organization or is
determined to be of equivalent credit quality by Lexington and MFR. If a
counterparty defaults, the Series may have contractual remedies pursuant to the
agreements related to the transactions. 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, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
The investment objective of Series M is to seek high total return,
consisting of capital appreciation and current income. The Series seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors. The Series
will invest in the following investment categories: equity securities of
domestic and foreign issuers, including common stocks, preferred stocks,
convertible securities and warrants; debt securities of domestic and foreign
issuers, including mortgage-related and other asset-backed securities;
exchange-traded real estate investment trusts (REITs); equity securities of
companies involved in the exploration, mining, development, production and
distribution of gold ("gold stocks"); zero coupon securities and domestic money
market instruments. See "Investment Methods and Risk Factors" in the
Prospectus and this Statement of Additional Information for a discussion of the
additional risks associated with investment in foreign securities, and see the
discussion of the risks associated with investment in gold stocks below.
Investment in gold stocks presents risks, because the prices of gold have
fluctuated substantially over short periods of time. Prices may be affected by
unpredictable monetary and political policies, such as currency devaluations or
revaluations, economic and social conditions within an individual country,
trade imbalances, or trade or currency restrictions between countries. The
unstable political and social conditions in South Africa and unsettled
political conditions prevailing in neighboring countries may have disruptive
effects on the market prices of securities of South African companies.
The Series is not required to maintain a portion of its assets in each of
the permitted investment categories. The Series, however, under normal
circumstances maintains a minimum of 35% of its total assets in equity
securities and 10% in debt securities. The Series will not invest more than
55% of its total assets in money market instruments (except when in a temporary
defensive position), more than 80% of its total assets in foreign securities,
nor more than 20% of its total assets in gold stocks.
The Series' Sub-Adviser, Meridian Investment Management Company
("Meridian"), conducts quantitative investment research and uses the research
to strategically allocate the Series' assets among the investment categories
identified above, primarily on the basis of a quantitative asset allocation
model. With respect to equity securities, the model analyzes a large number of
equity securities based on the following factors: current earnings, earnings
history, long-term earnings projections, current price, and price momentum.
Meridian then determines which sectors within an identified investment category
are deemed to be the most attractive relative to other sectors. For example,
the model may indicate that a portion of the Series' assets should be invested
in the domestic equity category of the market and within this category that
pharmaceutical stocks represent a sector with an attractive total return
potential.
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SERIES M (CONTINUED)
Meridian identifies sectors of the domestic and international economy in
which the Series will invest and then determines which equity securities to
purchase within the identified sectors.
With respect to the selection of debt securities for the Series, the asset
allocation model provided by Meridian, analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment
Manager will determine the portion of the portfolio to allocate to debt
securities and the duration of those securities based on the model's interest
rate projections. Gold stocks and REITs will be analyzed in a manner similar
to that used for equity securities. Money market instruments will be analyzed
based on current returns and the current yield curve. The asset allocation
model used by the Series may evolve over time or be replaced by other stock
selection techniques. There is no assurance that the model will correctly
predict market trends or enable the Series to achieve its investment objective.
The debt securities in which the Series may invest will, at the time of
investment, consist of "investment grade" bonds, which are bonds rated BBB or
better by S&P or Baa or better by Moody's or that are unrated by S&P and
Moody's but considered by the Investment Manager to be of equivalent credit
quality. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments.
The Series may invest in investment grade mortgage-backed securities
(MBSs), including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series will not invest in an MBS if, as a result of
such investment, more than 25% of its total assets would be invested in MBSs,
including CMOs and mortgage pass-through securities. For a discussion of MBSs
and the risks associated with such securities, see "Investment Methods and Risk
Factors" - "Mortgage-Backed Securities" in the Prospectus and this Statement of
Additional Information.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
The Series may write covered call options and purchase put options on
securities, financial indices and foreign currencies and may enter into futures
contracts. The Series may buy and sell futures contracts (and options on such
contracts) to manage exposure to changes in securities prices and foreign
currencies and as an efficient means of adjusting overall exposure to certain
markets. It is the Series' operating policy that initial margin deposits and
premiums on options used for non-hedging purposes will not equal more than 5%
of the Series' net assets. The total market value of securities against which
the Series has written call options may not exceed 25% of its total assets.
The Series will not commit more than 5% of its total assets to premiums when
purchasing put options. Futures contracts and options may not always be
successful hedges and their prices can be highly volatile. Using futures
contracts and options could lower the Series' total return and the potential
loss from the use of futures can exceed the Series' initial investment in such
contracts. Futures contracts and options and the risks associated with such
instruments are described in further detail under "Investment Methods and Risk
Factors."
SERIES N (MANAGED ASSET ALLOCATION SERIES)
The investment objective of Series N is to seek a high level of total
return by investing primarily in a diversified group of fixed income and equity
securities.
The Series is designed to balance the potential appreciation of common
stocks with the income and principal stability of bonds over the long term.
Over the long term, the Series expects to allocate its assets so that
approximately 40% of such assets will be in the fixed income sector (as defined
below) and approximately 60% in the equity sector (as defined below). This mix
may vary over shorter time periods within the ranges set forth below:
Range
-----
Fixed Income Sector 30-50%
Equity Sector 50-70%
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SERIES N (CONTINUED)
The primary consideration in varying from the 60-40 allocation will be the
outlook of the Series' Sub-Adviser, T. Rowe Price Associates, Inc. ("T. Rowe
Price"), for the different markets in which the Series invests. Shifts between
the fixed income and equity sectors will normally be done gradually and T. Rowe
Price will not attempt to precisely "time" the market. There is, of course no
guarantee that T. Rowe Price's gradual approach to allocating the Series'
assets will be successful in achieving the Series' objective. The Series will
maintain cash reserves to facilitate the Series' cash flow needs (redemptions,
expenses and purchases of Series securities) and it may invest in cash reserves
without limitation for temporary defensive purposes.
Assets allocated to the fixed income portion of the Series primarily will
be invested in U.S. and foreign investment grade bonds, high yield bonds,
short-term investments and currencies, as needed to gain exposure to foreign
markets. Assets allocated to the equity portion of the Series will be
allocated among U.S. and non-dollar large- and small-cap companies, currencies
and futures.
The Series' fixed income sector will be allocated among investment grade,
high yield, U.S. and non-dollar debt securities and currencies generally within
the ranges indicated below:
Range
-----
Investment Grade 50-100%
High Yield 0-30%
Non-dollar 0-30%
Cash Reserves 0-20%
Investment grade debt securities include long, intermediate and short-term
investment grade debt securities (e.g., AAA, AA, A or BBB by S&P or if not
rated, of equivalent investment quality as determined by T. Rowe Price). The
weighted average maturity for this portion (investment grade debt securities)
of the Series' portfolio is generally expected to be intermediate (3-10 years),
although it may vary significantly. Non-dollar debt securities include
non-dollar denominated government and corporate debt securities or currencies
of at least three countries. See "Investment Methods and Risk Factors" -
"Certain Risks of Foreign Investing" for a discussion of the risks involved in
foreign investing. High-yield securities include high-yielding,
income-producing debt securities in the lower rating categories (commonly
referred to as "junk bonds") and preferred stocks including convertible
securities. High yield bonds may be purchased without regard to maturity;
however, the average maturity is expected to be approximately 10 years,
although it may vary if market conditions warrant. Quality will generally
range from lower-medium to low and the Series may also purchase bonds in
default if, in the opinion of T. Rowe Price, there is significant potential for
capital appreciation. Lower-rated debt obligations are generally considered to
be high risk investments. See "Investment Methods and Risk Factors" for a
discussion of the risks involved in investing in high-yield, lower-rated debt
securities. Securities which may be held as cash reserves include liquid
short-term investments of one year or less having the highest ratings by at
least one established rating organization, or if not rated, of equivalent
investment quality as determined by T. Rowe Price. The Series may use
currencies to gain exposure to an international market prior to investing in
non-dollar securities.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies and futures, generally within the ranges indicated
below:
Large Cap 45-100%
Small Cap 0-30%
Non-dollar 0-35%
Large Cap securities generally include stocks of well-established
companies with capitalization over $1 billion which can produce increasing
dividend income.
Non-dollar securities include foreign currencies and common stocks of
established non-U.S. companies. Investments may be made solely for capital
appreciation or solely for income or any combination of both for the purpose of
achieving a higher overall return. T. Rowe Price intends to diversify the
non-dollar portion of the Series' portfolio broadly among countries and to
normally have at least three different countries represented. The countries of
the Far East and Western Europe as well as South Africa, Australia, Canada, and
other areas
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SERIES N (CONTINUED)
(including developing countries) may be included. Under unusual circumstances,
however, investment may be substantially in one or two countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies
may also be held to gain exposure to an international market prior to investing
in a non-dollar stock.
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may
trade less frequently and in limited volume and move more abruptly than
securities of larger companies. However, securities of smaller companies may
offer greater potential for capital appreciation since they are often overlooked
or undervalued by investors.
Until the Series reaches approximately $30 million in assets, the
composition of the Series' portfolio may vary significantly from the percent
limitations and ranges above. This might occur because, at lower asset levels,
the Series may be unable to prudently achieve diversification among the
described asset classes. During this initial period, the Series may use
futures contracts and purchase foreign currencies to a greater extent than it
will once the start-up period is over.
The Series may invest up to 35% of its total assets in U.S.
dollar-denominated and non-U.S. dollar-denominated securities issued by foreign
issuers. Some of the countries in which the Series may invest may be
considered to be developing and may involve special risks. For a discussion of
the risks involved in investment in foreign securities, see "Investment Methods
and Risk Factors" - "Certain Risks of Foreign Investing."
The Series' foreign investments are also subject to currency risk
described under "Investment Methods and Risk Factors" - "Currency
Fluctuations." To manage this risk and facilitate the purchase and sale of
foreign securities, the Series may engage in foreign currency transactions
involving the purchase and sale of forward foreign currency exchange contracts.
Although forward currency transactions will be used primarily to protect the
Series from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the Series'
total return could be adversely affected as a result. For a discussion of
forward currency transactions and the risks associated with such transactions,
see "Investment Methods and Risk Factors" - "Forward Currency Contracts and
Related Options" and "Purchase and Sale of Currency Futures Contracts and
Related Options." Purchases by the Series of currencies in substitution of
purchases of stocks and bonds will subject the Series to risks different from a
fund invested solely in stocks and bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or
as an efficient means of adjusting its exposure to the bond, stock, and
currency markets. The Series will not use futures contracts for leveraging
purposes. The Series will limit its use of futures contracts so that initial
margin deposits or premiums on such contracts used for non-hedging purposes
will not equal more than 5% of the Series' net asset value. The Series may
also write call and put options and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of
the Series' portfolio securities or currencies covering call or put options
will not exceed 25% of the Series' net assets. The Series may enter into
foreign futures and options transactions. As part of its investment program
and to maintain greater flexibility, the Series may invest in instruments which
have the characteristics of futures, options and securities, known as "hybrid
instruments." For a discussion of such instruments and the risks involved in
investing therein, see "Investment Methods and Risk Factors" -- "Hybrid
Instruments."
The Series may acquire illiquid securities in an amount not exceeding 15%
of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 5% of its total assets in
restricted securities (other than securities eligible for resale under Rule
144A of the Securities Act of 1933). Series N may invest in securities on a
"when-
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SERIES N (CONTINUED)
issued" or "delayed delivery basis" in excess of customary settlement
periods for the type of security involved. For a discussion of restricted and
when-issued securities, see "Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full
faith and credit of the U.S. Treasury while others, such as Freddie Mac
certificates, are not. The Series may also invest in collateralized mortgage
obligations (CMOs) and stripped mortgage securities (a type of derivative).
Stripped mortgage securities are created by separating the interest and
principal payments generated by a pool of mortgage-backed bonds to create two
classes of securities, "interest only" (IO) and "principal only" (PO) bonds.
There are risks involved in mortgage-backed securities, CMOs and stripped
mortgage securities. See "Investment Methods and Risk Factors" for an
additional discussion of such securities and the risks involved therein.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
While the Series will remain invested in primarily common stocks and
bonds, it may, for temporary defensive purposes, invest in cash reserves
without limitation. The Series may establish and maintain reserves as T. Rowe
Price believes is advisable to facilitate the Series' cash flow needs. Cash
reserves include money market instruments, including repurchase agreements, in
the two highest categories. Short-term securities may be held in the equity
sector as collateral for futures contracts. These securities are segregated
and may not be available for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3% of its total assets to broker-dealers,
institutional investors, or other persons. Any such loan will be continuously
secured by collateral at least equal to the value of the securities loaned.
For a discussion of the limitations on lending and risks of lending, see
"Investment Methods and Risk Factors" - "Lending of Portfolio Securities." The
Series may also invest in real estate investment trusts (REITs). For a
discussion of REITs and certain risks involved therein, see this Statement of
Additional Information and the Fund's Prospectus under "Investment Methods and
Risk Factors."
FIXED INCOME SECURITIES. Fixed income securities in which the Series may
invest include, but are not limited to, those described below.
U.S. GOVERNMENT OBLIGATIONS. Bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury, and the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
BANK OBLIGATIONS. Certificates of deposit, bankers' acceptances, and
other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposits may have fixed or variable
rates. The Series may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks and foreign branches of foreign banks.
SAVINGS AND LOAN OBLIGATIONS. Negotiable certificates of deposit and
other short-term debt obligations of savings and loan associations.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed
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SERIES N (CONTINUED)
through to the holders of the CMOs on the same schedule as they are received,
although certain classes of CMOs have priority over others with respect to the
receipt of prepayments on the mortgages. Therefore, depending on the type of
CMOs in which a Series invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related securities.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Series, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Series. Neither event will require a sale of such
security by the Series. However, T. Rowe Price will consider such event in its
determination of whether the Series should continue to hold the security. To
the extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Series will attempt
to use comparable ratings as standards for investments in accordance with the
investment policies contained in the Fund's Prospectus.
The Series may also invest in the securities of certain supranational
entities, such as the International Development Bank.
For a discussion of mortgage-backed securities and certain risks involved
therein, see this Statement of Additional Information and the Fund's Prospectus
under "Investment Methods and Risk Factors."
ASSET-BACKED SECURITIES. The Series may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
AUTOMOBILE RECEIVABLE SECURITIES. The Series may invest in asset-backed
securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities").
CREDIT CARD RECEIVABLE SECURITIES. The Series may invest in asset-backed
securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities").
OTHER ASSETS. T. Rowe Price anticipates that asset-backed securities
backed by assets other than those described above will be issued in the future.
The Series may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies. For a
discussion of these securities, see this Statement of Additional Information
and the Fund's Prospectus under "Investment Methods and Risk Factors."
In addition to the investments described in the Fund's Prospectus, the
Series may invest in the following:
ADDITIONAL FUTURES AND OPTIONS CONTRACTS. Although the Series has no
current intention of engaging in financial futures or options transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
SERIES O (EQUITY INCOME SERIES)
The investment objective of Series O is to seek to provide substantial
dividend income and also capital appreciation by investing primarily in
dividend-paying common stocks of established companies. In pursuing its
objective, the Series emphasizes companies with favorable prospects for
increasing dividend income, and secondarily, capital appreciation. Over time,
the income component (dividends and interest earned) of the Series' investments
is expected to be a significant contributor to the Series' total return. The
Series' income yield is expected to be significantly above that of the Standard
and Poor's 500 Stock Index ("S&P 500"). Total return is expected to consist
primarily of dividend income and secondarily of capital appreciation (or
depreciation).
The Series may invest up to 35% of its total assets in U.S. dollar
denominated and non U.S. dollar denominated securities issued by foreign
issuers. For a discussion of the risks involved in foreign securities
investments, see this Statement of Additional Information and the Prospectus
under "Investment Methods and Risk Factors."
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SERIES O (CONTINUED)
The investment program of the Series is based on several premises. First,
the Series' Sub-Adviser, T. Rowe Price, believes that, over time, dividend
income can account for a significant component of the total return from equity
investments. Second, dividends are normally a more stable and predictable
source of return than capital appreciation. While the price of a company's
stock generally increases or decreases in response to short-term earnings and
market fluctuations, its dividends are generally less volatile. Finally, T.
Rowe Price believes that stocks which distribute a high level of current income
tend to have less price volatility than those which have below average
dividends.
To achieve its objective, the Series, under normal circumstances, will
invest at least 65% of its assets in income-producing common stocks, whose
prospects for dividend growth and capital appreciation are considered favorable
by T. Rowe Price. To enhance capital appreciation potential, the Series also
uses a value-oriented approach, which means it invests in stocks it believes
are currently undervalued in the market place. The Series' investments will
generally be made in companies which share some of the following
characteristics: established operating histories; above-average current
dividend yields relative to the S&P 500; low price-earnings ratios relative to
the S&P 500; sound balance sheets and other financial characteristics; and low
stock price relative to company's underlying value as measured by assets,
earnings, cash flow or business franchises.
The Series may also invest its assets in fixed income securities
(corporate, government, and municipal bonds of various maturities). The Series
would invest in municipal bonds when the expected total return from such bonds
appears to exceed the total returns obtainable from corporate or government
bonds of similar credit quality.
Series O may invest in debt securities of any type without regard to
quality or rating. Such securities would be purchased in companies which meet
the investment criteria for the Series. Such securities may include securities
rated below investment grade (e.g., securities rated Ba or lower by Moody's or
BB or lower by S&P). The Series will not purchase such a security (commonly
referred to as a "junk bond") if immediately after such purchase the Series
would have more than 10% of its total assets invested in such securities. See
"Investment Methods and Risk Factors" - "Special Risks Associated with
Low-Rated and Comparable Unrated Debt Securities" for a discussion of the risks
associated with investing in such securities.
Although the Series will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
convertible securities, real estate investment trusts (REITs) and warrants,
when considered consistent with the Series' investment objective and program.
The Series' investments in foreign securities include non-dollar denominated
securities traded outside of the U.S. and dollar denominated securities traded
in the U.S. (such as ADRs). The Series may invest up to 25% of its total
assets in foreign securities. See the discussions of the risks associated with
investing in foreign securities under "American Depositary Receipts," "Currency
Fluctuations" and "Certain Risks of Foreign Investing."
The Series may also engage in a variety of investment management
practices, such as buying and selling futures and options. The Series may buy
and sell futures contracts (and options on such contracts) to manage its
exposure to changes in securities prices and foreign currencies and as an
efficient means of adjusting its overall exposure to certain markets. The
Series may purchase or write (sell) call and put options on securities,
financial indices, and foreign currencies. It is the Series' operating policy
that initial margin deposits and premiums on options used for non-hedging
purposes will not equal more than 5% of the Series' net asset value and, with
respect to options on securities, the total market value of securities against
which the Series has written call or put options may not exceed 25% of its
total assets. The Series will not commit more than 5% of its total assets to
premiums when purchasing call or put options. The Series may also invest up to
10% of its total assets in hybrid instruments which are described under
"Investment Methods and Risk Factors" - "Hybrid Instruments." Also see the
discussions of futures, options and forward currency transactions under
"Investment Methods and Risk Factors."
The Series may also invest in restricted securities described under
"Investment Methods and Risk Factors." The Series' investment in such
securities, other than Rule 144A securities, is limited to 5% of its net
assets. Series O may invest in securities on a "when-issued" or "delayed
delivery basis" as discussed in "Invesetment Methods and Risk Factors." The
Series may borrow up to 33 1/3% of its total assets; however, the Series may
not purchase securities when borrowings exceed 5% of its total assets. The
Series may hold a certain portion of its assets in money market securities,
including repurchase agreements, in the two highest rating categories, maturing
in one year or less. For temporary, defensive purposes, the Series may invest
without limitation in such
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SERIES O (CONTINUED)
securities. The Series may lend securities to broker-dealers, other
institutions, or other persons to earn additional income. The value of loaned
securities may not exceed 33 1/3% of the Series' total assets. See
"Investment Methods and Risk Factors" - "Lending of Portfolio Securities" for
a discussion of the risks associated with securities lending.
SERIES P (HIGH YIELD SERIES)
The investment objective of Series P is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Series will seek its investment objective by investing primarily in a broad
range of income producing securities, including (i) higher yielding, higher
risk, debt securities (commonly referred to as "junk bonds"); (ii) preferred
stock; (iii) securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars; (iv) mortgage-backed securities ("MBSs"); (v)
asset-backed securities; (vi) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (vii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; and (viii) zero
coupon securities. Series P may also invest up to 35% of its assets in common
stocks (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65% of the Series' total assets will be invested in
high-yielding, high risk debt securities.
Series P may invest up to 100% of its assets in debt securities that, at
the time of purchase, are rated below investment grade ("high yield securities"
or "junk bonds"), which involve a high degree of risk and are predominantly
speculative. For a description of debt ratings and a discussion of the risks
associated with investing in junk bonds, see "Investment Methods and Risk
Factors." Included in the debt securities which the Series may purchase are
convertible bonds, or bonds with warrants attached. A "convertible bond" is a
bond, debenture, or preferred share which may be exchanged by the owner for
common stock or another security, usually of the same company, in accordance
with the terms of the issue. A "warrant" confers upon the holder the right to
purchase an amount of securities at a particular time and price. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with such securities.
The Series may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Series may also invest in debt securities issued by foreign governments
(including Brady Bonds), their agencies and instrumentalities and foreign
corporations (including those in emerging markets), provided such securities
are denominated in U.S. dollars. The Series' investment in foreign securities,
excluding Canadian securities, will not exceed 25% of the Series' net assets.
See "Investment Methods and Risk Factors" for a discussion of the risks
associated with investing in foreign securities, Brady Bonds and emerging
markets.
The Series may invest in MBSs, including mortgage pass-through securities
and collateralized mortgage obligations (CMOs). The Series may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest only" (IO) and "principal only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs.
This is due to the fact that such instruments are more sensitive to interest
rate changes and to the rate of principal prepayments than are most other MBSs.
The Series will hold less than 25% of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
The Series may also invest in asset-backed securities. These include
secured debt instruments backed by automobile loans, credit card loans, home
equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest payments. Asset-backed
securities are subject to risks similar to those discussed with respect to
MBSs. See "Investment Methods and Risk Factors."
The Series may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial
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SERIES P (CONTINUED)
discounts but provide for the commencement of regular interest payments at a
deferred date. See "Investment Methods and Risk Factors" for a discussion of
zero coupon securities.
Series P may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series' policy that not more than 15% of
the Series' net assets will be invested in illiquid assets. See "Investment
Methods and Risk Factors" for a discussion of restricted securities.
Series P may purchase securities on "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. The Series may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Series may lend securities
to broker/dealers, other institutions or other persons to earn additional
income. The value of loaned securities may not exceed 33 1/3% of the Series'
total assets. In addition, the Series may purchase loans, loan participations
and other types of direct indebtedness.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Series will not use futures
contracts for leveraging purposes. The Series will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used
for non-hedging purposes will not equal more than 5% of the Series' net asset
value. The Series may purchase call and put options and write such options on
a "covered" basis. The Series may also enter into interest rate and index
swaps and purchase or sell related caps, floors and collars. The aggregate
market value of the Series' portfolio securities covering call or put options
will not exceed 25% of the Series' net assets. See "Investment Methods and
Risk Factors" for a discussion of the risks associated with these types of
investments.
The Series' investment in warrants, valued at the lower of cost or market,
will not exceed 5% of the Series' net assets. Included within this amount, but
not to exceed 2% of the Series' net assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by the
Series in units or attached to securities may be deemed to be without value.
From time to time, Series P may invest part or all of its assets in U.S.
Government securities, commercial notes or money market instruments. It is
anticipated that the weighted average maturity of the Series portfolio will
range from 5 to 15 years under normal circumstances.
SERIES S (SOCIAL AWARENESS SERIES)
The investment objective of Series S is to seek capital appreciation. In
seeking its objective, Series S will invest in various types of securities
which meet certain social criteria established for the Series. Series S will
invest in a diversified portfolio of common stocks (which may include ADRs),
convertible securities, preferred stocks and debt securities. See "Investment
Methods and Risk Factors" - "American Depositary Receipts." From time to time,
the Series may purchase government bonds or commercial notes on a temporary
basis for defensive purposes.
Series S will seek investments that comply with the Series' social
criteria and that offer investment potential. Because of the limitations on
investment imposed by the social criteria, the availability of investment
opportunities for the Series may be limited as compared to those of similar
funds which do not impose such restrictions on investment.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as securities convertible into common stocks. Securities
will be selected on the basis of their appreciation and growth potential.
Securities considered to have capital appreciation and growth potential will
often include securities of smaller and less mature companies. Such companies
may present greater opportunities for capital appreciation because of high
potential earnings growth, but may also involve greater risk. They may have
limited product lines, markets or financial resources, and they may be
dependent on a limited management group. Their securities may trade less
frequently and in limited volume, and only in the over-the-counter market or on
smaller securities exchanges. As a result, the securities of smaller companies
may have limited marketability and may be subject to more abrupt or erratic
changes in value than securities of larger, more established companies. The
Series may also invest in larger companies where opportunities for
above-average capital appreciation appear favorable and the Series' social
criteria are satisfied.
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SERIES S (CONTINUED)
Series S may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio or as an efficient
means of adjusting its exposure to the stock market. The Series will limit its
use of futures contracts so that initial margin deposits or premiums on such
contracts used for non-hedging purposes will not equal more than 5 percent of
the Series' net assets. The Series may also write call and put options on a
covered basis and purchase put and call options on securities and financial
indices. The aggregate market value of the Series' portfolio securities
covering call or put options will not exceed 25 percent of the Series' net
assets. See the discussion of options and futures contracts under "Investment
Methods and Risk Factors."
Series S will not invest in securities of companies that engage in the
production of nuclear energy, alcoholic beverages or tobacco products.
In addition, the Series will not invest in securities of companies that
significantly engage in: (1) the manufacture of weapon systems; (2) practices
that, on balance, have a detrimental effect on the environment; or (3) the
gambling industry. Series S will monitor the activities identified above to
determine whether they are significant to an issuer's business. Significance
may be determined on the basis of the percentage of revenue generated by, or
the size of operations attributable to, such activities. The Series may invest
in an issuer that engages in the activities set forth above, in a degree that
is not deemed significant by the Investment Manager. In addition, the Series
will seek out companies that have contributed substantially to the communities
in which they operate, have a positive record on employment relations, have
made substantial progress in the promotion of women and minorities or in the
implementation of benefit policies that support working parents, or have taken
notably positive steps in addressing environmental challenges.
The Investment Manager will evaluate an issuer's activities to determine
whether it engages in any practices prohibited by the Series' social criteria.
In addition to its own research with respect to an issuer's activities, the
Investment Manager will also rely on other organizations that publish
information for investors concerning the social policy implications of
corporate activities. The Investment Manager may rely upon information provided
by advisory firms that provide social research on U.S. corporations, such as
Kinder, Lydenberg, Domini & Co., Inc., Franklin Insight, Inc. and
Prudential-Bache Capital Funding. Investment selection on the basis of social
attributes is a relatively new practice and the sources for this type of
information are not well established. The Investment Manager will continue to
identify and monitor sources of such information to screen issuers which do not
meet the social investment restrictions of the Series.
If after purchase of an issuer's securities by Series S, it is determined
that such securities do not comply with the Series' social criteria, the
securities will be eliminated from the Series' portfolio within a reasonable
time. This requirement may cause the Series to dispose of a security at a time
when it may be disadvantageous to do so.
SERIES V (VALUE SERIES)
The investment objective of Series V is to seek long-term growth of
capital. Series V will seek to achieve its objective through investment in a
diversified portfolio of securities. Under normal circumstances the Series
will consist primarily of various types of common stock, which may include
ADRs, and securities convertible into common stocks which the Investment
Manager believes are undervalued relative to assets, earnings, growth potential
or cash flows. See the discussion of ADRs under "Investment Methods and Risk
Factors." Under normal circumstances, the Series will invest at least 65
percent of its assets in the securities of companies which the Investment
Manager believes are undervalued.
Series V may also invest in (i) preferred stocks; (ii) warrants; and (iii)
investment grade debt securities (or unrated securities of comparable quality).
The Series may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. The Series may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 15 percent of its total assets will be invested in illiquid
securities. Series V reserves the right to invest its assets temporarily in
cash and money market instruments when, in the opinion of the Investment
Manager, it is advisable to do so on account of current or anticipated market
conditions. The Series may utilize repurchase agreements on an overnight basis
or bank demand accounts, pending investment in securities or to meet potential
redemptions or expenses. See the discussion of
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SERIES V (CONTINUED)
when-issued securities, Rule 144A securities and repurchase agreements under
"Investment Methods and Risk Factors."
SERIES X (SMALL CAP SERIES)
The investment objective of Series X is to seek long-term growth of
capital. The Series invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Series
anticipates that under normal market conditions, the Series will invest at
least 65% of its assets in equity securities of domestic and foreign companies
with market capitalizations of less than $1 billion at the time of purchase.
The equity securities in which the Series may invest include common stocks,
preferred stocks (both convertible and non-convertible), warrants and rights.
It is anticipated that the Series will invest primarily in companies whose
securities are traded on foreign or domestic stock exchanges or in the
over-the-counter market ("OTC"). The Series also may invest in securities of
emerging growth companies, some of which may have market capitalizations over $1
billion. Emerging growth companies are companies which have passed their
start-up phase and which show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time.
Under normal conditions, the Series intends to invest primarily in small
company stocks; however, the Series is also permitted to invest up to 35% of
its assets in equity securities of domestic and foreign issuers with a market
capitalization of more than $1 billion at the time of purchase, debt
obligations and domestic and foreign money market instruments, including
bankers acceptances, certificates of deposit and discount notes of U.S.
Government securities. Debt obligations in which the Series may invest will be
investment grade debt obligations, although the Series may invest up to 5% of
its assets in non-investment grade debt obligations. In addition, for
temporary or emergency purposes, the Series can invest up to 100% of total
assets in cash, cash equivalents, U.S. Government securities, commercial paper
and certain other money market instruments, as well as repurchase agreements
collateralized by these types of securities. The Series also may invest in
reverse repurchase and agreements and shares of other non-affiliated investment
companies. See the discussion of such securities under "Investment Methods and
Risk Factors."
The Series may purchase an unlimited number of foreign securities,
including securities of companies in emerging markets. The Series may invest
in foreign securities, either directly or indirectly through the use of
depositary receipts. Depositary receipts, including American Depositary
Receipts ("ADRs"), European Depository Receipts and American Depository Shares
are generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. The Series also may invest in securities of
foreign investment funds or trusts (including passive foreign investment
companies). See the discussion of foreign securities, emerging growth stocks,
currency risk and ADRs under "Investment Methods and Risk Factors."
Some of the countries in which the Series may invest may not permit direct
investment by outside investors. Investment in such countries may only be
permitted through foreign government-approved or government-authorized
investment vehicles, which may include other investment companies. Investing
through such vehicles may involve frequent or layered fees or expenses and may
also be subject to limitation under the Investment Company Act of 1940. See
"Investment Methods and Risk Factors" - "Shares of Other Investment Companies"
in the Prospectus for more information.
The Series may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options and futures transactions
for hedging or risk management purposes. See the discussion of such
transactions and currency risk under "Investment Methods and Risk Factors."
At various times the Series may invest in derivative instruments for
hedging or risk management purposes or for any other permissible purpose
consistent with the Series' investment objective. Derivative transactions in
which the Series may engage include the writing of covered put and call options
on securities and the purchase of put and call options thereon, the purchase of
put and call options on securities indexes and exchange-traded options on
currencies and the writing of put and call options on securities indexes. The
Series may enter into spread transactions and swap agreements. The Series also
may buy and sell financial futures contracts which may include interest-rate
futures, futures on currency exchanges, and stock and bond index futures
contracts. The Series may enter into any futures contracts and related options
without limit for "bona fide hedging" purposes (as defined in the Commodity
Futures Trading Commission regulations) and for other permissible purposes,
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SERIES X (CONTINUED)
provided that aggregate initial margin and premiums on positions engaged in for
purposes other than "bona fide hedging" will not exceed 5% of its net asset
value, after taking into account unrealized profits and losses on such
contracts. See "Investment Methods and Risk Factors" for more information on
options, futures and other derivative instruments.
The Series may acquire warrants which are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance), on a
specified date, during a specified period, or perpetually. Warrants may be
acquired separately or in connection with the acquisition of securities. The
Series may purchase warrants, valued at the lower of cost or market value, of
up to 5% of the Series' net assets. Included in that amount, but not to exceed
2% of the Series' net assets, may be warrants that are not listed on any
recognized U.S. or foreign stock exchange. Warrants acquired by the Series in
units or attached to securities are not subject to these restrictions.
The Series may engage in short selling against the box, provided that no
more that 15% of the value of the Series' net assets is in deposits on short
sales against the box at any one time. The Series also may invest in real
estate investment trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. See the discussion of real
estate securities under "Investment Methods and Risk Factors."
The Series may invest in restricted securities, including Rule 144A
securities. See the discussion of restricted securities under "Investment
Methods and Risk Factors." The Series also may invest without limitation in
securities purchased on a when-issued or delayed delivery basis as discussed
under "Investment Methods and Risk Factors."
While there is careful selection and constant supervision by the Series'
Sub-Adviser, Strong Capital Management, Inc. ("Strong"), there can be no
guarantee that the Series' objective will be achieved. Strong invests in
companies whose earnings are believed to be in a relatively strong growth
trend, and, to a lesser extent, in companies in which significant further
growth is not anticipated but which are perceived to be undervalued. In
identifying companies with favorable growth prospects, Strong considers factors
such as prospects for above-average sales and earnings growth; high return on
invested capital; overall financial strength; competitive advantages, including
innovative products and services; effective research, product development and
marketing; and stable, capable management.
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in larger, more established issuers since
these securities may have limited marketability and, thus, they may be more
volatile than securities of larger, more established companies or the market
averages in general. Because small-sized companies normally have fewer shares
outstanding than larger companies, it may be more difficult for the Series to
buy or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies may have limited product lines,
markets or financial resources and may lack management depth. In addition,
small-sized companies are typically subject to wider variations in earnings and
business prospects than are larger, more established companies. There is
typically less publicly available information concerning small-sized companies
than for larger, more established ones.
Securities of issuers in "special situations" also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in "special situations"
include, but are not limited to, companies involved in an acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer, a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control.
Although investing in securities of emerging growth companies or issuers
in "special situations" offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Series may involve a greater degree of risk
than an investment in other mutual funds that seek long-term growth of capital
by investing in better-known, larger companies.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Series are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
Factors" sections of the Prospectus and in this Statement of Additional
Information. The following is a description of certain additional risk factors
related to various securities, instruments and techniques. The risks so
described only apply to those Series which may invest in such securities and
instruments or which use such techniques. Also included is a general
description of some of the investment instruments, techniques and methods which
may be used by one or more of the Series. The methods described only apply to
those Series which may use such methods. Although a Series may employ the
techniques, instruments and methods described below, consistent with its
investment objective and policies and any applicable law, no Series will be
required to do so.
AMERICAN DEPOSITARY RECEIPTS. Each of the Series (except Series C and E)
of the Fund may purchase American Depositary Receipts ("ADRs") which are issued
generally by U.S. banks and which represent the deposit with the bank of a
foreign company's securities. ADRs are publicly traded on exchanges or
over-the-counter in the United States. Investors should consider carefully the
substantial risks involved in investing in securities issued by companies of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. ADRs and European Depositary Receipts ("EDRs") or other securities
convertible into securities of issuers based in foreign countries are not
necessarily denominated in the same currency as the securities into which they
may be converted. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, while EDRs
(also referred to as Continental Depositary Receipts ("CDRs"), in bearer form,
may be denominated in other currencies and are designed for use in European
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. For purposes of the Series'
investment policies, ADRs and EDRs are deemed to have the same classification as
the underlying securities they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common stock.
Depositary receipts are issued through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited
security. Holders of unsponsored depositary receipts generally bear all the
cost of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
SHARES OF OTHER INVESTMENT COMPANIES. Certain of the Series may invest in
shares of other investment companies. The Series' investment in shares of
other investment companies may not exceed immediately after purchase 10 percent
of the Series' total assets and no more than 5 percent of its total assets may
be invested in the shares of any one investment company. Investment in the
shares of other investment companies has the effect of requiring shareholders
to pay the operating expenses of two mutual funds.
REPURCHASE AGREEMENTS. A repurchase agreement involves a purchase by the
Series of a security from a selling financial institution (such as a bank,
savings and loan association or broker-dealer) which agrees to repurchase such
security at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The resale price is in excess
of the purchase price and reflects an agreed upon yield effective for the
period of time the Series' money is invested in the security.
Currently, Series A, B, C, E, S, J, P and V may enter into repurchase
agreements only with federal reserve system member banks with total assets of
at least one billion dollars and equity capital of at least one hundred million
dollars and "primary" dealers in U.S. Government securities. These Series may
enter into repurchase agreements, fully collateralized by U.S. Government or
agency securities, only on an overnight basis.
Repurchase agreements are considered to be loans by the Fund under the
Investment Company Act of 1940. Engaging in any repurchase transaction will be
subject to any rules or regulations of the Securities and Exchange Commission
or other regulatory authorities. Not more than 10% of the assets of Series A,
B, C, D, E, S and J will be invested in illiquid assets, which include
repurchase agreements with maturities of over seven days.
Series D and K may enter into repurchase agreements only with (a)
securities dealers that have a total capitalization of at least $40,000,000 and
a ratio of aggregate indebtedness to net capital of no more than 4 to 1, or,
alternatively, net capital equal to 6% of aggregate debit balances, or (b)
banks that have at least $1,000,000,000 in assets and a net worth of at least
$100,000,000 as of its most recent annual report. In addition,
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
the aggregate repurchase price of all repurchase agreements held by each Series
with any broker shall not exceed 15% of the total assets of the Series or
$5,000,000, whichever is greater. The Series will not enter into repurchase
agreements maturing in more than seven days if the aggregate of such repurchase
agreements and other illiquid investments would exceed 10% of total assets for
Series D or 15% of net assets for Series K.
Series M and X may enter into repurchase agreements with (a)
well-established securities dealers or (b) banks that are members of the
Federal Reserve System. Any such dealer or bank will have a credit rating with
respect to its short-term debt of at least A1 by Standard & Poor's Corporation,
P1 by Moody's Investors Service, Inc., or the equivalent rating by the
Investment Manager or relevant Sub-Adviser. Series M and X may enter into
repurchase agreements with maturities of over seven days, provided that neither
may invest more than 15% of its total assets in illiquid securities.
Series N and O may enter into repurchase agreements only with (a)
securities dealers that have a net capital in excess of $50,000,000, are
reasonably leveraged, and are otherwise considered as appropriate entities with
which to enter into repurchase agreements, or (b) banks that are included on T.
Rowe Price's list of established banks. To determine whether a dealer or bank
qualifies under these criteria, T. Rowe Price's Credit Committee will conduct a
thorough examination to determine that the applicable financial and
profitability standards have been met. Series N and O will not under any
circumstances enter into a repurchase agreement of a duration of more than
seven business days if, as a result, more than 15% of the value of the Series'
total assets would be so invested or invested in illiquid securities.
Generally, the Series will not commit more than 50% of its gross assets to
repurchase agreements or more than 5% of its total assets to repurchase
agreements of any one vendor.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Series could experience both delays in liquidating the
underlying securities and losses, including (a) possible decline in the value
of the underlying security during the period while the Series seeks to enforce
its rights thereto; (b) possible subnormal levels of income and lack of access
to income during this period; and (c) expenses of enforcing its rights. The
Board of Directors of the Fund has promulgated guidelines with respect to
repurchase agreements.
REAL ESTATE SECURITIES. Certain Series may invest in equity securities of
real estate investment trusts ("REITs") and other real estate industry
companies or companies with substantial real estate investments and therefore,
such Series may be subject to certain risks associated with direct ownership of
real estate and with the real estate industry in general. These risks include,
among others: possible declines in the value of real estate; possible lack of
availability of mortgage funds; extended vacancies of properties; risks related
to general and local economic conditions; overbuilding; increases in
competition, property taxes and operating expenses; changes in zoning laws;
costs resulting from the clean-up of, and liability to third parties for
damages resulting from, environmental problems; casualty or condemnation
losses; uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code, as amended ( the "Code"). Certain REITs may be
self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
DEBT OBLIGATIONS. Yields on short, intermediate, and long-term securities
are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer
maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments. The
ability of the Series to achieve its investment objectives is also dependent on
the continuing ability of the issuers of the debt securities in which the
Series invest to meet their obligations for the payment of interest and
principal when due.
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
SPECIAL RISKS ASSOCIATED WITH LOW-RATED AND COMPARABLE UNRATED DEBT
SECURITIES. Low-rated and comparable unrated securities, while generally
offering higher yields than investment-grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The special risk
considerations in connection with such investments are discussed below. See
the Appendix of this Statement of Additional Information for a discussion of
securities ratings.
The low-rated and comparable unrated securities market is relatively new,
and its growth paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such a prolonged economic downturn could severely disrupt the market for and
adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. Low-rated and comparable unrated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. As a
result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of low-rated and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by an issuer of low-rated and comparable unrated securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a low-rated and comparable unrated
security defaulted, a Series might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of low-rated and comparable unrated
securities and thus in a Series' net asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Series' net asset value.
If a Series experiences unexpected net redemptions in such a market, it may be
forced to liquidate a portion of its portfolio securities without regard to
their investment merits. Due to the limited liquidity of high-yield securities
(discussed below) a Series may be forced to liquidate these securities at a
substantial discount. Any such liquidation would reduce a Series' asset base
over which expenses could be allocated and could result in a reduced rate of
return for a Series.
Low-rated and comparable unrated securities typically contain redemption,
call, or prepayment provisions which permit the issuer of such securities
containing such provisions to, at their discretion, redeem the securities.
During periods of falling interest rates, issuers of high-yield securities are
likely to redeem or prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent an issuer is able to
refinance the securities or otherwise redeem them, a Series may have to replace
the securities with a lower-yielding security, which would result in a lower
return for a Series.
Credit ratings issued by credit-rating agencies evaluate the safety of
principal and interest payments of rated securities. They do not, however,
evaluate the market value risk of low-rated and comparable unrated securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit-rating agencies may or may not make timely changes in a rating
to reflect changes in the economy or in the condition of the issuer that affect
the market value of the security. Consequently, credit ratings are used only
as a preliminary indicator of investment quality. Investments in low-rated and
comparable unrated securities will be more dependent on the Investment Manager
or relevant Sub-Adviser's credit analysis than would be the case with
investments in investment-grade debt securities. The Investment Manager or
relevant Sub-Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history, and the current trend of earnings. The Investment Manager or
relevant Sub-Adviser continually monitors the investments in a Series'
portfolio and carefully evaluates whether to dispose of or to retain low-rated
and comparable unrated securities whose credit ratings or credit quality may
have changed.
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
A Series may have difficulty disposing of certain low-rated and comparable
unrated securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all low-rated and
comparable unrated securities, there is no established retail secondary market
for many of these securities. A Series anticipates that such securities could
be sold only to a limited number of dealers or institutional investors. To the
extent a secondary trading market does exist, it is generally not as liquid as
the secondary market for higher-rated securities. The lack of a liquid
secondary market may have an adverse impact on the market price of the
security. As a result, a Series' asset value and a Series' ability to dispose
of particular securities, when necessary to meet a Series' liquidity needs or
in response to a specific economic event, may be impacted. The lack of a
liquid secondary market for certain securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing a
Series. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Recent legislation has been adopted and from time to time, proposals have
been discussed regarding new legislation designed to limit the use of certain
low-rated and comparable unrated securities by certain issuers. An example of
legislation is a recent law which requires federally insured savings and loan
associations to divest their investment in these securities over time. New
legislation could further reduce the market because such legislation,
generally, could negatively affect the financial condition of the issuers of
high-yield securities, and could adversely affect the market in general. It is
not currently possible to determine the impact of the recent legislation on
this market. However, it is anticipated that if additional legislation is
enacted or proposed, it could have a material effect on the value of low-rated
and comparable unrated securities and the existence of a secondary trading
market for the securities.
PUT AND CALL OPTIONS:
WRITING (SELLING) COVERED CALL OPTIONS. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price
(the exercise price), at expiration of the option (European style) or at any
time until a certain date (the expiration date) (American style). So long as
the obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
Certain Series may write (sell) "covered" call options and purchase
options to close out options previously written by the Series. In writing
covered call options, the Series expects to generate additional premium income
which should serve to enhance the Series' total return and reduce the effect of
any price decline of the security or currency involved in the option. Covered
call options will generally be written on securities or currencies which, in
the opinion of the Investment Manager or relevant Sub-Adviser, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Series.
The Series will write only covered call options. This means that the
Series will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash or liquid securities having a value equal to the
fluctuating market value of the optioned securities or currencies. In order to
comply with the requirements of several states, the Series will not write a
covered call option if, as a result, the aggregate market value of all Series
securities or currencies covering call or put options exceeds 25% of the market
value of the Series' net assets. Should these state laws change or should the
Series obtain a waiver of their application, the Series reserve the right to
increase this percentage. In calculating the 25% limit, the Series will
offset, against the value of assets covering written calls and puts, the value
of purchased calls and puts on identical securities or currencies with
identical maturity dates.
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
Series securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the Series' investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Series
will not do), but capable of enhancing the Series' total return. When writing
a covered call option, the Series, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely, retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Series has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the expiration
of its obligations as a writer. If a call option which the Series has written
expires, the Series will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call option is
exercised, the Series will realize a gain or loss from the sale of the
underlying security or currency.
Call options written by the Series will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the Series may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The premium received is the market value of an option. The premium the
Series will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Investment
Manager or relevant Sub-Adviser, in determining whether a particular call
option should be written on a particular security or currency, will consider
the reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by the
Series for writing covered call options will be recorded as a liability of the
Series. This liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the Series is computed (close of the New York Stock
Exchange), or, in the absence of such sale, the latest asked price. The option
will be terminated upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
The Series will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Series.
WRITING (SELLING) COVERED PUT OPTIONS. A put option gives the purchaser
of the option the right to sell, and the writer (seller) has the obligation to
buy, the underlying security or currency at the exercise price during the
option period (American style) or at the expiration of the option (European
style). So long as the obligation of the writer continues, he may be assigned
an exercise notice by the broker-dealer through whom such option was sold,
requiring him to make payment of the exercise price against delivery of the
underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options. Certain Series may write American or European style
covered put options and purchase options to close out options previously
written by the Series.
Certain Series may write put options on a covered basis, which means that
the Series would either (i) maintain in a segregated account cash or liquid
securities in an amount not less than the exercise price at all times while the
put option is outstanding; (ii) sell short the security or currency underlying
the put option at the same or higher price than the exercise price of the put
option; or (iii) purchase an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) The
Series would generally write covered put options in circumstances where the
Investment Manager or relevant Sub-Adviser wishes to purchase the
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
underlying security or currency for the Series' portfolio at a price lower than
the current market price of the security or currency. In such event the Series
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since
the Series would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk
in such a transaction would be that the market price of the underlying security
or currency would decline below the exercise price less the premiums received.
Such a decline could be substantial and result in a significant loss to the
Series. In addition, the Series, because it does not own the specific
securities or currencies which it may be required to purchase in the exercise
of the put, can not benefit from appreciation, if any, with respect to such
specific securities or currencies. In order to comply with the requirements of
several states, the Series will not write a covered put option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
put or call options exceeds 25% of the market value of the Series' net assets.
Should these state laws change or should the Series obtain a waiver of their
application, the Series reserve the right to increase this percentage. In
calculating the 25% limit, the Series will offset against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies.
PREMIUM RECEIVED FROM WRITING CALL OR PUT OPTIONS. A Series will receive
a premium from writing a put or call option, which increases such Series'
return in the event the option expires unexercised or is closed out at a
profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, a Series limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Series assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
CLOSING TRANSACTIONS. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or to permit the sale of the underlying
security or currency. A Series may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in
which it purchases an option having the same terms as the option written. A
Series will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the purchase of a call option is likely to be
offset in whole or in part by unrealized appreciation of the underlying
security owned by such Series.
Furthermore, effecting a closing transaction will permit the Series to
write another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Series desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Series will be able to
effect such closing transactions at a favorable price. If the Series cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the Series writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Series will pay transaction costs in connection with
the writing of options to close out previously written options. Such
transaction costs are normally higher than those applicable to purchases and
sales of portfolio securities.
PURCHASING CALL OPTIONS. Certain Series may purchase American or European
call options. The Series may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Series may
purchase call options for the purpose of increasing its current return.
Call options may also be purchased by a Series for the purpose of
acquiring the underlying securities or currencies for its portfolio. Utilized
in this fashion, the purchase of call options enables the Series to acquire the
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or currencies
directly. This technique may also be useful to a Series in purchasing a large
block of securities or currencies that would be more difficult to acquire by
direct market purchases. So long as it holds such a call option rather than
the underlying security or currency itself, the Series is partially protected
from any unexpected decline in the market price of the underlying security or
currency and in such event could allow the call option to expire, incurring a
loss only to the extent of the premium paid for the option.
To the extent required by the laws of certain states, a Series may not be
permitted to commit more than 5% of its assets to premiums when purchasing call
and put options. Should these state laws change or should the Series obtain a
waiver of their application, the Series may commit more than 5% of its assets
to premiums when purchasing call and put options. The Series may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. Call
options may also be purchased at times to avoid realizing losses. For example,
where the Series has written a call option on an underlying security or currency
having a current market value below the price at which such security or currency
was purchased by the Series, an increase in the market price could result in the
exercise of the call option written by the Series and the realization of a loss
on the underlying security or currency with the same exercise price and
expiration date as the option previously written.
PURCHASING PUT OPTIONS. Certain Series may purchase American or European
style put options. The Series may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. A Series may
purchase a put option on an underlying security or currency (a "protective
put") owned by the Series as a defensive technique in order to protect against
an anticipated decline in the value of the security or currency. Such hedge
protection is provided only during the life of the put option when the Series,
as the holder of the put option, is able to sell the underlying security or
currency at the put exercise price regardless of any decline in the underlying
security's market price or currency's exchange value. The premium paid for the
put option and any transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is eventually sold.
A Series may purchase put options at a time when the Series does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Series seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Series will lose its entire investment in the
put option. In order for the purchase of a put option to be profitable, the
market price of the underlying security or currency must decline sufficiently
below the exercise price to cover the premium and transaction costs, unless the
put option is sold in a closing sale transaction.
DEALER OPTIONS. Certain Series may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Series would look to a clearing corporation to exercise exchange-traded
options, if the Series were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. Exchange-traded options generally have a continuous liquid market
while dealer options have none. Consequently, the Series will generally be
able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when the
Series writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Series originally wrote the option.
While the Series will seek to enter into dealer options only with dealers who
will agree to and which are expected to be capable of entering into closing
transactions with the Series, there can be no assurance that the Series will be
able to liquidate a dealer option at a favorable price at any time prior to
expiration. Failure by the dealer to do so would result in the loss of the
premium paid by the Series as well as loss of the expected benefit of the
transaction. Until the Series, as a covered dealer call option writer, is able
to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Series may be
unable to liquidate a dealer option. With respect to options written by the
Series, the inability to enter into a closing transaction may result in
material losses to the Series. For example, since the Series must maintain a
secured position with respect to any call option on a security it writes,
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
the Series may not sell the assets which it has segregated to secure the
position while it is obligated under the option. This requirement may impair
the Series' ability to sell portfolio securities at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased dealer options
and the assets used to secure the written dealer options are illiquid
securities. The Series may treat the cover used for written OTC options as
liquid if the dealer agrees that the Series may repurchase the OTC option it
has written for a maximum price to be calculated by a predetermined formula.
In such cases, the OTC option would be considered illiquid only to the extent
the maximum repurchase price under the formula exceeds the intrinsic value of
the option. To this extent, the Series will treat dealer options as subject to
the Series' limitation on illiquid securities. If the SEC changes its position
on the liquidity of dealer options, the Series will change its treatment of
such instruments accordingly.
CERTAIN RISK FACTORS IN WRITING CALL OPTIONS AND IN PURCHASING CALL AND
PUT OPTIONS: During the option period, a Series, as writer of a call option
has, in return for the premium received on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of
the underlying security increase, but has retained the risk of loss should the
price of the underlying security decline. The writer has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. The risk of purchasing a call or put option is that the Series may
lose the premium it paid plus transaction costs. If the Series does not
exercise the option and is unable to close out the position prior to expiration
of the option, it will lose its entire investment.
An option position may be closed out only on an exchange which provides a
secondary market. There can be no assurance that a liquid secondary market
will exist for a particular option at a particular time and that the Series can
close out its position by effecting a closing transaction. If the Series is
unable to effect a closing purchase transaction, it cannot sell the underlying
security until the option expires or the option is exercised. Accordingly, the
Series may not be able to sell the underlying security at a time when it might
otherwise be advantageous to do so. Possible reasons for the absence of a
liquid secondary market include the following: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities;
(iv) inadequacy of the facilities of an exchange or the clearing corporation to
handle trading volume; and (v) a decision by one or more exchanges to
discontinue the trading of options or impose restrictions on orders. In
addition, the hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot
be reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary Series securities transactions.
Each exchange has established limitations governing the maximum number of
call options, whether or not covered, which may be written by a single investor
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or
more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike
options on specific securities, all settlements of options on stock indices are
in cash and gain or loss depends on general movements in the stocks included in
the index rather than price movements in particular stocks. A stock index
futures contract is an agreement in which one party agrees to deliver to the
other an amount of cash equal to a specific amount multiplied by the difference
between the value of a specific stock index at the close of the last trading
day of the contract and the price at which the agreement is made. No physical
delivery of securities is made.
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Series will realize a gain
or a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon the
ability of the Investment Manager or relevant Sub-Adviser to predict correctly
movements in the direction of the market generally or in the direction of a
particular industry. This requires different skills and techniques than
predicting changes in the prices of individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of securities in the index. If this occurred, a Series would not be able to
close out options which it had written or purchased and, if restrictions on
exercise were imposed, might be unable to exercise an option it purchased,
which would result in substantial losses.
Price movements in Series securities will not correlate perfectly with
movements in the level of the index and therefore, a Series bears the risk that
the price of the securities may not increase as much as the level of the index.
In this event, the Series would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of the Series' securities does
not. If this occurred, a Series would experience a loss on the call which
would not be offset by an increase in the value of its securities and might
also experience a loss in the market value of its securities.
Unless a Series has other liquid assets which are sufficient to satisfy
the exercise of a call on the index, the Series will be required to liquidate
securities in order to satisfy the exercise.
When a Series has written a call on an index, there is also the risk that
the market may decline between the time the Series has the call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Series is able to sell securities. As
with options on securities, the Investment Manager or relevant Sub-Adviser will
not learn that a call has been exercised until the day following the exercise
date, but, unlike a call on securities where the Series would be able to
deliver the underlying security in settlement, the Series may have to sell part
of its securities in order to make settlement in cash, and the price of such
securities might decline before they could be sold.
If a Series exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money" the Series will
be required to pay the difference between the closing index value and the
exercise price of the option (multiplied by the applicable multiplier) to the
assigned writer. Although the Series may be able to minimize this risk by
withholding exercise instructions until just before the daily cutoff time or by
selling rather than exercising an option when the index level is close to the
exercise price, it may not be possible to eliminate this risk entirely because
the cutoff time for index options may be earlier than those fixed for other
types of options and may occur before definitive closing index values are
announced.
TRADING IN FUTURES. Certain Series may enter into financial futures
contracts, including stock and bond index, interest rate and currency futures
("futures or futures contracts"). A futures contract provides for the future
sale by one party and purchase by another party of a specified amount of a
specific financial instrument (e.g., units of a stock index) for a specified
price, date, time and place designated at the time the contract is made.
Brokerage fees are incurred when a futures contract is bought or sold and
margin deposits must be maintained. Entering into a contract to buy is
commonly referred to as buying or purchasing a contract or holding a long
position. Entering into a contract to sell is commonly referred to as selling
a contract or holding a short position.
Unlike when the Series purchases or sells a security, no price would be
paid or received by the Series upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Series' open
positions in futures contracts, the Series would be required to deposit with
its custodian in a segregated account in the name of the futures broker an
amount of cash or liquid securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
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customarily purchased and sold on margins that may range upward from less than
5% of the value of the contract being traded.
Margin is the amount of funds that must be deposited by the Series with
its custodian in a segregated account in the name of the futures commission
merchant in order to initiate futures trading and to maintain the Series' open
position in futures contracts. A margin deposit is intended to ensure the
Series' performance of the futures contract. The margin required for a
particular futures contract is set by the exchange on which the futures
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the futures contract.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Series.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Series expects
to earn interest income on its margin deposits. Although certain futures
contracts, by their terms, require actual future delivery of and payment for
the underlying instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures contract
purchase or sale is effected by entering into an offsetting futures contract
purchase or sale, respectively, for the same aggregate amount of the identical
securities and the same delivery date. If the offsetting purchase price is
less than the original sale price, the Series realizes a gain; if it is more,
the Series realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, the Series realizes a gain; if it is less,
the Series realizes a loss. The transaction costs must also be included in
these calculations. There can be no assurance, however, that the Series will
be able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Series is not able to enter into
an offsetting transaction, the Series will continue to be required to maintain
the margin deposits on the futures contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150,
one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which the
contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
Options on futures are similar to options on underlying instruments except
that options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at any time during
the period of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers
of options who fail to exercise their options prior to the exercise date suffer
a loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
balance in the writer's margin account. This amount will be equal to the
amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
Commissions on financial futures contracts and related options
transactions may be higher than those which would apply to purchases and sales
of securities directly. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of the Series and
other mutual funds or portfolios of mutual funds for which the Investment
Manager or relevant Sub-Adviser serves as adviser or sub-adviser. Such
aggregated orders would be allocated among the Series and such other mutual
funds or series of mutual funds in a fair and non-discriminatory manner.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills;
90-day commercial paper; bank certificates of deposit; and Eurodollar
certificates of deposit. It is expected that Futures contracts trading in
additional financial instruments will be authorized. The standard contract
size is generally $100,000 for Futures contracts in U.S. Treasury bonds, U.S.
Treasury notes, and GNMA pass through securities and $1,000,000 for the other
designated Futures contracts. A public market exists in Futures contracts
covering a number of indexes, including, but not limited to, the Standard &
Poor's 500 Index, the Standard & Poor's 100 Index, the NASDAQ 100 Index, the
Value Line Composite Index and the New York Stock Exchange Composite Index.
Stock index futures contracts may be used to provide a hedge for a portion
of the Series' portfolio, as a cash management tool, or as an efficient way for
the Investment Manager or relevant Sub-Adviser to implement either an increase
or decrease in portfolio market exposure in response to changing market
conditions. Stock index futures contacts are currently traded with respect to
the S&P 500 Index and other broad stock market indices, such as the New York
Stock Exchange Composite Stock Index and the Value Line Composite Stock Index.
The Series may, however, purchase or sell futures contracts with respect to any
stock index. Nevertheless, to hedge the Series' portfolio successfully, the
Series must sell futures contracts with respect to indexes or subindexes whose
movements will have a significant correlation with movements in the prices of
the Series' securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Series. In this regard, the
Series could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Series may enter into futures contracts which are traded on national
or foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures are traded in London at the London International Financial
Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Series'
objectives in these areas.
CERTAIN RISKS RELATING TO FUTURES CONTRACTS AND RELATED OPTIONS. There
are special risks involved in futures transactions.
VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile and
are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit
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potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage (although the Series' use of futures will not
result in leverage, as is more fully described below). As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. However, the
Series would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying instrument and sold it
after the decline. Furthermore, in the case of a futures contract purchase,
in order to be certain that the Series has sufficient assets to satisfy its
obligations under a futures contract, the Series earmarks to the futures
contract cash or liquid securities equal in value to the current value of the
underlying instrument less the margin deposit.
LIQUIDITY. The Series may elect to close some or all of its futures
positions at any time prior to their expiration. The Series would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. The Series may close its positions by
taking opposite positions which would operate to terminate the Series' position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Series, and the Series would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Series intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Series would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Series would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
HEDGING RISK. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the Series of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. The Investment Manager or relevant Sub-Adviser will, however,
attempt to reduce this risk by entering into futures contracts whose movements,
in its, judgment, will have a significant correlation with movements in the
prices of the Series' underlying instruments sought to be hedged.
Successful use of futures contracts by the Series for hedging purposes is
also subject to the Investment Manager or relevant Sub-Adviser's ability to
correctly predict movements in the direction of the market. It is possible
that, when the Series has sold futures to hedge its portfolio against a decline
in the market, the index, indices, or underlying instruments on which the
futures are written might advance and the value of the underlying instruments
held in the Series' portfolio might decline. If this were to occur, the Series
would lose money on the futures and also would experience a decline in value in
its underlying instruments. However, while this might occur to a certain
degree, it is believed that over time the value of the Series' portfolio will
tend to move in the same direction as the market indices which are intended to
correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the Series were to hedge against the
possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
increased, the Series would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it would have
offsetting losses in its futures positions. In addition, in such situations, if
the Series had insufficient cash, it might have to sell underlying instruments
to meet daily variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased prices (which
would reflect the rising market). The Series might have to sell underlying
instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the
futures market are less onerous than margin requirements in the securities
markets, and as a result the futures market might attract more speculators than
the securities markets do. Increased participation by speculators in the
futures market might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also because of the
imperfect correlation between price movements in the underlying instruments and
movements in the prices of futures contracts, even a correct forecast of
general market trends by the Investment Manager or relevant Sub-Adviser might
not result in a successful hedging transaction over a very short time period.
CERTAIN RISKS OF OPTIONS ON FUTURES CONTRACTS: The Series may seek to
close out an option position by writing or buying an offsetting option covering
the same index, underlying instruments, or contract and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the class
or series of options) would cease to exist, although outstanding options on the
exchange that had been issued by a clearing corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms. There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities
of any of the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
REGULATORY LIMITATIONS. The Series will engage in transactions in futures
contracts and options thereon only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with the rules and
regulations of the CFTC.
The Series may not enter into futures contracts or options thereon if,
with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Series' existing futures and premiums paid for options on futures would exceed
5% of the net asset value of the Series after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into;
provided, however, that 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.
The Series' use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Series, an amount of cash or liquid securities, equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Series' custodian to cover
the position, or alternative cover will be employed.
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In addition, CFTC regulations may impose limitations on the Series'
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Series would comply with such new
restrictions.
FOREIGN FUTURES AND OPTIONS. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign
boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on
the market may be liquidated by a transaction on another market. Moreover,
such laws or regulations will vary depending on the foreign country in which
the foreign futures or foreign options transaction occurs. For these reasons,
customers who trade foreign futures or foreign options contracts may not be
afforded certain of the protective measures provided by the Commodity Exchange
Act, the CFTC's regulations and the rules of the National Futures Association
and any domestic exchange, including the right to use reparations proceedings
before the Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular,
funds received from the Series for foreign futures or foreign options
transactions may not be provided the same protections as funds received in
respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the
foreign exchange rate between the time an order is placed and the time it is
liquidated, offset or exercised.
FORWARD CURRENCY CONTRACTS AND RELATED OPTIONS. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the Contract. These contracts are principally traded in the interbank
market conducted directly between currency traders (usually large, commercial
banks) and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
Depending on the investment policies and restrictions applicable to a
Series, a Series will generally enter into forward foreign currency exchange
contracts under two circumstances. First, when a Series enters into a contract
for the purchase or sale of a security denominated in a foreign currency, it
may desire to "lock in" the U.S. dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transactions, the Series will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar
and the subject foreign currency during the period between the date the
security is purchased or sold and the date on which payment is made or
received.
Second, when the Investment Manager or relevant Sub-Adviser believes that
the currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, including the U.S. dollar, it may enter into
a forward contract to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Series' portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
Series may hedge all or part of its foreign currency exposure through the use
of a basket of currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case, the Series may
enter into a forward contract where the amount of the foreign currency to be
sold exceeds the value of the securities denominated in such currency. The use
of this basket hedging technique may be more efficient and economical than
entering into separate forward contracts for each currency held in the Series.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
The Series will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Series to deliver an amount of foreign currency in excess of the
value of the Series' portfolio securities or other assets denominated in that
currency. The Series, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in
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excess of the value of the Series' portfolio securities or other assets to which
the forward contracts relate (including accrued interest to the maturity of the
forward contract on such securities) provided the excess amount is "covered" by
liquid securities, denominated in any currency, at least equal at all times to
the amount of such excess. For these purposes "the securities or other assets
to which the forward contracts relate may be securities or assets denominated in
a single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Investment Manager and relevant Sub-Advisers believe that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Series will be served.
At the maturity of a forward contract, the Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for a Series to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency
the Series is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Series is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Series may use
liquid securities, denominated in any currency, to cover the amount by which
the value of a forward contract exceeds the value of the securities to which it
relates.
If the Series retains the portfolio security and engages in an offsetting
transaction, the Series will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Series
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Series entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Series will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Series
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Series' dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Series
reserve the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Series
are not required to enter into forward contracts with regard to their foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or relevant Sub-Adviser. It also should be realized
that this method of hedging against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange at a future date. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time, they tend to limit any potential gain
which might result from an increase in the value of that currency.
Although the Series value their assets daily in terms of U.S. dollars,
they do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Series at one rate, while offering a lesser rate of exchange
should the Series desire to resell that currency to the dealer.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. As
noted above, a currency futures contract sale creates an obligation by a
Series, as seller, to deliver the amount of currency called for in the contract
at a specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Series, as purchaser, to take delivery of
an amount of currency at a specified future time at a specified price.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of
a
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
currency futures contract is effected by entering into an offsetting purchase
or sale transaction. Unlike a currency futures contract, which requires the
parties to buy and sell currency on a set date, an option on a currency futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to enter into the
contract, the premium paid for the option is fixed at the point of sale.
SWAPS, CAPS, FLOORS AND COLLARS. Certain Series may enter into interest
rate, securities index, commodity, or security and currency exchange rate swap
agreements for any lawful purpose consistent with the Series' investment
objective, such as for the purpose of attempting to obtain or preserve a
particular desired return or spread at a lower cost to the Series than if the
Series had invested directly in an instrument that yielded that desired return
or spread. The Series also may enter into swaps in order to protect against an
increase in the price of, or the currency exchange rate applicable to,
securities that the Series anticipates purchasing at a later date. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to several years. In a standard
"swap" transaction, two parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular predetermined investments
or instruments. The gross returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional amount," i.e., the return on
or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate
caps, under which, in return for a premium, one party agrees to make payments to
the other to the extent that interests rates exceed a specified rate, or "cap";
interest rate floors under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Series, the
obligations of the parties would be exchanged on a "net basis." Consequently,
the Series' obligation (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based
on the relative value of the positions held by each party to the agreement (the
"net amount"). The Series' obligation under a swap agreement will be accrued
daily (offset against amounts owed to the Series) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Whether a Series' use of swap agreements will be successful in furthering
its investment objective will depend, in part, on the Investment Manager or
relevant Sub-Adviser's ability to predict correctly whether certain types of
investments are likely to produce greater returns than other investments. Swap
agreements may be considered to be illiquid. Moreover, the Series bears the
risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty.
Certain restrictions imposed on the Series by the Internal Revenue Code may
limit a Series' ability to use swap agreements. The swaps market is largely
unregulated.
The Series will enter swap agreements only with counterparties that the
Investment Manager or relevant Sub-Adviser reasonably believes are capable of
performing under the swap agreements. If there is a default by the other party
to such a transaction, the Series will have to rely on its contractual remedies
(which may be limited by bankruptcy, insolvency or similar laws) pursuant to
the agreements related to the transaction.
SPREAD TRANSACTIONS. Certain Series may purchase covered spread options
from securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Series the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the
Series does not own, but which is used as a benchmark. The risk to the Series
in purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect the Series against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
HYBRID INSTRUMENTS. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument ("Hybrid Instruments"). Often these Hybrid Instruments are
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
indexed to the price of a commodity or particular currency or a domestic or
foreign debt or equity securities index. Hybrid Instruments may take a variety
of forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity. The
risks of investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity
or currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Series and the seller of the Hybrid Instrument,
the creditworthiness of the contract party to the transaction would be a risk
factor which the Series would have to consider. Hybrid Instruments also may not
be subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, certain of the Series may make secured loans of Series securities
amounting to not more than 33 1/3% of its total assets. Securities loans are
made to broker/dealers, 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 securities lent 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 its investment program. While the securities are being lent,
the Series 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. The Series 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 of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Series will not have the right to
vote securities while they are being lent, but it 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 persons deemed by the Investment Manager or
relevant Sub-Adviser to be of good standing and will not be made unless, in the
judgment of the Investment Manager or relevant Sub-Adviser, the consideration
to be earned from such loans would justify the risk.
OTHER LENDING/BORROWING. Subject to approval by the Securities and
Exchange Commission, Series N and O may make loans to, or borrow funds from,
other mutual funds or portfolios of mutual funds sponsored or advised by T.
Rowe Price or Rowe Price-Fleming International, Inc. The Series have no
intention of engaging in these practices at this time.
ZERO COUPON SECURITIES. Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero coupon securities which
are convertible into common stock offer the opportunity for capital
appreciation as increases (or decreases) in market value, of such securities
closely follows the movements in the market value of the underlying common
stock. Zero coupon convertible securities generally are expected to be less
volatile than the underlying common stocks, as they usually are issued with
maturities of 15 years or less and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying
principal (the "corpus") of the U.S. Treasury security. A number of securities
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
firms and banks have stripped the interest coupons and receipts and then resold
them in custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on
Treasuries (CATSTM). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that, for federal tax and
securities purposes, in their opinion purchasers of such certificates, such as
the Series, most likely will be deemed the beneficial holder of the underlying
U.S. Government securities.
The U. S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Series will be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry recordkeeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment in the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be
sold separately. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form.
Purchasers of stripped obligations acquire, in effect, discount obligations
that are economically identical to the zero coupon securities that the Treasury
sells itself.
WHEN-ISSUED SECURITIES. Certain Series may from time to time purchase
securities on a "when-issued" basis. At the time the Series makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Series do not believe that net asset value or income will be
adversely affected by purchase of securities on a when-issued basis. The
Series will maintain cash and marketable securities equal in value to
commitments for when-issued securities.
The price of when-issued securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery
and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within 90 days of the purchase. During
the period between purchase and settlement no payment is made by the Series to
the issuer and no interest accrues to the Series. Forward commitments involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in value
of the Series' other assets. While when-issued securities may be sold prior to
the settlement date, the Series intends to purchase such securities for the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (MBSs), including
mortgage pass-through securities and collateralized mortgage obligations
(CMOs), include certain securities issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and securities issued by private issuers
that represent an interest in or are collateralized by mortgage loans. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. CMOs are obligations fully collateralized by a portfolio
of mortgages or mortgage-related securities.
Series E, N and P may invest in securities known as "inverse floating
obligations," "residual interest bonds," and "interest-only" (IO) and
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs due to the fact that such
instruments are more sensitive to interest rate charges and to the rate of
principal prepayments than are most other MBSs. An inverse floating obligation
is a derivative adjustable rate security with interest rates that adjust or
vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
as CMOs, which receive excess cash flow generated by the pool once all other
bondholders and expenses have been paid. IOs and POs are created by separating
the interest and principal payments generated by a pool of mortgage-backed bonds
to create two classes of securities. Generally, one class receives interest
only payments (IO) and the other class principal only payments (PO). MBSs have
been referred to as "derivatives" because the performance of MBSs is dependent
upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's
average life and perhaps its yield. Borrowers are most likely to exercise
their prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others
with respect to the receipt of prepayments on the mortgages and the Series may
invest in CMOs which are subject to greater risk of prepayment. Market risk
reflects the chance that the price of the security may fluctuate over time.
The price of MBSs may be particularly sensitive to prevailing interest rates,
the length of time the security is expected to be outstanding and the liquidity
of the issue. In a period of unstable interest rates, there may be decreased
demand for certain types of MBSs, and a Series invested in such securities
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments. They are
very volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. Credit risk reflects the chance that
the Fund may not receive all or part of its principal because the issuer or
credit enhancer has defaulted on its obligations. Obligations issued by U.S.
Government-related entities are guaranteed by the agency or instrumentality, and
some, such as GNMA certificates, are supported by the full faith and credit of
the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Series are not so guaranteed in any way. The performance of private
label MBSs, issued by private institutions, is based on the financial health of
those institutions. There is no guarantee the Series' investment in MBSs will be
successful, and the Series' total return could be adversely affected as a
result.
ASSET-BACKED SECURITIES: Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit
issued by a financial institution unaffiliated with the entities issuing the
securities. Asset-backed securities may be classified as pass-through
certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are
pledged to a trustee or custodian for the benefit of the holders thereof. Such
issuers generally hold no assets other than those underlying the asset-backed
securities and any credit support provided. As a result, although payments on
such asset-backed securities are obligations of the issuers, in the event of
defaults on the underlying assets not covered by any credit support (see "Types
of Credit Support"), the issuing entities are unlikely to have sufficient
assets to satisfy their obligations on the related asset-backed securities.
METHODS OF ALLOCATING CASH FLOWS. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are issued
in more than one class, each with different payment terms.
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Multiple class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support".
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Series may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Series.
TYPES OF CREDIT SUPPORT. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or
letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class asset-backed securities with certain classes subordinate to other classes
as to the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve Portfolios" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have been
"over collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment
of the asset-backed securities and pay any servicing or other fees). The
degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with such
payments. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in an asset-backed security. Additionally,
if the letter of credit is exhausted, holders of asset-backed securities may
also experience delays in payments or losses if the full amounts due on
underlying sales contracts are not realized.
AUTOMOBILE RECEIVABLE SECURITIES. Asset-Backed Securities may be backed
by receivables from motor vehicle installment sales contracts or installment
loans secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts
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 create an enforceable 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 Automobile
Contracts underlying the Automobile Receivable Security, usually is not amended
to reflect the assignment of the seller's security interest for the benefit of
the holders of the Automobile Receivable
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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
Securities. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on the
securities. In addition, various state and federal securities laws give the
motor vehicle owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have against the seller of
the motor vehicle. The assertion of such defenses could reduce payments on the
Automobile Receivable Securities.
CREDIT CARD RECEIVABLE SECURITIES. Asset-Backed Securities may be backed
by receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile Contracts. Most of
the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used
to fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account.
The initial fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest rates.
The ability of the issuer to extend the life of an issue of Credit Card
Receivable Securities thus depends upon the continued generation of additional
principal amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable Security.
Credit cardholders 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
amounts paid on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
RESTRICTED SECURITIES. Restricted securities may be sold only in
privately negotiated transactions or in a public offering with respect to which
a registration statement is in effect under the Securities Act of 1933 (the
"1933 Act"). Where registration is required, the Series may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Series may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Series
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in accordance
with procedures prescribed by the Board of Directors. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities or the depreciation of liquid securities, the Series should be in a
position where more than the percentage of its net assets permitted under the
respective Series operating policy are invested in illiquid assets, including
restricted securities, the Series will take appropriate steps to protect
liquidity.
The Series may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Series, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Investment Manager or relevant Sub-Adviser, under the
supervision of the Fund's Board of Directors, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Series'
restriction on investment of its assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Investment Manager or relevant
Sub-Adviser will consider the trading markets for the specific security taking
into account the unregistered nature of a Rule 144A security. In addition the
Investment Manager or relevant Sub-Adviser could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Series' holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the Series does not invest more than
permitted in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the
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amount of the Series' assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
WARRANTS. Investment in warrants is pure speculation in that they have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. Warrants basically are options to purchase
equity securities at a specific price valid for a specific period of time.
They do not represent ownership of the securities but only the right to buy
them. Warrants differ from call options in that warrants are issued by the
issuer of the security which may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
CERTAIN RISKS OF FOREIGN INVESTING
BRADY BONDS. Certain Series may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly issued
bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay, Venezuela, Ecuador and Poland.
Approximately $150 billion in principal amount of Brady Bonds has been issued
to date, the largest proportion having been issued by Mexico and Venezuela.
Investors should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
Series K may invest in either collateralized or uncollateralized Brady
Bonds denominated in various currencies, while Series B and Series P may invest
only in collateralized bonds denominated in U.S. dollars. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at the time and is adjusted at regular
intervals thereafter.
EMERGING COUNTRIES. Certain Series may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Series' investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; and (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S.
companies may entail additional risks due to the potential political and
economic instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, a Series
could lose its entire investment in any such country.
An investment in a Series which invests in non-U.S. companies is subject
to the political and economic risks associated with investments in emerging
markets. Even though opportunities for investment may exist in emerging
markets, any change in the leadership or policies of the governments of those
countries or in the leadership or policies of any other government which
exercises a significant influence over those countries, may halt the expansion
of or reverse the liberalization of foreign investment policies now occurring
and thereby eliminate any investment opportunities which may currently exist.
47
<PAGE> 93
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by the Series.
The claims of property owners against those governments were never finally
settled. There can be no assurance that any property represented by securities
purchased by a Series will not also be expropriated, nationalized, or otherwise
confiscated. If such confiscation were to occur, the Series could lose a
substantial portion of its investments in such countries. The Series'
investments would similarly be adversely affected by exchange control
regulation in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Series may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Series' investment in
those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Series. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investments by foreign persons to
only a specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals. Moreover, the national policies of certain countries may restrict
investment opportunities in issuers or industries deemed sensitive to national
interests. In addition, some countries require governmental approval for the
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors. A Series could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. In particular, the assets, liabilities and
profits appearing on the financial statements of such a company may not reflect
its financial position or results of operations in the way they would be
reflected had such financial statements been prepared in accordance with U.S.
generally accepted accounting principles. Most of the securities held by the
Series will not be registered with the SEC or regulators of any foreign
country, nor will the issuers thereof be subject to the SEC's reporting
requirements. Thus, there will be less available information concerning
foreign issuers of securities held by the Series than is available concerning
U.S. issuers. In instances where the financial statements of an issuer are not
deemed to reflect accurately the financial situation of the issuer, the
Investment Manager and relevant Sub-Adviser will take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists. There is substantially less publicly available
information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.
CURRENCY FLUCTUATIONS. Because a Series, under normal circumstances, may
invest substantial portions of its total assets in the securities of foreign
issuers which are denominated in foreign currencies, the strength or weakness
of the U.S. dollar against such foreign currencies will account for part of the
Series' investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of the Series' holdings of securities denominated in such currency and,
therefore, will cause an overall decline in the Series' net asset value and any
net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Series.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
48
<PAGE> 94
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
Although the Series values its assets daily in terms of U.S. dollars, the
Series does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Series will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Series at one rate, while offering a lesser rate of
exchange should the Series desire to sell that currency to the dealer.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the
Series are uninvested and no return is earned thereon. The inability of the
Series to make intended security purchases due to settlement problems could
cause it to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Series
due to subsequent declines in value of the portfolio security or, if the Series
has entered into a contract to sell the security, could result in possible
liability to the purchaser. The Investment Manager or relevant Sub-Adviser
will consider such difficulties when determining the allocation of the Series'
assets.
NON-U.S. WITHHOLDING TAXES. A Series' investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Series' investment income and gains.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment
in certain of such countries and may increase the costs and expenses of a
Series. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of securities
held by foreigners, and limits on the types of companies in which foreigners
may invest. Additional or different restrictions may be imposed at any time by
these or other countries in which a Series invests. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. These restrictions may in
the future make it undesirable to invest in these countries.
MARKET CHARACTERISTICS. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in
which the respective principal offices of the issuers of the various securities
are located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets and a Series' portfolio securities
may be less liquid and more volatile than securities of comparable U.S.
companies. Equity securities may trade at price/earnings multiples higher than
comparable United States securities and such levels may not be sustainable.
Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although a Series will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges, brokers and listed companies than in the United
States. Moreover, settlement practices for transactions in foreign markets may
differ from those in United States markets, and may include delays beyond
periods customary in the United States.
INFORMATION AND SUPERVISION. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
COSTS. Investors should understand that the expense ratio of the Series
that invest in foreign securities can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the Series
are higher.
OTHER. With respect to certain foreign countries, especially developing
and emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory
49
<PAGE> 95
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
taxation, limitations on the removal of funds or other assets of the Series,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fail, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend
away from centrally-planned economies and state owned industries. In many of
the countries of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal tradition
which does not recognize rights in private property. In addition, these
countries may have national policies which restrict investments in companies
deemed sensitive to the country's national interest. Further, the governments
in such countries may require governmental or quasi-governmental authorities to
act as custodian of the Series' assets invested in such countries and these
authorities may not qualify as a foreign custodian under the Investment
Company Act of 1940 and exemptive relief from such Act may be required. All of
these considerations are among the factors which could cause significant risks
and uncertainties to investment in Eastern Europe and Russia.
REGULATORY MATTERS. Currently, the Fund either has or will make a
commitment regarding each Series to the State of California Department of
Insurance to limit its borrowings to 10% of the Series' net asset value when
borrowing for any general purpose and to an additional 15% (for a total of 25%)
when borrowing as a temporary measure to facilitate redemptions. For purposes
of the foregoing commitment, net asset value is the market value of all
investments or assets owned by a Series, less its outstanding liabilities, at
the time that any new or additional borrowing is undertaken.
Additionally, the Fund either has made or will make a commitment regarding
each Series to the State of California Department of Insurance with respect to
diversification of its foreign investments. Such commitment generally requires
that a Series (i) (consistent with the Series' investment policies) invest in a
minimum of five different foreign countries and (ii) have no more than 20% of
its net asset value invested in securities of issuers located in any one
foreign country; except that, a Series may have an additional 15% of its net
asset value invested in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
West Germany. (Investments in U.S. issuers are not subject to any of the
foregoing restrictions.)
INVESTMENT POLICY LIMITATIONS
The Series operate within certain investment limitations which cannot be
changed without the approval of the holders of a majority of the outstanding
shares of the respective Series. Pursuant thereto, none of the Series will:
1. Purchase a security if, as a result, with respect to 75% of the value
of its total assets, more than 5% of the value of its total assets would
be invested in the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
2. Purchase more than 10% of the outstanding voting securities of any one
issuer.
3. Purchase securities for the purpose of exercising control over the
issuers thereof.
4. Underwrite securities of other issuers.
5. Borrow money or securities for any purposes except that borrowing up to
5% of the Fund's total assets from commercial banks is permitted for
emergency or temporary purposes; provided, however, that this investment
limitation does not apply to Series K, M, N, O, P, V and X which may
borrow up to 33 1/3% of total assets. The Fund may also obtain such
short-term credits as are necessary for the clearance of portfolio
transactions.
6. Make loans to other persons, except by entry into repurchase agreements
or by the purchase, upon original issuance or otherwise, of a portion of
an issue of publicly distributed bonds, notes, debentures or other
securities; provided, however, that this investment limitation does not
apply to Series K, M, N, O, P, V or X.
50
<PAGE> 96
7. Effect short sales of securities or buy securities on margin (except
such short-term credits as are necessary for the clearance of portfolio
transactions); provided, however, that this limitation does not apply to
Series K, M, N, O, P, V or X.
8. Invest in the securities of other investment companies; provided,
however, that this investment limitation does not apply to Series K, M,
N, O, P, V or X.
9. Concentrate investments in particular industries or make an investment
in any one industry if, when added to its other investments, total
investments in the same industry then held by the Series would exceed 25%
of the value of its assets.
10. Purchase or sell interests in real estate except as are represented by
securities of companies, including real estate trusts whose assets consist
substantially of interests in real estate, including obligations secured
by real estate or interests therein and which therefore may represent
indirect interest in real estate.
11. Own, buy, sell or otherwise deal in commodities or commodities contracts;
provided, however, that Series K, M, N, O, P, V and X may enter into
forward currency contracts and other forward commitments and transactions
in futures, options and options on futures.
12. Issue senior securities, except as permitted under the Investment Company
Act of 1940.
The following notes should be read in connection with the above-described
fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions 7 and 11, the Fund does not
interpret these restrictions as prohibiting transactions in currency contracts,
hybrid instruments, options, financial futures contracts or options on
financial futures contracts or from investing in securities or other
instruments backed by physical commodities.
For purposes of investment restriction 9, U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry. Industries are determined by reference to the classifications of
industries set forth in the Series' semiannual and annual reports.
For purposes of investment restriction 6, the Series will consider the
acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
The following investment policies of Series K are not fundamental policies
and may be changed by a vote of a majority of the Series' Board of Directors
without shareholder approval. Series K may purchase and sell futures contracts
and related options under the following conditions: (a) the then current
aggregate futures market prices of financial instruments required to be
delivered and purchased under open futures contracts shall not exceed 30% of
the Series' total assets, at market value; and (b) no more than 5% of the
Series' total assets, at market value at the time of entering into a contract,
shall be committed to margin deposits in relation to futures contracts.
As a matter of operating policy, Series O may not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona
fide hedging, the aggregate initial margin and premiums on such options
would exceed 5% of the Series' net asset value;
3. Purchase illiquid securities and securities of unseasoned issuers if,
as a result, more than 15% of its net assets would be invested in such
securities, provided that the Series will not invest more than 10% of its
total assets in restricted securities and not more than 5% in securities
of unseasoned issuers. Securities eligible for resale under Rule 144A of
the Securities Act of 1933 are not included in the 10% limitation but are
subject to the 15% limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 and
applicable state law. Duplicate fees may result from such purchases;
5. Purchase securities on margin except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) it
may make margin deposits in connection with futures contracts or other
permissible investments;
6. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Series 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 Series' total assets at the time of borrowing or investment;
51
<PAGE> 97
7. Purchase participations or other direct interests in or enter into
leases with respect to, oil, gas, or other mineral exploration or
development programs;
8. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Prospectus and Statement of
Additional Information;
9. Purchase or retain the securities of any issuer if those officers and
directors of the Series, and of its investment manager, who each owns
beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
10. Effect short sales of securities;
11. Purchase a security (other than obligations issued or guaranteed by the
U.S., any foreign, state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the value of the
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
(for this purpose, the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional guarantor of such
issuer). This restriction does not apply to securities of pooled
investment vehicles or mortgage or asset-backed securities; or
12. Invest in warrants if, as a result thereof, more than 2% of the value of
the net assets of the Series would be invested in warrants which are not
listed on the New York Stock Exchange, the American Stock Exchange, or
a recognized foreign exchange, or more than 5% of the value of the net
assets of the Series would be invested in warrants whether or not so
listed. For purposes of these percentage limitations, the warrants will
be valued at the lower of cost or market and warrants acquired by the
Series in units or attached to securities may be deemed to be without
value.
OFFICERS AND DIRECTORS
The directors and officers of the Fund and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the
address of each officer and director is 700 Harrison Street, Topeka, Kansas
66636-0001.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member
Representative, Security Management
Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors.
2222 SW 29th Street Prior to 1997, President, Neon Tube Light
Topeka, Kansas 66611 Company, Inc.
DONALD L. HARDESTY, Director President, Central Research Corporation.
900 Bank IV Tower
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to
3616 Canterbury Town Road October 1991, Secretary and Director,
Topeka, Kansas 66610 Palmer Companies, Inc. (Wholesale Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates
5500 SW 7th Street (Veterinary Research and Education).
Topeka, Kansas 66606
HUGH L. THOMPSON, Director President Emeritus, Washburn University.
2728 Newfound Harbour Drive Prior to June 1997, President, Washburn
Merritt Island, Florida 32952 University.
JAMES R. SCHMANK, Vice President and Treasurer Senior Vice President, Treasurer, Chief
Fiscal Officer and Managing Member
Representative, Security Management
Company, LLC; Vice President, Security
Benefit Group, Inc. and Security Benefit
Life Insurance Company.
- --------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------
<S> <C>
MARK E. YOUNG, Vice President Vice President, Security Management
Company, LLC; Assistant Vice President,
Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Economist,
Security Management Company, LLC; Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
TERRY A. MILBERGER, Vice President Senior Vice President and Senior Portfolio
Manager, Security Management Company, LLC;
Senior Vice President, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company.
AMY J. LEE, Secretary Secretary, Security Management Company,
LLC; Vice President, Associate General
Counsel and Assistant Secretary, Security
Benefit Group, Inc. and Security Benefit
Life Insurance Company.
BRENDA M. HARWOOD, Assistant Treasurer and Assistant Vice President, Assistant
Assistant Secretary Treasurer and Assistant Secretary, Security
Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
CINDY L. SHIELDS, Assistant Vice President Assistant Vice President and Portfolio
Manager, Security Management Company, LLC;
Assistant Vice President, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company. Prior to August 1994,
Junior Portfolio Manager, Research Analyst,
Junior Research Analyst and Portfolio
Assistant, Security Management Company.
THOMAS A. SWANK, Assistant Vice President Vice President and Portfolio Manager,
Security Management Company, LLC; Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
STEVEN M. BOWSER, Assistant Vice President Second Vice President and Portfolio
Manager, Security Management Company, LLC;
Second Vice President, Security Benefit
Life Insurance Company and Security Benefit
Group, Inc. Prior to October 1992,
Assistant Vice President and Portfolio
Manager, Federal Home Loan Bank.
BARBARA J. DAVISON, Assistant Vice President Compliance Officer, Assistant Vice
President and Portfolio Manager, Security
Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
Prior to 1996, Assistant Vice
President-Operations, Security Benefit Life
Insurance Company.
JIM P. SCHIER, Assistant Vice President Assistant Vice President and Portfolio
Manager, Security Management Company, LLC,
Security Benefit Group, Inc. and Security
Benefit Life Insurance Company. Prior to
February 1997, Assistant Vice President and
Senior Research Analyst, Security
Management Company, LLC. Prior to August
1995, Portfolio Manager, Mitchell Capital
Management. Prior to March 1993, Vice
President and Portfolio Manager, Fourth
Financial.
DAVID ESHNAUR, Assistant Vice President Assistant Vice President and Portfolio
Manager, Security Management Company, LLC.
Prior to July 1997, Assistant Vice
President and Assistant Portfolio Manager,
Waddell & Reed.
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------
<S> <C>
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Vice President and Assistant
Counsel, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
Prior to June 1992, student at Washburn
University School of Law.
- --------------------------------------------------------------------------------------------------
*These directors are deemed to be "interested persons" of the Fund under the Investment
Company Act of 1940, as amended.
**These directors serve on the Fund's audit committee, the purpose of which is to meet with
the independent auditors, to review the work of the auditors, and to oversee the handling
by Security Management Company, LLC of the accounting functions for the Fund.
- --------------------------------------------------------------------------------------------------
</TABLE>
The officers of the Fund hold identical offices in the other Funds in the
Security Group of Funds, except Ms. Tedder and Messrs. Milberger and Schier.
Ms. Tedder is also Vice President of Security Income Fund and Security Equity
Fund; Mr. Milberger is also Vice President of Security Equity Fund; Mr. Schier
is also Assistant Vice President of Security Equity Fund; Ms. Shields is also
Assistant Vice President of Security Ultra Fund and Security Equity Fund; Mr.
Bowser is also Assistant Vice President of Security Tax-Exempt Fund and
Security Income Fund; Mr. Swank is also Assistant Vice President of Security
Growth and Income Fund, Security Tax-Exempt Fund and Security Income Fund; Ms.
Davison is also Assistant Vice President of Security Cash Fund; and Mr. Eshnaur
is also Assistant Vice President of Security Equity Fund. The directors of the
Fund are also directors of each of the other Funds in the Security Group of
Funds. See the table under "Investment Management," page , for positions held
by such persons with the Investment Manager. Mr. Young and Ms. Lee hold
identical offices with Security Distributors, Inc. ("SDI"). Messrs. Cleland
and Schmank are also director and Vice President, and Ms. Harwood is Treasurer
of SDI.
REMUNERATION OF DIRECTORS AND OTHERS
The Fund pays each of its directors, except those directors who are
"interested persons" of the Fund, an annual retainer of $6,250 and a fee of
$800 per meeting, plus reasonable travel costs, for each meeting of the board
attended. The Fund pays a fee of $100 per hour with a minimum fee of $200 and
reasonable travel costs for each meeting of the Fund's audit committee attended
by those directors who serve on the committee. Such fees and travel costs are
paid by the Fund pursuant to the Fund's Administrative Services Agreement dated
April 1, 1987, as amended.
The Fund does not pay any fees to, or reimburse expenses of, its Directors
who are considered "interested persons" of the Fund. The aggregate
compensation paid by the Fund to each of the Directors during its fiscal year
ended December 31, 1996, and the aggregate compensation paid to each of the
Directors during calendar year 1996 by all seven of the registered investment
companies to which the Adviser provides investment advisory services
(collectively, the "Security Fund Complex"), are set forth below. Each of the
Directors is a director of each of the other registered investment companies in
the Security Fund Complex.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM THE SECURITY
NAME OF DIRECTOR COMPENSATION ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX,
OF THE FUND FROM SBL FUND FUND EXPENSES RETIREMENT INCLUDING THE FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Willis A. Anton $9,250 $0 $0 $18,500
Donald A. Chubb, Jr. 9,650 0 0 18,900
John D. Cleland 0 0 0 0
Donald L. Hardesty 9,250 0 0 18,500
Penny A. Lumpkin 9,650 0 0 18,900
Mark L. Morris, Jr. 9,650 0 0 18,900
Jeffrey B. Pantages 0 0 0 0
Harold G. Worswick* 0 0 0 0
Hugh L. Thompson 7,088 0 0 14,175
- --------------------------------------------------------------------------------------------------
*The Fund has accrued deferred compensation in the amount of $3,225 for Mr. Worswick for the
calendar year ended December 31, 1996.
- --------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 100
Security Management Company, LLC compensates its officers and directors
who may also serve as officers or directors of the Fund. On October 1, 1997,
the Fund's officers and directors (as a group) beneficially owned less than 1%
of the outstanding shares of the Fund.
SALE AND REDEMPTION OF SHARES
Shares of the Fund are sold and redeemed at their net asset value next
determined after receipt of a purchase or redemption order. No sales or
redemption charge is made. The value of shares redeemed may be more or less
than the shareholder's cost, depending upon the market value of the portfolio
securities at the time of redemption. Payment for shares redeemed will be made
as soon as practicable after receipt, but in no event later than seven days
after tender, except that the Fund may suspend the right of redemption during
any period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission.
INVESTMENT MANAGEMENT
Security Management Company, LLC (the "Investment Manager"), 700 Harrison
Street, Topeka, Kansas, serves as investment adviser to the Fund. The
Investment Manager also acts as investment adviser to the following mutual
funds: Security Equity Fund, Security Growth and Income Fund, Security Ultra
Fund, Security Income Fund, Security Cash Fund, and Security Tax-Exempt Fund.
The Investment Manager is controlled by its members, Security Benefit Life
Insurance Company and Security Benefit Group, Inc. ("SBG"). SBG is an
insurance and financial services holding company wholly-owned by Security
Benefit Life Insurance Company, 700 Harrison Street, Topeka, Kansas 66636-0001.
Security Benefit Life, a mutual life insurance company, is incorporated under
the laws of Kansas.
The Investment Manager serves as investment adviser to the Fund under an
Investment Advisory Contract dated June 20, 1977, which was renewed by the
board of directors of the Fund at a regular meeting held on February 7, 1997.
The contract may be terminated without penalty at any time by either party on
60 days' written notice and is automatically terminated in the event of its
assignment.
Pursuant to the Investment Advisory Contract, the Investment Manager
furnishes investment advisory, statistical and research facilities, supervises
and arranges for the purchase and sale of securities on behalf of the Fund, and
provides for the compilation and maintenance of records pertaining to the
investment advisory function. For such services, the Investment Manager is
entitled to receive compensation on an annual basis equal to .75% of the average
net assets of Series A, Series B, Series E, Series S, Series J, Series K, Series
P and Series V; .5% of the average net assets of Series C; and 1.00% of the
average net assets of Series D, Series M, Series N, Series O and Series X,
computed on a daily basis and payable monthly. During the last three fiscal
years, SBL Fund paid the following amounts to the Investment Manager for its
services: 1996 - $17,145,558; 1995 - $12,436,327; and 1994 - $10,141,578. For
the period May 1, 1997 (date of inception) to August 31, 1997, the Investment
Manager waived its entire advisory fee for Series V in the amount of $3,515.
For the fiscal year ended December 31, 1996 and the fiscal year ending December
31, 1997, the Investment Manager agreed to waive the investment advisory fees of
Series K and P. The Investment Manager also agreed to waive the investment
advisory fees of Series V and Series X for the fiscal year ending December 31,
1997.
The Investment Manager has retained Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
furnish certain investment advisory services to Series D and K of the Fund
pursuant to Sub-Advisory Agreements, dated April 26, 1991, and May 1, 1995,
respectively. Pursuant to the agreements, Lexington furnishes investment
advisory, statistical and research facilities, supervises and arranges for the
purchase and sale of securities on behalf of Series D and K and provides for
the compilation and maintenance of records pertaining to such investment
advisory services, subject to the control and supervision of the Board of
Directors of the Fund and the Investment Manager. For such services, the
Investment Manager pays Lexington an amount equal to .50% of the average net
assets of Series D, and .35% of the average net assets of Series K, computed on
a daily basis and payable monthly. The Lexington Sub-Advisory Agreements may
be terminated without penalty at any time by either party on 60 days' written
notice and are automatically terminated in the event of assignment or in the
event that the Investment Advisory Contract between the Investment Manager and
the Fund is terminated, assigned or not renewed.
55
<PAGE> 101
Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers,
Inc., a Delaware corporation with offices at Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
the outstanding shares of Lexington Global Asset Managers, Inc. Lexington
which was established in 1938 currently serves as investment adviser,
sub-adviser and/or sponsor to 21 investment companies with varying objectives
and manages over $3.8 billion in assets.
Lexington has entered into a sub-advisory contract with MFR Advisors, Inc.
("MFR"), One Liberty Plaza, New York, New York 10006, to provide investment and
economic research services to Series K, subject to the control and supervision
of the Board of Directors of SBL Fund For such services, Lexington pays MFR an
amount equal to .15% of the average net assets of Series K, computed on a daily
basis and payable monthly.
MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez") which was
established in August of 1992 to provide global economic consulting, investment
advisory and broker/dealer services. Ramirez owns 80% and Security Benefit
Group, Inc. ("SBG") owns 20% of the outstanding common stock of MFR. Maria
Fiorini Ramirez owns 100% of the outstanding capital stock of Ramirez, and
Security Benefit Life Insurance Company owns 100% of the outstanding common
stock of SBG. MFR currently acts as investment adviser to the Global High
Yield Fund (formerly Global Aggressive Bond Fund), Global Asset Allocation Fund
and Emerging Markets Total Return Fund, as sub-adviser to the Lexington Ramirez
Global Income Fund, and also serves as an institutional manager for private
clients.
The Investment Manager has entered into a sub-advisory agreement with
Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe
Road, Tower II, 7th Floor, Englewood, Colorado 80112. Pursuant to the
agreement, Meridian furnishes investment advisory, statistical and research
facilities, supervises and arranges for the purchase and sale of equity
securities on behalf of Series X and provides for the compilation and
maintenance of records pertaining to such investment advisory services, subject
to the control and supervision of the Board of Directors of the Fund and the
Investment Manager. Meridian is a wholly-owned subsidiary of Meridian
Management and Research Corporation which is controlled by its two
stockholders, Michael J. Hart and Craig T. Callahan. The Investment Manager
pays Meridian an annual fee equal to a percentage of the average daily closing
value of the net assets of Series M, computed on a daily basis according to the
following schedule:
Average Daily Net Assets of the Series Annual Fee
-------------------------------------- ----------
Less than $100 million...................... .40%, plus
$100 million but less than $200 million..... .35%, plus
$200 million but less than $400 million..... .30%, plus
$400 million or more........................ .25%
The Investment Manager has engaged T. Rowe Price Associates, Inc. ("T.
Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, organized in
1937 under the laws of the State of Maryland by the late Thomas Rowe Price,
Jr., to provide investment advisory services to Series N and O. Pursuant to
the agreements, T. Rowe Price furnishes investment advisory services,
supervises and arranges for the purchase and sale of securities on behalf of
Series N and O and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
T. Rowe Price is presently a publicly held company which with its affiliates
manages over $95 billion in assets for over 4.5 million individuals and
institutional investor accounts. The Investment Manager pays T. Rowe Price, on
an annual basis, an amount equal to .50% of the average net assets of Series N
which are less than $50,000,000, and .40% of the average net assets of Series N
of $50,000,000 and over, for management services provided to Series N,
provided, however, that the Investment Manager has agreed to pay T. Rowe Price
a minimum fee of $100,000 for the 12 months ended June 30, 1996. The
Investment Manager pays T. Rowe Price, on an annual basis, an amount equal to
.50% of the first $20,000,000 of average daily net assets of Series O and .40%
of such assets in excess of $20,000,000 for management services provided to
Series O. For any month in which the average daily net assets of Series O
exceed $50,000,000, T. Rowe Price will waive .10% of its fee on the first
$20,000,000 of Series O's average daily net assets. T. Rowe Price's fees for
investment management services are calculated daily and payable monthly.
The Investment Manager has engaged Strong Capital Management, Inc.
("Strong"), 900 Heritage Reserve, Menomonee Falls, Wisconsin 53051, to provide
certain investment advisory services to Series X. Strong is a
56
<PAGE> 102
privately held corporation which is controlled by Richard S. Strong. Strong was
established in 1974 and currently manages over $27 billion in assets. The
Investment Manager pays Strong with respect to Series X, an annual fee based on
the combined average net assets of Series X and another fund to which Strong
provides advisory services. The fee is equal to .50% of the combined average
net assets under $150 million, .45% of the combined average net assets at or
above $150 million but less than $500 million, and .40% of the combined average
net assets at or above $500 million.
The Investment Manager has agreed that the total annual expenses of any
Series, including its compensation from such Series, but excluding brokerage
commissions, interest, taxes, and extraordinary expenses, will not exceed the
level of expenses which the Fund is permitted to bear under the most
restrictive expense limitation imposed by any state in which shares of the Fund
are then offered for sale. (The Investment Manager is not aware of any state
that currently imposes limits on the level of mutual fund expenses.) The
Investment Manager will, on a monthly basis, contribute such funds or waive
such portion of its management fee as may be necessary to insure that the
aggregate expenses of any Series will not exceed any such limitation.
Pursuant to an Administrative Services Agreement, dated April 1, 1987, as
amended, the Investment Manager also acts as the administrative agent for the
Fund and as such performs administrative functions and the bookkeeping,
accounting and pricing functions for the Fund. For this service the Investment
Manager receives, on an annual basis, a fee of .045% of the average net assets
of each Series, except that with respect to Series X the Investment Manager
receives on an annual basis, a fee of .09%. For the services identified above,
the Investment Manager also receives, with respect to Series D, K, M and N, an
annual fee equal to the greater of .10 percent of each series' average net
assets or $60,000. The administrative fees paid by the Fund during its fiscal
years ended December 31, 1996, 1995 and 1994, were $1,346,653, $786,425 and
$605,515, respectively. For the period May 1, 1997 (date of inception) to
August 31, 1997, Series V paid the Investment Manager $442 for administrative
fees.
Under the same Agreement, the Investment Manager acts as the transfer
agent for the Fund. As such, it processes purchase and redemption transactions
and acts as the dividend disbursing agent for the separate accounts of Security
Benefit Life Insurance Company to which shares of the Fund are sold. For this
service, the Investment Manager receives an annual maintenance fee of $8.00 per
account, and a transaction fee of $1.00 per transaction. The transfer agency
fees paid by the Fund during its fiscal years ended December 31, 1996, 1995
and 1994, were $30,787, $18,750 and $13,242, respectively. For the period May
1, 1997 (date of inception) to August 31, 1997, Series V paid the Investment
Manager $66 for transfer agency fees.
The expense ratio of each Series for the fiscal year end December 31,
1996, was as follows: Series A - .83%; Series B - .84%; Series C - .58%; Series
D - 1.30%; Series E - .83%; Series S - .84%; Series J - .84%; Series K - .84%;
Series M - 1.34%; Series N - 1.45%; and Series O - 1.15%. The annualized
expense ratio of Series P for the period August 5, 1996 (date of inception) to
December 31, 1996 was .28% and for Series V for the period May 1, 1997 (date of
inception) to August 31, 1997, was .55%. None of the foregoing information is
available for Series X as it did not begin operations until October of 1997.
During the fiscal year ended December 31, 1996, the Investment Manager waived
the management fee of Series K and P, and during the fiscal year ending
December 31, 1997, the Investment Manager will waive the management fee of
Series K, P, V and X. In the absence of such waivers, the expense ratios for
Series K, P and V would have been higher.
The Fund will pay all its expenses not assumed by the Investment Manager
including directors' fees; fees and expenses of custodian; taxes and
governmental fees; interest charges; any membership dues; brokerage
commissions; reports, proxy statements, and notices to stockholders; costs of
stockholder and other meetings; and legal, auditing and accounting expenses.
The Fund will also pay all expenses in connection with the Fund's registration
under the Investment Company Act of 1940 and the registration of its capital
stock under the Securities Act of 1933.
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<PAGE> 103
The following persons are affiliated with the Fund and also with the
Investment Manager in the capacities indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NAME POSITION WITH SBL FUND POSITIONS WITH SECURITY MANAGEMENT COMPANY, LLC
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. Schmank Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal
Officer and Managing Member Representative
John D. Cleland President and Director Senior Vice President and Managing Member
Representative
Jane A. Tedder Vice President Vice President and Senior Portfolio Manager
Terry A. Milberger Vice President Senior Vice President and Senior Portfolio
Manager
James P. Schier Assistant Vice President Assistant Vice President and Portfolio Manager
Cindy L. Shields Assistant Vice President Assistant Vice President and Portfolio Manager
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Vice President, Assistant Treasurer
Assistant Secretary and Assistant Secretary
Thomas A. Swank Assistant Vice President Vice President and Portfolio Manager
Steven M. Bowser Assistant Vice President Second Vice President and Portfolio Manager
Barbara J. Davison Assistant Vice President Compliance Officer, Assistant Vice President
and Portfolio Manager
David Eshnaur Assistant Vice President Assistant Vice President and Portfolio Manager
- -----------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
SERIES A (GROWTH SERIES) is managed by the Large Capitalization Team of
the Investment Manager consisting of John Cleland, Chief Investment Strategist,
Terry Milberger, Jim Schier and Chuck Lauber. The Large Capitalization Team is
responsible for determining general investment strategy and monitoring
portfolio guidelines. Terry Milberger, Senior Portfolio Manager, has day-to-day
responsibility for managing Series A and has managed the Series since 1981.
The common stock portion of the SERIES B (GROWTH-INCOME SERIES) portfolio is
managed by the Investment Manager's Large Capitalization Team described above.
Mr. Milberger has day-to-day responsibility for managing the common stock
portion of the Series B portfolio and has managed this portion of the Series'
portfolio since 1995. The fixed income portion of the Series B portfolio is
managed by the Fixed Income Team of the Investment Manager consisting of John
Cleland, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison, David Eshnaur,
Elaine Miller and Paulette Schwerdt. The Fixed Income Team is responsible for
determining general investment strategy and monitoring portfolio guidelines.
Tom Swank, Portfolio Manager, has day-to-day responsibility for managing the
fixed income portion of Series B's portfolio and has managed this
portion of the portfolio since 1994. SERIES D (WORLDWIDE EQUITY SERIES) is
managed by an investment management team of Lexington. Richard T. Saler and
Alan Wapnick have the day-to-day responsibility for managing the investments of
Series D and have managed the Series since 1994. SERIES E (HIGH GRADE INCOME
SERIES) is managed by the Fixed Income Team described above. Tom Swank and
Steve Bowser have day-to-day responsibility for managing Series E and have
managed the Series since June 1997. SERIES J (EMERGING GROWTH SERIES) and
SERIES S (SOCIAL AWARENESS SERIES) are managed by the Investment Manager's
Small Capitalization Team and Social Responsibility Team, respectively, each of
which consists of John Cleland, Chief Investment Strategist, Cindy Shields,
Larry Valencia and Frank Whitsell. The Small Capitalization Team and the
Social Responsibility Team are responsible for determining general investment
strategy and monitoring portfolio guidelines. Cindy Shields, Portfolio Manager,
has day-to-day responsibility for managing Series J and Series S and has
managed the Series since 1994. SERIES K (GLOBAL AGGRESSIVE BOND SERIES) is
managed by an investment management team of Lexington and MFR. Denis P.
Jamison and Maria Fiorini Ramirez have day-to-day responsibility for managing
Series K and have managed the Series since its inception in 1995. SERIES M
(SPECIALIZED ASSET ALLOCATION SERIES) is managed by an investment management
team of portfolio managers of the Investment Manager and Meridian. Jane
Tedder, Senior Economist, has day-to-day responsibility for managing the
fixed-income portion of the Series' portfolio and has had responsibility for
the Series since January 1996. Pat Boyle, Portfolio Manager of Meridian, has
day-to-day responsibility for managing the equity portion of the Series'
portfolio. He has had day-to-day responsibility for managing the equity
portion of
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<PAGE> 104
the Series since August 1997 SERIES N (MANAGED ASSET ALLOCATION SERIES) is
managed by an Investment Advisory Committee of T. Rowe Price consisting of
Edmund M. Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark,
Peter Van Dyke, M. David Testa and Richard T. Whitney. Mr. Notzon has had
day-to-day responsibility for managing the Series since its inception in 1995.
SERIES O (EQUITY INCOME SERIES) is managed by an Investment Advisory Committee
of T. Rowe Price consisting of Brian C. Rogers, Chairman, Thomas H. Broadus,
Jr., Richard P. Howard and William J. Stromberg. Mr. Rogers has had day-to-day
responsibility for managing the Series since its inception in 1995. SERIES P
(HIGH YIELD SERIES) is managed by the Fixed Income Team described above. Tom
Swank and David Eshnaur have day-to-day responsibility for managing the
investments of Series P. Mr. Swank has managed the Series since its inception in
1996 and Mr. Eshnaur has managed the Series since July 1997. SERIES V (VALUE
SERIES) is managed by the Large Capitalization Team described above. Jim Schier
has day-to-day responsibility for managing Series V and has managed the Series
since its inception in 1997. SERIES X (SMALL CAP SERIES) is managed by Ronald
C. Ognar of Strong. He has had day-to-day responsibility for managing Small Cap
Fund since its inception in 1997.
Steve Bowser is Assistant Vice President and Portfolio Manager of the
Investment Manager. Prior to joining the Investment Manager in 1992, he was
Assistant Vice President and Portfolio Manager with the Federal Home Loan Bank
of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982. He is a Chartered Financial Analyst.
Pat Boyle is a research analyst and portfolio manager at Meridian. He has
four years of investment experience and is a Chartered Financial Analyst. Mr.
Boyle graduated from the University of Denver with a B.S.B.A. degree in
Finance.
John Cleland has been involved in the securities industry for more than 30
years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate
for approximately ten years. Mr. Cleland earned a Bachelor of Science degree
from the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
David Eshnaur is Assistant Vice President and Portfolio Manager of the
Investment Manager. Mr. Eshnaur has 15 years of investment experience. Prior
to joining the Investment Manager in 1997, he worked at Waddell & Reed in the
positions of Assistant Vice president, Assistant Portfolio Manager, Senior
Analyst, Industry Analyst and Account Administrator. Mr. Eshnaur earned a
Bachelor of Arts degree in Business Administration from Coe College and and
M.B.A. degree in Finance from the University of Missouri - Kansas City.
Denis P. Jamison, CFA, Senior Vice President, Director Fixed Income
Strategy, is responsible for fixed-income portfolio management for Lexington.
He is a member of the New York Society of Security Analysts. Mr. Jamison has
more than 20 years investment experience. Prior to joining Lexington in 1981,
Mr. Jamison had spent nine years at Arnold Bernhard and Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds.
Mr. Jamison is a graduate of the City College of New York with a B.A. in
Economics.
Terry A. Milberger is a Vice President and Senior Portfolio Manager of the
Investment Manager. Mr. Milberger has more than 19 years of investment
experience. He began his career as an investment analyst in the insurance
industry and from 1974 through 1978 he served as an assistant portfolio manager
for the Investment Manager. He was then employed as Vice President of Texas
Commerce Bank and managed its pension fund assets until he returned to the
Investment Manager in 1981. Mr. Milberger holds a Bachelor's degree in
Business and an M.B.A. from the University of Kansas and is a Chartered
Financial Analyst.
Edmund M. Notzon joined T. Rowe Price in 1989 and has been managing
investments since 1991. Prior to joining T. Rowe Price, Mr. Notzon was
Director of the Analysis and Evaluation Division at the U.S. Environmental
Protection Agency.
Ronald C. Ognar, Portfolio Manager of Strong, is a Chartered Financial
Analyst with more than 25 years of investment experience. Mr. Ognar joined
Strong in April 1993 after two years as a principal and Portfolio Manager with
RCM Capital Management. Prior to his position at RCM Capital Management, he
was a Portfolio Manager at
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<PAGE> 105
Kemper Financial Services in Chicago. Mr. Ognar began his investment career
in 1968 at LaSalle National Bank. He is a graduate of the University of
Illinois with a bachelor's degree in accounting.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill
Lynch, serving as Vice President and Senior Money Market Economist. She joined
Becker Paribas in 1984 as Vice President and Senior Money Market Economist
before joining Drexel Burnham Lambert that same year as First Vice President
and Money Market Economist. She was promoted to Managing Director of Drexel in
1986. From April 1990 to August 1992, Ms. Ramirez was the President and Chief
Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of
John Hancock Freedom Securities Corporation. Ms. Ramirez established MFR in
August, 1992. She is known in international financial, banking and economic
circles for her assessment of the interaction between global economic policy
and political trends and their effect on investments. Ms. Ramirez holds a B.A.
in Business Administration/Economics from Pace University.
Brian C. Rogers joined T. Rowe Price in 1982 and has been managing
investments since 1983.
Richard T. Saler is a Senior Vice President of Lexington and is
responsible for international investment analysis and portfolio management. He
has eleven years of investment experience. Mr. Saler has focused on
international markets since first joining Lexington in 1986. Most recently he
was a strategist with Nomura Securities and rejoined Lexington in 1992. Mr.
Saler is a graduate of New York University with a B.S. degree in Marketing and
an M.B.A. in Finance from New York University's Graduate School of Business
Administration.
James P. Schier, Assistant Vice President and Portfolio Manager of the
Investment Manager, has 13 years experience in the investment field and is a
Chartered Financial Analyst. While employed by the Investment Manager, he also
served as a research analyst. Prior to joining the Investment Manager in 1995,
he was a portfolio manager for Mitchell Capital Management from 1993 to 1995.
From 1988 to 1995 he served as Vice President and Portfolio Manager for Fourth
Financial. Prior to 1988, Mr. Schier served in various positions in the
investment field for Stifel Financial, Josepthal & Company and Mercantile Trust
Company. Mr. Schier earned a Bachelor of Business degree from the University
of Notre Dame and an M.B.A. from Washington University.
Cindy L. Shields is a Portfolio Manager of the Investment Manager. Ms.
Shields has eight years experience in the securities field and joined the
Investment Manager in 1989. She has been a portfolio manager since 1994, and
prior to that time, she served as a research analyst for the Investment
Manager. Ms. Shields graduated from Washburn University with a Bachelor of
Business Administration degree, majoring in finance and economics. She is a
Chartered Financial Analyst.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years
of experience in the investment field. He is a Chartered Financial Analyst.
Prior to joining the Investment Manager in 1992, he was an Investment
Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from
1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United
Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company
examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr.
Swank graduated from Miami University in Ohio with a Bachelor of Science degree
in finance in 1982 and earned a Master of Business Administration degree from
the University of Colorado.
Jane Tedder, Vice President and Senior Portfolio Manager of the Investment
Manager, has 20 years of experience in the investment field. Ms. Tedder has
been a portfolio manager for the Investment Manager since 1983. Prior to
joining the Investment Manager in 1983, she served as Vice President and Trust
Officer of Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's
degree in education from Oklahoma State University and advanced diplomas from
National Graduate Trust School, Northwestern University, and Stonier Graduate
School of Banking, Rutgers University. She is a Chartered Financial Analyst.
Alan Wapnick is a Senior Vice President of Lexington and is responsible
for equity analysis and portfolio management. He has 27 years of investment
experience. Prior to joining Lexington in 1986, Mr. Wapnick was an equity
analyst with Merrill Lynch, J. & W. Seligman, Dean Witter and most recently
Union Carbide Corporation. Mr. Wapnick is a graduate of Dartmouth College and
received a Master's degree in Business Administration from Columbia University.
60
<PAGE> 106
CODE OF ETHICS
The Fund, the Investment Manager and the Distributor have a written Code
of Ethics which requires all access persons to obtain prior clearance before
engaging in any personal securities transactions. Access persons include
officers and directors of the Fund and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the fund or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons
must report their personal securities transactions within ten days of the end
of each calendar quarter. Access persons will not be permitted to effect
transactions in a security if it: (a) is being considered for purchase or sale
by the Fund; (b) is being purchased or sold by the Fund; or (c) is being
offered in an initial public offering. In addition, portfolio managers are
prohibited from purchasing or selling a security within seven calendar days
before or after a Fund that he or she manages trades in that security. Any
material violation of the Code of Ethics is reported to the Board of the Fund.
The Board also reviews the administration of the Code of Ethics on an annual
basis.
PORTFOLIO TURNOVER
Generally, long-term rather than short-term investments will be made by
the Fund for Series A, B, D, E, S, J, P and V. Series J, however, reserves the
right during certain periods to trade to a substantial degree for the short
term. Although portfolio securities generally will be purchased with a view to
long-term potential, subsequent changes in the circumstances of a particular
company or industry, or in general economic conditions, may indicate that sale
of a portfolio security is desirable without regard to the length of time it
has been held or to the tax consequences thereof. The annual portfolio
turnover rate of Series A, S, J, M and V may exceed 100% and at times may
exceed 150%. The annual turnover rate of Series E, K and P may exceed 100%.
The annual turnover rate of Series B, D, N and O are not generally expected to
exceed 100%. The annual portfolio turnover rate of Series X is not expected to
exceed 200%.
Portfolio turnover is defined as the lesser of purchases or sales of
portfolio securities divided by the average market value of portfolio
securities owned during the year, determined monthly. The annual portfolio
turnover rates for Series A, B, D, E, S, J, K, M, N, O and P for the fiscal
years ended December 31, 1996, 1995 and 1994, are as follows:
-----------------------------------------
1996 1995 1994
-----------------------------------------
Series A 57% 83% 90%
Series B 58% 94% 43%
Series D 115% 169% 82%
Series E 232% 180% 185%
Series S 67% 122% 67%
Series J 123% 202% 91%
Series K 86% 127%* --
Series M 40% 181%* --
Series N 41% 26%* --
Series O 22% 3%* --
Series P 151%** -- --
-----------------------------------------
*Annualized portfolio turnover rates for
the period June 1, 1995 (date of
inception) to December 31, 1995.
**Annualized portfolio turnover rate for
the period August 5, 1996 (date of
inception) to December 31, 1996.
For this purpose the term "securities" does not include government
securities or debt securities maturing within one year after acquisition.
Since Series C's investment policies require a maturity shorter than 13 months,
the portfolio turnover rate will generally be 0%, although the portfolio will
turn over many times during a year. The annualized portfolio turnover rate for
Series V for the period May 1, 1997 (date of inception) to August 31, 1997 was
48%. Portfolio turnover information is not yet available for Series X as it
did not begin operations until October of 1997.
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<PAGE> 107
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus for the Fund, the net asset value per share
of each Series is determined as of the close of regular trading hours on the
New York Stock Exchange (normally 3:00 p.m. Central time) on each day that the
Exchange is open for trading (other than a day on which no shares of a Series
are tendered for redemption and no order to purchase shares of a Series is
received). The New York Stock Exchange is open for trading Monday through
Friday except when closed in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas. The determination is
made by dividing the value of the portfolio securities of each Series, plus any
cash or other assets (including dividends accrued but not collected), less all
liabilities (including accrued expenses but excluding capital and surplus), by
the number of shares of each Series outstanding. In determining asset value,
securities listed or traded on a recognized securities exchange are valued on
the basis of the last sale price. If there are no sales on a particular day,
then the securities shall be valued at the last bid price. All other
securities for which market quotations are available are valued on the basis of
the last current bid price. If there is no bid price, or if the bid price is
deemed to be unsatisfactory by the board of directors or the Fund's Investment
Manager, then the securities shall be valued in good faith by such method as
the board of directors determines will reflect their fair market value.
Circumstances under which the board of directors or the Fund's Investment
Manager may consider the bid price include instances in which the spread
between the bid and the asked prices is substantial, trades have been
infrequent or the size of the trades which have occurred are not
representative of the Fund's holdings.
As stated in the Prospectus, the Fund's short-term debt securities may be
valued by the amortized cost method. As a result of using this method, during
periods of declining interest rates, the yield on shares of these Series
(computed by dividing the annualized income of the Fund by the net asset value
computed as described above) may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Fund for instruments
with remaining maturities of 60 days or less resulted in a lower aggregate
portfolio value on a particular day, a prospective investor would be able to
obtain a somewhat higher yield than would result from investment in a fund
utilizing solely market values and existing investors in these Series would
receive less investment income. The converse would apply in a period of rising
interest rates. To the extent that, in the opinion of the board of directors,
the amortized cost value of a portfolio instrument or instruments does not
represent fair value thereof as determined in good faith, the board of
directors will take appropriate action which would include a revaluation of all
or an appropriate portion of the portfolio based upon current market factors.
Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities used in computing the net asset
value of the shares of certain Series of the Fund generally are determined as
of the close of such foreign markets or the close of the New York Stock
Exchange if earlier. Foreign currency exchange rates are generally determined
prior to the close of the New York Stock Exchange. Trading on foreign
exchanges and in foreign currencies may not take place on every day the New
York Stock Exchange is open. Conversely trading in various foreign markets may
take place on days when the New York Stock Exchange is not open and on other
days when the Fund's net asset values are not calculated. Therefore, the
shares of a Series which invests in foreign securities may be significantly
affected on days when investors have no access to the Series. The calculation
of the net asset value for Series that invest in foreign securities may not
occur contemporaneously with the determination of the most current market
prices for the securities included in such calculation, and events affecting
the value of such securities and such exchange rates that occur between the
times at which they are determined and the close of the New York Stock Exchange
will not be reflected in the computation of net asset value. If during such
periods, events occur that materially affect the value of such securities, the
securities will be valued at their fair market value as determined in good
faith by the directors.
For purposes of determining the net asset value per share of the Fund, all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major
U.S. bank.
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<PAGE> 108
PORTFOLIO TRANSACTIONS
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interests of the Fund and the respective Series. In
reaching a judgment relative to the qualifications of a broker-dealer
("broker") to obtain the best execution of a particular transaction, all
relevant factors and circumstances will be taken into account by the Investment
Manager or relevant Sub-Adviser, including the overall reasonableness of
commissions paid to the broker, the firm's general execution and operational
capabilities and its reliability and financial condition. The execution of
portfolio transactions may be directed to brokers who furnish investment
information or research services to the Investment Manager or relevant
Sub-Adviser. Such information and research services include advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, the availability of securities or purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts. Such investment information and research services may be furnished
by brokers in many ways, including: (1) on-line data base systems, the
equipment for which is provided by the broker, that enable registrant to have
real-time access to market information, including quotations; (2) economic
research services, such as publications, chart services and advice from
economists concerning macroeconomic information; and (3) analytical investment
information concerning particular corporations. If a transaction is directed
to a broker supplying such information or services, the commission paid for
such transaction may be in excess of the commission another broker would have
charged for effecting that transaction, provided that the Investment Manager
shall have determined in good faith that the commission is reasonable in
relation to the value of the investment information or research services
provided, viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Manager with respect to all accounts as to
which it exercises investment discretion. The Investment Manager may use all,
none or some of such information and services in providing investment advisory
services to the mutual funds under its management, including the Fund.
In addition, brokerage transactions may be placed with brokers who sell
variable contracts offered by SBL or shares of the Funds managed by the
Investment Manager and who may or may not also provide investment information
and research services. The Investment Manager may, consistent with the NASD
Rules of Fair Practice, consider sales of shares of the Fund in the selection
of a broker. The Fund may also buy securities from, or sell securities to,
dealers acting as principals or market makers.
Securities held by the Series may also be held by other investment
advisory clients of the Investment Manager or relevant Sub-Adviser, including
other investment companies. In addition, Security Benefit Life Insurance
Company ("SBL"), may also hold some of the same securities as the Series. When
selecting securities for purchase or sale for a Series, the Investment Manager
may at the same time be purchasing or selling the same securities for one or
more of such other accounts. Subject to the Investment Manager's obligation to
seek best execution, such purchases or sales may be executed simultaneously or
"bunched." It is the policy of the Investment Manager not to favor one
account over the other. Any purchase or sale orders executed simultaneously
(which may also include orders from SBL) are allocated at the average price and
as nearly as practicable on a pro rata basis (transaction costs will also
generally be shared on a pro rata basis) in proportion to the amounts desired to
be purchased or sold by each account. In those instances where it is not
practical to allocate purchase or sale orders on a pro rata basis, then the
allocation will be made on a rotating or other equitable basis. While it is
conceivable that in certain instances this procedure could adversely affect the
price or number of shares involved in a Series' transaction, it is believed that
the procedure generally contributes to better overall execution of the Series'
portfolio transactions. The Board of Directors of the Fund has adopted
guidelines governing this procedure and will monitor the procedure to determine
that the guidelines are being followed and that the procedure continues to be in
the best interest of the Fund and its stockholders. With respect to the
allocation of initial public offerings ("IPOs"), the Investment Manager may
determine not to purchase such offerings for certain of its clients (including
investment company clients) due to the limited number of shares typically
available to the Investment Manager in an IPO.
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<PAGE> 109
The following table sets forth the brokerage fees paid by the Fund during
the last three fiscal years and certain other information:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
TRANSACTIONS DIRECTED TO AND
BROKERAGE COMMISSIONS COMMISSIONS PAID TO BROKER-DEALERS
PAID TO SECURITY WHO ALSO PERFORMED SERVICES
TOTAL BROKERAGE DISTRIBUTORS INC., BROKERAGE
YEAR COMMISSIONS PAID THE UNDERWRITER TRANSACTIONS COMMISSIONS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 $4,458,407 $0 $561,547,687 $906,003
1995 4,345,806 0 402,404,593 738,594
1994 2,962,073 0 281,022,190 588,781
</TABLE>
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS
Each Series intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").
To qualify as a regulated investment company, each Series must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to certain securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities, or currencies ("Qualifying Income Test"); (ii)
derive in each taxable year less than 30% of its gross income from the sale or
other disposition of certain assets held less than three months (namely (a)
stock or securities, (b) options, futures and forward contracts (other than
those on foreign currencies), and (c) foreign currencies (including options,
futures, and forward contracts on such currencies) not directly related to a
Series' principal business of investing in stocks or securities (or options and
futures with respect to stocks and securities)); (iii) diversify its holdings
so that, at the end of each quarter of the taxable year, (a) at least 50% of
the market value of the Series' assets is represented by cash, cash items, U.S.
Government securities, the securities of other regulated investment companies,
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Series' total assets and 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies), or of
two or more issuers which the Series controls (as that term is defined in the
relevant provisions of the Code) and which are determined to be engaged in the
same or similar trades or businesses or related trades or businesses; and (iv)
distribute at least 90% of the sum of its investment company taxable income
(which includes, among other items, dividends, interest, and net short-term
capital gains in excess of any net long-term capital losses) and its net
tax-exempt interest each taxable year. The Treasury Department is authorized
to promulgate regulations under which foreign currency gains would constitute
qualifying income for purposes of the Qualifying Income Test only if such gains
are directly related to investing in securities (or options and futures with
respect to securities). To date, no such regulations have been issued.
A Series qualifying as a regulated investment company generally will not
be subject to U.S. federal income tax on its investment company taxable income
and net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Series intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and any net capital
gains.
Generally, regulated investment companies, like the Series, must
distribute amounts on a timely basis in accordance with a calendar year
distribution requirement in order to avoid a nondeductible 4% excise tax.
Generally, to avoid the tax, a regulated investment company must distribute
during each calendar year, (i) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (ii) at least
98% of its capital gains in excess of its capital losses (adjusted for certain
ordinary losses) for the 12-month period ending on October 31 of the calendar
year, and (iii) all ordinary income and capital gains for previous years that
were not distributed during such years. To avoid application of the excise
tax, each Series intends to make its distributions in accordance with the
calendar year distribution requirement. A distribution is treated as paid on
December 31 of the calendar year if it is declared by a Series in October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Series during January of the following calendar
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<PAGE> 110
year. Such distributions are taxable to shareholders in the calendar year in
which the distributions are declared, rather than the calendar year in which the
distributions are received. The excise tax provisions described above do not
apply to a regulated investment company, like a Series, all of whose
shareholders at all times during the calendar year are segregated asset
accounts of life insurance companies where the shares are held in connection
with variable contracts. (For this purpose, any shares of a Series
attributable to an investment in the Series not exceeding $250,000 made in
connection with the organization of the Series shall not be taken into
account.) Accordingly, if this condition regarding the ownership of shares of
a Series is met, the excise tax will be inapplicable to that Series.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Series were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Series
would not qualify for the favorable federal income tax treatment afforded
regulated investment companies, or, even if it did so qualify, it might become
liable for federal taxes on undistributed income. In addition, the ability of
a Series to obtain timely and accurate information relating to its investments
is a significant factor in complying with the requirements applicable to
regulated investment companies, in making tax-related computations, and in
complying with the Code Section 817(h) diversification requirements. Thus, if
a Series were unable to obtain accurate information on a timely basis, it might
be unable to qualify as a regulated investment company, its tax computations
might be subject to revisions (which could result in the imposition of taxes,
interest and penalties), or it might be unable to satisfy the Code Section
817(h) diversification requirements.
CODE SECTION 817(H) DIVERSIFICATION. To comply with regulations under
Section 817(h) of the Code, each Series will be required to diversify its
investments so that on the last day of each quarter of a calendar year, no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by
any four investments. Generally, securities of a single issuer are treated as
one investment and obligations of each U.S. Government agency and
instrumentality are treated for purposes of Section 817(h) as issued by
separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contractowner's control of the
investments of a separate account may cause the contractowner, rather than the
insurance company, to be treated as the owner of the assets held by the
separate account. If the variable contractowner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contractowner's gross income.
These future rules and regulations proscribing investment control may adversely
affect the ability of certain Series of the Fund to operate as described
herein. There is, however, no certainty as to what standards, if any, Treasury
will ultimately adopt. In the event that unfavorable rules or regulations are
adopted, there can be no assurance that the Series will be able to operate as
currently described in the Prospectus, or that a Series will not have to change
its investment objective or objectives, investment policies, or investment
restrictions.
PASSIVE FOREIGN INVESTMENT COMPANIES. Some of the Series may invest in
stocks of foreign companies that are classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign company is
classified as a PFIC if at least one half of its assets constitutes
investment-type assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received with respect
to PFIC stock is treated as having been realized ratably over a period during
which the Series held the PFIC stock. The Series itself will be subject to tax
on the portion, if any, of the excess distribution that is allocated to the
Series' holding period in prior taxable years (an interest factor will be added
to the tax, as if the tax had actually been payable in such prior taxable
years) even though the Series distributes the corresponding income to
shareholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions
are taxable as ordinary income.
A Series may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Series
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve
marking to market a Series' PFIC stock at
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<PAGE> 111
the end of each taxable year (and on certain other dates prescribed in the
Code), with the result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Series level under the PFIC
rules would be eliminated, but a Series could, in limited circumstances, incur
nondeductible interest charges. A Series' intention to qualify annually as a
regulated investment company may limit the Series' elections with respect to
PFIC stock.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Series
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC stock.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain
options, futures contracts, and forward contracts in which a Series may invest
may be "Section 1256 contracts." Gains or losses on Section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses; however, foreign currency gains or losses arising from certain Section
1256 contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Series at the end of each taxable year (and at certain
other times as prescribed pursuant to the Code) are "marked to market" with the
result that unrealized gains or losses are treated as though they were
realized.
Generally, the hedging transactions undertaken by a Series may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Series. In addition,
losses realized by a Series on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, swap agreements and other financial contracts to a Series
are not entirely clear. The transactions may increase the amount of short-term
capital gain realized by a Series which is taxed as ordinary income when
distributed to shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased as
compared to a fund that did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Series
intend to account for such transactions in a manner deemed by them to be
appropriate, but the Internal Revenue Service might not necessarily accept such
treatment. If it did not, the status of a Series as a regulated investment
company, and the Series' ability to satisfy the Code Section 817(h)
diversification requirements, might be affected.
The requirements applicable to a Series' qualification as a regulated
investment company may limit the extent to which a Series will be able to
engage in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
FOREIGN TAXATION. Income received by a Series from sources within a
foreign country may be subject to withholding and other taxes imposed by that
country. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Series accrues income or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time that Series actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses,
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<PAGE> 112
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Series' investment company taxable income to be
distributed to its shareholders as ordinary income.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Series (such as
zero coupon bonds) may be treated for U.S. federal income tax purposes as
having original issue discount. Original issue discount is treated as interest
for federal income tax purposes and can generally be defined as the excess of
the stated redemption price at maturity over the issue price. Original issue
discount, whether or not cash payments actually are received by a Series, is
treated for federal income tax purposes as income earned by the Series, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Series each
year is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest.
In addition, debt securities may be purchased by a Series at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Series purchased the securities. This additional discount
represents market discount for income tax purposes. Treatment of market
discount varies depending upon the maturity of the debt security. Generally,
in the case of any debt security having a fixed maturity date of more than one
year from the date of issue and having market discount, the gain realized on
disposition will be treated as ordinary income to the extent it does not exceed
the accrued market discount on the security (unless the Series elects for all
its debt securities having a fixed maturity date of more than one year from the
date of issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. For any
debt security having a fixed maturity date of not more than one year from the
date of issue, special rules apply which may require in some circumstances the
ratable inclusion of income attributable to discount at which the bond was
acquired as calculated under the Code. A Series may be required to capitalize,
rather than deduct currently, part or all of any net direct interest expense on
indebtedness incurred or continued to purchase or carry any debt security
having market discount (unless the Series makes the election to include market
discount currently).
DISTRIBUTIONS. Distributions of any investment company taxable income by
a Series are taxable to the shareholders as ordinary income. Net capital gains
designated by a Series as capital gain dividends will be treated, to the extent
distributed, as long-term capital gains in the hands of the shareholders,
regardless of the length of time the shareholders may have held the shares.
Any distributions that are not from a Series' investment company taxable income
or net capital gains may be characterized as a return of capital to
shareholders or, in some cases, as capital gain. A distribution will be
treated as paid on December 31 of the calendar year if it is declared by a
Series in October, November or December of that year to shareholders of record
on a date in such a month and paid by the Series during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which they are declared, rather than the calendar year in
which they are received.
OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Series. Distributions may also be subject to additional
state, local and foreign taxes, depending on each shareholder's particular
situation. Depending upon the nature and extent of a Series' contacts with a
state or local jurisdiction, the Series may be subject to the tax laws of such
jurisdiction if it is regarded under applicable law as doing business in, or as
having income derived from, the jurisdiction. Shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Series.
OWNERSHIP AND MANAGEMENT
As of October 1, 1997, SBL controls the Fund by virtue of its indirect
ownership of 100% of the outstanding shares of the Fund as custodian of SBL
Variable Annuity Account III, SBL Variable Annuity Account IV, Variflex,
Variflex LS, Variflex Signature, Security Elite Benefit and Varilife.
CAPITAL STOCK AND VOTING
The Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value. Its shares are currently issued in fourteen
Series: Series A, Series B, Series C, Series D, Series E, Series S, Series J,
Series K, Series M, Series N, Series O, Series P, Series V and Series X. The
shares of each Series represent pro rata beneficial interest in that Series'
assets and in the earnings and profits or losses derived from
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<PAGE> 113
the investment of such assets. Upon issuance and sale, such shares will be
fully paid and nonassessable. They are fully transferable and redeemable.
These shares have no preemptive rights, but the stockholders of each Series are
entitled to receive dividends as declared for that Series by the board of
directors of the Fund.
The shares of each Series have cumulative voting rights for the election
of directors. Within each respective Series, each share has equal voting
rights with each other share and there are no preferences as to conversion,
exchange, retirement or liquidation. On other matters, all shares,
(irrespective of Series) are entitled to one vote each. Pursuant to the rules
and regulations of the Securities and Exchange Commission, in certain
instances, a vote of the outstanding shares of the combined Series may not
modify the rights of holders of a particular Series without the approval of a
majority of the shares of that Series.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the
custodian for the portfolio securities of each Series of the Fund, except
Series D, K, M, N and O. The Chase Manhattan Bank, 4 Chase MetroTech Center,
Brooklyn, New York 11245 acts as custodian for the portfolio securities of
Series D, K, M, N and O, including those held by foreign banks and foreign
securities depositories which qualify as eligible foreign custodians under the
rules adopted by the SEC. Security Management Company, LLC is the Fund's
transfer and dividend-paying agent.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street,
Kansas City, Missouri, has been approved by the Fund's stockholders to serve as
the Fund's independent auditors, and as such, the firm will perform the annual
audit of the Fund's financial statements.
DISTRIBUTION OF VARIABLE INSURANCE PRODUCTS
SBL Fund serves as the underlying investment vehicle for the following
variable insurance products currently issued by Security Benefit Life Insurance
Company: Variflex, Variflex LS, Variflex Signature, Security Elite Benefit and
Varilife. Security Distributors, Inc. (the "Distributor"), a wholly-owned
subsidiary of Security Benefit Group, Inc., is the principal underwriter of the
foregoing variable insurance products. The Distributor has entered into an
agreement with Lexington Management Corporation ("Lexington") pursuant to which
it receives compensation from Lexington to defray expenses it incurs in the
distribution of certain mutual funds sub-advised by Lexington and variable
insurance products certain underlying funds of which are sub-advised by
Lexington and for the access which the Distributor permits Lexington to have to
its network of broker and dealers. The Agreement is currently in effect with
respect to the Global Series of Security Equity Fund and Series D of SBL Fund
(the "Sub-Advised Portfolios"). Pursuant to the terms of the Agreement,
Lexington pays the Distributor a fee, ranging from 0% of the average daily net
assets of the Sub-Advised Portfolios below $50 million to .25% of the average
daily net assets of the Sub-Advised Portfolios of $400 million or more. The
fee is calculated daily and payable monthly.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the average annual total return
and the total return of the Series in advertisements or reports to shareholders
or prospective investors.
Quotations of average annual total return for a Series will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Series over certain periods that will include periods of 1, 5
and 10 years (up to the life of the Series), calculated pursuant to the
following formula:
n
P(1+T) =ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures assume that all dividends and distributions are reinvested when
paid.
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For the 1-, 5- and 10-year periods ended June 30, 1997, the average annual
total return was the following:
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
------------------------------------------------------
Series A 27.9% 19.5% 13.6%
Series B 24.2% 16.1% 13.2%
Series C 5.1% 3.5% 5.2%
Series D 17.6% 14.3% 4.2%
Series E 5.7% 5.9% 7.6%
Series J 8.0% 16.0%(2) --
Series K 12.1% 11.0%(3) --
Series M 14.7% 14.0%(3) --
Series N 21.1% 17.9%(3) --
Series O 27.3% 26.0%(3) --
Series P 14.7%(4) -- --
Series S 15.0% 17.2% 14.0%(1)
Series V 88.9%(5) -- --
------------------------------------------------------
1 For the period May 1, 1991 (date of inception)
through December 31, 1996.
2 For the period October 1, 1992 (date of inception)
through December 31, 1996.
3 For the period June 1, 1995 (date of inception)
through December 31, 1996.
4 For the period August 5, 1996 (date of inception)
through June 30, 1997.
5 For the period May 1, 1997 (date of inception)
through August 31, 1997.
Quotations of total return for any Series will also be based on a
hypothetical investment in the Series for a certain period, and will assume
that all dividends and distributions are reinvested when paid. The total
return is calculated by subtracting the value of the investment at the
beginning of the period from the ending value and dividing the remainder by the
beginning value. The Investment Manager has waived the management fee for
Series K and P, and in the absence of such waiver, the performance quoted would
be reduced. Performance information is not yet available for Series X.
The aggregate total return on an investment made in shares of Series A
calculated as described above for the period from June 30, 1987 to June 30,
1997 was 257.8%.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), or other unmanaged indices so
that investors may compare a Series' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Series. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Such mutual fund rating services include the following: Lipper Analytical
Services; Morningstar, Inc.; Investment Company Data; Schabacker Investment
Management; Wiesenberger Investment Companies Service; Computer Directions
Advisory (CDA); and Johnson's Charts.
Quotations of average annual total return or total return for the Fund
will not take into account charges and deductions against the Separate Accounts
to which the Fund shares are sold or charges and deductions against the
Contracts issued by Security Benefit Life Insurance Company. Performance
information for any Series reflects only the performance of a hypothetical
investment in the Series during the particular time period on which the
calculations are based. Performance information should be considered in light
of the Series' investment objectives and policies, characteristics and quality
of the portfolios and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended
December 31, 1996, which are contained in the Annual Report of SBL Fund, the
unaudited financial statements of the Fund, which are contained in the Fund's
June 30, 1997 Semiannual Report, and the unaudited financial statements of
Series V for the period
69
<PAGE> 115
May 1, 1997 (date of inception) to August 31, 1997, are incorporated herein by
reference. Copies of the Annual Report, Semiannual Report and the unaudited
financial Statements of Series V are provided to every person requesting a copy
of the Statement of Additional Information.
70
<PAGE> 116
APPENDIX
DESCRIPTION OF SHORT-TERM INSTRUMENTS
U.S. GOVERNMENT SECURITIES. Federal agency securities are debt
obligations which principally result from lending programs of the U.S.
Government. Housing and agriculture have traditionally been the principal
beneficiaries of federal credit programs, and agencies involved in providing
credit to agriculture and housing account for the bulk of the outstanding
agency securities.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one
year. Three-month bills are currently offered by the Treasury on a 13-week
cycle and are auctioned each week by the Treasury. Bills are issued in bearer
form only and are sold only on a discount basis, and the difference between the
purchase price and the maturity value (or the resale price if they are sold
before maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the
bearer of the receipt on the date specified on the certificate.
COMMERCIAL PAPER. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to
nine months. Commercial paper is also sold on a discount basis.
BANKERS' ACCEPTANCES. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a bank
that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred
to by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings
are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of 10 years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has
the highest rating and is regarded as having the greatest capacity for timely
payment. Commercial paper rated A-1 by S&P has the following characteristics.
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
71
<PAGE> 117
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
STANDARD & POOR'S CORPORATION
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
72
<PAGE> 118
SBL FUND
ANNUAL REPORT
DECEMBER 31, 1996
- - Series A
(Growth Series)
- - Series B
(Growth-Income Series)
- - Series C
(Money Market Series)
- - Series D
(Worldwide Equity Series)
- - Series E
(High Grade Income Series)
- - Series J
(Emerging Growth Series)
- - Series K
(Global Aggressive Bond Series)
- - Series M
(Specialized Asset Allocation Series)
- - Series N
(Managed Asset Allocation Series)
- - Series O
(Equity Income Series)
- - Series S
(Social Awareness Series)
[SDI LOGO]
<PAGE> 119
PRESIDENT'S LETTER
February 15, 1997
Dear Contractholder:
1996 was another good year for the portfolios in the SBL Fund. The
equity portfolios in particular performed well, benefiting from the second
outstanding year in a row for the stock markets. The portfolio managers
will provide more detail in the letters that follow about the relative
performance of their respective funds.
The portfolios which are managed by our outside subadvisors produced
very attractive returns as well, with particularly favorable results generated
by the global funds. Only in the domestic fixed income funds were results
somewhat disappointing, as interest rates fluctuated dramatically throughout
the year.
PHENOMENAL EQUITY MARKETS
Looking back at the past two years, the equity markets by any historical
measure have been phenomenal in terms of performance. It is highly unlikely
that 1997 will be a year in which results will approximate either of the
last two years.
However, this is not to suggest that disaster lies around the corner, but
rather that we should lower our expectations more toward historical averages.
The equity markets will continue to be driven by expectations for the level
of interest rates and corporate earnings. If our forecast for continued
moderate inflation proves accurate, we believe interest rates will remain
stable. This will not only allow for a favorable fixed income year, but will
provide a positive backdrop for equity market performance.
Corporate earnings momentum will be dependent primarily on the overall level
of economic growth in the United States. We will watch carefully, as the jury
is still out on whether we can expect another year of slow and sustainable
growth in the 2% to 2.5% range or whether growth will slow dramatically and
impede corporate earnings.
BALANCED BUDGET A POSSIBILITY
Perhaps the most positive item on the horizon for bond investors is
the likelihood of a balanced budget becoming reality. Sentiment is strong on
both sides of the congressional aisle, and since 1997 is not an election year,
the possibility is greater than usual for bipartisan agreement. The promise
of reduced Federal spending lowers the potential for inflation.
The outlook is good for declining global interest rates as inflation drops
in many countries around the world and as the European nations work to
meet criteria for entry into the European Monetary Union. Many of the Pacific
Rim countries are experiencing rapid growth in infrastructure as well as
in corporate expansion, and should contribute positively to our global
portfolios' returns.
1997 A YEAR FOR STEADY GROWTH
All in all, we believe that although 1997 may not be as exciting as the past
two years have been, we will experience the kind of steady growth that helps
all of us to achieve our long-term investment goals. As always, we invite your
comments and questions at any time.
Sincerely,
[JOHN CLELAND]
John Cleland
President, Security Funds
1
<PAGE> 120
SERIES A (GROWTH SERIES)
February 15, 1997
Dear Contractholder:
In 1996, the second of two amazing years in a row for equity security
holders, the Growth Series returned an attractive 22.69%.* This closely
paralleled the 22.95% return of the S&P 500 Index and outperformed its peer
group average of 19.24%.
OUR PLANS EARLY IN THE YEAR
At the beginning of the year we felt that the economy would be slowing, with
a resulting slowdown in corporate profit growth. We concentrated the
portfolio assets largely in high quality companies which displayed consistent
earnings growth, believing that they would outperform in such a climate. For
most of the year the portfolio was invested about 85% in growth issues with the
remaining 15% in value stocks, much as it had been in 1995.
HOW WE IMPLEMENTED THOSE PLANS
Within the growth spectrum, we had a heavy emphasis on health care firms such
as major pharmaceutical companies Merck & Company, Inc. and Bristol-Myers
Squibb Company. These companies have strong new product flows as well as good
growth in their existing products. The outlook for the health care industry
in general is for steady growth in the years to come.
We also owned a number of steady growers like Gillette Company,
Colgate-Palmolive Company, Safeway, Inc., and Microsoft Corporation. Supermarket
chains such as Safeway have little economic sensitivity, and Microsoft was one
of the year's biggest winners with high growth and successful new product
offerings.
[PICTURE OF JOHN CLELAND, TERRY MILBERGER, CHUCK LAUBER]
THE SECURITY MANAGEMENT LARGE CAP TEAM:
JOHN CLELAND, TERRY MILBERGER, CHUCK LAUBER
Throughout the year we placed a low weighting on economically sensitive
stocks in industries such as chemicals, aluminums, and autos. This turned
out to be a prudent decision, as these sectors generally underperformed market
averages. Many of the financial stocks were strong performers, but
unfortunately, this was an area where we were underweighted as well.
Performance in the fourth quarter of 1996 was weaker than the previous three
in the Growth Series. Two issues we owned, Albertson's Inc. and EDS
Systems Corporation, reported disappointing earnings, causing their stock prices
to underperform. These were isolated instances, but they caused us to realize
that it is prudent in times of uncertain earnings to carry a larger-than-normal
number of issues in the portfolio. This will reduce the impact of negative
reports by any one issuer. We currently hold about 20% more names than usual.
2
<PAGE> 121
SERIES A (GROWTH SERIES)
February 15, 1997
THE OUTLOOK FOR 1997
We expect the "slower earnings growth" theme to continue throughout 1997 as
the economy moderates and low inflation continues. Many companies have been
able to expand their profit margins over the last several years. In a slowing
economy they lose the ability to raise prices as competition becomes more
intense, and this in turn causes margins to shrink. We plan to continue our
emphasis on companies with histories of steady earnings growth as we move into
1997, and monitor economic indicators for signs of change.
Sincerely,
Terry Milberger
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year 5 Years 10 Years
Series A 22.7% 15.8% 15.0%
* Performance figures do not reflect fees and expenses associated with
an investment in variable insurance products offered by Security Benefit
Life Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
SERIES A VS. S&P500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
SBL FUND SERIES A S&P 500
<S> <C> <C>
Dec-86 10,000.00 10,000.00
Mar-87 12,515.72 12,132.77
Jun-87 13,191.82 12,738.61
Sep-87 14,130.31 13,579.07
Dec-87 10,630.84 10,519.01
Mar-88 11,248.36 11,021.80
Jun-88 11,932.38 11,753.20
Sep-88 11,561.87 11,790.91
Dec-88 11,710.11 12,151.17
Mar-89 12,841.20 13,010.64
Jun-89 14,209.91 14,157.97
Sep-89 16,447.67 15,671.01
Dec-89 15,796.37 15,989.44
Mar-90 15,183.96 15,505.79
Jun-90 16,078.28 16,477.26
Sep-90 13,214.54 14,223.16
Dec-90 14,241.23 15,491.72
Mar-91 16,747.25 17,734.13
Jun-91 16,747.25 17,694.42
Sep-91 17,743.87 18,637.95
Dec-91 19,383.50 20,188.54
Mar-92 19,619.33 19,681.22
Jun-92 19,361.04 20,057.35
Sep-92 19,401.41 20,532.07
Dec-92 21,540.15 21,560.37
Mar-93 22,633.02 22,495.69
Jun-93 22,386.25 22,604.58
Sep-93 23,752.12 23,186.66
Dec-93 24,493.60 23,720.52
Mar-94 23,653.25 22,828.84
Jun-94 23,257.80 22,926.32
Sep-94 24,404.96 24,048.57
Dec-94 24,088.79 24,044.31
Mar-95 26,301.95 26,379.06
Jun-95 28,801.16 28,889.90
Sep-95 31,033.69 31,181.28
Dec-95 32,944.90 33,052.84
Mar-96 35,357.41 34,826.86
Jun-96 36,892.65 36,383.89
Sep-96 38,340.17 37,503.00
Dec-96 40,418.45 40,624.63
</TABLE>
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series A
(Growth Series) on December 31, 1986, and reflects the fees and expenses of
Series A. On December 31, 1996, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $40,418.
By comparison, the same $10,000 investment would have grown to $40,625 based
on the S&P 500 Index's performance.
3
<PAGE> 122
SERIES B (GROWTH-INCOME SERIES)
February 15, 1997
Dear Contractholder:
The Growth and Income Series provided an attractive 18.25% total return as
the stock markets once again turned in an excellent performance.* Throughout
the year we continued our emphasis on high quality companies with consistent
growth histories in anticipation of an economic slowdown. For most of the year
the equity portion of the portfolio was invested about 75% in growth companies
and 25% in value issues.
STRONG EQUITY PERFORMERS
We continued our emphasis on health care in the equity holdings, with
companies such as Schering-Plough Corporation and Columbia/HCA Healthcare
Corporation. Schering-Plough Corporation is a high quality manufacturer of
pharmaceuticals with a favorable new product outlook and with strong growth in
its existing product lines. Columbia/HCA Healthcare owns and operates
hospitals and health care facilities and is growing through acquisitions.
Columbia's earnings remain strong as they operate in an improving environment
for hospitals in general.
Another growth area in which we continue to remain active is technology.
We place our emphasis on computer services areas of the industry rather than
on hardware because we believe the services can provide consistent growth
with lower product obsolesence risk. Microsoft Corporation and Oracle
Corporation were two companies that performed well during the year, contributing
favorably to overall performance. We steered clear of some of the volatile
computer manufacturers that were experiencing earnings problems.
[PICTURE OF CHUCK LAUBER, TERY MILBERGER,
TOM SWANK, JIM SCHIER AND JOHN CLELAND]
THE SECURITY MANAGEMENT GROWTH-INCOME TEAM:
(L-R) CHUCK LAUBER, TERRY MILBERGER, TOM SWANK,
JIM SCHIER AND (SEATED) JOHN CLELAND
AREAS OF WEAKNESS
Throughout the year we intentionally avoided companies in economically
sensitive sectors such as chemicals, aluminums, and autos. These industries
generally underperformed market averages in 1996. An area in which we were
underweighted but which did perform well was financial stocks. This strong
performance was surprising given the volatility in interest rates.
The bond markets were disappointing in 1996, and consequently the
approximately 20% of the portfolio invested in the fixed income markets
underperformed the equity portion. The high yield bonds provided a boost for
the income stream, however, with coupons generally in the 8.5% to 10% range.
4
<PAGE> 123
SERIES B (GROWTH-INCOME SERIES)
February 15, 1997
THE YEAR AHEAD
Looking ahead to 1997, we believe that the "slower earnings growth" theme
will continue throughout the year as the economy moderates. Many companies
which have been able to improve their profit margins over the past few years
will find it harder to do so in a slowing economy, as competition becomes more
intense and they lose the ability to raise prices. We plan to continue our
emphasis on companies with steady earnings growth, and to keep our
growth/value ratio at approximately 75%/25%, as it is now. Value stocks in
general have lower volatility, and should perform well with the market at its
current high levels.
Sincerely,
Terry Milberger
Portfolio Manager
Tom Swank
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year 5 Years 10 Years
Series B 18.3% 11.7% 13.8%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit
Life Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
SERIES B VS. S&P 500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
BLENDED INDEX OF 80% S&P 500 AND
SBL FUND 20% LEHMAN BROTHERS COMPOSITE
SERIES B S&P 500 BB HIGH YIELD BOND INDEX
<S> <C> <C> <C>
Dec-86 10,000.00 10,000.00 10,000.00
Mar-87 11,684.91 12,132.77 11,835.00
Jun-87 12,147.20 12,738.61 12,297.00
Sep-87 12,783.53 13,579.07 12,912.00
Dec-87 10,367.42 10,519.01 10,608.00
Mar-88 11,264.92 11,021.80 11,211.00
Jun-88 12,116.22 11,753.20 11,866.00
Sep-88 12,043.63 11,790.91 11,965.00
Dec-88 12,365.71 12,151.17 12,331.00
Mar-89 13,270.20 13,010.64 13,033.00
Jun-89 14,366.14 14,157.97 14,068.00
Sep-89 15,525.26 15,671.01 15,330.00
Dec-89 15,878.91 15,989.44 15,602.00
Mar-90 15,595.99 15,505.79 15,253.00
Jun-90 15,977.93 16,477.26 16,144.00
Sep-90 14,730.81 14,223.16 14,177.00
Dec-90 15,173.78 15,491.72 15,228.00
Mar-91 17,200.96 17,734.13 17,302.00
Jun-91 17,561.35 17,694.42 17,455.00
Sep-91 19,373.54 18,637.95 18,342.00
Dec-91 20,899.14 20,188.54 19,741.00
Mar-92 20,727.90 19,681.22 19,544.00
Jun-92 19,918.40 20,057.35 19,902.00
Sep-92 20,917.54 20,532.07 20,559.00
Dec-92 22,213.88 21,560.37 21,436.00
Mar-93 23,142.13 22,495.69 22,382.00
Jun-93 23,382.19 22,604.58 22,660.00
Sep-93 24,296.06 23,186.66 23,274.00
Dec-93 24,345.20 23,720.52 23,832.00
Mar-94 23,624.59 22,828.84 23,004.00
Jun-94 22,781.14 22,926.32 23,050.00
Sep-94 23,617.25 24,048.57 24,059.00
Dec-94 23,617.25 24,044.31 24,072.00
Mar-95 25,147.83 26,379.06 26,255.00
Jun-95 27,328.03 28,889.90 28,618.00
Sep-95 29,306.68 31,181.28 30,593.00
Dec-95 30,718.18 33,052.84 32,225.00
Mar-96 32,663.51 34,826.86 33,642.00
Jun-96 33,758.33 36,383.89 34,916.00
Sep-96 35,185.80 37,503.00 36,020.00
Dec-96 36,324.80 40,624.63 39,962.00
</TABLE>
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series B
(Growth-Income Series) on December 31, 1986, and reflects the fees and
expenses of Series B. On December 31, 1996, the value of the investment
(assuming reinvestment of all dividends and distributions) would have been
$36,325. By comparison, the same $10,000 investment would have grown to
$40,625 based on the S&P 500 Index's performance. The blended index consists
of 80% S&P 500 and 20% Lehman Brothers Composite BB High Yield Bond Index.
The same $10,000 investment in the blended index would have grown to $39,962.
5
<PAGE> 124
SERIES C (MONEY MARKET SERIES)
February 15, 1997
Dear Contractholder:
Money market funds in 1996 became attractive alternatives for fixed-income
investors, outperforming many sectors of the bond market. The Money Market
Series returned 5.07% over the year, becoming the best performing of our
fixed income series and outperforming its Lipper peer group average of 4.81%.*
AVERAGE MATURITY TARGET RANGE
One of our objectives throughout the year was to keep the average maturity
of the portfolio holdings within ten days of that published weekly in
the IBC/Donoghue Money Fund Report. We avoid the practice of skewing the
average maturity strongly, either shorter or longer than the benchmark average,
in order to try to outguess the Federal Reserve Bank and their interest rate
movements. We believe that a more conservative approach is appropriate in our
money market funds.
SECTOR REPRESENTATION IN THE PORTFOLIO
We have been adding blocks of Small Business Administration mortgage pools
with interest rates which reset monthly or quarterly based on the prime rate.
These AAA-rated issues provide better yields than commercial paper, and they are
U.S. Government securities, so there is no additional credit risk in buying
them. The greatest risk with these instruments is that the mortgages will be
prepaid at a faster-than-anticipated rate. For this reason we choose to only
buy issues priced at par, so that no premium will be lost in the event of
escalated prepayments. Our SBA holdings now make up about 16% of the portfolio.
We have also increased our holdings of government agency issues such as
Federal Farm Credit Banks, Federal Home Loan Banks, and Federal National
Mortgage Association securities. These issues, with maturities of one year or
less, provide diversification from the larger position in commercial paper in
the portfolio. The IBC/Donoghue average portfolio position in commercial paper
is about 60%; we have reduced ours from almost 90% to the current 72% in order
to be more in line with that average.
LOOKING AHEAD TO 1997
In 1996 we established an overnight funds account with the Federal Home Loan
Bank in order to maximize our earnings on overnight monies. We continue to
study various investment alternatives for the portfolio assets in order to
provide competitive interest rates on the fund.
We expect interest rates on short-term fixed-income investments to stay within
a narrow band in 1997. When inflation is modest, as it has been for the last
two years, hints of escalating economic growth cause greater fluctuations in
the longer maturities of the bond markets than in the short ones. We continue
to strive to provide a high quality portfolio with a competitive yield for
our shareholders.
Sincerely,
Barbara Davison
Fixed Income Team
Series C is neither insured nor guaranteed by the U.S. Government and does
not maintain a stable net asset value at $1.00 per share.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year 5 Years 10 Years
Series C 5.1% 3.3% 5.3%
* Performance figures do not reflect fees and expenses associated with
an investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through
the purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
6
<PAGE> 125
SERIES D (WORLDWIDE EQUITY SERIES)
February 15, 1997
[LEXINGTON LOGO]
SUBADVISOR, LEXINGTON MANAGEMENT CORPORATION
PORTFOLIO MANAGERS, RICHARD SALER AND ALAN WAPNIK
Dear Contractholder:
The Worldwide Equity Series returned 17.47% during 1996, outperforming its
benchmark, the Morgan Stanley Capital International World index, which advanced
11.72% for the year.* Although it underperformed the strong U.S. market indexes,
the Series did very well when compared with other global portfolios.
GLOBAL AREAS OF STRENGTH
The Series benefited from an underweighting in Japan relative to the benchmark
weighting, as that country's market declined 15.5% in U.S. dollar terms during
the year. European equities as measured by the Morgan Stanley Capital
International Europe Index appreciated 21.1% in 1996, propelled by falling
interest rates and corporate restructuring. As Europe moved closer toward a
single currency, interest rates in Finland, Sweden, and Spain fell dramatically
and their markets responded with stocks rising 35% to 40%. Surprisingly, Italian
interest rates fell almost 4%, yet equities there only gained 12.6%.
THE OUTLOOK FOR EUROPEAN EQUITIES
The outlook for the European stock markets remains favorable. Growth should
continue to be muted by high unemployment levels. Interest rates, however, are
likely to stay low due to budget cutting measures and low inflation. European
companies are finally addressing shareholder concerns regarding competitiveness
and profitability. Companies which have demonstrated a commitment to enhancing
shareholder value through cost cutting, divestitures and share buybacks have
been rewarded with higher share prices. This trend should continue over the next
several years. Growth in Germany and Switzerland is likely to surprise on the
upside as their weak currencies are stimulating exports. Cyclical stocks offer
good value in these markets.
JAPANESE MARKETS IN 1996
As mentioned earlier, in dollar terms Japanese stocks lost 15.5% in 1996. Most
of the decline came in the fourth quarter as austere budget measures heightened
fears of slow growth and weak profits for 1997. Japanese stocks remain
unattractive as both the public and private sectors have been slow to
restructure. A further sharp fall in equities could provide an opportunity as
pressure would increase for restructuring to accelerate. In the Japanese sector
the Series holds primarily "Nifty Fifty" stocks such as Sony Corporation, Canon,
Inc. and Toyota Motor Corporation which are competitive globally; stocks of this
type are the primary ones which the Japanese market rewarded in 1996.
EMERGING MARKETS VARIED WIDELY IN PERFORMANCE
Emerging markets saw great divergence in 1996. Winners included Poland, up 57%,
Hungary, up 104%, and Brazil, up 38%. On the negative side, losers included
Thailand and Korea, which both fell 38%. Currently most emerging markets
7
<PAGE> 126
look very attractive as they have underperformed developed markets for the past
three years. Latin America is enjoying accelerating economic activity which
should positively impact profits. The Asian markets generally remain favorable
due to attractive valuation levels and expected declines in interest rates.
PLANS FOR INVESTING IN 1997
Global equities look appealing under current conditions. The Worldwide Equity
Series remains overweighted in emerging markets such as Malaysia, Philippines,
and Chile due to expectations of falling interest rates, strong profit growth
and relatively low stock prices. European equities are also overweighted with
a focus on value cyclicals and restructuring companies.
We continue to underweight U.S. stocks simply because risk-reward opportunities
look better elsewhere. Given a relatively anemic outlook for U.S. corporate
profits we think the upside is limited while risk remains high. Finally, the
portfolio remains underweighted in Japanese equities with positions primarily in
large world class companies. Further sharp falls could lead to opportunities in
Japanese domestic cyclicals, particularly if private and public sector
restructuring emerges from the ruins.
Sincerely,
Richard Saler
Portfolio Manager
Alan Wapnick
Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
SERIES D VS. MSCIWORLD INDEX AND LEHMAN BROTHERS HIGH YIELD INDEX
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
SBL FUND SERIES D MSCI WORLD INDEX HIGH-YIELD INDEX
<S> <C> <C> <C>
Dec-86 10,000.00 10,000.00 10,000.00
Mar-87 10,499.14 12,265.50 10,708.16
Jun-87 10,043.03 13,002.38 10,543.18
Sep-87 9,753.27 13,808.41 10,302.12
Dec-87 9,409.74 11,676.31 10,499.31
Mar-88 9,919.00 13,044.65 11,085.03
Jun-88 9,872.71 12,934.38 11,349.35
Sep-88 9,861.13 12,989.06 11,550.85
Dec-88 9,872.71 14,472.89 11,814.86
Mar-89 9,837.99 14,813.88 11,955.27
Jun-89 9,884.28 14,624.66 12,390.14
Sep-89 9,657.20 16,339.49 12,207.52
Dec-89 8,995.94 16,961.27 11,913.39
Mar-90 8,210.69 14,548.68 11,716.24
Jun-90 8,279.57 15,744.43 12,210.58
Sep-90 7,651.55 12,890.12 10,962.30
Dec-90 6,951.18 14,159.01 10,770.83
Mar-91 7,511.47 15,571.40 13,000.92
Jun-91 7,283.85 15,064.96 13,959.65
Sep-91 7,696.70 16,148.17 14,942.56
Dec-91 7,837.01 16,845.92 15,745.45
Mar-92 7,636.57 15,491.21 16,909.40
Jun-92 7,756.83 15,792.26 17,374.79
Sep-92 7,393.33 16,078.20 18,050.45
Dec-92 7,637.06 16,060.07 18,225.60
Mar-93 8,449.52 17,461.24 19,332.28
Jun-93 8,876.06 18,543.96 20,146.91
Sep-93 9,497.52 19,437.08 20,566.54
Dec-93 10,046.30 19,774.59 21,346.22
Mar-94 10,127.98 19,918.90 20,930.47
Jun-94 10,311.01 20,540.97 20,860.91
Sep-94 10,687.11 21,006.25 21,189.72
Dec-94 10,320.70 20,878.36 21,128.15
Mar-95 10,218.91 21,882.95 22,389.26
Jun-95 10,503.90 22,845.39 23,751.82
Sep-95 11,071.42 24,150.68 24,422.39
Dec-95 11,441.84 25,328.92 25,179.26
Mar-96 12,203.26 26,390.09 25,624.98
Jun-96 12,882.36 27,185.21 26,049.86
Sep-96 13,068.13 27,579.78 27,092.52
Dec-96 13,440.26 28,873.96 28,039.34
</TABLE>
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series D (Worldwide
Equity Series) on December 31, 1986, and reflects the fees and expenses of
Series D. On December 31, 1996, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $13,440. By
comparison, the same $10,000 investment would have grown to $28,874 based on the
MSCI Index's performance.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
SERIES D MSCI WORLD INDEX
<S> <C> <C>
May-91 10,000.00 10,000.00
Jun-91 9,651.97 9,598.00
Sep-91 10,199.05 10,289.00
Dec-91 10,384.97 10,733.00
Mar-92 10,119.37 9,870.00
Jun-92 10,278.73 10,062.00
Sep-92 9,797.04 10,244.00
Dec-92 10,120.02 10,232.00
Mar-93 11,196.62 11,125.00
Jun-93 11,761.83 11,815.00
Sep-93 12,585.34 12,384.00
Dec-93 13,312.98 12,599.00
Mar-94 13,420.77 12,691.00
Jun-94 13,663.32 13,087.00
Sep-94 14,161.69 13,384.00
Dec-94 13,676.15 13,302.00
Mar-95 13,541.27 13,942.00
Jun-95 13,918.92 14,556.00
Sep-95 14,670.95 15,387.00
Dec-95 15,161.80 16,138.00
Mar-96 16,170.77 16,814.00
Jun-96 17,070.66 17,321.00
Sep-96 17,316.83 17,572.00
Dec-96 17,809.94 18,397.00
</TABLE>
For the period of December 31, 1985 through April 30, 1991, the investment
objective of Series D was to seek high current income by investing primarily in
higher yielding, higher risk debt securities. For this period the Lehman
Brothers High yield index was the appropriate benchmark index. Effective May 1,
1991, the investment objective of Series D was changed to seek long-term growth
of capital primarily through investment in common stocks and equivalents of
companies domiciled in foreign countries and the United States. The appropriate
benchmark index from that date is the Morgan Stanley Capital International World
Index.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year 5 Years 10 Years
Series D 17.5% 11.4% 3.0%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
8
<PAGE> 127
SERIES E (HIGH GRADE INCOME SERIES)
February 15, 1997
Dear Contractholder:
As 1996 began, the average maturity and duration of the High Grade Income Series
was longer than those of the benchmark index, as we anticipated a continuation
of the interest rate declines we had seen in 1995. Instead, the first major
economic release of the year (the January employment figures) was much stronger
than expected and startled bond investors. Fear of impending inflation drove
interest rates higher, and the thirty-year Treasury bond which started 1996 at
5.94% rose to about 7.20% by June. It subsequently settled back down to 6.64% at
the end of the year, but left negative total returns in its wake.
PORTFOLIO ADJUSTMENTS EARLY IN THE YEAR
During February we shortened the average duration of the portfolio to be
closer in line with our benchmark index and our peer group. In addition, we
received approval from the SBL Fund Board of Directors to invest in three new
asset classes, including U.S. dollar-denominated foreign bonds ("Yankee"
bonds), high yield bonds and mortgage-backed securities. Many of these
additions to the portfolio added value throughout the year as the high yield
and mortgage-backed categories both outperformed corporate bonds.
[PHOTO OF ELAINE MILLER, JANE TEDDER, GREG HAMILTON,
JOHN CLELAND, TOM SWANK, STEVE BOWSER]
THE SECURITY MANAGEMENT FIXED-INCOME TEAM:
ELAINE MILLER, JANE TEDDER, GREG HAMILTON,
JOHN CLELAND, TOM SWANK, STEVE BOWSER
The mortgage-backed securities portion of the portfolio, approximately 15% of
the holdings, added defensive value. As interest rates rise, mortgage holders
are less likely to refinance their mortgages, and prepayment risk of
mortgage-backed securities is reduced. We also added some "put bond" issues as a
defensive step. These bonds can be sold ("put") back to the issuing company at a
stated price when interest rates rise above a given level. This reduces their
downside risk and helps stabilize value in a rising interest rate environment.
Some of these bonds were issued by such well-known companies as Coca-Cola
Enterprises, Inc., and Waste Management.
HIGH YIELD HOLDINGS IN THE SECOND HALF OF THE YEAR
In the high yield sector one of our bonds, Marvel Holdings, Inc. declined
substantially in value after the company announced that they were having
earnings and liquidity problems. The volatility with this issue caused us to
revise our strategy for the high yield issues in the
9
<PAGE> 128
SERIES E (HIGH GRADE INCOME SERIES)
February 15, 1997
portfolio. In order to reduce the magnitude of the negative impact any one
issue can have, we will limit the block size of each high yield holding to 1% or
less of the total portfolio, down from about 1.7%. We continue to concentrate on
the higher quality BB-rated companies, and believe that including these bonds in
the portfolio will contribute favorably to performance in the future.
OUTLOOK FOR 1997
We are positive about the outlook for bonds in 1997. Economic growth should
continue at a slow but steady pace, restrained somewhat by slow consumer
spending as individuals concentrate on reducing their debt burdens. The Federal
Reserve Open Market Committee is expected to continue its vigilant stance
against inflation. Aided by falling global inflation and interest rates, we
believe U.S. bond market investors should enjoy a somewhat better year than in
1996.
Sincerely,
Greg Hamilton
Portfolio Manager
SERIES E VS. LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
LEHMAN BROTHERS GOVERNMENT/
SERIES E CORPORATE INDEX
<S> <C> <C>
Dec-86 10,000.00 10,000.00
Mar-87 10,193.77 10,148.80
Jun-87 10,058.97 9,956.31
Sep-87 9,711.50 9,666.38
Dec-87 10,235.69 10,230.32
Mar-88 10,499.39 10,596.94
Jun-88 10,626.36 10,701.40
Sep-88 10,831.47 10,901.70
Dec-88 10,977.97 11,006.58
Mar-89 11,056.11 11,127.97
Jun-89 11,954.66 12,023.02
Sep-89 11,989.06 12,136.03
Dec-89 12,284.31 12,573.89
Mar-90 12,157.77 12,430.15
Jun-90 12,663.91 12,878.25
Sep-90 12,567.63 12,955.54
Dec-90 13,106.73 13,616.59
Mar-91 13,544.74 13,983.33
Jun-91 13,780.60 14,194.99
Sep-91 14,552.30 15,011.76
Dec-91 15,329.54 15,812.32
Mar-92 15,138.22 15,574.73
Jun-92 15,712.18 16,206.93
Sep-92 16,356.74 16,997.83
Dec-92 16,470.60 17,010.33
Mar-93 17,444.66 17,803.01
Jun-93 18,051.88 18,338.16
Sep-93 18,846.41 18,946.08
Dec-93 18,550.25 18,891.55
Mar-94 17,702.16 18,297.37
Jun-94 17,177.15 18,071.18
Sep-94 17,173.92 18,161.53
Dec-94 17,263.84 18,228.42
Mar-95 18,088.07 19,136.79
Jun-95 19,002.21 20,377.49
Sep-95 19,424.63 20,767.52
Dec-95 20,475.47 21,735.39
Mar-96 19,758.99 21,226.69
Jun-96 19,758.99 21,326.38
Sep-96 18,962.89 21,703.70
Dec-96 19,106.19 22,366.99
</TABLE>
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series E (High
Grade Income Series) on December 31, 1986, and reflects the fees and expenses
of Series E. On December 31, 1996, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $19,106. By
comparison, the same $10,000 investment would have grown to $22,367 based on
the Lehman Brothers Government/Corporate Index's performance.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year 5 Years 10 Years
Series E -0.7% 5.8% 7.4%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
10
<PAGE> 129
SERIES J (EMERGING GROWTH SERIES)
February 15, 1997
Dear Contractholder:
In another strong year for stocks, the Emerging Growth Series was up 18.04%, in
line with our benchmark S&P 400 Midcap Growth Index's return of 18.41%, and well
above our Lipper peer group average of 16.34%.* 1996 was an unusual year for
small and midcap stocks, with the largest portion of total returns coming in the
first half of the year. As speculation about the continued upward direction of
equity markets increased, investors became less willing to take the risk of
lower liquidity in the smaller issues. In addition, a growing calendar for
intitial public offerings, most of which involve small-cap companies, increased
supply and hurt performance in the small and midcap sectors.
SECTORS WHICH PERFORMED WELL
The small and midcap markets underperformed their large cap counterparts in the
second half of the year. The technology, interest sensitive, and energy sectors,
however, were especially strong in the second half of the year. We increased the
weighting in the technology issues in the third quarter, adding semiconductor
and semiconductor equipment companies to the personal computer, software, and
networking manufacturers we owned throughout the year. Among our semiconductor
holdings were Altera Corporation (a company which manufactures programmable
logic devices for computers), Linear Technology Corporation (a designer and
manufacturer of analog circuits), and KLA Instruments Corporation (a
manufacturer of products used to identify and correct problems in the
fabrication of integrated circuits).
[PHOTO OF LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS, JOHN CLELAND]
THE SECURITY MANAGEMENT SMALL CAP TEAM:
LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS, JOHN CLELAND
In the energy category, oil service companies performed especially well as oil
and natural gas prices increased. Among our holdings in this sector is Global
Marine Inc., an offshore drilling and oil and gas exploration contractor.
Another prominent name is Tidewater Inc., which provides marine services and
compression products to the international energy industry.
GROWTH IN SAVINGS HELPS CERTAIN FINANCIAL STOCKS
In the interest sensitive sector those companies that provide mutual funds fared
well as investors poured money into various types of funds. We owned stock in
such companies as SunAmerica, Inc., which specializes in retirement savings
products and services, and Franklin Resources, Inc. which operates the Franklin
and Templeton families of mutual funds. With consumers continuing to increase
their interest in investment savings, we believe these companies should continue
to prosper.
11
<PAGE> 130
SERIES J (EMERGING GROWTH SERIES)
February 15, 1997
Among the less rewarding sectors in 1996 was health care. Many companies saw
their share prices decline prior to the fall elections as investors worried
about what steps might be taken to curb medical costs. One of our holdings,
however, did very well. Dura Pharmaceuticals, Inc., acquires drugs from major
manufacturers which sell the drugs in small quantities and thus don't view them
as sales leaders. Dura then focuses attention and sales efforts on these
products, generating profitable sales levels.
LOOKING AHEAD TO 1997
Because of the general underperformance of the small cap and midcap market
sectors in the second half of 1996, we could be positioned to perform well in
1997 on a relative basis. Because valuations of the smaller stocks have not
risen as fast as their larger counterparts, they are now more attractive for
purchase than they were in early 1996. Cash flows into mutual funds should
continue as the growing "baby boomer" group of investors increases savings. A
wild card in the equity markets in general is the possibility of a capital
gains cut, which would be very good for small and midcap stocks in general.
Sincerely,
Cindy Shields
Portfolio Manager
SERIES J VS. S&P MIDCAP
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
SERIES J S&P MIDCAP
<S> <C> <C>
Oct-92 10,000.00 10,000.00
Dec-92 12,470.00 11,174.74
Mar-93 13,040.00 11,540.91
Jun-93 12,980.00 11,810.13
Sep-93 13,811.05 12,404.63
Dec-93 14,171.07 12,735.23
Mar-94 13,191.00 12,252.10
Jun-94 12,110.92 11,805.78
Sep-94 13,267.95 12,605.29
Dec-94 13,448.06 12,280.06
Mar-95 13,858.30 13,284.87
Jun-95 14,708.81 14,443.63
Sep-95 16,489.88 15,853.34
Dec-95 16,069.63 16,079.80
Mar-96 17,270.35 17,069.68
Jun-96 18,611.15 17,561.20
Sep-96 19,073.06 18,072.47
Dec-96 18,969.12 19,167.30
</TABLE>
$10,000 SINCE INCEPTION
The chart above assumes a hypothetical $10,000 investment in Series J (Emerging
Growth Series) on October 1, 1992, and reflects the fees and expenses of Series
J. On December 31, 1996, the value of the investment (assuming reinvestment of
all dividends and distributions) would have been $18,969. By comparison, the
same $10,000 investment would have grown to $19,167 based on the S&P Midcap
Index's performance.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year Since Inception
(10-1-92)
Series J 18.0% 16.2%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
12
<PAGE> 131
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
February 15, 1997
[LEXINGTON LOGO] [MFR LOGO]
SUBADVISORS, MFR ADVISORS, INC., AND LEXINGTON MANAGEMENT CORPORATION
PORTFOLIO MANAGERS, MARIA FIORINI RAMIREZ AND DENIS JAMISON
Dear Contractholder:
1996 was a very rewarding year for our investors, particularly during the second
half. While the first six months provided a total return of 3.91%, the last six
months' strong performance brought the total return of the fund for the year up
to 13.69%.* This compares favorably with the Lehman Brothers Global Bond Index
return of 5.37% for the year, a 0.2% return for a ten-year U.S. Treasury note,
and 10.4% average for the Lipper peer group.
INTERNATIONAL STRENGTH IN THE SECOND HALF
The second half of 1996 saw an acceleration of the trends which began earlier in
the year. Yields in peripheral European countries such as Spain, Italy, and
Portugal, which had fallen approximately 1% in the first half of the year
declined a further 2% in the second half. Restrictive fiscal policies by
these governments brought about by their desire not to be left out of the
European Monetary Union process and combined with rapidly declining inflation to
produce these dramatic declines in yields. While there is still room for this
trend to continue, we believe the majority of this convergence of yields with
"core" Europe is coming to an end.
Emerging market debt also continued its good performance. With the strongest
concentration of economic growth in the world, the credit quality of many
emerging market countries and companies is increasing and should continue on
that path in 1997.
DOLLAR BLOC PERFORMANCE
One of the differences in the second half of 1996 versus the first half is that
the dollar bloc which includes Australia, Canada, New Zealand and the United
States also performed very well. Interest rates which had increased in these
countries in the first half on the back of a poor U.S. market reversed their
upward trend. While longer term rates in the U.S. managed to decline slightly,
yields in the rest of the dollar bloc fell substantially, on the order of 1% to
1.5%. Recognition of the continued trend of low inflation in these countries was
the main contributing factor to the decline in yields.
OUTLOOK FOR 1997
Looking ahead to 1997, we believe that the most rewarding investments will be
those that seek out improving credit quality situations, both on the country and
company level. In particular, the return of strong growth to Latin America
should provide fertile ground for many of these opportunities. We look forward
to the challenges of the new year.
Sincerely,
Maria Fiorini Ramirez
Portfolio Manager
Denis P. Jamison
Portfolio Manager
Investing in foreign countries may involve risks, such as currency
fluctuations and political instability, not associated with investing
exclusively in the U.S.
13
<PAGE> 132
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
February 15, 1997
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year Since Inception
(6-1-95)
Series K 13.7% 13.6%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
SERIES K VS. LEHMAN BROTHERS GLOBAL BOND INDEX
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
SERIES K GLOBAL BOND INDEX
<S> <C> <C>
Jun-95 10,000.00 10,000.00
Jun-95 9,960.00 10,069.00
Jul-95 10,100.00 10,140.49
Aug-95 10,110.00 9,907.26
Sep-95 10,360.00 10,131.16
Oct-95 10,450.00 10,257.80
Nov-95 10,500.00 10,367.56
Dec-95 10,761.06 10,521.00
Jan-96 10,961.12 10,427.36
Feb-96 10,750.53 10,358.54
Mar-96 10,824.24 10,338.86
Apr-96 10,908.47 10,293.37
May-96 11,034.82 10,318.07
Jun-96 11,182.24 10,428.48
Jul-96 11,445.47 10,613.06
Aug-96 11,624.47 10,651.27
Sep-96 11,761.35 10,731.15
Oct-96 11,940.35 10,964.02
Nov-96 12,214.12 11,128.48
Dec-96 12,234.12 11,086.19
</TABLE>
$10,000 SINCE INCEPTION
The chart above assumes a hypothetical $10,000 investment in Series K (Global
Aggressive Bond Series) on June 1, 1995, and reflects the fees and expenses of
Series K. On December 31, 1996, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $12,234. By
comparison, the same $10,000 investment would have grown to $11,086 based on
the Lehman Brothers Global Bond Index's performance.
14
<PAGE> 133
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
February 15, 1997
[MERIDIAN INVESTMENT MANAGEMENT LOGO]
MANAGED BY SECURITY MANAGEMENT COMPANY
RESEARCH PROVIDED BY MERIDIAN INVESTMENT MANAGEMENT CORPORATION AND
TEMPLETON/FRANKLIN INVESTMENT SERVICES, INC.
Dear Contractholder:
The Specialized Asset Allocation Series provided a total return to its
shareholders of 14.24% in 1996.* As you know, in periods of strong equity market
returns asset allocation portfolios will underperform the stock market indexes,
but through their diversity add an element of stability that should reward
shareholders in periods of declining markets. The Series performed well in line
with our internal benchmark index, a blend of 40% S&P 500 Stock Index, 25%
Financial Times World Index (excluding U.S.), 20% Lehman Brothers Aggregate Bond
Index, 10% Wilshire Real Estate Securities Index, and 5% 91-day U.S. Treasury
Bills. This blended index generated a 14.43% return for the year.
RECOMMENDED ALLOCATIONS DURING THE YEAR
At the beginning of 1996 Meridian Investment Management Corporation, the
provider of our asset allocation research services, recommended that the
portfolio be invested 40% in U.S. equities, 35% in international equities, 15%
in U.S. bonds, and 10% in real estate through real estate investment trusts.
This overweighting in foreign stocks and underweighting in bonds versus the
benchmark allocation continued until late in the year, when shifts were made to
an underweighting in U.S. stocks, with bonds moving more in line with the
benchmark. At the close of the year Meridian suggested that appropriate targets
would be 34.80% U.S. equities, 33.40% international equities, 21.75% U.S. bonds,
and 10.05% real estate. They still suggest no allocations to the remaining
available sectors, foreign bonds and gold stocks, and only fractional amounts of
cash.
INTERNATIONAL AND INDUSTRY SECTOR ALLOCATIONS
Within the international sector Meridian recommended late in December that we
increase our exposure in Japan, as that market had fallen low enough that the
valuations were as attractive as they had been in the last five years. They
commented that Japanese companies' earnings relative to their interest rates
were very favorable, and that many issues looked 30% to 40% undervalued. There
also is a very low probability that interest rates in Japan will be increasing
in the near future. Other countries currently represented in the international
sector of the portfolio are Belgium, Germany, Hong Kong, and Italy.
In the U.S. equity portion, eleven industries are represented. The largest
industry weightings are in computers, electronics, machinery, recreation, and
building materials. Other industries include automotive parts, broadcasting,
telecommunications, metals and mining, restaurants, and steel. These allocations
are made purely on a valuation basis; that is, those sectors which appear most
undervalued
15
<PAGE> 134
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
February 15, 1997
according to Meridian's calculations are recommended for appropriate weightings
in the portfolio.
WHAT'S AHEAD FOR 1997
Looking ahead, the investment professionals at Meridian believe that the best
valuations can presently be found outside the United States. Although they don't
fear a dramatic selloff in the U.S., they think that more attractive candidates
exist elsewhere. They also like the U.S. bond market since prices have fallen
there recently, and may be recommending an increase in that area as well.
Sincerely,
Jane Tedder
Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
SERIES M VS. BLENDED INDEX
AND S&P 500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
SERIES M BLENDED INDEX S&P 500
<S> <C> <C> <C>
Jun-95 10,000.00 10,000.00 10,000.00
Jun-95 10,080.00 10,083.00 10,232.00
Jul-95 10,390.00 10,391.00 10,572.00
Aug-95 10,390.00 10,348.00 10,598.00
Sep-95 10,490.00 10,607.00 11,045.00
Oct-95 10,340.00 10,520.00 11,006.00
Nov-95 10,610.00 10,829.00 11,490.00
Dec-95 10,710.00 11,109.00 11,710.00
Jan-96 10,990.00 11,320.00 12,109.00
Feb-96 11,030.00 11,348.00 12,221.00
Mar-96 11,140.00 11,445.00 12,339.00
Apr-96 11,370.00 11,599.00 12,521.00
May-96 11,540.00 11,694.00 12,844.00
Jun-96 11,450.00 11,784.00 12,893.00
Jul-96 11,040.00 11,479.00 12,323.00
Aug-96 11,240.00 11,640.00 12,583.00
Sep-96 11,605.27 12,052.00 13,292.00
Oct-96 11,635.73 12,247.00 13,658.00
Nov-96 12,194.17 12,831.00 14,691.00
Dec-96 12,234.78 12,800.00 14,400.00
</TABLE>
$10,000 SINCE INCEPTION
The chart above assumes a hypothetical $10,000 investment in Series M
(Specialized Asset Allocation Series) on June 1, 1995, and reflects the fees and
expenses of Series M. On December 31, 1996, the value of the investment
(assuming reinvestment of all dividends and distributions) would have been
$12,235. By comparison, the same $10,000 investment would have grown to $14,400
based on the S&P 500 Index's performance. Comparison is also made to a blended
index of 40% S&P500, 25% Financial Times World Index, 20% Lehman Brothers
Aggregate Bond Index, 10% Wilshire Real Estate Securities Index and 5% 91-Day
Treasury Bill Yield. The same $10,000 investment would have grown to $12,800
based on the blended index.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year Since Inception
(6-1-95)
Series M 14.2% 13.6%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
16
<PAGE> 135
SERIES N (MANAGED ASSET ALLOCATION SERIES)
February 15, 1997
[T. ROWE PRICE LOGO]
SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC.
PORTFOLIO MANAGER, NED NOTZON
Dear Contractholder:
1996 was especially kind to stock investors and posted positive total returns
for bonds in some sectors as well. The U.S. stock market climbed to new highs
and the bond market rebounded from its intra-year lows. The Managed Asset
Allocation Series, which is well diversified, posted a solid total return of
12.80% for the year.*
A LOOK AT THE YEAR JUST COMPLETED
The domestic stock market completed another stellar year with the Standard &
Poor's 500 Stock Index, a benchmark for large-cap stocks, returning 22.95% and
smaller stocks represented by the Russell 2000 Index returning 16.55%. Equity
performance was driven by favorable economic growth, moderate inflation, and
rising corporate profits.
During the second quarter the economy registered an annualized growth rate of
4.7%, well above the level considered compatible with moderate inflation, and
long-term Treasury bond yields rose above 7%. Economic growth then slowed to
around 2% in the third quarter, and long-term interest rates ended the year at
6.6%.
Investment grade bonds, represented by the Lehman Brothers Aggregate Bond Index,
returned a modest 3.63% during the year, with corporate bonds outperforming
government and mortgage securities. High yield bonds, which sometimes act more
like stocks than like other bonds, benefited from the economic environment and
contributed strongly to performance throughout the year.
Many foreign markets also experienced interest rate declines, boosting
international bond returns. Even with the dampening effect of a strong U.S.
dollar, which reduced returns in dollar terms, international bonds in major
markets fared almost as well as their domestic counterparts over the last six
months.
PERFORMANCE AND STRATEGY REVIEW
Our investment committee meets monthly to adjust the weightings of stocks,
bonds, and money market securities within the specified ranges for the Series,
based on market conditions and economic fundamentals. The committee left the
sector weightings largely unchanged over the last six months but fine-tuned some
components within the sectors. For example, we added to foreign stock holdings,
and reduced exposure to domestic stocks. We favored growth over value stocks
since the former usually fare better in a moderate to slowing economy.
The committee maintained a minimal weighting in cash equivalents and a slight
overweighting in bonds, reducing foreign bond exposure in some areas as the U.S.
dollar strengthened. We overweighted investment-grade and high yield bonds as we
lightened up on foreign bonds.
We increased our exposure to foreign stocks to about 9.4% of total assets during
the past six months. Most overseas markets did not perform as well as the S&P
500, causing the Series to lag its benchmark for the year. Nevertheless,
absolute performance was strong, and we believe foreign equities offer very
good value at this time and provide greater diversification for the Series.
17
<PAGE> 136
SERIES N (MANAGED ASSET ALLOCATION SERIES)
February 15, 1997
OUTLOOK FOR 1997
We expect the year ahead to repeat 1996's economic pattern, with low
unemployment, barely rising inflation, and moderate growth overall, but varying
from quarter to quarter. Until either growth or inflation deviates from its
current path, we expect long-term Treasury yields to stay between 6% and 7%.
Prospects of a balanced budget in 1997 should increase the likelihood of subdued
inflation over the long term, providing further strength for stocks and bonds.
Although many stocks seem overvalued, we expect the domestic market to make
further progress, but returns could be more restrained than during the past two
years. Overseas, many world economies are expanding as a result of lower
interest rates and stronger corporate earnings. Accordingly, we are hopeful that
international markets can provide solid investment opportunities as well.
Sincerely,
Edmund M. Notzon
Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
SERIES N VS. S&P 500 AND LEHMAN BROTHERS AGGREGATE BOND INDEX
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
SERIES N AGGREGATE BOND INDEX S&P 500
<S> <C> <C> <C>
Jun-95 10,000.00 10,000.00 10,000.00
Jun-95 10,070.00 10,073.00 10,232.00
Jul-95 10,310.00 10,050.84 10,572.00
Aug-95 10,230.00 10,172.45 10,598.00
Sep-95 10,440.00 10,271.13 11,045.00
Oct-95 10,410.00 10,404.65 11,006.00
Nov-95 10,570.00 10,560.72 11,490.00
Dec-95 10,730.00 10,708.57 11,710.00
Jan-96 10,920.00 10,779.25 12,109.00
Feb-96 10,930.00 10,591.69 12,221.00
Mar-96 10,970.00 10,517.55 12,339.00
Apr-96 11,050.00 10,458.65 12,521.00
May-96 11,120.00 10,437.73 12,844.00
Jun-96 11,160.00 10,577.60 12,893.00
Jul-96 10,890.00 10,606.16 12,323.00
Aug-96 11,070.00 10,588.13 12,583.00
Sep-96 11,448.68 10,772.36 13,292.00
Oct-96 11,640.00 11,011.51 13,658.00
Nov-96 12,173.67 11,199.80 14,691.00
Dec-96 12,103.18 11,095.65 14,400.00
</TABLE>
$10,000 SINCE INCEPTION
The chart above assumes a hypothetical $10,000 investment in Series N (Managed
Asset Allocation Series) on June 1, 1995, and reflects the fees and expenses of
Series N. On December 31, 1996, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $12,103. By
comparison, the same $10,000 investment would have grown to $11,096 based on the
Lehman Brothers Aggregate Bond Index's performance and $14,400 based on the S&P
500 Index's performance.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year Since Inception
(6-1-95)
Series N 12.8% 12.8%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
18
<PAGE> 137
SERIES O (EQUITY INCOME SERIES)
February 15, 1997
[T. ROWE PRICE LOGO]
SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC.
PORTFOLIO MANAGER, BRIAN C. ROGERS
Dear Contractholder:
The equity market and your portfolio performance were strong in 1996, reflecting
good corporate earnings, a generally favorable economic and interest rate
environment, and heavy investor demand. For the year as a whole equity returns
were impressive, coming as they did on the heels of considerable strength in
1995. Stocks have now provided six consecutive years of positive returns with
virtually no interim corrections.
PERFORMANCE RESULTS
The Equity Income Series performed well for the year, returning 20.04%.* This
was slightly behind the 22.95% return of the Standard & Poor's 500 Stock Index,
but ahead of the Lipper Equity Income Funds' average of 18.97%, not an uncommon
pattern in strong years like 1996.
PORTFOLIO STRATEGY
While the last twelve months were strong for the broad equity market, they were
challenging for income-oriented investors. Bond and money market returns were
generally in the low-to mid-single-digit range in 1996, with shorter-maturity
securities returning more than their longer counterparts. Two traditional high
yield sectors of the equity market, electric utilities and telephone companies,
were about flat on average for the year, due to their interest rate sensitivity
and concern about the impact of a newly deregulated environment.
Despite poor returns from many traditional yield vehicles, the Series performed
reasonably well due to the continued strength of companies in the financial
(Chase Manhattan Corporation, American Express Company), health care
(Warner-Lambert Company, Eli Lilly & Company), and energy (Exxon Corporation,
Texaco Inc.) sectors. Many of these holdings were purchased when they were out
of favor and inexpensive on a relative valuation basis. We often make investment
decisions based on the tendency of a company's fundamentals and stock price to
regress within historical ranges, and on investor perceptions about the relative
values of these stocks to improve over the intermediate term. This was clearly
the case in 1996 with respect to some of the companies mentioned above.
During the second half of the year, despite a market that had advanced sharply
we were able to find opportunities in companies with higher-than-average
dividend yields, limited risk, and attractive return potential. We recently
initiated new positions in AT&T Corporation, Alltel Corporation, International
Flavors & Fragrances, Inc., ITT Corporation, and Whirlpool Corporation, all fine
companies that have struggled recently due to negative fundamental trends
affecting their businesses, negative investor views of their prospects, or some
combination of these factors.
19
<PAGE> 138
SERIES O (EQUITY INCOME SERIES)
February 15, 1997
SUMMARY AND OUTLOOK
Over the last few years stock prices have appreciated at a much faster rate than
the earnings and dividends of the underlying companies. Because of this
"delinkage," we expect more subdued equity performance in 1997. We are not at
the point of yelling fire in a crowded theater, but simply want to raise the
possibility that the year ahead may not live up to many investors' high
expectations for a continuation of recent trends. Notwithstanding this
cautionary tone, we continue to believe we will find interesting investment
opportunities during the year.
Sincerely,
Brian C. Rogers
Portfolio Manager
SERIES O VS. S&P 500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
SERIES O S&P 500
<S> <C> <C>
Jun-95 10,000.00 10,000.00
Jun-95 10,060.00 10,232.00
Jul-95 10,250.00 10,572.00
Aug-95 10,400.00 10,598.00
Sep-95 10,790.00 11,045.00
Oct-95 10,910.00 11,006.00
Nov-95 11,360.00 11,490.00
Dec-95 11,700.00 11,710.00
Jan-96 12,040.00 12,109.00
Feb-96 12,080.00 12,221.00
Mar-96 12,270.00 12,339.00
Apr-96 12,340.00 12,521.00
May-96 12,550.00 12,844.00
Jun-96 12,630.00 12,893.00
Jul-96 12,270.00 12,323.00
Aug-96 12,540.00 12,583.00
Sep-96 13,082.17 13,292.00
Oct-96 13,372.89 13,658.00
Nov-96 14,154.81 14,691.00
Dec-96 14,044.54 14,400.00
</TABLE>
$10,000 SINCE INCEPTION
The chart above assumes a hypothetical $10,000 investment in Series O (Equity
Income Series) on June 1, 1995, and reflects the fees and expenses of Series O.
On December 31, 1996, the value of the investment (assuming reinvestment of all
dividends and distributions) would have been $14,045. By comparison, the same
$10,000 investment would have grown to $14,400 based on the S&P 500 Index's
performance.
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1996*
1 Year Since Inception
(6-1-95)
Series O 20.0% 23.9%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
20
<PAGE> 139
SERIES S (SOCIAL AWARENESS SERIES)
February 15, 1997
Dear Contractholder:
The Social Awareness Series performed very well in 1996, returning 18.82%*
versus the average in its peer group of 18.71%. Because of its small and midcap
stock orientation, the portfolio underperformed its benchmark, the Domini Social
Index, which returned 23.71% for the year. It is interesting to note that the
largest 20 companies (based on market capitalization) out of the 400 listed in
the Domini index provided over 60% of its total market capitalization in 1996.
AREAS OF STRONG PERFORMANCE
For a good part of the year the portfolio was overweighted in technology-related
issues. In the software area our top holding was Microsoft Corporation, which
returned 88.3% during the year. Networking companies Cisco Systems, Inc. and
3Com Corporation and personal computer manufacturer Compaq Computer Corporation
also made substantial contributions to total return. Another "overachiever" in
this sector was Intel Corporation, which we started purchasing at a price of
about $85 in September; it closed the year at over $130 per share.
In the interest sensitive sector we held such issues as Federal National
Mortgage Association, Finova Group, Inc., and Northern Trust Corporation. This
sector performed surprisingly well, given the volatility of interest rates over
the course of the year. Although energy issues were strong performers, it is
always difficult to own oil issues in a socially-oriented portfolio. We did
participate in the sector's growth, however, by owning gas explorers and
producers such as Anadarko Petroleum Corporation and Apache Corporation.
MORE SOCIAL ISSUES RECEIVING ATTENTION
As social issues take a more prominent part in investment decisions, we like to
keep our shareholders informed about new areas of concern. We note that
according to the Social Investment Forum, at the end of 1995 one dollar out of
every ten dollars invested was directed to funds with some level of social
screening.
In the fall of 1996 the American Medical Association called upon all health care
institutions to divest their portfolios of those companies with exposure to
profits from tobacco products. This very important topic is moving to the
forefront of social investment issues.
Other topics of social importance which are receiving more press coverage are
labor-related. The first of these is the matter of working conditions for
employees of textiles and apparel manufacturing companies overseas the
"sweatshop" issue. The second is on the domestic front, arising most recently in
the General Motors contract negotiations, having to do with outsourcing of
certain jobs and the effect it has on workers. A third topic now drawing more
interest is the increased "corporatization" of business in the U.S. by companies
such as Wal-Mart Stores, making it difficult for small "Mom and Pop" stores to
survive.
21
<PAGE> 140
SERIES S (SOCIAL AWARENESS SERIES)
February 15, 1997
THE OUTLOOK FOR 1997
We believe that 1997 will be an average year for stocks not as strong as the
last two years have been, but rewarding to shareholders nonetheless. In
purchasing issues for the Social Awareness Series, we always look at financial
performance first. If a company can meet our criteria as an investment with
potential value, we then apply our social screens. Even if a company should be
the best social story in the world, we would not add it to the portfolio if we
didn't think it would make money for our shareholders.
Sincerely,
Cindy Shields
Portfolio Manager
SERIES S VS. S&P 500 AND
DOMINI SOCIAL INDEX
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
<TABLE>
<CAPTION>
SERIES S DOMINI SOCIAL INDEX S&P 500
<S> <C> <C> <C>
10,000.00 10,000.00 10,000.00
Jun-91 9,560.00 9,906.93 9,951.00
Sep-91 10,330.00 10,569.63 10,487.00
Dec-91 10,550.00 11,697.27 11,364.00
May-92 11,130.00 11,473.58 11,074.00
Jun-92 10,050.00 11,463.42 11,292.00
Sep-92 10,230.90 12,077.81 11,642.00
Dec-92 12,275.08 13,111.45 12,236.00
Mar-93 12,184.89 13,705.57 12,760.00
Jun-93 12,525.59 13,507.89 12,826.00
Sep-93 13,479.82 13,982.35 13,154.00
Dec-93 13,730.56 14,230.82 13,458.00
Mar-94 13,319.35 13,695.55 12,945.00
Jun-94 12,807.84 13,678.17 12,997.00
Sep-94 13,294.67 14,307.87 13,637.00
Dec-94 13,213.17 14,255.71 13,634.00
Mar-95 13,997.60 15,722.26 14,961.00
Jun-95 15,026.54 17,276.28 16,381.00
Sep-95 16,571.69 18,652.28 17,683.00
Dec-95 16,878.77 19,704.04 18,737.00
Mar-96 18,025.17 20,719.75 19,755.00
Jun-96 19,366.05 21,686.75 20,647.00
Sep-96 20,287.00 22,584.65 21,279.00
Dec-96 20,055.75 24,375.58 23,060.00
</TABLE>
$10,000 SINCE INCEPTION
The chart above assumes a hypothetical $10,000 investment in Series S (Social
Awareness Series) on May 1, 1991, and reflects the fees and expenses of Series
S. On December 31, 1996, the value of the investment (assuming reinvestment of
all dividends and distributions) would have been $20,056. By comparison, the
same $10,000 investment would have grown to $23,060 based on the S&P 500 Index's
performance and $24,376 based on the Domini Social Index.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996*
1 Year 5 Year Since Inception
(5-1-91)
Series S 18.8% 13.7% 13.1%
* Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only through the
purchase of such products.
The performance data quoted above represents past performance. Past performance
is not predictive of future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
22
<PAGE> 141
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES A (GROWTH)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
ADVERTISING - 1.3%
200,000 Omnicom Group, Inc. ................................ $ 9,150,000
AEROSPACE & DEFENSE - 4.4%
101,000 Boeing Company ..................................... 10,743,874
100,000 Lockheed Martin Corporation ........................ 9,150,000
180,000 McDonnell Douglas Corporation ...................... 11,520,000
------------
31,413,874
BANKING & FINANCE - 5.1%
110,000 Banc One Corporation ............................... 4,730,000
200,000 Bank of New York Company, Inc. ..................... 6,750,000
120,000 Chase Manhattan Corporation ........................ 10,710,000
200,000 Northern Trust Corporation ......................... 7,250,000
25,000 Wells Fargo & Company .............................. 6,743,750
------------
36,183,750
CHEMICALS - BASIC - 1.8%
40,000 du Pont (E.I.) de Nemours & Company ................ 3,775,000
225,000 Monsanto Company ................................... 8,746,875
------------
12,521,875
CHEMICALS - SPECIALTY - 2.4%
200,000 Morton International, Inc. ......................... 8,150,000
200,000 Praxair, Inc. ...................................... 9,225,000
------------
17,375,000
COMMUNICATION EQUIPMENT - 1.0%
100,000 U.S. Robotics Corporation* ......................... 7,200,000
COMPUTER SERVICES - 5.5%
150,000 Ceridian Corporation* .............................. 6,075,000
100,000 Computer Sciences Corporation* ..................... 8,212,500
200,000 DST Systems, Inc.* ................................. 6,275,000
150,000 Electronic Data Systems Corporation ................ 6,487,500
200,000 First Data Corporation ............................. 7,300,000
140,000 Fiserv, Inc.* ...................................... 5,145,000
------------
39,495,000
COMPUTER SOFTWARE - 2.5%
70,000 HBO & Company ...................................... 4,156,250
110,000 Microsoft Corporation* ............................. 9,088,750
112,500 Oracle Corporation* ................................ 4,696,875
------------
17,941,875
CONGLOMERATE - 4.7%
160,000 AlliedSignal, Inc. ................................. 10,720,000
400,000 Canadian Pacific Ltd. .............................. 10,600,000
350,000 U.S. Industries, Inc.* ............................. 12,031,250
------------
33,351,250
CONSUMER SERVICES - 1.3%
400,000 ADT, Ltd.* ......................................... $9,150,000
ELECTRICAL MACHINERY & ELECTRONIC COMPONENTS - 3.0%
100,000 General Electric Company ........................... 9,887,500
150,000 Rockwell International Corporation ................. 9,131,250
90,500 Teradyne, Inc.* .................................... 2,205,938
------------
21,224,688
ENTERTAINMENT - 2.8%
240,000 Carnival Corporation (CI. A) ....................... 7,920,000
350,000 International Game Technology ...................... 6,387,500
80,000 The Walt Disney Company ............................ 5,570,000
------------
19,877,500
FERTILIZER - 0.9%
80,000 Potash Corporation of Saskatchewan, Inc. ........... 6,800,000
FINANCIAL SERVICES - 1.9%
45,000 Federal Home Loan Mortgage Corporation ............. 4,955,625
240,000 Federal National Mortgage Association .............. 8,940,000
------------
13,895,625
FOOD & BEVERAGES - 7.0%
170,000 Anheuser-Busch Companies, Inc. ..................... 6,800,000
120,000 CPC International, Inc. ............................ 9,300,000
180,000 ConAgra, Inc. ...................................... 8,955,000
300,000 PepsiCo, Inc. ...................................... 8,775,000
200,000 Sara Lee Corporation ............................... 7,450,000
50,000 Unilever NV ADR .................................... 8,762,500
------------
50,042,500
FURNITURE - 1.2%
250,000 Leggett & Platt, Inc. .............................. 8,656,250
HOSPITAL MANAGEMENT - 1.1%
200,000 Columbia/HCA Healthcare Corporation ................ 8,150,000
HOUSEHOLD PRODUCTS - 3.9%
75,000 Colgate-Palmolive Company .......................... 6,918,750
100,000 Gillette Company ................................... 7,775,000
75,000 Procter & Gamble Company ........................... 8,062,500
100,000 Tupperware Corporation ............................. 5,362,500
------------
28,118,750
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE> 142
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES A (GROWTH) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS VALUE
- --------------------------------------------------------------------------------
INSURANCE - 5.0%
<S> <C> <C>
175,000 Allstate Corporation ............................... $10,128,125
75,000 American International Group, Inc. ................. 8,118,750
210,000 Equitable Companies, Inc. .......................... 5,171,250
35,000 General Re Corporation ............................. 5,521,250
100,000 ITT Hartford Group, Inc. ........................... 6,750,000
------------
35,689,375
MACHINERY - 0.7%
115,000 Deere & Company .................................... 4,671,875
MANUFACTURING - 0.7%
185,000 Pall Corporation ................................... 4,717,500
MEDICAL INSTRUMENTS - 3.9%
300,000 Allegiance Corporation ............................. 8,287,500
200,000 Baxter International, Inc. ......................... 8,200,000
40,000 Becton, Dickson & Company .......................... 1,735,000
110,000 Medtronic, Inc. .................................... 7,480,000
50,000 U.S. Surgical Corporation .......................... 1,968,750
------------
27,671,250
NATURAL GAS - 1.2%
170,000 Coastal Corporation ................................ 8,308,750
OIL & GAS COMPANIES - 3.5%
140,000 Louisana Land & Exploration ........................ 7,507,500
100,000 Noble Affiliates, Inc. ............................. 4,787,500
120,000 Pennzoil Company ................................... 6,780,000
200,000 Union Pacific Resources Group ...................... 5,850,000
------------
24,925,000
OIL & GAS PIPELINES - 1.4%
300,000 MAPCO, Inc. ........................................ 10,200,000
PAINT & ALLIED PRODUCTS - 1.1%
140,000 Sherwin-Williams Company ........................... 7,840,000
PETROLEUM REFINING - 2.6%
80,000 Mobil Corporation .................................. 9,780,000
50,000 Royal Dutch Petroleum Company ADR .................. 8,537,500
------------
18,317,500
PHARMACEUTICALS - 6.6%
100,000 American Home Products Corporation ................. 5,862,500
100,000 Bristol-Myers Squibb Company ....................... 10,875,000
200,000 Elan Corporation PLC ADR* .......................... 6,650,000
120,000 Merck & Company, Inc. .............................. 9,510,000
120,000 Schering-Plough Corporation ........................ 7,770,000
100,000 SmithKline Beecham PLC ADR ......................... 6,800,000
------------
47,467,500
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.1%
100,000 Eastman Kodak Company .............................. $ 8,025,000
PUBLISHING & PRINTING - 2.1%
100,000 Gannett Company, Inc. .............................. 7,487,500
170,000 McGraw-Hill Companies, Inc. ........................ 7,841,250
------------
15,328,750
RESTAURANTS & FOOD SERVICE - 0.9%
325,000 Wendy's International, Inc. ........................ 6,662,500
RETAIL TRADE - 5.7%
235,000 Federated Department Stores, Inc.* ................. 8,019,375
150,000 Officemax, Inc.* ................................... 1,593,750
170,000 Safeway, Inc.* ..................................... 7,267,500
175,000 TJX Companies, Inc. ................................ 8,290,625
350,000 Woolworth Corporation* ............................. 7,656,250
200,000 Walgreens Company .................................. 8,000,000
------------
40,827,500
SEMI-CONDUCTORS - 1.0%
85,000 Linear Technology Corporation ...................... 3,729,375
85,000 Xilinx, Inc.* ...................................... 3,129,063
------------
6,858,438
TELECOMMUNICATIONS - 0.2%
75,000 Frontier Corporation ............................... 1,696,875
TOYS & SPORTING GOODS - 1.0%
250,000 Mattel, Inc. ....................................... 6,937,500
TRANSPORTATION - 1.7%
70,000 Burlington Northern Santa Fe ....................... 6,046,250
100,000 Union Pacific Corporation .......................... 6,012,500
------------
12,058,750
------------
Total common stocks - Series A - 92.2% ............. 658,752,000
COMMERCIAL PAPER
-------------------------
$300,000 Interstate Power Company, 5.48%, 1-9-97 ............ 299,635
$600,000 Bay State Gas Company, 5.53%, 1-13-97 .............. 598,895
------------
Total commercial paper - Series A - 0.1% ........... 898,530
------------
Total investments - Series A - 92.3% ............... 659,650,530
Cash and other assets, less liabilities -
Series A - 7.7% .................................. 54,940,028
------------
Total net assets - Series A - 100.0% ............... $714,590,558
============
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE> 143
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES B (GROWTH-INCOME)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES PREFERRED STOCKS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BANKING AND CREDIT - 0.7%
60,000 First Nationwide Bank, $8.176 ...................... $ 6,870,000
ENTERTAINMENT - 0.4%
3,225 Time Warner, Inc. .................................. 3,502,684
PUBLISHING & PRINTING - 0.3%
30,000 K-III Communications Corporation ................... 2,835,000
RADIO & TELEVISION - 0.5%
53,344 Cablevision Systems Corporation .................... 4,654,264
------------
Total preferred stocks - Series B - 1.9% ........... 17,861,948
CORPORATE BONDS
-------------------------
AIR TRANSPORTATION - 0.5%
$4,125,000 Atlas Air, Inc., 12.25% - 2002 ..................... 4,573,594
AUTOMOTIVE - 0.4%
$3,400,000 Exide Corporation, 10.75% - 2002 ................... 3,570,000
BANKS - 0.2%
Chevy Chase Savings Bank,
$1,000,000 9.25% - 2005 ..................................... 1,020,000
$1,000,000 9.25% - 2008 ..................................... 1,012,500
------------
2,032,500
BUILDING MATERIALS - 0.3%
$2,750,000 Knoll, Inc., 10.875% - 2006 ........................ 3,038,750
CHEMICALS - 0.4%
$3,500,000 Envirodyne Industries, Inc., 12.00% - 2000 ......... 3,723,125
COMMUNICATIONS - 2.8%
$5,300,000 Allbritton Communications Company, 11.50% - 2004 ... 5,618,000
$4,000,000 Century Communications Corporation, 9.50% - 2005 ... 4,100,000
$5,500,000 Comcast Corporation, 9.125% - 2006 ................. 5,623,750
$2,000,000 Granite Broadcasting Corporation, 12.75% - 2002 .... 2,182,500
$3,250,000 Heritage Media Corporation, 8.75% - 2006 ........... 3,136,250
$4,350,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 4,556,625
$2,000,000 Rogers Communications, Inc., 9.125% - 2006 ......... 1,975,000
------------
27,192,125
CONSUMER GOODS & SERVICES - 0.9%
$4,775,000 Semi-Tech Corporation, 0% - 2003(1) ................ 3,139,563
$5,000,000 Westpoint Stevens, Inc., 9.375% - 2005 ............. 5,137,500
------------
8,277,063
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
DIVERSIFIED - 0.9%
$3,500,000 Jordan Industries, Inc., 10.375% - 2003 ............ $ 3,456,250
5,000,000 Sequa Corporation, 9.375% - 2003 ................... 5,050,000
------------
8,506,250
ELECTRIC & GAS COMPANIES - 0.7%
4,500,000 AES Corporation, 10.25% - 2006 ..................... 4,860,000
2,000,000 Cal Energy Company, Inc., 9.50% - 2006 ............. 2,060,000
------------
6,920,000
ENTERTAINMENT - 1.4%
4,100,000 AMF Group, Inc., 10.875% - 2006 .................... 4,325,500
2,000,000 Harrah's Operating Company, Inc., 10.875% - 2002 ... 2,122,500
4,500,000 Showboat, Inc., 9.25% - 2008 ....................... 4,426,875
2,850,000 Station Casinos, Inc., 10.125% - 2006 .............. 2,857,125
------------
13,732,000
FINANCE - 0.8%
4,000,000 Dime Bancorp, Inc., 10.50% - 2005 .................. 4,390,000
1,550,000 Dollar Financial Group, Inc., 10.875% - 2006 ....... 1,596,500
5,000,000 Home Holdings, Inc., 7.75% - 1998 .................. 2,200,000
------------
8,186,500
FOOD & BEVERAGE TRADE - 1.6%
4,250,000 Cott Corporation, 9.375% - 2005 .................... 4,377,500
2,600,000 Delta Beverage Group, 9.75% - 2003 ................. 2,658,500
Southland Corporation,
4,000,000 5.00% - 2003 ..................................... 3,305,000
1,000,000 4.50% - 2004 ..................................... 763,750
4,000,000 TLC Beatrice International Holdings, Inc.,
11.50% - 2005 .................................... 4,240,000
------------
15,344,750
HOSPITAL MANAGEMENT - 1.0%
4,000,000 Regency Health Services, Inc., 9.875% - 2002 ....... 4,050,000
4,750,000 Tenet Healthcare Corporation, 10.125% - 2005 ....... 5,242,813
------------
9,292,813
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE> 144
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES B (GROWTH-INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HOTEL & RECREATION - 0.4%
$4,000,000 Four Seasons Hotels, Inc., 9.125% - 2000 ........... $ 4,085,000
INDUSTRIAL PRODUCT - 0.4%
3,275,000 Shop Vac Corporation, 10.625% - 2003 ............... 3,446,938
MANUFACTURING - 0.7%
2,100,000 Pillowtex Corporation, 10.00% - 2006 ............... 2,184,000
4,000,000 Schuller International Group, Inc., 10.875% - 2004 . 4,460,000
------------
6,644,000
MEDICAL EQUIPMENT - 0.3%
2,450,000 Maxxim Medical, Inc., 10.50% - 2006 ................ 2,560,250
OIL & GAS COMPANIES - 0.5%
4,800,000 Seagull Energy Corporation, 8.625% - 2005 .......... 4,980,000
PLASTIC PRODUCTS - 0.2%
2,000,000 Plastic Containers, Inc., 10.00% - 2006 ............ 2,065,000
PUBLISHING & PRINTING - 0.7%
3,500,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 3,158,750
3,250,000 K-III Communications Corporation, 10.625% - 2002 ... 3,412,500
------------
6,571,250
REAL ESTATE - 0.3%
3,100,000 BF Saul REIT, 11.625% - 2002 ....................... 3,332,500
REFINERY - 0.4%
3,665,000 Crown Central Petroleum Corporation, 10.875% - 2005. 3,742,881
RESTAURANTS - 0.5%
4,800,000 Carrols Corporation, 11.50% - 2003 ................. 5,100,000
STEEL & METAL PRODUCTS - 0.2%
1,400,000 AK Steel Corporation, 9.125% - 2006 ................ 1,438,500
TOBACCO PRODUCTS - 0.5%
4,300,000 Dimon, Inc., 8.875% - 2006 ......................... 4,498,875
TRANSPORTATION - 0.4%
4,000,000 Teekay Shipping Corporation, 8.32% - 2008 .......... 4,000,000
------------
Total corporate bonds - Series B - 17.4% ........... 166,854,664
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ADVERTISING - 1.3%
280,000 Omnicom Group, Inc. ................................ $ 12,810,000
AEROSPACE & DEFENSE - 4.1%
110,000 Boeing Company ..................................... 11,701,250
150,000 Lockheed Martin Corporation ........................ 13,725,000
220,000 McDonnell Douglas Corporation ...................... 14,080,000
------------
39,506,250
BANKING & FINANCE - 4.9%
160,000 Banc One Corporation ............................... 6,880,000
250,000 Bank of New York Company, Inc. ..................... 8,437,500
150,000 Chase Manhattan Corporation ........................ 13,387,500
225,000 Northern Trust Corporation ......................... 8,156,250
35,000 Wells Fargo & Company .............................. 9,441,250
------------
46,302,500
CHEMICALS - BASIC - 1.6%
40,000 du Pont (E.I.) de Nemours & Company ................ 3,775,000
300,000 Monsanto Company ................................... 11,662,500
------------
15,437,500
CHEMICALS - SPECIALTY - 2.4%
230,000 Morton International, Inc. ......................... 9,372,500
300,000 Praxair, Inc. ...................................... 13,837,500
------------
23,210,000
COMMUNICATION EQUIPMENT - 0.9%
120,000 U.S. Robotics Corporation* ......................... 8,640,000
COMPUTER SERVICES - 3.3%
210,000 Ceridian Corporation* .............................. 8,505,000
60,000 Computer Sciences Corporation* ..................... 4,927,500
230,000 Electronic Data Systems Corporation ................ 9,947,500
220,000 First Data Corporation ............................. 8,030,000
------------
31,410,000
COMPUTER SOFTWARE - 3.0%
100,000 HBO & Company ...................................... 5,937,500
200,000 Microsoft Corporation* ............................. 16,525,000
150,000 Oracle Corporation* ................................ 6,262,500
------------
28,725,000
CONGLOMERATE - 2.8%
200,000 AlliedSignal, Inc. ................................. 13,400,000
500,000 Canadian Pacific, Ltd. ............................. 13,250,000
------------
26,650,000
CONSUMER SERVICES - 1.2%
500,000 ADT, Ltd.* ......................................... 11,437,500
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE> 145
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES B (GROWTH-INCOME) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
ELECTRICAL MACHINERY & ELECTRONIC COMPONENTS - 2.4%
140,000 General Electric Company ........................... $13,842,500
150,000 Rockwell International Corporation ................. 9,131,250
------------
22,973,750
ENTERTAINMENT - 2.1%
400,000 International Game Technology ...................... 7,300,000
180,000 The Walt Disney Company ............................ 12,532,500
------------
19,832,500
FERTILIZER - 0.9%
100,000 Potash Corporation of Saskatchewan, Inc. ........... 8,500,000
FINANCIAL SERVICES - 1.8%
50,000 Federal Home Loan Mortgage Corporation ............. 5,506,250
300,000 Federal National Mortgage Association .............. 11,175,000
------------
16,681,250
FOOD & BEVERAGES - 6.8%
220,000 Anheuser-Busch Companies, Inc. ..................... 8,800,000
150,000 CPC International, Inc. ............................ 11,625,000
280,000 Coca-Cola Company .................................. 14,735,000
200,000 ConAgra, Inc. ...................................... 9,950,000
300,000 Sara Lee Corporation ............................... 11,175,000
50,000 Unilever NV ADR .................................... 8,762,500
------------
65,047,500
HOSPITAL MANAGEMENT - 1.3%
300,000 Columbia/HCA Healthcare Corporation ................ 12,225,000
HOUSEHOLD PRODUCTS - 4.0%
75,000 Colgate-Palmolive Company .......................... 6,918,750
200,000 Gillette Company ................................... 15,550,000
150,000 Procter & Gamble Company ........................... 16,125,000
------------
38,593,750
INSURANCE - 3.2%
175,000 Allstate Corporation ............................... 10,128,125
230,000 Equitable Companies, Inc. .......................... 5,663,750
40,000 General Re Corporation ............................. 6,310,000
120,000 ITT Hartford Group, Inc. ........................... 8,100,000
------------
30,201,875
MACHINERY - 0.5%
125,000 Deere & Company .................................... 5,078,125
MANUFACTURING - 0.5%
200,000 Pall Corporation ................................... 5,100,000
MEDICAL INSTRUMENTS - 2.2%
250,000 Baxter International, Inc. ......................... $10,250,000
40,000 Becton, Dickinson & Company ........................ 1,735,000
135,000 Medtronic, Inc. .................................... 9,180,000
------------
21,165,000
NATURAL GAS - 2.6%
225,000 Coastal Corporation ................................ 10,996,875
280,000 El Paso Natural Gas Company ........................ 14,140,000
------------
25,136,875
OIL & GAS COMPANIES - 1.1%
60,000 Pennzoil Company ................................... 3,390,000
250,004 Union Pacific Resources Group ...................... 7,312,617
------------
10,702,617
OIL & GAS PIPELINES - 1.2%
340,000 MAPCO, Inc. ........................................ 11,560,000
PETROLEUM REFINING - 1.3%
100,000 Mobil Corporation .................................. 12,225,000
PHARMACEUTICALS - 6.6%
150,000 American Home Products Corporation ................. 8,793,750
125,000 Bristol-Myers Squibb Company ....................... 13,593,750
200,000 Elan Corporation PLC ADR* .......................... 6,650,000
175,000 Merck & Company, Inc. .............................. 13,868,750
150,000 Schering-Plough Corporation ........................ 9,712,500
150,000 SmithKline Beecham PLC ADR ......................... 10,200,000
------------
62,818,750
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.1%
125,000 Eastman Kodak Company .............................. 10,031,250
PUBLISHING & PRINTING - 1.7%
100,000 Gannett Company, Inc. .............................. 7,487,500
200,000 McGraw-Hill Companies, Inc. ........................ 9,225,000
------------
16,712,500
RESTAURANTS & FOOD SERVICE - 1.2%
40,000 McDonald's Corporation ............................. 1,810,000
450,000 Wendy's International, Inc. ........................ 9,225,000
------------
11,035,000
RETAIL TRADE - 2.6%
330,000 Federated Department Stores, Inc.* ................. 11,261,250
80,000 TJX Companies, Inc.* ............................... 3,790,000
450,000 Woolworth Corporation* ............................. 9,843,750
------------
24,895,000
TELECOMMUNICATIONS - 0.2%
90,000 Frontier Corporation ............................... 2,036,250
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE> 146
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES B (GROWTH-INCOME)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES PREFERRED STOCKS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TOYS & SPORTING GOODS - 1.0%
360,000 Mattel, Inc. ....................................... $9,990,000
TRANSPORTATION - 1.6%
110,000 Burlington Northern Santa Fe ....................... 9,501,250
100,000 Union Pacific Corporation .......................... 6,012,500
------------
15,513,750
------------
Total common stocks - Series B - 73.4% ............. 702,184,492
COMMERCIAL PAPER
------------------------------
$1,000,000 General Electric Capital Corporation,
5.325%, 1-06-97 .................................. 999,260
$500,000 Interstate Power Company, 5.475%, 1-08-97 .......... 499,468
$1,000,000 International Lease Finance Corporation,
5.625%, 1-06-97 .................................. 499,609
5.675%, 1-06-97 .................................. 499,606
------------
999,215
$600,000 McCormick & Company, Inc., 5.475%, 1-10-97 ......... 599,179
$1,600,000 Northern Illinois Gas Company, 5.295%, 1-16-97 ..... 1,596,470
$6,118,000 The Walt Disney Company,
5.425%, 1-24-97 .................................. 269,064
5.275%, 1-27-97 .................................. 896,571
5.285%, 1-27-97 .................................. 1,195,420
5.315%, 1-27-97 .................................. 944,361
5.325%, 1-27-97 .................................. 896,539
5.425%, 1-27-97 .................................. 1,892,556
------------
6,094,511
------------
Total commercial paper - Series B - 1.1% ........... 10,788,103
------------
Total investments - Series B - 93.8% ............... 897,689,207
Cash and other assets, less liabilities -
Series B - 6.2% .................................. 58,897,100
------------
Total net assets - Series B - 100.0% ............... $956,586,307
============
SERIES C (MONEY MARKET)
COMMERCIAL PAPER
-----------------------------------
BROKERAGE - 2.9%
$3,771,000 Merrill Lynch & Company
6.60%, 1-02-97 ................................... $199,963
5.48%, 1-07-97 ................................... 199,817
5.62%, 1-09-97 ................................... 199,750
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BROKERAGE, CONTINUED
5.35%, 1-13-97 ................................... $997,800
5.67%, 1-14-97 ................................... 199,591
5.34%, 1-15-97 ................................... 120,694
5.65%, 1-17-97 ................................... 99,749
5.59%, 2-18-97 ................................... 992,090
5.34%, 2-25-97 ................................... 396,440
5.36%, 2-26-97 ................................... 346,829
------------
3,752,723
BUSINESS SERVICES - 7.0%
$3,500,000 A1 Credit Corporation, 5.30%, 1-13-97 .............. 3,492,300
5,500,000 General Electric Capital Corporation,
5.30%, 1-09-97 ................................... 1,497,720
5.38%, 1-27-97 ................................... 3,984,458
------------
8,974,478
CHEMICALS - BASIC - 5.2%
6,700,000 du Pont (E.I.) de Nemours & Company, 5.27%, 1-10-97. 6,688,676
COMPUTER SYSTEMS - 4.7%
6,000,000 International Business Machines Corporation,
5.30%, 1-23-97 ................................... 996,140
5.30%, 1-28-97 ................................... 4,976,800
------------
5,972,940
ELECTRIC UTILITIES - 14.4%
2,530,000 Carolina Power & Light Company,
5.30%, 2-14-97 ................................... 1,518,800
5.38%, 2-20-97 ................................... 991,720
3,000,000 Florida Power Corporation, 5.54%, 1-8-97 ........... 2,996,768
6,650,000 Interstate Power Company,
5.33%, 1-08-97 ................................... 5,793,989
5.43%, 1-14-97 ................................... 99,804
5.45%, 2-04-97 ................................... 746,140
331,000 Massachusetts Electric Company, 6.05%, 1-03-97 ..... 330,889
3,100,000 Progress Capital Holdings, Inc., 5.53%, 1-07-97 .... 3,097,143
3,000,000 Southern California Edison Company, 5.30%, 1-13-97 . 2,993,370
------------
18,568,623
ELECTRONICS - 5.1%
6,600,000 Avnet, Inc.,
5.42%, 1-06-97 ................................... 2,997,741
5.35%, 1-31-97 ................................... 2,289,726
5.40%, 1-31-97 ................................... 597,320
5.45%, 2-21-97 ................................... 694,092
------------
6,578,879
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE> 147
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES C (MONEY MARKET) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ENGINEERING - 0.2%
$300,000 Fluor Corporation, 5.37%, 1-29-97 .................. $298,747
ENTERTAINMENT - 0.9%
1,200,000 The Walt Disney Company, 5.28%, 1-27-97 ............ 1,194,660
FINANCIAL SERVICES - 1.3%
1,623,000 Toyota Motor Credit Corporation,
5.28%, 1-03-97 ................................... 999,490
5.53%, 1-03-97 ................................... 622,809
------------
1,622,299
FOOD PROCESSING - 0.6%
800,000 McCormick & Company, Inc.,
5.31%, 1-10-97 ................................... 99,830
5.47%, 1-10-97 ................................... 699,042
------------
798,872
INDUSTRIAL SERVICES - 0.8%
1,000,000 PPG Industries, Inc., 5.32%, 2-10-97 ............... 994,089
LEASING - 4.6%
6,000,000 International Lease Finance Corporation,
5.30%, 1-23-97 ................................... 5,976,840
NATURAL GAS - 5.2%
700,000 Laclede Gas Company, 5.37%, 1-07-97 ................ 699,374
6,020,000 Northern Illinois Gas Company,
5.52%, 1-03-97 ................................... 899,724
5.30%, 1-16-97 ................................... 4,089,053
5.34%, 1-29-97 ................................... 1,015,764
------------
6,703,915
POLLUTION CONTROL - 4.9%
6,380,000 Engelhard Corporation,
5.32%, 2-14-97 ................................... 5,936,226
5.55%, 2-24-97 ................................... 396,428
------------
6,332,654
RETAIL - GROCERY - 3.8%
4,900,000 Winn-Dixie Stores, Inc., 5.30%, 1-14-97 ............ 4,889,180
TELECOMMUNICATIONS - 0.8%
1,000,000 Ameritech Corporation, 5.27%, 1-17-97 .............. 997,100
TOBACCO - 3.7%
$1,000,000 B.A.T. Capital Corporation, 5.45%, 1-17-97 ......... $997,578
3,775,000 Philip Morris Companies, Inc.,
5.30%, 1-14-97 ................................... 2,992,860
5.53%, 1-14-97 ................................... 773,454
------------
4,763,892
WASTE - 5.8%
7,500,000 WMX Technologies, Inc., 5.40%, 1-24-97 ............. 7,469,850
------------
Total commercial paper - Series C - 71.9% .......... 92,578,417
U.S. GOVERNMENT AND GOVERNMENT AGENCY SECURITIES
------------------------------------------------
FEDERAL FARM CREDIT BANKS - 2.3%
3,000,000 4.95%, 3-03-97 ................................... 2,997,510
FEDERAL HOME LOAN MORTGAGE - 2.3%
3,000,000 5.63%, 12-17-97 .................................. 2,996,010
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 6.3%
8,000,000 4.97%, 3-10-97 ................................... 7,993,200
SBA POOLS - 16.0%
601,967 6.0%, 2006(3) .................................... 601,967
816,454 6.25%, 2012(3) ................................... 816,454
200,201 6.0%, 2018(3) .................................... 200,201
901,880 5.875%, 2020(3) .................................. 906,389
3,264,711 5.75%, 2021(3) ................................... 3,250,938
1,993,677 5.75%, 2021(3) ................................... 1,986,200
1,952,530 5.75%, 2021(4) ................................... 1,942,767
1,978,435 5.75%, 2021(4) ................................... 1,968,543
1,483,826 5.75%, 2021(3) ................................... 1,483,826
2,042,864 5.875%, 2021(3) .................................. 2,042,864
5,375,030 5.875%, 2021(3) .................................. 5,375,030
------------
20,575,179
------------
Total U.S. government & government agency
securities - Series C - 26.9% .................... 34,561,899
------------
Total investments - Series C - 98.8% ............... 127,140,316
Cash & other assets, liabilities - Series C - 1.2% . 1,531,797
------------
Total net assets - Series C - 100.0% ............... $128,672,113
============
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE> 148
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES D (WORLDWIDE EQUITY)
NUMBER MARKET
OF SHARES COMMON STOCK VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA - 1.2%
578,350 QBE Insurance Group, Ltd. .......................... $3,045,536
AUSTRIA - 1.2%
15,800 Wienerberger Baustoffindstrie AG ................... 3,061,016
BELGIUM - 1.0%
27,400 Credit Communal Holding/Dexia* ..................... 2,497,223
BRAZIL - 0.8%
226,200 Aracruz Celulose S.A. ADR .......................... 1,866,150
CANADA - 1.4%
89,800 Jetform Corporation* ............................... 1,627,625
273,800 Noranda Forest, Inc. ............................... 1,857,757
------------
3,485,382
CHILE - 2.2%
249,000 Antofagasta Holdings PLC ........................... 1,448,787
154,100 Banco Santander ADR ................................ 2,311,500
116,500 Maderas y Sinteticos Sociedad Anonima S.A. ADR ..... 1,631,000
------------
5,391,287
FINLAND - 1.0%
146,400 Valmet Corporation ................................. 2,553,815
FRANCE - 5.7%
32,300 Alcatel Alsthom .................................... 2,589,598
57,500 Elf Aquitaine S.A. ADR ............................. 2,601,875
59,900 Lafarge ............................................ 3,586,808
20,660 SGS-Thomson Microelectronics N.V.* ................. 1,458,473
33,460 Sidel .............................................. 2,297,716
13,860 Societe Generale de Surveillance Holding S.A. "B" .. 1,495,644
------------
14,030,114
GERMANY - 3.3%
90,400 Continental AG ..................................... 1,624,856
29,500 Daimler-Benz AG* ................................... 2,029,058
51,500 Deutsche Bank AG ................................... 2,402,718
44,500 Hoechst AG ......................................... 2,099,235
------------
8,155,867
GREECE - 1.3%
27,200 Ergo Bank S.A. ..................................... 1,378,687
109,400 Hellenic Tellecommunication Organization S.A. ...... 1,869,080
------------
3,247,767
HONG KONG - 4.1%
464,000 Citic Pacific, Ltd. ................................ $2,693,421
3,623,000 Guangdong Investments .............................. 3,489,511
2,628,000 National Mutual Asia, Ltd. ......................... 2,497,196
854,000 Peregrine Investment Holdings, Ltd. ................ 1,462,897
------------
10,143,025
HUNGARY - 0.8%
30,800 Pick Szeged Rt. .................................... 1,823,421
INDONESIA - 1.1%
415,500 PT Semen Clbinong .................................. 1,169,555
803,500 PT Tambang Timah ................................... 1,462,455
------------
2,632,010
IRELAND - 2.8%
330,400 Allied Irish Banks PLC ............................. 2,214,457
1,530,800 Jefferson Smurfit Group ............................ 4,650,664
------------
6,865,121
ITALY - 2.6%
62,500 Bulgari SpA ........................................ 1,266,031
277,200 Istituto Mobillare Italiano SpA .................... 2,359,071
591,900 Stet Societa' Finanziarla Telefonica SpA ........... 2,683,306
------------
6,308,408
JAPAN - 8.2%
39,810 Amway Japan, Ltd. .................................. 1,275,896
67,000 Canon, Inc. ........................................ 1,477,729
173,000 Citizen Watch Company, Ltd. ........................ 1,237,098
900 H.I.S. Company, Ltd. ............................... 43,422
20,500 Maruco Company, Ltd. ............................... 687,042
112,000 Matsushita Electric Industrial Company, Ltd. ....... 1,823,727
79,000 Nitto Denko Corporation ............................ 1,157,060
113,000 Nomura Securities Company, Ltd. .................... 1,693,978
73 NTT Data Communications Systems Corporation ........ 2,132,075
139,000 Sodick ............................................. 1,149,651
39,300 Sony Corporation ................................... 2,569,889
64,000 Tokyo Electron, Ltd. ............................... 1,957,439
71,000 Toyota Motor Corporation ........................... 2,036,960
119,000 Yamato Kogyo Company, Ltd. ......................... 1,097,010
------------
20,338,976
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE> 149
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCK (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA - 4.6%
270,000 Araab Malaysian Finance Bhd ........................ $1,507,421
28,000 Berjaya Sports Toto Bhd ............................ 139,695
261,000 Hong Leong Credit Bhd .............................. 1,643,195
966,000 Magnum Corporation Bhd ............................. 1,874,238
1,026,000 MBF Capital Bhd .................................... 1,665,646
520,000 Sime Darby Bhd ..................................... 2,048,698
625,000 Tanjong PLC ........................................ 2,499,499
------------
11,378,392
MEXICO - 1.0%
150,500 Tubos De Acero De Mexico S.A. ADR* ................. 2,389,187
NETHERLANDS - 0.7%
41,140 Philips Electronics N.V. ........................... 1,664,877
NEW ZEALAND - 3.2%
1,765,300 Brierley Investments, Ltd. ......................... 1,633,893
925,900 Carter Holt Harvey, Ltd. ........................... 2,099,920
360,000 Fisher & Paykel Industries, Ltd. ................... 1,411,657
908,900 Fletcher Challenge Building ........................ 2,793,438
------------
7,938,908
NORWAY - 2.0%
352,200 Fokus Banken AS .................................... 2,415,888
145,300 Saga Petroleum AS .................................. 2,434,797
------------
4,850,685
PHILIPPINES - 1.9%
3,871,150 C & P Homes, Inc. .................................. 1,987,092
2,639,000 Filinvest Land, Inc.* .............................. 822,806
242,000 Manilla Electric Company "B" ....................... 1,978,327
------------
4,788,225
POLAND - 1.8%
48,500 Debica S.A. ........................................ 1,085,119
103,533 Elektrim Towarzystwo Handlowe S.A. ................. 941,040
42,146 Wedel S.A. ......................................... 2,077,453
8,241 Zaklady Piwowarski w Zywcu S.A. .................... 383,166
------------
4,486,778
PORTUGAL - 0.8%
30,500 Telecel-Comunicacaoes Pessoais, S.A.* .............. 1,944,927
RUSSIA - 1.0%
53,500 Lukoil Holdings of Russia ADR ...................... 2,492,030
SINGAPORE - 4.0%
216,000 City Developments, Ltd. ............................ $1,945,641
450,000 Clipsal Industries, Ltd. ........................... 1,638,000
540,000 DBS Land, Ltd. ..................................... 1,988,106
477,000 Inchape Bhd. ....................................... 1,657,269
438,000 Jardine Strategic Holdings ......................... 1,585,560
410,000 Want Want Holdings* ................................ 1,078,300
------------
9,892,876
SPAIN - 2.7%
10,800 Banco Popular Espanol S.A. ......................... 2,117,240
39,800 Banc Santander S.A. ................................ 2,542,671
54,600 Repsol S.A. ........................................ 2,090,394
------------
6,750,305
SWEDEN - 1.6%
23,100 Astra AB ........................................... 1,140,110
163,500 Skandinaviska Enskilda Banken ...................... 1,676,180
41,600 Svenska Handelsbanken .............................. 1,194,137
------------
4,010,427
SWITZERLAND - 3.9%
1,560 ABB AG ............................................. 1,934,430
2,870 Nestle S.A. ........................................ 3,071,517
372 Roche Holdings AG .................................. 2,885,469
2,950 Winterthur Schweizerische
Versicherungs - Gesellschaft ..................... 1,700,502
------------
9,591,918
THAILAND - 0.4%
95,000 BEC World Public Company, Ltd.* .................... 859,593
81,500 Property Perfect Public Company, Ltd. .............. 84,233
------------
943,826
UNITED KINGDOM - 8.1%
1,422,000 Aegis Group PLC .................................... 1,484,416
307,800 British Telecommunications PLC ..................... 2,077,982
211,900 D.F.S. Furniture Company PLC ....................... 2,188,439
678,900 Grand Metropolitan PLC ............................. 5,332,669
131,800 RTZ Corporation PLC ................................ 2,112,270
11,200 SmithKline Beecham PLC ADR ......................... 761,600
913,100 Tomkins PLC ........................................ 4,195,549
463,600 Vodafone Group PLC ................................. 1,955,629
------------
20,108,554
UNITED STATES - 18.2%
16,600 Abbott Laboratories ................................ 842,450
17,000 Ace, Ltd. .......................................... 1,022,125
13,500 AlliedSignal, Inc. ................................. 904,500
8,100 American International Group ....................... 876,825
15,100 Aon Corporation .................................... 938,087
24,800 Avery-Dennison Corporation ......................... 877,300
19,800 Becton, Dickinson & Company ........................ 858,825
10,100 Boeing Company ..................................... 1,074,387
25,300 Borders Group, Inc*. ............................... 907,638
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE> 150
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCK (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES, CONTINUED
53,800 Calpine Corporation* ............................... $1,076,000
10,200 Citicorp ........................................... 1,050,600
19,500 Computer Associates International, Inc. ............ 970,125
22,600 Conseco, Inc. ...................................... 1,440,750
10,800 CPC International, Inc. ............................ 837,000
21,900 Crown Cork & Seal Company, Inc. .................... 1,190,812
33,200 Data General Corporation* .......................... 481,400
27,700 Diamond Offshore Drilling, Inc.* ................... 1,578,900
17,900 Dover Corporation .................................. 899,475
25,100 Ecolab, Inc. ....................................... 944,387
23,200 Federal National Mortgage Association .............. 864,200
26,800 Gap, Inc. .......................................... 807,350
21,600 Hasbro, Inc. ....................................... 839,700
22,200 Hershey Foods Corporation .......................... 971,250
15,700 Honeywell, Inc. .................................... 1,032,275
21,800 Ingersoll-Rand Company ............................. 970,100
18,400 Johnson & Johnson .................................. 915,400
10,500 Lockheed Martin Corporation ........................ 960,750
7,000 Mobil Corporation .................................. 855,750
27,000 Monsanto Company ................................... 1,049,625
22,300 NAC Re Corporation ................................. 755,412
10,000 NationsBank Corporation ............................ 977,500
20,500 Newmont Gold Company ............................... 896,875
21,600 Nike, Inc. ......................................... 1,290,600
21,900 Norwest Corporation ................................ 952,650
4,800 PacifiCare Health Systems, Inc.* ................... 408,600
16,500 Parker Hannifin Corporation ........................ 639,375
8,600 Procter & Gamble Company ........................... 924,500
26,900 Safeway, Inc.* ..................................... 1,149,975
9,900 Schlumberger, Ltd. ................................. 988,763
37,000 Service Corporation International .................. 1,036,000
32,000 Talbots, Inc. ...................................... 916,000
12,700 Union Pacific Corporation .......................... 763,588
31,756 Union Pacific Resources Group, Inc. ................ 928,863
12,700 United Healthcare Corporation ...................... 571,500
14,400 Warner-Lambert Company ............................. 1,080,000
40,800 Williams Companies, Inc. ........................... 1,530,000
35,600 WMX Technologies, Inc. ............................. 1,161,450
------------
45,009,637
------------
Total common stocks - Series D - 94.6% ............. 233,686,670
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER FOREIGN GOVERNMENT MARKET
OF SHARES OBLIGATIONS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
GERMANY - 1.8%
7,000,000 German Treasury Bill 3.06%, due 4-18-97 ............ $4,501,249
PREFERRED STOCKS
------------------------
AUSTRIA - 0.7%
44,100 Bank Austria AG .................................... 1,708,745
GERMANY - 1.0%
5,390 Sto AG ............................................. 2,535,674
------------
Total preferred stocks - Series D - 1.7% ........... 4,244,419
------------
Total investments - Series D - 98.1% ............... 242,432,338
Cash and other assets less liabilities - 1.9% ...... 4,593,243
------------
Total net assets - Series D - 100.0% ............... $247,025,581
============
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 1996, Series D's investment concentration by industry was
as follows:
<TABLE>
<S> <C>
Banking ................................ 10.9%
Capital Equipment ...................... 6.4%
Chemicals .............................. 0.4%
Construction & Housing ................. 0.8%
Consumer Durables ...................... 7.3%
Consumer Nondurables ................... 8.0%
Electrical and Electronics ............. 4.1%
Energy Sources ......................... 5.9%
Financial Services ..................... 11.8%
Health & Personal Care ................. 3.8%
Materials .............................. 14.0%
Merchandising .......................... 2.4%
Multi-industry ......................... 7.3%
Real Estate ............................ 2.0%
Services ............................... 5.4%
Telecommunications ..................... 4.3%
Trade .................................. 0.4%
Transportation ......................... 0.3%
Utilities .............................. 0.8%
Cash, short-term instruments and
other assets, less liabilities ....... 3.7%
------
Total net assets ....................... 100.0%
======
</TABLE>
SEE ACCOMPANYING NOTES.
32
<PAGE> 151
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES E (HIGH GRADE INCOME)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES PREFERRED STOCK VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC & GAS COMPANIES - 0.3%
15,900 Georgia Power Capital Trust, $1.9375 ............... $397,500
CORPORATE BONDS
---------------------------
AIR TRANSPORTATION - 3.7%
$2,500,000 Southwest Airlines Company, 7.875% - 2007 .......... 2,646,875
$1,800,000 United Airlines, 11.21% - 2014 ..................... 2,335,500
------------
4,982,375
BANKS - 14.2%
ABN AMRO Bank NV,
$1,000,000 7.55% - 2006 ..................................... 1,036,250
$1,500,000 7.30% - 2026 ..................................... 1,428,750
$2,750,000 Abbey National PLC, 6.69% - 2005 ................... 2,698,438
$2,000,000 BCH Cayman Islands, Ltd., 7.70% - 2006 ............. 2,065,000
$3,000,000 Bank of America, 9.70% - 2000 ...................... 3,296,250
$3,500,000 Bank of New York, Inc., 6.50% - 2003 ............... 3,438,750
$2,000,000 Malayan Bank of New York, 7.125% - 2005 ............ 1,987,500
$3,150,000 Santander Financial Issuances, Ltd., 7.00% - 2006 .. 3,130,313
------------
19,081,251
BROKERS, DEALERS & SERVICES - 6.0%
$3,250,000 Lehman Brothers, Inc., 7.25% - 2003 ................ 3,266,250
$5,000,000 Morgan Stanley Group, Inc., 7.25% - 2023 ........... 4,756,250
------------
8,022,500
CABLE SYSTEMS - 5.0%
$3,100,000 Rogers Cablesystems, Ltd, 9.625% - 2002 ............ 3,247,250
$2,000,000 TCI, 7.875% - 2013 ................................. 1,825,000
$1,750,000 Viacom, Inc., 8.00% - 2006 ......................... 1,701,875
------------
6,774,125
CONSUMER GOODS & SERVICES - 5.5%
$1,500,000 Semi-Tech Corporation, 0% - 2003(1) ................ 986,250
$1,500,000 Nike, Inc., 6.375% - 2003 .......................... 1,471,875
$5,000,000 Sears Roebuck Acceptance Corporation, 6.41% - 2001 . 4,943,750
------------
7,401,875
ELECTRONICS - 2.5%
$3,300,000 Pioneer Standards Electronics, Inc., 8.50% - 2006 .. 3,357,750
ENTERTAINMENT - 4.2%
$2,000,000 Harrah's Operating Company, Inc. 8.75% - 2000 ...... $2,042,500
1,250,000 Showboat, Inc., 13.50% - 2003 ...................... 1,378,125
2,200,000 Station Casinos, Inc., 10.125% - 2006 .............. 2,205,500
------------
5,626,125
FINANCE - 0.7%
1,000,000 Countrywide Capital, 8.00% - 2026 .................. 987,500
FOOD & BEVERAGES - 4.4%
1,750,000 Chiquita Brands International, Inc., 10.25% - 2006 . 1,863,750
1,500,000 Coca-Cola Enterprises, Inc., 6.70% - 2036(5) ....... 1,515,000
400,000 FEMSA Fomento Economico Mexicano SA, 9.50% - 1997 .. 405,500
2,000,000 Panamerican Beverages, Inc., 8.125% - 2003 ......... 2,050,000
------------
5,834,250
FUNERAL HOMES - 1.7%
2,250,000 Loewen Group International, Inc., 8.25% - 2003 ..... 2,278,125
INSURANCE - 3.4%
1,750,000 American RE Corporation, 7.45% - 2026 .............. 1,747,813
2,700,000 Home Holdings, Inc., 7.75% - 1998 .................. 1,188,000
1,650,000 Travelers Capital Trust, 7.75% - 2036 .............. 1,600,500
------------
4,536,313
MEDIA - 1.8%
2,250,000 Time Warner, Inc., 9.125% - 2013 ................... 2,421,563
MISCELLANEOUS - 1.3%
1,750,000 Securitized Asset Sales, Inc., 7.50% - 2025 CMO .... 1,750,154
MOTOR VEHICLES & EQUIPMENT - 5.3%
4,000,000 Chrysler-Auburn Hills Trust, 12.00% - 2020 ......... 6,035,000
1,000,000 Ford Motor Company, 7.25% - 2008 ................... 1,010,000
------------
7,045,000
NATURAL GAS COMPANIES - 1.0%
1,300,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 1,290,250
OIL & GAS COMPANIES - 1.2%
1,500,000 Seagull Energy Corporation, 8.625% - 2005 .......... 1,556,250
</TABLE>
SEE ACCOMPANYING NOTES.
33
<PAGE> 152
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES E (HIGH GRADE INCOME)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
PAPER & LUMBER PRODUCTS - 1.4%
$1,750,000 Domtar, Inc., 9.50% - 2016 ......................... $1,920,625
PUBLISHING & PRINTING - 2.5%
625,000 Golden Books Publishing, Inc. 7.65% - 2002 ......... 564,063
2,700,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 2,781,000
------------
3,345,063
REAL ESTATE - 1.5%
1,000,000 Chelsea GCA Realty, Inc., 7.75% - 2001 ............. 1,021,250
1,000,000 Simon DeBartolo Group Ltd., 6.875% - 2006 .......... 972,500
------------
1,993,750
SANITARY SERVICES - 1.5%
2,000,000 Waste Management, 7.10% - 2026(5) .................. 2,060,000
STEEL & METAL PRODUCTS - 1.0%
1,250,000 AK Steel Corporation, 10.75% - 2004 ................ 1,362,500
TOBACCO PRODUCTS - 0.5%
675,000 Dimon, Inc., 8.875% - 2006 ......................... 706,219
TRANSPORTATION - 0.8%
1,000,000 Union Pacific Resources Group, Inc., 7.50% - 2026 .. 1,017,500
------------
Total corporate bonds - Series E - 71.1% ........... 95,351,063
GOVERNMENT AND GOVERNMENT AGENCY SECURITIES
-------------------------------------------
CANADIAN GOVERNMENT AGENCIES - 0.4%
500,000 British Columbia Province, 6.50% - 2026 ............ 463,750
U.S. GOVERNMENT AGENCIES - 12.0%
Federal Home Loan Mortgage Corporation,
3,000,000 8.82% - 2004(1) .................................. 3,055,350
1,000,000 8.00% - 2006 CMO ................................. 1,052,143
1,127,896 8.80% - 2020 CMO ................................. 1,152,979
3,250,000 9.00% - 2020 CMO ................................. 3,306,373
1,250,000 6.50% - 2021 CMO ................................. 1,139,582
661,027 7.00% - 2022 CMO ................................. 588,365
Federal National Mortgage Association,
1,700,000 0% - 2004(1) ..................................... 1,668,363
1,700,000 6.75% - 2021 CMO ................................. 1,677,952
1,000,000 8.00% - 2021 CMO ................................. 1,022,942
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER GOVERNMENT AND GOVERNMENT MARKET
OF SHARES AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES (CONTINUED)
Government National Mortgage Association,
$444,212 9.50% - 2009 ..................................... $476,707
$379,788 9.50% - 2020 ..................................... 405,711
$556,928 9.00% - 2021 ..................................... 584,511
------------
16,130,978
U.S. GOVERNMENT SECURITIES - 7.5%
$5,000,000 U.S. Treasury Bonds, 6.50% - 2006 .................. 5,025,000
U.S. Treasury Notes,
$3,000,000 5.625% - 1998 .................................... 2,986,170
$2,000,000 5.75% - 1998 ..................................... 1,994,780
------------
10,005,950
------------
Total government and government agency securities -
Series E - 19.9% ................................. 26,600,678
------------
Total investments - Series E - 91.3% ............... 122,349,241
Cash and other assets, less liabilities -
Series E - 8.7% .................................. 11,691,870
------------
Total net assets - Series E - 100.0% ............... $134,041,111
============
SERIES J (EMERGING GROWTH)
COMMON STOCKS
--------------------------------
ADVERTISING - 1.1%
35,500 Omnicom Group, Inc. ................................ $1,624,125
BANKS & TRUSTS - 1.3%
30,000 State Street Boston Corporation .................... 1,935,000
BIOTECHNOLOGY - 2.4%
21,000 Amgen, Inc.* ....................................... 1,141,875
32,800 Biogen, Inc.* ...................................... 1,271,000
31,000 Centocor, Inc.* .................................... 1,108,250
------------
3,521,125
BROKERAGE - 2.1%
95,500 Schwab (Charles) Corporation ....................... 3,056,000
BUSINESS SERVICES - 4.5%
33,500 APAC Teleservices, Inc.* ........................... 1,285,563
22,000 Cintas Corporation ................................. 1,292,500
49,000 Concord EFS, Inc.* ................................. 1,384,250
40,625 HA-LO Industries, Inc.* ............................ 1,117,188
29,500 Paychex, Inc. ...................................... 1,517,406
------------
6,596,907
</TABLE>
SEE ACCOMPANYING NOTES.
34
<PAGE> 153
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES J (EMERGING GROWTH) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - SPECIALTY - 2.0%
34,500 Praxair, Inc. ...................................... $1,591,313
23,000 Sigma-Aldrich ...................................... 1,436,062
------------
3,027,375
COMMUNICATIONS - EQUIPMENT - 6.1%
23,000 Ascend Communications, Inc.* ....................... 1,428,875
27,200 Aspect Telecommunications* ......................... 1,727,200
31,500 Checkpoint Systems, Inc. ........................... 779,625
36,000 DSP Communications, Inc.* .......................... 697,500
61,000 Tellabs, Inc.* ..................................... 2,295,125
30,100 U.S. Robotics Corporation* ......................... 2,167,200
------------
9,095,525
COMPUTER SOFTWARE - 17.0%
47,000 BMC Software, Inc.* ................................ 1,944,625
18,000 CBT Group PLC-ADR* ................................. 976,500
36,250 Cadence Design Systems, Inc.* ...................... 1,440,938
49,000 Cambridge Technology Partners, Inc.* ............... 1,644,562
33,000 Clarify, Inc.* ..................................... 1,584,000
52,000 Cognos, Inc.* ...................................... 1,462,500
17,500 Electronics for Imaging, Inc.* ..................... 1,439,375
32,000 HBO & Company ...................................... 1,900,000
32,250 McAfee Associates* ................................. 1,419,000
42,000 Pairgain Technologies, Inc.* ....................... 1,278,375
47,000 Parametric Technology Corporation* ................. 2,414,625
42,000 Peoplesoft, Inc.* .................................. 2,013,375
34,000 Project Software & Development* .................... 1,440,750
10,000 Rational Software Corporation* ..................... 395,625
17,000 Remedy Corporation* ................................ 913,750
26,500 Veritas Software Corporation* ...................... 1,318,375
35,500 Viasoft, Inc.* ..................................... 1,677,375
------------
25,263,750
COMPUTER SYSTEMS - 2.5%
45,500 Dell Computer Corporation* ......................... 2,417,188
30,000 SCI Systems, Inc.* ................................. 1,338,750
------------
3,755,938
CONSUMER SERVICES - 1.5%
31,000 Apollo Group, Inc.* ................................ 1,036,563
35,000 Stewart Enterprises, Inc. (CL. A) .................. 1,190,000
------------
2,226,563
CONSUMER STAPLES - 1.0%
57,000 Rexall Sundown, Inc.* .............................. 1,549,688
ENTERTAINMENT - 3.1%
47,000 Circus Circus Enterprises, Inc.* ................... 1,615,625
64,000 International Game Technology ...................... 1,168,000
83,000 Mirage Resorts, Inc.* .............................. 1,794,875
------------
4,578,500
FINANCIAL SERVICES - 1.7%
37,000 Franklin Resources, Inc. ........................... $2,529,875
HEALTH CARE - HMO - 0.5%
13,400 Oxford Health Plans* ............................... 784,738
HEALTH CARE - 4.1%
43,500 Cardinal Health, Inc. .............................. 2,533,875
28,500 OccuSystems, Inc.* ................................. 769,500
49,000 Omnicare, Inc. ..................................... 1,574,125
17,500 Quintiles Transnational Corporation* ............... 1,159,375
------------
6,036,875
HOSPITAL SUPPLIES/MANAGEMENT - 1.5%
59,000 Healthsouth Corporation* ........................... 2,278,875
HOTEL/MOTEL - 1.0%
25,500 HFS, Inc.* ......................................... 1,523,625
INSURANCE - 3.6%
55,250 AFLAC, Inc. ........................................ 2,361,938
66,000 SunAmerica, Inc. ................................... 2,928,750
------------
5,290,688
MANUFACTURING - 1.3%
23,500 Illinois Tool Works ................................ 1,877,062
MEDICAL PRODUCTS - 1.8%
27,000 Guidant Corporation ................................ 1,539,000
44,500 Hologic, Inc.* ..................................... 1,101,375
------------
2,640,375
OFFICE EQUIPMENT & SUPPLIES - 0.7%
38,500 Viking Office Products, Inc.* ...................... 1,027,468
OIL & GAS DRILLING - 0.7%
23,000 Noble Affiliates, Inc. ............................. 1,101,125
OIL & GAS EQUIPMENT & SERVICES - 4.4%
33,000 Ensco International, Inc.* ......................... 1,600,500
78,500 Global Marine, Inc.* ............................... 1,619,062
18,500 Smith International, Inc.* ......................... 830,187
28,500 Tidewater, Inc. .................................... 1,289,625
13,000 Transocean Offshore, Inc. .......................... 814,125
15,000 Varco International, Inc.* ......................... 346,875
------------
6,500,374
OIL & GAS EXPLORATION - 2.4%
21,100 Anadarko Petroleum Corporation ..................... 1,366,225
42,000 Sonat, Inc. ........................................ 2,163,000
------------
3,529,225
PACKAGING & CONTAINERS - 0.6%
21,500 Sealed Air Corporation* ............................ 894,937
</TABLE>
SEE ACCOMPANYING NOTES.
35
<PAGE> 154
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES J (EMERGING GROWTH) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 3.2%
67,000 Dura Pharmaceuticals, Inc.* ........................ $3,199,250
32,000 Jones Medical Industries, Inc. ..................... 1,172,000
9,500 Medicis Pharmaceuticals Corporation ................ 418,000
------------
4,789,250
POLLUTION CONTROL - 1.9%
49,750 United States Filter Corporation* .................. 1,579,563
36,000 United Waste Systems, Inc.* ........................ 1,237,500
------------
2,817,063
RESTAURANTS - 2.0%
50,500 Landry's Seafood Restaurants* ...................... 1,079,438
22,000 Outback Steakhouse, Inc.* .......................... 588,500
38,250 Papa John's International, Inc.* ................... 1,290,938
------------
2,958,876
RETAIL - 5.8%
32,500 Bed Bath & Beyond, Inc.* ........................... 788,125
19,500 CDW Computer Centers, Inc.* ........................ 1,156,594
30,250 Consolidated Stores Corporation .................... 971,781
37,500 Dollar General Corporation ......................... 1,200,000
42,000 Kohl's Corporation* ................................ 1,648,500
16,500 Nine West Group, Inc.* ............................. 765,187
80,250 Staples, Inc.* ..................................... 1,449,515
17,500 Tiffany & Company .................................. 640,937
------------
8,620,639
SEMI-CONDUCTORS - 7.2%
22,500 Altera Corporation* ................................ 1,635,469
57,000 Analog Devices, Inc.* .............................. 1,930,875
44,500 Atmel Corporation* ................................. 1,474,062
42,000 KLA Instruments Corporation* ....................... 1,491,000
34,000 Linear Technology Corporation ...................... 1,491,750
25,000 Novellus Systems, Inc.* ............................ 1,354,687
37,000 Xilinx, Inc.* ...................................... 1,362,062
------------
10,739,905
TELECOMMUNICATIONS - 0.7%
43,500 360 Communications Company* ........................ 1,005,938
TEXTILES - APPAREL - 1.5%
27,000 Jones Apparel Group, Inc. .......................... 1,009,125
23,500 Tommy Hilfiger Corporation* ........................ 1,128,000
------------
2,137,125
TRANSPORTATION - 0.6%
28,000 Illinois Central Corporation ....................... 896,000
------------
Total common stocks - Series J - 91.8% ............. 136,210,534
Cash and other assets, less liabilities -
Series J - 8.2% .................................. 12,210,754
------------
Total net assets - Series J - 100.0% ............... $148,421,288
============
</TABLE>
<TABLE>
<CAPTION>
SERIES K (GLOBAL AGGRESSIVE BOND)
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 2.5%
$500,000 Republic of Argentina, 5.25% - 2023 ................ $315,625
AUSTRALIA - 6.8%
400,000 Commonwealth of Australia, 9.00% - 2004(2) ......... 349,240
700,000 New South Wales Treasury Corporation,
6.50% - 2006(2) .................................. 514,974
------------
864,214
BRAZIL - 4.8%
$826,027 Government of Brazil C, 4.50% - 2014 ............... 610,487
COSTA RICA - 1.9%
$300,000 Banco Costa Rica, 6.25% - 2010 ..................... 238,500
DOMINICAN REPUBLIC - 3.3%
$550,000 Central Bank of Dominican Republic, 6.375% - 2024 .. 419,375
GREECE - 3.9%
120,000,000 Hellenic Republic, 14.00% - 2003(2) ................ 493,259
HUNGARY - 2.0%
40,000,000 Government of Hungary, 21.00% - 1999(2) ............ 252,496
JORDAN - 4.6%
$1,000,000 Kingdom of Jordan, 4.00% - 2023 .................... 592,500
NEW ZEALAND - 3.6%
650,000 New Zealand Government, 6.50% - 2000(2) ............ 452,679
POLAND - 4.3%
1,675,000 Government of Poland, 16.00% - 1998(2) ............. 551,889
PORTUGAL - 8.0%
Obrig Do Tes Medio Prazo,
45,000,000 11.875% - 2000(2) ................................ 337,263
80,000,000 11.875% - 2005(2) ................................ 675,533
------------
1,012,796
SOUTH AFRICA - 2.1%
600,000 Electricity Supply Commission, 11.00% - 2008(2) .... 93,913
1,000,000 Republic of South Africa, 12.00% - 2005(2) ......... 174,846
------------
268,759
SPAIN - 2.9%
40,000,000 Bonos Y Oblig Del Estado, 10.15% - 2006(2) ......... 375,322
------------
Total government obligations - Series K - 50.7% .... 6,447,901
</TABLE>
SEE ACCOMPANYING NOTES.
36
<PAGE> 155
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES K (GLOBAL AGGRESSIVE BOND) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CANADA - 8.3%
$500,000 CHC Helicopter, 11.50% - 2002 ...................... $512,500
500,000 Roger's Communication, Inc., 10.50% - 2006(2) ...... 380,804
200,000 Stelco, Inc., 10.40% - 2009(2) ..................... 172,465
------------
1,065,769
CZECH REPUBLIC - 4.0%
6,000,000 CEZ, a.s., 11.30% - 2005(2) ........................ 222,741
7,700,000 Skofin, S.R.O., a.s., 11.625% - 1998(2) ............ 284,211
------------
506,952
DENMARK - 8.8%
3,500,000 Nykredit, 7.00% - 2026(2) .......................... 558,620
3,500,000 Realkredit Danmark, 7.00% - 2026(2) ................ 556,128
------------
1,114,748
THAILAND - 3.1%
9,500,000 Italian-Thai Development Company, 12.50% - 2005(2) . 398,952
UNITED STATES - 3.5%
$250,000 Chiquita Brands International, Inc., 10.25% - 2006 . 267,500
$241,896 Residential Asset Securitization Trust, 7.50% - 2011 176,688
------------
444,188
------------
Total corporate bonds - Series K - 27.7% ........... 3,530,609
SHORT-TERM INVESTMENTS
---------------------------------------
GREECE - 3.0%
Hellenic Treasury Bills,
75,000,000 0%, 01-31-97(2) .................................. 301,025
25,000,000 0%, 05-31-97(2) .................................. 96,477
------------
397,502
INDONESIA - 7.2%
1,000,000,000 Asia Pulp & Paper, 0%, 04-29-972 ................ 403,193
1,200,000,000 Chase Manhattan Bank Time Deposit,
14.00%, 1-16-97(2) ............................ 507,936
------------
911,129
SLOVAKIA - 3.7%
15,000,000 European Bank for Research & Development,
12.50%, 08-19-97(2) .............................. 469,534
UNITED STATES - 3.7%
$500,000 U.S. Treasury Bills, 5.20%, 12-11-97 ............... 475,080
------------
Total short-term investments - Series K - 17.6% .... 2,253,245
------------
Total investments - Series K - 96.1% ............... $12,231,755
WRITTEN OPTIONS - (0.1%)
$826,027 Call Option on Government of Brazil C Bond, strike
price 72.75 USD - January 1997 (premium $9,147) .. (17,937)
Cash and other assets, less liabilities -
Series K - 4.0% .................................. 506,077
------------
Total net assets - Series K - 100.0% ............... $12,719,895
============
SERIES M (SPECIALIZED ASSET ALLOCATION)
CORPORATE BONDS
------------------------
AIRLINES - 0.3%
$100,000 United Airlines, Inc., 9.35% - 2016 ................. $111,869
BANKS & CREDIT - 0.6%
250,000 NationsBank Corporation, 7.25% - 2025 .............. 240,938
BROKERAGE - 0.7%
250,000 Merrill Lynch & Company, Inc., 8.00% - 2007 ........ 266,562
COMMUNICATIONS - 0.2%
40,000 News American Holdings, 8.625% - 2003 .............. 43,200
40,000 TCI Communications, Inc., 8.00% - 2005 ............. 39,100
------------
82,300
FINANCIAL SERVICES - 0.3%
125,000 MCN Investment Corporation, 6.32% - 2003 ........... 122,500
INDUSTRIAL SERVICES - 1.8%
200,000 Martin Marietta Technology, 7.375% - 2013 .......... 200,000
500,000 Sears Roebuck Acceptance, 6.70% - 2006 ............. 488,125
------------
688,125
PETROLEUM - 0.3%
110,000 Occidental Petroleum Corporation, 6.24% - 2000 ..... 108,625
TRANSPORTATION - NON RAIL - 1.3%
500,000 Airborn Freight Corporation, 7.35% - 2005 .......... 493,125
------------
Total corporate bonds - Series M - 5.5% ............ 2,114,044
</TABLE>
SEE ACCOMPANYING NOTES.
37
<PAGE> 156
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCK VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AUTO PARTS & SUPPLIES - 2.8%
10,100 Arvin Industries, Inc. ............................. $249,975
6,800 Dana Corporation ................................... 221,850
3,100 Eaton Corporation .................................. 216,225
3,000 Modine Manufacturing Company ....................... 80,250
14,100 Simpson Industries ................................. 153,558
3,900 Standard Products Company .......................... 99,450
3,200 Walbro Corporation ................................. 58,400
------------
1,079,708
BROADCAST MEDIA - 2.5%
4,000 A.H. Belo Corporation .............................. 139,500
2,000 Chris-Craft Industries, Inc. ....................... 83,750
1,200 TCI Satellite Entertainment, Inc. .................. 11,850
12,000 Tele-Communications, Inc.* ......................... 156,750
5,000 Time Warner, Inc. .................................. 187,500
10,000 U.S. West Media Group* ............................. 185,000
6,000 Viacom, Inc.* ...................................... 207,000
------------
971,350
BUILDING MATERIALS - 3.6%
4,200 Ameron International Corporation ................... 216,825
500 Armstrong World Industries, Inc. ................... 34,750
3,050 Butler Manufacturing Company ....................... 123,525
8,100 Crane Company ...................................... 234,900
6,500 Jacobs Engineering Group* .......................... 153,563
16,500 Schuller Corporation ............................... 175,312
10,000 TJ International, Inc. ............................. 232,500
9,500 Thomas Industries, Inc. ............................ 198,313
------------
1,369,688
COMPUTER SYSTEMS - 4.2%
10,000 American Power Conversion Corporation* ............. 272,500
4,000 Compaq Computer Corporation* ....................... 297,000
4,200 Dell Computer Corporation* ......................... 223,125
1,800 Hewlett-Packard Company ............................ 90,450
1,200 International Business Machines Corporation ........ 181,200
1,000 Quantum Corporation* ............................... 28,625
4,300 SCI Systems, Inc.* ................................. 191,888
7,000 Sun Microsystems, Inc.* ............................ 179,812
9,100 Tandem Computers, Inc.* ............................ 125,125
------------
1,589,725
ELECTRONICS - 3.7%
5,000 Bell Industries* ................................... 106,875
9,200 CTS Corporation .................................... 393,300
8,400 Fluke (John) Manufacturing Company ................. 374,850
5,300 Harris Corporation ................................. 363,713
10,000 Zero Corporation ................................... 200,000
------------
1,438,738
MACHINERY - 4.0%
600 Applied Power, Inc. ................................ $23,775
3,000 Bearings, Inc. ..................................... 83,625
1,600 Briggs & Stratton Corporation ...................... 70,400
2,400 Donaldson Company, Inc. ............................ 80,400
3,200 Dover Corporation .................................. 160,800
4,200 Duriron Company, Inc. .............................. 113,925
4,500 GATX Corporation ................................... 218,250
3,000 Goulds Pumps, Inc. ................................. 68,813
5,650 Graco, Inc. ........................................ 138,425
2,100 Kaydon Corporation ................................. 98,962
3,200 Lindsay Manufacturing Company ...................... 149,600
4,300 Parker-Hannifin Corporation ........................ 166,625
4,700 Trinova Corporation ................................ 170,962
------------
1,544,562
MINING & METALS - 2.4%
9,500 Asarco, Inc. ....................................... 236,313
10,300 Ashland Coal, Inc. ................................. 285,825
6,800 Brush Wellman, Inc. ................................ 111,350
2,000 Handy & Harman ..................................... 35,000
3,500 Phelps Dodge Corporation ........................... 236,250
------------
904,738
RECREATION - 3.6%
12,400 Brunswick Corporation .............................. 297,600
11,300 Callaway Golf Company .............................. 324,875
5,200 Harcourt General, Inc. ............................. 239,850
4,100 Harley Davidson, Inc. .............................. 192,700
8,600 King World Productions, Inc.* ...................... 317,125
------------
1,372,150
RESTAURANTS - 2.5%
3,000 Applebees International, Inc. ...................... 82,500
3,500 CKE Restaurants, Inc. .............................. 126,000
9,000 International Dairy Queen, Inc.* ................... 180,000
8,000 Luby's Cafeterias, Inc. ............................ 159,000
10,000 Ruby Tuesday, Inc.* ................................ 185,000
20,000 Ryan's Family Steak House, Inc.* ................... 137,500
5,000 Wendy's International, Inc. ........................ 102,500
------------
972,500
STEEL - 2.2%
2,600 Carpenter Technology Corporation ................... 95,225
3,100 Cleveland Cliffs, Inc. ............................. 140,662
6,000 Commercial Metals Company .......................... 180,750
8,500 Oregon Steel Mills, Inc. ........................... 142,375
8,200 Quanex Corporation ................................. 224,475
5,200 Steel Technologies, Inc. ........................... 68,900
------------
852,387
</TABLE>
SEE ACCOMPANYING NOTES.
38
<PAGE> 157
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS - 2.3%
2,400 Ameritech Corporation .............................. $145,500
2,000 Bell Atlantic Corporation .......................... 129,500
2,900 BellSouth Corporation .............................. 117,087
3,100 GTE Corporation .................................... 141,050
1,000 Nynex Corporation .................................. 48,125
1,200 Pacific Telesis Group .............................. 44,100
2,500 Southern New England Telecommunications ............ 97,187
3,400 Sprint Corporation ................................. 135,575
366 360 Communications Company* ........................ 8,464
------------
866,588
------------
Total common stocks - Series M - 33.8% ............. 12,962,134
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
-----------------------------------------
U.S. GOVERNMENT AGENCIES - 11.5%
Federal Home Loan Mortgage Corporation,
$63,206 6.0% - 2006 ...................................... 61,130
$250,000 7.0% - 2020 ...................................... 246,438
$100,000 7.0% - 2021 ...................................... 97,472
Federal National Mortgage Association,
$3,000,000 5.25% - 3-21-97 .................................. 2,964,840
189,222 6.5% - 2008 ...................................... 172,175
$392,755 6.5% - 2018 ...................................... 375,934
$170,000 6.95% - 2020 ..................................... 163,166
$160,000 7.5% - 2020 ...................................... 159,509
$150,000 8.8% - 2025 ...................................... 156,656
$90,000 Financing Corporation, 0% - 2010 ................... 33,693
------------
4,431,013
U.S. GOVERNMENT SECURITIES - 3.2%
$775,000 U.S. Treasury Bond, 6.0% - 2026 .................... 705,343
U.S. Treasury Notes,
$375,000 6.38% - 2002 ..................................... 377,622
$100,000 5.875% - 2005 .................................... 96,415
$50,000 6.5% - 2005 ...................................... 50,315
------------
1,229,695
------------
Total U.S. government & government agencies -
Series M - 14.7% ................................. 5,660,708
</TABLE>
<TABLE>
<CAPTION>
NUMBER REAL ESTATE MARKET
OF SHARES INVESTMENT TRUSTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
14,600 BRE Properties, Inc. ............................... $361,350
15,200 Federal Realty Investment Trust .................... 412,300
9,400 First Union Real Estate Investment Trust ........... 115,150
4,400 HRE Properties ..................................... 79,200
5,354 Homestead Village, Inc.* ........................... 97,041
3,592 Homestead Village, Inc. Warrants ................... 29,185
5,100 MGI Properties, Inc. ............................... 112,200
25,700 New Plan Realty Trust .............................. 652,138
3,900 Pennsylvania Real Estate Investment Trust .......... 95,062
5,000 Santa Anita Realty Enterprises, Inc. ............... 131,250
32,600 Security Capital Pacific Trust ..................... 745,725
26,100 United Dominion Realty Trust ....................... 404,550
14,100 Washington Real Estate Investment Trust ............ 246,750
11,800 Weingarten Realty Investors ........................ 479,375
------------
Total real estate investment trusts -
Series M - 10.3% ................................. 3,961,276
FOREIGN STOCKS
--------------------------------------
BELGIUM - 6.6%
50 Bekaert SA ......................................... 31,718
600 Cementbedrijven Cimenteries ........................ 54,495
1,550 Delhaize - Le Lion ................................. 91,982
1,900 Electrabel ......................................... 449,212
1,750 Fortis AG .......................................... 280,423
900 Gevaert Photo Productions .......................... 62,334
700 Groupe Bruxelles Lambert ........................... 90,022
1,050 Kredietbank ........................................ 343,780
1,050 Petrofina SA ....................................... 333,863
650 Royale Belgium ..................................... 134,033
500 Solvay SA .......................................... 305,766
700 Tractebel Investment International ................. 325,599
500 Union Miniere* ..................................... 33,843
------------
2,537,070
GERMANY - 6.8%
214 Allianz AG Holding ................................. 384,645
6,419 BASF AG ............................................ 245,746
4,365 Bayer AG ........................................... 176,882
1,198 Continental AG ..................................... 21,649
5,050 Daimler-Benz AG* ................................... 345,709
86 Degussa AG ......................................... 39,063
4,108 Deutsche Bank AG ................................... 191,391
7,189 Dresdner Bank AG ................................... 214,582
</TABLE>
SEE ACCOMPANYING NOTES.
39
<PAGE> 158
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES FOREIGN STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
GERMANY, CONTINUED
43 Friedrich Grohe AG-Vorzugsak ....................... $11,998
471 Heidelberger Zement AG ............................. 37,959
1,070 Hochtief AG ........................................ 42,005
86 Linde AG ........................................... 52,177
1,113 Merck KGAA ......................................... 39,974
43 Muenchener Rueckversicherungs-Gesellschaft AG ...... 104,214
428 Preussag AG ........................................ 96,647
728 SAP AG ............................................. 99,437
6,162 Siemens AG ......................................... 285,567
3,766 Veba AG ............................................ 216,267
------------
2,605,912
HONG KONG - 3.1%
14,000 Bank of East Asia .................................. 62,262
16,000 Cathay Pacific Airways ............................. 25,236
16,000 Cheung Kong Holdings ............................... 142,211
16,000 China Light & Power Company ........................ 71,157
36,000 Chinese Estates .................................... 40,026
3,000 Dicksons Concept International ..................... 11,248
5,000 Elec & Eltek International Holdings ................ 1,099
5,591 Evergo China Holdings Limited* ..................... 932
10,000 Hong Kong & Shanghai Hotels ........................ 18,875
74,850 Hong Kong Telecommunications ....................... 120,476
17,000 Hong Kong & China Gas .............................. 32,857
26,000 Hutchinson Whampoa Limited ......................... 204,202
4,000 Johnson Elect ...................................... 11,067
3,000 Kumagai Gumi ....................................... 3,491
3,000 Lai-Sun Garment International ...................... 4,771
500 Melco International Develop ........................ 174
27,000 Oriental Press Group ............................... 12,130
5,000 Peregrine Investments Holdings ..................... 8,565
6,000 Shon Tak Holdings .................................. 3,995
14,000 Sun Hung Kai Properties ............................ 171,493
5,000 Swire Pacific, Ltd. ................................ 47,673
105,000 Tai Cheung Holdings ................................ 99,095
11,000 Wing Lung Bank ..................................... 74,660
------------
1,167,695
ITALY - 5.8%
12,650 Assicurazioni Gererali ............................. 239,189
9,000 Banco Ambrosiano Vento ............................. 21,605
37,000 Banco Commerciale Italiane ......................... 67,162
2,500 Benetton Group SPA ................................. 31,552
37,500 Credito Italiano ................................... 41,088
19,000 Edison SPA ......................................... 119,961
70,000 Fiat SPA ........................................... 211,312
14,000 Fiat SPA-Private Preferred ......................... 23,065
115,977 Ina-Instituto Naz Assicuraz ........................ 150,720
12,500 Instituto Banc San Paolo Tori ...................... 76,455
11,441 Instituto Mobiliare Italiano ....................... 97,818
23,000 Mediobanca ......................................... 123,811
51,800 Montedison SPA* .................................... 35,226
42,500 Olivetti Group* .................................... 14,954
85,000 Pirelli PSA ........................................ 157,366
4,500 Ras-Riun Adriat Di Sicurta ......................... 41,878
4,000 Sirti SPA .......................................... 24,203
138,200 Telecom Italia Mobile SPA .......................... 348,568
27,614 Telecom Italia Mobile-DRNC ......................... 39,319
20,000 Telecom Italia-RNC ................................. 38,935
130,000 Telecom Italia-SPA ................................. 336,863
------------
2,241,050
JAPAN - 9.0%
7,000 Bank of Yokohama Limited ........................... 45,231
6,000 Daiei, Inc. ........................................ 45,748
8 East Japan Railway Company ......................... 35,909
700 Fanuc .............................................. 22,374
9,000 Fuji Bank, Ltd. .................................... 131,042
1,000 Fuji Photo Film .................................... 32,911
7,000 Fujitsu, Ltd. ...................................... 65,133
6,000 Furukawa Electric Company .......................... 28,379
8,000 Hitachi Ltd. (Hit. Seisakusho) ..................... 74,438
6,000 Hokuriku Bank ...................................... 29,362
2,000 Honda Motor Company, Ltd. .......................... 57,034
7,000 Industrial Bank of Japan ........................... 121,220
1,000 Ito-Yokado Company, Ltd. ........................... 43,422
3,000 Itoham Foods ....................................... 18,558
13,000 Japan Airlines* .................................... 68,881
6,000 Japan Energy Corporation ........................... 16,283
13,000 Kawasaki Heavy Industries .......................... 53,649
1,000 KAO Corporation .................................... 11,631
6,000 Komatsu, Ltd. ...................................... 49,108
2,000 Komori Corporation ................................. 42,388
2,000 Marui Company, Ltd. ................................ 36,013
8,000 Matsushita Electric Industrial Company, Ltd. ....... 130,266
9,000 Mitsubishi Corporation ............................. 93,047
11,000 Mitsubishi Heavy Industrial, Ltd. .................. 87,189
12,000 Mitsubishi Materials Corporation ................... 48,385
2,000 Mori Seiki ......................................... 27,570
2,000 NEC Corporation .................................... 24,123
2,000 Nippon Comsys Corporation .......................... 22,745
13,000 Nippon Oil Company, Ltd. ........................... 66,641
3,000 Nippon Shokubai K.K. Company ....................... 22,228
3,000 Nippondenso Company, Ltd. .......................... 72,112
6,000 Normura Securities Company, Ltd. ................... 89,946
13,000 NSK Limited ........................................ 78,625
2,000 Onward Kashiyama Company, Ltd. ..................... 28,086
1,100 Oyo Corporation .................................... 47,670
2,000 Sakura Bank, Ltd. .................................. 14,267
1,000 Sankyo Company, Ltd. ............................... 28,259
1,000 Secom .............................................. 60,395
</TABLE>
SEE ACCOMPANYING NOTES.
40
<PAGE> 159
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES FOREIGN STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN, CONTINUED
500 Sega Enterprises ................................... $16,800
10,000 Sekisui House, Ltd. ................................ 101,663
12,000 Shimizu Corporation ................................ 89,429
4,000 Shin-Etsu Chemical Company ......................... 72,715
11,000 Sumitiomo Bank ..................................... 158,266
18,000 Sumitomo Chemical Company .......................... 71,181
7,000 Sumitomo Heavy Industries* ......................... 21,229
3,000 Sumitomo Marine & Fire ............................. 18,609
2,000 Taisho Pharmaceutical .............................. 47,041
10,000 The Bank of Tokyo-Mitsubishi ....................... 185,233
7,000 Tokai Bank ......................................... 72,973
3,000 Tokyo Dome Corporation ............................. 52,210
8,500 Tokyo Electric Power ............................... 186,008
2,000 Tokyo Style ........................................ 27,914
13,000 Tokyu Corporation .................................. 73,697
1,000 Tostem Corporation ................................. 27,570
2,000 Toyoda Automatic Loom Works ........................ 37,391
6,000 Toyota Motor Corporation ........................... 172,137
12,000 Yamaichi Securities ................................ 53,244
------------
3,455,578
------------
Total foreign stocks - Series M - 31.3% ............ 12,007,305
FOREIGN WARRANTS
---------------------------
HONG KONG - 0.0%
1,500 Hong Kong and China Gas-Warrants 9-30-97 ........... 834
1,000 Kumagai Gumi-Warrants 6-30-98 ...................... 427
5,700 Oriental Press Group-Warrants 10-02-98 ............. 405
1,000 Peregrine Investment Holdings-Warrants 5-15-98 ..... 320
------------
Total foreign warrants - Series M - 0.0% ........... 1,986
TEMPORARY CASH INVESTMENTS
-------------------------------------
353,000 Vista Federal Money Market Fund .................... 353,000
------------
Total temporary cash - Series M - 0.9% ............. 353,000
------------
Total investments - Series M - 96.5% ............... 37,060,453
Cash & other assets, less liabilities - 3.5% ....... 1,335,470
------------
Total net assets - Series M - 100.0% ............... $38,395,923
============
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & DEFENSE - 0.2%
$35,000 B.E. Aerospace, 9.875% - 2006 ...................... $36,531
AUTO PARTS & SUPPLIES - 0.2%
50,000 Speedy Muffler King, Inc., 10.875% - 2006 .......... 53,500
BANKS & CREDIT - 0.4%
100,000 Bankers Trust-NY, 7.25% - 2003 ..................... 102,000
BROADCAST MEDIA - 0.2%
50,000 Young Broadcasting Corporation, 10.125% - 2005 ..... 51,125
CHEMICALS - SPECIALTY - 0.5%
50,000 Agricultural Minerals & Chemicals, 10.75% - 2003 ... 53,312
50,000 IMC Fertilizer Group, Inc., 9.45% - 2011 ........... 58,000
------------
111,312
ELECTRIC UTILITIES - 2.6%
50,000 El Paso Electric Company, 8.90% - 2006 ............. 52,125
100,000 Florida Power & Light Company, 5.70% - 1998 ........ 99,625
140,000 Midwest Power System, 7.125% - 2003 ................ 143,325
100,000 Monongahela Power, 8.50% - 2022 .................... 106,125
50,000 Southern California Edison, 6.50% - 2001 ........... 49,625
110,000 Texas Utilities, 5.875% - 1998 ..................... 109,587
50,000 Wisconsin Electric Power, 5.875% - 1997 ............ 50,000
------------
610,412
ENTERTAINMENT - 0.3%
25,000 Six Flags Theme Parks, 0% - 2005(1) ................ 23,469
49,588 United Artists Theatre, 9.30% - 2016 ............... 46,117
------------
69,586
FINANCIAL SERVICES - 0.2%
50,000 Trump Atlantic City, 11.25% - 2006 ................. 49,375
INDUSTRIAL SERVICES - 8.1%
50,000 Allied Waste North America, 10.25% - 2006 .......... 52,625
100,000 American Safety Razor Company, 9.875% - 2005 ....... 105,875
50,000 Building Materials Corporation, 0% - 2004(1) ....... 43,250
50,000 Chancellor Broadcasting, 9.375% - 2004 ............. 50,750
</TABLE>
SEE ACCOMPANYING NOTES.
41
<PAGE> 160
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL SERVICES, CONTINUED
$50,000 Coinmach Corporation, 11.75% - 2005 ................ $53,750
80,000 Columbia/HCA Healthcare, 8.85% - 2007 .............. 90,200
50,000 Communications & Power Industry, 12.00% - 2005 ..... 55,750
50,000 Consol Cigar, 10.50% - 2003 ........................ 52,438
50,000 Doane Products Company, 10.625% - 2006 ............. 53,250
50,000 Dominion Textile USA, 9.25% - 2006 ................. 51,000
50,000 Dual Drilling Company, 9.875% - 2004 ............... 54,188
50,000 Freeport McMoran Resource Partners, LP, 7.00% - 2008 48,063
50,000 Fundy Cable Ltd., 11.00% - 2005 .................... 53,000
25,000 Gaylord Container Corporation, 12.75% - 2005 ....... 27,438
50,000 Hayes Wheels International, Inc., 11.00% - 2006 .... 54,250
50,000 Haynes International, Inc., 11.625% - 2004 ......... 52,625
50,000 Herff Jones, Inc., 11.00% - 2005 ................... 53,875
50,000 HMC Acquisition Properties, 9.00% - 2007 ........... 50,625
50,000 Host Marriott Travel Plaza, 9.50% - 2005 ........... 52,125
25,000 K & F Industries, 13.75% - 2001 .................... 26,312
50,000 Kelley Oil & Gas Corporation, 10.375% - 2006 ....... 51,875
50,000 Lenfest Communications, 8.375% - 2005 .............. 48,375
50,000 Loehmann's, Inc., 11.875% - 2003 ................... 52,375
50,000 Owens & Minor, Inc., 10.875% - 2006 ................ 53,625
50,000 Petroleum Heat & Power, 12.25% - 2005 .............. 55,750
50,000 Portola Packaging, Inc., 10.75% - 2005 ............. 52,000
100,000 Price/Costco, Inc., 7.125% - 2005 .................. 100,000
100,000 Raytheon Company, 6.5% - 2005 ...................... 97,500
30,000 Rio Hotel & Casino, Inc., 10.625% - 2005 ........... 31,350
50,000 Rowan Companies, 11.875% - 2001 .................... 53,312
30,000 Sea Containers Ltd., 12.5% - 2004 .................. 33,075
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL SERVICES, CONTINUED
$100,000 Tele-Communications, Inc., 8.75% - 2023 ............ $95,000
$50,000 Tractor, Inc., 10.875% - 2001 ...................... 53,312
$25,000 UNC, Inc., 11.00% - 2006 ........................... 26,687
------------
1,885,625
MISCELLANEOUS - 0.2%
$50,000 McDonald's Corporation, 6.625% - 2005 .............. 49,188
PACKAGING & CONTAINERS - 0.1%
$25,000 Plastic Containers, Inc. Sr., 10.00% - 2006 ........ 25,813
PAPER & FOREST PRODUCTS - 0.4%
$100,000 Celulosa Arauco Y Constitucion SA, 7.00% - 2007 .... 96,375
REAL ESTATE - 0.2%
$50,000 B.F. Saul REIT, 11.625% - 2002 ..................... 53,750
TELECOMMUNICATIONS - 0.5%
$50,000 Lucent Technologies, Inc., 6.90% - 2001 ............ 50,500
$50,000 Teleport Communications, 9.875% - 2006 ............. 53,125
------------
103,625
TEXTILES - 0.2%
$50,000 Dan River, Inc., 10.125% - 2003 .................... 50,625
------------
Total corporate bonds - Series N - 14.3% ........... 3,348,842
COMMON STOCKS
--------------------------------------
Advertising - 0.1%
200 Omnicom Group, Inc. ................................ 9,150
AEROSPACE & DEFENSE - 0.9%
513 Boeing Company ..................................... 54,528
200 Harsco Corporation ................................. 13,700
400 Lockheed Martin Corporation ........................ 36,600
200 McDonnell Douglas Corporation ...................... 12,800
200 Northrop Grumman Corporation ....................... 16,550
300 Raytheon Company ................................... 14,438
300 Rockwell International Corporation ................. 18,263
500 Sunstrand Corporation .............................. 21,250
400 United Technologies Corporation .................... 26,400
------------
214,529
AIRLINES - 0.2%
600 Alaska Air Group, Inc.* ............................ 12,600
300 AMR Corporation* ................................... 26,438
800 KLM Royal Dutch Air Lines NV ADR ................... 22,300
------------
61,338
</TABLE>
SEE ACCOMPANYING NOTES.
42
<PAGE> 161
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
APPLIANCES - 0.1%
300 Black & Decker Corporation ......................... $9,037
100 National Presto Industries ......................... 3,738
------------
12,775
AUTOMOBILES - 0.8%
400 Echlin, Inc. ....................................... 12,650
2,100 Ford Motor Company ................................. 66,938
1,000 General Motors Corporation ......................... 55,750
300 Genuine Parts Company .............................. 13,350
700 Honda Motor Company, Ltd. ADR ..................... 39,638
------------
188,326
AUTO PARTS & SUPPLIES - 0.1%
200 Arvin Industries, Inc. ............................. 4,950
400 TRW, Inc. .......................................... 19,800
------------
24,750
BANKS & TRUSTS - 2.6%
600 Banc One Corporation ............................... 25,800
612 Chase Manhattan Corporation ........................ 54,621
800 Citicorp ........................................... 82,400
800 Corestates Financial Corporation ................... 41,500
200 Fifth Third Bancorp ................................ 12,563
500 First Chicago NBD Corporation ...................... 26,875
800 First Security Corporation ......................... 27,000
700 First Union Corporation ............................ 51,800
600 Keycorp ............................................ 30,300
300 Mellon Bank Corporation ............................ 21,300
400 J.P. Morgan & Company, Inc. ........................ 39,050
500 NationsBank Corporation ............................ 48,875
615 PNC Bank Corporation ............................... 23,140
800 Southtrust Corporation ............................. 27,900
300 State Street Boston Corporation .................... 19,350
500 U.S. Bancorp Oregon ................................ 22,469
200 Wells Fargo & Company .............................. 53,950
------------
608,893
BEVERAGES - 1.4%
1,000 Anheuser-Busch Companies, Inc. ..................... 40,000
1,400 Cadbury Schweppes PLC ADR .......................... 47,775
200 Coca-Cola Enterprises, Inc. ........................ 9,700
3,400 Coca-Cola Company .................................. 178,925
2,000 PepsiCo, Inc. ...................................... 58,500
------------
334,900
BROADCAST MEDIA - 0.5%
300 A.H. Belo Corporation (Cl. A) ...................... 10,463
300 Chris-Craft Industries, Inc.* ...................... 12,563
400 Comcast Corporation (Cl. A) ........................ 7,125
300 TCA Cable TV, Inc. ................................. 9,038
1,100 Time Warner, Inc. .................................. 41,250
900 U.S. West Media Group* ............................. 16,650
600 Viacom, Inc. (Cl. B)* .............................. 20,925
------------
118,014
BROKERAGE - 0.1%
300 Edwards (A.G.),.Inc. ............................... $10,087
300 Paine Webber Group, Inc. ........................... 8,438
500 Salomon, Inc. ...................................... 23,533
600 Schwab (Charles) Corporation ....................... 19,200
------------
61,258
BUILDING MATERIALS - 0.1%
400 Calmat Company ..................................... 7,500
100 Granite Construction, Inc. ......................... 1,900
200 Jacobs Engineering Group ........................... 4,725
------------
14,125
BUILDING & REAL ESTATE - 0.1%
500 Masco Corporation .................................. 18,000
CHEMICALS - BASIC - 1.2%
1,300 Akzo Nobel NV ADR .................................. 87,750
500 Dow Chemical Company ............................... 39,188
900 du Pont (E.I.) de Nemours & Company ................ 84,938
200 FMC Corporation* ................................... 14,025
200 Great Lakes Chemical Corporation ................... 9,350
300 IMC Global, Inc. ................................... 11,738
400 Morton International, Inc. ......................... 16,300
200 Olin Corporation ................................... 7,525
------------
270,814
CHEMICALS - DIVERSIFIED - 0.2%
00 Cabot Corporation .................................. 10,050
1,000 Monsanto Company ................................... 38,875
------------
48,925
CHEMICALS - SPECIALTY - 0.7%
800 Crompton & Knowles Corporation ..................... 15,400
300 Dexter Corporation ................................. 9,563
600 Ivax Corporation ................................... 6,150
200 Loctite Corporation ................................ 12,175
500 Lubrizol Corporation ............................... 15,500
600 Minnesota Mining & Manufacturing Company ........... 49,725
200 Rohm & Haas Company ................................ 16,325
200 Sequa Corporation (Cl. A)* ......................... 7,850
900 Witco Corporation .................................. 27,450
------------
160,138
COMMUNICATION EQUIPMENT - 0.2%
400 Tellabs, Inc.* ..................................... 15,050
400 U.S. Robotics Corporation* ......................... 28,800
------------
43,850
</TABLE>
SEE ACCOMPANYING NOTES.
43
<PAGE> 162
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE - 1.5%
400 America Online, Inc.* .............................. $13,300
500 Automatic Data Processing, Inc. .................... 21,438
800 BMC Software, Inc.* ................................ 33,100
300 Cadence Design Systems, Inc.* ...................... 11,925
200 Ceridian Corporation* .............................. 8,100
300 Computer Associates International, Inc. ............ 14,925
600 First Data Corporation ............................. 21,900
900 Informix Corporation* .............................. 18,338
1,800 Microsoft Corporation* ............................. 148,725
800 Oracle Corporation* ................................ 33,400
500 Parametric Technology Company* ..................... 25,688
400 Structural Dynamics Research Corporation* .......... 8,000
------------
358,839
COMPUTER SYSTEMS - 1.7%
400 Bay Networks, Inc.* ................................ 8,350
800 Cisco Systems, Inc.* ............................... 50,900
300 Comdisco, Inc. ..................................... 9,525
400 Compaq Computer Corporation* ....................... 29,700
600 Dell Computer Corporation* ......................... 31,875
200 Digital Equipment Corporation* ..................... 7,275
1,200 Hewlett-Packard Company ............................ 60,300
700 International Business Machines Corporation ........ 105,700
200 Micro Warehouse, Inc.* ............................. 2,350
800 Seagate Technology, Inc.* .......................... 31,600
200 Storage Technology Corporation* .................... 9,525
200 Stratus Computer, Inc.* ............................ 5,450
600 Sun Microsystems, Inc.* ............................ 15,413
500 3Com Corporation* .................................. 36,688
------------
404,651
COSMETICS - 0.1%
300 International Flavors & Fragrances, Inc. ........... 13,500
DISTRIBUTION CONSUMER PRODUCTS - 0.1%
200 McKesson Corporation ............................... 11,200
DRUGS - 0.5%
300 Amgen, Inc.* ....................................... 16,313
200 Centocor, Inc.* .................................... 7,150
400 Genzyme Corporation* ............................... 8,700
1,600 Johnson & Johnson .................................. 79,600
------------
111,763
ELECTRICAL EQUIPMENT - 1.3%
400 Emerson Electric Company ........................... 38,700
2,400 General Electric Company ........................... 237,300
400 Hubbell, Inc. (Cl. B) .............................. 17,300
------------
293,300
ELECTRIC UTILITIES - 2.2%
500 Allegheny Power System, Inc. ....................... $15,187
500 CMS Energy Corporation ............................. 16,812
700 Duke Power Company ................................. 32,375
1,700 Edison International ............................... 33,787
500 Empresa Nacional Electricidad Chile SA ADR ......... 7,750
1,100 Empresa Nacional De Electricidad SA ADR ............ 77,000
600 Entergy Corporation ................................ 16,650
500 FPL Group, Inc. .................................... 23,000
400 Florida Progress Corporation ....................... 12,900
700 Idaho Power Company ................................ 21,787
500 Illinova Corporation ............................... 13,750
500 Ipalco Enterprises, Inc. ........................... 13,625
800 Midamerican Energy Company ......................... 12,700
500 Nipsco Industries, Inc. ............................ 19,813
700 New York State Electric & Gas Corporation .......... 15,138
1,000 Niagara Mohawk Power Corporation* .................. 9,875
700 Pacific Gas & Electric Company ..................... 14,700
600 Portland General Corporation ....................... 25,200
400 Potomac Electric Power Company ..................... 10,300
700 Scana Corporation .................................. 18,725
900 Southern Company ................................... 20,363
500 Southwestern Public Services Company ............... 17,688
600 Teco Energy, Inc. .................................. 14,475
800 Texas Utilities Company ............................ 32,600
800 Unicom Corporation ................................. 21,700
------------
517,900
ELECTRONICS - 1.5%
1,150 Analog Devices, Inc.* .............................. 38,956
200 Arrow Electronics, Inc. ............................ 10,700
400 Hitachi Ltd. ADR ................................... 37,000
600 Molex, Inc. ........................................ 23,475
900 Motorola, Inc. ..................................... 55,238
2,000 Phillips Electronics NV ADR ........................ 80,000
200 Solectron Corporation* ............................. 10,675
200 Symbol Technologies, Inc.* ......................... 8,850
200 Teleflex, Inc. ..................................... 10,425
1,000 Thermo Electron Corporation* ....................... 41,250
200 Varian Associates, Inc. ............................ 10,175
700 Xilinx, Inc.* ...................................... 25,769
------------
352,513
ELECTRONIC SYSTEMS - 0.2%
300 Honeywell, Inc. .................................... 19,725
600 Oy Nokia AB Corporation ADR* ....................... 34,500
------------
54,225
</TABLE>
SEE ACCOMPANYING NOTES.
44
<PAGE> 163
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ENERGY SERVICES - 0.1%
200 Halliburton Company ................................ $12,050
ENTERTAINMENT - 0.5%
500 Circus Circus Enterprises, Inc.* ................... 17,187
400 Cracker Barrel Old Country Store, Inc. ............. 10,150
800 Mirage Resorts, Inc.* .............................. 17,300
914 The Walt Disney Company ............................ 63,638
--------
108,275
ENVIRONMENTAL - 0.2%
400 U.S.A. Waste Services, Inc.* ....................... 12,750
700 WMX Technologies, Inc. ............................. 22,838
--------
35,588
FINANCIAL - BANKS, COMMERCIAL - 1.1%
1,500 Australia & New Zealand Banking Group Ltd. ADR ..... 46,688
805 Banco Frances Del Rio De La Plata ADR .............. 22,138
200 Bancorp Hawaii, Inc. ............................... 8,400
400 City National Corporation .......................... 8,650
300 Crestar Financial Corporation ...................... 22,313
300 First Bank Systems, Inc. ........................... 20,475
700 First Tennessee National Corporation ............... 26,250
400 Fleet Financial Group, Inc. ........................ 19,950
200 Mercantile Bancorporation .......................... 10,275
300 Mercantile Bankshares Corporation .................. 9,600
800 Northern Trust Corporation ......................... 29,000
800 Norwest Corporation ................................ 34,800
--------
258,539
FINANCIAL SERVICES - 1.4%
800 American Express Company ........................... 45,200
1,000 Banco Bilbao Viz ADR ............................... 53,375
400 Bear Stearns Companies, Inc. ....................... 11,150
300 H & R Block, Inc. .................................. 8,700
200 Dean Witter Discovery & Company .................... 13,250
27 Echelon International Corporation, Inc.* ........... 417
300 Federal Home Loan Mortgage Corporation ............. 33,038
1,300 Federal National Mortgage Association .............. 48,425
400 Franklin Resources, Inc. ........................... 27,350
200 Greentree Financial Corporation .................... 7,725
200 Household International, Inc. ...................... 18,450
200 Merrill Lynch & Company, Inc. ...................... 16,300
200 Morgan Stanley Group, Inc. ......................... 11,425
800 Travelers Group, Inc. .............................. 36,300
--------
331,105
FOOD PROCESSING - 1.2%
1,716 Archer-Daniels-Midland Company ..................... $37,752
200 CPC International, Inc. ............................ 15,500
500 ConAgra, Inc. ...................................... 24,875
300 Dole Foods, Inc. ................................... 10,163
300 General Mills ...................................... 19,013
500 Grand Metropolitan PLC ADR ......................... 15,813
700 Heinz (H.J.) Company ............................... 25,025
500 IBP, Inc. .......................................... 12,125
500 Kellogg Company .................................... 32,812
300 Ralston-Purina Group ............................... 22,013
700 Sara Lee Corporation ............................... 26,075
300 Smucker (J.M.) Company (Cl. A) ..................... 5,288
200 Unilever NY ADR .................................... 35,050
200 Universal Foods Corporation ........................ 7,050
--------
288,554
FOOD WHOLESALERS - 0.1%
32 Earthgrains Company ................................ 1,672
300 McCormick & Company, Inc. .......................... 7,069
--------
8,741
GENERAL MERCHANDISERS - 0.4%
700 Price/Costco, Inc. ................................. 17,588
3,500 Wal-Mart Stores, Inc. .............................. 80,063
--------
97,651
HEALTH CARE SERVICES - 0.2%
400 Apria Healthcare Group, Inc.* ...................... 7,500
600 Vencor, Inc.* ...................................... 18,975
--------
26,475
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT - 0.3%
200 Becton, Dickinson & Company ........................ 8,675
900 Columbia/HCA Healthcare Corporation ................ 36,675
600 Healthsouth Corporation* ........................... 23,175
100 Pacificare Health Systems, Inc. (Cl. B)* ........... 8,525
--------
77,050
HOTEL/MOTEL - 0.2%
500 HFS, Inc.* ......................................... 29,875
200 ITT Corporation* ................................... 8,675
--------
38,550
HOUSEHOLD FURNISHINGS & APPLIANCES - 0.0%
200 Leggett & Platt. Inc. .............................. 6,925
HOUSEHOLD PRODUCTS - 0.6%
400 Colgate-Palmolive Company .......................... 36,900
1,000 Procter & Gamble Company ........................... 107,500
--------
144,400
</TABLE>
SEE ACCOMPANYING NOTES.
45
<PAGE> 164
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HOUSING - HOME BUILDING - 0.2%
700 PPG Industries, Inc. ............................... $39,288
INSURANCE - 1.6%
550 AFLAC, Inc. ........................................ 23,513
244 Aetna, Inc. ........................................ 19,520
300 American Financial Group ........................... 11,325
600 American General Corporation ....................... 24,525
800 American International Group, Inc. ................. 86,600
100 Cigna Corporation .................................. 13,663
800 Chubb Corporation .................................. 43,000
200 General Re Corporation ............................. 31,550
200 Hartford Steam Boiler Inspection & Insurance Company 9,275
200 Loews Corporation .................................. 18,850
200 Pacificare Health Systems, Inc. (Cl. A)* ........... 16,250
200 Progressive Corporation Ohio ....................... 13,475
400 SunAmerica, Inc. ................................... 17,750
300 Torchmark Corporation .............................. 15,150
100 Transatlantic Holdings, Inc. ....................... 8,050
200 Unum Corporation ................................... 14,450
300 United Healthcare Corporation ...................... 13,500
--------
380,446
INTEGRATED PETROLEUM - DOMESTIC - 0.6%
300 Atlantic-Richfield Company ......................... 39,750
300 British Petroleum PLC ADR .......................... 42,413
300 National Fuel Gas Company .......................... 12,375
500 Occidental Petroleum Corporation ................... 11,688
800 USX Marathon Group ................................. 19,100
500 Unocal Corporation ................................. 20,313
--------
145,639
INTEGRATED PETROLEUM - INTERNATIONAL - 2.8%
900 Chevron Corporation ................................ 58,500
700 Ente Nazionale Idrocarburi Spa ADR* ................ 36,138
1,700 Exxon Corporation .................................. 166,600
600 Mobil Corporation .................................. 73,350
1,200 Royal Dutch Petroleum Company ADR .................. 204,900
400 Shell Transport & Trading Company ADR .............. 40,950
400 Texaco, Inc. ....................................... 39,250
1,000 Total S.A. ADR* .................................... 40,250
--------
659,938
MACHINERY - 0.4%
300 Caterpillar, Inc. .................................. $22,575
200 Danaher Corporation ................................ 9,325
600 Deere & Company .................................... 24,375
600 Duriron Company, Inc. .............................. 16,275
300 Tecumseh Products Company .......................... 17,213
--------
89,763
MANUFACTURING - 0.6%
600 AlliedSignal, Inc. ................................. 40,200
200 Cross (A.T.) Company (Cl. A) ....................... 2,325
600 Gencorp, Inc. ...................................... 10,875
200 Illinois Tool Works, Inc. .......................... 15,975
400 Pall Corporation ................................... 10,200
3,000 Tompkins PLC ADR ................................... 55,500
--------
135,075
MEDIA & COMMUNICATIONS - 0.1%
600 Banta Corporation .................................. 13,725
MEDICAL - 0.1%
100 Guidant Corporation ................................ 5,700
800 Stryker Corporation ................................ 23,900
--------
29,600
MEDICAL SUPPLIES - 0.3%
700 Baxter International ............................... 28,700
200 Boston Scientific Corporation* ..................... 12,000
300 Medtronic, Inc. .................................... 20,400
--------
61,100
MINING & METALS - 0.4%
500 Aluminum Company of America ........................ 31,875
300 Brush Wellman, Inc. ................................ 4,912
1,300 Barrick Gold Corporation ........................... 37,375
450 Hanna (M.A.) Company ............................... 9,844
500 Placer Dome, Inc. .................................. 10,875
--------
94,881
MISCELLANEOUS - 0.0%
200 American Water Works Company, Inc. ................. 4,125
MISCELLANEOUS BUSINESS SERVICES - 0.6%
300 Browning-Ferris Industries ......................... 7,875
400 Cintas Corporation ................................. 23,500
400 Cognizant Corporation .............................. 13,200
800 Equifax, Inc. ...................................... 24,500
300 Olsten Corporation (The) ........................... 4,537
550 Paychex, Inc. ...................................... 28,291
200 Standard Register Company .......................... 6,500
800 Wallace Computer Services, Inc. .................... 27,600
--------
136,003
</TABLE>
SEE ACCOMPANYING NOTES.
46
<PAGE> 165
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS CONSUMER CYCLICALS - 0.1%
400 Flight Safety International, Inc. .................. $19,112
400 Mattel, Inc. ....................................... 11,100
----------
30,212
MISCELLANEOUS CONSUMER DURABLES - 0.3%
500 Corning, Inc. ...................................... 23,125
400 Eastman Kodak Company .............................. 32,100
200 Tandy Corporation .................................. 8,800
----------
64,025
MISCELLANEOUS CONSUMER PRODUCTS - 0.8%
800 Jones Apparel Group, Inc.* ......................... 29,900
1,100 Philip Morris Companies, Inc. ...................... 123,888
300 Spring Industries, Inc. (Cl. A) .................... 12,900
300 Tambrands, Inc. .................................... 12,263
200 Universal Corporation .............................. 6,425
----------
185,376
MISCELLANEOUS CONSUMER SERVICES - 0.1%
450 CUC International, Inc.* ........................... 10,688
600 Service Corporation International .................. 16,800
----------
27,488
MISCELLANEOUS HEALTH CARE - 0.1%
600 Cardinal Health, Inc. .............................. 34,950
NATURAL GAS - 0.2%
500 Enron Corporation .................................. 21,563
600 Valero Energy Corporation .......................... 17,175
----------
38,738
NATURAL GAS UTILITIES - 0.2%
500 Calenergy, Inc.* ................................... 16,812
500 MCN Corporation .................................... 14,438
500 Washington Gas Light Company ....................... 11,313
----------
42,563
OFFICE EQUIPMENT & SUPPLIES - 0.5%
600 Alco Standard Corporation .......................... 30,975
400 Diebold, Inc. ...................................... 25,150
400 Pitney-Bowes, Inc. ................................. 21,800
600 Xerox Corporation .................................. 31,575
----------
109,500
OIL - 0.8%
1,000 Amerada Hess Corporation ........................... 57,875
700 B.J. Services Company* ............................. 35,700
200 Helmerich & Payne, Inc. ............................ 10,425
200 Murphy Oil Corporation ............................. 11,125
1,100 Ranger Oil, Ltd.* .................................. 10,863
400 Schlumberger Ltd. .................................. 39,950
300 Sonat, Inc. ........................................ 15,450
200 Tosco Corporation .................................. 15,825
----------
197,213
OIL & GAS DRILLING - 0.3%
200 El Paso Natural Gas Company ........................ $10,100
600 Noble Affiliates, Inc. ............................. 28,725
400 Repsol SA ADR ...................................... 15,250
338 Union Pacific Resources Group, Inc. ................ 9,887
----------
63,962
OIL/GAS EQUIPMENT & SERVICES - 0.3%
400 Ensco International, Inc.* ......................... 19,400
800 Global Marine, Inc.* ............................... 16,500
700 Tidewater, Inc. .................................... 31,675
----------
67,575
PACKAGING & CONTAINERS - 0.2%
300 Bemis Company, Inc. ................................ 11,063
700 Sealed Air Corporation* ............................ 29,138
----------
40,201
PAPER - 0.2%
900 International Paper Company ........................ 36,338
400 Wausau Paper Mills Company ......................... 7,400
----------
43,738
PAPER & FOREST PRODUCTS - 0.3%
200 Georgia-Pacific Corporation ........................ 14,400
400 Kimberly-Clark Corporation ......................... 38,100
400 Weyerhaeuser Company ............................... 18,950
----------
71,450
PETROLEUM - 0.1%
800 Phillips Petroleum Company ......................... 35,400
PHARMACEUTICALS - 2.6%
900 Abbott Laboratories ................................ 45,675
1,200 American Home Products Corporation ................. 70,350
900 Bristol-Myers Squibb Company ....................... 97,875
800 Carter-Wallace, Inc. ............................... 12,500
900 Glaxo Wellcome PLC ADR ............................. 28,575
600 Eli Lilly & Company ................................ 43,800
1,500 Merck & Company, Inc. .............................. 118,875
600 Perrigo Company* ................................... 5,475
1,000 Pharmacia & Upjohn, Inc. ........................... 39,625
800 Pfizer, Inc. ....................................... 66,300
200 Scherer R.P. Corporation* .......................... 10,050
400 Schering-Plough Corporation ........................ 25,900
300 Warner Lambert Company ............................. 22,500
300 Watson Pharmaceuticals, Inc.* ...................... 13,481
----------
600,981
</TABLE>
SEE ACCOMPANYING NOTES.
47
<PAGE> 166
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
PUBLISHING - 0.2%
400 Dun & Bradstreet Corporation ....................... $9,500
300 Gannett Company, Inc. .............................. 22,462
500 McGraw-Hill Companies, Inc. ........................ 23,063
----------
55,025
RAILROADS - 0.4%
200 Burlington Northern Santa Fe Corporation ........... 17,275
200 CSX Corporation .................................... 8,450
400 Kansas City Southern Industries, Inc. .............. 18,000
200 Norfolk Southern Corporation ....................... 17,500
400 Union Pacific Corporation .......................... 24,050
----------
85,275
RECREATION - 0.2%
400 Brunswick Corporation .............................. 9,600
400 Callaway Golf Company .............................. 11,500
400 Harley Davidson, Inc. .............................. 18,800
----------
39,900
RESTAURANTS - 0.1%
1,500 Brinker International, Inc.* ....................... 24,000
400 Outback Steakhouse, Inc.* .......................... 10,700
----------
34,700
RETAIL - APPAREL - 0.2%
300 Ann Taylor Stores Corporation* ..................... 5,250
500 Gap, Inc. .......................................... 15,063
400 Land's End, Inc.* .................................. 10,600
200 TJX Companies, Inc. ................................ 9,475
----------
40,388
RETAIL - DEPARTMENT STORES - 0.4%
300 Federated Department Stores, Inc.* ................. 10,238
600 Kohls Corporation* ................................. 23,550
500 May Department Stores Company ...................... 23,375
300 Meyer (Fred), Inc.* ................................ 10,650
500 J.C. Penney Company, Inc. .......................... 24,375
----------
92,188
RETAIL - DRUG STORES - 0.1%
600 Revco D.S., Inc.* .................................. 22,200
400 Walgreens Company .................................. 16,000
----------
38,200
RETAIL - FOOD CHAINS - 0.2%
1,300 McDonald's Corporation ............................. 58,825
RETAIL - GENERAL MERCHANDISING - 0.1%
600 Dayton Hudson Corporation .......................... 23,550
RETAIL - GROCERY - 0.2%
600 Albertsons, Inc. ................................... $21,375
300 Kroger Company* .................................... 13,950
300 Vons Companies, Inc.* .............................. 17,963
----------
53,288
RETAIL - SPECIALTY - 0.4%
400 Bed Bath & Beyond, Inc.* ........................... 9,700
200 Circuit City Stores, Inc. .......................... 6,025
200 Fastenal Company ................................... 9,150
800 Home Depot, Inc. ................................... 40,100
600 Staples, Inc.* ..................................... 10,838
500 Toys "R" Us, Inc.* ................................. 15,000
----------
90,813
SECURITY SERVICES - 0.1%
300 Pittston Brink's Group ............................. 8,100
SEMI-CONDUCTORS - 0.8%
300 Altera Corporation* ................................ 21,806
200 Applied Materials, Inc.* ........................... 7,187
400 Atmel Corporation* ................................. 13,250
1,000 Intel Corporation .................................. 130,938
300 Linear Technology Corporation ...................... 13,163
300 Maxim Integrated Products, Inc.* ................... 12,975
----------
199,319
SHOES - 0.1%
400 Nike, Inc. ......................................... 23,900
144 Payless Shoesource, Inc.* .......................... 5,400
----------
29,300
SPECIALTY MERCHANDISERS - 0.6%
2,000 LVMH Moet Hennessylou ADR .......................... 112,000
200 Tiffany & Company .................................. 7,325
500 Viking Office Products, Inc.* ...................... 13,344
----------
132,669
STEEL - 0.2%
600 Carpenter Technology Corporation ................... 21,975
300 Nucor Corporation .................................. 15,300
----------
37,275
</TABLE>
SEE ACCOMPANYING NOTES.
48
<PAGE> 167
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS - 3.4%
600 ADC Telecommunications, Inc.* ...................... $18,675
1,500 AT&T Corporation ................................... 65,250
900 Airtouch Communications, Inc.* ..................... 22,725
800 Ameritech Corporation .............................. 48,500
800 Bell Atlantic Corporation .......................... 51,800
1,100 Bellsouth Corporation .............................. 44,412
700 British Telecom PLC ADR ............................ 48,037
100 Cia de Telecomunicaciones de Chile S.A. ADR ........ 10,112
1,200 Ericsson (L.M.) Telecom Company ADR ................ 36,225
300 Federal Signal Corporation ......................... 7,763
1,200 GTE Corporation .................................... 54,600
800 Hong Kong Telecommunications Ltd. ADR .............. 13,000
786 Lucent Technologies ................................ 36,352
1,000 MCI Communications Corporation ..................... 32,688
400 Nextel Communications, Inc., (Cl. A)* .............. 5,225
400 Northern Telecom Limited ........................... 24,750
500 Nynex Corporation .................................. 24,063
1,200 Pacific Telesis Group .............................. 44,100
500 Southern New England Telecommunications Corporation 19,438
500 Sprint Corporation ................................. 19,938
500 Telecom New Zealand ADR ............................ 40,500
700 Telecom Braxileiras SA ADR ......................... 53,550
400 Telefonica De Espana ADR ........................... 27,700
400 360 Communications Company* ........................ 9,250
800 Vodafone Group PLC ADR ............................. 33,100
400 Worldcom, Inc.* .................................... 10,425
----------
802,178
TELEPHONE - 0.7%
600 Century Telephone Enterprises 18,525
1,300 SBC Communications, Inc. 67,275
1,800 Telefonos De Mexico ADR 59,400
400 Telephone & Data Systems, Inc. 14,500
400 U.S. West Communications Group 12,900
----------
172,600
TEXTILES - 0.2%
2,000 Benetton Group SPA ADR ............................. 49,750
TIRE & RUBBER - 0.1%
300 Goodyear Tire & Rubber Company ..................... 15,413
TOBACCO - 0.1%
300 American Brands, Inc. .............................. 14,888
TRANSPORTATION - 0.1%
400 Alexander & Baldwin, Inc. .......................... $10,000
----------
Total common stocks - Series N - 48.3% ............. 11,268,178
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
-----------------------------------------
U.S. GOVERNMENT AGENCIES - 10.2%
Government National Mortgage Association,
$46,584 11.50% - 2013 ..................................... 52,036
$121,206 7.00% - 2025 ..................................... 118,537
$85,597 7.50% - 2025 ..................................... 85,939
$55,373 8.00% - 2025 ..................................... 56,215
$190,350 8.50% - 2025 ..................................... 196,940
$126,396 6.50% - 2026 ..................................... 120,549
$353,500 7.00% - 2026 ..................................... 345,730
$271,501 7.00% - 2026 ..................................... 265,606
$99,777 7.50% - 2026 ..................................... 99,808
$397,702 7.50% - 2026 ..................................... 397,825
$250,983 8.00% - 2026 ..................................... 256,078
$246,338 8.50% - 2026 ..................................... 255,155
$135,917 8.50% - 2026 ..................................... 140,799
---------
2,391,217
U.S. GOVERNMENT SECURITIES - 9.5%
U.S. Treasury Bonds,
$35,000 6.875% - 2025 .................................... 35,660
$250,000 7.625% - 2025 .................................... 277,548
U.S. Treasury Notes,
$225,000 5.75% - 1997 ..................................... 225,448
$325,000 6.00% - 1998 ..................................... 326,024
$300,000 6.375% - 1999 .................................... 302,616
$75,000 5.625% - 2000 .................................... 73,644
$100,000 6.25% - 2000 ..................................... 100,417
$425,000 5.625% - 2001 .................................... 416,462
$75,000 5.875% - 2005 .................................... 72,311
$100,000 6.50% - 2005 ..................................... 100,630
$100,000 5.625% - 2006 .................................... 94,571
$175,000 6.50% - 2006 ..................................... 175,875
---------
2,201,206
---------
Total U.S. government & government agency
securities - Series N - 19.7% ...................... 4,592,423
MISCELLANEOUS ASSETS
----------------------------------
ASSET-BACKED SECURITIES - 0.2%
$50,000 Airplanes Pass Through Trust (Cl. D), 10.875% - 2019 55,153
</TABLE>
SEE ACCOMPANYING NOTES.
49
<PAGE> 168
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES FOREIGN CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - 1.1%
17,000,000 European Investment Bank, 4.625% - 2003(2) ......... $167,334
5,000,000 Interamer Development Bank, 6.00% - 2001(2) ........ 51,478
3,000,000 KFW International Finance, 6.00% - 1999(2) ......... 29,465
------------
Total foreign bonds - Series N - 1.1% .............. 248,277
FOREIGN GOVERNMENT ISSUES
--------------------------------------
CANADA - 0.3%
42,000 Government Bond, 8.50% - 2002(2) ................... 34,564
60,000 Government Bond, 6.50% - 2004(2) ................... 44,677
------------
79,241
FRANCE - 0.4%
430,000 O.A.T. Government Bond, 8.50% - 2002(2) ............ 97,311
GERMANY - 0.8%
Bundersrepub Deutschland,
130,000 8.375% - 2001(2) ................................. 96,645
125,000 7.375% - 2005(2) ................................. 90,017
------------
186,662
UNITED KINGDOM - 0.2%
29,000 Treasury Bond, 8.00% - 2003(2) ..................... 51,210
------------
Total foreign government issues - Series N - 1.7% .. 414,424
FOREIGN STOCKS
-----------------------------
AUSTRALIA - 0.1%
1,000 CRA Limited ........................................ 15,687
BELGIUM - 0.3%
50 Electrabel ......................................... 11,821
100 Kredietbank ........................................ 32,741
200 Societe Generale de Belgique ....................... 15,678
------------
60,240
DENMARK - 0.3%
1,000 Danisco A/S ........................................ 60,689
FRANCE - 0.7%
400 Axa ................................................ $25,390
200 Eridania Beghin-Say SA ............................. 32,123
111 L'Air Liquide ...................................... 17,295
100 Pinault-Printemps-Redoute SA ....................... 39,587
200 Societe Generale De Paris .......................... 21,582
300 Societe Technip .................................... 28,103
------------
164,080
GERMANY - 1.1%
2,000 Bankgesellschaft Berlin ............................ 36,337
2,000 Bayer A.G. ......................................... 81,045
300 Ckag Colonia Konzern A.G. .......................... 24,976
500 Deutsche Bank A.G. ................................. 23,295
200 M.A.N. A.G. ........................................ 48,212
400 Siemens A.G. ....................................... 18,537
600 Vega A.G. .......................................... 34,456
------------
266,858
HONG KONG - 0.8%
5,000 Cheung Kong Holdings ............................... 44,441
9,000 Hong Kong Electric Holdings Limited ................ 29,904
14,000 Hutchinson Whampoa Limited ......................... 109,955
------------
184,300
ITALY - 0.2%
13,000 Banco Commerciale Italiane ......................... 23,598
10,000 Telecom Italia SPA ................................. 25,912
------------
49,510
JAPAN - 1.8%
7,000 Bridgestone Corporation ............................ 132,679
2,000 Dia Nippon Printing, Ltd. .......................... 34,979
3,000 Kao Corp ........................................... 34,893
3,000 Kuraray Company, Ltd. .............................. 27,656
2,000 Marui Company, Ltd. ................................ 36,012
4,000 Mitsubishi Heavy Inds, Ltd. ........................ 31,705
4,000 Ricoh Corp, Ltd. ................................... 45,834
2,000 Sharp Corp ......................................... 28,431
2,000 Takeda Chemical Inds ............................... 41,871
------------
414,060
MALAYSIA - 0.5%
10,000 Malayan Cement Berhad .............................. 22,965
16,000 Sime Darby Berhad .................................. 63,037
3,000 United Engineers (Malaysia), Ltd. .................. 27,084
------------
113,086
NETHERLANDS - 0.5%
600 CSM NV ............................................. 33,300
1,500 Ing Groep NV ....................................... 53,938
300 Oce-Van Der Grinter NV ............................. 32,537
------------
119,775
</TABLE>
SEE ACCOMPANYING NOTES.
50
<PAGE> 169
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES FOREIGN CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
NEW ZEALAND - 0.1%
10,000 Lion Nathan, Ltd. .................................. $23,952
SINGAPORE - 0.6%
3,000 Cycle & Carriage, Ltd. ............................. 36,674
5,000 Development Bank of Singapore ...................... 67,557
3,000 Singapore Airlines Ltd. ............................ 27,237
------------
131,468
SWEDEN - 0.3%
1,200 Astra AB (Cl. B) ................................... 57,821
SWITZERLAND - 1.0%
20 ABB AG-Bearer ...................................... 24,800
20 Nestle S.A. ........................................ 21,404
27 Novartis* .......................................... 30,444
30 Sig Schweizland .................................... 75,742
80 Union Bank of Switzerland .......................... 69,888
------------
222,278
UNITED KINGDOM - 1.1%
3,600 Abbey National Plc ................................. 47,129
3,000 Barclays Plc ....................................... 51,365
2,000 GKN Plc ............................................ 34,260
3,000 HSBC Holdings Plc .................................. 67,049
22,000 Lonrho, Ltd. ....................................... 46,873
10,000 Tesco Plc .......................................... 60,665
------------
307,341
Total foreign stocks - Series N - 9.4% ............. 2,191,145
TEMPORARY CASH INVESTMENTS
------------------------------------------
372,017 Vista Treasury Institutional Money Market Fund ..... 372,017
------------ ------------
Total temporary cash investments - Series N - 1.6% . 372,017
COMMERCIAL PAPER
------------------------------------------
$970,000 Dillard Investment Company, 6.75%, 1-02-97 ......... 969,818
------------
Total commercial paper - Series N - 4.2% ........... 969,818
------------
Total investments - Series N - 100.5% .............. 23,460,277
Liabilities, less cash and other assets -
Series N - (0.5%) ................................ (115,699)
------------
Total net assets - Series N - 100.0% ............... $23,344,578
============
</TABLE>
<TABLE>
<CAPTION>
SERIES O (EQUITY INCOME)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 0.3%
$200,000 El Paso Electric Company, 8.90% - 2006 ............. $208,500
REAL ESTATE - 0.2%
$100,000 B.F. Saul REIT, 11.625% - 2002 ..................... 107,500
------------
Total corporate bonds - Series O - 0.5% ............ 316,000
COMMON STOCKS
------------------------------------------
APPLIANCES - 0.6%
7,500 Whirlpool Corporation .............................. 349,688
AUTO PARTS & SUPPLIES - 0.5%
4,300 Eaton Corporation .................................. 299,925
AUTOMOBILES - 0.9%
4,100 Ford Motor Company ................................. 130,687
4,100 General Motors Corporation ......................... 228,575
5,100 Genuine Parts Company .............................. 226,950
------------
586,212
BANKS & TRUST - 7.9%
6,570 Banc One Corporation ............................... 282,510
4,000 Bankers Trust New York Corporation ................. 345,000
10,308 Chase Manhattan Corporation ........................ 919,989
12,900 Mellon Bank Corporation ............................ 915,900
6,900 J.P. Morgan & Company, Inc. ........................ 673,612
9,700 National City Corporation .......................... 435,288
9,800 PNC Bank Corporation ............................... 368,725
7,800 U.S. Bancorp Oregon ................................ 350,513
2,400 Wells Fargo & Company .............................. 647,400
------------
4,938,937
BEVERAGES - 1.5%
13,200 Anheuser-Busch Companies, Inc. ..................... 528,000
8,400 Brown-Forman Corporation (Cl. B) ................... 384,300
------------
912,300
BUILDING MATERIALS - 0.4%
3,200 Armstrong World Industries, Inc. ................... 222,400
CHEMICALS - BASIC - 3.0%
7,500 Dow Chemical Company ............................... 587,812
7,300 du Pont (E.I.) de Nemours & Company ................ 688,938
2,900 FMC Corporation* ................................... 203,363
8,800 Great Lakes Chemical Company ....................... 411,400
------------
1,891,513
</TABLE>
SEE ACCOMPANYING NOTES.
51
<PAGE> 170
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES O (EQUITY INCOME) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - SPECIALTY - 3.2%
7,600 Betzdearborn, Inc. ................................. $444,600
11,500 Lubrizol Corporation ............................... 356,500
5,000 Minnesota Mining & Manufacturing Company ........... 414,375
11,600 Nalco Chemical Company ............................. 419,050
12,600 Witco Corporation .................................. 384,300
------------
2,018,825
COSMETICS - 1.0%
14,100 International Flavors & Fragrances, Inc. .......... 634,500
ELECTRIC UTILITIES - 6.7%
6,800 Baltimore Gas & Electric Company ................... 181,900
23,600 Centerior Energy Corporation ....................... 253,700
4,700 DQE, Inc. .......................................... 136,300
9,100 Dominion Resources, Inc. ........................... 350,350
4,100 Duke Power Company ................................. 189,625
9,800 Edison International ............................... 194,775
12,600 Entergy Corporation ................................ 349,650
2,800 Florida Progress Corporation ....................... 90,300
3,100 General Public Utilities Corporation ............... 104,237
9,000 Ohio Edison Company ................................ 204,750
13,600 Pacific Gas & Electric Company ..................... 285,600
16,200 Pacificorp ......................................... 332,100
16,200 Peco Energy Corporation ............................ 409,050
10,100 Public Service Enterprise Group, Inc. .............. 275,225
9,700 Southern Company ................................... 219,462
13,500 Unicom Corporation ................................. 366,188
7,500 Western Resources, Inc. ............................ 231,563
------------
4,174,775
ELECTRICAL EQUIPMENT - 2.9%
8,988 Cooper Industries, Inc. ............................ 378,619
10,600 General Electric Company ........................... 1,048,075
9,700 Hubbell, Inc. (Cl. B) .............................. 419,525
------------
1,846,219
ELECTRONICS - 0.5%
8,500 AMP, Inc. .......................................... 326,188
ELECTRONIC SYSTEMS - 0.4%
3,600 Honeywell, Inc. .................................... 236,700
FINANCIAL - BANKS, COMMERCIAL - 2.0%
6,500 Bank of Boston Corporation ......................... 417,625
8,900 Fleet Financial Group, Inc. ........................ 443,888
4,800 Mercantile Bancshares Corporation .................. 153,600
7,900 Signet Banking Corporation ......................... 242,925
------------
1,258,038
FINANCIAL SERVICES - 3.8%
9,300 American Express Company ........................... $525,450
187 Echelon International Corporation, Inc.* ........... 2,916
11,300 Federal National Mortgage Association .............. 420,925
16,800 H & R Block, Inc. .................................. 487,200
4,700 Student Loan Marketing Association ................. 437,688
11,200 Travelers Group, Inc. .............................. 508,200
------------
2,382,379
FOOD PROCESSING - 5.1%
11,700 General Mills ...................................... 741,487
8,700 Grand Metropolitan Plc ADR ......................... 275,137
13,500 Heinz (H.J.) Company ............................... 484,413
3,400 Kellogg Company .................................... 223,125
15,500 Quaker Oats Company ................................ 590,938
7,100 Sara Lee Corporation ............................... 264,475
3,500 Unilever NY ADR .................................... 613,375
------------
3,192,950
FOOD WHOLESALERS - 0.8%
4,000 Fleming Companies, Inc. ............................ 69,000
17,400 McCormick & Company, Inc. .......................... 409,988
------------
478,988
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT - 0.5%
10,000 Bausch & Lomb, Inc. ................................ 350,000
HOTEL/MOTEL - 0.6%
9,200 ITT Corporation* ................................... 399,050
INSURANCE - 3.9%
12,600 Alexander & Alexander Services, Inc. ............... 218,925
14,200 American General Corporation ....................... 580,425
4,600 Hilb, Rogal & Hamilton Company ..................... 60,950
4,300 Lincoln National Corporation ....................... 225,750
3,200 Provident Companies, Inc. .......................... 154,800
7,100 Safeco Corporation ................................. 280,006
8,300 St. Paul Companies, Inc. ........................... 486,588
12,200 USF & G Corporation ................................ 254,675
15,300 Willis Corroon Group Plc ADR ....................... 175,950
------------
2,438,069
</TABLE>
SEE ACCOMPANYING NOTES.
52
<PAGE> 171
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES O (EQUITY INCOME) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INTEGRATED PETROLEUM - DOMESTIC - 4.1%
6,300 Amoco Corporation .................................. $507,150
7,400 Atlantic-Richfield Company ......................... 980,500
3,800 British Petroleum PLC ADR .......................... 537,225
3,646 Sun Company, Inc. .................................. 88,871
3,900 Transcanada Pipelines, Ltd. ........................ 68,250
15,700 USX Marathon Group ................................. 374,837
------------
2,556,833
INTEGRATED PETROLEUM - INTERNATIONAL - 5.5%
9,800 Chevron Corporation ................................ 637,000
9,200 Exxon Corporation .................................. 901,600
4,000 Mobil Corporation .................................. 489,000
3,500 Royal Dutch Petroleum Company ADR .................. 597,625
8,000 Texaco, Inc. ....................................... 785,000
------------
3,410,225
MACHINERY - 0.3%
1,800 GATX Corporation ................................... 87,300
4,900 McDermott International, Inc. ...................... 81,462
------------
168,762
MEDIA & COMMUNICATIONS - 0.5%
10,400 R.R. Donnelley & Sons Company ...................... 326,300
MEDICAL SUPPLIES - 0.9%
5,100 Bard (C.R.), Inc. .................................. 142,800
10,500 Baxter International ............................... 430,500
------------
573,300
MINING & METALS - 1.3%
7,400 Newmont Mining Corporation ......................... 331,150
8,000 Reynolds Metals Company ............................ 451,000
------------
782,150
MISCELLANEOUS BUSINESS SERVICES - 0.1%
2 ACNeilsen Corporation* ............................. 30
2,300 Cognizant Corporation .............................. 75,900
------------
75,930
MISCELLANEOUS CONSUMER DURABLES - 1.4%
13,700 Corning, Inc. ...................................... 633,625
2,700 Eastman Kodak Company .............................. 216,675
------------
850,300
MISCELLANEOUS CONSUMER PRODUCTS - 1.4%
3,400 Philip Morris Companies ............................ 382,925
11,700 Tambrands, Inc. .................................... 478,238
------------
861,163
MISCELLANEOUS - 0.2%
3,500 Rouse Company ...................................... 111,125
OFFICE EQUIPMENT & SUPPLIES - 0.2%
1,700 Pitney-Bowes, Inc. ................................. $92,650
OIL & GAS DRILLING - 0.5%
8,900 Repsol SA ADR ...................................... 339,322
PAPER - 0.7%
10,600 International Paper Company ........................ 427,975
PAPER & FOREST PRODUCTS - 3.1%
6,000 Consolidated Papers, Inc ........................... 294,750
8,100 Georgia-Pacific Corporation ........................ 583,200
5,600 James River Corporation of Virginia ................ 185,500
2,700 Kimberly Clark ..................................... 257,175
13,100 Union Camp Corporation ............................. 625,525
------------
1,946,150
PHARMACEUTICALS - 4.8%
9,700 Abbott Laboratories ................................ 492,275
10,600 American Home Products Corporation ................. 621,425
15,595 Pharmacia & Upjohn, Inc. ........................... 617,951
7,000 Smithkline Beecham Plc ADR ......................... 476,000
10,400 Warner-Lambert Company ............................. 780,000
------------
2,987,651
PUBLISHING - 2.9%
4,900 Deluxe Corporation ................................. 160,475
7,100 Dow Jones & Company, Inc. .......................... 240,512
10,900 Dun & Bradstreet ................................... 258,875
3,700 Gannett Company, Inc. .............................. 277,038
6,600 McGraw-Hill Companies, Inc. ........................ 304,425
12,200 Readers Digest Association, Inc., (Cl. A) .......... 491,050
1,300 Readers Digest Association, Inc., (Cl. B) .......... 47,125
------------
1,779,500
RAILROADS - 0.8%
5,800 Union Pacific Corporation .......................... 348,725
1,531 Conrail, Inc. ...................................... 152,525
------------
501,250
RETAIL - DEPARTMENT STORES - 1.4%
6,000 May Department Stores Company ...................... 280,500
12,600 J.C. Penney Company, Inc. .......................... 614,250
------------
894,750
</TABLE>
SEE ACCOMPANYING NOTES.
53
<PAGE> 172
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES O (EQUITY INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS - 6.5%
19,000 AT & T Corporation ................................. $826,500
16,100 Alltel Corporation ................................. 505,137
8,000 BCE, Inc. .......................................... 382,000
6,300 Bell Atlantic Corporation .......................... 407,925
11,700 Bellsouth Corporation .............................. 472,388
11,500 Frontier Corporation ............................... 260,187
11,000 GTE Corporation .................................... 500,500
11,100 Pacific Telesis Group .............................. 407,925
7,100 Southern New England Telecommunications Corporation 276,013
------------
4,038,575
TELEPHONE - 0.8%
5,000 SBC Communications, Inc. ........................... 258,750
7,200 U.S. West Communications Group ..................... 232,200
------------
490,950
TOBACCO - 1.8%
12,400 American Brands, Inc. .............................. 615,350
3,600 RJR Nabisco Holdings ............................... 122,400
11,400 UST, Inc. .......................................... 369,075
------------
1,106,825
TRANSPORTATION - MISCELLANEOUS - 0.2%
4,500 Alexander & Baldwin, Inc. .......................... 112,500
------------
Total common stocks - Series O - 85.6% ............. 53,371,842
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
----------------------------------------------
U.S. GOVERNMENT SECURITIES - 2.6%
U.S. Treasury Notes,
$100,000 6.125% - 1998 ....................................... 100,491
$100,000 6.25% - 2000 ........................................ 100,417
$400,000 6.50% - 2001 ........................................ 404,448
$400,000 5.75% - 2003 ........................................ 387,952
$200,000 5.625% - 2006 ....................................... 189,142
$100,000 7.00% - 2006 ........................................ 103,876
$400,000 U.S. Treasury Bonds, 6.00% - 2026 ..................... 364,048
------------
Total U.S. government & government agency
securities - Series O - 2.6% ...................... 1,650,374
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES REAL ESTATE INVESTMENT TRUSTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
2,000 Security Capital Pacific Trust ..................... $45,750
27,236 Simon Debartolo Group, Inc. ........................ 844,316
4,300 Weingarten Realty Investors ........................ 174,688
------------
Total real estate investment trusts -
Series O - 1.7% .................................. 1,064,754
WARRANTS - 0.0%
168 Homestead Village, Inc.* ........................... 1,365
FOREIGN STOCKS
------------------------------------------
SWITZERLAND - 0.8%
451 Novartis* .......................................... 515,262
UNITED KINGDOM - 0.2%
63,200 Lonrho, Ltd. ....................................... 134,652
------------
Total foreign stocks - Series O - 1.0% ............. 649,914
TEMPORARY CASH INVESTMENTS
------------------------------------------
1,029,532 Vista Treasury Institutional Money Market Fund ..... 1,029,532
------------
Total temporary cash investments - Series O - 1.7% . 1,029,532
COMMERCIAL PAPER
------------------------------------------
$765,000 Delaware Funding Corporation, 6.00%, 1-06-97 ....... 764,363
$1,000,000 Dover Corporation, 5.75%, 1-02-97 .................. 996,326
$1,000,000 Dow Jones & Company, Inc., 6.25%, 1-02-97 .......... 999,653
$1,000,000 Shell Oil Company, 6.25%, 1-24-97 .................. 999,826
$1,200,000 Warner-Lambert Company, 6.5%, 1-02-97 .............. 1,199,783
------------
Total commercial paper - Series O - 8.0% ........... 4,959,951
------------
Total investments - Series O - 101.1% .............. 63,043,732
Liabilities in excess of cash and other assets -
Series O - (1.1%) .................................. (666,670)
------------
Total net assets - Series O - 100.0% ................ $62,377,062
============
</TABLE>
SEE ACCOMPANYING NOTES.
54
<PAGE> 173
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES S (SOCIAL AWARENESS)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ADVERTISING - 1.3%
16,000 Omnicom Group, Inc. ................................ $732,000
BANKING & FINANCE - 3.2%
15,400 Banc One Corporation ............................... 662,200
19,200 Bank of New York Company, Inc. ..................... 648,000
15,000 Northern Trust Corporation ......................... 543,750
------------
1,853,950
BEVERAGES - 2.5%
16,300 Coca-Cola Company .................................. 857,788
20,000 PepsiCo, Inc. ...................................... 585,000
------------
1,442,788
BIOTECHNOLOGY - 0.9%
9,000 Amgen, Inc.* ....................................... 489,375
BUSINESS SERVICES - 7.3%
17,000 Automatic Data Processing, Inc. .................... 728,875
17,500 Bisys Group, Inc. .................................. 648,594
10,000 Cintas Corporation ................................. 587,500
19,500 Concord EFS, Inc.* ................................. 550,875
20,625 Ha-Lo Industries, Inc.* ............................ 567,187
15,750 Paychex, Inc. ...................................... 810,141
9,000 Snap-On, Inc. ...................................... 320,625
------------
4,213,797
CHEMICALS - SPECIALTY - 2.5%
18,500 Praxair, Inc. ...................................... 853,312
9,000 Sigma - Aldrich .................................... 561,937
------------
1,415,249
COMMUNICATIONS - EQUIPMENT - 3.1%
8,500 Aspect Telecommunications* ......................... 539,750
19,000 Tellabs, Inc.* ..................................... 714,875
7,000 U.S. Robotics Corporation* ......................... 504,000
------------
1,758,625
COMPUTER SOFTWARE - 9.0%
19,500 Cognos, Inc.* ...................................... 548,437
12,000 Computer Associates ................................ 597,000
6,000 Electronics for Imaging, Inc.* ..................... 493,500
10,500 HBO & Company ...................................... 623,437
15,750 McAfee Associates* ................................. 693,000
11,000 Microsoft Corporation* ............................. 908,875
10,500 Parametric Technology Corporation* ................. 539,438
16,400 Peoplesoft, Inc.* .................................. 786,175
------------
5,189,862
COMPUTER SYSTEMS - 4.9%
14,000 Cisco Systems, Inc. ................................ 890,750
7,000 Compaq Computer Corporation* ....................... 519,750
16,000 Sun Microsystems, Inc.* ............................ 411,000
13,300 3Com Corporation* .................................. 975,888
------------
2,797,388
CONSUMER SERVICES - 3.5%
26,000 Apollo Group, Inc. (Cl. A)* ........................ $869,375
22,500 Service Corporation International .................. 630,000
18,000 Sylvan Learning Systems, Inc.* ..................... 513,000
------------
2,012,375
CONSUMER STAPLES - 1.0%
20,250 Rexall Sundown, Inc.* .............................. 550,547
FINANCIAL SERVICES - 5.0%
7,200 Federal Home Loan Mortgage Corporation ............. 792,900
22,000 Federal National Mortgage Association .............. 819,500
9,500 Finova Group, Inc. ................................. 610,375
19,000 First USA, Inc. .................................... 657,875
------------
2,880,650
HEALTH CARE - HMO - 0.9%
8,900 Oxford Health Plans* ............................... 521,206
HEALTH CARE - 2.1%
12,000 Cardinal Health, Inc. .............................. 699,000
16,000 Omnicare, Inc. ..................................... 514,000
------------
1,213,000
HOSPITAL SUPPLIES/MANAGEMENT - 0.8%
12,500 Healthsouth Corporation* ........................... 482,813
HOUSEHOLD FURNISHINGS - 1.2%
19,600 Leggett & Platt, Inc. .............................. 678,650
HOUSEHOLD PRODUCTS - 2.7%
8,000 Colgate-Palmolive Company .......................... 738,000
7,800 Procter & Gamble Company ........................... 838,500
------------
1,576,500
INSURANCE - 2.4%
6,200 American International Group, Inc. ................. 671,150
16,000 SunAmerica, Inc. ................................... 710,000
------------
1,381,150
MACHINERY - 1.1%
15,000 Deere & Company .................................... 609,375
MANUFACTURING - 1.3%
9,000 Illinois Tool Works ................................ 718,875
MEDICAL PRODUCTS - 1.0%
10,500 Guidant Corporation ................................ 598,500
MEDICAL INSTRUMENTS - 1.3%
10,900 Medtronics, Inc. ................................... 741,200
OFFICE EQUIPMENT & SUPPLIES - 0.7%
15,500 Viking Office Products, Inc.* ...................... 413,656
</TABLE>
SEE ACCOMPANYING NOTES.
55
<PAGE> 174
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996
SERIES S (SOCIAL AWARENESS) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS EXPLORATION - 3.6%
12,000 Anadarko Petroleum Corporation ..................... $777,000
15,500 Apache Corporation ................................. 548,313
14,900 Sonat, Inc. ........................................ 767,350
------------
2,092,663
PACKAGING & CONTAINERS - 0.5%
7,200 Sealed Air Corporation* ............................ 299,700
PHARMACEUTICALS - 5.9%
24,000 Dura Pharmaceuticals, Inc.* ........................ 1,146,000
13,032 Johnson & Johnson .................................. 648,342
10,400 Merck & Company, Inc. .............................. 824,200
11,900 Schering-Plough Corporation ........................ 770,525
------------
3,389,067
POLLUTION CONTROL - 1.2%
21,750 United States Filter Corporation* .................. 690,563
RESTAURANTS - 3.9%
26,500 Landry's Seafood Restaurants* ...................... 566,437
19,000 Papa John's International, Inc.* ................... 641,250
18,500 Starbucks Corporation* ............................. 529,562
24,000 Wendy's International, Inc. ........................ 492,000
------------
2,229,249
RETAIL - 4.9%
6,250 CDW Computer Centers, Inc.* ........................ 370,703
12,000 Dollar General Corporation ......................... 384,000
12,000 Kohl's Corporation* ................................ 471,000
5,000 Nine West Group, Inc.* ............................. 231,875
20,000 Petsmart, Inc.* .................................... 437,500
30,375 Staples, Inc.* ..................................... 548,648
10,000 Tiffany & Company .................................. 366,250
------------
2,809,976
RETAIL TRADE - 1.5%
21,300 Walgreens Company .................................. 852,000
SEMI-CONDUCTORS - 5.3%
14,500 Applied Materials, Inc.* ........................... 521,094
17,000 Atmel Corporation* ................................. 563,125
7,500 Intel Corporation .................................. 982,031
7,700 KLA Instruments Corporation* ....................... 273,350
4,800 Novellus Systems, Inc.* ............................ 260,100
13,000 Xilinx, Inc.* ...................................... 478,563
------------
3,078,263
TELECOMMUNICATIONS - 0.6%
9,000 Sprint Corporation ................................. 358,875
TEXTILES - APPAREL - 0.6%
7,500 Tommy Hilfiger Corporation* ........................ 360,000
TOYS & SPORTING GOODS - 0.9%
18,500 Mattel, Inc. ....................................... 513,375
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 0.9%
16,500 Illinois Central Corporation ....................... $528,000
UTILITIES - 0.9%
9,500 Consolidated Natural Gas ........................... 524,875
------------
Total common stocks - Series S - 90.4% ............. 51,998,137
CERTIFICATE OF DEPOSIT
------------------------------------------
CERTIFICATE OF DEPOSIT - 0.2%
$100,000 South Shore Bank, 5%, 3-3-97 ....................... 100,000
------------
Total certificate of deposit - Series S - 0.2% ..... 100,000
------------
Total investments - Series S - 90.6% ............... 52,098,137
Cash and other assets, less liabilities -
Series S - 9.4% .................................. 5,398,578
------------
Total net assets - Series S - 100.0% ............... $57,496,715
============
</TABLE>
The identified cost of investments owned at December 31, 1996 was the same
for federal income tax and financial statement purposes for Series A, B, C, K
and S. The identified cost of investments for federal income tax purposes for
Series D, E, J, M, N and O was $218,817,069, $123,051,930, $108,447,841,
$35,178,909, $20,642,524, and $52,128,597, respectively.
*Securities on which no cash dividend was paid during the preceding twelve
months. ADR (American Depositary Receipt) CMO (Collateralized Mortgage
Obligation)
(1) Deferred interest obligation; currently zero coupon under terms of initial
*offering.
(2) Principal amount on foreign bond is reflected in local currency (e.g.,
Danish krone) while market value is reflected in U.S. dollars.
(3) Variable rate security which may be reset the first of each month.
(4) Variable rate security which may be reset the first of each quarter.
(5) Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturity.
SEE ACCOMPANYING NOTES.
56
<PAGE> 175
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES D SERIES E
SERIES A SERIES B SERIES C (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) (MONEY MARKET) EQUITY) INCOME)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value
(identified cost $476,701,228,
$677,179,834, $34,582,131,
$218,780,429 and $122,998,024,
respectively) ......................... $658,752,000 $886,901,104 $34,561,899 $242,432,338 $122,349,241
Short-term commercial paper, at
market value or at amortized cost
which approximates market value
(identified cost $898,530, $10,788,103,
$92,611,702, $0 and $0, respectively).. 898,530 10,788,103 92,578,417 -- --
Cash ....................................... 54,826,926 56,456,638 7,307 7,498,782 9,930,500
Receivables:
Fund shares sold ...................... 855,610 469,673 1,927,247 208,967 134,668
Securities sold -- -- 70,445 6,474,269 46,324
Interest .............................. 158,409 4,156,776 425,620 -- 2,154,046
Dividends ............................. 865,396 1,014,175 -- 137,727 --
Foreign taxes recoverable ............. -- -- -- 134,482 --
------------- ------------- ------------- ------------- ------------
Total assets ........................ $716,356,871 $959,786,469 $129,570,935 $256,886,565 $134,614,779
============= ============= ============= ============= ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ................ $-- $-- $-- $9,242,676 $--
Fund shares redeemed ................ 1,200,844 2,441,454 820,749 157,685 460,681
Other liabilities:
Management fees ................... 467,334 631,048 56,076 210,219 85,999
Custodian fees .................... 8,399 7,500 4,120 47,367 2,791
Forward foreign exchange contracts. -- -- -- 114,392 --
Transfer and administration fees .. 28,357 38,160 5,334 8,698 5,419
Professional fees ................. 29,728 34,000 5,000 2,668 6,699
Miscellaneous ..................... 31,651 48,000 7,543 77,279 12,079
------------- ------------- ------------- ------------- ------------
Total liabilities ..................... 1,766,313 3,200,162 898,822 9,860,984 573,668
Net Assets:
Paid in capital ....................... 476,200,521 666,852,038 121,964,722 206,377,325 138,273,273
Undistributed net investment income ... 5,364,046 22,620,615 6,760,908 5,665,264 8,629,443
Accumulated undistributed net
realized gain (loss) on sale
of investments and foreign
currency transactions .......... 50,975,219 57,392,384 -- 11,450,403 (12,212,822)
Net unrealized appreciation
(depreciation) in value of
investments and translation
of assets and liabilities in
foreign currency ............... 182,050,772 209,721,270 (53,517) 23,532,589 (648,783)
------------- ------------- ------------- ------------- ------------
Net assets .................. 714,590,558 956,586,307 128,672,113 247,025,581 134,041,111
------------- ------------- ------------- ------------- ------------
Total liabilities
and net assets .......... $716,356,871 $959,786,469 $129,570,935 $256,886,565 $134,614,779
============= ============= ============= ============= ============
Capital shares authorized .................. 1,000,000,000 1,000,000,000 1,000,000,000 1,000,000,000 250,000,000
Capital shares outstanding ................. 29,390,562 27,020,483 10,245,857 40,253,879 11,170,955
Net asset value per share (net assets
divided by shares outstanding) ........ $24.31 $35.40 $12.56 $6.14 $12.00
============= ============= ============= ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
57
<PAGE> 176
BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S
(EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL
GROWTH) BOND) ALLOCATION) ALLOCATION) INCOME) AWARENESS)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value (identified cost
$108,447,123, $11,909,824, $35,115,700,
$20,637,586, $52,098,699 and
$40,913,266, respectively) ........... $136,210,534 $12,231,755 $37,060,453 $22,490,459 $58,083,781 $52,098,137
Short-term commercial paper,
at market value or at amortized
cost which approximates market
value (identified cost $0, $0,
$0, $969,818, $4,959,951 and $0,
respectively) .......................... -- -- -- 969,818 4,959,951 --
Cash ........................................ 12,199,550 113,497 118 -- -- -- 5,323,445
Receivables:
Fund shares sold ....................... 192,455 34,639 77,760 5,924 288,647 238,200
Securities sold ........................ -- 58,394 1,208,407 -- -- --
Interest ............................... 47,348 367,069 75,428 141,909 43,522 25,656
Dividends .............................. 34,565 -- 37,491 20,213 137,723 34,438
Prepaid expenses ....................... -- -- 2,355 4,122 5,584 --
Forward foreign exchange contracts ..... -- 11,473 -- -- 69 --
Foreign taxes recoverable .............. -- -- 6,920 2,593 -- --
------------ ------------ ----------- ----------- ----------- -----------
Total assets .......................... $148,684,452 $12,816,827 $38,468,932 $23,635,038 $63,519,277 $57,719,876
============ ============ =========== =========== =========== ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for
Securities purchased .................. $-- $-- $-- $240,692 $406,681 $--
Fund shares redeemed .................. 152,493 56,841 25,218 12,565 660,061 180,312
Written call options outstanding ...... -- 17,937 -- -- -- --
Other liabilities:
Management fees ....................... 97,128 -- 32,878 19,951 53,686 37,435
Custodian fees ........................ 2,106 10,067 3,480 6,246 8,127 647
Transfer and administration fees ...... 6,101 904 1,672 4,826 2,634 2,459
Professional fees ..................... 904 3,339 5,500 2,500 6,000 576
Miscellaneous ......................... 4,432 7,844 4,261 3,680 5,026 1,732
------------ ------------ ----------- ----------- ----------- -----------
Total liabilities ..................... 263,164 96,932 73,009 290,460 1,142,215 223,161
Net Assets:
Paid in capital ....................... 115,388,609 12,369,761 34,576,966 20,739,163 53,928,508 42,359,859
Undistributed net investment income ... 541,285 -- 925,207 455,999 1,028,253 138,079
Accumulated undistributed net realized
gain (loss) on sale of investments and
foreign currency transactions ......... 4,727,983 29,227 949,137 297,452 1,435,303 3,813,906
Net unrealized appreciation in value of
investments and translation of assets
and liabilities in foreign currency ... 27,763,411 320,907 1,944,613 1,851,964 5,984,998 11,184,871
------------ ------------ ----------- ----------- ----------- -----------
Net assets ............................ 148,421,288 12,719,895 38,395,923 23,344,578 62,377,062 57,496,715
------------ ------------ ----------- ----------- ----------- -----------
Total liabilities and net assets....... $148,684,452 $12,816,827 $38,468,932 $23,635,038 $63,519,277 $57,719,876
============ ============ =========== =========== =========== ===========
Capital shares authorized .................. 250,000,000 50,000,000 50,000,000 50,000,000 50,000,000 250,000,000
Capital shares outstanding ................. 8,133,639 1,186,103 3,186,888 1,942,823 4,451,014 3,012,966
Net asset value per share (net assets
divided by shares outstanding) ............. $18.25 $10.72 $12.05 $12.02 $14.01 $19.08
============ ============ =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
58
<PAGE> 177
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES D SERIES E
SERIES A SERIES B SERIES C (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) (MONEY MARKET) EQUITY) INCOME)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $8,963,248 $12,388,937 $-- $3,960,433 $--
Interest ............................. 1,483,422 17,764,649 7,746,574 842,315 9,721,375
------------- ------------- ------------- ------------- ------------
10,446,670 30,153,586 7,746,574 4,802,748 9,721,375
Less foreign tax expense ............. -- -- -- (428,149) --
------------- ------------- ------------- ------------- ------------
Total investment income .............. 10,446,670 30,153,586 7,746,574 4,374,599 9,721,375
EXPENSES:
Management fees ...................... 4,497,034 6,655,890 708,300 2,164,284 959,641
Custodian fees ....................... 30,331 37,924 12,429 193,610 9,821
Transfer/maintenance fees ............ 3,573 3,347 3,415 3,061 2,911
Administration fees .................. 269,822 399,353 63,747 317,824 57,578
Directors' fees ...................... 17,955 27,369 4,808 6,735 1,447
Professional fees .................... 66,130 75,033 10,296 25,036 8,755
Reports to shareholders .............. 64,555 150,384 14,062 21,331 21,361
Registration fees .................... 763 1,145 313 21,350 190
Other expenses ....................... 30,312 69,719 9,712 33,047 2,350
------------- ------------- ------------- ------------- -------------
Total expenses ..................... 4,980,475 7,420,164 827,082 2,786,278 1,064,054
Less earnings credits ................ (566) (258) (1,716) -- (7,030)
------------- ------------- ------------- ------------- ------------
Net expenses ......................... 4,979,909 7,419,906 825,366 2,786,278 1,057,024
------------- ------------- ------------- ------------- ------------
Net investment income .............. 5,466,761 22,733,680 6,921,208 1,588,321 8,664,351
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the year on:
Investments ........................ 51,089,074 57,472,747 -- 14,468,531 (2,164,110)
Foreign currency transactions ...... -- -- -- 3,728,221 --
------------- ------------- ------------- ------------- -------------
Net realized gain (loss) ......... 51,089,074 57,472,747 -- 18,196,752 (2,164,110)
Net change in unrealized appreciation
(depreciation) during the year on:
Investments ........................ 62,940,793 65,772,214 (41,770) 15,106,354 (7,551,691)
Translation of assets and liabilities
in foreign currencies ............ -- -- -- (1,758,832) --
------------- ------------- ------------- ------------- ------------
Net unrealized appreciation
(depreciation) ................ 62,940,793 65,772,214 (41,770) 13,347,522 (7,551,691)
Net gain (loss) .................. 114,029,867 123,244,961 (41,770) 31,544,274 (9,715,801)
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in
net assets resulting from
operations .................... $119,496,628 $145,978,641 $6,879,438 $33,132,595 ($1,051,450)
============= ============ ============= ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
59
<PAGE> 178
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S
(EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL
GROWTH) BOND) ALLOCATION) ALLOCATION) INCOME) AWARENESS)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $386,091 $-- $669,164 $219,880 $1,125,073 $312,204
Interest ............................. 421,213 1,085,466 519,827 507,512 359,083 225,317
------------ ------------ ----------- ----------- ----------- -----------
807,304 1,085,466 1,188,991 727,392 1,484,153 537,521
Less foreign tax expense ........... -- (12,806) (18,715) (5,474) -- --
------------ ------------ ----------- ----------- ----------- -----------
Total investment income .......... 807,304 1,072,660 1,170,276 721,918 1,484,156 537,521
EXPENSES:
Management fees ...................... 961,958 69,196 286,419 174,823 392,594 353,220
Custodian fees ....................... 12,809 15,235 18,674 17,568 21,612 3,696
Transfer/maintenance fees ............ 3,025 2,399 2,232 2,109 2,359 2,351
Administration fees .................. 57,717 43,030 51,639 46,617 17,667 21,193
Directors' fees ...................... 3,901 51 805 648 1,167 1,582
Professional fees .................... 8,755 10,967 4,182 7,069 10,680 3,316
Reports to shareholders .............. 20,517 1,433 3,114 2,254 3,920 7,931
Registration fees .................... 136 2,500 1,460 1,460 1,460 54
Other expenses ....................... 8,559 1,515 16,389 1,959 1,510 3,382
------------ ------------ ----------- ----------- ----------- -----------
Total expenses ..................... 1,077,377 146,326 384,914 254,507 452,969 396,725
Less:
Reimbursement of expenses .......... -- (69,196) -- -- -- --
Earnings credits ................... (30) -- -- -- -- (2,088)
------------ ------------ ----------- ----------- ----------- -----------
Net expenses ......................... 1,077,347 77,130 384,914 254,507 452,969 394,637
------------ ------------ ----------- ----------- ----------- -----------
Net investment income (loss) ....... (270,043) 995,530 785,362 467,411 1,031,187 142,884
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss)
during the year on:
Investments ........................ 4,744,892 218,893 950,428 297,696 1,436,802 3,818,240
Foreign currency transactions ...... -- (184,631) (13,901) (7,082) (1,154) --
Futures contracts .................. 829,934 -- 176,425 -- -- --
------------ ------------ ----------- ----------- ----------- -----------
Net realized gain ................ 5,574,826 34,262 1,112,952 290,614 1,435,648 3,818,240
Net change in unrealized appreciation
(depreciation) during the year on:
Investments .......................... 16,151,675 228,681 1,910,847 1,466,738 4,978,960 3,541,342
Translation of assets and liabilities
in foreign currencies .............. -- 7,865 (253) (258) (84) --
Futures contracts .................... -- -- (76,555) -- -- --
------------ ------------ ----------- ----------- ----------- -----------
Net unrealized appreciation ........ 16,151,675 236,546 1,834,039 1,466,480 4,978,876 3,541,342
------------ ------------ ----------- ----------- ----------- -----------
Net gain ......................... 21,726,501 270,808 2,946,991 1,757,094 6,414,524 7,359,582
------------ ------------ ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations ...... $21,456,458 $1,266,338 $3,732,353 $2,224,505 $7,445,711 $7,502,466
============ ============ =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
60
<PAGE> 179
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES D SERIES E
SERIES A SERIES B SERIES C (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) (MONEY MARKET) EQUITY) INCOME)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS:
Net investment income ................ $5,466,761 $22,733,680 $6,921,208 $1,588,321 $8,664,351
Net realized gain (loss) ............. 51,089,074 57,472,747 -- 18,196,752 (2,164,110)
Unrealized appreciation (depreciation)
during the period .................. 62,940,793 65,772,214 (41,770) 13,347,522 (7,551,691)
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in
net assets resulting from
operations ....................... 119,496,628 145,978,641 6,879,438 33,132,595 (1,051,450)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ (4,858,702) (18,421,256) (5,014,558) (6,982,410) (7,686,321)
Net realized gain .................... (30,078,874) (89,075,535) -- (6,588,531) --
------------- ------------- ------------- ------------- ------------
Total distributions to shareholders (34,937,576) (107,496,791) (5,014,558) (13,570,941) (7,686,321)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 272,735,836 195,756,138 300,770,030 95,984,267 71,870,139
Dividends reinvested ................. 34,937,576 107,496,791 5,014,558 13,570,941 7,686,321
Shares redeemed ...................... (197,533,006) (180,261,174) (284,413,035) (59,872,380) (62,429,363)
------------- ------------- ------------- ------------- ------------
Net increase from capital share
transactions ..................... 110,140,406 122,991,755 21,371,553 49,682,828 17,127,097
------------- ------------- ------------- ------------- ------------
Total increase in net assets ... 194,699,458 161,473,605 23,236,433 69,244,482 8,389,326
NET ASSETS:
Beginning of year .................... 519,891,100 795,112,702 105,435,680 177,781,099 125,651,785
------------- ------------- ------------- ------------- ------------
End of year .......................... $714,590,558 $956,586,307 $128,672,113 $247,025,581 $134,041,111
============= ============= ============= ============= ============
Undistributed net investment
income at end of year .............. $5,364,046 $22,620,615 $6,760,908 $5,665,264 $8,629,443
============= ============= ============= ============= ============
(a) Shares issued and redeemed
Shares sold ...................... 11,815,669 5,479,920 23,991,955 15,951,967 5,820,235
Dividends reinvested ............. 1,535,718 3,174,743 405,053 2,280,830 649,731
Shares redeemed .................. (8,682,010) (5,055,630) (22,692,246) (9,930,879) (5,068,479)
------------- ------------- ------------- ------------- ------------
Net increase ................... 4,669,377 3,599,033 1,704,762 8,301,918 1,401,487
============= ============= ============= ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
61
<PAGE> 180
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S
(EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL
GROWTH) BOND) ALLOCATION) ALLOCATION) INCOME) AWARENESS)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss) ......... $(270,043) $995,530 $785,362 $467,411 $1,031,187 $142,884
Net realized gain .................... 5,574,826 34,262 1,112,952 290,614 1,435,648 3,818,240
Unrealized appreciation
during the period .................. 16,151,675 236,546 1,834,039 1,466,480 4,978,876 3,541,342
------------ ------------ ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations ...... 21,456,458 1,266,338 3,732,353 2,224,505 7,445,711 7,502,466
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ (236,747) (844,106) (332,910) (112,833) (108,567) (217,556)
Net realized gain .................... (5,477,835) (141,415) (154,426) (22,914) (7,238) (1,127,096)
------------ ------------ ----------- ----------- ----------- -----------
Total distribution to shareholders (5,714,582) (985,521) (487,336) (135,747) (115,805) (1,344,652)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 93,417,694 10,501,775 27,932,031 14,703,728 54,553,040 20,989,370
Dividends reinvested ................. 5,714,582 985,521 487,336 135,747 115,805 1,344,652
Shares redeemed ...................... (59,832,305) (4,726,579) (9,244,884) (4,163,794) (13,149,311) (7,825,379)
------------ ------------ ----------- ----------- ----------- -----------
Net increase from capital
share transactions ............... 39,299,971 6,760,717 19,174,483 10,675,681 41,519,534 14,508,643
------------ ------------ ----------- ----------- ----------- -----------
Total increase in net assets ....... 55,041,847 7,041,534 22,419,500 12,764,439 48,849,440 20,666,457
NET ASSETS:
Beginning of year .................... 93,379,441 5,678,361 15,976,423 10,580,139 13,527,622 36,830,258
------------ ------------ ----------- ----------- ----------- -----------
End of year .......................... $148,421,288 $12,719,895 $38,395,923 $23,344,578 $62,377,062 $57,496,715
============ ============ =========== =========== =========== ===========
Undistributed net investment
income at end of year .............. $541,285 $-- $925,207 $455,499 $1,028,253 $138,079
============ ============ =========== =========== =========== ===========
(a) Shares issued and redeemed
Shares sold ...................... 5,392,420 968,131 2,471,114 1,317,755 4,318,273 1,144,145
Dividends reinvested ............. 316,597 91,933 42,899 12,013 8,922 70,585
Shares redeemed .................. (3,388,952) (429,302) (818,625) (372,924) (1,032,400) (435,648)
------------ ------------ ----------- ----------- ----------- -----------
Net increase ................... 2,320,065 630,762 1,695,388 956,844 3,294,795 779,082
============ ============ =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
62
<PAGE> 181
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SERIES D SERIES E
SERIES A SERIES B SERIES C (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) (MONEY MARKET) EQUITY) INCOME)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................ $4,866,610 $18,703,765 $5,008,362 $1,475,486 $7,776,981
Net realized gain .................... 30,112,684 99,034,666 -- 10,198,109 3,043,977
Unrealized appreciation during the period 97,759,964 63,506,371 16,141 6,880,054 9,249,705
------------- ------------- ------------- ------------- ------------
Net increase in net assets resulting
from operations ...................... 132,739,258 181,244,802 5,024,503 18,553,649 20,070,663
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ (3,560,363) (12,339,763) (4,193,295) (28,486) (7,575,652)
Net realized gain .................... (15,009,374) -- -- (1,835,762) --
------------- ------------- ------------- ------------- ------------
Total distributions to shareholders... (18,569,737) (12,339,763) (4,193,295) (1,864,248) (7,575,652)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 178,841,720 149,198,824 162,965,890 81,864,579 56,773,129
Dividends reinvested ................. 18,569,737 12,339,763 4,193,295 1,864,248 7,575,652
Shares redeemed ...................... (123,978,278) (130,485,002) (181,223,040) (69,669,706) (58,270,162)
------------- ------------- ------------- ------------- ------------
Net increase (decrease) from
capital share transactions ......... 73,433,179 31,053,585 (14,063,855) 14,059,121 6,078,619
------------- ------------- ------------- ------------- ------------
Total increase (decrease)
in net assets .................... 187,602,700 199,958,624 (13,232,647) 30,748,522 18,573,630
NET ASSETS:
Beginning of period .................. 332,288,400 595,154,078 118,668,327 147,032,577 107,078,155
------------- ------------- ------------- ------------- ------------
End of period ........................ $519,891,100 $795,112,702 $105,435,680 $177,781,099 $125,651,785
============= ============= ============= ============= ============
Undistributed net investment
income at end of period ............. $4,755,987 $18,308,191 $4,854,258 $4,447,615 $7,651,413
============= ============= ============= ============= ============
(a) Shares issued and redeemed
Shares sold ..................... 9,705,386 4,927,872 13,110,725 15,967,670 4,585,694
Dividends reinvested ............ 943,105 383,461 344,843 345,872 622,486
Shares redeemed ................. (6,692,130) (4,314,590) (14,585,481) (13,363,236) (4,736,924)
------------- ------------- ------------- ------------- ------------
Net increase (decrease) ........ 3,956,361 996,743 (1,129,913) 2,950,306 471,256
============= ============= ============= ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
63
<PAGE> 182
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
SERIES J (GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES S
(EMERGING AGGRESSIVE ASSET ASSET (EQUITY (SOCIAL
GROWTH) BOND)* ALLOCATION)* ALLOCATION)* INCOME)* AWARENESS)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................ $218,141 $285,818 $155,597 $112,171 $106,787 $224,085
Net realized gain (loss) ............. 11,201,462 (16,723) 307,769 19,003 5,739 1,728,460
Unrealized appreciation
during the period .................. 3,419,768 84,361 110,574 385,484 1,006,122 5,304,983
------------ ------------ ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations ......... 14,839,371 353,456 573,940 516,658 1,118,648 7,257,528
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ -- (245,889) -- -- -- (158,603)
Distribution in excess of capital gains -- (23,205) -- -- -- --
Tax return of capital distribution ... -- (15,693) -- -- -- --
------------ ------------ ----------- ----------- ----------- -----------
Total distribution to shareholders . -- (284,787) -- -- -- (158,603)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 44,371,374 8,894,552 20,292,459 10,904,285 13,390,619 10,381,340
Dividends reinvested ................. -- 284,787 -- -- -- 158,603
Shares redeemed ...................... (42,770,961) (3,569,647) (4,889,976) (840,804) (981,645) (5,347,822)
------------ ------------ ----------- ----------- ----------- -----------
Net increase from capital
share transactions ................. 1,600,413 5,609,692 15,402,483 10,063,481 12,408,974 5,192,121
------------ ------------ ----------- ----------- ----------- -----------
Total increase in net assets ......... 16,439,784 5,678,361 15,976,423 10,580,139 13,527,622 12,291,046
NET ASSETS:
Beginning of period .................. 76,939,657 -- -- -- -- 24,539,212
------------ ------------ ----------- ----------- ----------- -----------
End of period ........................ $93,379,441 $5,678,361 $15,976,423 $10,580,139 $13,527,622 $36,830,258
============ ============ =========== =========== =========== ===========
Undistributed net investment
income at end of period ............ $218,141 $-- $310,231 $108,503 $106,787 $212,751
============ ============ =========== =========== =========== ===========
(a) Shares issued and redeemed
Shares sold ...................... 2,964,051 875,221 1,952,323 1,067,140 1,243,531 698,002
Dividends reinvested -- 27,920 -- -- -- 9,760
Shares redeemed .................. (2,875,387) (347,800) (460,823) (81,161) (87,312) (366,291)
------------ ------------ ----------- ----------- ----------- -----------
Net increase ......................... 88,664 555,341 1,491,500 985,979 1,156,219 341,471
============ ============ =========== =========== =========== ===========
</TABLE>
*Period June 1, 1995 (inception) through December 31, 1995.
SEE ACCOMPANYING NOTES.
64
<PAGE> 183
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AVERAGE
RATIO COM-
RATIO OF MISSION
NET NET DIVI- OF NET PAID
ASSET GAIN TOTAL DENDS NET EXPENSES INCOME PER
VALUE NET (LOSS) FROM (FROM DISTRI- NET ASSETS TO (LOSS) PORT- INVEST-
FISCAL BEGIN- INVEST- (REAL- INVEST- NET BUTIONS ASSET END OF AVER- TO FOLIO MENT
PERIOD NING MENT IZED & MENT INVEST- (FROM TOTAL VALUE TOTAL PERIOD AGE AVERAGE TURN- SECU-
ENDED OF INCOME UNREAL- OPERA- MENT CAPITAL DISTRI- END OF RETURN (THOU- NET NET OVER RITY
DEC.31 PERIOD (LOSS) IZED) TIONS INCOME) GAINS) BUTIONS PERIOD (c) SANDS) ASSETS ASSETS RATE TRADED
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES A (Growth)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $17.26 $0.23 $1.615 $1.845 $(0.242) $(0.533) $(0.775) $18.33 11.1% $296,548 0.86% 1.46% 77% $N/A
1993 18.33 0.39 2.076 2.466 (0.224) (0.752) (0.976) 19.82 13.7% 317,407 0.86% 2.01% 108% N/A
1994 19.82 0.20 (0.442) (0.242) (0.38) (3.198) (3.578) 16.00 (1.7%) 332,288 0.84% 1.13% 90% N/A
1995(f) 16.00 0.18 5.648 5.828 (0.153) (0.645) (0.798) 21.03 36.8% 519,891 0.83% 1.13% 83% N/A
1996(f) 21.03 0.18 4.495 4.675 (0.194) (1.201) (1.395) 24.31 22.7% 714,591 0.83% 0.9% 57% 0.0598
SERIES B (Growth-Income)
1992 $26.85 $0.65 $.999 $1.649 $(0.583) $(0.156) $(0.739) $27.76 6.3% $467,208 0.86% 3.22% 56% $N/A
1993 27.76 0.64 2.009 2.649 (0.679) --- (0.679) 29.73 9.6% 583,599 0.86% 2.63% 95% N/A
1994 29.73 0.51 (1.34) (0.83) (0.680) (1.68) (2.36) 26.54 (3.0%) 595,154 0.84% 2.07% 43% N/A
1995(f) 26.54 0.79 7.16 7.95 (0.540) --- (0.540) 33.95 30.1% 795,113 0.83% 2.70% 94% N/A
1996(f) 33.95 0.83 5.16 5.99 (0.778) (3.762) (4.54) 35.40 18.3% 956,586 0.84% 2.56% 58% 0.0602
SERIES C (Money Market)
1992 $12.52 $0.43 $(0.03) $0.40 $(0.71) $--- $(0.71) $12.21 3.2% $87,246 0.61% 3.19% --- $N/A
1993 12.21 0.29 0.027 0.317 (0.437) --- (0.437) 12.09 2.6% 99,092 0.61% 2.65% --- N/A
1994 12.09 0.41 0.035 0.445 (0.265) --- (0.265) 12.27 3.7% 118,668 0.61% 3.70% --- N/A
1995(f) 12.27 0.74 (0.085) 0.655 (0.585) --- (0.585) 12.34 5.4% 105,436 0.60% 5.27% --- N/A
1996 12.34 0.61 0.01 0.62 (0.40) --- (0.40) 12.56 5.1% 128,672 0.58% 4.89% --- N/A
(a)(f)
SERIES D (Worldwide Equity)
1992(a) $3.91 $0.02 $(0.122) $(0.102) $(0.048) $--- $(0.048) $3.76 (2.6%) $25,183 1.62% 0.50% 81% $N/A
1993(a) 3.76 0.02 1.17 1.19 (0.006) --- (0.006) 4.94 31.6% 98,252 1.42% 0.38% 70% N/A
1994(a) 4.94 0.02 0.115 0.135 (0.005) --- (0.005) 5.07 2.7% 147,033 1.34% 0.50% 82% N/A
1995 5.07 0.05 0.4989 0.5489 (0.0009) (0.058) (0.0589) 5.56 10.9% 177,781 1.31% 0.90% 169% N/A
1996 5.56 0.03 0.93 0.96 (0.20) (0.18) (0.38) 6.14 17.5% 247,026 1.30% 0.74% 115% 0.0276
SERIES E (High Grade Income)
1992 $12.82 $0.78 $0.168 $0.948 $(0.748) $--- $(0.748) $13.02 7.4% $81,440 0.86% 7.41% 76% $N/A
1993 13.02 0.64 1.02 1.66 (0.79) (0.11) (0.90) 13.78 12.6% 112,900 0.86% 6.21% 151% N/A
1994 13.78 0.76 (1.713) (0.953) (0.69) (0.617) (1.307) 11.52 (6.9%) 107,078 0.85% 6.74% 185% N/A
1995(f) 11.52 0.74 1.36 2.10 (0.76) --- (0.76) 12.86 18.6% 125,652 0.85% 6.60% 180% N/A
1996(f) 12.86 0.75 (0.853) (0.103) (0.757) --- (0.757) 12.00 (0.7%) 134,041 0.83% 6.77% 232% N/A
</TABLE>
65
<PAGE> 184
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
AVE-
RAGE
NET RATIO COM-
GAIN RATIO OF MISSION
NET (LOSS) DIVI- OF NET PAID
ASSET ON SEC- TOTAL DENDS NET EXPENSES INCOME PER
VALUE NET URITIES FROM (FROM DISTRI- NET ASSETS TO (LOSS) PORT- INVEST-
FISCAL BEGIN- INVEST- (REAL- INVEST- NET BUTIONS RETURN ASSET END OF AVER- TO FOLIO MENT
PERIOD NING MENT IZED & MENT INVEST- (FROM OF TOTAL VALUE TOTAL PERIOD AGE AVERAGE TURN- SECU-
ENDED OF INCOME UNREAL- OPERA- MENT CAPITAL CAPI- DISTRI- END OF RETURN (THOU- NET NET OVER RITY
DEC.31 PERIOD (LOSS) IZED) TIONS INCOME) GAINS) TAL BUTIONS PERIOD (c) SANDS) ASSETS ASSETS RATE TRADED
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES J (Emerging Growth)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992(b) $10.00 $0.01 $2.46 $2.47 $--- $--- $--- $--- $12.47 24.7% $7,113 1.06% 0.22% 4% N/A
1993 12.47 (0.01) 1.711 1.701 (0.001) --- --- (0.001) 14.17 13.6% 42,096 0.91% (0.14%) 117% N/A
1994 14.17 (0.01) (0.713) (0.723) --- (0.007) --- (0.007) 13.44 (5.1%) 76,940 0.88% (0.11%) 91% N/A
1995(f) 13.44 0.04 2.58 2.62 --- --- --- --- 16.06 19.5% 93,379 0.84% 0.26% 202% N/A
1996(f) 16.06 (0.04) 2.93 2.89 (0.029) (0.671) --- (0.700) 18.25 18.0% 148,421 0.84% (0.21%) 123% 0.0601
SERIES K (Global Aggressive)
1995 $10.00 $0.54 $0.22 $0.76 $(0.466) $(0.044) $(0.03) $(0.540) $10.22 7.6% $5,678 1.63% 11.03% 127% $N/A
(a)(d)(e)
1996(e) 10.22 0.90 0.50 1.40 (0.77) (0.13) --- (0.90) 10.72 13.7% 12,720 0.84% 10.79% 86% N/A
SERIES M (Specialized Asset Allocation)
1995 $10.00 $0.169 $0.541 $0.71 $--- $--- $--- $--- $10.71 7.1% $15,976 1.94% 3.2% 181% $N/A
(a)(d)
1996 10.71 0.150 1.364 1.514 (0.119) (0.055) --- (.174) 12.05 14.2% 38,396 1.34% 2.73% 40% .0266
SERIES N (Managed Asset Allocation)
1995 $10.00 $0.156 $0.574 $0.73 $--- $--- $--- $--- $10.73 7.3% $10,580 1.90% 2.8% 26% $N/A
(a)(d)
1996 10.73 0.193 1.175 1.368 (0.065) (0.013) --- (0.078) 12.02 12.8% 23,345 1.45% 2.67% 41% 0.0393
SERIES O (Equity Income)
1995 $10.00 $0.166 $1.534 $1.70 $--- $--- $--- $--- $11.70 17.0% $13,528 1.40% 3.0% 3% $N/A
(a)(d)
1996 11.70 0.169 2.173 2.342 (0.03) (0.002) --- (0.032) 14.01 20.0% 62,377 1.15% 2.62% 22% 0.0385
SERIES S (Social Awareness)
1992(a) $10.55 $0.03 $1.691 $1.721 $(0.021) $--- $--- $(0.021) $12.25 16.4% 9,653 0.92% 0.24% 110% $N/A
1993 12.25 0.02 1.432 1.452 (0.012) --- --- (0.012) 13.69 11.9% 19,490 0.90% 0.23% 105% N/A
1994 13.69 0.08 (0.595) (0.515) (0.02) (0.185) --- (0.205) 12.97 (3.7%) 24,539 0.90% 0.75% 67% N/A
1995(f) 12.97 0.09 3.507 3.597 (0.077) --- --- (0.077) 16.49 27.7% 36,830 0.86% 0.75% 122% N/A
1996(f) 16.49 0.03 3.073 3.103 (0.083) (0.43) --- (0.513) 19.08 18.8% 57,497 0.84% 0.30% 67% 0.0602
</TABLE>
(a) Net investment income per share has been calculated using the weighted
monthly average number of capital shares outstanding.
(b) Series J was initially capitalized on October 1, 1992, with a net asset
value of $10.00 per share. Percentage amounts for the period have been
annualized, except for total return.
(c) Total return does not take into account any charges paid at the time of
purchase.
(d) Series K, M, N and O were initially capitalized on June 1, 1995 with net
asset values of $10.00 per share. Percentage amounts for the period have
been annualized, except for total return.
(e) Fund expenses for Series K were reduced by the Investment Manager during
the period, and expense ratios absent such reimbursement would have been
2.03% in 1995 and 1.59% in 1996.
(f) Expense ratios were calculated without the reduction for custodian fees
earnings credits beginning February 1, 1995. Expense ratios with such
reductions would have been as follows:
<TABLE>
1995 1996
---- ----
<S> <C> <C>
Series A 0.83% 0.83%
Series B 0.83% 0.84%
Series C 0.60% 0.58%
Series E 0.85% 0.83%
Series J 0.83% 0.84%
Series S 0.84% 0.84%
</TABLE>
66
<PAGE> 185
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company of the series
type. Its shares are currently issued in eleven series with each series, in
effect, representing a separate fund. The Fund is required to account for the
assets of each series separately and to allocate general liabilities of the Fund
to each series based upon the net asset value of each series. Shares of the Fund
will be sold only to Security Benefit Life Insurance Company (SBL) separate
accounts. The following is a summary of the significant accounting policies
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. SECURITIES VALUATION - Valuations of the Fund's securities are supplied
by pricing services approved by the Board of Directors. Securities listed or
traded on a recognized securities exchange are valued on the basis of the last
sales price. If there are no sales on a particular day, then the securities are
valued at the last bid price. If a security is traded on multiple exchanges, its
value will be based on the price from the principal exchange where it is traded.
All other securities for which market quotations are available are valued on the
basis of the current bid price. If there is no bid price or if the bid price is
deemed to be unsatisfactory by the Board of Directors or by the Fund's
investment manager, then the securities are valued in good faith by such method
as the Board of Directors determines will reflect the fair value. The Fund
generally will value short-term debt securities at prices based on market
quotations for such securities or securities of similar type, yield, quality and
duration, except those securities purchased with 60 days or less to maturity are
valued on the basis of amortized cost which approximates market value.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange, if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rates prevailing at the close of business. Investment
in foreign securities may involve risks not present in domestic investments.
Since foreign securities may be denominated in a foreign currency and involve
settlement and pay interest or dividends in foreign currencies, changes in the
relationship of these foreign currencies to the U.S. dollar can significantly
affect the value of the investments and earnings of the Fund. Foreign
investments may also subject the Fund to foreign government exchange
restrictions, expropriation, taxation or other political, social or economic
developments, all of which could affect the market and/or credit risk of the
investments.
B. FOREIGN CURRENCY TRANSACTIONS - The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translate at the rates of exchange prevailing on the
respective dates of such transactions.
Series D, M, N and O do not isolate that portion of the results of
operations resulting from changes in the foreign exchange rates on investments
from the fluctutation arising from changes in the market prices of securities
held. Such fluctuations are included with the net realized and unrealized gain
or loss on investments. Series K isolates their portion of the results of
operations resulting from foreign exchange rates on investment from the
fluctuation arising from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the value of portfolio securities and
other assets and liabilities at the end of the reporting period, resulting from
changes in the exchange rates.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Series D, K, M, N and O
may enter into forward foreign exchange contracts in connection with foreign
currency risk from purchase or sale of securities denominated in foreign
currency. These Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate asunrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the Statement of Operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Series have in that particular
currency contract. Losses may arise due to changes in the value of the foreign
currency or if the counterparty does not perform under the contract.
D. FUTURES - Series J and M utilize futures contracts to a limited extent,
with the objectives of maintaining full exposure to the underlying stock
markets, enhancing returns, maintaining liquidity, and minimizing transaction
costs. Series J and M may purchase futures contracts to immediately position
incoming cash in the market, thereby simulating a fully invested position in the
underlying index while maintaining a cash balance for liquidity. Returns may be
enhanced by purchasing futures contracts instead of the underlying securitites
when futures are believed to be priced more attractively than the underlying
securities. The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of stocks contained in
the indices and the prices of futures contracts, and the possibility of an
illiquid market. Futures contracts are valued based upon their quoted daily
settlement prices. Upon entering into a futures contract, the Series is required
to deposit either cash or liquid securities, representing the initial margin,
equal to a certain percentage of the contract value. Subsequent changes in the
value of the contract, or variation margin, are recorded as unrealized gains or
losses. The variation margin is paid or received in cash daily by the Series.
The Series realizes a gain or loss when the contract is closed or expires. There
were no futures contracts held by the Fund at December 31, 1996.
67
<PAGE> 186
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
E. OPTIONS WRITTEN - Series K may purchase put and call options and write
such options on a covered basis on securities that are traded on recognized
securities exchanges and over-the-counter markets. Call and put options on
securities give the holder the right to purchase or sell respectively, (and the
writer the obligation to sell or purchase) a security at a specified price, on
or until a certain date. The primary risks associated with the use of options
are an imperfect correlation between the change in market value of the
securities held by the Series and the price of the option, the possibility of an
illiquid market, and the inability of the counter-party to meet the terms of the
contract.
The premium received for a written option is recorded as an asset with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuations in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized. Series K wrote covered call options during 1996
and received $26,287 in premiums.
F. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Dividend income less
foreign taxes withheld (if any) are recorded on the ex-dividend date. Interest
income is recognized on the accrual basis. Premium and discounts (except
original issue discounts) on debt securities are not amortized.
G. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to differing treatments for expiration of net operating losses and
recharacterization of foreign currency gains and losses.
H. TAXES - The Fund complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of its
taxable net income and net realized gains sufficient to relieve it from all, or
substantially all, federal income, excise and state income taxes. Therefore, no
provision for federal or state income tax is required.
I. EARNINGS CREDITS - Under the fee schedule with the custodian, the Fund
earns credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the Statement of Operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC) (the
Investment Manager) under an investment advisory contract at an annual rate of
.50% of the average daily net assets for Series C, .75% for Series A, B, E, J, K
and S and 1.00% for Series D, M, N and O. SMC pays Lexington Management
Corporation (LMC), an amount equal to .50% of the average daily net assets of
Series D and .35% of the average net assets for Series K, for management
services. SMC & LMC have agreed to waive all of the management fees for Series K
through December 31, 1996. The Investment Manager pays T. Rowe Price Associates,
Inc. an annual fee equal to .50% of the first $50,000,000 of average net assets
of Series N and .40% of the average net assets of Series N in excess of
$50,000,000 for management services provided to that Series. The Investment
Manager pays T. Rowe Price Associates, Inc. an annual fee equal to .50% of the
first $20,000,000 of average net assets of Series O and .40% of the average
assets in excess of $20,000,000 for management services provided to Series O.
The Investment Manager pays Templeton Quantitative Advisors, Inc., for research
provided to Series M, an annual fee equal to .30% of the first $50,000,000 of
the average net assets of Series M invested in equity securities and .25% of the
average net assets invested in equity securities in excess of $50,000,000. The
Investment Manager also pays Meridian Investment Management Corporation, for
research provided to Series M, an annual fee equal to .20% of the average net
assets of that Series.
The investment advisory contract provides that the total annual expenses of
each Series (including management fees, but excluding interest, taxes, brokerage
commissions and extraordinary expenses) will not exceed the level of expenses
which the Series is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Fund are then offered for
sale. For the year ended December 31, 1996, SMC agreed to limit the total
expenses for Series K, M, N and O to an annual rate of 2% of the average daily
net asset value of each respective Series.
The Fund has entered into a contract with SMC for transfer agent services
and administrative services which SMC provides to the Fund. The charges paid by
the Fund under the contract for transfer agent services are insignificant. The
administrative services provided by SMC principally include all fund and
portfolio accounting and regulatory filings. For providing these services, SMC
receives a fee at the annual rate of .045% of the average daily net assets of
the Fund, plus the greater of .10% of the average net assets of Series D or
$60,000, and with respect to Series K, M, and N, an annual fee equal to the
greater of .10% of each Series average net assets or (i) $45,000 in the year
ending April 29, 1997, and (ii) $60,000 thereafter. SMC has arranged for LMC to
provide certain administrative services relating to Series D and K, including
performing certain accounting and pricing functions. LMC is compensated directly
by SMC for providing these services.
Certain officers and directors of the Fund are also officers and/or
directors of SBL and its subsidiaries, which include Security Management
Company.
68
<PAGE> 187
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
3. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) for income tax
purposes at December 31, 1996, for all securities and foreign currency holdings
(including foreign currency receivables and payables) were as follows:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
SERIES A (GROWTH (MONEY (WORLDWIDE (HIGH GRADE
(GROWTH) INCOME) MARKET) EQUITY) INCOME)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate
gross unrealized
appreciation $185,780,737 $215,310,355 $6,416 $28,630,771 $1,320,752
Aggregate
gross unrealized
depreciation (3,729,965) (5,589,085) (59,933) (5,134,822) (2,023,441)
--------------------------------------------------------------------------
Net unrealized
appreciation
(depreciation) $182,050,772 $209,721,270 ($53,517) $23,495,949 ($702,689)
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
SERIES M SERIES N
SERIES J SERIES K (SPECIALIZED (MANAGED SERIES O SERIES S
(EMERGING (GLOBAL ASSET ASSET (EQUITY (SOCIAL
GROWTH) AGGRESSIVE) ALLOCATION) ALLOCATION) INCOME) AWARENESS)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate
gross unrealized
appreciation $29,624,951 $543,451 $2,821,687 $2,241,187 $6,426,024 $11,893,151
Aggregate
gross unrealized
depreciation (1,862,258) (222,544) (940,283) (394,161) (470,924) (708,280)
-------------------------------------------------------------------------------------------
Net unrealized
appreciation
(depreciation) $27,762,693 $320,907 $1,881,404 $1,847,026 $5,955,100 $11,184,871
===========================================================================================
</TABLE>
Realized gains and losses are determined on an identified cost basis for
federal income tax purposes. Series A, B, D, J, K and S hereby designate
$12,046,576, $74,040,191, $5,192,049, $5,477,835, $50,427 and $1,127,096
respectively as capital gains dividends attributable to the year ended December
31, 1996, for the purpose of the dividends paid deduction on the Series' federal
income tax return. At December 31, 1996, Series E has a capital loss
carryforward of $12,158,916 which is available to offset future taxable gains
and expires in 2002.
4. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1996, (excluding
overnight investments and short-term debt securities) are as follows:
<TABLE>
<CAPTION>
SERIES B SERIES D SERIES E
SERIES A (GROWTH (WORLDWIDE (HIGH GRADE
(GROWTH) INCOME) EQUITY) INCOME)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases $380,418,678 $504,488,729 $269,846,872 $295,216,186
Proceeds
from sales $323,094,488 $482,161,952 $228,811,067 $286,566,631
</TABLE>
<TABLE>
<CAPTION>
SERIES M SERIES N
SERIES J SERIES K (SPECIALIZED (MANAGED SERIES O SERIES S
(EMERGING (GLOBAL ASSET ASSET (EQUITY (SOCIAL
GROWTH) AGGRESSIVE) ALLOCATION) ALLOCATION) INCOME) AWARENESS)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases $171,754,324 $11,203,592 $27,994,840 $17,647,937 $47,210,686 $38,678,461
Proceeds
From sales $142,970,484 $ 6,066,612 $ 9,534,480 $ 6,775,437 $ 7,732,623 $28,044,400
</TABLE>
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At December 31, 1996, Series D & Series K had the following open forward
foreign exchange contracts to sell currency (excluding foreign currency
contracts used for purchase and sale settlements):
<TABLE>
<CAPTION>
SETTLEMENT CONTRACT CONTRACT CURRENT UNREALIZED
CURRENCY DATE AMOUNT RATE RATE GAIN (LOSS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SERIES D
New Zealand
Dollar 4/01/97 $4,559,067 0.6859 0.70311 ($114,392)
==========
SERIES K
Canadian Dollar 1/31/97 $523,169 1.338 1.368 ($11,473)
==========
</TABLE>
6. FEDERAL TAX STATUS OF DIVIDENDS
The income dividends paid by the Funds are taxable as ordinary income on
the shareholders' tax return. The portion of ordinary income of dividends
(including net short-term capital gains) attributed to fiscal year ended
December 31, 1996, that qualified for the dividends received deduction for
corporate shareholders in accordance with the provisions of the Internal Revenue
Code for each Series was: Series A, 14%; Series B, 28%; Series C, 0%; Series D,
4%; Series E, 0%; Series J, 69%; Series K, 0%; Series M, 33%; Series N, 19%;
Series O, 62%; and Series S, 8%.
69
<PAGE> 188
REPORT OF INDEPENDENT AUDITORS
TO THE CONTRACT OWNERS AND BOARD OF DIRECTORS
SBL FUND
We have audited the accompanying balance sheets including the statements of net
assets, of SBL Fund (comprising, respectively the Series A, B, C, D, E, J, K, M,
N, O and S portfolios) (the Fund) as of December 31, 1996, and the related
statements of operations, statements of changes in net assets and the financial
highlights for each of the periods indicated therein. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1996, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other
auditing procedures. 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 each
of the respective portfolios constituting the SBL Fund at December 31, 1996, and
the results of their operations, the changes in their net assets and their
financial highlights for the periods indicated therein in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
January 31, 1997
70
<PAGE> 189
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Hugh L. Thompson, Ph.D.
OFFICERS
John D. Cleland, PRESIDENT
James R. Schmank, VICE PRESIDENT AND TREASURER
Terry A. Milberger, VICE PRESIDENT
Jane A. Tedder, VICE PRESIDENT
Mark E. Young, VICE PRESIDENT
Barbara J. Davison, ASSISTANT VICE PRESIDENT
Greg A. Hamilton, ASSISTANT VICE PRESIDENT
Cindy L. Shields, ASSISTANT VICE PRESIDENT
Thomas A. Swank, ASSISTANT VICE PRESIDENT
Amy J. Lee, SECRETARY
Christopher D. Swickard, ASSISTANT SECRETARY
Brenda M. Harwood, ASSISTANT TREASURER AND ASSISTANT SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUNDS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN
THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS WHICH
CONTAINS DETAILS CONCERNING THE SALES CHARGES AND OTHER PERTINENT INFORMATION.
[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
700 SW Harrison St.
Topeka, KS 66636-0001
(913) 295-3112
(800) 888-2461
<PAGE> 190
SBL FUND
ANNUAL REPORT
DECEMBER 31, 1996
- - Series P
(High Yield Series)
<PAGE> 191
DECEMBER 31, 1996
SBL FUND
SERIES P (HIGH YIELD)
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
PRINCIPAL MARKET VALUE
- ------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS
APPAREL - 2.0%
$50,000 Tultex Corporation, 10.625% - 2005 $54,437
AUTOMOBILES - 3.1%
80,000 Exide Corporation, 10.00% - 2005 83,400
BANKS & CREDIT - 2.0%
50,000 B.F. Saul REIT, 11.625% - 2002 53,750
BEVERAGES - 3.9%
50,000 Cott Corporation, 9.375% - 2005 51,500
50,000 Delta Beverage Group, 9.75% - 2003 51,125
------------
102,625
BROADCAST MEDIA - 4.4%
65,000 Allbritton Communications Company, 11.50%, 2004 68,900
50,000 Heritage Media Corporation, 8.75% - 2006 48,250
------------
117,150
CHEMICALS - 3.2%
80,000 Envirodyne Industries Inc., 12.00% - 2000 85,100
COMMUNICATION SERVICES - 9.5%
50,000 Cablevision Systems Corporation, 10.75% - 2004 52,000
50,000 Century Communications, 9.50% - 2005 51,250
65,000 Comcast Corporation, 9.125% - 2006 66,462
80,000 Rogers Cablesystems, 9.625% - 2002 83,800
------------
253,512
CONSUMER GOODS & SERVICES - 1.2%
50,000 Semi-Tech Corporation, 0% - 2003(1) 32,875
ELECTRIC UTILITIES - 4.6%
65,000 AES Corporation, 10.25% - 2006 70,200
50,000 Cal Energy Company Inc., 9.50% - 2006 51,500
------------
121,700
ENTERTAINMENT - 4.5%
70,000 Showboat, Inc., 9.25% - 2008 68,862
50,000 Station Casinos Inc., 10.125% - 2006 50,125
------------
118,987
FINANCIAL SERVICES - 1.9%
50,000 Dollar Financial Group, 10.875% - 2006 51,500
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 192
DECEMBER 31, 1996
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
PRINCIPAL MARKET VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FOOD PROCESSING - 2.6%
$ 65,000 TLC Beatrice International Holdings, 11.50% - 2005 $68,900
HEALTH CARE SERVICES - 1.9%
50,000 Regency Health Services, 9.875% - 2002 50,625
INDUSTRIAL SERVICES - 2.0%
50,000 Iron Mountain Inc., 10.125% - 2006 52,812
MANUFACTURING - 3.8%
50,000 Sequa Corporation, 9.375% - 2003 50,500
50,000 Shop Vac Corporation, 10.625% - 2003 52,625
------------
103,125
MEDICAL - 2.0%
50,000 Maxxim Medical, 10.50% - 2006 52,250
MISCELLANEOUS - 1.8%
50,000 Jordan Industries, 10.375% - 2003 49,375
OIL - 2.5%
65,000 Maxus Energy, 9.50% - 2003 65,813
PACKAGING & CONTAINERS - 1.9%
50,000 Plastic Containers, Inc., 10.00% - 2006 51,625
PETROLEUM - 1.9%
50,000 Crown Central Petroleum, 10.875% - 2005 51,063
PUBLISHING - 5.5%
80,000 Golden Books Publishing, 7.65% - 2002 72,200
70,000 KIII Communications Corporation, 10.625% - 2002 73,500
------------
145,700
RECREATION - 2.0%
50,000 AMF Group, Inc., 10.875% - 2006 52,750
RESTAURANTS - 2.6%
65,000 Carrols Corporation, 11.50% - 2003 69,063
STEEL - 1.0%
25,000 AK Steel Corporation, 9.125% - 2006 25,688
TEXTILES - 4.5%
50,000 Pillowtex Corporation, 10.00% - 2006 52,000
65,000 Westpoint Stevens Inc., 9.375% - 2005 66,788
------------
118,788
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 193
DECEMBER 31, 1996
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
PRINCIPAL MARKET VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TOBACCO - 2.6%
$ 65,000 Dimon, Inc., 8.875% - 2006 $68,006
TRANSPORTATION - 5.5%
75,000 Atlas Air, Inc., 12.25% - 2002 83,156
65,000 Teekay Shipping Corporation, 8.32% - 2003 65,000
------------
148,156
Total corporate bonds - Series P - 84.4% $2,248,775
<CAPTION>
GOVERNMENT AGENCY SECURITIES
<S> <C> <C>
FEDERAL HOME LOAN BANK - 4.7%
$125,000 Federal Home Loan Mortgage
Corporation, 5.32% - 1997 124,760
Total government agency
securities - Series P - 4.7% 124,760
------------
Total investments - Series P - 89.1% 2,373,535
Cash and other assets,
less liabilities - Series P - 10.9% 291,570
------------
Total net assets - Series P - 100% $2,665,105
============
</TABLE>
(1) Deferred interest obligation; currently zero coupon under terms of
initial offering.
The identified cost of investments owned at December 31, 1996 was the same
for federal income tax and financial statement purposes.
SEE ACCOMPANYING NOTES.
<PAGE> 194
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES P
(HIGH YIELD)
ASSETS
<S> <C>
Investments, at value (identified cost $2,311,304)........... $2,373,535
Cash......................................................... 236,877
Interest receivable.......................................... 54,798
------------
Total assets....................................... $2,665,210
============
LIABILITIES AND NET ASSETS
Liabilities:
Transfer and administration fees......................... 105
------------
Total liabilities.................................. 105
Net Assets:
Paid in capital.......................................... 2,500,000
Undistributed net investment income...................... 85,799
Accumulated undistributed net realized gain on
sale of investments................................ 17,075
Net unrealized appreciation in value of investments...... 62,231
------------
Net assets......................................... 2,665,105
------------
Total liabilities and net assets............... $2,665,210
============
Capital shares authorized.................................... Indefinite
Capital shares outstanding................................... 166,667
Net asset value per share (net assets
divided by shares outstanding).......................... $ 15.99
============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 195
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 5, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION> SERIES P
(HIGH YIELD)
INVESTMENT INCOME:
<S> <C>
Interest........................................................ $ 88,728
---------
Total investment income.................................. 88,728
EXPENSES:
Management fees................................................. 8,605
Custodian fees.................................................. 448
Transfer/maintenance fees....................................... 5
Administration fees............................................. 466
Professional fees............................................... 2,000
Registration fees............................................... 10
---------
11,534
Less management fees waived..................................... (8,605)
---------
Total expenses........................................... 11,534
---------
Net investment income................................. 85,799
NET REALIZED AND UNREALIZED GAIN:
Net realized gain during the period on investments.............. 17,075
Net change in unrealized appreciation during
the period on investments.................................. 62,231
----------
Net gain.............................................. 79,306
----------
Net increase in net assets resulting from operations $165,105
==========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 196
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD AUGUST 5, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION> SERIES P
(HIGH YIELD)
INCREASE IN NET ASSETS FROM OPERATIONS:
<S> <C>
Net investment income........................................... $ 85,799
Net realized gain............................................... 17,075
Unrealized appreciation during the period....................... 62,231
---------
Net increase in net assets resulting from operations........ 165,105
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares.................................... 2,500,000
----------
Net increase from capital share transactions................ 2,500,000
----------
Total increase in net assets.......................... 2,665,105
NET ASSETS:
Beginning of period............................................. ----------
End of period $2,665,105
==========
Undistributed net investment income at end of period............ $ 85,799
(a)Shares issued and redeemed
Shares sold........................................... 166,667
----------
Net increase...................................... 166,667
==========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 197
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(a)(b)
SERIES P
(HIGH YIELD)
FISCAL PERIOD ENDED DECEMBER 31, 1996:
<S> <C>
Net asset value, beginning of period............................. $15.00
Net investment income ........................................... .51
Net gain (realized and unrealized)............................... .48
-----
Total from investment operations................................. .99
-----
Net asset value, end of period................................... $15.99
=====
Total return.................................................... 6.6%
Net assets end of period (thousands)............................. $2,665
Ratio of expenses to average net assets(a)....................... .28%
Ratio of net income to average net assets(a)..................... 8.24%
Portfolio turnover rate.......................................... 151%
</TABLE>
(a) Fund expenses were reduced by the Investment Manager and the expense
ratio absent such reimbursement would have been 1.11%.
(b) Series P was initially capitalized on August 5, 1996, with a net asset
value of $15 per share. Percentage amounts for the period have been
annualized, except for total return.
SEE ACCOMPANYING NOTES.
<PAGE> 198
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Significant accounting policies
The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company of
the series type. Series P is one of twelve series currently issued by SBL
Fund (the Fund). The Fund is required to account for the assets of each
series separately and to allocate general liabilities of the Fund to
each series based upon the net asset value of each series. Shares of the
Fund will be sold only to Security Benefit Life Insurance Company
(SBL) separate accounts. The following is a summary of the significant
accounting policies followed by the Fund in the preparation of its
financial statements. These policies are in conformity with generally
accepted accounting principles.
A. Security Valuation - Valuations of the Series' securities are supplied
by pricing services approved by the Board of Directors.
Securities listed or traded on a recognized securities exchange are
valued on the basis of the last sales price. If a security is
traded on multiple exchanges, its value will be based on the
price from the principal exchange where it is traded. If there
are no sales on a particular day, then the securities are valued
at the last bid. Securities for which market quotations are not
readily available are valued by a pricing service considering
securities with similar yields, quality, type of issue, duration,
and rating. If there is no bid price or if the bid price is deemed
to be unsatisfactory by the Board of Directors or by the Series'
investment manager, then the securities are valued in good faith by
such method as the Board of Directors determines will reflect the
fair value. The Series generally will value short-term debt
securities at prices based on market quotations for such
securities or securities of similar type, yield, quality and
duration, except that securities purchased with 60 days or less to
maturity are valued at amortized cost which approximates market
value.
B. Security Transactions and Investment Income - Security transactions
are accounted for on the date the securities are purchased or
sold. Realized gains and losses are reported on an identified cost
basis. Interest income is recognized on the accrual basis.
Premium and discounts (except original issue discounts) on debt
securities are not amortized.
C. Distributions to Shareholders - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions
made during year from net investment income or net realized
gains may differ from their ultimate characterization for
federal income tax purposes.
D. Taxes - The Series complied with the requirements of the Internal
Revenue Code applicable to regulated investment companies
and distributed all of its taxable net income and net realized
gains sufficient to relieve it from all, or substantially all,
federal
<PAGE> 199
income, excise and state income taxes. Therefore, no provision for
federal or state income tax is required.
2. Management Fees and Other Transactions With Affiliates
Management fees are payable to Security Management Company, LLC (SMC) (the
Investment Manager) under an investment advisory contract at an annual rate
of .75% of the average daily net assets for Series P. For the period August
5, 1996 through December 31, 1996, SMC waived all of its management fee.
The investment advisory contract provides that the total annual expenses of
the Series (including management fees, but excluding interest, taxes,
brokerage commissions and extraordinary expenses) will not exceed the level
of expenses which the Series is permitted to bear under the most
restrictive expense limitation imposed by any state in which shares of the
Series are then offered for sale.
The Series has entered into a contract with SMC for transfer agent services
and administrative services which SMC provides to the Series. The charges
paid by the Series under the contract for transfer agent services were
insignificant. The administrative services provided by SMC principally
include all fund and portfolio accounting and regulatory filings. For
providing these services, SMC receives a fee at the annual rate of .045% of
the average daily net assets of the Series.
Certain officers and directors of the Series are also officers and/or
directors of SBL and its subsidiaries, which include Security Management
Company, LLC.
SBL is the sole shareholder of Series P.
3. Federal Income Tax Matters
The amounts of unrealized appreciation (depreciation) as of December 31,
1996, were as follows:
Aggregate gross unrealized appreciation............. $62,481
Aggregate gross unrealized depreciation............. (250)
--------
Net unrealized appreciation ........................ $62,231
========
4. Investment Transactions
Investment transactions for the period August 5, 1996 through December 31,
1996 (excluding overnight investments and short-term debt securities) were
as follows:
Purchases.......................................... $3,400,209
Proceeds from sales................................ 1,232,338
<PAGE> 200
Report of Independent Auditors
To the Shareholder and Board of Directors
SBL Fund
We have audited the accompanying balance sheet and statement of net assets of
SBL Fund Series P (the Fund) as of December 31, 1996, the related statements of
operations and changes in net assets and financial highlights for the period
August 5, 1996 (commencement of operations) through December 31, 1996. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
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 investments
owned as of December 31, 1996, by correspondence with the custodian. As to
securities relating to uncompleted transactions, we performed other audit
procedures. 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 audit provides 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 SBL
Fund Series P at December 31, 1996, and the results of its operations, changes
in its net assets and the financial highlights for the period indicated above
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
January 31, 1997
<PAGE> 201
SBL FUND
================================================================================
SEMI-ANNUAL REPORT
JUNE 30, 1997
*Series A
(Growth Series)
*Series B
(Growth-Income Series)
*Series C
(Money Market Series)
*Series D
(Worldwide Equity Series)
*Series E
(High Grade Income Series)
*Series J
(Emerging Growth Series)
*Series K
(Global Aggressive Bond Series)
*Series M
(Specialized Asset Allocation Series)
*Series N
(Managed Asset Allocation Series)
*Series O
(Equity Income Series)
*Series P
(High Yield Series)
*Series S
(Social Awareness Series)
[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE> 202
PRESIDENT'S LETTER
August 15, 1997
To Our Contractholders:
For the six months concluded June 30, 1997 the financial markets again provided
positive returns for investors. This is particularly true for those
contractholders who have funds in our equity portfolios.
MARKET PERFORMANCE IN THE FIRST SIX MONTHS
The first half of 1997 was a roller-coaster ride for fixed income investors. At
the beginning of the year the bellwether thirty-year Treasury bond yielded
6.64%. By late April the yield had risen to 7.14% before it began its descent to
6.78% at the end of June. As you know, bond prices move inversely to yields,
staging a "mirror" roller coaster ride which produced a 2.3% total return on the
long Treasury bond for the period.
The equity markets, however, produced another six months of incredible
performance. The Dow Jones Industrial Average Index returned 20.12% over the
first half while the Standard and Poor's 500 Index increased 20.61%. The S&P
Midcap 400 Index was less dramatic, generating 12.16% and the Russell 2000
Index, representing the small cap sector, also lagged its large-cap counterparts
but still produced a very respectable 10.17%. Clearly the markets were focused
again on the larger capitalization companies, reflecting the growing tendency of
money managers to prefer liquid issues for investment of new cash flows.
WHAT IS FUELING THE STRONG MARKETS?
The overriding economic theme for the first six months of 1997 was declining
secular inflation pressures, not just in the U.S. but globally as well. The
economy continues to grow at a steady pace, one which we expect to decline from
the torrid 5.9% annualized rate of the first quarter to a more sustainable 2.75%
to 3% for the balance of the year. We believe that it is possible to have growth
in this range without reigniting inflation.
This "steady growth, low inflation" picture should create an opportunity for
further declines in long-term interest rates. At the same time, the continuation
of the second-longest period of uninterrupted economic growth in post-World War
II history can create a climate which will take the equity markets to record
high ground.
KEEP THE LONG TERM PICTURE IN MIND
This is the stuff of which bull markets are made, and we clearly are enjoying
one of record proportions. However, we caution that increased volatility in the
financial markets creates the potential for sudden sharp downdrafts. These can
trap the unwary investor into becoming a trader in response to the schizophrenia
created by daily market noise. It is more important than ever to maintain a
disciplined approach to investing with a long-term financial plan.
As always, we invite your questions and comments. We appreciate your continuing
investment in Security products. Sincerely,
JOHN CLELAND
John Cleland, President
The Security Funds
1
<PAGE> 203
SERIES A (GROWTH SERIES)
August 15, 1997
The Growth Series of the SBL Fund returned a very attractive 16.78% in the first
six months of 1997(1). Although the Series lagged the 20.61% return of the S&P
500 Index, it was stronger than its peer group average of 13.57% for the same
time period. In an absolute sense the Series turned in an outstanding first half
for its investors.
COMPARISONS WITH THE BENCHMARK INDEX
This was a period in which performance was held back more by what we didn't own
than by what was in the portfolio. One of the primary reasons the Series lagged
its benchmark S&P 500 Index was an underweighting in some financial areas.
Regional banks as a group performed very well; unfortunately, the portfolio was
underweighted relative to the benchmark in this sector. Conversely, we held an
overweight position in money center banks which underperformed during the
period. The telecommunications sector, another area in which we were
underinvested relative to the S&P Index, also had an outstanding six months.
Continuing the "what we didn't own" theme, Coca Cola Company makes up 2.5% of
the S&P 500 Index, and General Electric Company another 3%. These two stocks
returned 29.8% and 32.2% respectively during the six months. We didn't own Coca
Cola Company, and held only a 1.67% weight in General Electric Company.
FAVORABLE INDUSTRY WEIGHTINGS
On the other, more favorable, side of the coin, there were many sector
weightings in the portfolio which helped performance. An overweighting in health
care issues relative to the benchmark index added to total performance as issues
such as Bristol-Myers-Squibb Company continued their above-average growth. Our
holdings in consumer nondurable goods companies, including Procter & Gamble
Company and Colgate-Palmolive Company, also did very well over the six months.
Insurance company stocks like our position in Allstate Corporation outperform as
a general rule when interest rates decline.
Our Microsoft Corporation stock was a strong performer, rising sharply in
mid-April after the company reported a third-quarter earnings increase of 85%.
The Series benefited from an underweighting in the energy sector as well when
this area performed weakly in the first half.
2
<PAGE> 204
SERIES A (GROWTH SERIES)
August 15, 1997
WHAT'S AHEAD FOR THE SECOND HALF
Our plans for the remainder of the year are to "stay the course." At this time
we anticipate no major changes in the general nature of the portfolio holdings.
We are expecting some moderation in the rate of economic growth, with earnings
continuing to be strong in sectors such as consumer nondurable goods and health
care. If interest rates continue to decline as we believe they will, our
insurance company issues will still do well. We have increased our holdings in
the regional bank sector, which would also benefit from falling interest rates.
We will maintain our focus on consistent high growth companies, particularly
those with earnings derived from international as well as domestic exposure.
Terry Milberger
Senior Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year 5 Years 10 Years
Series A 27.9% 19.5% 13.6%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 EQUITY HOLDINGS**
SERIES A - GROWTH SERIES
Bristol-Myers Squibb Company ....... 1.9%
Microsoft Corporation .............. 1.7%
AlliedSignal, Inc .................. 1.6%
ADT, Ltd. .......................... 1.6%
General Electric Company ........... 1.6%
** At June 30, 1997
3
<PAGE> 205
SERIES B (GROWTH-INCOME SERIES)
August 15, 1997
The Growth-Income Series of the SBL Fund returned a rewarding 15.45% in the
first six months of 1997, close to its peer group average of 15.81%(1). As you
know, the stock markets have experienced another period of incredible returns,
with the Standard and Poor's 500 Index rising 20.61%. Our blended benchmark
index, consisting of 80% S&P 500 Index and 20% Lehman Brothers Aggregate High
Yield Bond Index, generated a six-month return of 17.65%.
PORTFOLIO MIX
The portion of the portfolio invested in high yield bonds, while outperforming
its benchmark index, has held back performance on the overall portfolio
throughout this period of strong stock markets. Even though high yield bonds
have been the star performers in the domestic fixed income investment realm for
the first half of the year, they have still vastly underperformed equities. The
20% of the portfolio allocated to bonds was reduced to 15% late in the first
half, and may be reduced further in coming months.
In the 80% of the Series allocated to equities (which has recently been raised
to 85%), the emphasis is still heavily on growth stocks. The mix is a ratio of
about four to one growth to value stocks.
POSITIVE AND NEGATIVE FORCES DURING THE FIRST HALF
A primary reason for underperformance relative to the benchmark index was an
underweighting in the portfolio in certain sectors which performed very well in
the index. These include some areas such as regional banks and
telecommunications. Also hurting return was an overweighting in money center
banks which, unlike their smaller regional counterparts, underperformed during
the six months.
Those areas in which our selection added to performance included health care
issues such as Bristol-Myers-Squibb Company and consumer nondurable goods
companies like Procter & Gamble Company and Colgate-Palmolive Company. Our
Allstate Corporation holdings did very well in a period of declining interest
rates. We held a large position--2% of the equity portion of the portfolio--in
Coca Cola Company stock, which rose nearly 30% in value in the first half of
1997.
4
<PAGE> 206
SERIES B (GROWTH-INCOME SERIES)
August 15, 1997
PLANS FOR THE NEXT SIX MONTHS
As mentioned earlier, we will probably reduce the high yield bond portion of the
portfolio a bit more in the second half. We anticipate no other major changes to
the structure in the coming months, but will continue focusing on stocks of
consistent high growth companies, emphasizing those with earnings derived from
international as well as domestic exposure. We expect earnings to remain strong
in the consumer nondurable goods and health care sectors. If interest rates
continue to decline as we believe they will, interest-sensitive stocks should
also outperform.
Terry Milberger
Senior Portfolio Manager
Tom Swank
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year 5 Years 10 Years
Series B 24.2% 16.1% 13.2%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 EQUITY HOLDINGS**
SERIES B - GROWTH-INCOME SERIES
Procter & Gamble Company ........... 1.9%
Bristol-Myers Squibb Company ....... 1.9%
Microsoft Corporation .............. 1.7%
Gillette Company ................... 1.7%
General Electric Company ........... 1.7%
** At June 30, 1997
5
<PAGE> 207
SERIES C (MONEY MARKET SERIES)
August 15, 1997
The total return on money market funds in the first half of 1997 was near that
of its close relatives, the fixed income funds, as interest rates on thirty-year
Treasury bonds fluctuated in a range roughly between 6.50% and 7.25%. The Money
Market Series of SBL Fund posted a gain of 2.51% for the period, outpacing the
2.47% peer group average yield.(1) Money market funds, unlike longer-term fixed
income securities, generally benefit from increases in short-term interest rates
such as the one executed by the Federal Reserve Open Market Committee in March.
AVERAGE MATURITY TARGETS FOR THE SERIES
At June 30 the Money Market Series had a 48-day average maturity, six days
shorter than that of the benchmark IBC Donoghue Money Fund Report. Our goal is
to stay within a range of ten days more or less than the Donoghue average and
avoid trying to outguess the markets by moving maturities sharply shorter or
longer. Because of the short-maturity nature of money market assets we can
quickly adjust to interest rate changes when they occur, without taking
unnecessary maturity risk in this conservative portfolio.
ASSET SECTORS REPRESENTED IN THE PORTFOLIO
The assets in SBL Fund's Money Market Series at the end of the six-month period
consisted of 77% commercial paper, 10% federal agency securities, and 13% Small
Business Administration issues. The commercial paper we purchase is entirely in
the "top tier" of rating agency classifications, rated at least A1 by Standard
and Poor's rating agency or P1 by Moody's. Federal agency holdings may from time
to time include short-term securities issued by the Federal National Mortgage
Association, the Federal Home Loan Bank, and Federal Farm Credit Banks.
The Small Business Association (SBA) holdings are fully guaranteed by the
federal government as to timely payment of principal and interest. These issues,
while bearing stated maturities in the twenty to thirty year range, are
considered to be short-maturity paper because their interest rate resets
periodically (usually monthly or quarterly). This enables the issues to carry
coupons representing recent market levels, staying competitive with other
short-term investment instruments.
OUTLOOK FOR THE NEXT SIX MONTHS
Interest rates have recently been declining on long-term bonds. Although this
movement has some effect on short-term rates, until the Federal Reserve decides
to lower their short rate targets, commercial paper and short-maturity agency
interest rates should not drop substantially. We expect the Fed to maintain
their cautious stance toward a rekindling of inflationary pressures, and
therefore believe that money fund returns will not vary substantially in the
near future.
Barbara Davison
Fixed Income Team
Series C is neither insured nor guaranteed by the U.S. Government and does not
maintain a stable net asset value at $1.00 per share.
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year 5 Years 10 Years
Series C 5.1% 3.5% 5.2%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
6
<PAGE> 208
SERIES D (WORLDWIDE EQUITY SERIES)
August 15, 1997
[LEXINGTON LOGO] SUBADVISOR, LEXINGTON MANAGEMENT CORPORATION
PORTFOLIO MANAGERS, RICHARD SALER AND ALAN WAPNICK
The Worldwide Equity Series returned 12.70% during the six month period ending
June 30, outpacing its peer group average of 12.50%(1). The benchmark Morgan
Stanley Capital International World Index (MSCI Index) advanced 14.55%, with a
large part of the return coming from its 45% weighting in United States stocks.
THE EFFECT OF U.S. WEIGHTINGS IN GLOBAL PORTFOLIOS
The United States equity market continued to power ahead with a first half gain
as measured by the Standard & Poor's 500 Index of 20.61%. Due to the perceived
risk of slow profit growth and lofty valuation levels, the Worldwide Equity
Series maintained a relatively low U.S. exposure, as did most global funds. As a
result, the benchmark MSCI Index easily outperformed most managed global funds.
The Series benefited from strong equity performance in Europe. For example,
Switzerland posted a staggering 31.3% increase, while Spain advanced 20.7%.
Emerging market holdings in Latin America performed well; however, these gains
in the portfolio were offset by losses suffered in Malaysia and the Philippines.
MARKET PERFORMANCE AROUND THE WORLD
Equity markets are enjoying a historic climb in most countries as inflation
worldwide continues to fall. There are other regional drivers moving stock
prices, also. In Latin America economic recovery is leading to profit
acceleration. European equities are advancing as investors anticipate European
Monetary Union will become a reality, and this confidence has led to dramatic
falls in interest rates as European rates converge with low German rates.
Economic activity is accelerating from depressed levels across Europe, resulting
in rising profit expectations. Many European companies are now undertaking the
restructuring process already completed by many U.S. corporations, reducing
costs and increasing profit margins.
Finally, even Japan, after a difficult start, has enjoyed positive returns so
far in 1997 with a market gain of 8.7%. Japanese economic growth has
accelerated, improving profits and investor confidence.
WHERE DO WE GO FROM HERE?
The challenge for investors today is quite high. Conditions are positive for
stocks, yet much of
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SERIES D (WORLDWIDE EQUITY SERIES)
August 15, 1997
the good news seems to be already reflected in valuations. Given that markets
have been and continue to be driven by excess liquidity, large companies have
seen their stock prices soar. These same stocks will be most vulnerable when
markets eventually decline.
As a result of this trend, we have discovered better value in smaller stocks
like IMAX in Canada or JCG Holdings in Hong Kong. These growth stocks are not
well known and can be purchased at a discount relative to large stocks with a
similar growth outlook. Regionally the Series remains underweighted in the U.S.
due to high valuation levels and a muted profit outlook.
Europe is attractive although many stocks are becoming extended. Japanese stocks
may have a difficult second half as we expect that economy to slow and profits
to disappoint. Opportunities in emerging markets, we believe, are best found in
Latin America; the Mexican market looks especially attractive as profit growth
accelerates in a falling interest rate environment. The Series is currently
overweight in Canada, Latin America and Europe.
Richard Saler
Portfolio Manager
Alan Wapnick
Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year 5 Years 10 Years
Series D 17.6% 14.3% 4.2%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 EQUITY HOLDINGS**
SERIES D - WORLDWIDE EQUITY SERIES
Bohler Uddeholm AG ................... 2.5%
Imax Corporation ..................... 2.0%
Wienerberger Bautofindstrie AG ....... 1.8%
Cemex "B" ............................ 1.7%
Jefferson Smurfit Group .............. 1.7%
** At June 30, 1997
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SERIES E (HIGH GRADE INCOME SERIES)
August 15, 1997
The fixed income markets were volatile during the first half of 1997. The
thirty-year Treasury bond began the year yielding 6.64% and finished June at
6.78%, rising as high as 7.14% in between. The total return for the long bond
was only 2.3% over the six-month period. Corporate issues fared slightly better,
as the Lehman Corporate Bond Index rose 3.07%. The High Grade Income Series of
the SBL Fund returned 2.75% through June 30, slightly behind its peer group
average of 2.84%.(1)
CONTRIBUTORS TO PERFORMANCE IN THE FIRST HALF
The Series underperformed in the first three months of 1997 primarily because of
its position in bonds issued by property and casualty insurer Home Holdings.
This company, which experienced problems among some of its insured risks,
continued to decline in value and was ultimately sold from the portfolio.
While the first quarter's total return was negative, the second quarter's was
much better, outperforming its peers over the three month period. Steps were
taken to upgrade the overall credit quality of the holdings in the portfolio.
The high yield portion is now concentrated in issues rated BB and B, the upper
tiers of the high yield rating universe. Some of these issues have the potential
to be upgraded to investment grade ratings in the not-too-distant future, which
should add a capital gain return element to their attractive coupon rates.
HOW THE PORTFOLIO LOOKS NOW
At the end of June the sector composition of the portfolio was approximately
50.7% high grade corporate bonds, 20.4% Yankee bonds (U.S. dollar-denominated
securities issued by foreign corporations), 16.9% high yield corporate issues,
and about 12% mortgage-backed securities issues primarily by agencies of the
U.S. Government. This sector diversification should give the Series some
downside protection because the various sectors will not always move up or down
in value in tandem.
The average rating of the bonds in the portfolio is A-, with an average coupon
of 7.82%. Average duration of the securities is about 6.6 years, slightly longer
than that of the benchmark Lehman Corporate Bond Index duration of 5.88 years.
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SERIES E (HIGH GRADE INCOME SERIES)
August 15, 1997
LOOKING TO THE SECOND HALF
We plan to increase the allocation of high yield bonds to be nearer 20% of total
assets early in the second half. We are also working to reduce the block size of
issues in the portfolio so that each issuer will represent 2.5% or less of total
assets, in order to achieve further diversification.
The High Grade Income Series' portfolio, with these changes, will be well
positioned for the coming months. We will maintain our emphasis on maintaining a
neutral duration and diversification among sectors and asset classes. The
mortgage-backed securities and Yankee bonds provide cash flow through their
generally higher coupon interest rates than other classes. Finally,
fundamentally improving stories among our high yield credits provide the
potential for added return through capital gain.
Tom Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year 5 Years 10 Years
Series E 5.7% 5.9% 7.6%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
ASSET MIX**
SERIES E - HIGH GRADE INCOME SERIES
Corporate Bonds ................... 76.7%
Trust Preferred Securities ........ 4.8%
Mortgage Backed Securities ........ 14.6%
Government Securities ............. 0.4%
Cash & Equivalents ................ 3.5%
** At June 30, 1997
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SERIES J (EMERGING GROWTH SERIES)
August 15, 1997
In the midst of generally robust stock markets, small cap and midcap stocks
continued to underperform. By most measures, their returns were very attractive.
The Standard & Poor's 400 Midcap Growth Stock Index rose 14.95% in the first
half, and the small-cap Russell 2000 Index was up 10.17%. It is only when
compared with their larger counterparts that these returns seem less than ideal.
RELATIVE PERFORMANCE OF THE SERIES VERSUS ITS PEERS
The Emerging Growth Series returned 5.97% over the six months, trailing the
average 9.68% performance of its peer group of funds(1). The Series was hit hard
in the February and March stock market correction primarily because of its
orientation toward consistent growth companies. In periods when interest rates
are rising and uncertainty about corporate earnings abound, value stocks
frequently outperform growth issues.
Some of this damage was repaired in the second quarter when growth issues
recaptured part of their previous losses. The general recovery of the small and
midcap sectors of the stock markets during this period also helped the portfolio
overall to regain earlier losses. Issues which have performed very well include
Dell Computer which gained over 120% during the first half of 1997, money
manager Franklin Resources which rose almost 60%, and State Street Corporation,
up over 40%.
SMALL CAP AND MIDCAP MARKET OUTLOOK
If economic growth should weaken from its strong first-half pace, small cap and
midcap companies would be more likely to outperform the larger issues because
their earnings growth would look better by comparison. In addition, a slowing in
the pace of initial public offerings has allowed the supply/demand ratio to move
closer to normal, strengthening the foundation of the small cap markets.
A reduction in the capital gains tax would be beneficial for the smaller company
stocks, since more of their increase in value tends to come from capital
appreciation instead of dividends. The outlook for the tax cut seems favorable
at the present time; factors not yet known are who the recipients of the cut
will be and when it will become effective. Although the initial impact on the
stock markets might be a period of decline as investors take advantage of the
opportunity to sell their stocks, the longer-term effect will in all likelihood
be to benefit the small cap and midcap issues.
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SERIES J (EMERGING GROWTH SERIES)
August 15, 1997
PLANS FOR THE NEXT SIX MONTHS
In general we plan to keep the portfolio weighted toward the midcap portion of
the market, as investors appear to still be avoiding the smaller companies. We
will maintain our focus on higher-quality companies with good earnings
consistency and strong management. It is anticipated that our sector weightings
will be held close to that of our benchmark index, with substantial weights in
technology, health care, and interest sensitive issues. We view any corrections
in the markets as excellent buying opportunities.
Cindy Shields
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year Since Inception
(10-1-92)
Series J 8.0% 16.0%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 INDUSTRIES**
SERIES J - EMERGING GROWTH SERIES
Retail Trade ............ 8.5%
Computer Software ....... 8.5%
Business Services ....... 6.5%
Semiconductors .......... 6.3%
Computer Systems ........ 6.0%
** At June 30, 1997
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SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
August 15, 1997
[LEXINGTON LOGO] [MFR LOGO]
SUBADVISORS, MFR ADVISORS, INC., AND LEXINGTON MANAGEMENT CORPORATION
PORTFOLIO MANAGERS, MARIA FIORINI RAMIREZ AND DENIS JAMISON
The first half of 1997 saw mediocre returns for the global fixed income
investor. The Global Aggressive Bond Series' total return of 2.43% for the
period placed it above the median in its peer group which averaged 1.73%(1).
HOW WORLD BOND MARKETS LOOKED
Many of the world's developed government bond markets performed reasonably well.
The average ten-year bond yield of the G-7 countries (Germany, France, United
Kingdom, Italy, Japan, Canada and the United States) started the year yielding
6.02% and fell to 5.82% during the first six months. The United States was the
only country in the group that experienced a rise in its ten-year bond yields.
Although most global bond returns were attractive, they became mediocre for U.S.
investors when the value of the U.S. dollar rose against most European
currencies.
The two major European anchor countries, Germany and France, remained in the
economic doldrums. Constrained by the economic guidelines of the rapidly
approaching European Monetary Union (EMU), neither country has the fiscal
latitude needed to jump start its economy. This continued anemic economic growth
outlook combined with the large short-term interest rate differentials between
core Europe and the U.S. (Germany's three-month interest rates are 2.5% below
the U.S.) pushed the U.S. dollar up approximately 11% versus the German currency
in the first half of 1997. This decline more than offset interest income and
bond gains and resulted in the benchmark Lehman Brothers Global Bond Index
declining 1.58% for the period.
PERFORMANCE OF THE GLOBAL AGGRESSIVE BOND SERIES
The Series owed much of its 2.43% return to its investment in dollar denominated
high yield bonds. This category includes Brady bonds, U.S. high yield corporate
debt and dollar denominated mortgages. All of these sectors saw their interest
rate spreads narrow versus U.S. Treasury securities as investors around the
world sought relatively high yielding securities. With yields in the G-7
countries averaging about 5.8% on June 30, this comes as no surprise.
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SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
August 15, 1997
A LOOK AHEAD
We are optimistic about the Series' return for the second half of 1997. The
global interest rate environment should remain friendly with subdued inflation
the most important contributor. In addition, we believe that most of the bad
news regarding Europe has been priced into the U.S. dollar. These factors,
combined with a continued flow of funds into the high yield bond sectors, bode
well for the Global Aggressive Bond Series.
Maria Fiorini Ramirez
Portfolio Manager
Denis Jamison
Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year Since Inception
(6-1-95)
Series K 12.1% 11.0%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 COUNTRIES*
SERIES K - GLOBAL AGRESSIVE BOND SERIES
United States ....... 11.6%
Canada .............. 9.6%
Denmark ............. 9.3%
Greece .............. 7.4%
Hungary ............. 6.2%
* At June 30, 1997
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SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
August 15, 1997
[MERIDIAN LOGO] MANAGED BY SECURITY MANAGEMENT COMPANY
RESEARCH PROVIDED BY MERIDIAN INVESTMENT MANAGEMENT CORPORATION
The extremely strong U.S. stock markets made returns on asset allocation funds
pale in comparison. In periods such as we have experienced so far this year, any
fund invested in asset classes other than U.S. stocks will underperform.
Investors in these types of funds recognize that the diversification of asset
classes generally provides reduced volatility, and can provide an added measure
of safety when markets decline. The peer group average for the Specialized Asset
Allocation Series rose 9.96% in the first half of 1997, while the Series itself
posted a 7.39% gain.(1)
CONTRIBUTORS TO PERFORMANCE IN FIRST HALF
Sometimes allocation choices seem jinxed. Meridian Asset Management recommended
changes three times during the past six months. Each worked very well for
awhile, and then lost ground to the raging bull market. In late February, they
suggested that we sell our remaining real estate stock holdings. The benchmark
Wilshire Real Estate Securities Index, which stood at a reading of about 100 at
the time, subsequently dropped below 95 before resuming its upward move and
closing the period above 104.
In early March Meridian suggested that we reduce our U.S. equity position by 10%
to be 24.8% of the portfolio, and our U.S. bond holdings to 15% from almost 22%
of assets. As with real estate, following the earlier recommendation, stocks and
bonds initially dropped in value from their levels at the time of the portfolio
change, and then began rising again.
The third recommendation, a move of 10% of assets into gold on May 7, seemed
well-timed as gold stocks rose sharply in the days following the change. But
after the Australian central bank announced in June that it had earlier sold a
large quantity of its gold reserves, gold stocks departed from overall equity
market movements and fell sharply.
EQUITY ASSET CLASSES REVISED
In May Meridian reclassified many of the industry designations in their model
portfolio in response to the introduction of a broader S&P industry grouping.
The S&P's new "Super 1500" list of industries replaces the 67 classifications
previously used, and provides a more descriptive and more narrowly defined
index. This change does not affect overall allocation strategies, but allows for
better usage of industry
15
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SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
August 15, 1997
designations within the U.S. equity portion of the portfolio.
PLANS FOR THE SECOND HALF OF 1997
The outlook for the U.S. bond market for the balance of the year is positive,
given the low level of inflation, the steady decline in commodity prices, and
steady economic growth conditions that prevail currently. We expect this
atmosphere to continue through the next six months, and plan to adjust bond
holdings from time to time accordingly.
Meridian remains skeptical on the domestic stock markets. At their current high
levels, and even with the support of lower bond yields, the danger remains for a
substantial correction. International equity markets have lagged the performance
of the U.S. markets in dollar terms. In Meridian's view select foreign countries
such as Italy and Japan are likely to outperform their U.S. counterparts in the
months to come. Accordingly, the foreign stock portion of the portfolio may be
increased. Cash continues to be the least rewarding asset class to hold, and
will probably be reduced to a very small percentage of assets going forward.
Jane Tedder
Senior Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year Since Inception
(6-1-95)
Series M 14.7% 14.0%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
MERIDIAN TARGET ALLOCATION*
SERIES M - SPECIALIZED ASSET ALLOCATION SERIES
U.S. Equities ................. 24.8%
International Equities ........ 29.9%
U.S. Bonds .................... 15.0%
International Bonds ........... 00.0%
Gold .......................... 10.0%
Real Estate ................... 00.0%
Cash .......................... 20.3%
* At June 30, 1997
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SERIES N (MANAGED ASSET ALLOCATION SERIES)
August 15, 1997
[T. ROWE PRICE LOGO]
SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC.
PORTFOLIO MANAGER, NED NOTZON
After a dull first quarter in which U.S. stocks eked out a positive return and
most bonds declined, both rallied in the second quarter of 1997. Stocks were
particularly strong, returning 20.61% over the six months as measured by the S&P
500 Index, while the Lehman Brothers Aggregate Bond Index rose 3.09%.
International stock markets also performed well. Bonds of established foreign
markets trailed their U.S. counterparts, and those of emerging markets had the
highest returns in the fixed income sector overall.
A LOOK AT THE MARKETS
Market sentiment was dampened in the first quarter by signs of extremely strong
economic growth, rising interest rates, and anticipation of a tightening by the
Federal Reserve. As the second quarter progressed, however, investor confidence
recovered and soared. Nevertheless, performance among the various stock market
sectors was uneven, with some sharp though brief declines.
On the whole, foreign stock markets performed well, although behind the U.S.
market. Emerging markets led the way, especially Latin America, up over 40% for
the six months. Europe was strong and Japan rebounded, helped by a strengthening
of the yen versus the dollar. For the first half, however, the dollar's
generally strong showing dampened returns on foreign stocks and bonds for U.S.
investors.
PORTFOLIO PERFORMANCE DURING THE FIRST HALF
The Managed Asset Allocation Series performed very well when compared with its
peer group, returning 11.65% in the first half of the year versus the peer group
average return of 10.19%(1). The Series' benchmark index, a blend of 60% S&P 500
Index and 40% Lehman Brothers Aggregate Bond Index, returned 13.60% for the
period.
Sector exposures in the Series have changed very little from the end of 1996. We
continue to take a slightly defensive posture given the recent run-up in equity
valuations. Therefore, the Series is underweighted in equities versus the
benchmark. In the second quarter, the cash position was increased about 1% at
the expense of the equity sector. In the equity portion, we continue to
overweight foreign versus domestic stocks. In the bond sector we are
overweighting high yield bonds, while underweighting foreign issues. We are
about neutral in our allocation to investment grade bonds, including cash.
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SERIES N (MANAGED ASSET ALLOCATION SERIES)
August 15, 1997
OUR SECOND HALF OUTLOOK
The Federal Reserve seems to be on hold regarding interest rate changes for now.
There is no indication that further rate hikes are likely in the near future. We
do not expect any significant shifts in bond yields from their current levels.
The domestic stock market continues to climb. Even with the labor market as
tight as it has been, corporations have yet to experience the high labor costs
that could hurt earnings.
Although we believe that many stocks are highly valued, the domestic market
appears on track to generate another year of solid returns. Overseas, world
economies continue to recover and Japan seems to have emerged from its long
period of stagnation. We expect international markets to provide sound
investment opportunities in coming months.
Ned Notzon
Portfolio Manager
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year Since Inception
(6-1-95)
Series N 21.1% 17.9%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 EQUITY SECTORS*
SERIES N - MANAGED ASSET ALLOCATION SERIES
Interest Sensitive ........ 16.2%
Consumer Staples .......... 13.2%
Basic Materials ........... 12.7%
Energy .................... 10.1%
Technology ................ 8.1%
* At June 30, 1997
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SERIES O (EQUITY INCOME SERIES)
August 15, 1997
[T. ROWE PRICE LOGO] SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC.
PORTFOLIO MANAGER, BRIAN C. ROGERS
Ending strong in 1996, the equity market continued to advance sharply in the
first half of 1997. The year began slowly with the market up only modestly in
the first several months. April, May and June, however, were another matter
altogether as the combination of good corporate earnings growth, generally
stable interest rates, and strong investor demand for equities fueled a sharply
rising, almost frenzied, equity market.
PERFORMANCE COMPARISON WITH PEER FUNDS AND BENCHMARK INDEX
The Equity Income Series trailed the broad market in this environment, returning
14.49% for the six months compared with 20.61% for the benchmark Standard &
Poor's 500 Index(1). Its return was closer to that of its peer group average of
16.83%. Often, in sharply rising markets, conservative funds like the Equity
Income Series tend to advance at a moderate pace. Nonetheless, given our
conservative charter, we are reasonably pleased with the fund's six-month
return.
STRATEGY DURING THE FIRST HALF
What's a conservative, value-oriented fund to do in a market environment like
the first half of 1997? Our strategy has been to focus on risk even more than we
do typically. While we did not alter the overall asset allocation of the fund,
we did reduce our investments in a number of companies that have performed well
and no longer appear as undervalued as they once did. We always distinguish
between the quality of a company and the price of a company's stock.
Several of our larger sales represent investments in some of the world's great
companies such as Warner-Lambert Company, Honeywell, Inc., and General Electric
Company. When the market fully values a company's equity, our valuation
discipline prompts us to "recycle" these holdings into more reasonably valued
companies with attractive upside potential and relatively low downside risk.
We added to or initiated positions in companies such as Dow Chemical Company,
Knight-Ridder, Inc., General Motors Corporation and Duke Energy Corporation.
These companies share the characteristics of attractive relative valuations,
high relative dividend yields, and in our opinion good upside potential and
moderate downside risk. We purchased smaller positions in a number of other
electric utilities, one of the few groups not to participate in the market's
advance.
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<PAGE> 221
SERIES O (EQUITY INCOME SERIES)
August 15, 1997
SUMMARY AND OUTLOOK
As we entered 1997, the last thing we expected was a market advance as sharp as
that which we experienced in the first half. At year end we encountered a
"delinkage" which occurred as stock prices surged at a much faster rate than did
corporate earnings and dividends. This "delinkage" is even more true today after
the first half's strong advance. We will continue to follow our conservative
investment approach because there are always interesting investment
opportunities in any market environment. From an expectations standpoint,
however, we believe that the going is likely to get tougher sometime between now
and the end of the year.
Brian C. Rogers
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year Since Inception
(6-1-95)
Series O 27.3% 26.0%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 EQUITY HOLDINGS*
SERIES O - EQUITY INCOME SERIES
Mellon Bank Company .............. 1.6%
Dow Chemical Company ............. 1.6%
Atlantic-Richfield Company ....... 1.5%
Exxon Corporation ................ 1.4%
General Electric Company ......... 1.3%
* At June 30, 1997
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SERIES S (SOCIAL AWARENESS SERIES)
August 15, 1997
Performance of the Social Awareness Series in the first half of 1997 lagged that
of the benchmark Domini Social 400 Index. The Series had a very respectable
six-month return of 11.01%, while the large-cap oriented Domini Index returned
21.83%(1). The greatest part of the shortfall occurred in the first quarter,
when the Series had some exposure to small and mid-cap stocks. In March we
decided to move up the capitalization ladder toward the larger companies. As a
result, in the second quarter our 15.49% return outperformed the peer group
average of 14.25%, although still slightly underperforming the benchmark's
17.82% return for the quarter.
CONTRIBUTORS TO IMPROVING PERFORMANCE
Because of the small size of the Series, changes can be made fairly quickly when
prudent to do so. The average market capitalization after making adjustments
beginning in March and continuing into the second quarter now stands at about
$33 billion. Many of the larger company stocks have contributed strongly to
total return. For example, Microsoft rose 53% in the first half of 1997, Procter
& Gamble increased 32%, and Coca-Cola was up 30% in the same period. Other
stocks in the portfolio increased by greater percentages, but made up a smaller
portion of total assets so had less impact. Many major pharmaceutical companies
such as Schering-Plough and Merck & Company were also outstanding performers.
CURRENT EVENTS IN THE SOCIAL AWARENESS INVESTING ARENA
As always, we vote our proxies in accordance with the dictates of our social
screens. The leading issues throughout "proxy season" in 1997 were the
environment, tobacco, workplace diversity, and human rights. A major event is
taking place as the settlement nears completion between the tobacco companies
and states suing for recovery of health costs related to smoking (we have no
exposure to tobacco in our portfolio.) The American Medical Association has
encouraged its physician members to check their holdings carefully in order to
be fully aware of what they are supporting with their investment dollars. We are
pleased that our publicly offered Security Social Awareness Fund has been
included on the AMA's list of approved funds for investment by its members.
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SERIES S (SOCIAL AWARENESS SERIES)
August 15, 1997
LOOKING TO THE NEXT SIX MONTHS
Our plans for the balance of 1997 are to continue to focus on the larger
capitalized companies whose earnings have shown consistent growth. We will
continue to closely monitor our social screens and to follow the happenings in
the social investing industry, watching for new developments and resolution of
continuing issues.
Cindy Shields
Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997(1)
1 Year 5 Year Since Inception
(5-1-91)
Series S 15.0% 17.2% 14.0%
(1) Performance figures do not reflect fees and expenses associated with an
investment in variable insurance products offered by Security Benefit Life
Insurance Company. Shares of a Series of SBL Fund are available only
through the purchase of such products.
The performance data quoted above represents past performance. Past
performance is not predictive of future performance. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
TOP 5 EQUITY HOLDINGS*
SERIES S - SOCIAL AWARENESS SERIES
Coca-Cola Company .............. 3.5%
Microsoft Corporation .......... 3.2%
Merck & Company, Inc. .......... 3.0%
Intel Corporation .............. 3.0%
Procter & Gamble Company ....... 2.6%
* At June 30, 1997
22
<PAGE> 224
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES A (GROWTH)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ADVERTISING - 1.5%
Omnicom Group, Inc. ........................... 200,000 $ 12,325,000
AEROSPACE & DEFENSE - 1.5%
McDonnell Douglas Corporation ................. 180,000 12,330,000
BROADCAST MEDIA - 1.1%
Tribune Company ............................... 200,000 9,612,500
BANKING & FINANCE - 4.2%
Bank of New York Company, Inc. ................ 200,000 8,700,000
Chase Manhattan Corporation ................... 120,000 11,647,500
Northern Trust Corporation .................... 200,000 9,675,000
Norwest Corporation ........................... 100,000 5,625,000
-------------
35,647,500
CHEMICALS - BASIC - 1.1%
Monsanto Company .............................. 225,000 9,689,063
CHEMICALS - SPECIALTY - 2.2%
Nalco Chemical Company ........................ 200,000 7,725,000
Praxair, Inc. ................................. 200,000 11,200,000
-------------
18,925,000
COMPUTER SERVICES - 0.9%
Computer Sciences Corporation* ................ 100,000 7,212,500
COMPUTER SOFTWARE - 2.5%
BMC Software, Inc.* ........................... 130,000 7,198,750
Microsoft Corporation* 110,000 13,901,250
.............................................. -------------
21,100,000
COMPUTER SYSTEMS - 2.0%
Compaq Computer Corporation* .................. 80,000 7,940,000
International Business Machines Corporation ... 100,000 9,018,750
-------------
16,958,750
CONGLOMERATE - 6.8%
AlliedSignal, Inc. ............................ 160,000 13,440,000
Canadian Pacific, Ltd. ........................ 400,000 11,375,000
Rockwell International Corporation ............ 150,000 8,850,000
U.S. Industries, Inc.* ........................ 350,000 12,468,750
United Technologies Corporation ............... 130,000 10,790,000
-------------
56,923,750
CONSUMER SERVICES - 1.6%
ADT, Ltd.* .................................... 400,000 13,200,000
DATA NETWORKING - 1.1%
3Com Corporation* ............................. 60,000 2,700,000
Cisco Systems, Inc.* .......................... 100,000 6,712,500
-------------
9,412,500
ELECTRIC MACHINERY & ELECTRONIC
COMPONENTS - 1.6%
General Electric Company ...................... 200,000 13,075,000
</TABLE>
<PAGE> 225
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS - INSTRUMENTATION - 1.7%
Perkin-Elmer Corporation ...................... 120,000 $ 9,547,500
Teradyne, Inc.* ............................... 125,000 4,906,250
-------------
14,453,750
ENERGY EXPLORATION - PRODUCTION - 1.2%
Louisiana Land & Exploration Company .......... 170,000 9,711,250
ENERGY SERVICES - 1.1%
Halliburton Company ........................... 115,000 9,113,750
ENTERTAINMENT - 1.2%
Carnival Corporation (Cl. A) .................. 240,000 9,900,000
FINANCIAL SERVICES - 2.0%
Federal Home Loan Mortgage Corporation ........ 180,000 6,187,500
Federal National Mortgage Association ......... 240,000 10,470,000
-------------
16,657,500
FOOD & BEVERAGES - 5.0%
CPC International, Inc. ....................... 120,000 11,077,500
ConAgra, Inc. ................................. 180,000 11,542,500
PepsiCo, Inc. ................................. 300,000 11,268,750
Sara Lee Corporation .......................... 200,000 8,325,000
-------------
42,213,750
FOOD PROCESSING - 0.6%
Archer-Daniels-Midland Company ................ 200,000 4,700,000
HOUSEHOLD PRODUCTS - 4.8%
Colgate-Palmolive Company ..................... 150,000 9,787,500
Dial Corporation .............................. 290,000 4,531,250
Gillette Company .............................. 100,000 9,475,000
Kimberly-Clark Corporation .................... 120,000 5,970,000
Procter & Gamble Company ...................... 75,000 10,593,750
-------------
40,357,500
INSURANCE - 9.0%
Aetna, Inc. ................................... 120,000 12,285,000
Allstate Corporation .......................... 175,000 12,775,000
American International Group, Inc. ............ 75,000 11,203,125
Chubb Corporation ............................. 160,000 10,700,000
General Re Corporation ........................ 50,000 9,100,000
Hartford Financial Services Group, Inc. ....... 100,000 8,275,000
St. Paul Companies, Inc. ...................... 150,000 11,437,500
-------------
75,775,625
MANUFACTURING - 2.4%
Corning, Inc. ................................. 170,000 9,456,250
Leggett & Platt, Inc. ......................... 250,000 10,750,000
-------------
20,206,250
</TABLE>
See accompanying notes.
23
<PAGE> 226
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES A (GROWTH) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL INSTRUMENTS & SUPPLIES - 4.4%
Baxter International, Inc. .................... 200,000 $ 10,450,000
Becton, Dickinson & Company ................... 200,000 10,125,000
Boston Scientific Corporation* ................ 120,000 7,372,500
Medtronic, Inc. ............................... 110,000 8,910,000
-------------
36,857,500
MINING & METALS - 1.0%
Aluminum Company Of America ................... 110,000 8,291,250
NATURAL GAS - 1.1%
Coastal Corporation ........................... 170,000 9,041,875
OIL & GAS COMPANIES - 1.0%
Noble Affiliates, Inc. ........................ 200,000 7,737,500
Sonat, Inc. ................................... 20,000 1,025,000
-------------
8,762,500
PAPER & FORESTRY PRODUCTS - 1.2%
Fort Howard Corporation* ...................... 50,000 2,531,250
James River Corporation of Virginia ........... 200,000 7,400,000
-------------
9,931,250
PAINT & ALLIED PRODUCTS - 1.0%
Sherwin-Williams Company ...................... 280,000 8,645,000
PETROLEUM REFINING - 4.9%
Amoco Corporation ............................. 100,000 8,693,750
Mobil Corporation ............................. 160,000 11,180,000
Royal Dutch Petroleum Company - NY Shares ..... 200,000 10,800,000
Texaco, Inc. .................................. 100,000 10,875,000
-------------
41,548,750
PHARMACEUTICALS - 8.0%
American Home Products Corporation ............ 150,000 11,475,000
Bristol-Myers Squibb Company .................. 200,000 16,200,000
Elan Corporation PLC ADR* ..................... 200,000 9,050,000
Merck & Company, Inc. ......................... 100,000 10,350,000
Schering-Plough Corporation ................... 240,000 11,490,000
SmithKline Beecham PLC ADR .................... 100,000 9,162,500
-------------
67,727,500
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.9%
Eastman Kodak Company ......................... 100,000 7,675,000
Xerox Corporation ............................. 110,000 8,676,250
-------------
16,351,250
PUBLISHING & PRINTING - 2.4%
Gannett Company, Inc. ......................... 100,000 9,875,000
McGraw-Hill Companies, Inc. ................... 170,000 9,998,125
-------------
19,873,125
</TABLE>
<PAGE> 227
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
RETAIL TRADE - 9.9%
Dayton Hudson Corporation ..................... 150,000 $ 7,978,125
Federated Department Stores, Inc.* ............ 235,000 8,166,250
Payless ShoeSource, Inc.* ..................... 225,000 12,304,687
Rite Aid Corporation .......................... 90,000 4,488,750
Safeway, Inc.* ................................ 170,000 7,841,250
TJX Companies, Inc. ........................... 350,000 9,231,250
Toys "R" Us, Inc.* ............................ 350,000 12,250,000
Walgreen Company .............................. 200,000 10,725,000
Woolworth Corporation* ........................ 450,000 10,800,000
-------------
83,785,312
SEMICONDUCTORS - 1.7%
Intel Corporation ............................. 50,000 7,090,625
Linear Technology Corporation ................. 70,000 3,622,500
Xilinx, Inc.* ................................. 70,000 3,434,375
-------------
14,147,500
TRANSPORTATION - 0.8%
Union Pacific Corporation ..................... 100,000 7,050,000
-------------
Total common stocks- Series A - 96.4% ....... 811,513,750
Cash and other assets, less liabilities -
Series A - 3.6% ........................... 30,395,934
-------------
Total net assets - Series A - 100.0% ........ $ 841,909,684
=============
<CAPTION>
SERIES B (GROWTH-INCOME)
PREFERRED STOCKS
- ----------------
<S> <C> <C>
BANKING AND CREDIT - 0.6%
California Federal Bank ....................... 60,000 $ 6,660,000
CABLE TELEVISION - 0.2%
Cablevision Systems Corporation ............... 19,629 2,002,220
ENTERTAINMENT - 0.3%
Time Warner, Inc. ............................. 3,391 3,772,176
PUBLISHING & PRINTING - 0.3%
K-III Communications Corporation .............. 30,000 3,052,500
-------------
Total preferred stocks - Series B - 1.4% .... 15,486,896
TRUST PREFERRED SECURITIES(9)
- -----------------------------
FINANCE - 0.3%
S I Financing, Inc., 9.50% - 2026 ............. 134,000 3,542,625
-------------
Total trust preferred securities -
Series B - 0.3% ........................... 3,542,625
</TABLE>
See accompanying notes.
24
<PAGE> 228
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES B (GROWTH-INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AIR TRANSPORTATION - 0.4%
Atlas Air, Inc., 12.25% - 2002 ................ $4,275,000 $ 4,745,250
CHEMICALS - 0.3%
Envirodyne Industries, Inc., 12.00% - 2000 .... 3,500,000 3,828,125
COMMUNICATIONS - 2.2%
Allbritton Communications Company,
11.50% - 2004 ............................... 2,975,000 2,952,687
CF Cable TV, Inc., 11.625% - 2005 ............. 1,390,000 1,591,550
Century Communications Corporation,
9.50% - 2005 ................................ 4,000,000 4,110,000
Comcast Corporation, 9.125% - 2006 ............ 3,500,000 3,666,250
Heritage Media Corporation, 8.75% - 2006 ...... 3,200,000 3,320,000
Rogers Cablesystems Ltd., 9.625% - 2002 ....... 2,000,000 2,112,500
Rogers Communications, Inc. 9.125% - 2006 ..... 2,500,000 2,531,250
Valassis Communications, Inc. 9.55% - 2003 .... 3,150,000 3,398,063
-------------
23,682,300
CONSUMER GOODS & SERVICES - 0.4%
Pillowtex Corporation, 10.00% - 2006 .......... 1,125,000 1,191,094
Westpoint Stevens, Inc., 9.375% - 2005 ........ 3,000,000 3,146,250
-------------
4,337,344
DIVERSIFIED - 0.3%
Sequa Corporation, 9.375% - 2003 .............. 3,000,000 3,063,750
ELECTRIC & GAS COMPANIES - 0.6%
AES Corporation, 10.25% - 2006 ................ 4,500,000 4,905,000
Cal Energy Company, Inc., 9.50% - 2006 ........ 2,000,000 2,140,000
-------------
7,045,000
ENTERTAINMENT - 0.8%
AMF Group, Inc., 10.875% - 2006 ............... 2,725,000 2,943,000
Showboat, Inc., 9.25% - 2008 .................. 4,500,000 4,612,500
Station Casinos, Inc., 10.125% - 2006 ......... 1,300,000 1,293,500
-------------
8,849,000
FINANCE - 0.8%
Dime Bancorp, Inc., 10.50% - 2005 ............. 4,000,000 4,340,000
Dollar Financial Group, Inc., 10.875% - 2006 .. 1,550,000 1,658,500
Homeside, Inc., 11.25% - 2003 ................. 2,585,000 3,001,831
-------------
9,000,331
</TABLE>
<PAGE> 229
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FOOD & BEVERAGE TRADE - 1.3%
Cott Corporation, 9.375% - 2005 ............... $4,025,000 $ 4,216,187
Delta Beverage Group, 9.75% - 2003 ............ 2,600,000 2,713,750
Southland Corporation,
5.00% - 2003 ................................ 4,000,000 3,385,000
4.50% - 2004 ................................ 900,000 708,750
TLC Beatrice International Holdings, Inc.,
11.50% - 2005 ............................... 3,300,000 3,708,375
-------------
14,732,062
HOSPITAL MANAGEMENT - 0.7%
Regency Health Services, Inc., 9.875% - 2002 .. 2,000,000 2,065,000
Tenet Healthcare Corporation, 10.125% - 2005 .. 4,750,000 5,189,375
-------------
7,254,375
HOTEL & RECREATION - 0.4%
Four Seasons Hotels, Inc., 9.125% - 2000 ...... 3,600,000 3,879,000
INDUSTRIAL PRODUCT - 0.3%
Shop Vac Corporation, 10.625% - 2003 .......... 3,175,000 3,373,438
MANUFACTURING - 0.9%
AGCO Corporation, 8.50% - 2006 ................ 2,200,000 2,257,750
Johns Manville International Group, Inc.,
10.875% - 2004 .............................. 3,970,000 4,416,625
Titan Wheel International, Inc., 8.75% - 2007 . 2,650,000 2,696,375
-------------
9,370,750
OIL & GAS COMPANIES - 0.4%
Seagull Energy Corporation, 8.625% - 2005 ..... 4,800,000 4,884,000
PUBLISHING & PRINTING - 0.6%
Golden Books Publishing, Inc., 7.65% - 2002 ... 3,500,000 3,298,750
Hollinger International Publishing, Inc.,
8.625% - 2005 ............................... 2,825,000 2,874,438
-------------
6,173,188
REAL ESTATE - 0.3%
BF Saul REIT, 11.625% - 2002 .................. 3,100,000 3,332,500
REFINERY - 0.3%
Crown Central Petroleum Corporation,
10.875% - 2005 .............................. 3,665,000 3,839,087
RESTAURANTS - 0.5%
Carrols Corporation, 11.50% - 2003 ............ 4,800,000 5,142,000
</TABLE>
See accompanying notes.
25
<PAGE> 230
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES B (GROWTH-INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
STEEL & METAL PRODUCTS - 0.1%
AK Steel Corporation, 9.125% - 2006 ........... $1,400,000 $ 1,438,500
TOBACCO PRODUCTS - 0.4%
Dimon, Inc., 8.875% - 2006 .................... $4,300,000 4,482,750
TRANSPORTATION - 0.4%
Teekay Shipping Corporation, 8.32% - 2008 ..... $4,000,000 4,040,000
-------------
Total corporate bonds - Series B - 12.4% .... 136,492,750
<CAPTION>
COMMON STOCKS
- -------------
<S> <C> <C>
ADVERTISING - 1.6%
Omnicom Group, Inc. ........................... 280,000 17,255,000
AEROSPACE & DEFENSE - 2.9%
Boeing Company ................................ 110,000 5,836,875
Lockheed Martin Corporation ................... 105,000 10,874,062
McDonnell Douglas Corporation ................. 220,000 15,070,000
-------------
31,780,937
BANKING & FINANCE - 4.4%
Banc One Corporation .......................... 200,000 9,687,500
Bank of New York Company, Inc. ................ 300,000 13,050,000
Chase Manhattan Corporation ................... 150,000 14,559,375
Northern Trust Corporation .................... 225,000 10,884,375
-------------
48,181,250
BROADCAST MEDIA - 1.3%
Tribune Company ............................... 300,000 14,418,750
CHEMICALS - BASIC - 1.2%
Monsanto Company .............................. 300,000 12,918,750
CHEMICALS - SPECIALTY - 1.5%
Praxair, Inc. ................................. 300,000 16,800,000
COMMUNICATION EQUIPMENT - 0.8%
Corning,Inc. .................................. 150,000 8,343,750
COMPUTER SERVICES - 0.4%
Computer Sciences Corporation* ................ 60,000 4,327,500
COMPUTER SOFTWARE - 2.4%
BMC Software, Inc.* ........................... 130,000 7,198,750
Microsoft Corporation* ........................ 150,000 18,956,250
-------------
26,155,000
COMPUTER SYSTEMS - 2.0%
Compaq Computer Corporation* .................. 80,000 7,940,000
International Business Systems Corporation .... 150,000 13,528,125
-------------
21,468,125
</TABLE>
<PAGE> 231
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CONGLOMERATE - 4.9%
AlliedSignal, Inc. ............................ 200,000 $ 16,800,000
Canadian Pacific, Ltd. ........................ 500,000 14,218,750
Rockwell International Corporation ............ 170,000 10,030,000
United Technologies Corporation ............... 150,000 12,450,000
-------------
53,498,750
CONSUMER SERVICES - 1.5%
ADT, Ltd.* .................................... 500,000 16,500,000
DATA NETWORKING - 1.0%
3Com Corporation* ............................. 60,000 2,700,000
Cisco Systems, Inc.* .......................... 130,000 8,726,250
-------------
11,426,250
ELECTRICAL MACHINERY & ELECTRONIC
COMPONENTS - 1.7%
General Electric Company ...................... 280,000 18,305,000
ENERGY SERVICES - 0.9%
Halliburton Company ........................... 120,000 9,510,000
ENTERTAINMENT - 0.9%
The Walt Disney Company ....................... 120,000 9,630,000
FINANCIAL SERVICES - 1.8%
Federal Home Loan Mortgage Corporation ........ 200,000 6,875,000
Federal National Mortgage Association ......... 300,000 13,087,500
-------------
19,962,500
FOOD & BEVERAGES - 5.4%
Archer-Daniels-Midland Company ................ 100,000 2,350,000
CPC International, Inc. ....................... 150,000 13,846,875
Coca-Cola Company ............................. 260,000 18,135,000
ConAgra, Inc. ................................. 200,000 12,825,000
Sara Lee Corporation .......................... 300,000 12,487,500
-------------
59,644,375
HOSPITAL MANAGEMENT & SERVICES - 0.9%
Columbia/HCA Healthcare Corporation ........... 240,000 9,435,000
HOUSEHOLD PRODUCTS - 5.1%
Colgate-Palmolive Company ..................... 150,000 9,787,500
Gillette Company .............................. 200,000 18,950,000
Kimberly-Clark Corporation .................... 120,000 5,970,000
Procter & Gamble Company ...................... 150,000 21,187,500
-------------
55,895,000
INSURANCE - 6.2%
Aetna, Inc. ................................... 115,000 11,773,125
Allstate Corporation .......................... 175,000 12,775,000
Chubb Corporation ............................. 200,000 13,375,000
General Re Corporation ........................ 40,000 7,280,000
Hartford Financial Services Group, Inc. ....... 120,000 9,930,000
St. Paul Companies, Inc. ...................... 175,000 13,343,750
-------------
68,476,875
</TABLE>
See accompanying notes.
26
<PAGE> 232
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES B (GROWTH-INCOME) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL INSTRUMENTS & SUPPLIES - 3.1%
Baxter International, Inc. .................... 250,000 $ 13,062,500
Boston Scientific Corporation* ................ 170,000 10,444,375
Medtronic, Inc. ............................... 135,000 10,935,000
-------------
34,441,875
MINING & METALS - 1.0%
Aluminum Company of America ................... 150,000 11,306,250
NATURAL GAS - 2.5%
Coastal Corporation ........................... 225,000 112,967,188
El Paso Natural Gas Company ................... 280,000 15,400,000
-------------
27,367,188
OIL & GAS COMPANIES - 0.4%
Noble Affiliates, Inc. ........................ 120,000 4,642,500
OIL & GAS PIPELINES - 1.0%
MAPCO, Inc. ................................... 340,000 10,710,000
PAPER & FORESTRY PRODUCTS - 1.3%
James River Corporation of Virginia ........... 400,000 14,800,000
PETROLEUM REFINING - 4.4%
Amoco Corporation ............................. 140,000 12,171,250
Chevron Corporation ........................... 150,000 11,090,625
Mobil Corporation ............................. 200,000 13,975,000
Texaco, Inc. .................................. 110,000 11,962,500
-------------
49,199,375
PHARMACEUTICALS - 7.9%
American Home Products Corporation ............ 175,000 13,387,500
Bristol-Myers Squibb Company .................. 250,000 20,250,000
Elan Corporation PLC ADR* ..................... 200,000 9,050,000
Merck & Company, Inc. ......................... 150,000 15,525,000
Schering-Plough Corporation ................... 300,000 14,362,500
SmithKline Beecham PLC ADR .................... 150,000 13,743,750
-------------
86,318,750
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.9%
Eastman Kodak Company ......................... 140,000 10,745,000
Xerox Corporation ............................. 125,000 9,859,375
-------------
20,604,375
PUBLISHING & PRINTING - 2.0%
Gannett Company, Inc. ......................... 100,000 9,875,000
McGraw-Hill Companies, Inc. ................... 200,000 11,762,500
-------------
21,637,500
RESTAURANTS & FOOD SERVICE - 1.0%
Wendy's International, Inc. ................... 450,000 11,671,875
</TABLE>
<PAGE> 233
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
RETAIL TRADE - 4.1%
Dayton Hudson Corporation ..................... 100,000 $ 5,318,750
Federated Department Stores, Inc.* ............ 330,000 11,467,500
Toys "R" Us, Inc.* ............................ 450,000 15,750,000
Woolworth Corporation* ........................ 500,000 12,000,000
-------------
44,536,250
SEMICONDUCTORS - 0.8%
Intel Corporation ............................. 60,000 8,508,750
TOYS & SPORTING GOODS - 1.1%
Mattel, Inc. .................................. 360,000 12,195,000
TRANSPORTATION - 0.6%
Union Pacific Corporation ..................... 100,000 7,050,000
-------------
Total common stocks - Series B - 81.9% ...... 898,922,500
COMMERCIAL PAPER
- ----------------
AIG Funding, Inc., 5.725%, 7-03-97 ............ $ 900,000 899,714
Avnet, Inc., 5.57%, 8-11-97 ................... $2,300,000 2,285,073
Merrill Lynch & Company, Inc., ................ $5,000,000
5.55%, 7-02-97 .............................. 999,846
5.55%, 7-03-97 .............................. 3,998,766
-------------
Total commercial paper - Series B - 0.8% .... 8,183,399
-------------
Total investments - Series B - 96.8% ........ 1,062,628,170
Cash and other assets, less liabilities -
Series B - 3.2% ........................... 34,785,481
-------------
Total net assets - Series B - 100.0% ........ $1,097,413,651
=============
<CAPTION>
SERIES C (MONEY MARKET)
COMMERCIAL PAPER
- ----------------
<S> <C> <C>
AEROSPACE & DEFENSE - 1.4%
Allied Signal, Inc. (PP), 5.52%, 7-2-97 ....... $2,000,000 $ 1,999,693
BEVERAGES - 0.6%
PepsiCo, Inc., ................................ $ 845,000
5.50%, 7-1-97 ............................... 424,156
5.50%, 7-14-97 .............................. 420,000
-------------
844,156
</TABLE>
See accompanying notes.
27
<PAGE> 234
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES C (MONEY MARKET) (CONTINUED)
<TABLE>
<CAPITON>
PRINCIPAL MARKET
COMMERCIAL PAPER (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BROKERAGE - 6.2%
Credit Suisse First Boston, 5.60%, 7-9-97 ..... $2,000,000 $ 1,997,220
Merrill Lynch & Company, Inc., ................ 6,640,000
5.57%, 7-10-97 .............................. 499,304
5.53%, 7-2-97 ............................... 2,499,616
5.58%, 8-18-97 .............................. 337,440
5.57%, 8-29-97 .............................. 1,981,560
5.57%, 8-5-97 ............................... 1,292,960
-------------
8,608,100
BUSINESS SERVICES - 2.9%
AI Credit Corporation, 5.475%, 7-7-97 ......... 1,400,000 1,398,722
General Electric Capital Corporation,
5.52%, 8-6-97 ................................. 2,600,000 2,585,648
-------------
3,984,370
COMBINATION GAS & ELECTRIC - 7.3%
Central Illinois Light Company, 5.57%, 8-12-97. 2,400,000 2,384,404
Dayton Power & Light Company, 5.56%, 7-15-97 .. 4,300,000 4,290,702
Pacific Gas & Electric Company, ............... 3,500,000
5.56%, 7-21-97 .............................. 2,990,733
5.56%, 7-24-97 .............................. 498,224
-------------
10,164,063
COMPUTER SYSTEMS - 4.8%
International Business Machines Corporation, .. 6,600,000
5.50%, 7-14-97 .............................. 2,395,233
5.52%, 7-25-97 .............................. 3,188,224
5.50%, 7-8-97 ............................... 998,931
-------------
6,582,388
ELECTRIC UTILITIES - 15.7%
Carolina Power & Light Company, ............... 4,310,000
5.53%, 7-29-97 .............................. 1,593,118
5.53%, 7-30-97 .............................. 2,697,928
Georgia Power Company, 5.53%, 7-7-97 .......... 138,000 137,873
Idaho Power Company, .......................... 3,996,000
5.52%, 7-10-97 .............................. 2,995,860
5.60%, 7-31-97 .............................. 991,352
New England Power Company, .................... 6,745,000
5.57%, 7-10-97 .............................. 3,919,534
5.57%, 7-14-97 .............................. 1,816,339
5.62%, 7-17-97 .............................. 997,502
Progress Capital Holdings, Inc., .............. 6,500,000
5.54%, 7-11-97 .............................. 2,496,153
5.57%, 7-25-97 .............................. 3,985,147
-------------
21,630,806
</TABLE>
<PAGE> 235
<TABLE>
<CAPTION>
PRINCIPAL MARKET
COMMERCIAL PAPER (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRICAL EQUIPMENT - 2.5%
General Electric Company, ..................... $3,500,000
5.56%, 7-28-97 .............................. $ 497,915
5.51%, 7-7-97 ............................... 2,997,245
-------------
3,495,160
ELECTRONICS - 4.7%
Avent, Inc., .................................. 6,450,000
5.55%, 7-18-97 .............................. 997,379
5.57%, 7-1-97 ............................... 3,500,000
5.55%, 8-1-97 ............................... 1,940,681
-------------
6,438,060
ENGINEERING - 0.2%
Fluor Corporation, 5.56%, 7-31-97 ............. 225,000 223,957
ENTERTAINMENT - 0.2%
Walt Disney Company, The, 5.55%, 7-3-97 ....... 248,000 247,924
HARDWARE & TOOLS - 3.2%
Sherwin-Williams Company (PP), 5.55%, 8-4-97 .. 4,500,000 4,476,413
INDUSTRIAL SERVICES - 2.7%
PPG Industries, Inc., 5.50%, 7-7-97 ........... 3,700,000 3,696,608
MANUFACTURING - 1.3%
Eaton Corporation, 5.55%, 7-24-97 ............. 1,870,000 1,863,369
NATURAL GAS - 4.7%
Laclede Gas Company, .......................... 6,500,000
5.52%, 7-10-97 .............................. 2,995,860
5.55%, 7-31-97 .............................. 3,483,813
-------------
6,479,673
PHARMACEUTICALS - 4.9%
Allergan, Inc., ............................... 6,875,000
5.56%, 7-22-97 .............................. 1,669,567
5.52%, 7-8-97 ............................... 1,997,853
5.56%, 8-19-97 .............................. 2,481,081
5.57%, 9-16-97 .............................. 691,537
-------------
6,840,038
POLLUTION CONTROL - 2.4%
Engelhard Corporation, ........................ 3,350,000
5.60%, 8-11-97 .............................. 332,826
5.70%, 8-11-97 .............................. 2,995,433
-------------
3,328,259
PHOTOGRAPH/IMAGING - 4.6%
Eastman Kodak Company, ........................ 6,400,000
5.50%, 7-11-97 .............................. 3,993,889
5.50%, 7-9-97 ............................... 2,397,067
-------------
6,390,956
RETAIL - GROCERY - 2.7%
Winn-Dixie Stores, Inc., 5.55%, 8-19-97 ....... 3,700,000 3,672,050
</TABLE>
See accompanying notes.
28
<PAGE> 236
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES C (MONEY MARKET) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
COMMERCIAL PAPER (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
RETAIL TRADE - 2.4%
Toys "R" Us, Inc., 5.52%, 7-2-97 .............. $3,325,000 $ 3,324,490
TELECOMMUNICATIONS - 1.7%
Pacific Bell, 5.60%, 7-11-97 .................. 2,300,000 2,296,422
-------------
Total commercial paper - Series C- 77.1% .... 106,586,955
U.S. GOVERNMENT & AGENCIES
- --------------------------
FEDERAL HOME LOAN BANK - 10.1%
5.63%, 12-17-97 ............................. 3,000,000 3,001,590
5.87%, 1-30-98 .............................. 2,000,000 2,004,040
5.70%, 3-4-98 ............................... 2,000,000 2,000,100
5.885%, 3-30-98 ............................. 2,000,000 2,002,000
6.13%, 4-17-98 .............................. 2,000,000 2,002,100
5.90%, 7-8-98 ............................... 3,000,000 3,000,000
-------------
14,009,830
SMALL BUSINESS ASSOCIATION POOLS - 13.4%
#502406, 6.25%, 2006(3)...................... 459,862 459,862
#502163, 6.50%, 2012(3)...................... 801,337 801,337
#502353, 6.25%, 2018(3)...................... 130,799 130,799
#503176, 6.125%, 2020(3)..................... 777,355 781,242
#503459, 6.00%, 2021(3)...................... 1,974,570 1,967,166
#503283, 6.00%, 2021(3)...................... 2,398,175 2,388,057
#503295, 6.00%, 2021(3)...................... 1,626,572 1,618,439
#503303, 6.00%, 2021(4)...................... 1,722,266 1,713,655
#503308, 6.00%, 2021(4)...................... 1,345,639 1,345,639
#503343, 6.125%, 2021(3)..................... 2,023,887 2,023,887
#503347, 6.125%, 2021(3)..................... 5,325,098 5,325,098
-------------
18,555,181
Total U.S. government & agencies -
Series C - 23.5% .......................... 32,565,011
-------------
Total investments - Series C - 100.6% ....... 139,151,966
Liabilities in excess of cash and other
assets - Series C - (0.6%) ................ (776,050)
-------------
Total net assets - Series C - 100.0% ........ $ 138,375,916
=============
</TABLE>
<PAGE> 237
<TABLE>
<CAPITON>
SERIES D (WORLDWIDE EQUITY)
NUMBER MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 1.5%
Perez Companc S.A. ............................ 300,400 $ 2,412,504
Transportadora de Gas del Sur, S.A. ADR ....... 159,100 1,988,750
-------------
4,401,254
AUSTRALIA - 2.5%
Foster's Brewing Group, Ltd. .................. 2,266,000 4,175,998
QBE Insurance Group, Ltd. ..................... 578,350 3,466,139
-------------
7,642,137
AUSTRIA - 4.2%
Boehler - Uddeholm AG ......................... 97,100 7,531,362
Wienerberger Baustoffindustrie AG ............. 26,000 5,341,648
-------------
12,873,010
BRAZIL - 1.3%
Aracruz Celulose S.A. ADR ..................... 197,450 4,023,044
CANADA - 6.7%
Bombardier, Inc. "B" .......................... 196,600 4,460,545
Hudson's Bay Company .......................... 112,100 2,518,995
Imax Corporation* ............................. 244,000 6,023,750
Jetform Corporation* .......................... 89,800 1,184,238
Noranda Forest, Inc. .......................... 312,000 2,295,518
Tarragon Oil & Gas, Ltd. ...................... 88,900 1,043,943
Yogen Fruz Wor ................................ 607,000 2,661,975
-------------
20,188,964
CHILE - 1.6%
Antofagasta Holdings PLC ...................... 249,000 1,900,073
Banco Santander ADR ........................... 93,700 1,382,075
Maderas y Sinteticos Sociedad ................. 90,500 1,504,563
-------------
4,786,711
FRANCE - 3.8%
Alcatel Alsthom ............................... 21,900 2,745,457
Elf Aquitaine S.A. ADR ........................ 68,100 3,707,194
Lafarge ....................................... 38,000 2,365,722
Sidel ......................................... 25,960 2,011,911
Unisor Sacilor ................................ 46,600 841,365
-------------
11,671,649
GERMANY - 3.1%
Continental AG ................................ 103,300 2,566,888
Deutsche Bank AG .............................. 64,300 3,760,139
Hoechst AG .................................... 26,300 1,116,577
Rofin - Sinar Technologies* ................... 95,900 1,834,087
-------------
9,277,691
</TABLE>
See accompanying notes.
29
<PAGE> 238
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
<TABLE>
<CAPITON>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
GREECE - 0.4%
Hellenic Tellecommunication Organization S.A.
Rights* ..................................... 7,158 $ 11,736
Michaniki S.A. ................................ 170,100 1,289,059
-------------
1,300,795
HONG KONG - 4.1%
HSBC Holdings PLC ............................. 80,000 2,406,005
JCG Holdings, Ltd. ............................ 2,732,000 2,203,999
National Mutual Asia, Ltd. .................... 2,479,000 2,751,856
Nu Skin Asia Pacific, Inc.* ................... 52,800 1,399,200
Peregrine Investment Holdings, Ltd. ........... 1,723,000 3,547,290
-------------
12,308,350
INDONESIA - 0.6%
PT Tambang Timah .............................. 1,258,500 1,953,871
IRELAND - 3.1%
Allied Irish Banks PLC ........................ 330,400 2,528,363
Elan Corporation PLC .......................... 31,700 1,434,425
Jefferson Smurfit Group ....................... 1,784,700 5,169,443
Rynair Holdings ............................... 25,000 132,757
-------------
9,264,988
ITALY - 1.6%
Industrie Natuzzi Spa ADR ..................... 95,400 2,444,625
Stet Societa' Finanziaria Telefonica S.p.A. ... 434,900 2,530,676
-------------
4,975,301
JAPAN - 12.4%
Acorn Company, Ltd. ........................... 38,300 1,847,556
Amway Japan, Ltd. ............................. 117,800 3,994,266
Doutor Coffee Company, Ltd. ................... 38,200 1,552,302
Fuji Bank, Ltd. ............................... 156,000 2,344,839
Fujitsu, Ltd. ................................. 84,000 1,167,176
Kubota Corporation ............................ 237,000 1,161,907
Maruco Company, Ltd. .......................... 20,500 170,908
Matsushita Electric Industrial Company, Ltd. .. 88,000 1,776,457
Mitsubishi Estate Company ..................... 169,000 2,451,629
NEC Corporation ............................... 82,000 1,146,552
Nippon Steel Corporation ...................... 1,004,000 3,211,255
Omron Corporation ............................. 58,000 1,211,395
Sony Corporation .............................. 54,000 4,714,322
Sumitomo Electric Industries .................. 74,000 1,241,632
The Bank of Tokyo - Mitsubishi, Ltd. .......... 119,000 2,391,855
Timco, Ltd. ................................... 27,900 1,243,467
Tokyo Electron, Ltd. .......................... 54,000 2,586,034
Toshiba Corporation ........................... 265,000 1,706,763
Yamato Kogyo Company, Ltd. .................... 184,000 1,817,006
-------------
37,737,321
</TABLE>
<PAGE> 239
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA - 1.3%
Tanjong PLC ................................... 1,182,000 $ 4,074,241
MEXICO - 1.7%
Cemex S.A. de C.V. "B" ........................ 1,064,000 5,176,532
NETHERLANDS - 0.8%
Phillips Electronics N.V. ..................... 33,640 2,413,990
NEW ZEALAND - 2.6%
Brierley Investments, Ltd. .................... 2,029,100 1,980,259
Carter Holt Harvey, Ltd. ...................... 1,205,900 3,113,812
Fletcher Challenge Building ................... 908,900 2,728,826
Fletcher Challenge Forests* ................... 36,356 52,729
-------------
7,875,626
NORWAY - 1.5%
Saga Petroleum AS ............................. 235,700 4,475,238
PHILIPPINES - 0.5%
C & P Homes, Inc. ............................. 4,034,150 1,514,182
POLAND - 1.4%
Debica S.A.* .................................. 37,383 767,853
Elektrim Towarzystwo Handlowe S.A. ............ 148,233 1,290,063
Wedel S.A. .................................... 40,359 2,173,770
-------------
4,231,686
SINGAPORE - 1.8%
Clipsal Industries, Ltd. ...................... 357,000 1,263,780
Jardine Strategic Holdings, Ltd. .............. 438,000 1,655,640
Jardine Strategic Holdings, Ltd. (Warrants)* .. 21,900 986
Want Want Holdings* ........................... 762,000 2,529,840
-------------
5,450,246
SPAIN - 2.2%
Adolfo Dominguez S.A. ......................... 57,600 2,271,570
Banco Popular Espanol S.A. .................... 10,800 2,650,981
Tele Pizza, S.A. .............................. 28,900 1,705,663
-------------
6,628,214
SWEDEN - 1.3%
Industrial & Financial Systems,
IFS AB ...................................... 464,500 2,252,703
Skandinaviska Enskilda ...................... 163,500 1,765,595
-------------
4,018,298
SWITZERLAND - 5.8%
ABB AG ........................................ 2,520 3,820,146
Nestle S.A. ................................... 2,870 3,791,625
Novartis AG ................................... 2,200 3,522,173
Saurer AG ..................................... 5,390 3,575,217
Winterthur Schweizerlsche
Versicherungs - Gesellschaft ................ 3,350 2,955,105
-------------
17,664,266
</TABLE>
See accompanying notes.
30
<PAGE> 240
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
<TABLE>
<CAPITON>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
THAILAND - 0.4%
BEC World Public Company ...................... 125,000 $ 1,071,222
UNITED KINGDOM - 8.7%
Aegis Group PLC ............................... 1,695,000 1,770,170
Blacks Leisure Group PLC ...................... 48,100 364,240
D.F.S. Furniture Company PLC .................. 214,500 2,006,297
George Wimpey PLC ............................. 671,500 1,508,730
Grand Metropolitan PLC ........................ 240,800 2,330,439
Harvey Nichols PLC ............................ 196,200 920,831
Inchcape PLC .................................. 1,019,000 4,799,458
Norwich Union PLC ............................. 90,000 478,569
Oriflame International S.A .................... 105,000 847,545
PizzaExpress PLC .............................. 215,400 2,254,903
Provident Financial PLC ....................... 107,100 992,833
RTZ Corporation PLC ........................... 131,800 2,295,547
SmithKline Beecham PLC ADR .................... 11,200 1,026,200
Tomkins PLC ................................... 573,800 2,482,936
Vodafone Group PLC ............................ 477,600 2,324,994
-------------
26,403,692
UNITED STATES - 17.7%
Ace Ltd. ...................................... 17,000 1,255,875
Adaptec, Inc.* ................................ 28,000 973,000
AlliedSignal, Inc. ............................ 13,500 1,134,000
BJ Services Company* .......................... 16,600 890,175
Boeing Company ................................ 20,200 1,071,862
Borders Group, Inc.* .......................... 50,600 1,220,725
Bristol-Myers Squibb Company .................. 13,000 1,053,000
Citicorp ...................................... 10,300 1,241,794
Conseco, Inc. ................................. 31,200 1,154,400
Crown Cork & Seal Company, Inc. ............... 17,100 913,781
Data General Corporation* ..................... 44,500 1,157,000
Diamond Offshore Drilling, Inc.* .............. 27,700 2,164,063
Dover Corporation ............................. 16,600 1,020,900
Equity Residential Properties Trust ........... 22,000 1,045,000
Federal National Mortgage Association ......... 23,200 1,012,100
Gap, Inc. ..................................... 26,800 1,041,850
Georgia Pacific Corporation ................... 13,600 1,161,100
Honeywell, Inc. ............................... 15,700 1,191,237
Ingersoll-Rand Company ........................ 27,300 1,685,775
James River Corporation of Virginia ........... 25,400 939,800
Johnson & Johnson ............................. 18,400 1,184,500
Kimberly-Clark Corporation .................... 22,600 1,124,350
Medtronic, Inc. ............................... 12,300 996,300
Mobil Corporation ............................. 14,000 978,250
Monsanto Company .............................. 33,500 1,442,594
NAC Re Corporation ............................ 32,400 1,567,350
NationsBank Corporation ....................... 15,500 999,750
Norwest Corporation ........................... 27,300 1,535,625
Perkin-Elmer Corporation ...................... 11,900 946,794
</TABLE>
<PAGE> 241
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Procter & Gamble Company ...................... 8,600 $ 1,214,750
Reynolds Metals Company ....................... 13,200 940,500
Rite Aid Corporation .......................... 19,900 992,513
Safeway, Inc.* ................................ 20,400 940,950
Schlumberger, Ltd. ............................ 9,900 1,237,500
Seagate Technology, Inc.* ..................... 27,000 950,063
Sealed Air Corporation ........................ 21,000 997,500
Service Corporation ........................... 37,000 1,216,375
St. Paul Companies, Inc. ...................... 14,700 1,120,875
Structural Dynamics Research Corporation* ..... 40,300 1,059,134
Tosco Corporation ............................. 32,700 978,956
Tyco International, Ltd. ...................... 17,500 1,217,344
Union Pacific Corporation ..................... 12,700 895,350
Union Planters Corporation .................... 21,800 1,130,875
United Healthcare Corporation ................. 20,400 1,060,800
Warner-Lambert Company ........................ 11,200 1,391,600
Waste Management, Inc. ........................ 27,200 873,800
Williams Companies, Inc. ...................... 28,400 1,242,500
-------------
53,564,335
-------------
Total common stocks - Series D - 94.6% ...... 286,966,854
<CAPTION>
PREFERRED STOCKS
- ----------------
<S> <C> <C>
BRAZIL - 0.8%
Companhia Cervejaria Brahma ................... 3,070,000 2,352,659
GERMANY - 0.7%
Sto AG ........................................ 5,390 2,254,940
-------------
Total preferred stocks - Series D - 1.5% .... 4,607,599
-------------
Total investments - Series D - 96.1% ........ 291,574,453
Cash and other assets less liabilities -
Series D - 3.9% ........................... 11,804,135
-------------
Total net assets - Series D - 100.0% ........ $ 303,378,588
=============
</TABLE>
See accompanying notes.
31
<PAGE> 242
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
<TABLE>
At June 30, 1997, the composition of the Fund's net assets by industry
concentration was as follows
<S> <C>
Banking ..................................................... 7.1%
Capital Equipment ........................................... 11.6%
Chemicals ................................................... 0.5%
Construction & Housing ...................................... 1.4%
Consumer Durables ........................................... 4.8%
Consumer Nondurables ........................................ 11.0%
Electrical and Electronics .................................. 3.9%
Energy Sources .............................................. 5.8%
Financial Services .......................................... 9.8%
Health & Personal Care ...................................... 4.5%
Materials ................................................... 16.8%
Merchandising ............................................... 5.3%
Multi-industry .............................................. 4.2%
Real Estate ................................................. 1.2%
Services .................................................... 4.3%
Telecommunications .......................................... 1.6%
Trade ....................................................... 2.0%
Transportation .............................................. 0.3%
Cash and other assets less liabilities ...................... 3.9%
------
Total net assets ............................................ 100.0%
======
</TABLE>
SERIES E (HIGH GRADE INCOME)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AIR TRANSPORTATION - 4.2%
Southwest Airlines Company, 7.875% - 2007 ..... $2,500,000 $ 2,621,875
United Airlines, 11.21% - 2014 ................ 1,800,000 2,355,750
-------------
4,977,625
BANKS - 15.0%
ABN AMRO Bank NV,
7.55% - 2006 ................................ 1,000,000 1,030,000
7.30% - 2026 ................................ 3,000,000 2,842,500
Abbey National PLC, 6.69% - 2005 .............. 2,750,000 2,695,000
BCH Cayman Islands, Ltd., 7.70% - 2006 ........ 2,500,000 2,562,500
Bank of New York, Inc., 6.50% - 2003 .......... 3,500,000 3,416,875
Malayan Bank of New York, 7.125% - 2005 ....... 2,750,000 2,719,063
Santander Financial Issuances, Ltd.,
7.00% - 2006 ................................ 2,800,000 2,765,000
-------------
18,030,938
BROKERS, DEALERS & SERVICES - 7.2%
Lehman Brothers, Inc., 7.25% - 2003 ........... 3,250,000 3,262,188
Morgan Stanley Group, Inc., 7.25% - 2023 ...... 5,000,000 4,693,750
Salomon Inc., 7.30% - 2002 .................... 700,000 704,375
-------------
8,660,313
</TABLE>
<PAGE> 243
SERIES E (HIGH GRADE INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATIONS - 5.5%
Comcast Corporation, 9.125% - 2006 ............ $1,000,000 $ 1,047,500
Paramount Communications, 7.50% - 2023 ........ 1,000,000 878,750
Rogers Cablesystems, Ltd., 9.625% - 2002 ...... 1,100,000 1,161,875
Rogers Communication, Inc., 9.125% - 2006 ..... 900,000 911,250
Valassis Communications, Inc., 9.55% - 2003 ... 2,375,000 2,562,031
-------------
6,561,406
CONSUMER GOODS & SERVICES - 5.1%
Nike, Inc., 6.375% - 2003 ..................... 3,180,000 3,096,525
Sears Roebuck Acceptance Corporation,
6.41% - 2001 ................................ 3,000,000 2,962,500
-------------
6,059,025
ELECTRONICS - 1.7%
Pioneer Standard Electronics, Inc.,
8.50% - 2006 ................................ 1,900,000 1,980,750
FINANCE - 5.0%
Argentaria Capital Funding, 6.375% - 2026 ..... 2,000,000 1,875,627
Countrywide Capital Industries, Inc.,
8.00% - 2026 ................................ 1,000,000 997,500
PNC Funding Corporation, 7.75% - 2004 ......... 3,000,000 3,105,000
-------------
5,978,127
FOOD & BEVERAGES - 6.5%
Chiquita Brands International, Inc.,
10.25% - 2006 ............................... 1,750,000 1,863,750
Coca-Cola Enterprises, Inc., 6.70% - 2036(5) .. 3,500,000 3,500,000
FEMSA Fomento Economico Mexicano SA,
9.50% - 1997 ................................ 400,000 400,500
Panamerican Beverage, Inc., 8.125% - 2003 ..... 2,000,000 2,035,000
-------------
7,799,250
FUNERAL HOMES - 1.9%
Loewen Group International, Inc., 8.25% - 2003. 2,250,000 2,286,563
HOSPITAL MANAGEMENT - 0.9%
Tenet Healthcare, 10.125% - 2005 .............. 1,000,000 1,092,500
INSURANCE - 1.4%
Travelers Capital Trust, 7.75% - 2036 ......... 1,650,000 1,600,500
</TABLE>
See accompanying notes.
32
<PAGE> 244
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES E (HIGH GRADE INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MEDIA - 3.7%
Time Warner Entertainment, 10.15% - 2012 ...... $1,750,000 $ 2,115,313
Turner Broadcasting, 8.375% - 2013 ............ 2,250,000 2,328,750
-------------
4,444,063
MANUFACTURING - 0.8%
Agrium, Inc., 7.00% - 2004 .................... 1,000,000 995,000
MOTOR VEHICLES & EQUIPMENT - 4.1%
Chrysler Corporation, 7.45% - 2027 ............ 4,000,000 3,945,000
Ford Motor Company, 7.25% - 2008 .............. 1,000,000 1,007,500
-------------
4,952,500
OIL & GAS COMPANIES - 6.1%
Petroleum Geo-Services, 7.50% - 2007 .......... 2,000,000 2,012,500
Petroleum Nasional Berhad, 7.125% - 2006 ...... 1,750,000 1,745,625
Seagull Energy Corporation, 8.625% - 2005 ..... 1,500,000 1,526,250
Transocean Offshore, Inc., 8.00% - 2027 ....... 2,000,000 2,067,500
-------------
7,351,875
PAPER & LUMBER PRODUCTS - 1.5%
Domtar, Inc., 9.50% - 2016 .................... 1,750,000 1,767,500
PUBLISHING & PRINTING - 1.3%
K-III Communications Corporation, 10.25% - 2004 555,000 585,525
Quebecor Printing Capital, 7.25% - 2007 ....... 1,000,000 1,007,500
-------------
1,593,025
STEEL & METAL PRODUCTS - 1.1%
AK Steel, 10.75% - 2004 ....................... 1,250,000 1,346,875
TOBACCO PRODUCTS - 0.6%
Dimon, Inc., 8.875% - 2006 .................... 675,000 703,688
UTILITIES - 2.3%
Tennessee Gas Pipeline, 7.50% - 2017 .......... 1,700,000 1,697,875
Westinghouse Electric Company, 8.375% - 2002 .. 1,050,000 1,089,375
-------------
2,787,250
TRANSPORTATION - 0.8%
Union Pacific Resources Group, Inc.,
7.50% - 2026 ................................ 1,000,000 986,250
-------------
Total corporate bonds - Series E - 76.7% .... 91,955,023
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
TRUST PREFERRED SECURITIES(9) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE - 4.8%
Chase Capital Trust, 6.1047% - 2027(4) ........ $2,500,000 $ 2,450,725
Washington Mutual Capital, 8.375% - 2002 ...... $1,000,000 1,016,250
SI Financing, Inc., 9.50% - 2026 .............. 87,140 2,303,764
-------------
Total trust preferred securities -
Series E - 4.8% ........................... 5,770,739
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 8.0%
Federal Home Loan Mortgage Corporation,
#1339 C, 8.00% - 2006 CMO ................... $1,000,000 1,043,268
#112 H, 8.80% - 2020 CMO .................... $ 969,041 988,630
#1311 J, 7.50% - 2021 CMO ................... $3,350,000 3,380,615
#1468 U, 7.00% - 2022 CMO ................... $ 711,037 669,825
#1930 AB, 7.50% - 2023 CMO .................. $2,442,959 2,473,679
Federal National Mortgage Association,
#1992-88 L, 8.00% - 2021 CMO ............... $1,000,000 1,022,877
-------------
9,578,894
U.S. GOVERNMENT SECURITIES - 3.2%
Government National Mortgage Association,
#39238, 9.50% - 2009 ........................ $ 365,281 391,323
#181907, 9.50% - 2020 ....................... $ 376,963 402,022
#305617, 9.00% - 2021 ....................... $ 294,271 309,837
#301465, 9.00% - 2021 ....................... $ 226,213 238,180
#2445, 8.00% - 2027 ......................... $2,400,000 2,444,250
-------------
3,785,612
NON-AGENCY SECURITIES - 3.4%
Chase Capital Mortgage Securities Company,
1997-1B, 7.37% - 2007 CMO ................... $1,500,000 1,526,250
Chase Mortgage 1994-G A13, 7.00% - 2025, CMO .. $2,840,191 2,596,677
-------------
4,122,927
-------------
Total mortgage backed securities -
Series E - 14.6% .......................... 17,487,433
GOVERNMENT SECURITIES
- ---------------------
CANADIAN GOVERNMENT AGENCIES - 0.4%
British Columbia Province, 6.50% - 2026 ....... $ 500,000 453,750
-------------
Total investments - Series E - 96.5% ........ 115,666,945
Cash & other assets, less liabilities -
Series E - 3.5% ........................... 4,267,053
-------------
Total net assets - Series E - 100.0% ........ $ 119,933,998
=============
</TABLE>
See accompanying notes.
33
<PAGE> 246
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES J (EMERGING GROWTH)
<TABLE>
<CAPITON>
NUMBER MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ADVERTISING - 1.5%
Omnicom Group, Inc. ........................... 49,000 $ 3,019,625
BANKS & TRUST - 3.2%
Northern Trust Corporation .................... 60,000 2,902,500
State Street Corporation ...................... 79,000 3,653,750
-------------
6,556,250
BEVERAGES - 2.4%
Coca-Cola Enterprises, Inc. ................... 210,200 4,834,600
BIOTECHNOLOGY - 2.5%
Amgen, Inc. ................................... 24,000 1,395,000
BioChem Pharma, Inc.* ......................... 62,500 1,390,625
Biogen, Inc.* ................................. 32,800 1,111,100
Centocor, Inc.* ............................... 39,000 1,211,437
-------------
5,108,162
BROKERAGE - 1.8%
Charles Schwab Corporation .................... 88,500 3,600,844
BUSINESS SERVICES - 7.4%
CBT Group PLC ADR* ............................ 10,000 631,250
Cambridge Technology Partners, Inc.* .......... 49,000 1,568,000
Cintas Corporation ............................ 26,000 1,787,500
Equifax, Inc. ................................. 80,800 3,004,750
Fiserv, Inc.* ................................. 25,500 1,137,937
Manpower, Inc. ................................ 43,000 1,913,500
Paychex, Inc. ................................. 60,600 2,302,800
Robert Half International, Inc.* .............. 31,500 1,482,469
Sungard Data Systems, Inc.* ................... 22,500 1,046,250
-------------
14,874,456
CHEMICALS - SPECIALTY - 2.5%
Praxair, Inc. ................................. 55,500 3,108,000
Sigma-Aldrich Corporation ..................... 59,000 2,068,687
-------------
5,176,687
COMMUNICATIONS - EQUIPMENT - 2.0%
ADC Telecommunications, Inc.* ................. 70,500 2,352,938
Tellabs, Inc.* ................................ 30,500 1,704,187
-------------
4,057,125
COMPUTER SOFTWARE - 7.6%
America OnLine,Inc.* .......................... 52,500 2,920,313
Ascend Communications, Inc.* .................. 35,000 1,378,125
BMC Software, Inc.* ........................... 56,000 3,101,000
Compuware Corporation* ........................ 47,700 2,277,675
McAfee Associates, Inc.* ...................... 31,000 1,956,875
PeopleSoft, Inc.* ............................. 42,000 2,215,500
Viasoft, Inc.* ................................ 31,000 1,573,250
-------------
15,422,738
</TABLE>
<PAGE> 247
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SYSTEMS - 6.0%
Dell Computer Corporation* .................... 26,500 $ 3,112,094
Electronics for Imaging, Inc.* ................ 47,500 2,244,375
ENCAD, Inc.* .................................. 62,000 2,573,000
Sanmina Corporation* .......................... 33,000 2,095,500
SCI Systems, Inc.* ............................ 33,000 2,103,750
-------------
12,128,719
CONSUMER SERVICES - 1.8%
Apollo Group, Inc.* ........................... 56,000 1,974,000
Stewart Enterprises, Inc. ..................... 38,500 1,617,000
-------------
3,591,000
ELECTRIC UTILITIES - 1.0%
AES Corporation* .............................. 29,000 2,051,750
ELECTRONICS - 0.7%
Perkin-Elmer Corporation ...................... 18,700 1,487,819
FOOD - 0.7%
Dole Food Company, Inc. ....................... 33,200 1,419,300
HEALTH CARE - 2.4%
Cardinal Health, Inc. ......................... 30,900 1,769,025
Parexel International Corporation* ............ 49,000 1,555,750
Quintiles Transnational Corporation* .......... 21,900 1,524,787
-------------
4,849,562
HEALTH CARE - HMO - 1.6%
Oxford Health Plans, Inc.* .................... 44,400 3,185,700
HOSPITAL SUPPLIES/MANAGEMENT - 3.0%
Advanced Technology Labs, Inc.* ............... 25,000 1,075,000
Health Management Associates, Inc.* ........... 70,000 1,995,000
HEALTHSOUTH Corporation* ...................... 118,000 2,942,625
-------------
6,012,625
HOTEL/MOTEL - 0.5%
Promus Hotel Corporation* ..................... 27,500 1,065,625
HOUSEHOLD FURNISHINGS & APPLIANCES - 1.1%
Leggett & Platt, Inc. ......................... 51,300 2,205,900
HOUSEHOLD PRODUCTS - 0.4%
Dial Corporation .............................. 50,000 781,250
INSURANCE - 4.2%
AFLAC, Inc. ................................... 75,950 3,588,637
Progressive Corporation ....................... 19,500 1,696,500
SunAmerica, Inc. .............................. 66,000 3,217,500
-------------
8,502,637
INVESTMENT MANAGEMENT - 3.3%
Franklin Resources, Inc. ...................... 69,500 5,043,094
T. Rowe Price Associates, Inc. ................ 30,800 1,590,050
-------------
6,633,144
</TABLE>
See accompanying notes.
34
<PAGE> 248
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES J (EMERGING GROWTH) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
LEISURE TIME - 1.9%
Callaway Golf Company ......................... 41,200 $ 1,462,600
Mirage Resorts, Inc.* ......................... 98,500 2,487,125
-------------
3,949,725
MANUFACTURING - 1.4%
Illinois Tool Works, Inc. ..................... 57,000 2,846,437
MEDICAL INSTRUMENTS - 1.5%
Guidant Corporation ........................... 35,300 3,000,500
OFFICE EQUIPMENT & SUPPLIES - 0.5%
Corporate Express, Inc.* ...................... 70,500 1,017,844
OIL & GAS EQUIPMENT & SERVICES - 4.3%
BJ Services Company* .......................... 21,000 1,126,125
ENSCO International, Inc.* .................... 38,500 2,030,875
Global Marine, Inc.* .......................... 96,000 2,232,000
Smith International, Inc.* .................... 21,000 1,275,750
Tidewater, Inc. ............................... 33,000 1,452,000
Varco International, Inc.* .................... 17,500 564,375
-------------
8,681,125
OIL & GAS EXPLORATION - 2.8%
Anadarko Petroleum Corporation ................ 32,600 1,956,000
Apache Corporation ............................ 50,000 1,625,000
Sonat, Inc. ................................... 42,000 2,152,500
-------------
5,733,500
PACKAGING & CONTAINERS - 0.6%
Sealed Air Corporation* ....................... 24,000 1,140,000
PHARMACEUTICALS - 2.5%
Dura Pharmaceuticals, Inc.* ................... 77,500 3,090,312
Jones Medical Industries, Inc. ................ 40,000 1,900,000
-------------
4,990,312
POLLUTION CONTROL - 1.4%
United States Filter Corporation* ............. 49,750 1,355,688
United Waste Systems, Inc.* ................... 36,000 1,476,000
-------------
2,831,688
RESTAURANTS - 1.7%
Papa John's International, Inc.* .............. 46,250 1,699,688
Starbucks Corporation* ........................ 43,500 1,693,781
-------------
3,393,469
RETAIL TRADE - 8.5%
Bed Bath & Beyond, Inc.* ...................... 32,500 987,187
Consolidated Stores Corporation* .............. 44,688 1,552,891
Dollar General Corporation .................... 68,375 2,564,062
Dollar Tree Stores, Inc.* ..................... 45,000 2,266,875
General Nutrition Companies, Inc.* ............ 77,000 2,156,000
Kohl's Corporation* ........................... 52,500 2,779,219
Payless ShoeSource, Inc.* ..................... 22,000 1,203,125
Staples, Inc.* ................................ 119,250 2,772,563
Tiffany & Company ............................. 19,500 900,656
-------------
17,182,578
</TABLE>
See accompanying notes.
47
<PAGE> 249
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
SEMICONDUCTORS - 6.3%
Altera Corporation* ........................... 47,000 $ 2,373,500
ANADIGICS, Inc.* .............................. 45,000 1,395,000
Analog Devices, Inc.* ......................... 80,500 2,138,281
Atmel Corporation* ............................ 55,500 1,554,000
Cymer, Inc.* .................................. 27,500 1,340,625
Linear Technology Corporation ................. 41,000 2,121,750
Xilinx, Inc.* ................................. 37,000 1,815,313
-------------
12,738,469
TEXTILES - 0.8%
Jones Apparel Group,Inc.* ..................... 34,500 1,647,375
TOOLS - 1.0%
Snap-On, Inc. ................................. 50,300 1,980,563
TRANSPORTATION - 0.6%
Illinois Central Corporation .................. 32,500 1,135,469
-------------
Total common stocks - Series J - 93.4% ...... 188,834,572
Cash & other assets, less liabilities -
Series J - 6.6% ........................... 13,385,529
-------------
Total net assets - Series J - 100.0% ........ $ 202,220,101
=============
SERIES K (GLOBAL AGGRESSIVE BOND)
<CAPTION>
GOVERNMENT OBLIGATIONS
- ----------------------
<S> <C> <C>
ARGENTINA - 4.4%
Republic of Argentina, 5.50% - 2023(6) ........ $1,000,000 $692,500
AUSTRALIA - 3.2%
New South Wales Treasury Corporation,
6.50% - 2006(2) ............................. 700,000 501,848
BRAZIL - 4.8%
Government of Brazil "C", 4.50% - 2014(7) ..... $ 952,553 765,019
CANADA - 2.6%
Canadian Government, 8.00% - 2023(2) .......... 500,000 410,684
COSTA RICA - 2.4%
Banco Costa Rica, 6.25% - 2010 ................ $ 459,015 387,868
DOMINICAN REPUBLIC - 4.5%
Central Bank of Dominican Republic,
6.875% - 2024(8) ............................ $ 850,000 709,750
ECUADOR - 2.3%
Republic of Ecuador, 6.4375% - 2025(8) ........ $ 500,000 358,128
</TABLE>
See accompanying notes.
35
<PAGE> 250
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES K (GLOBAL AGGRESSIVE BOND) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
GOVERNMENT OBLIGATIONS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
GREECE - 7.4%
Hellenic Republic, 14.00% - 2003(2) ........... 310,000,000 $1,172,933
HUNGARY - 6.2%
Government of Hungary, 23.00% - 1999(2) ....... 130,000,000 743,303
Government of Hungary, 21.00% - 1999(2) ....... 40,000,000 229,906
-------------
973,209
JORDAN - 4.1%
Kingdom of Jordan, 4.00% - 2023(6) ............ $1,000,000 650,000
MEXICO - 2.4%
United Mexican States, 6.25% - 2019 ........... $ 500,000 386,563
NEW ZEALAND - 2.8%
New Zealand Government, 6.50% - 2000(2) ....... 650,000 438,785
POLAND - 3.0%
Government of Poland, 16.00% - 1998(2) ........ 1,675,000 474,531
SOUTH AFRICA - 3.8%
Electricity Supply Commission, 11.00% - 2008(2) 600,000 106,694
Republic of South Africa, 12.00% - 2005(2) .... 2,500,000 491,454
-------------
598,148
SPAIN - 2.2%
Bonos u Oblig Del Estado, 10.15% - 2006(2) .... 40,000,000 341,212
VENEZUELA - 4.4%
Venezuela - DCB, 6.75% - 2007(8) .............. $ 750,000 695,625
-------------
Total government obligations -
Series K - 60.5% .......................... 9,556,802
<CAPTION>
CORPORATE BONDS
- ---------------
<S> <C> <C>
CANADA - 7.0%
CHC Helicopter, 11.50% - 2002 ................. $ 500,000 520,000
Roger's Communication, Inc., 10.50% - 2006(2) . 500,000 400,643
Stelco, Inc., 10.40% - 2009(2) ................ 200,000 178,790
-------------
1,099,433
</TABLE>
<PAGE> 251
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CZECH REPUBLIC - 3.8%
CEZ, a.s., 11.30% - 2005(2) ................... 13,000,000 $ 381,149
Skofin, S.R.O., a.s., 11.625% - 1998(2) ....... 7,700,000 228,134
-------------
609,283
DENMARK - 9.3%
Nykredit, 7.00% - 2026(2) ..................... 3,479,501 514,155
Realkredit Danmark, 7.00% - 2026(2) ........... 3,479,001 514,606
Unikredit Realkredit, 7.00% - 2026(2) ......... 3,000,000 442,033
-------------
1,470,794
UNITED STATES - 11.6%
Archibald Candy Corporation, 10.25% - 2004 .... $ 500,000 508,750
Chiquita Brands International, Inc.,
10.25% - 2006 ............................... $ 250,000 266,250
Citicorp Mortgage Securities, Inc.,
7.25% - 2027 ................................ $ 410,315 274,798
Countrywide Home Loans, 7.05% - 2027 .......... $ 704,837 593,402
Residential Asset Securization Trust,
7.50% - 2011 ................................ $ 235,751 182,265
-------------
1,825,465
-------------
Total corporate bonds - Series K - 31.7% .... 5,004,975
SHORT-TERM INVESTMENTS
- ----------------------
MEXICO - 2.8%
Mexican Cetes, 0% - 7-24-97(2) ................ 3,600,000 446,815
SLOVAKIA - 2.8%
European Bank Research & Development,
12.50% - 8-19-97(2) ......................... 215,000,000 434,515
-------------
Total short-term investments -
Series K - 5.6% ........................... 881,330
-------------
Total investments - Series K - 97.8% ........ 15,443,107
WRITTEN OPTIONS
- ---------------
Call option on Government of Brazil "C" Bond,
strike price 80.5 USD - July 1997
(premium $9,586) ............................ $ 952,553 (8,143)
Call option on United Mexican States, strike
price 78.4375 USD - July 1997
(premium $4,250) ............................ $ 500,000 (2,306)
-------------
Total written options - Series K - 0.0% ..... (10,449)
Cash and other assets, less liabilities -
Series K - 2.2% ........................... 352,104
-------------
Total net assets - Series K - 100% .......... $ 15,784,762
=============
</TABLE>
See accompanying notes.
36
<PAGE> 252
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES M (SPECIALIZED ASSET ALLOCATION)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BANKS & CREDITS - 4.1%
Citicorp 7.125% - 2003 ........................ $1,000,000 $ 1,010,000
Star Bank Cincinnati, 6.375% - 2004 ........... $1,000,000 962,500
-------------
1,972,500
BROKERAGE - .6%
Merrill Lynch & Company, Inc., 8.00% - 2007 ... $ 250,000 265,000
COMMUNICATIONS - .1%
News America Holdings, 8.625% - 2003 .......... $ 40,000 43,050
FINANCIAL SERVICES - .3%
MCN Investment Corporation, 6.32% - 2003 ...... $ 125,000 121,875
INDUSTRIAL SERVICES - 4.1%
Black & Decker, 7.50% - 2003 .................. $1,000,000 1,025,000
Rite Aid Corporation, 6.70% - 2001 ............ $ 400,000 397,500
Xerox Corporation, 8.125% - 2002 .............. $ 500,000 525,625
-------------
1,948,125
PETROLEUM - .2%
Occidental Petroleum Corporation, 6.24% - 2000. $ 110,000 108,763
TRANSPORTATION - NON-RAIL - 1.0%
Airborn Freight Corporation, 7.35% - 2005 ..... $ 500,000 490,000
-------------
Total corporate bonds - Series M - 10.4% .... 4,949,313
<CAPTION>
COMMON STOCKS
- -------------
<S> <C> <C>
AMERICAN GOLD - 8.9%
Barrick Gold Corporation ...................... 38,000 836,000
Battle Mountain Gold Company .................. 90,000 511,875
Echo Bay Mines, Ltd. .......................... 99,000 556,875
Hecla Mining Company* ......................... 24,500 131,687
Homestake Mining Company ...................... 39,000 509,437
Newmont Mining Corporation .................... 19,500 760,500
Placer Dome, Inc. ............................. 49,000 802,375
Stillwater Mining Company* .................... 6,600 141,488
-------------
4,250,237
BROADCAST MEDIA - 1.2%
A.H. Belo Corporation ......................... 1,500 62,437
Chris-Craft Industries, Inc.* ................. 2,000 96,500
TCI Satellite Entertainment, Inc.* ............ 1,200 9,450
Tele-Communications, Inc.* .................... 12,000 178,500
U.S. West Media Group* ........................ 10,000 202,500
-------------
549,387
</TABLE>
<PAGE> 253
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
ENTERTAINMENT - 1.4%
King World Productions, Inc. .................. 4,300 $ 150,500
Time Warner, Inc. ............................. 5,000 241,250
Viacom, Inc.* ................................. 6,000 178,125
The Walt Disney Company ....................... 1,200 96,300
-------------
666,175
GAMING - 2.1%
Circus Circus Enterprises, Inc.* .............. 8,900 219,163
Harrah's Entertainment, Inc.* ................. 13,300 242,725
International Game Technology ................. 14,400 255,600
Mirage Resorts, Inc.* ......................... 10,900 275,225
-------------
992,713
HOSPITAL MANAGEMENT - 1.7%
Columbia/HCA Healthcare Corporation ........... 8,400 330,225
Tenet Healthcare Corporation* ................. 11,600 342,925
Universal Health Services, Inc.* .............. 4,000 154,000
-------------
827,150
LEISURE TIME - .8%
Brunswick Corporation ......................... 6,400 200,000
Callaway Golf Company ......................... 5,300 188,150
-------------
388,150
LONG-TERM CARE - 2.1%
Beverly Enterprises* .......................... 6,900 112,125
Genesis Health Ventures, Inc.* ................ 6,400 216,000
HEALTHSOUTH Corporation* ...................... 4,700 117,206
Health Care and Retirements Corporation* ...... 3,100 103,463
Horizon/CMS Healthcare Corporation* ........... 5,900 118,369
Integrated Health Services, Inc. .............. 4,300 165,550
Mariner Health Group, Inc.* ................... 9,000 138,937
-------------
971,650
MANAGED CARE - 1.4%
Express Scripts, Inc.* ........................ 3,100 129,425
Healthcare Compare Corporation* ............... 3,100 162,362
Oxford Health Plans* .......................... 2,100 150,675
Pacificare Health Systems,Inc.* ............... 1,600 102,200
United Healthcare Corporation ................. 2,600 135,200
-------------
679,862
MISCELLANEOUS - .1%
Ameron International Corporation .............. 1,100 62,288
NETWORKING - 2.2%
Bay Networks, Inc.* ........................... 9,400 249,688
3Com Corporation* ............................. 6,600 297,000
Cabletron Systems, Inc.* ...................... 9,800 277,462
Cisco Systems, Inc.* .......................... 3,300 221,513
-------------
1,045,663
See accompanying notes.
37
<PAGE> 254
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
PERIPHERALS - 1.7%
EMC Corporation* .............................. 3,000 $ 117,000
Iomega Corporation* ........................... 4,300 85,463
Lexmark International Group, Inc.* ............ 4,900 148,837
Quantum Corporation* .......................... 7,000 142,625
Read-Rite Corporation* ........................ 4,200 87,675
Seagate Technology, Inc.* ..................... 2,400 84,450
Storage Technology Corporation* ............... 3,300 146,850
-------------
812,900
RESTAURANTS - 2.5%
Applebees International, Inc. ................. 3,000 80,250
Brinker International, Inc.* .................. 12,000 171,000
CKE Restaurants, Inc. ......................... 9,750 308,344
Cracker Barrel Old Country Store, Inc. ........ 5,000 132,500
McDonalds Corporation ......................... 2,500 120,781
Outback Steakhouse, Inc.* ..................... 7,000 169,312
Ryan's Family Steak House, Inc.* .............. 10,000 85,625
Wendy's International, Inc. ................... 5,000 129,688
-------------
1,197,500
STEEL - 1.8%
Allegheny Teledyne, Inc. ...................... 3,500 94,500
Carpenter Technology .......................... 2,600 118,950
Cleveland Cliffs, Inc. ........................ 6,600 268,950
Quanex Corporation ............................ 10,200 313,013
Steel Technologies, Inc. ...................... 5,200 55,575
-------------
850,988
TELECOMMUNICATIONS - 2.3%
Ameritech Corporation ......................... 3,700 251,369
Bell Atlantic Corporation ..................... 2,000 151,750
Bellsouth Corporation ......................... 2,900 134,488
GTE Corporation ............................... 3,100 136,012
Nynex Corporation ............................. 3,000 172,875
SBC Communication, Inc. ....................... 2,560 158,400
Southern New England Telecommunications
Corporation ................................. 2,500 97,187
-------------
1,102,081
TRUCKING - 1.4%
Caliber System, Inc. .......................... 4,200 156,450
Rollings Truck Leasing Corporation ............ 9,500 141,312
Ryder System, Inc. ............................ 4,000 132,000
US Freightways Corporation .................... 4,800 124,200
Werner Enterprises, Inc. ...................... 6,600 127,875
-------------
681,837
TRUCKING PARTS & SUPPLIES - 1.9%
Cummins Engine Company, Inc. .................. 3,700 261,081
Navistar International Corporation* ........... 18,900 326,025
PACCAR, Inc. .................................. 6,200 287,913
-------------
875,019
-------------
</TABLE>
See accompanying notes.
53
<PAGE> 255
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Total common stocks - Series M - 33.5% ...... $ 15,953,600
U.S. GOVERNMENT AGENCIES
- ------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - .9%
6.00% - 2006 ................................ $ 60,574 58,503
7.00% - 2020 ................................ $ 250,000 247,575
7.00% - 2021 ................................ $ 100,000 98,068
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 2.0%
7.17% - 2007 ................................ $ 500,000 494,805
6.50% - 2018 ................................ $ 140,000 135,065
6.95% - 2020 ................................ $ 170,000 165,854
7.50% - 2020 ................................ $ 160,000 160,206
U.S. TREASURY NOTES - 1.7%
6.875% - 1999 ............................... $ 800,000 811,800
-------------
Total U.S. government & government agencies -
Series M - 4.6% ........................... 2,171,876
FOREIGN STOCKS
- --------------
BELGIUM - 5.8%
Bekaert SA .................................... 50 33,901
Cementbedrijven Cimenteries ................... 600 55,077
Delhaize-Le Lion .............................. 1,550 81,488
Electrabel .................................... 1,900 407,483
Fortis AG ..................................... 1,750 361,683
Gevaert Photo Productions ..................... 900 84,617
Groupe Bruxelles Lambert ...................... 700 117,413
Kredietbank ................................... 1,050 423,505
Petrofina SA .................................. 1,050 397,949
Royale Belgium ................................ 650 188,943
Solvay SA ..................................... 500 294,854
Tractebel Investment International ............ 700 292,072
Union Miniere* ................................ 500 46,871
-------------
2,785,856
GERMANY - 7.1%
Allianz AG Holding ............................ 2,140 457,466
BASF AG ....................................... 7,919 292,440
Bayer AG ...................................... 5,365 206,899
Continental AG ................................ 1,198 29,769
Daimler-Benz AG ............................... 5,050 411,237
Degussa AG .................................... 860 45,504
Deutsche Bank AG .............................. 5,108 300,172
Dresdner Bank AG .............................. 8,689 304,670
Friedrich Grohe AG-Vorzugsak .................. 43 13,449
Heidelberger Zement AG ........................ 471 45,680
Hochtief AG ................................... 1,070 47,896
Linde AG ...................................... 86 66,874
Merck KGAA .................................... 1,113 48,543
</TABLE>
See accompanying notes.
38
<PAGE> 256
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
FOREIGN STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
GERMANY (CONTINUED)
Muenchener Rueckversicherungs-Gesellschaft AG . 43 $ 121,903
Preussag AG ................................... 428 126,003
SAP AG ........................................ 728 146,140
Siemens AG .................................... 7,662 459,271
Veba AG ....................................... 4,766 269,407
-------------
3,393,323
ITALY - 5.4%
Assicurazioni Gererali ........................ 12,650 229,730
Banco Ambrosiano Vento ........................ 9,000 25,918
Banco Commerciale Italiane .................... 37,000 76,544
Benetton Group SPA ............................ 2,600 41,487
Credito Italiano .............................. 37,500 68,543
Edison SPA .................................... 19,000 94,414
Fiat SPA ...................................... 70,000 251,778
Fiat SPA - Private ............................ 14,000 25,836
Ina-Instituto Naz Assicuraz ................... 115,977 176,539
Instituto Banc San Paolo Tori ................. 12,500 91,023
Instituto Mobiliare Italiano .................. 11,441 102,878
Mediobanca .................................... 23,000 139,500
Montedison SPA* ............................... 51,800 34,158
Olivetti Group* ............................... 42,500 12,027
Pirelli SPA ................................... 85,000 210,314
Ras-Riun Adriat Di Sicurta .................... 4,500 35,572
Sirti SPA ..................................... 4,000 23,050
Telecom Italia Mobile SPA ..................... 138,200 446,723
Telecom Italia Mobile-DRNC .................... 27,614 49,337
Telecom Italia-RNC ............................ 20,000 39,553
Telecom Italia-SPA ............................ 130,000 388,892
-------------
2,563,816
JAPAN - 11.2%
Bank of Yokohama Limited ...................... 9,000 50,730
Daiei, Inc. ................................... 8,000 51,385
East Japan Railway Company .................... 10 51,385
Fanuc ......................................... 900 34,606
Fuji Bank, Ltd. ............................... 15,000 225,465
Fuji Photo Film ............................... 1,000 40,287
Fujitsu, Ltd. ................................. 7,000 97,265
Furukawa Electric Company ..................... 8,000 50,966
Hitachi, Ltd. (Hit. Seisakusho) ............... 10,000 111,859
Hokuriku Bank ................................. 8,000 27,475
Honda Motor Company, Ltd. ..................... 2,000 60,299
Industrial Bank Of Japan ...................... 13,000 202,220
Ito-Yokado Company, Ltd. ...................... 1,000 58,114
Itoham Foods .................................. 3,000 16,569
Japan Airlines* ............................... 16,000 72,848
Japan Energy Corporation ...................... 8,000 20,973
Kawasaki Heavy Industries ..................... 16,000 74,526
KOA Corporation ............................... 1,000 13,895
Komatsu, Ltd. ................................. 8,000 65,018
</TABLE>
<PAGE> 257
<TABLE>
<CAPTION>
NUMBER MARKET
FOREIGN STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONTINUED)
Komori Corporation ............................ 3,000 $ 71,310
Marui Company, Ltd. ........................... 3,000 55,842
Matsushita Electric Industrial Company, Ltd. .. 11,000 222,057
Mitsubishi Corporation ........................ 16,000 199,948
Mitsubishi Heavy Industrial, Ltd. ............. 20,000 153,631
Mitsubishi Materials Corporation .............. 15,000 60,037
Mori Seiki .................................... 3,000 48,239
NEC Corporation ............................... 3,000 41,947
Nippon Comsys Corporation ..................... 3,000 44,569
Nippon Oil Company, Ltd. ...................... 16,000 87,669
Nippon Shokubai K.K. Company .................. 4,000 31,810
Nippondenso Company, Ltd. ..................... 4,000 95,779
Normura Securities Company,Ltd. ............... 8,000 110,460
NSK Limited ................................... 16,000 103,050
Onward Kashiyama Company, Ltd. ................ 3,000 49,812
Oyo Corporation ............................... 1,400 54,444
Sakura Bank, Ltd. ............................. 3,000 23,018
Sankyo Company, Ltd. .......................... 1,000 33,645
Secom ......................................... 1,000 73,495
Sega Enterprises .............................. 500 16,604
Sekisui House, Ltd. ........................... 18,000 182,470
Shimizu Corporation ........................... 21,000 126,077
Shin-Etsu Chemical Company .................... 5,000 132,832
Sumitomo Bank ................................. 20,000 328,585
Sumitomo Chemical Company ..................... 23,000 104,317
Sumitomo Heavy Industries ..................... 9,000 36,415
Sumitomo Marine & Fire ........................ 4,000 32,858
Taisho Pharmaceutical ......................... 3,000 81,010
The Bank of Tokyo-Mitsubishi .................. 16,000 321,594
Tokai Bank .................................... 9,000 92,808
Tokyo Dome Corporation ........................ 4,000 53,832
Tokyo Electric Power .......................... 14,500 305,383
Tokyo Style ................................... 3,000 41,685
Tokyu Corporation ............................. 25,000 155,335
Tostem Corporation ............................ 1,000 27,702
Toyoda Automatic Loom Works ................... 3,000 68,164
Toyota Motor Corporation ...................... 10,000 295,377
Yamaichi Securities ........................... 15,000 44,700
-------------
5,334,395
-------------
Total foreign stocks - Series M - 29.5% ..... 14,077,390
FOREIGN WARRANTS
- ----------------
Tractebel Warrants - 1999 ..................... 600 6,442
</TABLE>
See accompanying notes.
39
<PAGE> 258
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
TEMPORARY CASH INVESTMENTS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET FUNDS - 2.3%
Vista Federal Money Market Fund ............... 1,073,000 $ 1,073,000
FEDERAL HOME LOAN BANK - 1.0%
5.21% - 7-3-97 .............................. $ 500,000 499,855
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 17.1%
5.26% - 7-9-97 .............................. $2,000,000 1,997,662
5.26% - 7-10-97 ............................. $1,200,000 1,198,421
5.33% - 8-4-97 .............................. $5,000,000 4,975,112
-------------
8,171,195
-------------
Total temporary cash - Series M - 20.4% ..... 9,744,050
-------------
Total investments - Series M - 98.4% ........ 46,902,671
Cash & other assets, less liabilities -
Series M - 1.6% ........................... 776,885
-------------
Total net assets - Series M - 100% .......... $ 47,679,556
=============
SERIES N (MANAGED ASSET ALLOCATION)
CORPORATE BONDS
- ---------------
AEROSPACE & DEFENSE - 0.6%
B.E. AeroSpace, 9.875% - 2006 ................. $ 35,000 $ 36,181
K & F Industries, 10.375% - 2004 .............. $ 25,000 26,406
Raytheon Company, 6.50% - 2005 ................ $ 100,000 96,125
-------------
158,712
BANKS & CREDIT - 0.6%
B.F. Saul Reit, 11.625% - 2002 ................ $ 50,000 53,750
Bankers Trust - NY, 7.25% - 2003 .............. $ 100,000 s 101,000
-------------
154,750
BEVERAGES - 0.2%
Dr. Pepper Bottling Holdings, 0.00% - 2003 .... $ 50,000 49,625
BROADCAST MEDIA - 0.4%
Chancellor Radio Broadcasting, 9.375% - 2004 .. $ 50,000 51,875
American Radio Systems, 9.00% - 2006 .......... $ 50,000 51,000
-------------
102,875
BUILDING/CONSTRUCTION - 0.2%
Synthetic Industries, 9.25% - 2007 ............ $ 50,000 51,000
</TABLE>
<PAGE> 259
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CABLE SYSTEMS - 0.8%
Comcast Cable Communications, 8.125% - 2004 ... $ 100,000 $ 104,500
Fundy Cable, Ltd., 11.00% - 2005 .............. 50,000 54,188
Marcus Cable Operating Company, 0.00% - 2004 .. 50,000 43,500
-------------
202,188
CHEMICALS - SPECIALTY - 0.2%
Agricultural Minerals & Chemicals, 10.75% - 2003 50,000 53,188
COMMERCIAL SERVICES - 0.2%
Dyncorp, Inc., 9.50% - 2007 ................... 50,000 50,500
CONSUMER GOODS & SERVICES - 0.6%
Coinmach Corporation, 11.75% - 2005 ........... 50,000 55,313
Doane Products Company, 10.625% - 2006 ........ 50,000 52,750
Windy Hill Pet Food Company, 9.75% - 2007 ..... 50,000 50,750
-------------
158,813
COSMETICS - 0.6%
American Safety Razor Company, 9.875% - 2005 .. 100,000 104,500
Revlon Consumer Products Company, 10.50% - 2003 50,000 53,375
-------------
157,875
ELECTRIC UTILITIES - 2.1%
Florida Power & Light Company, 5.70% - 1998 ... 100,000 99,750
Midwest Power System, 7.125% - 2003 ........... 140,000 141,575
Monongahela Power, 8.50% - 2022 ............... 100,000 105,375
Southern California Edison, 6.50% - 2001 ...... 50,000 49,562
Texas Utilities, 5.875% - 1998 ................ 110,000 109,863
Wisconsin Electric Power, 5.875% - 1997 ....... 50,000 50,000
-------------
556,125
ELECTRONICS - 0.4%
Communications & Power Industry, 12.00% - 2005. 50,000 54,875
Fairchild Semiconductor, 10.125% - 2007 ....... 50,000 52,875
-------------
107,750
</TABLE>
See accompanying notes.
40
<PAGE> 260
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ENTERTAINMENT - 0.8%
AMC Entertainment, Inc., 9.50% - 2009 ......... $ 50,000 $ 51,750
Six Flags Theme Parks, 0.00% - 2005 ........... 25,000 25,469
Time Warner Entertainment, 7.25% - 2008 ....... 100,000 98,125
United Artists Theatre, 9.30% - 2015 .......... 49,157 47,129
-------------
222,473
ENVIRONMENTAL - 0.2%
Allied Waste North America, 10.25% - 2006 ..... 50,000 53,875
FINANCIAL SERVICES - 1.5%
Conseco, Inc., 8.125% - 2003 .................. 100,000 103,375
Intertek Finance PLC, 10.25% - 2006 ........... 50,000 51,750
New York Life Insurance, 7.50% - 2023 ......... 100,000 95,375
Salomon, Inc., 6.75% - 2003 ................... 100,000 97,750
Trump Atlantic City, 11.25% - 2006 ............ 50,000 48,875
-------------
397,125
FOOD PROCESSING - 0.2%
TLC Beatrice International Holdings,
11.50% - 2005 ............................... 50,000 56,188
FOOD WHOLESALERS - 0.4%
Price/Costco, Inc., 7.125% - 2005 ............. 100,000 99,750
HOSPITAL MANAGEMENT - 0.3%
Columbia/HCA Healthcare, 8.85% - 2007 ......... 80,000 89,500
HOTEL/MOTEL - 0.6%
Grand Casinos, 10.125% - 2003 ................. 50,000 52,000
Host Marriott Travel Plaza, 9.50% - 2005 ...... 50,000 52,250
Rio Hotel & Casino, Inc.,
10.625% - 2005 .............................. 30,000 32,287
9.50% - 2007 ................................ 25,000 25,812
-------------
162,349
LEASING - 0.4%
Penske Truck Leasing, 6.65% - 2000 ............ 100,000 100,375
MANUFACTURING - 0.2%
International Wire Group, 11.75% - 2005 ....... 50,000 54,562
MEDICAL - 0.3%
Owens & Minor, Inc., 10.875% - 2006 ........... 25,000 27,750
Quest Diagnostics, Inc., 10.75% - 2006 ........ 50,000 54,000
-------------
81,750
</TABLE>
<PAGE> 261
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
METALS & MINERALS - 0.6%
Freeport McMoran Resources, 7.00% - 2008 ...... $ 50,000 $ 47,687
Haynes International, Inc., 11.625% - 2004 .... 50,000 53,938
Maxxam Group, Inc., 11.25% - 2003 ............. 50,000 51,813
-------------
153,438
MISCELLANEOUS - 0.2%
McDonald's Corporation, 6.625% - 2005 ......... 50,000 48,875
OIL - 0.2%
Pride Petroleum Services, Inc., 9.375% - 2007 . 50,000 51,875
PACKAGING & CONTAINERS - 0.8%
Bway Corporation, 10.25% - 2007 ............... 50,000 53,500
Gaylord Container Corporation, 12.75% - 2005 .. 25,000 27,531
Plastic Containers, Inc., 10.00% - 2006 ....... 25,000 25,938
Silgan Corporation, 11.75% - 2002 ............. 50,000 53,000
U.S. Can Corporation, 10.125% - 2006 .......... 50,000 53,250
-------------
213,219
RETAIL - SPECIALTY - 0.4%
Safelite Glass Corporation, 9.875% - 2006 ..... 50,000 52,750
Specialty Retailers, 8.50% - 2005 ............. 50,000 50,250
-------------
103,000
SECURITY - 0.2%
Loomis Fargo & Company, 10.00% - 2004 ......... 50,000 50,875
TELECOMMUNICATIONS - 0.5%
Lucent Technologies, Inc., 6.90% - 2001 ....... 100,000 100,500
Telewest Communication PLC, 0.00% - 2007(1) ... 50,000 36,125
-------------
136,625
TEXTILES - 0.4%
Dan River, Inc., 10.125% - 2003 ............... 50,000 52,625
Dominion Textile USA, 9.25% - 2006 ............ 50,000 52,125
-------------
104,750
TRANSPORTATION - MISCELLANEOUS - 0.1%
Sea Containers, Ltd., 12.50% - 2004 ........... 30,000 33,675
-------------
Total corporate bonds - Series N - 15.2% .... 4,017,680
</TABLE>
See accompanying notes.
41
<PAGE> 262
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & DEFENSE - 0.4%
Northrop Grumman Corporation .................. 200 $ 17,563
Raytheon Company .............................. 300 15,300
Rockwell International Corporation ............ 600 35,400
United Technologies Corporation ............... 500 41,500
-------------
109,763
AIRLINES - 0.2%
AMR Corporation* .............................. 300 27,750
KLM Royal Dutch Air Lines NV ADR .............. 800 24,700
-------------
52,450
AMERICAN GOLD - 0.1%
Barrick Gold Corporation ...................... 1,300 28,600
Placer Dome, Inc. ............................. 500 8,187
-------------
36,787
APPLIANCES - 0.0%
Black & Decker Corporation .................... 300 11,156
AUTOMOBILES - 0.9%
Echlin, Inc. .................................. 600 21,600
Ford Motor Company ............................ 2,100 79,275
General Motors Corporation .................... 1,400 77,963
Genuine Parts Company ......................... 750 25,406
Honda Motor Company, Ltd. ADR ................. 700 42,131
-------------
246,375
AUTO PARTS & SUPPLIES - 0.1%
TRW, Inc. ..................................... 400 22,725
BANKS & TRUST - 2.7%
Banc One Corporation .......................... 800 38,750
Chase Manhattan Corporation ................... 612 59,402
Citicorp ...................................... 1,000 120,563
Corestates Financial Corporation .............. 900 48,375
Fifth Third Bancorp ........................... 500 41,016
First Chicago NBD Corporation ................. 500 30,250
First Union Corporation ....................... 700 64,750
Keycorp ....................................... 600 33,525
Mellon Bank Corporation ....................... 600 27,075
J.P. Morgan & Company, Inc. ................... 400 41,750
Nationsbank Corporation ....................... 1,400 90,300
PNCBank Corporation ........................... 915 38,087
U.S. Bancorp Oregon ........................... 500 32,062
Wells Fargo & Company ......................... 200 53,900
-------------
719,805
BEVERAGES - 1.5%
Anheuser-Busch Companies, Inc. ................ 1,000 41,938
Coca-Cola Company ............................. 3,600 251,100
Pepsico, Inc. ................................. 2,500 93,906
-------------
386,944
</TABLE>
<PAGE> 263
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BROADCAST MEDIA - 0.3%
Comcast Corporation (Cl. A) ................... 800 $ 17,100
U.S. West Media Group* ........................ 1,200 24,300
Viacom, Inc. (Cl. B)* ......................... 1,000 30,000
-------------
71,400
BROKERAGE - 0.1%
Charles Schwab Corporation .................... 300 12,206
Salomon, Inc. ................................. 500 27,813
-------------
40,019
BUILDING & REAL ESTATE - 0.1%
Masco Corporation ............................. 700 29,225
CHEMICALS - BASIC - 1.1%
Akzo Nobel NV ADR ............................. 1,300 89,863
Dow Chemical Company .......................... 500 43,563
du Pont (E.I.) de Nemours & Company ........... 1,800 113,175
FMC Corporation* .............................. 200 15,887
Great Lakes Chemical Corporation .............. 400 20,950
Morton International, Inc. .................... 600 18,112
-------------
301,550
CHEMICALS - DIVERSIFIED - 0.2%
Monsanto Company .............................. 1,000 43,062
CHEMICALS - SPECIALTY - 0.4%
Minnesota Mining & Manufacturing Company ...... 800 81,600
Rohm & Haas Company ........................... 300 27,019
-------------
108,619
COMMUNICATIONS EQUIPMENT - 0.1%
Tellabs, Inc.* ................................ 400 22,350
COMPUTER SOFTWARE - 1.6%
Adobe Systems, Inc. ........................... 100 3,506
Automatic Data Processing, Inc. ............... 500 23,500
Ceridian Corporation* ......................... 200 8,450
Computer Associates International, Inc. ....... 700 38,981
First Data Corporation ........................ 900 39,544
Microsoft Corporation* ........................ 1,900 240,113
Novell, Inc.* ................................. 2,100 14,569
Oracle Corporation* ........................... 1100 55,413
Parametric Technology Company* ................ 200 8,512
-------------
432,588
COMPUTER SYSTEMS - 1.3%
Compaq Computer Corporation* .................. 400 39,700
Dell Computer Corporation* .................... 600 70,462
Digital Equipment Corporation* ................ 200 7,087
Hewlett Packard Company ....................... 1,200 67,200
International Business Machines Corporation ... 1,400 126,263
Sun Microsystems, Inc.* ....................... 900 33,497
-------------
344,209
</TABLE>
See accompanying notes.
42
<PAGE> 264
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COSMETICS - 0.4%
Gillette Company .............................. 800 $ 75,800
International Flavors & Fragrances, Inc. ...... 500 25,250
-------------
101,050
DRUGS - 0.6%
Amgen, Inc. ................................... 500 29,062
Johnson & Johnson ............................. 1,900 122,313
-------------
151,375
ELECTRICAL EQUIPMENT - 1.6%
Emerson Electric Company ...................... 1,000 55,062
General Electric Company ...................... 5,500 359,563
-------------
414,625
ELECTRIC UTILITIES - 1.2%
Duke Energy Corporation ....................... 900 43,144
Edison International .......................... 1,700 42,288
Empresa Nacional Electricidad Chile S.A. ADR .. 500 11,281
Empresa Nacional de Electricidad S.A. ADR ..... 600 51,038
Entergy Corporation ........................... 600 16,425
FPL Group, Inc. ............................... 500 23,031
Niagra Mohawk Power Corporation* .............. 1,600 13,700
P G & E Corporation ........................... 1,000 24,250
Southern Company .............................. 1,700 37,187
Texas Utilities Company ....................... 1,000 34,437
Unicom Corporation ............................ 800 17,800
-------------
314,581
ELECTRONICS - 1.1%
Analog Devices, Inc.* ......................... 667 17,717
Hitachi, Ltd. ADR ............................. 300 33,900
Motorola, Inc. ................................ 900 68,400
Phillips Electronics NV ADR ................... 2,000 143,750
Thermo Electron Corporation* .................. 300 10,200
Xilinx, Inc.* ................................. 400 19,625
-------------
293,592
ELECTRONIC SYSTEMS - 0.2%
Honeywell, Inc. ............................... 300 22,763
Oy Nokia AB Corporation ADR ................... 300 22,125
-------------
44,888
ENERGY SERVICES - 0.1%
Halliburton Company ........................... 200 15,850
ENTERTAINMENT - 0.5%
The Walt Disney Company ....................... 1,114 89,398
Time Warner, Inc. ............................. 1,100 53,075
-------------
142,473
ENVRIONMENTAL - 0.1%
Waste Technologies, Inc. ...................... 796 25,571
</TABLE>
<PAGE> 265
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL - BANKS, COMMERCIAL - 0.5%
Banco Frances Del Rio De La Plata ADR ......... 805 $ 26,163
First Bank Systems, Inc. ...................... 300 25,612
Fleet Financial Group, Inc. ................... 500 31,625
Norwest Corporation ........................... 800 45,000
-------------
128,400
FINANCIAL SERVICES - 1.5%
American Express Company ...................... 800 59,600
Banco Bilbao Viz ADR .......................... 1,000 80,875
Block (H & R.), Inc. .......................... 300 9,675
Federal Home Loan Mortgage Corporation ........ 1,200 41,250
Federal National Mortgage Association ......... 1,700 74,163
Greentree Financial Corporation ............... 400 14,250
Household International, Inc. ................. 300 35,231
Merrill Lynch & Company, Inc. ................. 400 23,850
Travelers Group, Inc. ......................... 1,000 63,062
-------------
401,956
FOOD PROCESSING - 1.5%
Archer-Daniels-Midland Company ................ 1,716 40,326
CPC International, Inc. ....................... 300 27,694
Conagra, Inc. ................................. 700 44,888
General Mills ................................. 600 39,075
Grand Metropolitan PLC ADR .................... 900 35,269
Heinz (H.J.) Company .......................... 700 32,287
Kellogg Company ............................... 500 42,812
Ralston Purina Group .......................... 300 24,656
Sara Lee Corporation .......................... 1,100 45,788
Unilever NY ADR ............................... 300 64,219
-------------
397,014
FOOD WHOLESALERS - 0.0%
Earthgrains Company ........................... 32 2,098
GENERAL MERCHANDISERS - 0.6%
Costco Companies, Inc.* ....................... 1,000 32,875
Wal-Mart Stores, Inc. ......................... 3,500 118,344
-------------
151,219
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT - 0.1%
Becton Dickinson & Company .................... 400 20,250
HOSPITAL MANAGEMENT - 0.2%
Columbia/HCA Healthcare Corporation ........... 1,300 51,106
HOTEL/MOTEL - 0.2%
HFS, Inc.* .................................... 500 29,000
ITT Corporation* .............................. 200 12,212
-------------
41,212
</TABLE>
See accompanying notes.
43
<PAGE> 266
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HOUSEHOLD - PRODUCTS - 0.7%
Colgate-Palmolive Company ..................... 800 $ 52,200
Procter & Gamble Company ...................... 1,000 141,250
-------------
193,450
HOUSING - HOME BUILDING - 0.1%
PPG Industries, Inc. .......................... 700 40,687
INSURANCE - 1.7%
Aetna, Inc. ................................... 344 35,217
Allstate Corporation .......................... 700 51,100
American General Corporation .................. 600 28,650
American International Group, Inc. ............ 800 119,500
Cigna Corporation ............................. 200 35,500
Chubb Corporation ............................. 800 53,500
General Re Corporation ........................ 200 36,400
Loews Corporation ............................. 300 30,038
Selective Insurance Group ..................... 200 9,687
Torchmark Corporation ......................... 300 21,375
Unum Corporation .............................. 600 25,200
-------------
446,167
INTEGRATED PETROLEUM - DOMESTIC - 0.6%
Atlantic-Richfield Company .................... 600 42,300
British Petroleum PLC ADR ..................... 600 44,925
Occidental Petroleum Corporation .............. 800 20,050
USX Marathon Group ............................ 800 23,100
Unocal Corporation ............................ 700 27,169
-------------
157,544
INTEGRATED PETROLEUM - INTERNATIONAL - 2.8%
Chevron Corporation ........................... 1,000 73,938
Ente Nazionale Idrocarburi S.p.a. ADR ......... 400 22,750
Exxon Corporation ............................. 3,400 209,100
Mobil Corporation ............................. 1,400 97,825
Royal Dutch Petroleum Company - NY Shares ..... 3,600 194,400
Shell Transport & Trading Company ADR ......... 300 37,725
Texaco, Inc. .................................. 600 65,250
Total S.A. ADR ................................ 1,000 50,750
-------------
751,738
INVESTMENT MANAGEMENT - 0.1%
Morgan Stanley, Dean Witter, Discover & Company 930 40,048
LEISURE TIME - 0.1%
Brunswick Corporation ......................... 400 12,500
LONG-TERM CARE - 0.1%
HEALTHSOUTH Corporation* ...................... 600 14,962
</TABLE>
<PAGE> 267
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MACHINERY - 0.3%
Caterpillar, Inc. ............................. 400 $ 42,950
Deere & Company ............................... 600 32,925
-------------
75,875
MANAGED CARE - 0.1%
United Healthcare Corporation ................. 300 15,600
MANUFACTURING - 1.0%
AlliedSignal, Inc. ............................ 600 50,400
Boeing Company ................................ 1,225 65,012
Illinois Tool Works, Inc. ..................... 600 29,963
Lockheed Martin Corporation ................... 400 41,425
McDonnell Douglas Corporation ................. 300 20,550
Pall Corporation .............................. 700 16,275
Tomkins PLC ADR ............................... 2,000 35,750
-------------
259,375
MEDICAL - 0.0%
Guidant Corporation ........................... 100 8,500
MEDICAL SUPPLIES - 0.3%
Baxter International .......................... 700 36,575
Boston Scientific Corporation* ................ 400 24,575
Medtronic, Inc. ............................... 300 24,300
-------------
85,450
MINING & METALS - 0.1%
Aluminum Company of America ................... 500 37,687
MISCELLANEOUS BUSINESS SERVICES - 0.1%
Browning-Ferris Industries .................... 500 16,625
Cognizant Corporation ......................... 400 16,200
-------------
32,825
MISCELLANEOUS CONSUMER CYCLICALS - 0.1%
Mattel, Inc. .................................. 400 13,550
MISCELLANEOUS CONSUMER DURABLES - 0.3%
Corning,Inc. .................................. 600 33,375
Eastman Kodak Company ......................... 500 38,375
Tandy Corporation ............................. 200 11,200
-------------
82,950
MISCELLANEOUS CONSUMER PRODUCTS - 0.7%
Philip Morris Companies, Inc. ................. 3,900 173,063
Spring Industries, Inc. (Cl. A) ............... 300 15,825
-------------
188,888
MISCELLANEOUS CONSUMER SERVICES - 0.1%
CUC International, Inc.* ...................... 750 19,359
Service Corporation International ............. 600 19,725
-------------
39,084
NATURAL GAS - 0.1%
Enron Corporation ............................. 900 36,731
</TABLE>
See accompanying notes.
44
<PAGE> 268
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
NETWORKING - 0.4%
Bay Networks, Inc.* ........................... 400 $ 10,625
3Com Corporation* ............................. 500 22,500
Cisco Systems, Inc.* .......................... 900 60,413
-------------
93,538
OFFICE EQUIPMENT & SUPPLIES - 0.3%
Ikon Office Solutions, Inc. ................... 600 14,963
Pitney-Bowes, Inc. ............................ 400 28,500
Xerox Corporation ............................. 600 47,325
-------------
90,788
OIL - 0.7%
Amerada Hess Corporation ...................... 1,000 55,563
B.J. Services Company* ........................ 700 37,537
Helmerich & Payne, Inc. ....................... 200 11,525
Schlumberger, Ltd. ............................ 400 50,000
Sonat, Inc. ................................... 500 25,625
-------------
180,250
OIL & GAS DRILLING - 0.2%
Repsol S.A. ADR ............................... 400 16,975
Union Pacific Resources Group, Inc. ........... 1,138 28,308
-------------
45,283
PACKAGING & CONTAINERS - 0.1%
Bemis Company, Inc. ........................... 500 21,687
PAPER & FOREST PRODUCTS - 0.4%
Georgia-Pacific Corporation ................... 300 25,612
Kimberly-Clark Corporation .................... 1,000 49,750
Weyerhaeuser Company .......................... 400 20,800
-------------
96,162
PAPER & PAPER PRODUCTS - 0.2%
International Paper Company ................... 900 43,706
PERIPHERALS - 0.1%
Seagate Technology,Inc.* ...................... 800 28,150
PETROLEUM - 0.1%
Phillips Petroleum Company .................... 800 35,000
PHARMACEUTICALS - 3.3%
Abbott Laboratories ........................... 1,100 73,425
American Home Products Corporation ............ 1,300 99,450
Bristol-Myers Squibb Company .................. 1,400 113,400
Glaxo Wellcome PLC ADR ........................ 900 37,631
Eli Lilly & Company ........................... 900 98,381
Merck & Company Inc. .......................... 1,900 196,650
Pharmacia & Upjohn, Inc. ...................... 1,000 34,750
Pfizer, Inc. .................................. 900 107,550
Schering-Plough Corporation ................... 1,200 57,450
Warner Lambert Company ........................ 400 49,700
-------------
868,387
</TABLE>
<PAGE> 269
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
PUBLISHING - 0.3%
Dun & Bradstreet Corporation .................. 400 $ 10,500
Gannett Company, Inc. ......................... 400 39,500
McGraw-Hill Companies, Inc. ................... 500 29,406
-------------
79,406
RAILROADS - 0.4%
Burlington Northern Santa Fe Corporation ...... 300 26,963
CSX Corporation ............................... 600 33,300
Norfolk Southern Corporation .................. 200 20,150
Union Pacific Corporation ..................... 400 28,200
-------------
108,613
RESTAURANTS - 0.3%
Brinker International, Inc.* .................. 1,500 21,375
Darden Restaurants, Inc. ...................... 1,400 12,688
McDonald's Corporation ........................ 900 43,481
-------------
77,544
RETAIL - APPAREL - 0.1%
Gap, Inc. ..................................... 500 19,438
TJX Companies, Inc. ........................... 400 10,550
-------------
29,988
RETAIL - DEPARTMENT STORES - 0.3%
Federated Department Stores, Inc.* ............ 300 10,425
May Department Stores Company ................. 700 33,075
J.C. Penney Company, Inc. ..................... 700 36,531
-------------
80,031
RETAIL - DRUG STORES - 0.2%
Walgreen Company .............................. 800 42,900
RETAIL - GENERAL MERCHANDISING - 0.1%
Dayton Hudson Corporation 600 31,912
RETAIL - GROCERY - 0.2%
Albertsons, Inc. .............................. 900 32,850
Kroger Company* ............................... 1,000 29,000
-------------
61,850
RETAIL - SPECIALTY - 0.4%
Circuit City Stores, Inc. ..................... 200 7,113
Home Depot, Inc. .............................. 800 55,150
Toys "R" Us, Inc.* ............................ 900 31,500
-------------
93,763
SEMICONDUCTORS - 0.9%
Altera Corporation* ........................... 600 30,300
Applied Materials, Inc.* ...................... 300 21,244
Intel Corporation ............................. 1,300 184,356
-------------
235,900
</TABLE>
See accompanying notes.
45
<PAGE> 270
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
SHOES - 0.1%
Nike, Inc. .................................... 400 $ 23,350
Payless ShoeSource, Inc.* ..................... 144 7,875
-------------
31,225
SPECIALTY MERCHANDISERS - 0.2%
LVMH Moet Hennessylou ADR ..................... 1,000 53,875
STEEL - 0.1%
Nucor Corporation ............................. 300 17,175
TELECOMMUNICATIONS - 3.9%
AT&T Corporation .............................. 2,400 84,150
Airtouch Communications, Inc.* ................ 900 24,637
Ameritech Corporation ......................... 900 61,144
Bell Atlantic Corporation ..................... 800 60,700
Bellsouth Corporation ......................... 1,300 60,288
British Telecom PLC ADR ....................... 400 29,700
Ericsson (L.M.) Telecom Company ADR ........... 1,200 47,250
GTE Corporation ............................... 1,200 52,650
Hong Kong Telecommunications, Ltd. ADR ........ 800 18,700
Lucent Technologies, Inc. ..................... 986 71,054
MCI Communications Corporation ................ 1,200 45,938
Northern Telecom, Ltd. ........................ 500 45,500
Nynex Corporation ............................. 700 40,337
SBC Communications, Inc. ...................... 1,977 122,327
Sprint Corporation ............................ 700 36,837
Telecom New Zealand ADR ....................... 400 16,300
Telecom Braxileiras S.A. ADR .................. 700 106,225
Telefonica De Espana ADR ...................... 400 34,500
Vodafone Group PLC ADR ........................ 500 24,219
Worldcom, Inc.* ............................... 1,400 44,800
-------------
1,027,256
TELEPHONE - 0.5%
Cia De Telecomunicaciones De Chile S.A. ADR ... 425 14,025
Telefonos De Mexico ADR ....................... 1,800 85,950
U.S. West Communications Group ................ 600 22,613
-------------
122,588
TEXTILES - 0.2%
Benetton Group S.p.a. ADR ..................... 2,000 64,750
TIRE & RUBBER - 0.1%
Goodyear Tire & Rubber Company ................ 300 18,994
TOBACCO - 0.1%
Fortune Brands, Inc. .......................... 500 18,656
Gallaher Group PLC ADR* ....................... 500 9,219
-------------
27,875
-------------
Total common stocks - Series N - 45.1% ...... 11,918,494
</TABLE>
<PAGE> 271
<TABLE>
<CAPTION>
PRINCIPAL MARKET
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES - 8.4%
Government National Mortgage Association,
#67365, 11.50% - 2013 ....................... $ 38,692 $ 42,987
#410777, 7.00% - 2025 ....................... 120,508 118,386
#780057, 7.50% - 2025 ....................... 81,439 81,988
#2102, 8.00% - 2025 ......................... 53,031 53,997
#412429, 8.50% - 2025 ....................... 189,578 196,767
#426834, 7.00% - 2026 ....................... 339,672 333,833
#410891, 7.00% - 2026 ....................... 266,007 261,434
#432891, 7.50% - 2026 ....................... 99,306 99,616
#424476, 7.50% - 2026 ....................... 395,340 396,573
#402684, 8.00% - 2026 ....................... 249,901 255,594
#427029, 8.50% - 2026 ....................... 243,876 253,431
#435589, 8.50% - 2026 ....................... 122,397 127,166
-------------
2,221,772
U.S. GOVERNMENT SECURITIES - 10.3%
U.S. Treasury Bonds,
6.875% - 2025 ............................... 35,000 35,127
6.75% - 2026 ................................ 525,000 519,330
6.625% - 2027 ............................... 250,000 244,585
-------------
799,042
U.S. Treasury Notes,
5.75% - 1997 ................................ 225,000 225,182
6.375% - 1999 ............................... 300,000 301,458
5.625% - 2000 ............................... 75,000 73,440
6.25% - 2000 ................................ 100,000 100,019
5.875% - 2005 ............................... 75,000 71,723
6.50% - 2005 ................................ 100,000 99,743
5.625% - 2006 ............................... 100,000 93,849
6.50% - 2006 ................................ 175,000 174,143
6.25% - 2007 ................................ 800,000 782,504
-------------
1,922,061
-------------
Total U.S. government & government agency
securities - Series N - 18.7% ............. 4,942,875
MISCELLANEOUS ASSETS
- --------------------
ASSET-BACKED SECURITIES - 0.2%
Airplanes Pass Through Trust (Cl. D),
10.875% - 2019 .............................. 50,000 57,521
</TABLE>
See accompanying notes.
46
<PAGE> 272
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
FOREIGN CORPORATE BONDS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - 1.2%
European Investment Bank, 4.625% - 2003(2) .... 17,000,000 $ 169,082
European Investment Bank, 3.00% - 2006(2) ..... 7,000,000 63,811
Interamer Development Bank, 6.00% - 2001(2) ... 5,000,000 51,451
KFW International Finance, 6.00% - 1999(2) .... 3,000,000 29,199
-------------
Total foreign bonds - Series N - 1.2% ....... 313,543
FOREIGN GOVERNMENT ISSUES
- -------------------------
CANADA - 0.3%
Government Bond, 8.50% - 2002(2) .............. 60,000 48,419
Government Bond, 6.50% - 2004(2) .............. 60,000 44,486
-------------
92,905
FRANCE - 0.4%
O.A.T. Government Bond, 8.50% - 2002(2) ....... 430,000 86,257
O.A.T. Government Bond, 5.50% - 2007(2) ....... 214,000 36,210
-------------
122,467
GERMANY - 0.8%
Bundersrepub Deutschland, 8.375% - 2001(2) .... 130,000 85,377
Bundersrepub Deutschland, 7.375% - 2005(2) .... 125,000 80,608
Deutschland Republic Government Bond,
6.00% - 2007(2) ............................. 62,000 36,481
-------------
202,466
UNITED KINGDOM - 0.3%
Treasury Bond, 8.00% - 2003(2) ................ 29,000 50,301
Treasury Bond, 7.50% - 2006(2) ................ 12,000 20,489
-------------
70,790
-------------
Total foreign government issues -
Series N - 1.8% ........................... 488,628
FOREIGN STOCKS
- --------------
AUSTRALIA - 0.1%
Rio Tinto, Ltd. ............................... 1,000 16,916
BELGIUM - 0.3%
Electrabel .................................... 50 10,723
Kredietbank ................................... 100 40,334
Societe Generale de Belgique .................. 200 18,693
-------------
69,750
DENMARK - 0.2%
Danisco A/S ................................... 1,000 61,230
</TABLE>
<PAGE> 273
<TABLE>
<CAPTION>
NUMBER MARKET
FOREIGN STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - 0.8%
Axa ........................................... 500 $ 31,128
Eridania Beghin-Say S.A. ...................... 200 29,978
L'Air Liquide ................................. 211 33,532
Pinault-Printemps-Redoute S.A. ................ 100 48,101
Societe Generale De Paris ..................... 308 34,415
Societe Technip ............................... 400 46,466
-------------
223,620
GERMANY - 1.3%
Altana AG ..................................... 30 32,195
Bank of Berlin ................................ 2,000 42,214
Bayer AG ...................................... 2,000 77,129
Ckag Colonia Konzern AG ....................... 300 28,407
Deutsche Bank AG .............................. 500 29,382
M.A.N. AG ..................................... 200 62,323
Siemens AG .................................... 400 23,977
Veba AG ....................................... 600 33,916
-------------
329,543
HONG KONG - 0.8%
Cheung Kong Holdings .......................... 5,000 49,372
Hong Kong Electric Holdings, Ltd. ............. 9,000 36,245
Hutchinson Whampoa, Ltd. ...................... 14,000 121,075
-------------
206,692
ITALY - 0.2%
Banco Commerciale Italiane .................... 13,000 26,894
Telecom Italia S.p.a. ......................... 10,000 29,915
-------------
56,809
JAPAN - 1.7%
Bridgestone Corporation ....................... 3,000 69,737
Canon, Inc. ................................... 1,000 27,265
Dia Nippon Printing, Ltd. ..................... 2,000 45,268
Kao Corp ...................................... 4,000 55,580
Kuraray Company, Ltd. ......................... 3,000 29,887
Marui Company, Ltd. ........................... 2,000 37,228
Mitsubishi Electric Corporation ............... 4,000 22,407
Mitsubishi Heavy Inds., Ltd. .................. 4,000 30,726
Ricoh Corp, Ltd. .............................. 4,000 52,434
Sharp Corp .................................... 2,000 27,615
Takeda Chemical Inds. ......................... 2,000 56,279
-------------
454,426
MALAYSIA - 0.3%
Malayan Cement Berhad ......................... 12,500 20,899
Sime Darby Berhad ............................. 8,000 26,624
United Engineers (Malaysia), Ltd. ............. 3,000 21,632
-------------
69,155
</TABLE>
See accompanying notes.
47
<PAGE> 274
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
FOREIGN STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS - 0.5%
CSM NV ........................................ 600 $ 30,133
Ing Groep NV .................................. 1,500 69,284
Oce NV ........................................ 300 38,769
-------------
138,186
NEW ZEALAND - 0.1%
Lion Nathan, Ltd. ............................. 10,000 25,279
SINGAPORE - 0.3%
Cycle & Carriage, Ltd. ........................ 3,000 31,052
Development Bank of Singapore ................. 2,000 25,178
Singapore Airlines, Ltd. ...................... 3,000 26,856
-------------
83,086
SOUTH AFRICA - 0.1%
Rustenburg Platinum ........................... 2,000 36,600
SWEDEN - 0.2%
Astra AB (Cl. B) .............................. 3,200 56,904
SWITZERLAND - 1.1%
ABB AG-Bearer ................................. 20 30,318
Nestle S.A. ................................... 20 26,422
Novartis AG ................................... 26 41,626
Sig Schweizland ............................... 30 91,059
UBS-Bearer (Union Bank of Switzerland) ........ 80 91,642
-------------
281,067
UNITED KINGDOM - 1.5%
Abbey National PLC ............................ 3,600 49,130
BAA PLC ....................................... 2,300 21,188
Barclays PLC .................................. 3,000 59,515
Blue Circle Industries PLC .................... 3,800 27,068
GKN PLC ....................................... 2,000 34,434
HSBC Holdings PLC ............................. 3,000 92,294
Lonrho, Ltd. .................................. 22,000 46,684
Texco PLC ..................................... 10,000 61,496
____________
391,809
Total foreign stocks - Series N - 9.5% ...... 2,501,072
TEMPORARY CASH INVESTMENTS
- --------------------------
MONEY MARKET FUNDS - 0.7%
Vista Treasury Plus International Fund ........ 173,005 173,005
</TABLE>
<PAGE> 275
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
COMMERICAL PAPER OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - 8.1%
Bell Atlantic Network Funding, 5.50%, 7-02-97 . $ 390,000 $ 389,940
Ciesco L.P., 6.20%, 7-01-97 ................... $1,751,000 1,751,000
-------------
Total commercial paper - Series N - 8.1% .... 2,140,940
-------------
Total investments - Series N - 100.5% ....... 26,553,758
Liabilities in excess of cash & other
assets - Series N - (0.5%) ................ (125,394 )
-------------
Total net assets - Series N - 100.0% ........ $ 26,428,364
=============
SERIES O (EQUITY INCOME)
COMMON STOCKS
- -------------
AMERICAN GOLD - 0.8%
Newmont Mining Corporation .................... 20,900 $ 815,100
APPLIANCES - 0.6%
Whirlpool Corporation ......................... 11,800 643,838
AUTO PARTS & SUPPLIES - 0.4%
Eaton Corporation ............................. 5,300 462,756
AUTOMOBILES - 1.4%
Ford Motor Company ............................ 8,000 302,000
General Motors Corporation .................... 11,800 657,113
Genuine Parts Company ......................... 14,400 487,800
-------------
1,446,913
BANKS & TRUST - 7.1%
Banc One Corporation .......................... 17,870 865,578
Bankers Trust New York Corporation ............ 9,500 826,500
Chase Manhattan Corporation ................... 12,708 1,233,470
Great Western Financial Corporation ........... 3,100 166,625
Mellon Bank Corporation ....................... 37,300 1,683,163
J.P. Morgan & Company, Inc. ................... 9,500 991,562
National City Corporation ..................... 9,700 509,250
PNC Bank Corporation .......................... 9,800 407,925
Wells Fargo & Company ......................... 3,000 808,500
-------------
7,492,573
BEVERAGES - 1.3%
Anheuser-Busch Companies, Inc. ................ 19,500 817,781
Brown-Forman Corporation (Cl. B) .............. 10,400 546,700
-------------
1,364,481
BUILDING MATERIALS - 0.4%
Armstrong World Industries, Inc. .............. 6,400 469,600
</TABLE>
See accompanying notes.
48
<PAGE> 276
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES O (EQUITY INCOME) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - BASIC - 3.8%
Dow Chemical Company .......................... 18,800 $ 1,637,950
du Pont (E.I.) de Nemours & Company ........... 19,200 1,207,200
FMC Corporation* .............................. 2,900 230,369
Great Lakes Chemical Company .................. 17,600 921,800
-------------
3,997,319
CHEMICALS - SPECIALTY - 4.1%
Betzdearborn, Inc. ............................ 9,600 633,600
Eastman Chemical Company ...................... 7,800 495,300
Imperial Chemical Industries PLC ADR .......... 9,400 534,625
Lubrizol Corporation .......................... 11,500 482,281
Minnesota Mining & Manufacturing Company ...... 7,200 734,400
Nalco Chemical Company ........................ 11,600 448,050
Witco Corporation ............................. 25,900 982,581
-------------
4,310,837
COSMETICS - 1.2%
International Flavors & Fragrances, Inc. ...... 23,100 1,217,050
ELECTRICAL EQUIPMENT - 2.3%
Cooper Industries, Inc. ....................... 11,488 571,528
General Electric Company ...................... 20,800 1,359,800
Hubbell, Inc. (Cl. B) ......................... 11,400 501,600
-------------
2,432,928
ELECTRIC UTILITIES - 7.2%
Baltimore Gas & Electric Company .............. 14,700 392,306
Centerior Energy Corporation .................. 23,600 264,025
Central & South West Corporation .............. 13,400 284,750
DQE, Inc. ..................................... 15,600 440,700
Dominion Resources, Inc. ...................... 15,300 560,363
Duke Energy Corporation ....................... 19,300 925,194
Edison International .......................... 10,900 271,137
Entergy Corporation ........................... 14,300 391,463
Florida Progress Corporation .................. 5,300 165,956
GPU, Inc. ..................................... 5,100 182,962
Ohio Edison Company ........................... 16,600 362,087
Peco Energy Corporation ....................... 22,600 474,600
P G & E Corporation ........................... 13,600 329,800
Pacificorp .................................... 25,200 554,400
Public Service Enterprise Group, Inc. ......... 13,000 325,000
Southern Company .............................. 26,800 586,250
Unicom Corporation ............................ 26,700 594,075
Western Resources, Inc. ....................... 13,000 421,688
-------------
7,526,756
</TABLE>
<PAGE> 277
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS - 0.8%
AMP, Inc. ..................................... 19,500 $ 814,125
FINANCIAL - BANKS, COMMERCIAL - 2.2%
BankBoston Corporation ........................ 7,700 554,881
Fleet Financial Group, Inc. ................... 12,000 759,000
Mercantile Bankshares Corporation ............. 9,800 392,000
Signet Banking Corporation .................... 16,600 597,600
-------------
2,303,481
FINANCIAL SERVICES - 2.8%
American Express Company ...................... 8,400 685,400
Federal National Mortgage Association ......... 19,900 868,138
Block (H. & R.), Inc. ......................... 20,100 648,225
Travelers Group, Inc. ......................... 11,200 706,300
-------------
2,908,063
FOOD PROCESSING - 4.4%
General Mills ................................. 16,400 1,068,050
Grand Metropolitan PLC ADR .................... 5,000 195,937
Heinz (H.J.) Company .......................... 15,150 698,794
Kellogg Company ............................... 6,700 573,688
Quaker Oats Company ........................... 20,600 924,425
Sara Lee Corporation .......................... 8,700 362,137
Unilever NY ADR ............................... 3,900 834,844
-------------
4,657,875
FOOD WHOLESALERS - 0.6%
McCormick & Company, Inc. ..................... 24,400 616,100
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT - 0.7%
Bausch & Lomb, Inc. ........................... 15,000 706,875
HOTEL/MOTEL - 0.7%
ITTCorporation* ............................... 11,600 708,325
INSURANCE - 4.1%
Exel Limited .................................. 11,700 617,175
American General Corporation .................. 18,200 869,050
Hilb, Rogal & Hamilton Company ................ 5,600 95,200
Lincoln National Corporation .................. 7,200 463,500
Safeco Corporation ............................ 13,600 630,281
St. Paul Companies, Inc. ...................... 13,900 1,059,875
USF& G Corporation ............................ 14,100 338,400
Willis Corroon Group PLC ADR .................. 20,600 233,819
-------------
4,307,300
INTEGRATED PETROLEUM - DOMESTIC - 3.6%
Amoco Corporation ............................. 9,700 843,294
Atlantic-Richfield Company .................... 21,400 1,536,900
British Petroleum PLCADR ...................... 10,200 763,725
USX Marathon Group ............................ 21,400 617,925
-------------
3,761,844
</TABLE>
See accompanying notes.
49
<PAGE> 278
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES O (EQUITY INCOME) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INTEGRATED PETROLEUM - INTERNATIONAL - 5.1%
Chevron Corporation ........................... 13,300 $ 983,369
Exxon Corporation ............................. 22,300 1,420,650
Mobil Corporation ............................. 13,200 922,350
Royal Dutch Petroleum Company - NY Shares ..... 16,400 896,400
Texaco, Inc. .................................. 10,600 1,152,750
-------------
5,375,519
MACHINERY - 0.2%
Gatx Corporation .............................. 2,600 190,575
MANUFACTURING - 0.5%
Pall Corporation .............................. 21,000 488,250
MEDIA & COMMUNICATIONS - 0.7%
R.R. Donnelley & Sons Company ................. 18,800 725,175
MEDICAL SUPPLIES - 0.9%
Bard (C.R.), Inc. ............................. 11,500 417,594
Baxter International .......................... 10,500 548,625
-------------
966,219
MINING & METALS - 0.7%
Reynolds Metals Company ....................... 10,400 741,000
MISCELLANEOUS CONSUMER PRODUCTS - 1.6%
Philip Morris Companies, Inc. ................. 14,700 714,437
Tambrands, Inc. ............................... 19,300 962,588
-------------
1,677,025
MISCELLANEOUS - 0.1%
Rouse Company ................................. 5,000 147,500
OIL - 0.5%
Amerada Hess Corporation ...................... 8,500 522,287
OIL & GAS DRILLING - 0.4%
Repsol S.A. ADR ............................... 10,600 449,837
Union Pacific Resources Group, Inc. ........... 1 8
-------------
449,845
PAPER & PAPER PRODUCTS - 0.7%
International Paper Company ................... 15,900 772,144
PAPER & FOREST PRODUCTS - 2.6%
Consolidated Papers, Inc. ..................... 11,700 685,800
Georgia-Pacific Corporation ................... 11,800 1,007,425
Union Camp Corporation ........................ 20,200 1,010,000
-------------
2,703,225
PETROLEUM - 0.5%$
Phillips Petroleum Company .................... 11,900 520,625
</TABLE>
<PAGE> 279
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 2.6%
Abbott Laboratories ........................... 12,600 $ 841,050
American Home Products Corporation ............ 12,700 971,550
Pharmacia & Upjohn, Inc. ...................... 24,795 903,326
-------------
2,715,926
PUBLISHING - 3.8%
Deluxe Corporation ............................ 7,700 262,762
Dow Jones & Company, Inc. ..................... 17,000 683,187
Dun & Bradstreet Corporation .................. 21,000 551,250
Gannett Company, Inc. ......................... 4,600 454,250
Knight-Ridder, Inc. ........................... 18,000 932,188
McGraw-Hill Companies, Inc. ................... 9,500 558,719
Readers Digest Association, Inc. (Cl. A) ...... 16,300 467,606
Readers Digest Association, Inc. (Cl. B) ...... 1,300 35,994
-------------
3,945,956
RAILROADS - 1.5%
Burlington Northern Santa Fe Corporation ...... 8,700 781,913
Union Pacific Corporation ..................... 11,900 838,950
-------------
1,620,863
RETAIL - DEPARTMENT STORES - 1.5%
May Department Stores Company ................. 11,100 524,475
J.C. Penney Company, Inc. ..................... 21,000 1,095,938
-------------
1,620,413
SPECIALTY MERCHANDISERS - 0.2%
The Limited,Inc. .............................. 13,100 265,275
TELECOMMUNICATIONS - 6.6%
AT & T Corporation ............................ 28,300 992,269
Alltel Corporation ............................ 31,400 1,100,094
BCE, Inc. ..................................... 17,800 498,400
Bell Atlantic Corporation ..................... 11,900 902,912
Bellsouth Corporation ......................... 15,000 695,625
Frontier Corporation .......................... 18,900 376,819
GTE Corporation ............................... 16,000 789,750
SBC Communications, Inc. ...................... 13,119 811,738
Southern New England Telecommunications
Corporation ................................. 9,400 365,425
Sprint Corporation ............................ 7,200 426,262
-------------
6,959,294
TELEPHONE - 0.4%
U.S. West Communications Group ................ 12,000 452,250
TOBACCO - 1.6%
Fortune Brands, Inc. .......................... 13,600 507,450
Gallaher Group PLC ADR* ....................... 13,600 250,750
UST, Inc. ..................................... 31,300 868,575
-------------
1,626,775
</TABLE>
See accompanying notes.
50
<PAGE> 280
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES O (EQUITY INCOME) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - MISCELLANEOUS - 0.2%
Alexander & Baldwin, Inc. ..................... 7,400 $ 193,325
-------------
Total common stocks - Series O - 83.4% ...... 87,643,605
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- ----------------------------------------------
U.S. GOVERNMENT SECURITIES - 1.7%
U.S. Treasury Notes,
6.125% - 1998 ............................... $ 100,000 100,311
5.875% - 1999 ............................... $ 100,000 99,328
6.25% - 2000 ................................ $ 100,000 100,019
6.50% - 2001 ................................ $ 400,000 402,016
5.75% - 2003 ................................ $ 400,000 386,132
5.625% - 2006 ............................... $ 200,000 187,698
7.00% - 2006 ................................ $ 100,000 102,827
-------------
1,378,331
U.S. Treasury Bonds, 6.00% - 2026 ............. $ 400,000 357,760
-------------
Total U.S. government & government agency
securities - Series O - 1.7% .............. 1,736,091
REAL ESTATE INVESTMENT TRUSTS
- -----------------------------
REAL ESTATE - 1.3%
Security Capital Pacific Trust ................ 6,800 173,850
Weingarten Realty Investors ................... 5,700 240,825
Simon Debartolo Group, Inc. ................... 29,536 945,152
-------------
1,359,827
FOREIGN STOCKS
- --------------
SWITZERLAND - 0.8%
Novartis AG ................................... 491 850,125
UNITED KINGDOM - 1.0%
Cadbury Schweppes PLC ......................... 5,100 169,334
Lonrho, Ltd. .................................. 148,200 314,478
Smith & Nephew PLC ............................ 21,800 60,591
Tomkins PLC ................................... 111,400 520,992
-------------
1,065,395
-------------
Total foreign stocks - Series O - 1.8% ...... 1,915,520
</TABLE>
<PAGE> 281
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
TEMPORARY CASH INVESTMENTS OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET FUNDS - 1.3%
Vista Treasury Institutional Money Market Fund. 1,390,904 $ 1,390,904
COMMERCIAL PAPER
- ----------------
FINANCIAL SERVICES - 10.0%
Bell Atlantic Network Funding 5.55%, 7-01-97 .. $ 400,000 400,000
Ciesco L.P., 5.55%, 7-01-97 ................... $2,000,000 2,000,000
Corporate Asset Funding, 5.55%, 7-22-97 ....... $1,400,000 1,395,468
Motorola Credit Corporation, 5.50%, 7-17-97 ... $4,000,000 3,990,222
Preferred Receivables Funding, 5.58%, 8-04-97 . $ 800,000 795,784
Progress Capital Holdings, 5.53%, 7-07-97 ..... $1,950,000 1,948,203
-------------
10,529,677
PHARMACEUTICALS - 1.0%
Warner-Lambert Company, 5.52%, 8-05-97 ........ $1,000,000 994,633
-------------
Total commercial paper - Series O - 11.0% ... 11,524,310
-------------
Total investments - Series O - 100.5% ....... 105,570,257
Liabilities in excess of cash & other
assets - Series O - (0.5%) ................ (482,870)
-------------
Total net assets - Series O - 100.0% ........ $ 105,087,387
=============
SERIES P (HIGH YIELD)
CORPORATE BONDS
- ---------------
APPAREL - 1.9%
Tultex Corporation, 10.625% - 2005 ............ $ 50,000 $ 54,875
BANKS & CREDIT - 1.9%
B.F. Saul REIT, 11.625% - 2002 ................ $ 50,000 53,750
BEVERAGES - 3.7%
Cott Corporation, 9.375% - 2005 ............... $ 50,000 52,375
Delta Beverage Group, 9.75% - 2003 ............ $ 50,000 52,187
-------------
104,562
BROADCAST MEDIA - 3.6%
Allbritton Communications Company, 9.75% - 2007 $ 65,000 49,625
Heritage Media Corporation, 8.75% - 2006 ...... $ 50,000 51,875
-------------
101,500
</TABLE>
See accompanying notes.
51
<PAGE> 282
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES P (HIGH YIELD) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
CABLE SYSTEMS - 1.9%
Rogers Cablesystems, 9.625% - 2002 ............ $ 50,000 $ 52,812
CHEMICALS - 3.1%
Envirodyne Industries, Inc., 12.00% - 2000 .... 80,000 87,500
COMMUNICATIONS - 3.3%
K-IIICommunications Corporation, 10.25% - 2004 20,000 21,100
Rogers Communications, Inc., 9.125% - 2006 .... 30,000 30,375
Valassis Communications, Inc., 9.55% - 2003 ... 40,000 43,150
-------------
94,625
COMMUNICATION SERVICES - 7.5%
CF Cable TV, Inc., 11.625% - 2005 ............. 35,000 40,075
Cablevision Systems Corporation, 10.75% - 2004 50,000 51,812
Century Communications Corporation, 9.50% - 2005 50,000 51,375
Comcast Corporation, 9.125% - 2006 ............ 65,000 68,087
-------------
211,349
CONSUMER GOODS & SERVICES - 4.3%
Pillowtex Corporation, 10.00% - 2006 .......... 50,000 52,937
Westpoint Stevens, Inc., 9.375% - 2005 ........ 65,000 68,169
-------------
121,106
ELECTRIC - 4.4%
AES Corporation, 10.25% - 2006 ................ 65,000 70,850
Cal Energy Company, Inc., 9.50% - 2006 ........ 50,000 53,500
-------------
124,350
ENTERTAINMENT - 2.7%
Showboat, Inc., 9.25% - 2008 .................. 50,000 51,250
Station Casinos, Inc., 9.625% - 2003 .......... 25,000 24,875
-------------
76,125
FINANCIAL SERVICES - 3.9%
Dollar Financial Group, Inc., 10.875% - 2006 .. 50,000 53,500
Homeside, Inc., 11.25% - 2003 ................. 50,000 58,062
-------------
111,562
FOOD & BEVERAGES - 2.9%
Chiquita Brands International, Inc.,
10.25% - 2006 ............................... 25,000 26,625
TLC Beatrice International Holdings, Inc.,
11.50% - 2005 ............................... 50,000 56,187
-------------
82,812
</TABLE>
<PAGE> 283
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HOSPITAL MANAGEMENT - 4.5%
Regency Health Services, Inc., 9.875% - 2002 .. $ 50,000 $ 51,625
Tenet Healthcare Corporation, 10.125% - 2005 .. 70,000 76,475
-------------
128,100
HOTEL & RECREATION - 1.9%
Four Seasons Hotels, Inc., 9.125% - 2000 ...... 50,000 53,875
INDUSTRIAL SERVICES - 1.9%
Iron Mountain, Inc., 10.125% - 2006 ........... 50,000 53,375
MANUFACTURING -10.0%
AAF-McQuay, Inc., 8.875% - 2003 ............... 50,000 50,125
AGCO Corporation, 8.50% - 2006 ................ 50,000 51,313
Johns Manville International Group, Inc.,
10.875% - 2004 .............................. 35,000 38,938
Sequa Corporation, 9.375% - 2003 .............. 50,000 51,063
Shop Vac Corporation, 10.625% - 2003 .......... 50,000 53,125
Titan Wheel International, Inc., 8.75% - 2007 . 25,000 25,437
-------------
270,001
MISCELLANEOUS - 1.0%
Packard Bioscience Company, 9.375% - 2007 ..... 40,000 40,600
OIL - 2.4%
Maxus Energy Corporation, 9.50% - 2003 ........ 65,000 68,169
PACKAGING & CONTAINERS - 1.8%
Plastic Containers, Inc., 10.00% - 2006 ....... 50,000 51,875
PUBLISHING - 2.7%
Golden Books Publishing, Inc., 7.65% - 2002 ... 80,000 75,400
RECREATION - 1.9%
AMF Group, Inc., 10.875% - 2006 ............... 50,000 54,000
REFINERY - 1.9%
Crown Central Petroleum, 10.875% - 2005 ....... 50,000 52,375
RESTAURANTS - 2.5%
Carrols Corporation, 11.50% - 2003 ............ 65,000 69,631
RETAIL - GENERAL MERCHANDISING - 0.9%
Cole National Group, 9.875% - 2006 ............ 25,000 26,313
</TABLE>
See accompanying notes.
52
<PAGE> 284
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES P (HIGH YIELD) (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
STEEL & METAL PRODUCTS - 0.9%
AK Steel Corporation, 9.125% - 2006 ........... $ 25,000 $ 25,688
TELECOMMUNICATIONS - 1.8%
Centennial Cellular, 8.875% - 2001 ............ $ 50,000 50,000
TOBACCO PRODUCTS - 2.4%
Dimon, Inc., 8.875% - 2006 .................... $ 65,000 67,763
TRANSPORTATION - 5.3%
Atlas Air, Inc., 12.25% - 2002 ................ $ 75,000 83,250
Teekay Shipping Corporation, 8.32% - 2003 ..... $ 65,000 65,650
-------------
148,900
-------------
Total corporate bonds - Series P - 88.8% .... 2,512,993
TRUST PREFERRED SECURITIES(9)
- -----------------------------
FINANCE - 1.9%
S I Financing, Inc., 9.50% - 2026 ............. 2,000 52,875
PREFERRED STOCKS
- ----------------
COMMUNICATIONS - 2.0%
Cablevision Systems Corporation, 11.25% ....... 257 30,525
K-III Communications Corporation, 10.00% - 2008 300 26,206
-------------
56,731
-------------
Total investments - Series P - 92.7% ........ 2,622,599
Cash and other assets, less liabilities -
Series P - 7.3% ........................... 207,554
-------------
Total net assets - Series P - 100.0% ........ $ 2,830,153
=============
SERIES S (SOCIAL AWARENESS)
COMMON STOCKS
- -------------
ADVERTISING - 1.5%
Omnicom Group, Inc. ........................... 17,500 1,078,437
BANKS & TRUST - 3.4%
Banc One Corporation .......................... 15,400 745,938
Bank of New York Company, Inc. ................ 19,200 835,200
Northern Trust Corporation .................... 19,200 928,800
-------------
2,509,938
</TABLE>
<PAGE> 285
SERIES S (SOCIAL AWARENESS) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BEVERAGES - 5.1%
Coca-Cola Company ............................. 37,200 $ 2,594,700
PepsiCo, Inc. ................................. 31,900 1,198,244
-------------
3,792,944
BIOTECHNOLOGY - 0.7%
Amgen, Inc. ................................... 9,500 552,187
BUSINESS SERVICES - 1.1%
Automatic Data Processing, Inc. ............... 17,000 799,000
CHEMICALS - SPECIALTY - 3.1%
Nalco Chemical Company ........................ 16,400 633,450
Praxair, Inc. ................................. 18,800 1,052,800
Sigma-Aldrich Corporation ..................... 18,000 631,125
-------------
2,317,375
COMMUNICATIONS - EQUIPMENT - 1.1%
Tellabs, Inc.* ................................ 14,300 799,012
COMPUTER SOFTWARE - 5.2%
McAfee Associates, Inc.* ...................... 10,000 631,250
Microsoft Corporation* ........................ 18,600 2,350,575
PeopleSoft, Inc.* ............................. 16,400 865,100
-------------
3,846,925
COMPUTER SYSTEMS - 7.3%
3Com Corporation* ............................. 7,500 337,500
Ascend Communications, Inc.* .................. 12,500 492,188
Cisco Systems, Inc.* .......................... 14,900 1,000,163
Compaq Computer Corporation* .................. 7,000 694,750
Electronics for Imaging, Inc.* ................ 12,000 567,000
Hewlett-Packard Company ....................... 17,600 985,600
Sanmina Corporation* .......................... 12,000 762,000
Sun Microsystems, Inc.* ....................... 16,000 595,500
-------------
5,434,701
CONSUMER SERVICES - 3.4%
Apollo Group, Inc.* ........................... 26,000 916,500
Service Corporation International ............. 23,800 782,425
Sylvan Learning Systems, Inc.* ................ 24,500 833,000
-------------
2,531,925
ELECTRONICS - 1.0%
Perkin-Elmer Corporation ...................... 9,100 724,019
FINANCIAL SERVICES - 3.6%
Federal Home Loan Mortgage Corporation ........ 28,800 990,000
Federal National Mortgage Corporation ......... 22,000 959,750
Finova Group,Inc. ............................. 9,500 726,750
-------------
2,676,500
HEALTH CARE - 2.9%
Cardinal Health, Inc. ......................... 13,800 790,050
Omnicare, Inc. ................................ 25,000 784,375
Quintiles Transnational Corporation* .......... 8,500 591,812
-------------
2,166,237
</TABLE>
See accompanying notes.
53
<PAGE> 286
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SERIES S (SOCIAL AWARENESS) (CONTINUED)
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HOSPITAL SUPPLIES/MANAGEMENT - 2.2%
Boston Scientific Corporation* ................ 16,900 $ 1,038,294
HEALTHSOUTH Corporation* ...................... 25,000 623,437
-------------
1,661,731
HOUSEHOLD FURNISHING & APPLIANCES - 1.5%
Leggett & Platt, Inc. ......................... 26,100 1,122,300
HOUSEHOLD PRODUCTS - 4.8%
Colgate-Palmolive Company ..................... 16,000 1,044,000
Kimberly-Clark Corporation .................... 11,800 587,050
Procter & Gamble Company ...................... 13,700 1,935,125
-------------
3,566,175
INSURANCE - 6.0%
Aetna, Inc. ................................... 10,600 1,085,175
American International Group, Inc. ............ 10,300 1,538,563
Chubb Corporation ............................. 13,900 929,562
SunAmerica, Inc. .............................. 18,400 897,000
-------------
4,450,300
MACHINERY - 1.4%
Deere & Company ............................... 19,200 1,053,600
MANUFACTURING - 1.5%
Illinois Tool Works, Inc. ..................... 22,200 1,108,612
MEDICAL INSTRUMENTS - 1.5%
Guidant Corporation ........................... 12,900 1,096,500
OIL & GAS EXPLORATION - 2.7%
Anadarko Petroleum Corporation ................ 12,000 720,000
Apache Corporation ............................ 15,500 503,750
Sonat, Inc. ................................... 14,900 763,625
-------------
1,987,375
PACKAGING & CONTAINERS - 1.0%
Sealed Air Corporation* ....................... 15,400 731,500
PHARMACEUTICALS - 7.7%
Dura Pharmaceuticals, Inc.* ................... 14,500 578,188
Johnson & Johnson ............................. 24,832 1,598,560
Merck & Company, Inc. ......................... 21,800 2,256,300
Schering-Plough Corporation ................... 26,600 1,273,475
-------------
5,706,523
POLLUTION CONTROL - 1.0%
United States Filter Corporation* ............. 26,250 715,312
RESTAURANTS - 2.8%
Papa John's International, Inc.* .............. 19,000 698,250
Starbucks Corporation* ........................ 18,500 720,344
Wendy's International, Inc. ................... 24,000 622,500
-------------
2,041,094
</TABLE>
<PAGE> 287
<TABLE>
<CAPTION>
NUMBER MARKET
COMMON STOCKS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
RETAIL TRADE - 8.9%
Dayton Hudson Corporation ..................... 21,400 $ 1,138,213
Dollar General Corporation .................... 15,000 562,500
Kohl's Corporation* ........................... 13,500 714,656
Nine West Group, Inc.* ........................ 5,000 190,937
Staples, Inc.* ................................ 33,075 768,994
TJX Companies, Inc. ........................... 29,600 780,700
Tiffany & Company ............................. 15,100 697,431
Walgreen Company .............................. 21,300 1,142,213
Woolworth Corporation* ........................ 25,000 600,000
-------------
6,595,644
SAVINGS & LOAN - 1.1%
Ahmanson (H.F.) & Company ..................... 18,200 782,600
SEMICONDUCTORS - 5.0%
Analog Devices, Inc.* ......................... 33,000 876,563
Intel Corporation ............................. 15,600 2,212,275
Xilinx, Inc.* ................................. 13,000 637,812
-------------
3,726,650
TELECOMMUNICATIONS - 0.6%
Sprint Corporation ............................ 9,000 473,625
TOOLS - 1.4%
Snap-On, Inc. ................................. 25,500 1,004,063
TOYS & SPORTING GOODS - 1.1%
Mattel, Inc. .................................. 24,000 813,000
TRANSPORTATION - 0.8%
Illinois Central Corporation .................. 16,500 576,469
-------------
Total common stocks - Series S - 92.4% ...... 68,442,273
Cash and other assets, less liabilities -
Series S - 7.6% ........................... 5,636,995
-------------
Total net assets - Series S - 100.0% ........ $ 74,079,268
=============
</TABLE>
The identified cost of investments owned at June 30, 1997, was the same for
federal income tax and financial statement purposes.
*Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depositary Receipt)
CMO (Collateralized Mortgage Obligation)
PP (Private Placement)
(1) Deferred interest obligation; currently zero coupon under terms of initial
offering.
(2) Principal amount on foreign bond is reflected in local currency (e.g.,
Danish krone) while market value is reflected in U.S. dollars.
(3) Variable rate security which may be reset the first of each month.
(4) Variable rate security which may be reset the first of each quarter.
(5) Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturing.
(6) Step rate security in which the coupon rate will increase over the life of
the bond.
(7) Variable rate security which may be reset over the life of the bond.
(8) Floating rate security which may be reset the first of each semi-annual
payment.
(9) Trust preferred securities - Securities issued by financial institutions to
augment their Tier 1 capital base. Issued on a subordinate basis relative
to senior notes or debentures. Institution may defer cash payments for up
to 10 pay periods.
See accompanying notes.
54
<PAGE> 288
BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E SERIES J
SERIES A (GROWTH- (MONEY (WORLDWIDE (HIGH GRADE (EMERGING
(GROWTH) INCOME) MARKET) EQUITY) INCOME) GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified
cost $537,055,658, $739,683,085,
$32,574,018, $254,120,632,
$115,285,760 and $148,295,727
respectively) ........................ $811,513,750 $1,054,444,771 $ 32,565,011 $291,574,453 $115,666,945 $188,834,572
Short-term commercial paper, at
market or at amortized cost which
approximates market value (identified
cost $0, $8,183,736, $106,587,617,
$0, $0 and $0, respectively) ......... --- 8,183,399 106,586,955 --- --- ---
Cash ................................... 31,798,225 32,356,017 168,924 16,284,953 903,282 18,403,654
Receivables:
Fund shares sold ..................... 1,479,557 1,402,132 1,464,603 733,487 328,923 259,451
Securities sold ...................... --- 2,273,924 552,664 5,356,234 1,509,414 618,482
Forward foreign exchange contracts ... --- --- --- 341,702 --- ---
Interest ............................. 133,283 3,286,255 541,293 57,726 1,896,304 79,524
Dividends ............................ 743,999 1,043,474 --- 623,853 --- 70,176
Prepaid Expenses ..................... 18,693 19,717 2,437 --- 2,568 1,941
Miscellaneous ........................ 4,014 --- --- --- --- ---
Foreign taxes recoverable ............ --- --- --- 330,437 --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total assets ....................... $845,691,521 $1,103,009,689 $141,881,887 $315,302,845 $120,307,436 $208,267,800
============= ============= ============= ============= ============= =============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ................. $ 2,094,081 $ 3,598,164 $ 3,000,000 $ 11,007,975 $ --- $ 5,678,562
Fund shares redeemed ................. 1,039,986 1,113,232 428,835 429,549 275,633 225,963
Other liabilities:
Management fees ...................... 529,698 694,189 57,338 252,444 76,881 127,726
Custodian fees ....................... 5,699 6,266 4,118 86,282 --- 1,574
Transfer and administration fees ..... 32,072 41,918 5,412 11,468 4,833 7,924
Professional fees .................... 53,021 31,748 5,163 --- 5,268 2,373
Miscellaneous ........................ 27,280 110,521 5,105 136,539 10,823 3,577
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities .................. 3,781,837 5,596,038 3,505,971 11,924,257 373,438 6,047,699
Net Assets:
Paid in capital ........................ 484,290,025 660,817,938 128,345,278 229,253,305 120,877,958 156,784,544
Undistributed net investment income .... 8,083,501 33,603,862 10,040,307 7,681,530 12,903,738 501,538
Accumulated undistributed net realized
gain (loss) on sale of investments,
futures and foreign currency
transactions ......................... 75,078,066 88,230,502 --- 28,673,337 (14,228,883) 4,395,174
Net unrealized appreciation
(depreciation) in value of investments,
futures and translation of assets and
liabilities in foreign currency ...... 274,458,092 314,761,349 (9,669) 37,770,416 381,185 40,538,845
------------- ------------- ------------- ------------- ------------- -------------
Net assets ............................ 841,909,684 1,097,413,651 138,375,916 303,378,588 119,933,998 202,220,101
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and net assets .... $845,691,521 $1,103,009,689 $141,881,887 $315,302,845 $120,307,436 $208,267,800
============= ============= ============= ============= ============= =============
Capital shares authorized .............. 1,000,000,000 1,000,000,000 1,000,000,000 1,000,000,000 250,000,000 250,000,000
Capital shares outstanding ............. 29,650,037 26,848,422 10,745,951 43,813,340 9,726,483 10,454,362
Net asset value per share (net assets
divided by shares outstanding) ....... $28.39 $40.87 $12.88 $6.92 $12.33 $19.34
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
55
<PAGE> 289
BALANCE SHEETS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
(GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES P SERIES S
AGGRESSIVE ASSET ASSET (EQUITY (HIGH (SOCIAL
BOND) ALLOCATION) ALLOCATION) INCOME) YIELD) AWARENESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified
cost $15,533,498, $44,723,748,
$20,759,127, $80,390,897, $2,528,580
and $52,040,883, respectively) ....... $15,443,107 $46,902,671 $24,412,818 $ 94,045,947 $2,622,599 $68,442,273
Short-term commercial paper, at market
or at amortized cost which approximates
market value (identified cost $0, $0,
$2,140,940, $11,524,310, $0 and $0,
respectively) ........................ --- --- 2,140,940 11,524,310 --- ---
Cash ................................... (348,955) 16,517 2,286 --- 150,547 5,604,959
Receivables:
Fund shares sold ..................... 81,474 239,463 281,920 847,741 --- 290,506
Securities sold ...................... 1,373,001 555,000 --- 69,930 --- ---
Forward foreign exchange contracts ... 4,786 --- --- --- --- ---
Interest ............................. 482,058 104,360 166,785 33,788 55,321 29,953
Dividends ............................ --- 5,157 17,334 198,430 --- 46,656
Prepaid Expenses ..................... 524 --- 234 21,802 2,171 3,705
Foreign taxes recoverable ............ 15,288 17,177 5,045 1,237 --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total assets ....................... $17,051,283 $47,840,345 $27,027,362 $106,743,185 $2,830,638 $74,418,052
============= ============= ============= ============= ============= =============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ................. $ 1,189,968 $ --- $ 533,737 $ 1,131,649 $ --- $ 95,621
Fund shares redeemed ................. 35,750 100,737 20,312 399,607 --- 191,498
Written call options outstanding ..... 10,449 --- --- --- --- ---
Other liabilities:
Management fees ...................... --- 39,869 21,118 85,517 --- 46,588
Custodian fees ....................... 16,782 7,357 11,436 23,159 --- ---
Transfer and administration fees ..... 5,815 6,985 6,126 4,054 108 3,002
Professional fees .................... 1,791 2,672 3,180 9,073 --- ---
Miscellaneous ........................ 5,966 3,169 3,089 2,739 377 2,075
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities .................. 1,266,521 160,789 598,998 1,655,798 485 338,784
Net Assets:
Paid in capital ........................ 15,042,250 40,700,906 21,275,194 85,281,929 2,500,000 51,932,892
Undistributed net investment income .... 690,287 1,399,176 756,098 2,024,650 204,813 294,141
Accumulated undistributed net realized
gain on sale of investments, futures
and foreign currency transactions .... 140,219 3,401,157 743,666 4,125,681 31,321 5,450,845
Net unrealized appreciation
(depreciation) in value of investments,
futures and translation of assets and
liabilities in foreign currency ...... (87,994) 2,178,317 3,653,406 13,655,127 94,019 16,401,390
------------- ------------- ------------- ------------- ------------- -------------
Net assets ........................... 15,784,762 47,679,556 26,428,364 105,087,387 2,830,153 74,079,268
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and net assets ... $17,051,283 $47,840,345 $27,027,362 $106,743,185 $2,830,638 $74,418,052
============= ============= ============= ============= ============= =============
Capital shares authorized .............. 50,000,000 50,000,000 50,000,000 50,000,000 Indefinite 250,000,000
Capital shares outstanding ............. 1,437,941 3,684,006 1,969,832 6,553,124 166,667 3,497,996
Net asset value per share (net assets
divided by shares outstanding) $10.98 $12.94 $13.42 $16.04 $16.98 $21.18
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
56
<PAGE> 290
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E SERIES J
SERIES A (GROWTH- (MONEY (WORLDWIDE (HIGH GRADE (EMERGING
(GROWTH) INCOME) MARKET) EQUITY) INCOME) GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $ 4,857,455 $ 6,342,523 $ --- $ 3,656,509 $ --- $ 238,039
Interest ............................. 988,472 8,819,254 3,658,759 402,105 4,790,487 418,542
------------- ------------- ------------- ------------- ------------- -------------
5,845,927 15,161,777 3,658,759 4,058,614 4,790,487 656,581
Less foreign tax expense ............. (5,335) --- --- (367,753) --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total investment income ............ 5,840,592 15,161,777 3,658,759 3,690,861 4,790,487 656,581
EXPENSES:
Management fees ...................... 2,841,075 3,758,591 328,145 1,345,446 464,915 634,511
Custodian fees ....................... 13,074 18,867 6,015 38,915 6,071 5,156
Transfer/maintenance fees ............ 1,786 1,676 1,629 2,534 1,412 1,551
Administration fees .................. 170,464 225,515 29,533 222,902 27,895 38,071
Directors' fees ...................... 9,509 32,942 2,092 4,887 1,372 1,629
Professional fees .................... 42,593 27,748 4,463 8,688 4,029 5,373
Reports to shareholders .............. 30,111 90,169 2,724 30,046 4,443 6,026
Registration fees .................... 708 947 147 15,204 133 199
Other expenses ....................... 11,892 22,820 4,612 5,973 5,922 3,918
------------- ------------- ------------- ------------- ------------- -------------
Total expenses ..................... 3,121,212 4,179,275 379,360 1,674,595 516,192 696,434
Less earnings credits ................ (75) (745) --- --- --- (106)
------------- ------------- ------------- ------------- ------------- -------------
Net expenses ......................... 3,121,137 4,178,530 379,360 1,674,595 516,192 696,328
------------- ------------- ------------- ------------- ------------- -------------
Net investment income (loss) ....... 2,719,455 10,983,247 3,279,399 2,016,266 4,274,295 (39,747)
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the
period on:
Investments ........................ 24,102,847 30,838,118 --- 17,015,874 (2,016,061) (1,946,813)
Foreign currency transactions ...... --- --- --- 207,060 --- ---
Futures contract ................... --- --- --- --- --- 1,614,004
------------- ------------- ------------- ------------- ------------- -------------
Net realized gain (loss) ........... 24,102,847 30,838,118 --- 17,222,934 (2,016,061) (332,809)
Net change in unrealized appreciation
during the period on:
Investments: ....................... 92,407,320 105,040,079 43,848 13,801,912 1,029,968 12,775,434
Translation of assets and liabilities
in foreign currencies ............ --- --- --- 435,915 --- ---
------------- ------------- ------------- ------------- ------------- -------------
Net unrealized appreciation .......... 92,407,320 105,040,079 43,848 14,237,827 1,029,968 12,775,434
------------- ------------- ------------- ------------- ------------- -------------
Net gain (loss) .................... 116,510,167 135,878,197 43,848 31,460,761 (986,093) 12,442,625
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations ...... $119,229,622 $146,861,444 $3,323,247 $33,477,027 $3,288,202 $12,402,878
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
57
<PAGE> 291
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
(GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES P SERIES S
AGGRESSIVE ASSET ASSET (EQUITY (HIGH (SOCIAL
BOND) ALLOCATION) ALLOCATION) INCOME) YIELD) AWARENESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $ --- $ 317,354 $ 136,105 $ 1,090,527 $ 2,375 $ 251,016
Interest ............................. 741,417 455,157 330,910 345,035 120,584 170,870
------------- ------------- ------------- ------------- ------------- -------------
741,417 772,511 467,015 1,435,562 122,959 421,886
Less foreign tax expense ............. (7,610) (27,835) (7,158) (1,388) --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total investment income ............ 733,807 744,676 459,857 1,434,174 122,959 421,886
EXPENSES:
Management fees ...................... 54,166 212,341 108,499 400,272 12,956 242,060
Custodian fees ....................... 9,955 15,786 16,522 9,385 534 1,367
Transfer/maintenance fees ............ 949 1,133 1,076 1,255 5 1,233
Administration fees .................. 26,966 33,366 28,632 18,012 610 14,524
Directors' fees ...................... 43 300 418 594 5 500
Professional fees .................... 3,077 3,922 3,680 6,072 2,380 1,955
Reports to shareholders .............. 543 1,596 1,055 1,516 29 2,349
Registration fees .................... 1,237 150 --- --- 34 78
Other expenses ....................... 750 2,113 (124) 671 348 1,758
------------- ------------- ------------- ------------- ------------- -------------
Total expenses ..................... 97,686 270,707 159,758 437,777 16,901 265,824
Less earnings credits
Reimbursement of expenses .......... (54,166) --- --- --- (12,956) ---
------------- ------------- ------------- ------------- ------------- -------------
Net expenses ......................... 43,520 270,707 159,758 437,777 3,945 265,824
------------- ------------- ------------- ------------- ------------- -------------
Net investment income .............. 690,287 473,969 300,099 996,397 119,014 156,062
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the
period on:
Investments ........................ 205,203 2,456,570 450,729 2,691,953 14,246 1,636,939
Foreign currency transactions ...... (94,211) (4,550) (4,515) (1,575) --- ---
Futures contract ................... --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Net realized gain ................ 110,992 2,452,020 446,214 2,690,378 14,246 1,636,939
Change in unrealized appreciation
(depreciation) during the period on:
Investments: ....................... (400,144) 234,171 1,801,089 7,669,967 31,788 5,216,519
Translation of assets and liabilities
in foreign currencies ............ (8,757) (467) 353 162 --- ---
------------- ------------- ------------- ------------- ------------- -------------
Net unrealized appreciation
(depreciation) ..................... (408,901) 233,704 1,801,442 7,670,129 31,788 5,216,519
------------- ------------- ------------- ------------- ------------- -------------
Net gain (loss) .................... (297,909) 2,685,724 2,247,656 10,360,507 46,034 6,853,458
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations ...... $392,378 $3,159,693 $2,547,755 $11,356,904 $165,048 $7,009,520
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
58
<PAGE> 292
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E SERIES J
SERIES A (GROWTH- (MONEY (WORLDWIDE (HIGH GRADE (EMERGING
(GROWTH) INCOME) MARKET) EQUITY) INCOME) GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss) ......... $ 2,719,455 $ 10,983,247 $ 3,279,399 $ 2,016,266 $ 4,274,295 $ (39,747)
Net realized gain (loss) ............. 24,102,847 30,838,118 --- 17,222,934 (2,016,061) (332,809)
Unrealized appreciation during the
period ............................. 92,407,320 105,040,079 43,848 14,237,827 1,029,968 12,775,434
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets resulting
from operations .................. 119,229,622 146,861,444 3,323,247 33,477,027 3,288,202 12,402,878
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ --- --- --- --- --- ---
Net realized gain .................... --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to shareholders --- --- --- --- --- ---
CAPITAL SHARE TRANSACTION (A):
Proceeds from sale of shares ......... 153,438,304 101,254,815 173,709,558 53,884,223 24,674,244 76,587,478
Dividends reinvested ................. --- --- --- --- --- ---
Shares redeemed ...................... (145,348,800) (107,288,915) (167,329,002) (31,008,243) (42,069,559) (35,191,543)
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) from capital
share transactions ............... 8,089,504 (6,034,100) 6,380,556 22,875,980 (17,395,315) 41,395,935
------------- ------------- ------------- ------------- ------------- -------------
Total increase (decrease) in net
assets ......................... 127,319,126 140,827,344 9,703,803 56,353,007 (14,107,113) 53,798,813
NET ASSETS:
Beginning of period .................. 714,590,558 956,586,307 128,672,113 247,025,581 134,041,111 148,421,288
------------- ------------- ------------- ------------- ------------- -------------
End of period ........................ $841,909,684 $1,097,413,651 $138,375,916 $303,378,588 $119,933,998 $202,220,101
============= ============= ============= ============= ============= =============
Undistributed net investment income at
end of period ...................... $ 8,083,501 $ 33,603,862 $ 10,040,307 $ 7,681,530 $ 12,903,738 $ 501,538
============= ============= ============= ============= ============= =============
(a) Shares issued and redeemed
Shares sold ...................... 6,013,952 2,705,271 13,653,674 8,395,268 2,045,973 4,238,882
Dividends reinvested ............. --- --- --- --- --- ---
Shares redeemed .................. (5,754,477) (2,877,332) (13,153,580) (4,835,807) (3,490,445) (1,918,159)
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) ........ 259,475 (172,061) 500,094 3,559,461 (1,444,472) 2,320,723
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
59
<PAGE> 293
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
(GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES P SERIES S
AGGRESSIVE ASSET ASSET (EQUITY (HIGH (SOCIAL
BOND) ALLOCATION) ALLOCATION) INCOME) YIELD) AWARENESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................ $ 690,287 $ 473,969 $ 300,099 $ 996,397 $ 119,014 $ 156,062
Net realized gain .................... 110,992 2,452,020 446,214 2,690,378 14,246 1,636,939
Unrealized appreciation during the
period ............................. (408,901) 233,704 1,801,442 7,670,129 31,788 5,216,519
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets resulting
from operations .................. 392,378 3,159,693 2,547,755 11,356,904 165,048 7,009,520
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ --- --- --- --- --- ---
Net realized gain .................... --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to shareholders --- --- --- --- --- ---
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 7,063,300 11,541,278 9,149,341 41,228,629 --- 17,036,988
Dividends reinvested ................. --- --- --- --- --- ---
Shares redeemed ...................... (4,390,811) (5,417,338) (8,613,310) (9,875,208) --- (7,463,955)
------------- ------------- ------------- ------------- ------------- -------------
Net increase from capital share
transactions ..................... 2,672,489 6,123,940 536,031 31,353,421 --- 9,573,033
------------- ------------- ------------- ------------- ------------- -------------
Total increase in net assets ..... 3,064,867 9,283,633 3,083,786 42,710,325 165,048 16,582,553
NET ASSETS:
Beginning of period .................. 12,719,895 38,395,923 23,344,578 62,377,062 2,665,105 57,496,715
------------- ------------- ------------- ------------- ------------- -------------
End of period ........................ $15,784,762 $47,679,556 $26,428,364 $105,087,387 $2,830,153 $74,079,268
============= ============= ============= ============= ============= =============
Undistributed net investment income at
end of period ...................... $ 690,287 $ 1,399,176 $ 756,098 $ 2,024,650 $ 204,813 $ 294,141
============= ============= ============= ============= ============= =============
(a) Shares issued and redeemed
Shares sold ...................... 657,534 937,936 725,455 2,767,321 --- 864,896
Dividends reinvested ............. --- --- --- --- --- ---
Shares redeemed .................. (405,696) (440,818) (698,446) (665,211) --- (379,866)
------------- ------------- ------------- ------------- ------------- -------------
Net increase ................... 251,838 497,118 27,009 2,102,110 --- 485,030
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
60
<PAGE> 294
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E SERIES J
SERIES A (GROWTH- (MONEY (WORLDWIDE (HIGH GRADE (EMERGING
(GROWTH) INCOME) MARKET) EQUITY) INCOME) GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income ................ $ 5,466,761 $ 22,733,680 $ 6,921,208 $ 1,588,321 $ 8,664,351 $ (270,043)
Net realized gain (loss) ............. 51,089,074 57,472,747 --- 18,196,752 (2,164,110) 5,574,826
Unrealized appreciation (depreciation)
during the period .................. 62,940,793 65,772,214 (41,770) 13,347,522 (7,551,691) 16,151,675
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in net
assets resulting from operations 119,496,628 145,978,641 6,879,438 33,132,595 (1,051,450) 21,456,458
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ (4,858,702) (18,421,256) (5,014,558) (6,982,410) (7,686,321) (236,747)
Net realized gain .................... (30,078,874) (89,075,535) --- (6,588,531) --- (5,477,835)
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to shareholders (34,937,576) (107,496,791) (5,014,558) (13,570,941) (7,686,321) (5,714,582)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 272,735,836 195,756,138 300,770,030 95,984,267 71,870,139 93,417,694
Dividends reinvested ................. 34,937,576 107,496,791 5,014,558 13,570,941 7,686,321 5,714,582
Shares redeemed ...................... (197,533,006) (180,261,174) (284,413,035) (59,872,380) (62,429,363) (59,832,305)
------------- ------------- ------------- ------------- ------------- -------------
Net increase from capital share
transactions ..................... 110,140,406 122,991,755 21,371,553 49,682,828 17,127,097 39,299,971
------------- ------------- ------------- ------------- ------------- -------------
Total increase in net assets ..... 194,699,458 161,473,605 23,236,433 69,244,482 8,389,326 55,041,847
NET ASSETS:
Beginning of year .................... 519,891,100 795,112,702 105,435,680 177,781,099 125,651,785 93,379,441
------------- ------------- ------------- ------------- ------------- -------------
End of year .......................... $714,590,558 $956,586,307 $128,672,113 $247,025,581 $134,041,111 $148,421,288
============= ============= ============= ============= ============= =============
Undistributed net investment
income at end of year .............. $ 5,364,046 $ 22,620,615 $ 6,760,908 $ 5,665,264 $ 8,629,443 $ 541,285
============= ============= ============= ============= ============= =============
(a) Shares issued and redeemed
Shares sold .................. 11,815,669 5,479,920 23,991,955 15,951,967 5,820,235 5,392,420
Dividends reinvested ......... 1,535,718 3,174,743 405,053 2,280,830 649,731 316,597
Shares redeemed .............. (8,682,010) (5,055,630) (22,692,246) (9,930,879) (5,068,479) (3,388,952)
------------- ------------- ------------- ------------- ------------- -------------
Net increase ............... 4,669,377 3,599,033 1,704,762 8,301,918 1,401,487 2,320,065
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
61
<PAGE> 295
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES K SERIES M SERIES N
(GLOBAL (SPECIALIZED (MANAGED SERIES O SERIES P SERIES S
AGGRESSIVE ASSET ASSET (EQUITY (HIGH (SOCIAL
BOND) ALLOCATION) ALLOCATION) INCOME) YIELD) AWARENESS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss) ......... $ 995,530 $ 785,362 $ 467,411 $ 1,031,187 $ 85,799 $ 142,884
Net realized gain .................... 34,262 1,112,952 290,614 1,435,648 17,075 3,818,240
Unrealized appreciation during the
period ............................. 236,546 1,834,039 1,466,480 4,978,876 62,231 3,541,342
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets resulting
from operations .................. 1,266,338 3,732,353 2,224,505 7,445,711 165,105 7,502,466
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................ (844,106) (332,910) (112,833) (108,567) --- (217,556)
Net realized gain .................... (141,415) (154,426) (22,914) (7,238) --- (1,127,096)
------------- ------------- ------------- ------------- ------------- -------------
Total distribution to shareholders . (985,521) (487,336) (135,747) (115,805) --- (1,344,652)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ......... 10,501,775 27,932,031 14,703,728 54,553,040 2,500,000 20,989,370
Dividends reinvested ................. 985,521 487,336 135,747 115,805 --- 1,344,652
Shares redeemed ...................... (4,726,579) (9,244,884) (4,163,794) (13,149,311) --- (7,825,379)
------------- ------------- ------------- ------------- ------------- -------------
Net increase from capital share
transactions ..................... 6,760,717 19,174,483 10,675,681 41,519,534 2,500,000 14,508,643
------------- ------------- ------------- ------------- ------------- -------------
Total increase in net assets ..... 7,041,534 22,419,500 12,764,439 48,849,440 2,665,105 20,666,457
NET ASSETS:
Beginning of year .................... 5,678,361 15,976,423 10,580,139 13,527,622 --- 36,830,258
------------- ------------- ------------- ------------- ------------- -------------
End of year .......................... $12,719,895 $38,395,923 $23,344,578 $62,377,062 $2,665,105 $57,496,715
============= ============= ============= ============= ============= =============
Undistributed net investment income at
end of year ........................ $ --- $ 925,207 $ 455,499 $ 1,028,253 $ 85,799 $ 138,079
============= ============= ============= ============= ============= =============
(a) Shares issued and redeemed
Shares sold .................. 968,131 2,471,114 1,317,755 4,318,273 166,667 1,144,145
Dividends reinvested ......... 91,933 42,899 12,013 8,922 --- 70,585
Shares redeemed .............. (429,302) (818,625) (372,924) (1,032,400) --- (435,648)
------------- ------------- ------------- ------------- ------------- -------------
Net increase ............... 630,762 1,695,388 956,844 3,294,795 166,667 779,082
============= ============= ============= ============= ============= =============
</TABLE>
62
<PAGE> 296
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SERIES A (GROWTH) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(F)(H) 1996(F) 1995(F) 1994 1993 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $24.31 $21.03 $16.00 $19.82 $18.33 $17.26
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.090 0.180 0.180 0.200 0.390 0.230
Net Gain (Loss) on Securities
(realized and unrealized) ........ 3.990 4.495 5.648 (0.442) 2.076 1.615
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations ... 4.080 4.675 5.828 (0.242) 2.466 1.845
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.194) (0.153) (0.380) (0.224) (0.242)
Distributions (from Capital Gains) . --- (1.201) (0.645) (3.198) (0.752) (0.533)
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions .............. --- (1.395) (0.798) (3.578) (0.976) (0.775)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $28.39 $24.31 $21.03 $16.00 $19.82 $18.33
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 16.8% 22.7% 36.8% (1.7%) 13.7% 11.1%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $841,910 $714,591 $519,891 $332,288 $317,407 $296,548
Ratio of Expenses to Average Net
Assets ........................... 0.81% 0.83% 0.83% 0.84% 0.86% 0.86%
Ratio of Net Income (Loss) to
Average Net Assets ............... 0.71% 0.90% 1.13% 1.13% 2.01% 1.46%
Portfolio Turnover Rate ............ 69% 57% 83% 90% 108% 77%
Average Commission Paid Per Equity
Share Traded ..................... $0.0600 $0.0598 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES B (GROWTH & INCOME) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(F)(H) 1996(F) 1995(F) 1994 1993 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $35.40 $33.95 $26.54 $29.73 $27.76 $26.85
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.410 0.830 0.790 0.510 0.640 0.650
Net Gain (Loss) on Securities
(realized and unrealized) ........ 5.060 5.160 7.160 (1.34) 2.009 0.999
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations . 5.470 5.990 7.950 (0.830) 2.649 1.649
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.778) (0.540) (0.680) (0.679) (0.583)
Distributions (from Capital Gains) . --- (3.762) --- (1.680) --- (0.156)
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions ............. --- (4.540) (0.540) (2.360) (0.679) (0.739)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $40.87 $35.40 $33.95 $26.54 $29.73 $27.76
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 15.5% 18.3% 30.1% (3.0%) 9.6% 6.3%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $1,097,414 $956,586 $795,113 $595,154 $583,599 $467,208
Ratio of Expenses to Average Net
Assets ........................... 0.83% 0.84% 0.83% 0.84% 0.86% 0.86%
Ratio of Net Income (Loss) to
Average Net Assets ............... 2.19% 2.56% 2.70% 2.07% 2.63% 3.22%
Portfolio Turnover Rate ............ 54% 58% 94% 43% 95% 56%
Average Commission Paid Per Equity
Share Traded ..................... $.0600 $0.0602 N/A N/A N/A N/A
</TABLE>
63
<PAGE> 297
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
SERIES C (MONEY MARKET) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(E)(F)(H) 1996(A)(F) 1995(F) 1994 1993 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $12.56 $12.34 $12.27 $12.09 $12.21 $12.52
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.316 0.610 0.740 0.410 0.290 0.430
Net Gain (Loss) on Securities
(realized and unrealized) ........ 0.004 0.010 (0.085) 0.035 0.027 (0.030)
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations . 0.320 0.620 0.655 0.445 0.317 0.400
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.400) (0.585) (0.265) (0.437) (0.710)
Distributions (from Capital Gains) . --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions .............. --- (0.400) (0.585) (0.265) (0.437) (0.710)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $12.88 $12.56 $12.34 $12.27 $12.09 $12.21
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 2.5% 5.1% 5.4% 3.7% 2.6% 3.2%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $138,376 $128,672 $105,436 $118,668 $99,092 $87,246
Ratio of Expenses to Average Net
Assets ........................... 0.58% 0.58% 0.60% 0.61% 0.61% 0.61%
Ratio of Net Income (Loss) to
Average Net Assets ............... 5.00% 4.89% 5.27% 3.70% 2.65% 3.19%
Portfolio Turnover Rate ............ --- --- --- --- --- ---
Average Commission Paid Per Equity
Share Traded ..................... N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES D (WORLDWIDE EQUITY) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(H) 1996 1995 1994(A) 1993(A) 1992(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $6.14 $5.56 $5.07 $4.94 $3.76 $3.91
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.040 0.030 0.050 0.020 0.020 0.020
Net Gain (Loss) on Securities
(realized and unrealized) ........ 0.740 0.930 0.4989 0.115 1.166 (0.1220)
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations . 0.780 0.960 0.5489 0.135 1.186 (0.1020)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.200) (0.0009) (0.005) (0.0060) (0.0480)
Distributions (from Capital Gains) --- (0.180) (0.0580) --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions .............. --- (0.380) (0.0589) (0.005) (0.0060) (0.0480)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $6.92 $6.14 $5.56 $5.07 $4.94 $3.76
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 12.7% 17.5% 10.9% 2.7% 31.6% (2.6%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $303,379 $247,026 $177,781 $147,033 $98,252 $25,183
Ratio of Expenses to Average Net
Assets ........................... 1.24% 1.30% 1.31% 1.34% 1.42% 1.62%
Ratio of Net Income (Loss) to
Average Net Assets ............... 1.50% 0.74% 0.90% 0.50% 0.38% 0.50%
Portfolio Turnover Rate ............ 141% 115% 169% 82% 70% 81%
Average Commission Paid Per Equity
Share Traded ..................... $0.0100 $0.0276 N/A N/A N/A N/A
</TABLE>
64
<PAGE> 298
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
SERIES E (HIGH GRADE INCOME) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(F)(H) 1996(F) 1995(F) 1994 1993 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $12.00 $12.86 $11.52 $13.78 $13.02 $12.82
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.550 0.750 0.740 0.760 0.640 0.780
Net Gain (Loss) on Securities
(realized and unrealized) ........ (0.220) (0.853) 1.360 (1.713) 1.020 0.168
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations . 0.330 (0.103) 2.100 (0.953) 1.660 0.948
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.757) (0.760) (0.690) (0.790) (0.748)
Distributions (from Capital Gains) . --- --- --- (0.617) (0.110) ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions .............. --- (0.757) (0.760) (1.307) (0.900) (0.748)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $12.33 $12.00 $12.86 $11.52 $13.78 $13.02
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 2.8% (0.7%) 18.6% 6.9% 12.6% 7.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $119,934 $134,041 $125,652 $107,078 $112,900 $81,440
Ratio of Expenses to Average Net
Assets ........................... 0.83% 0.83% 0.85% 0.85% 0.86% 0.86%
Ratio of Net Income (Loss) to
Average Net Assets ............... 6.90% 6.77% 6.60% 6.74% 6.21% 7.41%
Portfolio Turnover Rate ............ 151% 232% 180% 185% 151% 76%
Average Commission Paid Per Equity
Share Traded ..................... N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES J (EMERGING GROWTH) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(F)(H) 1996(F) 1995(F) 1994 1993 1992(B)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $18.25 $16.06 $13.44 $14.17 $12.47 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. (0.020) (0.040) 0.040 (0.010) (0.010) 0.010
Net Gain (Loss) on Securities
(realized and unrealized) ........ 1.110 2.930 2.580 (0.713) 1.711 2.460
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations . 1.090 2.890 2.620 (0.723) 1.701 2.470
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.029) --- --- (0.001) ---
Distributions (from Capital Gains) . --- (0.671) --- (0.007) --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions .............. --- (0.700) --- (0.007) (0.001) ---
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ..... $19.34 $18.25 $16.06 $13.44 $14.17 $12.47
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 6.0% 18.0% 19.5% (5.1%) 13.6% 24.7%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $202,220 $148,421 $93,379 $76,940 $42,096 $7,113
Ratio of Expenses to Average Net
Assets ........................... 0.82% 0.84% 0.84% 0.88% 0.91% 1.06%
Ratio of Net Income (Loss) to
Average Net Assets ............... (0.05%) (0.21%) 0.26% (0.11%) (0.14%) 0.22%
Portfolio Turnover Rate ............ 79% 123% 202% 91% 117% 4%
Average Commission Paid Per Equity
Share Traded ..................... $0.0600 $0.0601 N/A N/A N/A N/A
</TABLE>
65
<PAGE> 299
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
SERIES K (GLOBAL AGGRESSIVE) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------
1997(E)(H) 1996(E) 1995(A)(D)(E)
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $10.72 $10.22 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.480 0.900 0.540
Net Gain (Loss) on Securities
(realized and unrealized) ........ (0.220) 0.500 0.220
------------- ------------- -------------
Total from investment operations . 0.260 1.400 0.760
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.770) (0.466)
Distributions (from Capital Gains) . --- (0.130) (0.044)
Return of Capital .................. --- --- (0.030)
------------- ------------- -------------
Total Distributions .............. --- (0.900) (0.540)
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $10.98 $10.72 $10.22
============= ============= =============
TOTAL RETURN (C) ................... 2.4% 13.7% 7.6%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $15,785 $12,720 $5,678
Ratio of Expenses to Average Net
Assets ........................... .60% 0.84% 1.63%
Ratio of Net Income (Loss) to
Average Net Assets ............... 9.56% 10.79% 11.03%
Portfolio Turnover Rate ............ 107% 86% 127%
Average Commission Paid Per Equity
Share Traded ..................... N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES M (SPECIALIZED ASSET ALLOCATION) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------
1997(H) 1996 1995(A)(D)
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $12.05 $10.71 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.090 0.150 0.169
Net Gain (Loss) on Securities
(realized and unrealized) ........ 0.800 1.364 0.541
------------- ------------- -------------
Total from investment operations ... 0.890 1.514 0.710
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.119) ---
Distributions (from Capital Gains) . --- (0.055) ---
------------- ------------- -------------
Total Distributions .............. --- (0.174) ---
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $12.94 $12.05 $10.71
============= ============= =============
TOTAL RETURN (C) ................... 7.4% 14.2% 7.1%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $47,680 $38,396 $15,976
Ratio of Expenses to Average Net
Assets ........................... 1.27% 1.34% 1.94%
Ratio of Net Income (Loss) to
Average Net Assets ............... 2.23% 2.73% 3.20%
Portfolio Turnover Rate ............ 123% 40% 181%
Average Commission Paid Per Equity
Share Traded ..................... $0.0452 $0.0266 N/A
</TABLE>
66
<PAGE> 300
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
SERIES N (MANAGED ASSET ALLOCATION) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------
1997(H) 1996 1995(A)(D)
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $12.02 $10.73 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.150 0.193 0.156
Net Gain (Loss) on Securities
(realized and unrealized) ........ 1.250 1.175 0.574
------------- ------------- -------------
Total from investment operations ... 1.400 1.368 0.730
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.065) ---
Distributions (from Capital Gains) . --- (0.013) ---
------------- ------------- -------------
Total Distributions .............. --- (0.078) ---
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $13.42 $12.02 $10.73
============= ============= =============
TOTAL RETURN (C) ................... 11.7% 12.8% 7.3%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $26,428 $23,345 $10,580
Ratio of Expenses to Average Net
Assets ........................... 1.47% 1.45% 1.90%
Ratio of Net Income (Loss) to
Average Net Assets ............... 2.77% 2.67% 2.80%
Portfolio Turnover Rate ............ 64% 41% 26%
Average Commission Paid Per Equity
Share Traded ..................... $0.0296 $0.0393 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES O (EQUITY INCOME) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------
1997(H) 1996 1995(A)(D)
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $14.01 $11.70 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. .080 0.169 0.166
Net Gain (Loss) on Securities
(realized and unrealized) ........ 1.950 2.173 1.534
------------- ------------- -------------
Total from investment operations ... 2.030 2.342 1.700
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.030) ---
Distributions (from Capital Gains) . --- (0.002) ---
------------- ------------- -------------
Total Distributions .............. --- (0.032) ---
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $16.04 $14.01 $11.70
============= ============= =============
TOTAL RETURN (C) ................... 14.5% 20.0% 17.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $105,087 $62,377 $13,528
Ratio of Expenses to Average Net
Assets ........................... 1.09% 1.15% 1.40%
Ratio of Net Income (Loss) to
Average Net Assets ............... 2.49% 2.62% 3.00%
Portfolio Turnover Rate ............ 49% 22% 3%
Average Commission Paid Per Equity
Share Traded ..................... $0.0314 $0.0385 N/A
</TABLE>
67
<PAGE> 301
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
SERIES P (HIGH YIELD) DECEMBER 31
-----------------------------
1997(H) 1996(G)
------------- -------------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $15.99 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.714 0.510
Net Gain (Loss) on Securities
(realized and unrealized) ........ 0.276 0.480
------------- -------------
Total from investment operations . 0.990 0.990
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- ---
Distributions (from Capital Gains) . --- ---
------------- -------------
Total Distributions .............. --- ---
------------- -------------
NET ASSET VALUE END OF PERIOD ...... $16.98 $15.99
============= =============
TOTAL RETURN (C) ................... 6.2% 6.6%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $2,830 $2,665
Ratio of Expenses to Average Net
Assets ........................... 0.29% 0.28%
Ratio of Net Income (Loss) to
Average Net Assets ............... 8.78% 8.24%
Portfolio Turnover Rate ............ 59% 151%
Average Commission Paid Per Equity
Share Traded ..................... N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES S (SOCIAL AWARENESS) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(F)(C)(H) 1996(F) 1995(F) 1994 1993 1992(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD $19.08 $16.49 $12.97 $13.69 $12.25 $10.55
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............. 0.100 0.030 0.090 0.080 0.020 0.030
Net Gain (Loss) on Securities
(realized and unrealized) ........ 2.000 3.073 3.507 (0.595) 1.432 1.691
------------- ------------- ------------- ------------- ------------- -------------
Total from investment operations . 2.100 3.103 3.597 (0.515) 1.452 1.721
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income) .......................... --- (0.083) (0.077) (0.020) (0.012) (0.021)
Distributions (from Capital Gains) . --- (0.430) --- (0.185) --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions .............. --- (0.513) (0.077) (0.205) (0.012) (0.021)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD ...... $21.18 $19.08 $16.49 $12.97 $13.69 $12.25
============= ============= ============= ============= ============= =============
TOTAL RETURN (C) ................... 11.0% 18.8% 27.7% (3.7%) 11.9% 16.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $74,079 $57,497 $36,830 $24,539 $19,490 $9,653
Ratio of Expenses to Average Net
Assets ........................... 0.82% 0.84% 0.86% 0.90% 0.90% 0.92%
Ratio of Net Income (Loss) to
Average Net Assets ............... 0.48% 0.30% 0.75% 0.75% 0.23% 0.24%
Portfolio Turnover Rate ............ 57% 67% 122% 67% 105% 110%
Average Commission Paid Per Equity
Share Traded ..................... $0.0600 $0.0602 N/A N/A N/A N/A
</TABLE>
(a) Net investment income per share has been calculated using the weighted
monthly average number of capital shares outstanding.
(b) Series J was initially capitalized on October 1, 1992, with a net asset
value of $10.00 per share. Percentage amounts for the period have been
annualized, except for total return.
(c) Total return does not take into account any charges paid at the time of
purchase.
(d) Series K, M, N and O were initially capitalized on June 1, 1995 with net
asset values of $10.00 per share. Percentage amounts for the period have
been annualized, except for total return.
(e) Fund expenses for Series K and P were reduced by the Investment Manager
during the period. Expense ratios absent such reimbursement would have been
as follows:
<PAGE> 302
1995 1996 1997
---- ---- ----
Series K 2.03% 1.59% 1.35%
Series P --- 1.11% 1.25%
(f) Expense ratios were calculated without the reduction for custodian fees
earnings credits beginning February 1, 1995. Expense ratios with such
reductions would have been as follows:
1995 1996 1997
---- ---- ----
Series A 0.83% 0.83% 0.81%
Series B 0.83% 0.84% 0.83%
Series C 0.60% 0.58% 0.58%
Series E 0.85% 0.83% 0.83%
Series J 0.83% 0.84% 0.82%
Series S 0.84% 0.84% 0.82%
(g) Series P was initially capitalized on August 5, 1996, with a net asset
value of $15 per share. Percentage amounts for the period have been
annualized, except for total return.
(h) Unaudited figures for the six months ended June 30, 1997. Percentage
amounts for the period, except total return, have been annualized.
68
<PAGE> 303
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company of the series
type. Each series, in effect, represents a separate fund. The Fund is required
to account for the assets of each series separately and to allocate general
liabilities of the Fund to each series based upon the net asset value of each
series. Shares of the Fund will be sold only to Security Benefit Life Insurance
Company (SBL) separate accounts. The following is a summary of the significant
accounting policies followed by the Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted accounting
principles.
A. SECURITIES VALUATION - Valuations of the Fund's securities are supplied
by pricing services approved by the Board of Directors. Securities listed or
traded on a recognized securities exchange are valued on the basis of the last
sales price. If there are no sales on a particular day, then the securities are
valued at the last bid price. If a security is traded on multiple exchanges, its
value will be based on the price from the principal exchange where it is traded.
All other securities for which market quotations are available are valued on the
basis of the current bid price. If there is no bid price or if the bid price is
deemed to be unsatisfactory by the Board of Directors or by the Fund's
investment manager, then the securities are valued in good faith by such method
as the Board of Directors determines will reflect the fair value. The Fund
generally will value short-term debt securities at prices based on market
quotations for such securities or securities of similar type, yield, quality and
duration, except those securit ies purchased with 60 days or less to maturity
are valued on the basis of amortized cost which approximates market value.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange, if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rates prevailing at the close of business. Investment
in foreign securities may involve risks not present in domestic investments.
Since foreign securities may be denominated in a foreign currency and involve
settlement and pay interest or dividends in foreign currencies, changes in the
relationship of these foreign currencies to the U.S. dollar can significantly
affect the value of the investments and earnings of the Fund. Foreign
investments may also subject the Fund to foreign government exchange
restrictions, expropriation, taxation or other political, social or economic
developments, all of which could affect the market and/or credit risk of the
investments.
B. FOREIGN CURRENCY TRANSACTIONS - The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Series D, M, N and O do not isolate that portion of the results of
operations resulting from changes in the foreign exchange rates on investments
from the fluctutation arising from changes in the market prices of securities
held. Such fluctuations are included with the net realized and unrealized gain
or loss on investments. Series K isolates their portion of the results of
operations resulting from foreign exchange rates on investment from the
fluctuation arising from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the value of portfolio securities and
other assets and liabilities at the end of the reporting period, resulting from
changes in the exchange rates.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Series D, K, M, N and O
may enter into forward foreign exchange contracts in connection with foreign
currency risk from purchase or sale of securities denominated in foreign
currency. These Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate as unrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the Statement of Operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Series have in that particular
currency contract. Losses may arise due to changes in the value of the foreign
currency or if the counterparty does not perform under the contract.
D. FUTURES - The Fund may utilize futures contracts to a limited extent,
with the objectives of maintaining full exposure to the underlying stock
markets, enhancing returns, maintaining liquidity, and minimizing transaction
costs. Series Jand M may purchase futures contracts to immediately position
incoming cash in the market, thereby simulating a fully invested position in the
underlying index while maintaining a cash balance for liquidity. Returns may be
enhanced by purchasing futures contracts instead of the underlying securitites
when futures are believed to be priced more attractively than the underlying
securities. The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of stocks contained in
the indices and the prices of futures contracts, and the possibility of an
illiquid market. Futures contracts are valued based upon their quoted daily
settlement prices. Upon entering into a futures contract, the Series is required
to deposit either cash or liquid securities, representing the initial margin,
equal to a certain percentage of the contract value. Subsequent changes in the
value of the contract, or variation margin, are recorded as unrealized gains or
losses. The variation margin is paid or received in cash daily by the Series.
The Series realizes a gain or loss when the contract is closed or expires. There
were no futures contracts held by the Fund at June 30, 1997.
69
<PAGE> 304
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
E. OPTIONS WRITTEN - The Fund may purchase put and call options and write
such options on a covered basis on securities that are traded on recognized
securities exchanges and over-the-counter markets. Call and put options on
securities give the holder the right to purchase or sell respectively, (and the
writer the obligation to sell or purchase) a security at a specified price, on
or until a certain date. The primary risks associated with the use of options
are an imperfect correlation between the change in market value of the
securities held by the Series and the price of the option, the possibility of an
illiquid market, and the inability of the counter-party to meet the terms of the
contract.
The premium received for a written option is recorded as an asset with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuations in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized. Series K wrote covered call options during 1997
and received $92,746 in premiums.
F. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Dividend income less
foreign taxes withheld (if any) are recorded on the ex-dividend date. Interest
income is recognized on the accrual basis. Premium and discounts (except
original issue discounts) on debt securities are not amortized, except for
Series K, which does amortize premiums and discounts on debt securities.
G. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to differing treatments for expiration of net operating losses and
recharacterization of foreign currency gains and losses.
H. TAXES - The Fund complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of its
taxable net income and net realized gains sufficient to relieve it from all, or
substantially all, federal income, excise and state income taxes. Therefore, no
provision for federal or state income tax is required.
I. EARNINGS CREDITS - Under the fee schedule with the custodian, the Fund
earns credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the Statement of Operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC) (the
Investment Manager) under an investment advisory contract at an annual rate of
.50% of the average daily net assets for Series C, .75% for Series A, B, E, J,
K, P and S and 1.00% for Series D, M, N and O. SMC pays Lexington Management
Corporation (LMC), an amount equal to .50% of the average daily net assets of
Series D and .35% of the average net assets for Series K, for management
services. SMC has agreed to waive all of the manageme nt fees for Series P
through December 31, 1997. SMC & LMC have agreed to waive all of the management
fees for Series K through December 31, 1997. The Investment Manager pays T. Rowe
Price Associates, Inc. an annual fee equal to .50% of the first $50,000,000 of
average net assets of Series N and .40% of the average net assets of Series N in
excess of $50,000,000 for management services provided to that Series. The
Investment Manager pays T. Rowe Price Associates, Inc. an annual fee equal to
.50% of the first $20,000,000 of average net assets of Series O and .40% of the
average assets in excess of $20,000,000 for management services provided to
Series O. The Investment Manager pays Templeton Franklin Investment Services,
Inc., for research provided to Series M, an annual fee equal to .30% of the
first $50,000,000 of the average net assets of Series M invested in equity
securities and .25% of the average net assets invested in equity securities in
excess of $50,000,000. The Investment Manager also pays Meridian Investment
Management Corporation, for research provided to Series M, an annual fee equal
to .20% of the average net assets of that Series.
On August 1, 1997, shareholders of Series M voted to approve a new
subadvisory agreement with Meridian Investment Management Corporation, which
replaced all existing subadvisory agreements. Under this agreement, Meridian
furnishes investment advisory, statistical and research facilities, supervises
and arranges for the purchase and sale of securities on behalf of Series M. This
new contract was effective August 1, 1997.
The investment advisory contract provides that the total annual expenses of
each Series (including management fees, but excluding interest, taxes, brokerage
commissions and extraordinary expenses) will not exceed the level of expenses
which the Series is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Fund are then offered for
sale. For the period ended June 30, 1997, SMCagreed to limit the total expenses
for Series K, M and P to an annual rate of 2% of the average daily net asset
value of each respective Series.
The Fund has entered into a contract with SMC for transfer agent services
and administrative services which SMC provides to the Fund. The charges paid by
the Fund under the contract for transfer agent services are insignificant. The
administrative services provided by SMC principally include all fund and
portfolio accounting and regulatory filings. For providing these services, SMC
receives a fee at the annual rate of .045% of the average daily net assets of
the Fund, plus the greater of .10% of the aver age net assets of Series D or
$60,000, and with respect to Series K, M, and N, an annual fee equal to the
greater of .10% of each Series average net assets or (i) $45,000 in the year
ending April 29, 1997, and (ii) $60,000 thereafter. SMC has arranged for LMC to
provide certain administrative services relating to Series D, including
performing certain accounting and pricing functions. LMC is compensated directly
by SMC for providing these services.
Certain officers and directors of the Fund are also officers and/or
directors of SBL and its subsidiaries, which include SMC.
70
<PAGE> 305
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
3. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) for income tax
purposes at June 30, 1997, for all securities and foreign currency holdings
(including foreign currency receivables and payables) were as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES J
(Growth) (Growth Income) (Money Market) (Worldwide Equity) (High Grade Income) (Emerging Growth)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized
appreciation .... $276,241,681 $316,598,930 $ 9,830 $43,673,349 $1,141,852 $41,953,529
Gross unrealized
depreciation .... (1,783,589) (1,837,581) (19,499) (5,902,933) (760,667) (1,414,684)
----------- ----------- ------- ---------- --------- ----------
Net unrealized
appreciation
(depreciation) .. $274,458,092 $314,761,349 $ (9,669) $37,770,416 $ 381,185 $40,538,845
=========== =========== ======= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
SERIES M SERIES N
SERIES K (Specialized Asset (Managed Asset SHARES O SERIES P SERIES S
(Global Aggressive) Allocation) Allocation) (Equity Income) (High Yield) (Social Awareness)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized
appreciation ...... $ 556,027 $ 3,280,438 $3,925,902 $14,352,578 $96,263 $16,863,851
Gross unrealized
depreciation ...... (644,021) (1,102,121) (272,496) (697,451) (2,244) (462,461)
-------- ---------- --------- ---------- ------ ----------
Net unrealized
appreciation
(depreciation) .... $ (87,994) $ 2,178,317 $3,653,406 $13,655,127 $94,019 $16,401,390
======== ========== ========= ========== ====== ==========
</TABLE>
4. INVESTMENT TRANSACTIONS
Investment transactions for the period ended June 30, 1997, (excluding
overnight investments and short-term debt securities) are as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES D SERIES E SERIES J
(Growth) (Growth Income) (Worldwide Equity) (High Grade Income) (Emerging Growth)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $282,476,088 $286,304,738 $195,963,609 $84,001,822 $97,532,630
Proceeds from sales $246,217,231 $254,464,606 $177,947,821 $89,772,434 $55,724,439
</TABLE>
<TABLE>
<CAPTION>
SERIES M SERIES N
SERIES K (Specialized Asset (Managed Asset SHARES O SERIES P SERIES S
(Global Aggressive) Allocation) Allocation) (Equity Income) (High Yield) (Social Awareness)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases $11,520,812 $21,464,770 $5,783,930 $33,756,480 $1,056,557 $26,139,369
Proceeds from sales $ 7,075,401 $20,747,453 $5,918,096 $ 8,519,182 $ 729,338 $16,545,986
</TABLE>
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At June 30, 1997, Series D & Series K had the following open forward
foreign exchange contracts to sell currency (excluding foreign currency
contracts used for purchase and sale settlements):
<TABLE>
<CAPTION>
Currency Settlement Date Contract Amount Contract Rate Current Rate Unrealized Gain
<S> <C> <C> <C> <C> <C> <C>
Series D French Franc 12/02/97 $5,316,058 5.6747 5.8215 $134,054
Italian Lira 12/02/97 $1,792,482 1,699.2200 1710.7000 12,029
New Zealand Dollar 10/03/97 $5,305,047 0.6900 0.6783 89,844
Spanish Peseta 12/02/97 $4,351,143 143.4850 147.0600 105,775
-------
$341,702
=======
Series K Australian Dollar 7/31/97 $1,051,820 1.331026 1.336154 $4,036
Australian Dollar 7/31/97 $ 561,300 1.336184 1.336154 13
Canadian Dollar 7/09/97 $ 943,396 1.378000 1.379077 737
-----
$4,786
=====
</TABLE>
71
<PAGE> 306
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
- ---------
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Hugh L. Thompson, Ph.D.
OFFICERS
- --------
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Terry A. Milberger, Vice President
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Barbara J. Davison, Assistant Vice President
Cindy L. Shields, Assistant Vice President
Thomas A. Swank, Assistant Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
[SDI LOGO]
SECURITY DISTRIBUTORS, INC. BULK RATE
700 SW Harrison St. U.S. POSTAGE
Topeka, KS 66636-0001 PAID
(785) 431-3112 SECURITY BENEFIT
(800) 888-2461
<PAGE> 307
SBL FUND SERIES V (VALUE)
STATEMENT OF NET ASSETS
AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE
COMMON STOCKS SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ALUMINUM - 1.9%
Reynolds Metals Company . . . . . . . . . . . . . . . . . . . . . . . . . 500 $ 35,344
BANKS - MAJOR REGIONAL - 4.4%
Banc One Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 800 42,900
Bank Of New York Company, Inc. . . . . . . . . . . . . . . . . . . . . . 900 40,162
---------
83,062
CHEMICALS (SPECIALTY) - 7.3%
Dexter Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 41,800
Material Sciences Corporation* . . . . . . . . . . . . . . . . . . . . . 2,000 32,000
Minerals Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . 900 35,775
Potash Corporation Of Saskatchewan, Inc. (Cl. F) . . . . . . . . . . . . 400 29,575
---------
139,150
COMMUNICATION EQUIPMENT - 2.8%
Harris Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 52,275
COMPUTER SOFTWARE/SERVICES - 5.4%
Computer Sciences Corporation* . . . . . . . . . . . . . . . . . . . . . 800 59,500
DST Systems, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 43,425
---------
102,925
COMPUTER SYSTEMS - SERVICES - 1.3%
Tandem Computers, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 700 23,800
DRUGS - 5.6%
Mylan Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 5,000 106,250
ELECTRIC COMPANIES - 2.7%
Equitable Resources, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,700 51,956
ELECTRICAL EQUIPMENT - 2.5%
Raychem Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 46,531
ELECTRONICS - SEMI-CONDUCTORS - 0.9%
Atmel Corporation* . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 17,688
ELECTRONICS - INSTRUMENTATION - 0.4%
E G & G, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 8,500
FINANCIAL (DIVERSE) - 2.5%
American Express Company . . . . . . . . . . . . . . . . . . . . . . . . 600 46,650
FOODS - 2.3%
Chiquita Brands International, Inc. . . . . . . . . . . . . . . . . . . . 3,000 42,750
</TABLE>
See accompanying notes.
<PAGE> 308
SBL FUND SERIES V (VALUE)
STATEMENT OF NET ASSETS
AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE
COMMON STOCKS SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSEHOLD FURNISHINGS & APPLIANCES - 2.0%
Leggett & Platt, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 900 $ 38,700
INSURANCE - LIFE/HEALTH - 0.9%
Aflac, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 16,519
INSURANCE - MULTILINE - 1.0%
Leucadia National Corporation . . . . . . . . . . . . . . . . . . . . . . 600 19,125
INSURANCE - PROPERTY - 1.8%
W.R. Berkley Corporation . . . . . . . . . . . . . . . . . . . . . . . . 600 33,188
LEISURE TIME PRODUCTS - 1.8%
Hasbro, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 34,938
MANUFACTURING-DIVERSIFIED - 2.9%
Textron, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 24,925
U. S. Industries, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 800 30,400
---------
55,325
MEDICAL PRODUCTS & SUPPLIES - 1.5%
ATL Ultrasound, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 300 12,187
Sunrise Medical, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 16,294
---------
28,481
METALS & MINING - 1.3%
Cyprus Amax Minerals Company . . . . . . . . . . . . . . . . . . . . . . 1,000 25,250
NATURAL GAS - 6.6%
Coastal Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 700 40,425
Eastern Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 35,687
Peoples Energy Corporation . . . . . . . . . . . . . . . . . . . . . . . 900 33,919
Questar Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 16,000
---------
126,031
OFFICE EQUIPMENT & SUPPLIES - 1.8%
Corporate Express, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 2,000 34,125
OIL & GAS - EXPLORATION & PRODUCTION - 5.9%
Apache Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 39,687
Forcenergy, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 18,125
Lousiana Land & Exploration Company . . . . . . . . . . . . . . . . . . . 400 30,625
Noble Affiliates, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 500 23,188
---------
111,625
PUBLISHING - 1.9%
McGraw-Hill Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . 600 36,787
</TABLE>
See accompanying notes.
<PAGE> 309
SBL FUND SERIES V (VALUE)
STATEMENT OF NET ASSETS
AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE
COMMON STOCKS SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUBLISHING - NEWSPAPER - 2.7%
E.W. Scripps Company . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 $ 51,106
REAL ESTATE INVESTMENT TRUSTS - 0.2%
CCA Prison Realty Trust* . . . . . . . . . . . . . . . . . . . . . . . . 100 3,313
RESTAURANTS - 3.1%
The Cheesecake Factory* . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 58,012
RETAIL - SPECIALTY - 7.9%
Autozone, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 50,850
Payless ShoeSource, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 400 25,650
Toys "R" Us, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 38,019
Woolworth Corporation* . . . . . . . . . . . . . . . . . . . . . . . . . 1,600 35,800
-----------
150,319
SERVICES - ADVERTISING / MARKETING - 2.2%
Acxiom Corporation* . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,300 40,825
SERVICES - COMMERCIAL & CONSUMER - 2.8%
Angelica Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 53,813
-----------
TOTAL COMMON STOCKS - 88.3% . . . . . . . . . . . . . . . . . . . . . . . 1,674,363
CASH AND OTHER ASSETS, LESS LIABILITIES - 11.7% . . . . . . . . . . . . . 221,317
-----------
TOTAL NET ASSETS - 100.0% . . . . . . . . . . . . . . . . . . . . . . . . $ 1,895,680
===========
</TABLE>
*Securities on which no cash dividend was paid during the preceding twelve
months
See accompanying notes.
<PAGE> 310
BALANCE SHEET
AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
SBL FUND
SERIES V
(VALUE)
------------
<S> <C>
ASSETS
Investments, at value (identified cost $1,425,586). . . . . . . . . . . . . . . . . . . . . . $ 1,674,363
Cash 223,138
Receivables:
Securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,009
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,062
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,926,912
============
LIABILITIES AND NET ASSETS
Liabilities:
Payable:
Securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,991
Other Liabilities:
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843
Transfer & administration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 797
Directors fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Miscellaneous fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,232
------------
Net Assets:
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,594,806
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,826
Accumulated undistributed net realized gain on sale of investments . . . . . . . . . . . . . 46,271
Net unrealized appreciation in value of investments . . . . . . . . . . . . . . . . . . . . . 248,777
------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,895,680
------------
Total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,926,912
============
Capital shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indefinite
Capital shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,018
Net asset value per share (net assets divided by shares outstanding) . . . . . . . . . . . . $ 12.39
============
</TABLE>
See accompanying notes.
<PAGE> 311
STATEMENT OF OPERATIONS
FOR THE PERIOD MAY 1, 1997 THROUGH AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
SBL FUND
SERIES V
(VALUE)
------------
<S> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,536
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,909
------------
Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,445
EXPENSES:
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,515
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843
Transfer & maintenance fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Administration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
Director's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 797
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
------------
6,134
Less management fees waived . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,515)
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,619
------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,826
NET REALIZED AND UNREALIZED GAIN
Net realized gain during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,271
Net change in unrealized appreciation during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,777
------------
Net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,048
------------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $ 300,874
============
</TABLE>
See accompanying notes.
<PAGE> 312
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MAY 1, 1997 THROUGH AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
SBL FUND
SERIES V
(VALUE)
------------
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,826
Net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,271
Unrealized appreciation during the period . . . . . . . . . . . . . . . . . . . . . . . . 248,777
------------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . 300,874
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,651,350
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,544)
------------
Net increase from capital share transactions . . . . . . . . . . . . . . . . . . . . . 1,594,806
------------
Total increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,895,680
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,895,680
============
Undistributed net investment income at end of period . . . . . . . . . . . . . . . . . . $ 5,826
============
(a) Shares issued and redeemed
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,599
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,581)
------------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,018
============
</TABLE>
See accompanying notes.
<PAGE> 313
FINANCIAL HIGHLIGHTS
FOR THE PERIOD MAY 1, 1997 THROUGH AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
SERIES V (VALUE)
FISCAL PERIOD
ENDED AUGUST 31,
1997(B)(C)(D)
-------------
<S> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.044
Net Gain On Securities (realized and unrealized) . . . . . . . . . . . . . . . . . 2.346
------
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . 2.390
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) . . . . . . . . . . . . . . . . . . . . . . 0.00
Distributions (from Capital Gains) . . . . . . . . . . . . . . . . . . . . . . . . 0.00
------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00
------
NET ASSET VALUE END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.39
=====
TOTAL RETURN (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.9%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) . . . . . . . . . . . . . . . . . . . . . . . $ 1,896
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . . . . . . . . . 0.55%
Ratio of Net Income to Average Net Assets . . . . . . . . . . . . . . . . . . . . . 1.21%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48%
Average Commission Paid Per Equity Share Traded . . . . . . . . . . . . . . . . . . $0.0600
</TABLE>
(a) Total return information does not take into account any charges paid at
the time of purchase.
(b) SBL Fund Series V was initially capitalized on May 1, 1997 with a net
asset value of $10 per share. Percentage amounts for the period, except
for total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager during the period
and the expense ratio absent such reimbursements would have been 1.30%
(d) Net investment income per share was computed using the average month-end
shares outstanding throughout the period.
See accompanying notes.
<PAGE> 314
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
SBL Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company of the
series type. Series V (the Fund) is a Series of SBL Fund. The Fund is
required to account for the assets of each series separately and to
allocate general liabilities of the Fund to each series based upon the net
asset value of each series. Shares of the Fund will be sold only to
Security Benefit Life Insurance Company (SBL) separate accounts. The
following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements. These policies
are in conformity with generally accepted accounting principles.
A. SECURITIES VALUATION - Valuations of the Fund's securities are supplied by
a pricing service approved by the Board of Directors. Securities listed
or traded on a national securities exchange are valued on the basis of
the last sales price. If there are no sales on a particular day, then
the securities are valued at the last bid price. If a security is traded
on multiple exchanges, its value will be based on prices from the
principal exchange where it is traded. All other securities for which
market quotations are available are valued on the basis of the current
bid price. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or the Fund, investment manager,
then the securities are valued in good faith by such method as the Board
of Directors determines will reflect the fair market value. The Fund
generally will value short-term debt securities at prices based on
market quotations for securities of similar type, yield, quality and
duration, except those securities purchased with 60 days or less to
maturity are valued on the basis of amortized cost which approximates
market value.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized
gains or losses are reported on an identified cost basis. Dividend
income less foreign taxes withheld (if any) plus foreign taxes
recoverable (if any) are recorded on the ex-dividend date. Interest
income is recognized on the accrual basis. Premium and discounts (except
original issue discounts) on debt securities are not amortized.
C. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made
during the year from net investment income or net realized gains may
differ from the ultimate characterization for federal income tax
purposes. These differences are primarily due to differing treatments
relating to the expiration of net operating losses.
D. TAXES - The Fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and distribute
all of its taxable net income and net realized gains sufficient to
relieve it from all, or substantially all, federal income, excise and
state income taxes. Therefore, no provision for federal or state income
tax is required.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC)
under an investment advisory contract at an annual rate of 0.75% of the
average daily net assets of the fund. SMC has agreed to waive all the
management fees until April 30, 1998.
SMC also acts as the administrative agent and transfer agent for the Fund
and as such performs administrative functions, transfer agency and
dividend disbursing services, and the bookkeeping, accounting and pricing
functions for the Fund. For these services, the Investment Manager
receives an administrative fee equal to .045% of the average daily net
assets of the Fund. For
<PAGE> 315
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997
(Unaudited)
transfer agent services, SMC is paid an annual fixed charge per account
as well as a transaction fee for all shareholder and dividend payments.
Certain officers and directors of the Fund are also officers and/or
directors of Security Benefit Life Insurance Company and its
subsidiaries, which include SMC.
3. FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the amounts of unrealized appreciation
(depreciation) at August 31, 1997, were as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 254,450
Gross unrealized depreciation $ (5,673)
---------
Net unrealized appreciation $ 248,777
=========
</TABLE>
4. INVESTMENT TRANSACTIONS
Investment transactions for the period May 1, 1997 to August 31, 1997,
(excluding overnight investments and short-term commercial paper) are as
follows:
<TABLE>
<S> <C>
Purchases $ 1,610,983
Proceeds from sales $ 231,668
</TABLE>
<PAGE> 316
SBL FUND
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a. Financial Statements
Included in Part A of this Registration Statement:
Per Share Income and Capital Changes
To be included in Part B of this Registration Statement:
The audited financial statements contained in
the most recent Annual Report of SBL Fund for fiscal year
ended December 31, 1996, the unaudited financial
statements contained in the most recent Semiannual Report
of SBL Fund for the period ended June 30, 1996, and the
unaudited financial statement of Series V for the period
May 1, 1997, to August 31, 1997, are incorporated by
reference in Part B of this Registration Statement.
b. Exhibits:
(1) Articles of Incorporation.
(2) Corporate Bylaws of Registrant.(a)
(3) Not applicable.
(4) Not applicable.
(5) (a) Investment Advisory Contract.
(b) Sub-Advisory Contract - Lexington (Series D).(a)
(c) Sub-Advisory Contract - Lexington (Series K).(a)
(d) Sub-Advisory Contract - T. Rowe Price (Series N).(a)
(e) Sub-Advisory Contract - T. Rowe Price (Series O).(a)
(f) Sub-Advisory Contract - Meridian
(Series M).(b)
(g) Sub-Advisory Contract - Strong
(Series X).
(6) Not applicable.
(7) Form of Non-Qualified Deferred Compensation
Plan.(a)
(8) (a) Custodian Agreement - UMB.
(b) Global Custodian Agreement - Chase Manhattan Bank (Series
D).(a)
(c) Global Custodian Agreement - Chase Manhattan Bank (Series
K).(a)
(d) Global Custodian Agreement - Chase Manhattan Bank (Series
M).(a)
(e) Global Custodian Agreement - Chase Manhattan Bank (Series
N).(a)
(f) Global Custodian Agreement - Chase Manhattan Bank (Series
O).(a)
(9) (a) Administrative Services and Transfer
Agency Agreement.
(b) Sub-Administrative Agreement.(a)
(10) Opinion of counsel as to the legality of the securities
offered.(a)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Schedule of Computation of Performance.
(17) Financial Data Schedules.
(18) Not applicable.
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 26 to Registration Statement No.
2-59353 (November 1, 1995).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 33 to Registration Statement No.
2-59353 (October 15, 1997).
<PAGE> 317
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities as of September 30, 1997
<TABLE>
<CAPTION>
(1) (2)
Number of Record
Title of Class Shareholders
-------------- ----------------
<S> <C>
Series A 24
Series B 24
Series C 33
Series D 21
Series E 23
Series S 21
Series J 14
Series K 20
Series M 14
Series N 14
Series O 18
Series P 3
Series V 4
</TABLE>
Item 27. Indemnification
A policy of insurance covering Security Management Company, LLC, its
subsidiaries, Security Distributors, Inc., and all of the registered
investment companies advised by Security Management Company, LLC
insures the Registrant's directors and officers and others against
liability arising by reason of an alleged breach of duty caused by
any negligent act, error or accidental omission in the scope of their
duties.
Paragraph 30 of Registrant's Bylaws, dated February 3, 1995, provides
in relevant part as follows:
30. Indemnification and Liability of Directors and Officers.
Each person who is or was a Director or officer of the Corporation
or is or was serving at the request of the Corporation as a
Director or officer of another corporation (including the heirs,
executors, administrators and estate of such person) shall be
indemnified by the Corporation as of right to the full extent
permitted or authorized by the laws of the State of Kansas, as now
in effect and as hereafter amended, against any liability,
judgment, fine, amount paid in settlement, cost and expense
(including attorneys' fees) asserted or threatened against and
incurred by such person in his/her capacity as or arising out of
his/her status as a Director or officer of the Corporation or, if
serving at the request of the Corporation, as a Director or
officer of another corporation. The indemnification provided by
this bylaw provision shall not be exclusive of any other rights to
which those indemnified may be entitled under the Articles of
Incorporation, under any other bylaw or
<PAGE> 318
under any agreement, vote of stockholders or disinterested
directors or otherwise, and shall not limit in any way any right
which the Corporation may have to make different or further
indemnification with respect to the same or different persons or
classes of persons.
No person shall be liable to the Corporation for any loss, damage,
liability or expense suffered by it on account of any action taken
or omitted to be taken by him/her as a Director or officer of the
Corporation or of any other corporation which he/she serves as a
Director or officer at the request of the Corporation, if such
person (a) exercised the same degree of care and skill as a
prudent man would have exercised under the circumstances in the
conduct of his/her own affairs, or (b) took or omitted to take
such action in reliance upon advice of counsel for the
Corporation, or for such other corporation, or upon statement made
or information furnished by Directors, officers, employees or
agents of the Corporation, or of such other corporation, which
he/she had no reasonable grounds to disbelieve.
In the event any provision of this Section 30 shall be in
violation of the Investment Company Act of 1940, as amended or of
the rules and regulations promulgated thereunder, such provisions
shall be void to the extent of such violations.
On March 25, 1988, the shareholders approved the Board of Directors'
recommendation that the Articles of Incorporation be amended by
adopting the following Article Fifteenth:
"A director shall not be personally liable to the corporation or
to its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this sentence shall not
eliminate nor limit the liability of a director:
A. for any breach of his or her duty of loyalty to
the corporation or to its stockholders;
B. for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation
of law;
C. for any unlawful dividend, stock purchase or
redemption under the provisions of Kansas Statutes Annotated
(K.S.A.) 17-6424 and amendments thereto; or
D. for any transaction from which the director
derived an improper personal benefit."
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by
<PAGE> 319
such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business or Other Connections of Investment Adviser
SECURITY MANAGEMENT COMPANY, LLC:
Security Management Company, LLC also acts as Investment
Manager to Security Cash Fund, Security Equity Fund, Security Income
Fund, Security Growth and Income Fund, Security Tax-Exempt Fund and
Security Ultra Fund.
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Jeffrey B. Pantages President and Chief Investment Officer
(until October 1997)
Security Management Company, LLC
Director (until October 1997)
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund,
Security Growth and Income Fund,
Security Equity Fund, Security Ultra Fund
Senior Vice President and Chief Investment Officer
(until October 1997)
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Director
Mulvane Art Center
Mulvane Art Museum
Washburn University
17th & Jewell
Topeka, Kansas
United Way of Greater Topeka
P.O. Box 4188
Topeka, Kansas
</TABLE>
<PAGE> 320
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
James R. Schmank Senior Vice President, Treasurer, Chief Fiscal Officer
and Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Vice President
Security Benefit Group, Inc.
Security Benefit Life Insurance Company
Vice President and Treasurer
Security Growth and Income Fund, Security
Income Fund, Security Cash Fund, Security
Tax-Exempt Fund, Security Ultra Fund, Security
Equity Fund, SBL Fund
John D. Cleland Senior Vice President and Managing Member
Representative
Security Management Company, LLC
President and Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund, Security
Growth and Income Fund, Security Equity Fund,
Security Ultra Fund
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Vice President and Director
Security Distributors, Inc.
Trustee and Treasurer
Mount Hope Cemetery Corporation
4700 SW 17th
Topeka, Kansas
Trustee and Investment Committee Chairman
Topeka Community Foundation
5100 SW 10th
Topeka, Kansas
James W. Lammers Senior Vice President and Director (until October 1997)
Security Management Company, LLC
Security Distributors, Inc.
Director (until November 1996)
Security Management Company
</TABLE>
<PAGE> 321
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Donald E. Caum Director (until November 1996)
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Director
YMCA Metro, Topeka, Kansas
Executive Director
Jayhawk Area Council Boy Scouts of America,
Metropolitan Ballet,
Topeka, Kansas
James L. Woods Senior Vice President (until July 1997)
Security Management Company, LLC
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Mark E. Young Vice President
Security Growth and Income Fund, Security Income Fund, Security Cash Fund,
Security Tax-Exempt Fund, Security Ultra Fund, Security Equity Fund, SBL
Fund, Security Management Company, LLC, Security Distributors, Inc.
Assistant Vice President
Security Benefit Life Insurance Company
First Security Benefit Life Insurance and Annuity Company of New York
Security Benefit Group, Inc.
Trustee
Topeka Zoological Foundation, Topeka, Kansas
Terry A. Milberger Senior Portfolio Manager and Senior Vice President
Security Management Company, LLC
Vice President
Security Equity Fund, SBL Fund
Jane A. Tedder Vice President and Senior Economist
Security Management Company, LLC
Vice President
Security Income Fund, SBL Fund,
Security Equity Fund
</TABLE>
<PAGE> 322
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Amy J. Lee Vice President and Associate General Counsel
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Secretary
Security Management Company, LLC, Security Distributors, Inc., Security
Cash Fund, Security Equity Fund, Security Tax-Exempt Fund, Security Ultra
Fund, SBL Fund, Security Growth and Income Fund, Security Income Fund
Brenda M. Harwood Assistant Vice President, Assistant Treasurer and Assistant Secretary
Security Management Company, LLC
Assistant Treasurer and Assistant Secretary
Security Equity Fund, Security Ultra Fund, Security Growth and Income Fund,
Security Income Fund, Security Cash Fund, SBL Fund, Security Tax-Exempt Fund
Treasurer
Security Distributors, Inc.
Steven M. Bowser Second Vice President and Portfolio Manager
Security Management Company, LLC
Second Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Thomas A. Swank Vice President and Portfolio Manager
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Barbara J. Davison Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Vice-Chairman
Topeka Chapter American Red Cross
Topeka, Kansas
</TABLE>
<PAGE> 323
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Ultra Fund, SBL Fund,
Security Equity Fund
Larry L. Valencia Assistant Vice President and Senior Research Analyst
Security Management Company, LLC
James P. Schier Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
David Eshnaur Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
SBL Fund, Security Income Fund
Martha L. Sutherland Second Vice President
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
</TABLE>
*Located at 700 Harrison, Topeka, Kansas 66636-0001
LEXINGTON MANAGEMENT CORPORATION:
Lexington Management Corporation, sub-adviser to Series K
(Global Aggressive Bond Series), acts as investment adviser,
sub-adviser and/or sponsor to 21 investment companies other than
Registrant.
<PAGE> 324
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Robert M. DeMichele President and Director
Lexington Global Asset Managers, Inc.
Chairman and Chief Executive Officer
Lexington Management Corporation, Lexington Funds
Distributor, Inc.
Director
Chartwell Re Corporation, The Navigator's Insurance
Group, Inc., Unione Italiana Reinsurance, Vanguard Cellular
Systems, Inc.
Chairman of the Board
Lexington Group of Investment Companies,
Market Systems Research, Inc.,
Market Systems Research Advisors, Inc.
Richard M. Hisey Executive Vice President and Chief Financial Officer
Lexington Global Asset Managers, Inc.
Chief Financial Officer, Managing Director and Director
Lexington Management Corporation
Chief Financial Officer, Vice President and Director
Lexington Funds Distributor, Inc.
Vice President and Treasurer
Market Systems Research Advisors, Inc.
Chief Financial Officer and Vice President
Lexington Group of Investment Companies
Lawrence Kantor Executive Vice President and General Manager-Mutual Funds
Lexington Global Asset Managers, Inc.
Executive Vice President, Managing Director and Director
Lexington Management Corporation
Executive Vice President and Director
Lexington Funds Distributor, Inc.
Vice President and Director
Lexington Group of Investment Companies
Stuart S. Richardson Chairman of the Board
Lexington Global Asset Managers, Inc.
Director
Lexington Management Corporation
</TABLE>
*Located at P.O. Box 1515, Saddle Brook, New Jersey 07663.
<PAGE> 325
MFR ADVISORS, INC.
Lexington Management Corporation contracts with MFR Advisors,
Inc. to provide advisory services for Series K (Global Aggressive
Bond Series). MFR Advisors, Inc. serves as sub-adviser to one
investment company other than Registrant.
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Maria Fiorini Ramirez Chief Executive Officer, President and Director
MFR Advisors, Inc.
Director
Statewide Savings Bank S.L.A. of New Jersey
Arlington Capital-Offshore Investment Company
Dorchester Capital-Offshore Investment Company
Bruce Jensen Executive Vice President
MFR Advisors, Inc.
Timothy F. Downing Chief Financial Officer
MFR Advisors, Inc.
</TABLE>
*Located at One Liberty Plaza, New York, New York 10006
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
Meridian Investment Management Corporation, sub-adviser to
Series M, serves as an investment adviser, sub-adviser and provider
of investment research to mutual funds and private accounts
representing assets over $650 million.
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Michael J. Hart President and Director
Meridian Investment Management Corporation
President
Meridian Management and Research Corporation, Meridian
Clearing Corporation
Craig T. Callahan Chief Investment Advisor, Secretary-Treasurer, and Director
Meridian Investment Management Corporation
Chief Investment Officer
Meridian Management and Research Corporation
Vice President
Meridian Clearing Corporation
</TABLE>
<PAGE> 326
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Deborah Z. Urtz Compliance Officer
Meridian Investment Management Corporation
Erik L. Jonson Chief Financial Officer
Meridian Investment Management Corporation, Meridian
Management and Research Corporation
</TABLE>
*Located at 12835 E. Arapahoe Rd., Tower II, 7th Fl., Englewood, Colorado 80112
STRONG CAPITAL MANAGEMENT, INC.
Strong Capital Management, Inc., sub-adviser to Series X,
serves as investment adviser to the Strong Funds and provides
investment management services for mutual funds and other investment
portfolios representing assets over $27 billion.
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Richard S. Strong Director, Chairman, Chief Investment Officer and Portfolio
Manager
Strong Capital Management, Inc.
Richard T. Weiss Director and Portfolio Manager
Strong Capital Management, Inc.
John Dragisic President and Director
Strong Capital Management, Inc.
Joseph R. DeMartine Senior Vice President and Chief Marketing Officer
Strong Capital Management, Inc.
Thomas P. Lemke Acting Chief Operating Officer, Senior Vice President, General
Counsel, Secretary and Chief Compliance Officer
Strong Capital Management, Inc.
Lawrence A. Totsky Senior Vice President - Mutual Fund Administration
Strong Capital Management, Inc.
Rochelle Lamm Wallach Senior Vice President
Strong Capital Management, Inc.
</TABLE>
<PAGE> 327
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ------------------------------ --------------------------------------------------------
<S> <C>
Stephen J. Shenkenberg Vice President, Assistant Secretary, and Deputy General Counsel
Strong Capital Management, Inc.
Michael E. Fisher Senior Vice President
Strong Capital Management, Inc.
Managing Director
International Business Group
Kenneth M. Landis Senior Vice President and Chief Information Officer
Strong Capital Management, Inc.
</TABLE>
*Located at 100 Heritage Reserve, Menomonee Falls, WI 53051
T. ROWE PRICE ASSOCIATES, INC.
T. Rowe Price Associates, Inc., sub-adviser to Series N and O, was
founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31,
1996, the firm and its affiliates managed over $95 billion for over
4.5 million individual and institutional investor accounts.
Listed below are the Directors of T. Rowe Price who have other
substantial businesses, professions, vocations, or employment aside
from that of Director of T. Rowe Price:
James E. Halbkat, Jr., President of U.S. Monitor Corporation, a
provider of public response systems. Mr. Halbkat's address is
P.O. Box 23109, Hilton Head Island, South Carolina 29925.
Richard L. Menschel, limited partner of the Goldman Sachs Group,
L.P. Mr. Menschel's address is 85 Broad Street, 2nd Floor, New
York, New York 10004.
John W. Rosenblum, Dean of the Jepson School of Leadership Studies
at the University of Richmond, and a Director of: Chesapeake
Corporation, a manufacturer of paper products, Camdus Corp., a
provider of printing and communication services, Comdial
Corporation, a manufacturer of telephone systems for businesses,
Cone Mills Corporation, a textiles producer, and Providence
Journal Company, a publisher of newspapers and owner of broadcast
television stations. Mr. Rosenblum's address is University of
Richmond, Virginia 23173.
Robert L. Strickland, Chairman of Loew's Companies, Inc., a
retailer of specialty home supplies, and a Director of Hannaford
Bros. Co., a food retailer. Mr. Strickland's address is 604
Piedmont Building, Winston-Salem, North Carolina 27104.
<PAGE> 328
T. ROWE PRICE ASSOCIATES, INC. (continued)
Philip C. Walsh, Consultant to Cyprus Amax Minerals Company,
Englewood, Colorado. Mr. Walsh's address is Pleasant Valley,
Peapack, New Jersey 07977.
Ann Marie Whittemore, partner of the law firm of McGuire,
Woods, Battle and Boothe and is a director of Owens & Minor, Inc.;
USF&G Corporation, the James River Corporation of Virginia, and
Albermarle Corporation. Mrs. Whittemore's address is One James
Center, Richmond, Virginia 23219.
With the exception of Messrs. Halbkat, Rosenblum, Strickland,
Walsh and Mrs. Whittemore (listed above), all Directors of T. Rowe
Price are employees of T. Rowe Price. Listed below are the
additional Directors and the principal executive officer of T. Rowe
Price:
James S. Riepe, George A. Roche, M. David Testa, Henry H.
Hopkins, Charles P. Smith and Peter Van Dyke.
George J. Collins, Chief Executive Officer and President of T.
Rowe Price.
The address of each of the above individuals is 100 East Pratt
Street, Baltimore, Maryland 21202.
Item 29. Principal Underwriters
(a) Not applicable.
(b) Not applicable.
Item 30. Location of Accounts and Records
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the Rules promulgated thereunder
are maintained by Security Management Company, LLC, 700 Harrison,
Topeka, Kansas 66636-0001; Lexington Management Corporation, Park 80
West, Plaza Two, Saddle Brook, New Jersey 07663; T. Rowe Price
Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202;
Meridian Investment Management Corporation, 12835 Arapahoe Road,
Tower II, 7th Floor, Englewood, Colorado 80112; Strong Capital
Management, Inc., 100 Heritage Reserve, Menomonee Falls, Wisconsin
53051. Records relating to the duties of the Registrant's custodian
are maintained by UMB, n.a., 928 Grand Avenue, Kansas City, Missouri
64106 and Chase Manhattan Bank, 4 Chase MetroTech Center, 18th Floor,
Brooklyn, New York 11245.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person, to
whom a prospectus is delivered, a copy of the Registrant's latest
report to shareholders upon request and without charge.
<PAGE> 329
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Topeka, and State of Kansas on the 8th day of
October, 1997.
SBL FUND
(The Registrant)
By: JOHN D. CLELAND, President
------------------------------
John D. Cleland, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Date: October 8, 1997
-----------------------------
DONALD A. CHUBB, JR. Director
- --------------------
Donald A. Chubb, Jr.
JOHN D. CLELAND President and Director
- --------------------
John D. Cleland
DONALD L. HARDESTY Director
- --------------------
Donald L. Hardesty
PENNY A. LUMPKIN Director
- --------------------
Penny A. Lumpkin
MARK L. MORRIS, JR. Director
- --------------------
Mark L. Morris, Jr.
JEFFREY B. PANTAGES Director
- --------------------
Jeffrey B. Pantages
HUGH L. THOMPSON Director
- --------------------
Hugh L. Thompson
<PAGE> 330
EXHIBIT INDEX
(1) Articles of Incorporation
(2) None
(3) None
(4) None
(5) (a) Investment Advisory Contract
(b) None
(c) None
(d) None
(e) None
(f) None
(g) Sub-Advisory Contract - Strong
(6) None
(7) None
(8) (a) Custodian Agreement - UMB
(b) None
(c) None
(d) None
(e) None
(f) None
(9) (a) Administrative Services and Transfer Agency Agreement
(b) None
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) None
(16) Schedule of Computation of Performance
(17) Financial Data Schedules
(18) None
<PAGE> 1
ARTICLES OF INCORPORATION
OF
SBL FUND, INC.
FIRST: The name of the Corporation is:
SBL FUND, INC.
SECOND: The address of its registered office in the State of Kansas is Security
Benefit Life Building, 700 Harrison Street, in the City of Topeka, County of
Shawnee. The name of its registered agent at such address is Security Management
Company, Inc.
THIRD: The nature of the business or objects or purposes to be conducted,
transacted, promoted or carried on by the Corporation is:
(a) To engage in the business of an investment company and mutual fund and
to hold, invest and reinvest its funds, and in connection therewith to
hold part or all of its funds in cash, and to purchase or otherwise
acquire, hold for investment or otherwise, trade, purchase on margin,
sell, sell short, assign, pledge, hypothecate, negotiate, transfer,
exchange or otherwise dispose of or turn to account or realize upon,
securities (which term "securities" shall for the purposes of this
Article, without limitation of the generality thereof, be deemed to
include any stocks, bonds, shares, debentures, notes, mortgages or
other obligations, and any certificates, receipts, warrants or other
instruments representing rights to receive, purchase or subscribe for
the same, or evidencing or representing any other rights or interests
therein, or in any property or assets) created or issued by any
persons, firms, associations, corporations, syndicates, combinations,
organizations, governments or subdivisions thereof; and to exercise,
as owner of holder of any securities, all rights, powers and
privileges in respect thereof; and to do any and all acts and things
for the preservation, protection, improvement and enhancement in value
of any and all such securities; and
(b) To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Code of the State of Kansas.
In addition to the powers and privileges conferred upon the corporation by law
and those incidental thereto, the corporation shall possess and may exercise all
the powers and privileges which are necessary or convenient to the conduct,
promotion or attainment of the business, objects or purposes of the corporation.
FOURTH: The total number of shares of stock which the corporation shall have
authority to issue is Ten Million (10,000,000) shares of common stock, of the
par value of One Dollar ($1.00) per share. The board of directors of the
corporation is expressly authorized to cause shares of common stock of the
corporation authorized herein to be issued in one or more series and to increase
or decrease the number of shares so authorized to be issued in any such series.
All shares of stock of the corporation of any class or series shall be
non-assessable.
<PAGE> 2
No holder of any shares or stock of the corporation of any class or series shall
be entitled as such, as a matter of right, to subscribe for or purchase any
shares of stock of the corporation of any class or series, whether now or
hereafter authorized or whether issued for cash, property or services or as a
dividend or otherwise, or to subscribe for or purchase any obligations, bonds,
notes, debentures, other securities or stock convertible into shares of stock of
the corporation of any class or series or carrying or evidencing any right to
purchase shares of stock of any class or series.
FIFTH: The name and mailing address of the incorporation are as follows:
NAME ADDRESS
Larry D. Armel 700 Harrison Street
Topeka, KS 66636
The number of directors of the corporation shall be fixed by or in the manner
provided in the bylaws. The names and mailing addresses of the persons who are
to serve as directors of the corporation until the first annual meeting of
stockholders or until their successors are elected and qualified are as follows:
NAME ADDRESS
John W. Henderson 3130 Shadow Lane
Topeka, Kansas 66604
Robert E. Jacoby 700 Harrison Street
Topeka, Kansas 66636
William R. Oberkrieser 700 Harrison Street
Topeka, Kansas 66636
John J. Schaff 4409 Holly Lane
Topeka, Kansas 66604
Willis A. Anton, Jr. 3616 York Way
Topeka, Kansas 66604
SIXTH: The corporation is to have perpetual existence.
SEVENTH: The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
EIGHTH: Elections of directors need not be by ballot unless the bylaws of the
corporation so provide.
NINTH: The bylaws of the corporation may from time to time be altered, amended
or repealed, or new bylaws may be adopted, in any of the following ways: (i) by
the holders of a majority of the outstanding shares of stock of the corporation
entitled to vote, or (ii) by a majority of the full board of directors and any
change so made by the stockholders may thereafter be further changed by a
majority of the directors; provided, however, that the power of the board of
directors to alter, amend or repeal bylaws, or to adopt new bylaws, may be
denied as to any bylaws or portion thereof by the stockholders if at the time of
enactment the stockholders shall so expressly provide.
<PAGE> 3
TENTH: The corporation may agree to the terms and conditions upon which any
director, officer, employee or agent accepts his office or position and in its
bylaws, by contract or in any other manner may agree to indemnify and protect
any director, officer, employee or agent of the corporation, or any person who
serves at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to the extent permitted by the laws of the State of Kansas and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated under said Act.
ELEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them or between this corporation
and its stockholders or any class of them, any court of competent jurisdiction
within the State of Kansas, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under the provisions of
section 104 of the General Corporation Code of Kansas or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
corporation under the provisions of section 98 of the General Corporation Code
of Kansas, may order a meeting of the creditors or class of creditors, or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors, or
of the stockholders or class of stockholders of this corporation, as the case
may be, agree to any compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization, if sanctioned by the
court to which the said application has been made, shall be binding on all the
creditors or class of creditors, or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
TWELFTH: Except as may be otherwise provided by statute, the corporation shall
be entitled to treat the registered holder of any shares of the corporation as
the owner of such shares and of all rights derived from such shares for all
purposes, and the corporation shall not be obligated to recognize any equitable
or other claim to or interest in such shares or rights on the part of any other
person, including, but without limiting the generality of the term "person," a
purchaser, pledgee, assignee or transferee of such shares or rights, unless and
until such person becomes the registered holder of such shares. The foregoing
shall apply whether or not the corporation shall have either actual or
constructive notice of the interest of such person.
THIRTEENTH: Meetings of stockholders may be held within or without the State of
Kansas, as the bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes of Kansas) outside the State
of Kansas at such place or places as may be designated from time to time by the
board of directors or in the bylaws of the corporation.
FOURTEENTH: The corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation; provided, however, any proposed
amendment, alteration, change or repeal of these Articles or the adoption of any
additional provision inconsistent with any provision of these Articles which
materially and adversely affect the rights of the holders of any particular
series of common stock as a series, shall not be effective unless approved by
the holders of a majority of the outstanding shares of common stock of such
series.
<PAGE> 4
The undersigned, for the purpose of forming a corporation under the General
Corporation Code of the State of Kansas, does hereby execute these Articles, and
does hereby declare and certify that this is his act and deed and the facts
herein stated are true, and accordingly has executed these Articles this 26th
day of May, 1977.
Larry D. Armel
------------------------------------
Larry D. Armel
STATE OF KANSAS )
)
COUNTY OF SHAWNEE )
BE IT REMEMBERED, that on this 26th day of May, 1977, before me, the
undersigned, a Notary Public in and for said County and State, personally
appeared Larry D. Armel, who duly acknowledged before me that he executed the
foregoing instrument.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official
seal the day and year last above written.
Janet M. Ladd
-------------------------------------------------
Notary Public in and for said County and State
(NOTARIAL SEAL)
My Commission expires September 3, 1980
<PAGE> 5
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SBL FUND, INC.
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
We, ROBERT F. JACOBY, president, and LARRY D. ARMEL, secretary, of SBL Fund,
Inc., a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee, Kansas, do hereby certify that pursuant to
authority expressly invested in the board of directors by the provisions of the
corporation's articles of incorporation, the board of directors of said
corporation at its first meeting duly convened and held on the 6TH day of June,
1977, adopted resolutions establishing three separate series of common stock of
the corporation and setting forth the preferences, rights, privileges and
restrictions of such three series, which resolutions provided in their entirety
as follows:
RESOLVED, that, pursuant to authority vested in the board of directors of the
corporation by its Articles of Incorporation, the corporation initially shall
issue its Common Stock, par value One Dollar per share, in the following three
series:
Series A Common Stock;
Series B Common Stock; and
Series C Common Stock
FURTHER RESOLVED, that the Corporation shall initially have the authority to
issue Two Million shares of Common Stock in each of the foregoing three series;
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of each such series shall be as follows:
1. Except as set forth below and as may be hereafter established by the board
of directors of the corporation all shares of the corporation, regardless of
series, shall be equal.
2. (a) Outstanding shares of each series shall represent a stockholder
interest in a particular fund of assets held by the corporation which
fund shall be invested and reinvested in accordance with policies and
objectives established by the board of directors.
(b) All cash and other property received by the corporation from the sale
of shares of a particular series, all securities and other property
held as a result of the investment and reinvestment of such cash and
other property, all revenues and income received or receivable with
respect to such cash, other property, investments and reinvestments,
and all proceeds derived from the sale, exchange, liquidation or other
disposition of any of the foregoing, shall be allocated to the series
to which they relate and held for the benefit of the stockholders
owning shares of such series.
<PAGE> 6
(c) All losses, liabilities and expenses of the corporation (including
accrued liabilities and expenses and such reserves as the board of
directors may determine are appropriate) shall be allocated and
charged to the series to which such loss, liability or expense
relates. Where any loss, liability or expense relates to more than one
series, the board of directors shall allocate the same between or
among such series pro rata based on the respective net asset values of
such series or on such other basis as the board of directors deem
appropriate.
(d) All allocations made hereunder by the board of directors shall be
conclusive and binding upon all stockholders and upon the corporation.
3. Each share of stock of a series shall have the same preferences, rights,
privileges and restrictions as each other share of stock of that series.
Each fractional share of stock of a series proportionately shall have the
same preferences, rights, privileges and restrictions as a whole share.
4. Dividends may be paid when, as and if declared by the board of directors
out of funds legally available therefor. Dividends shall be declared and
paid with respect to a particular series and shall be allocated to such
series. Stockholders of the same series shall share in dividends declared
and paid with respect to such series pro rata based on their ownership of
shares of such series. Whenever dividends are declared and paid with
respect to any series, the holders of shares of other series shall have no
rights in or to such dividends.
5. In the event of liquidation, stockholders of each series shall be entitled
to share in the assets of the corporation that are allocated to such series
and that are available for distribution to the stockholders of such series.
Liquidating distributions shall be made to the stockholders of each series
pro rata based on their share ownership of such series.
6. At all meetings of stockholders each stockholder of the corporation shall
be entitled to one vote in person or by proxy on each matter submitted to a
vote at such meeting for each share of common stock standing in his name on
the books of the corporation on the date, fixed in accordance with the
bylaws, for determination of stockholders entitled to vote at such
meetings. At all elections of directors each stockholder shall be entitled
to as many votes as shall equal the number of shares of stock multiplied by
the number of directors to be elected, and he may cast all of such votes
for a single director or may distribute them among the number to be noted
for, or any two or more of them as he may see fit. Notwithstanding the
foregoing, (i) if any matter is submitted to the stockholders which does
not affect the investment policies or objectives of all series, then only
stockholders of the affected series shall be entitled to vote and (ii) in
the event the Investment Company Act of 1940, as amended, or the rules and
regulations promulgated thereunder shall require a greater or different
vote than would otherwise be required herein or by the Articles of
Incorporation of the corporation, such greater or different voting
requirement shall also be satisfied.
7. Each stockholder of the corporation shall have the right to require the
corporation to purchase for cash part or all of the shares held by such
stockholder at a price per share equal to the per share net asset value of
such shares as determined by the board of directors of the corporation or
in accordance with procedures established by the board of directors and in
compliance with applicable statutes and regulations. Any shares of the
corporation purchased as a result of a stockholder exercising the right
granted in the immediately preceding sentence, shall, subject to filing
such instruments and documents as the laws of the State of Kansas may
require, upon such purchase automatically and without the necessity of
further action on the part of the board of directors or stockholders of the
corporation, be retired, and thereupon such shares shall be returned to the
status of authorized and unissued shares of
<PAGE> 7
common stock of the series to which they belong, and the capital of the
corporation shall be reduced by an amount equal to the par value of such
shares, and the surplus of the corporation shall be reduced by the amount
of cash paid by the corporation to such stockholder in excess of such par
value.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 16th day of June, 1977.
Robert E. Jacoby
------------------------------------------
Robert E. Jacoby, President
Larry D. Armel
------------------------------------------
Larry D. Armel, Secretary
[SEAL]
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
Be it remembered, that before me JANET M. LADD a Notary Public in and for the
County and State aforesaid, came ROBERT E. JACOBY, president, and LARRY D.
ARMEL, secretary, of SBL Fund, Inc., a Kansas Corporation, personally known to
me to be the persons who executed the foregoing instrument of writing as
president and secretary, respectively, and duly acknowledged the execution of
the same this 16th day of June, 1977.
Janet M. Ladd
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: Sept. 3, 1980
<PAGE> 8
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
SBL FUND, INC.
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
We, Everett S. Gille, President, and Larry D. Armel, Secretary of SBL Fund,
Inc., a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that at the
regular meeting of the board of directors of said corporation held on the 22nd
day of January, 1982, said board adopted resolutions setting forth the following
amendments to the Articles of Incorporation and declared their advisability, to
wit:
"RESOLVED, that the Articles of Incorporation of SBL Fund, Inc. be amended by
deleting Article FIRST in its entirety and by inserting, in lieu thereof, the
following new Article FIRST:
`FIRST: The name of the Corporation is SBL Fund.'
"RESOLVED, that the Articles of Incorporation of SBL Fund, Inc. be further
amended by deleting the first paragraph of Article FOURTH and by inserting in
lieu thereof, the following:
`FOURTH: The total number of shares of stock which the Corporation shall have
authority to issue is 500,000,000 shares of common stock, of the par value of
One Dollar ($1.00) per share. The board of directors of the corporation is
expressly authorized to cause shares of common stock of the corporation
authorized herein to be issued in one or more series and to increase or decrease
the number of shares so authorized to be issued in any such series.'
FURTHER RESOLVED, that the board of directors of this corporation hereby
declares the advisability of the foregoing amendments to the articles of
incorporation of this corporation and hereby recommends that the stockholders of
this corporation adopt said amendments.
FURTHER RESOLVED, that at the annual meeting of the stockholders of this
corporation to be held at the offices of the corporation in Topeka, Kansas, on
March 4, 1982, beginning at 10:00 a.m. on that day, the matter of the aforesaid
proposed amendments to the articles of incorporation of this corporation shall
be submitted to the stockholders entitled to vote thereon.
FURTHER RESOLVED, that in the event the stockholders of this corporation shall
approve and adopt the proposed amendments to the articles of incorporation of
this corporation as heretofore adopted and recommended by this board of
directors, the appropriate officers of this corporation be, and they hereby are,
authorized and directed, for and in behalf of this corporation, to make,
execute, verify, acknowledge and file or record in any and all appropriate
governmental offices any and all certificates and other instruments, and to take
any and all other action as may be necessary to effectuate the said proposed
amendments to the articles of incorporation of this corporation."
That thereafter, pursuant to said resolutions and in accordance with the bylaws
and the laws of the State of Kansas, said directors called a meeting of
stockholders for the consideration of said amendments and thereafter, pursuant
to said notice and in accordance with the statutes of the State of Kansas, on
the 4th day of March, 1982, said stockholders met and convened and considered
said proposed amendments.
<PAGE> 9
That at said meeting the stockholders entitled to vote did vote upon the
amendment to Article FIRST, and the majority of voting stockholders of the
corporation had voted for the proposed amendment certifying that the votes were
(Common Stock) 71,981 shares in favor of the proposed amendment and (Common
Stock) no shares against the amendment.
That said amendments were duly adopted in accordance with the provisions of
K.S.A. 17-6602, as amended.
That the capital of said corporation will not be reduced under or by reason of
said amendments.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of said
corporation, this 9th day of March, 1982.
[Seal]
Everett S. Gille
------------------------------------------
Everett S. Gille, President
Larry D. Armel
------------------------------------------
Larry D. Armel, Secretary
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
Be it remembered, that before me, Lois J. Hedrick, a Notary Public in and for
the County and State aforesaid, came Everett S. Gille, President, and Larry D.
Armel, Secretary, of SBL Fund, Inc., a corporation, personally known to me to be
the persons who executed the foregoing instrument of writing as president and
secretary, respectively, and duly acknowledged the execution of the same this
9th day of March, 1982.
Lois J. Hedrick
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: January 8, 1984.
Submit in duplicate
A fee of $20.00 must accompany this form.
<PAGE> 10
CERTIFICATE OF CHANGE OF DESIGNATION OF COMMON STOCK OF SBL FUND
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
We, Everett S. Gille, President, and Larry D. Armel, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to
authority expressly invested in the board of directors by the corporation's
articles of incorporation, the board of directors of said corporation, by
Statement of Unanimous Consent dated March 7, 1983, adopted resolutions
increasing the number of shares authorized to be issued in the three separate
previously-designated series of common stock of the corporation, which
resolutions are as follows:
WHEREAS, at a meeting on the sixth day of June, 1977, the board of directors of
this corporation adopted resolutions establishing three separate series of
common stock of the corporation, setting forth the preferences, rights,
privileges and restrictions of said three series, and designating the number of
shares to be initially issued in each of said three series; and
WHEREAS, this board of directors wishes to increase the number of shares to be
issued in each of said three series;
NOW, THEREFORE, BE IT RESOLVED, that this corporation shall have the authority
to issue ten million shares of common stock in each previously designated Series
A, Series B, and Series C, and that the preferences, rights, privileges and
restrictions of the shares of each such series shall be those adopted by the
board of directors on June 6, 1977, and contained in the Certificate of
Designation of Common Stock executed and filed with the Secretary of State of
the State of Kansas on June 16, 1977.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized empowered and directed for and on behalf of this
corporation to prepare, execute and file with the Secretary of State of the
State of Kansas a certificate reflecting the aforementioned increase in the
number of shares authorized to be issued in each of the three series of common
stock, and to do any and all other necessary and appropriate acts and things in
connection therewith.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 8th day of March, 1983.
Everett S. Gille
------------------------------------------
Everett S. Gille, President
(Corporate Seal)
Larry D. Armel
------------------------------------------
Larry D. Armel, Secretary
<PAGE> 11
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
Be it remembered, that before me, Lois J. Hedrick, a Notary Public in and for
the County and State aforesaid, came EVERETT S. GILLE, President, and LARRY D.
ARMEL, Secretary, of SBL Fund, a Kansas corporation, personally known to me to
be the persons who executed the foregoing instrument of writing as president and
secretary, respectively, and duly acknowledged the execution of the same this
8th day of March, 1983.
Lois J. Hedrick
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires January 8, 1984.
<PAGE> 12
CERTIFICATE OF CHANGE OF DESIGNATION OF COMMON STOCK OF SBL FUND
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
We, Everett S. Gille, President, and Lois J. Hedrick, Assistant Secretary, of
SBL Fund, a corporation organized and existing under the laws of the State of
Kansas, whose registered office is the Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly invested in the board of directors by the corporation's
articles of incorporation, the board of directors of said corporation, by
Statement of Unanimous Consent dated February 1, 1984, adopted resolutions
increasing the number of shares authorized to be issued in the three separate
previously-designated series of common stock of the corporation, which
resolutions are as follows:
WHEREAS, at a meeting on the sixth day of June, 1977, the board of directors of
this corporation adopted resolutions establishing three separate series of
common stock of the corporation, setting forth the preferences, rights,
privileges and restrictions of said three series, and designating the number of
shares to be initially issued in each of said three series; and on March 8,
1983, the board of directors increased the number of shares designated for
public sale of the three separate series; and
WHEREAS, this board of directors wishes to further increase the number of shares
to be issued in each of said three series;
NOW, THEREFORE, BE IT RESOLVED, that this corporation shall have the authority
to issue fifty million shares of common stock in each previously designated
Series A, Series B, and Series C, and that the preferences, rights, privileges
and restrictions of the shares of each such series shall be those adopted by the
board of directors on June 6, 1977, and contained in the Certificate of
Designation of Common Stock executed and filed with the Secretary of State of
the State of Kansas on June 16, 1977.
FURTHER RESOLVED, that, the appropriate officers of this corporation be, and
they hereby are fully authorized, empowered and directed, for and on behalf of
this corporation, to prepare, execute and file with the Secretary of State of
the State of Kansas a certificate reflecting the aforementioned increase in the
number of shares authorized to be issued in each of the three series of common
stock, and to do any and all other necessary and appropriate acts and things in
connection therewith.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 3rd day of February, 1984.
Everett S. Gille
------------------------------------------
Everett S. Gille, President
(Corporate Seal)
Lois J. Hedrick
------------------------------------------
Lois J. Hedrick, Assistant Secretary
<PAGE> 13
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, a Notary Public in and for the County and
State aforesaid, came EVERETT S. GILLE, President, and LOIS J. HEDRICK,
Assistant Secretary, of SBL Fund, a Kansas corporation, personally known to me
to be the persons who executed the foregoing instrument of writing as president
and secretary, respectively, and duly acknowledged the execution of the same
this 3rd day of February, 1984.
Gloria J. Sanders
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: April 11, 1986
<PAGE> 14
CERTIFICATE OF
DESIGNATION OF SERIES
OF COMMON STOCK
OF
SBL FUND
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
We, Everett S. Gille, President, and Tad Patton, Assistant Secretary, of SBL
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is the Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to the authority expressly vested in the board of directors by the provisions of
the corporation's articles of incorporation, the board of directors of said
corporation at its regular meeting duly convened and held on the 18th day of
November, 1983, adopted resolutions establishing the fourth separate series of
common stock of the corporation and setting forth the preferences, rights,
privileges and restrictions of such series, which resolutions provided in their
entirety as follows:
RESOLVED, that, pursuant to the authority vested in the board of directors of
the corporation by its articles of incorporation, the corporation shall be
authorized, subject to the approval of appropriate regulatory authorities, to
offer Series D common stock, par value $1.00 per share, in addition to its
presently offered series of common stock (Series A, Series B and Series C).
FURTHER RESOLVED, that, the corporation shall initially have the authority to
issue 50 million shares of Series D common stock.
FURTHER RESOLVED, that, the preferences, rights, privileges, and restrictions of
the shares of each of the Fund's series of common stock, as set forth in the
minutes of the June 6, 1977 meeting of this board of directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective and to create the additional series of
common stock of the corporation contemplated herein.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 23rd day of March, 1984.
Everett S. Gille
------------------------------------------
EVERETT S. GILLE, President
Tad Patton
------------------------------------------
TAD PATTON, Assistant Secretary
<PAGE> 15
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
Be it remembered, that before me, VICKIE JACQUES, a Notary Public in and for the
County and State aforesaid, came EVERETT S. GILLE, President, and TAD PATTON,
Assistant Secretary, of SBL Fund, a Kansas corporation, personally known to me
to be the persons who executed the foregoing instrument of writing as president
and assistant secretary, respectively, and duly acknowledged the execution of
the same this 23rd day of March, 1984.
Vickie Jacques
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: June 3, 1986
<PAGE> 16
CERTIFICATE OF
DESIGNATION OF SERIES
OF COMMON STOCK
OF
SBL FUND
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
We, Everett S. Gille, President, and Barbara W. Rankin, Secretary, of SBL Fund,
a corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at its regular meeting duly convened and held on the 9th day of
November, 1984, adopted resolutions establishing the fifth separate series of
common stock of the corporation and setting forth the preferences, rights,
privileges and restrictions of such series, which resolutions provided in their
entirety as follows:
RESOLVED, that, pursuant to the authority vested in the Board of Directors of
the corporation by its articles of incorporation, the corporation shall be
authorized, subject to the approval of appropriate regulatory authorities, to
offer Series E common stock, par value $1.00 per share, in addition to its
presently offered series of common stock (Series A, Series B, Series C, and
Series D).
FURTHER RESOLVED, that, the Corporation shall initially have the authority to
issue 50 million shares of Series E common stock.
FURTHER RESOLVED, that, the preferences, rights, privileges, and restrictions of
the shares of each of the Fund's series of common stock, as set forth in the
minutes of the June 6, 1977 meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective and to create the additional series of
common stock of the corporation contemplated herein.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 23rd day of July, 1985.
Everett S. Gille
------------------------------------------
EVERETT S. GILLE, President
Barbara W. Rankin
------------------------------------------
Barbara W. Rankin, Secretary
<PAGE> 17
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
Be it remembered, that before me, LOIS J. HEDRICK, a Notary Public in and for
the County and State aforesaid, came EVERETT S. GILLE, President, and BARBARA W.
RANKIN, Secretary, of SBL Fund, a Kansas corporation, personally known to me to
be the persons who executed the foregoing instrument of writing as president and
secretary, respectively, and duly acknowledged the execution of the same this
23rd day of July, 1985.
Lois J. Hedrick
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: June 1, 1988.
<PAGE> 18
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
SBL FUND
We, Michael J. Provines, President, and Amy J. Lee, Secretary of the above named
corporation, a corporation organized and existing under the laws of the State of
Kansas, do hereby certify that at a meeting of the board of directors of said
corporation, the board adopted a resolution setting forth the following
amendment to the Articles of Incorporation and declaring its advisability;
"A director shall not be personally liable to the corporation or to its
stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this sentence shall not eliminate nor limit the
liability of a director:
A. for any breach of his or her duty of loyalty to the corporation or to
its stockholders;
B. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
C. for an unlawful dividend, stock purchase or redemption under the
provisions of Kansas Statutes Annotated (K.S.A.) 17-6424 and
amendments thereto; or
D. for any transaction from which the director derived an improper
personal benefit."
We further certify that thereafter, pursuant to said resolution, and in
accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, the stockholders
convened and considered the proposed amendment.
We further certify that at a meeting a majority of the stockholders entitled to
vote voted in favor of the proposed amendment.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
We further certify that the capital of said corporation will not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of said
corporation this 19th day of April, 1988.
Michael J. Provines
------------------------------------------
Michael J. Provines, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
<PAGE> 19
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, a Notary Public in and for the aforesaid
county and state, personally appeared Michael J. Provines, President, and Amy J.
Lee, Secretary, of the corporation named in this document, who are known to be
to be the same persons who executed the foregoing certificate, and duly
acknowledged the execution of the same this 19th day of April, 1988.
Connie Brungardt
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: November 30, 1991
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE, WITH $20 FILING FEE TO:
Secretary of State
2nd Floor, State Capitol
Topeka, KS 66612-1594
(913) 296-2236
<PAGE> 20
CERTIFICATE OF CHANGE OF DESIGNATION OF COMMON STOCK OF SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
We, Michael J. Provines, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, whose
registered office is Security Benefit Life Building, 700 Harrison, Topeka,
Shawnee County, Kansas, do hereby certify that pursuant to the authority
expressly invested in the board of directors by the corporation's articles of
incorporation, the board of directors of said corporation by Statement of
Unanimous Consent dated October 13, 1989, adopted resolutions increasing the
number of shares authorized to be issued in three separate previously-designated
series of common stock of the corporation, which resolutions are as follows:
WHEREAS, at a meeting on the sixth day of June, 1977, the board of directors of
this corporation adopted resolutions establishing three separate series of
common stock of the corporation, setting forth the preferences, rights,
privileges and restrictions of said three series, and designating the number of
shares to be initially issued in each of said three series; and on March 8,
1983, and on February 3, 1984, the board of directors increased the number of
shares designated for public sale to Series A, Series B and Series C; and
WHEREAS, this board of directors wishes to further increase the number of shares
to be issued in each of said Series;
NOW, THEREFORE, BE IT RESOLVED, that this corporation shall have the authority
to issue one hundred fifty million shares of common stock in each previously
designated Series A and Series C and shall have the authority to issue one
hundred million shares of common stock in the previously designated Series B,
and that the preferences, rights, privileges and restrictions of the shares of
each such series shall be those adopted by the board of directors on June 6,
1977, and contained in the Certificate of Designation of Common Stock executed
and filed with the Secretary of State of the State of Kansas on June 16, 1977.
FURTHER RESOLVED, that the appropriate officers of this corporation be, and they
hereby are, fully authorized, empowered and directed, for and on behalf of this
corporation, to prepare, execute and file with the Secretary of State of the
State of Kansas a certificate reflecting the aforementioned increase in the
number of shares authorized to be issued in each of the three series of common
stock, and to do any and all other necessary and appropriate acts and things in
connection therewith.
<PAGE> 21
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 19th day of October, 1989.
Michael J. Provines
------------------------------------------
Michael J. Provines, President
(Corporate Seal)
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE )
Be it remembered, that before me, Coleen C. Hoffmeister, a Notary Public in and
for the County and State aforesaid, came Michael J. Provines, President, and Amy
J. Lee, Secretary, of SBL Fund, a Kansas corporation, personally known to me to
be the persons who executed the foregoing instrument of writing as president and
secretary, respectively, and duly acknowledged the execution of the same this
19th day of October, 1989.
Coleen C. Hoffmeister
------------------------------------------
Notary Public
My Commission Expires: May 19, 1990
<PAGE> 22
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
We, Michael J. Provines, President and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at its regular meeting duly convened and held on the 24th day of
July, 1992, adopted resolutions establishing the seventh separate series of
common stock of the corporation and setting forth the preferences, rights,
privileges and restrictions of such series, which resolutions provided in their
entirety as follows:
RESOLVED, that, pursuant to the authority vested in the Board of Directors of
the corporation by its Articles of Incorporation, the corporation shall be
authorized, subject to the approval of appropriate regulatory authorities, to
offer Series J common stock, par value $1.00 per share, in addition to its
presently offered series of common stock (Series A, Series B, Series C, Series
D, Series E and Series S).
FURTHER RESOLVED, that, the corporation shall initially have the authority to
issue 50 million shares of Series J common stock.
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the Fund's series of common stock, as set forth in the
minutes of the June 6, 1977, meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective and to create the additional series of
common stock of the corporation contemplated therein.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of the
corporation this 24th day of September 1992.
Michael J. Provines
------------------------------------------
MICHAEL J. PROVINES, President
Amy J. Lee
------------------------------------------
AMY J. LEE, Secretary
<PAGE> 23
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Peggy S. Avey, a Notary Public in and for the
County and State aforesaid, came MICHAEL J. PROVINES, President, and AMY J. LEE,
Secretary, of SBL Fund, a Kansas Corporation, personally known to me to be the
persons who executed the foregoing instrument of writing as president and
secretary, respectively, and duly acknowledged the execution of the same this
24th day of September 1992.
Peggy S. Avey
------------------------------------------
Notary Public
My Commission Expires: November 22, 1992
<PAGE> 24
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
OF
SBL FUND
We, Michael J Provines, President , and Amy J. Lee, Secretary of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is at 700 Harrison, in the city of Topeka, county of
Shawnee, 66636, Kansas, do hereby certify that the regular meeting of the Board
of Directors of said corporation, held on the 30th day of April, 1990, said
board adopted a resolution setting forth the following amendment to the Articles
of Incorporation and declaring its advisability;
SEE ATTACHED CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
We further certify that thereafter, pursuant to said resolution, and in
accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, on the 30th day of
April, 1990, said stockholders convened and considered the proposed amendment.
We further certify that at a meeting a majority of the stockholders entitled to
vote voted in favor of the proposed amendment, and that the votes were
26,489,283 shares in favor of the proposed amendment and 1,762,215 shares
against the amendment.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
We further certify that the capital of said corporation will not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of said
corporation this 14th day of May, 1990.
Michael J. Provines
------------------------------------------
Michael J. Provines, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
<PAGE> 25
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered that before me, a Notary Public in and for the aforesaid county
and state, personally appeared: Michael J. Provines, President, and Amy J. Lee,
Secretary, of SBL FUND, a corporation, who are known to me to be the same
persons who executed the foregoing Certificate of Amendment to Articles of
Incorporation, duly acknowledged the execution of the same this 14th day of May,
1990.
Connie Brungardt
------------------------------------------
Notary Public
My Commission Expires: November 30, 1991.
THIS FORM MUST BE SUBMITTED TO THIS OFFICE IN DUPLICATE.
THE FILING FEE OF $20 MUST ACCOMPANY THIS DOCUMENT.
MAIL THIS DOCUMENT, WITH FEE, TO:
Secretary of State
Capitol, 2nd Floor
Topeka, KS 66612
(913) 296-2236
<PAGE> 26
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
We, Michael J Provines, President , and Amy J. Lee, Secretary of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation, at its regular meeting duly convened and held on the 30th day of
April, 1990, adopted a resolution setting forth the following amendment to the
Articles of Incorporation and declared its advisability to wit:
RESOLVED, that the Articles of Incorporation of SBL Fund, Inc. be further
amended by deleting the first paragraph of Article FOURTH and by inserting in
lieu thereof, the following:
"FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is 1,000,000,000 shares of common stock,
of the par value of One Dollar ($1) per share. The Board of
Directors of the corporation is expressly authorized to cause
shares of common stock of the corporation authorized herein to be
issued in one or more series and to increase or decrease the
number of shares so authorized to be issued in any such series'.
RESOLVED, that, pursuant to the authority vested in the Board of Directors of
the corporation by its Articles of Incorporation, the corporation shall be
authorized, subject to the approval of appropriate regulatory authorities, to
offer Series D common stock, par value $1 per share, in addition to its
presently offered series of common stock (Series A, Series B and Series C).
FURTHER RESOLVED, that, the corporation shall initially have the authority to
issue 50 million shares of Series D common stock.
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the Fund's series of common stock, as set forth in the
minutes of the June 6, 1977, meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolution to become effective.
<PAGE> 27
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of the
Corporation this 14th day of May, 1990.
Michael J. Provines
------------------------------------------
Michael J. Provines, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Connie Brungardt, a Notary Public in and for
the county and state aforesaid, came Michael J. Provines, President, and Amy J.
Lee, Secretary, of SBL Fund, a Kansas corporation, personally known to me to be
the persons who executed the foregoing instrument of writing as President and
Secretary respectively and duly acknowledged the execution, of the same this
14th day of May, 1990.
Connie Brungardt
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: November 30, 1991.
<PAGE> 28
CERTIFICATE OF
DESIGNATION OF SERIES
OF COMMON STOCK OF
SBL FUND
STATE OF KANSAS )
) ss
COUNTY OF SHAWNEE )
We, John D. Cleland, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a special meeting duly convened and held on the 3rd day of April,
1995, adopted resolutions (i) establishing three new series of common stock in
addition to those eight series of common stock currently being issued by the
corporation, and (ii) allocating the corporation's authorized capital stock
among the eleven separate series of common stock of the corporation. Resolutions
were also adopted which reaffirmed the preferences, rights, privileges and
restrictions of the separate series of stock of SBL Fund, which resolutions are
provided in their entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of three new
series of common stock of SBL Fund in addition to the eight separate series
presently issued by the fund designated as Series A, Series B, Series C, Series
D, Series E, Series S, Series J and Series K;
WHEREAS, the Board of Directors wishes to reallocate the 5,000,000,000 shares of
authorized capital stock among the series.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the Corporation are hereby
directed and authorized to establish three new series of the SBL Fund designated
as Series M, Series N and Series O.
FURTHER RESOLVED, that, officers of the corporation are hereby directed and
authorized to allocate the Fund's 5,000,000,000 shares of authorized capital
stock as follows: 1,000,000,000 $1.00 par value shares to each of the Series A,
B, C, and D, 250,000,000 $1.00 par value shares to each of the Series E, S, and
J; 50,000,000 $1.00 par value shares to each of Series K, M, N and O; and
50,000,000 shares shall remain unallocated.
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the corporation's series of common stock, as set forth in
the minutes of the June 6, 1977, meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting.
<PAGE> 29
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
Corporation this 3rd day of April, 1995.
John D. Cleland
------------------------------------------
JOHN D. CLELAND, President
Amy J. Lee
------------------------------------------
AMY J. LEE, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Connie Brungardt, a Notary Public in and for
the County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of SBL Fund, a Kansas Corporation, personally known to me to be the
persons who executed the foregoing instrument of writing as President and
Secretary, respectively, and duly acknowledged the execution of the same this
3rd day of April, 1995.
Connie Brungardt
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: November 30, 1998.
<PAGE> 30
CERTIFICATE OF DESIGNATIONS
OF COMMON STOCK OF
SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
We, John D. Cleland, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
Corporation at a special meeting duly convened and held on the 2nd day of
February, 1996, adopted resolutions authorizing the corporation to authorize the
issuance of an indefinite number of shares of capital stock of each of the
eleven series of common stock of the corporation. Resolutions were also adopted
which reaffirmed the preferences, rights, privileges and restrictions of the
separate series of stock of SBL Fund, which resolutions are provided in their
entirety as follows:
WHEREAS, K.S.A. 17-6602 has been amended to allow the board of directors of a
corporation that is registered as an open-end investment company under the
Investment Company Act of 1940 (the "1940 Act") to approve, by resolution, an
amendment of the corporation's Articles of Incorporation, to allow the issuance
of an indefinite number of shares of the capital stock of the corporation;
WHEREAS, the corporation is registered as an open-end investment company under
the 1940 Act; and
WHEREAS, the Board of Directors desire to authorize the issuance of an
indefinite number of shares of capital stock of each of the eleven series of
common stock of the corporation;
NOW THEREFORE BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to issue an indefinite number of $1.00 par value shares
of capital stock of each series of the corporation, including: Series A, Series
B, Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series
N, and Series O;
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the corporation's series of common stock, as set forth in
the minutes of the June 6, 1977, meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting; and
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
<PAGE> 31
The undersigned do hereby certify that the foregoing amendment to the
corporation's Articles of Incorporation has been duly adopted in accordance with
the provisions of K.S.A. 17-6602.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 2nd day of February, 1996.
John D. Cleland
------------------------------------------
John D. Cleland, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, L. Charmaine Lucas, a Notary Public in and for
the County and State aforesaid, came John D. Cleland, President, and Amy J. Lee,
Secretary, of SBL Fund, a Kansas corporation, personally known to me to be the
persons who executed the foregoing instrument of writing as President and
Secretary, respectively, and duly acknowledged the execution of the same this
2nd day of February, 1996.
L. Charmaine Lucas
------------------------------------------
Notary Public
My Commission Expires: 04/01/98
<PAGE> 32
CERTIFICATE OF
CHANGE OF DESIGNATION
OF COMMON STOCK OF
SBL FUND
STATE OF KANSAS )
)ss
COUNTY OF SHAWNEE )
We, John D. Cleland, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at its regular meeting duly convened and held on the 21st day of
October, 1994, adopted resolutions allocating the corporation's authorized
capital stock among the seven separate series of common stock of the
corporations. Resolutions were also adopted which reaffirmed the preferences,
rights, privileges and restrictions of the separate series of stock of SBL Fund,
which resolutions are provided in their entirety as follows:
WHEREAS SBL Fund issues its common stock in seven separate series designated as
Series A, Series B, Series C, Series D, Series E, Series S, and Series J;
WHEREAS, the corporation's shareholders will consider an amendment to the
corporation's Articles of Incorporation to increase the authorized capital stock
of the corporation from 1,000,000,000 to 5,000,000,000 shares, at a meeting of
shareholders to be held December 21, 1994; and
WHEREAS, upon approval by shareholders of the proposed amendment to the
corporation's articles of incorporation, the Board of Directors wishes to
reallocate the 5,000,000,000 shares of authorized capital stock among the
series.
NOW, THEREFORE, BE IT RESOLVED, that upon approval by shareholders of an
amendment to the articles of incorporation increasing the corporation's
authorized capital stock from 1,000,000,000 to 5,000,000,000 shares, the
officers of the corporation are hereby directed and authorized to allocate the
Fund's authorized capital stock as follows: 100,000,000 $1.00 par value shares
to each of the Series A, B, C and D; and 250,000,000 $1.00 par value shares to
each of the Series E, S, and J.
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the corporation's series of common stock, as set forth in
the minutes of the June 6, 1977, meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
<PAGE> 33
We hereby certify that in accordance with the by-laws of the corporation and the
laws of the State of Kansas, the Board of Directors called a meeting of
stockholders for consideration of the proposed amendment to the articles of
incorporation, and thereafter, pursuant to notice and in accordance with the
statutes of the State of Kansas, the stockholders convened and considered the
proposed amendment. We further certify that at the meeting a majority of the
stockholders entitled to vote voted in favor of the proposed amendment which was
duly adopted in accordance with the provisions of K.S.A. 17-66602, as amended.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 21st day of December, 1994.
John D. Cleland
------------------------------------------
JOHN D. CLELAND, President
Amy J. Lee
------------------------------------------
AMY J. LEE, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Judith M. Ralston, a Notary Public in and fore
the County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of SBL Fund, a Kansas corporation, personally known to me to be the
persons who executed the foregoing instrument of writing as President and
Secretary, respectively, and duly acknowledged the execution of the same this
21st day of October, 1994.
Judith M. Ralston
------------------------------------------
Notary Public
My Commission Expires: January 1, 1995
<PAGE> 34
CERTIFICATE OF
DESIGNATION OF SERIES
OF COMMON STOCK OF
SBL FUND
STATE OF KANSAS )
) ss
COUNTY OF SHAWNEE )
We, Michael J. Provines, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a special meeting duly convened and held on the 15th day of
February, 1991, adopted resolutions establishing the sixth separate series of
common stock of the corporation and setting forth the preferences, rights,
privileges and restrictions of such series, which resolutions provided in their
entirety as follows:
RESOLVED, that, pursuant to the authority vested in the Board of Directors of
the corporation by its Articles of Incorporation, the corporation shall be
authorized, subject to the approval of the appropriate regulatory authorities,
to offer Series S common stock, par value $1.00 per share, in addition to its
presently offered series of common stock (Series A, Series B, Series C, Series
D, and Series E).
FURTHER RESOLVED, that, the Corporation shall initially have the authority to
issue 50 million shares of Series S common stock.
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the Fund's series of common stock, as set forth in the
minutes of the June 6, 1977, meeting of this Board of Directors, are hereby
reaffirmed and incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective, and to create the additional series
in common stock of the corporation contemplated therein.
<PAGE> 35
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 26th day of February, 1991.
Michael J. Provines
------------------------------------------
MICHAEL J. PROVINES, President
Amy J. Lee
------------------------------------------
AMY J. LEE, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Judith M. Ralston, a Notary Public in and for
the County and State aforesaid, came MICHAEL J. PROVINES, President, and AMY J.
LEE, Secretary, of SBL Fund, a Kansas corporation, personally known to me to be
the persons who executed the foregoing instrument of writing as President and
Secretary, respectively, and duly acknowledged the execution of the same this
25th day of February, 1991.
Judith M. Ralston
------------------------------------------
Notary Public
My Commission Expires: January 1, 1995
<PAGE> 36
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
SBL FUND
We, John D. Cleland, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, do
hereby certify that at a meeting of the Board of Directors of said Corporation,
the board adopted a resolution setting forth the following amendment to the
Articles of Incorporation and declaring its advisability:
See attached amendment
We further certify that thereafter, pursuant to said resolution, and in
accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, the stockholders
convened and considered the proposed amendment.
We further certify that at the meeting a majority of the stockholders entitled
to vote, voted in favor of the proposed amendment.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of said
Corporation this 21st day of December, 1994.
John D. Cleland
------------------------------------------
John D. Cleland, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
<PAGE> 37
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
BE IT REMEMBERED that before me, a Notary Public in and for the aforesaid county
and state, personally appeared John C. Cleland, President, and Amy J. Lee,
Secretary, of SBL Fund, who are known to me to be the same persons who executed
the foregoing certificate, and duly acknowledged the execution of the same this
21st day of December, 1994.
Judith M. Ralston
------------------------------------------
Notary Public
My Commission Expires January 1, 1995.
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE, WITH $20 FILING FEE TO:
Secretary of State
2nd Floor, State Capitol
Topeka, KS 66612-1594
(913) 296-4564
<PAGE> 38
SBL FUND, INC.
The Board of Directors of SBL Fund, Inc. recommends that the Articles of
Incorporation be amended by deleting the first paragraph of Article Fourth and
by inserting, in lieu thereof, the following new Article:
FOURTH: The total number of shares which the corporation shall have authority to
issue shall be (5,000,000,000) shares of common stock, of the par value of one
dollar ($1.00) per share. The Board of Directors of the corporation is expressly
authorized to cause shares of common stock of the corporation authorized herein
to be issued in one or more series and to increase or decrease the number of
shares so authorized to be issued in any such series.
<PAGE> 39
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
SBL FUND
We, John D. Cleland, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, do
hereby certify that at a regular meeting of the Board of Directors of said
corporation, held on the 2nd day of February, 1996, the board adopted a
resolution setting forth the following amendment to the Articles of
Incorporation and declaring its advisability:
RESOLVED
The Board of Directors of SBL Fund recommends that the Articles of Incorporation
be amended by deleting the first paragraph of Article Fourth and by inserting,
in lieu thereof, the following new Article:
FOURTH: The Corporation shall have authority to issue an indefinite number
of shares of common stock, of the par value of one dollar ($1.00)
per share. The board of directors of the Corporation, is expressly
authorized to cause shares of common stock of the Corporation
authorized herein to be issued in one or more series and to
increase or decrease the number of shares so authorized to be
issued in any such series.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of said
corporation this 2nd day of February, 1996.
John D. Cleland
------------------------------------------
John D. Cleland, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
[SEAL]
<PAGE> 40
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
BE IT REMEMBERED, that before me, L. Charmaine Lucas, a Notary Public in and for
the aforesaid county and state, personally appeared John D. Cleland, President
and Amy J. Lee, Secretary, of SBL Fund who are known to me to be the same
persons who executed the foregoing certificate, and duly acknowledged the
execution of the same this 2nd day of February, 1996.
L. Charmaine Lucas
------------------------------------------
Notary Public
My Commission Expires: 04/01/98
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE WITH $20 FILING FEE TO:
Secretary of State
2nd Floor, State Capital
Topeka, KS 66612-1594
(913) 296-4564
<PAGE> 41
CERTIFICATE OF
DESIGNATION OF SERIES
OF COMMON STOCK OF
SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
We, John D. Cleland, President, and Amy J. Lee, Secretary, of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is the Security Benefit Life Building, 700 Harrison
Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant to the
authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 3rd day of May, 1996,
adopted resolutions (i) establishing a new series of common stock in addition to
those eleven series of common stock currently being issued by the corporation,
and (ii) allocating the corporation's authorized capital stock among the twelve
separate series of common stock of the corporation. Resolutions were also
adopted which for the new series set forth and for the existing eleven,
reaffirmed the preferences, rights, privileges and restrictions of the separate
series of stock of SBL Fund, which resolutions are provided in their entirety as
follows:
WHEREAS, the Board of Directors has approved the establishment of a new series
of common stock of SBL Fund in addition to the eleven separate series of common
stock presently issued by the fund designated as Series A, Series B, Series C,
Series D, Series E, Series S, Series J, Series K, Series M, Series N, and Series
O; and
WHEREAS, the Board of Directors desire to authorize the issuance of an
indefinite number of shares of capital stock of each of the twelve series of
common stock of the corporation.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the Corporation are hereby
directed and authorized to establish a new series of the SBL Fund designated as
Series P.
FURTHER RESOLVED, that, officers of the corporation are hereby directed and
authorized to issue an indefinite number of $1.00 par value shares of capital
stock of each series of the corporation, which consist of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O, and Series P.
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the corporation's series of common stock, as set forth in
the minutes of the June 6, 1977 meeting of this Board of Directors, are hereby
reaffirmed into the minutes of this meeting.
<PAGE> 42
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
Corporation this 13th day of May, 1996.
John D. Cleland
------------------------------------------
JOHN D. CLELAND, President
Amy J. Lee
------------------------------------------
AMY J. LEE, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Jana R. Selley, a Notary Public in and for the
County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of the SBL Fund, a Kansas corporation, personally known to me to be
the persons who executed the foregoing instrument of writing as President and
Secretary, respectively, and duly acknowledged the execution of the same this
13th day of May, 1996.
Jana R. Selley
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: June 14, 1996.
<PAGE> 43
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is Security Benefit Life Building, 700 Harrison Street,
Topeka, Shawnee County, Kansas, do hereby certify that pursuant to authority
expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 7th day of February,
1997, adopted resolutions (i) establishing a new series of common stock in
addition to those twelve series of common stock currently being issued by the
corporation, and (ii) allocating the corporation's authorized capital stock
among the thirteen separate series of common stock of the corporation.
Resolutions were also adopted, which for the new series set forth and for the
existing twelve, reaffirmed the preferences, rights, privileges and restrictions
of separate series of stock of SBL Fund, which resolutions are provided in their
entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of a new series
of common stock of SBL Fund in addition to the twelve separate series of common
stock presently issued by the fund designated as Series A, Series B, Series C,
Series D, Series E, Series S, Series J, Series K, Series M, Series N, Series O,
and Series P; and
WHEREAS, the Board of Directors desires to authorize the issuance of an
indefinite number of shares of capital stock of each of the thirteen series of
common stock of the corporation.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to establish a new series of the SBL Fund designated as
Series V.
FURTHER RESOLVED, that, the officers of the corporation are hereby directed and
authorized to issue an indefinite number of $1.00 par value shares of capital
stock of each series of the corporation, which consist of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O, Series P, and Series V.
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of the corporation's series of common stock, as set forth in the
minutes of the June 6, 1977 meeting of this Board of Directors, are hereby
reaffirmed into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
<PAGE> 44
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 12th day of March, 1997.
JOHN D. CLELAND
------------------------------------------
John D. Cleland, President
AMY J. LEE
------------------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, L. Charmaine Lucas, a Notary Public in
and for the County and State aforesaid, came JOHN D. CLELAND, President, and AMY
J. LEE, Secretary, of the SBL Fund, a Kansas corporation, personally known to me
to be the persons who executed the foregoing instrument of writing as President
and Secretary, respectively, and duly acknowledged the execution of the same
this 12th day of March, 1997.
L. CHARMAINE LUCAS
------------------------------------------
Notary Public
My commission expires 04/01/98
--------------------------
<PAGE> 45
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SBL FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
We, John D. Cleland, President, and Amy J. Lee, Secretary of SBL Fund, a
corporation organized and existing under the laws of the State of Kansas, and
whose registered office is Security Benefit Life Building, 700 Harrison Street,
Topeka, Shawnee County, Kansas, do hereby certify that pursuant to authority
expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 25th day of July, 1997,
adopted resolutions (i) establishing a new series of common stock in addition
to those thirteen series of common stock currently being issued by the
corporation, and (ii) allocating the corporation's authorized capital stock
among the fourteen separate series of common stock of the corporation.
Resolutions were also adopted, which for the new series set forth and for the
existing thirteen, reaffirmed the preferences, rights, privileges and
restrictions of separate series of stock of SBL Fund, which resolutions are
provided in their entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of a new series
of common stock of SBL Fund in addition to the thirteen separate series of
common stock presently issued by the fund designated as Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O, Series P and Series V; and
WHEREAS, the Board of Directors desires to authorize the issuance of an
indefinite number of shares of capital stock of each of the fourteen series of
common stock of the corporation.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation are
hereby directed and authorized to establish a new series of the SBL Fund
designated as Series X.
FURTHER RESOLVED, that, the officers of the corporation are hereby directed and
authorized to issue an indefinite number of $1.00 par value shares of capital
stock of each series of the corporation, which consist of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O, Series P, Series V and Series X.
FURTHER RESOLVED, that the preferences, rights, privileges and
restrictions of the shares of the corporation's series of common stock, as set
forth in the minutes of the June 6, 1977 meeting of this Board of Directors,
are hereby reaffirmed into the minutes of this meeting.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and
they hereby are, authorized and directed to take such action as may be
necessary under the laws of the State of Kansas or as they deem appropriate to
cause the foregoing resolutions to become effective.
<PAGE> 46
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 15th day of September, 1997.
John D. Cleland
---------------------------
John D. Cleland, President
Amy J. Lee
---------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
Be it remembered, that before me, Jana R. Selley, a Notary Public in
and for the County and State aforesaid, came JOHN D. CLELAND, President, and
AMY J. LEE, Secretary, of the SBL Fund, a Kansas corporation, personally known
to me to be the persons who executed the foregoing instrument of writing as
President and Secretary, respectively, and duly acknowledged the execution of
the same this 15th day of September, 1997.
Jana R. Selley
---------------------------
Notary Public
My commission expires June 14, 2000
<PAGE> 1
INVESTMENT ADVISORY CONTRACT
THIS AGREEMENT, made and entered into this 20th day of June, 1977, by and
between SBL FUND, INC., a Kansas corporation (hereinafter referred to as the
"Fund"), and SECURITY MANAGEMENT COMPANY, INC., a Kansas corporation
(hereinafter referred to as the "Management Company").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end, management
investment company registered under the Federal Investment Company Act of 1940;
and
WHEREAS, the Management Company is willing to provide interest research and
advice to the Fund on the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. EMPLOYMENT OF MANAGEMENT COMPANY. The Fund hereby employs the Management
Company to act as investment adviser to the Fund with respect to the investment
of its assets and to supervise and arrange the purchase of securities for the
Fund and the sale of securities held in the portfolio of the Fund, subject
always to the supervision of the board of directors of the Fund (or a duly
appointed committee thereof), during the period and upon and subject to the
terms and conditions herein set forth. The Management Company hereby accepts
such employment and agrees to perform the services required by this Agreement
for the compensation herein provided.
2. INVESTMENT ADVISORY DUTIES. The Management Company shall regularly
provide the Fund with investment research, advice and supervision, continuously
furnish an investment program and recommend what securities shall be purchased
and sold and what portion of the assets of the Fund shall be held uninvested and
shall arrange for the purchase of securities and other investments for the Fund
and the sale of securities and other investments held in the portfolio of the
Fund. All investment advice furnished by the Management Company to the Fund
under this Section 2 shall at all times conform to any requirements imposed by
the provisions of the Fund's Articles of Incorporation and Bylaws, the
Investment Company Act of 1940, the Investment Advisors Act of 1940 and the
rules and regulations promulgated thereunder, any other applicable provisions of
law, and the terms of the registration statements of the Fund under the
Securities Act of 1933 and the Investment Company Act of 1940, all as from time
to time
<PAGE> 2
amended. The Management Company shall advise and assist the officers or other
agents of the Fund in taking such steps as are necessary or appropriate to carry
out the decisions of the board of directors of the Fund (and any duly appointed
committee thereof) in regard to the foregoing matters and the general conduct of
the Fund's business.
3. PORTFOLIO TRANSACTIONS AND BROKERAGE.
(a) Transactions in portfolio securities shall be effected by the
Management Company, through brokers or otherwise, in the manner permitted
in this Section 3 and in such manner as the Management Company shall deem
to be in the best interests of the Fund after consideration is given to all
relevant factors.
(b) In reaching a judgment relative to the qualification of a broker to
obtain the best execution of a particular transaction, the Management
Company may take into account all relevant factors and circumstances,
including the size of any contemporaneous market in such securities; the
importance to the Fund of speed and efficiency of execution; whether the
particular transaction is part of a larger intended change of portfolio
position in the same securities; the execution capabilities required by the
circumstances of the particular transaction; the capital to be required by
the transaction; the overall capital strength of the broker; the broker's
apparent knowledge of or familiarity with sources from or to whom such
securities may be purchased or sold; as well as the efficiency, reliability
and confidentiality with which the broker has handled the execution of
prior similar transactions.
(c) Subject to any statements concerning the allocation of brokerage
contained in the Fund's prospectus, the Management Company is authorized to
direct the execution of the portfolio transactions of the Fund to brokers
who furnish investment information or research services to the Management
Company. Such allocation shall be in such amounts and proportions as the
Management Company may determine. If a transaction is directed to a broker
supplying brokerage and research services to the Management Company, the
commission paid for such transaction may be in excess of the commission
another broker would have charged for effecting that transaction, provided
that the Management Company shall have determined in good faith that the
commission is reasonable in relation to the value of the brokerage and
research services provided, viewed in terms of either that particular
transaction or the overall responsibilities of the Management Company with
respect to all accounts as to which it now or hereafter exercises
investment discretion.
<PAGE> 3
For purposes of the immediately preceding sentence, "providing brokerage
and research services" shall have the meaning generally given in such term
or similar term under Section 28 (c)(3) of the Securities Exchange Act of
1934, as amended.
(d) In the selection of a broker for the execution of any transaction
not subject to fixed commission rates, the Management Company shall have no
duty or obligation to seek advance competitive bidding for the most
favorable negotiated commission rate to be applicable to such transaction,
or to select any broker solely on the basis of its purported or "posted"
commission rates.
(e) In connection with transactions on markets other than national or
regional securities exchanges, the Fund will deal directly with the selling
principal or market maker without incurring charges for the services of a
broker on its behalf unless, in the best judgment of the Management
Company, better price or execution can be obtained by utilizing the
services of a broker.
4. ALLOCATION OF EXPENSES AND CHARGES. The Management Company shall provide
investment advisory, statistical and research facilities and all clerical
services relating to research, statistical and investment work, and shall
provide for the compilation and maintenance of such records relating to these
functions as shall be required under applicable law and the rules and
regulations of the Securities and Exchange Commission. Other than as
specifically indicated in the preceding sentence, the Management Company shall
not be required to pay any expenses of the Fund, and in particular, but without
limiting the generality of the foregoing, the Management Company shall not be
required to pay office rental or general administrative expenses; board of
directors' fees; legal, auditing and accounting expenses; broker's commissions;
taxes and governmental fees; membership dues; fees of custodian, transfer agent,
registrar and dividend disbursing agent (if any); expenses (including clerical
expenses) of issue, sale or redemption of shares of the Fund's capital stock;
costs and expenses in connection with the registration of such capital stock
under the Securities Act of 1933 and qualification of the Fund's capital stock
under the "Blue Sky" laws of the states where such stock is offered; costs and
expenses in connection with the registration of the Fund under the Investment
Company Act of 1940 and all periodic and other reports required thereunder;
expenses of preparing and distributing reports, proxy statements, notices and
distributions to stockholders; costs of stationery; expenses of printing
prospectuses; costs of stockholder and other meetings; and such nonrecurring
expenses as may
<PAGE> 4
arise including litigation affecting the Fund and the legal obligations the Fund
may have to indemnify its officers and the members of its board of directors.
5. COMPENSATION OF MANAGEMENT COMPANY.
(a) As compensation for the services to be rendered by the Management
Company as provided herein, for each of the years this Agreement is in effect,
the Fund shall pay the Management Company an annual fee equal to .5 of 1% of the
average daily closing value of the net assets of each Series of the Fund
computed on a daily basis. Such fee shall be adjusted and payable monthly. If
this Agreement shall be effective for only a portion of a year, then the
Management Company's compensation for said year shall be prorated for such
portion. For purposes of this Section 5, the value of the net assets of each
such Series shall be computed in the same manner at the end of the business day
as the value of such net assets is computed in connection with the determination
of the net asset value of the Fund's shares as described in the Fund's
prospectus.
(b) For each of the Fund's full fiscal years this Agreement remains in
force, the Management Company agrees that if total annual expenses of each
Series of the Fund, exclusive of interest and taxes and extraordinary expenses
(such as litigation), but inclusive of the Management Company's compensation,
exceed any expense limitation imposed by state securities law or regulation in
any state in which shares of the Fund are then qualified for sale, as such
regulations may be amended from time to time, the Management Company will
contribute to such Series such funds or to waive such portion of its fee,
adjusted monthly, as may be requisite to insure that such annual expenses will
not exceed any such limitation. If this contract shall be effective for only a
portion of one of the Series' fiscal years, then the maximum annual expenses
shall be prorated for such portion. Brokerage fees and commissions incurred in
connection with the purchase or sale of any securities by a Series shall not be
deemed to be expenses within the meaning of this paragraph (b)". (Amended March
27, 1987)
6. MANAGEMENT COMPANY NOT TO RECEIVE COMMISSIONS. In connection with the
purchase or sale of portfolio securities for the account of the Fund, neither
the Management Company nor any officer or director of the Management Company
shall act as principal or receive any compensation from the Fund other than its
compensation as provided for in Section 5 above. If the Management Company, or
any "affiliated person" (as defined in the Investment Company Act of 1940)
receives any cash credits, commissions or tender fees from any person in
connection with
<PAGE> 5
transactions in portfolio securities of the Fund (including but not limited to
the tender or delivery of any securities held in such portfolio), the Management
Company shall immediately pay such amount to the Fund in cash or as a credit
against any then earned but unpaid management fees due by the Fund to the
Management Company.
7. LIMITATION OF LIABILITY OF MANAGEMENT COMPANY. So long as the Management
Company shall give the Fund the benefit of its best judgment and effort in
rendering services hereunder, the Management Company shall not be liable for any
errors of judgment or mistake of law, or for any loss sustained by reason of the
adoption of any investment policy or the purchase, sale or retention of any
security on its recommendation, whether or not such recommendation shall have
been based upon its own investigation and research or upon investigation and
research made by any other individual, firm or corporation, if such
recommendation shall have been made and such other individual firm or
corporation shall have been selected with due care and in good faith. Nothing
herein contained shall, however, be construed to protect the Management Company
against any liability to the Fund or its contractowners by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
Agreement. As used in this Section 7, "Management Company" shall include
directors, officers and employees of the Management Company, as well as that
corporation itself.
8. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent
the Management Company or any officer thereof from acting as investment adviser
for any other person, firm, or corporation, not shall it in any way limit or
restrict the Management Company or any of its directors, officer, stockholders
or employees from buying, selling, or trading any securities for its own
accounts or for the accounts of others for whom it may be acting; provided,
however, that the Management Company expressly represents that it will undertake
no activities which, in its judgment, will conflict with the performance of its
obligations to the Fund under this Agreement. The Fund acknowledges that the
Management Company acts as investment adviser to other investment companies, and
it expressly consents to the Management Company acting as such; provided,
however, that if securities of one issuer are purchased or sold, the purchase or
sale of such securities is consistent with the investment objectives of, and, in
the opinion of the Management Company, such securities are desirable purchases
or sales for the portfolios of the Fund and one or more of such other investment
companies at approximately the same time, such
<PAGE> 6
purchases or sales will be made on a proportionate basis if feasible, and if not
feasible, then on a rotating or other equitable basis.
9. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective on the date hereof, provided that on or before that date it has been
approved by a majority of the holders of the outstanding voting securities of
the Fund, and shall remain in force until the first regular or special meeting
of the Fund stockholders following the date shares of capital stock of the Fund
are first sold to Security Benefit Life Insurance Company for allocation to its
separate account. This Agreement shall be presented to the Fund's stockholders
at such meeting for their approval and, if so approved, shall continue in force
from year to year thereafter, but only if such continuance is specifically
approved at least annually by the vote of a majority of the board of directors
of the Fund (including approval by the vote of a majority of the directors who
are not parties to this Agreement or interested persons of any such party) cast
in person at a regular or special meeting of the board of directors called for
the purpose of voting upon such approval, or by the vote of the holders of a
majority of the outstanding voting securities of the Fund and by such a vote of
the board of directors. The words "interested persons" as used herein shall have
the meaning set forth in Section 2(a) (19) of the Investment Company Act of
1940.
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the board of directors of the Fund or by vote of the holders
of a majority of the outstanding voting securities of the Fund, or by the
Management Company, upon 60 days written notice to the other party.
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940).
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereto duly authorized on the day,
month and year first above written.
(SEAL)
SBL FUND, INC.
ATTEST By Robert E. Jacoby
-----------------------------------------------
President
Larry D. Armel
- --------------------------
Secretary SECURITY MANAGEMENT COMPANY, INC.
By Everett S. Gille
-----------------------------------------------
ATTEST President
Larry D. Armel
- --------------------------
Secretary
<PAGE> 8
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security
Management Company (hereinafter referred to as the "Management Company") are
parties to an Investment Advisory Contract dated June 20, 1977, (the "Advisory
Contract") under which the Management Company agrees to provide investment
research, advice and supervision and business management services to the Fund in
return for the compensation specified in the Advisory Contract; and
WHEREAS, on January 27, 1989, the Board of Directors voted to amend the Advisory
Contract to increase the compensation payable to the Management Company, which
was approved by the Shareholders of Series A, Series B, Series D, and Series E
of the Fund on March 31, 1989;
NOW THEREFORE, the Fund and Management Company hereby amend the Investment
Advisory Contract, dated June 20, 1977, effective April 28, 1989, as follows:
Paragraph 5 (a) shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
5. COMPENSATION OF MANAGEMENT COMPANY
(a) As compensation for the services to be rendered by the Management
Company as provided herein, for each of the years this Agreement is in
effect, the Fund shall pay the Management Company an annual fee equal
to .75 of 1 percent of the average daily closing value of the net
assets of Series A, Series B, Series D, and Series E, of the Fund and
.50 of 1 percent of the average daily closing value of the net assets
of Series C of the Fund computed on a daily basis. Such fee shall be
adjusted and payable monthly. If this Agreement shall be effective for
only a portion of a year, then the Management Company's compensation
for said year shall be prorated for such portion. For purposes of this
Section 5, the value of the net assets of each such Series shall be
computed in the same manner at the end of the business day as the value
of such net assets is computed in connection with the determination of
the net asset value of the Fund's shares as described in the Fund's
prospectus.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have made this Agreement to the
Investment Advisory Contract this 31st day of March, 1989.
SBL FUND, INC.
By M. J. Provines
-----------------------------------------------
ATTEST Michael J. Provines, President
Amy J. Lee
- -------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, INC.
ATTEST
By M. J. Provines
-----------------------------------------------
Amy J. Lee Michael J. Provines, President
- -------------------------
Amy J. Lee, Secretary
<PAGE> 10
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company (the "Management
Company") are parties to an Investment Advisory Contract dated June 20, 1977, as
amended, (the "Advisory Contract"), under which the Management Company agrees to
provide investment research, advice and supervision and business management
services to the Fund in return for the compensation specified in the Advisory
Contract;
WHEREAS, on February 15, 1991, the Board of Directors of the Fund authorized the
Fund to offer Series S common stock in addition to its presently offered series
of common stock (Series A, Series B, Series C, Series D, and Series E);
WHEREAS, on February 15, 1991, the Board of Directors of the Fund voted to amend
the Advisory Contract to provide that the Management Company would provide
investment advisory and business management services to Series S of the Fund
pursuant to the Advisory Contract;
WHEREAS, on April 15, 1991, the initial shareholder of Series S approved such
amendment to the Investment Advisory Contract;
WHEREAS, on February 15, 1991, the Board of Directors of the Fund approved an
amendment to the investment advisory contract to increase the compensation
payable to the Management Company as to Series D of the Fund; and;
WHEREAS, on April 26, 1991, the shareholders of Series D approved such amendment
to the Investment Advisory Contract;
NOW, THEREFORE, the Fund and the Management Company hereby amend the Investment
Advisory Contract, dated June 20, 1977, effective April 30, 1991, as follows:
Paragraph 5(a) shall be deleted in its entirety and the following paragraph
inserted in lieu thereof:
<PAGE> 11
5. COMPENSATION OF MANAGEMENT COMPANY
(a) As compensation for the services to be rendered by the Management
Company as provided for herein, for each of the years this Agreement is
in effect, the Fund shall pay the Management Company an annual fee
equal to .75 percent of the average daily closing value of the net
assets of Series A, Series B, Series E and Series S of the Fund, .50
percent of the average daily closing value of the net assets of Series
C of the Fund and 1.00 percent of the average daily closing value of
the net assets of Series D of the Fund, computed on a daily basis. Such
fee shall be adjusted and payable monthly. If this Agreement shall be
effective for only a portion of a year, then the Management Company's
compensation for said year shall be prorated for such portion. For
purposes of this Section 5, the value of the net assets of each such
series shall be computed in the same manner at the end of the business
day as the value of such net assets is computed in connection with the
determination of the net asset value of the Fund's shares as described
in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 26th day of April, 1991.
SBL FUND, INC.
By James R. Schmank
-----------------------------------------------
ATTEST James R. Schmank, Vice President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, INC.
ATTEST
By James R. Schmank
-----------------------------------------------
Amy J. Lee James R. Schmank, Sr. Vice President
- --------------------------
Amy J. Lee, Secretary
<PAGE> 12
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company (the "Management
Company") are parties to an Investment Advisory Contract dated June 20, 1977, as
amended, (the "Advisory Contract"), under which the Management Company agrees to
provide investment research, advice and supervision and business management
services to the Fund in return for the compensation specified in the Advisory
Contract;
WHEREAS, on July 24, 1992, the Board of Directors of the Fund authorized the
Fund to offer Series J common stock in addition to its presently offered series
of common stock (Series A, Series B, Series C, Series D, Series E and Series S);
WHEREAS, on July 24, 1992, the Board of Directors of the Fund voted to amend the
Advisory Contract to provide that the Management Company would provide
investment advisory and business management services to Series J of the Fund
pursuant to the Advisory Contract;
WHEREAS, on July 31, 1992, the initial shareholder of Series J approved such
amendment to the Investment Advisory Contract;
NOW, THEREFORE, the Fund and the Management Company hereby amend the Investment
Advisory Contract, dated June 20, 1977, effective October 1, 1992, as follows:
Paragraph 5(a) shall be deleted in its entirety and the following paragraph
inserted in lieu thereof:
5. COMPENSATION OF MANAGEMENT COMPANY
(a) As compensation for the services to be rendered by the Management
Company as provided for herein, for each of the years this Agreement is
in effect, the Fund shall pay the Management Company an annual fee
equal to .75 percent of the average daily closing value of the net
assets of Series A, Series B, Series E, Series S and Series J of the
Fund, .50 percent of the average daily closing value of
<PAGE> 13
the net assets of Series C of the Fund and 1.00 percent of the average
daily closing value of the net assets of Series D of the Fund, computed
on a daily basis. Such fee shall be adjusted and payable monthly. If
this Agreement shall be effective for only a portion of a year, then
the Management Company's compensation for said year shall be prorated
for such portion. For purposes of this Section 5, the value of the net
assets of each such Series shall be computed in the same manner at the
end of the business day as the value of such net assets is computed in
connection with the determination of the net asset value of the Fund's
shares as described in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 1st day of October, 1992.
SBL FUND, INC.
By James R. Schmank
-----------------------------------------------
ATTEST James R. Schmank, Vice President
Amy J. Lee
- ------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, INC.
ATTEST
By James R. Schmank
-----------------------------------------------
Amy J. Lee James R. Schmank, Sr. Vice President
- -------------------------
Amy J. Lee, Secretary
<PAGE> 14
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company (the "Management
Company") are parties to an Investment Advisory Contract dated June 20, 1977, as
amended (the "Advisory Contract"), under which the Management Company agrees to
provide investment research, advice and supervision and business management
services to the Fund in return for the compensation specified in the Advisory
Contract;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer a new series, Series K, of common stock, and voted to amend the
Advisory Contract to provide that the Management Company would provide
investment advisory and business management services to Series K of the Fund
pursuant to the Advisory Contract; and
WHEREAS, on April 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer three additional new series of common stock, Series M, N and O,
and voted to amend the Advisory Contract to provide that the Management Company
would provide investment advisory and business management services to Series M,
N and O pursuant to the Advisory Contract; and
WHEREAS, on April 18, 1995, the initial shareholder of each of Series K, M, N
and O approved such amendments to the Advisory Contract;
NOW, THEREFORE, the Fund and the Management Company hereby amend the Investment
Advisory Contract, dated June 20, 1977, effective May 1, 1995, as follows:
The Paragraph 5(a) shall be amended as follows (new language underlined):
5. COMPENSATION OF MANAGEMENT COMPANY
(a) As compensation for the services to be rendered by the Management
Company as provided for herein, for each of the years this Agreement is
in effect, the Fund shall pay the Management Company an annual fee
equal to .75 percent of the average daily closing value of the net
assets of Series A, Series B, Series E, Series S, Series J, AND SERIES
K of the Fund, .50 percent of the average daily closing value of the
net assets of Series C of the Fund and 1.00 percent of the average
daily closing value of the net assets of Series D, SERIES M, SERIES N
AND SERIES O of the Fund, computed on a daily basis. Such fee shall be
adjusted and payable monthly. If this Agreement shall be effective for
only a portion of a year, then the Management Company's compensation
<PAGE> 15
for said year shall be prorated for such portion. For purposes of this
Section 5, the value of the net assets of each such Series shall be
computed in the same manner at the end of the business day as the value
of such net assets is computed in connection with the determination of
the net asset value of the Fund's shares as described in the Fund's
prospectus.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 28th day of April, 1995.
SBL FUND, INC.
By John D. Cleland
-----------------------------------------------
ATTEST John D. Cleland, President
Amy J. Lee
- -------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, INC.
ATTEST
By J. B. Pantages
-----------------------------------------------
Amy J. Lee Jeffrey B. Pantages, President
- -------------------------
Amy J. Lee, Secretary
<PAGE> 16
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company (the "Management
Company") are parties to an Investment Advisory Contract dated June 20, 1977, as
amended, (the "Advisory Contract"), under which the Management Company agrees to
provide investment research, advice and supervision and business management
services to the Fund in return for the compensation specified in the Advisory
Contract;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund authorized the Fund
to offer its common stock in a new series designated as Series P, addition to
its presently offered series of common stock of Series A, Series B, Series C,
Series D, Series E, Series S, Series J, Series K, Series M, Series N and Series
O;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to Series P of the
Fund under the terms and conditions of the Advisory Contract;
WHEREAS, this amendment to the Advisory Contract is subject to the approval of
the initial shareholder of Series P;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, dated June 20, 1977, as amended as follows,
effective July 1, 1996:
Paragraph 5(a) shall be amended as follows (new language underlined):
5. COMPENSATION OF MANAGEMENT COMPANY
(a) As compensation for the services to be rendered by the Management
Company as provided for herein, for each of the years this Agreement is in
effect, the Fund shall pay the Management Company an annual fee equal to .75
percent of the average daily closing value of the net assets of Series A, Series
B, Series E, Series S, Series J, Series K, AND SERIES P of the Fund, .50 percent
of the average daily closing value of the net assets of Series C of the Fund
<PAGE> 17
and 1.00 percent of the average daily closing value of the net assets of Series
D, Series M, Series N and Series O of the Fund, computed on a daily basis. Such
fee shall be adjusted and payable monthly. If this Agreement shall be effective
for only a portion of a year, then the Management Company's compensation for
said year shall be prorated for such portion. For purposes of this Section 5,
the value of the net assets of each such Series shall be computed in the same
manner at the end of the business day as the value of such net assets is
computed in connection with the determination of the net asset value of the
Fund's shares as described in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 13th day of May, 1996.
SBL FUND, INC.
By John D. Cleland
-----------------------------------------------
ATTEST John D. Cleland, Vice President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, INC.
ATTEST
By Jeffrey B. Pantages
-----------------------------------------------
Amy J. Lee Jeffrey B. Pantages, President
- --------------------------
Amy J. Lee, Secretary
<PAGE> 18
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company (the "Management
Company") are parties to an Investment Advisory Contract, dated June 20, 1977,
as amended (the "Advisory Contract"), under which the Management Company agrees
to provide investment research, advice and supervision and business management
services to the Fund in return for the compensation specified in the Advisory
Contract;
WHEREAS, on October 31, 1996, the operations of the Management Company, a Kansas
corporation, will be transferred to Security Management Company, LLC ("SMC,
LLC"), a Kansas limited liability company; and
WHEREAS, SMC, LLC desires to assume all rights, duties and obligations of the
Management Company under the Advisory Contract.
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. The Advisory Contract is hereby amended to substitute SMC, LLC for Security
Management Company, with the same effect as though SMC, LLC were the
originally named management company, effective November 1, 1996;
2. SMC, LLC agrees to assume the rights, duties and obligations of Security
Management Company pursuant to the terms of the Advisory Contract.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Investment Advisory Contract this 1st day of November, 1996.
SBL FUND SECURITY MANAGEMENT COMPANY, LLC
By: JOHN D. CLELAND By: JAMES R. SCHMANK
------------------------------- ---------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
AMY J. LEE AMY J. LEE
- ----------------------------- --------------------------------
Amy J. Lee, Secretary Amy J. Lee, Secretary
<PAGE> 19
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company, LLC (the
"Management Company") are parties to an Investment Advisory Contract dated June
20, 1977, as amended (the "Advisory Contract"), under which the Management
Company agrees to provide investment research, advice and supervision and
business management services to the Fund in return for the compensation
specified in the Advisory Contract;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as Series V, in
addition to its presently offered series of common stock of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O and Series P;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to Series V of the
Fund under the terms and conditions of the Advisory Contract; and
WHEREAS, this amendment to the Advisory Contract is subject to the approval of
the initial shareholder of Series V;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, dated June 20, 1977, as amended as follows,
effective April 30, 1997:
Paragraph 5(a) shall be amended as follows (new language underlined):
5. COMPENSATION OF MANAGEMENT COMPANY
a) As compensation for the services to be rendered by the Management Company
as provided for herein, for each of the years this Agreement is in effect, the
Fund shall pay the Management Company an annual fee equal to .75 percent of the
average daily closing value of the net assets of Series A, Series B, Series E,
Series S, Series J, Series K, Series P, AND SERIES V of the Fund, .50 percent of
the average daily closing value of the net assets of Series C of the Fund and
1.00 percent of the average daily closing value of the net assets of Series D,
Series M, Series N and Series O of the Fund, computed on a daily basis. Such fee
shall be adjusted and payable monthly. If this Agreement shall be effective for
only a portion of a year, then the Management Company's compensation for said
year shall be prorated for such portion. For purposes of this Section 5, the
value of the net assets of each such Series shall be computed in the
<PAGE> 20
same manner at the end of the business day as the value of such net assets is
computed in connection with the determination of the net asset value of the
Fund's shares as described in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 12th day of March, 1997.
SBL FUND
By: JOHN D. CLELAND
---------------------------------
John D. Cleland, President
ATTEST:
AMY J. LEE
- -----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, LLC
By: JAMES R. SCHMANK
---------------------------------
James R. Schmank, President
ATTEST:
AMY J. LEE
- -----------------------------------
Amy J. Lee, Secretary
<PAGE> 21
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, SBL Fund (the "Fund") and Security Management Company, LLC (the
"Management Company") are parties to an Investment Advisory Contract dated June
20, 1977, as amended (the "Advisory Contract"), under which the Management
Company agrees to provide investment research, advice and supervision and
business management services to the Fund in return for the compensation
specified in the Advisory Contract;
WHEREAS, on July 25, 1997, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as Series X, in
addition to its presently offered series of common stock of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O, Series P and Series V;
WHEREAS, on July 25, 1997, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to Series X of the
Fund under the terms and conditions of the Advisory Contract; and
WHEREAS, this amendment to the Advisory Contract is subject to the approval of
the initial shareholder of Series X;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, dated June 20, 1977, as amended as follows,
effective October 15, 1997:
Paragraph 5(a) shall be amended as follows (new language underlined):
5. Compensation of Management Company
a) As compensation for the services to be rendered by the Management
Company as provided for herein, for each of the years this Agreement is in
effect, the Fund shall pay the Management Company an annual fee equal to .75
percent of the average daily closing value of the net assets of Series A,
Series B, Series E, Series S, Series J, Series K, Series P and Series V of the
Fund, .50 percent of the average daily closing value of the net assets of
Series C of the Fund and 1.00 percent of the average daily closing value of the
net assets of Series D, Series M, Series N, Series O and Series X of the Fund,
computed on a daily basis. Such fee shall be adjusted and payable monthly. If
this Agreement shall be
<PAGE> 22
effective for only a portion of a year, then the Management Company's
compensation for said year shall be prorated for such portion. For purposes of
this Section 5, the value of the net assets of each such Series shall be
computed in the same manner at the end of the business day as the value of such
net assets is computed in connection with the determination of the net asset
value of the Fund's shares as described in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 15th day of September, 1997.
SBL FUND
By: JOHN D. CLELAND
-------------------------------
John D. Cleland, President
ATTEST:
AMY J. LEE
- -------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, LLC
By: JEFFREY B. PANTAGES
-------------------------------
Jeffrey B. Pantages, President
ATTEST:
AMY J. LEE
- --------------------------------
Amy J. Lee, Secretary
<PAGE> 1
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 9th day of September, 1997
between SECURITY MANAGEMENT COMPANY, LLC (the "Adviser"), a Kansas limited
liability company, registered under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and STRONG CAPITAL MANAGEMENT, INC.
(the "Subadviser"), a Wisconsin corporation registered under the Investment
Advisers Act.
W I T N E S S E T H :
WHEREAS, SBL Fund and Security Equity Fund, Kansas corporations, are
registered with the Securities and Exchange Commission (the "Commission") as
open-end management investment companies under the Investment Company Act of
1940, as amended (the "Investment Company Act");
WHEREAS, SBL Fund is authorized to issue shares of Series X, a separate
series of SBL Fund and Security Equity Fund is authorized to issue shares of
the Small Company Series, a separate series of Security Equity Fund (each
series referred to herein individually as a "Fund" and collectively as the
"Funds");
WHEREAS, each of SBL Fund and Security Equity Fund has, pursuant to an
Advisory Agreement with the Adviser (the "Advisory Agreements"), retained the
Adviser to act as investment adviser for and to manage each Fund's assets;
WHEREAS, the Advisory Agreements permit the Adviser to delegate certain of
its duties under the Advisory Agreements to other investment advisers, subject
to the requirements of the Investment Company Act; and
WHEREAS, the Adviser desires to retain the Subadviser as subadviser for
the Funds to act as investment adviser for and to manage each Fund's
Investments (as defined below) and the Subadviser desires to render such
services.
NOW, THEREFORE, the Adviser and Subadviser do mutually agree and promise
as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser
to act as investment adviser for and to manage certain assets of the Funds
subject to the supervision of the Adviser and the respective Boards of
Directors of SBL Fund and Security Equity Fund and subject to the terms of this
Agreement; and the Subadviser hereby accepts such employment. In such
capacity, the Subadviser shall be responsible for each Fund's Investments.
<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Funds as set forth in each Fund's current prospectus
and statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the respective Fund's Board to purchase, hold and sell
investments for the account of the Funds (hereinafter "Investments") and
to monitor on a continuous basis the performance of such Investments.
The Subadviser shall give the Funds the benefit of its best efforts in
rendering its services as Subadviser.
(b) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the respective Fund's Board to establish
and maintain accounts on behalf of each Fund with, and place orders for
the purchase and sale of the Fund's Investments with or through, such
persons, brokers or dealers as Subadviser may select and negotiate
commissions to be paid on such transactions. The Subadviser agrees that
in placing such orders it shall attempt to obtain best execution,
provided that, the Subadviser may, on behalf of a Fund, pay brokerage
commissions to a broker which provides brokerage and research services to
the Subadviser in excess of the amount another broker would have charged
for effecting the transaction, provided (i) the Subadviser determines in
good faith that the amount is reasonable in relation to the value of the
brokerage and research services provided by the executing broker in terms
of the particular transaction or in terms of the Subadviser's overall
responsibilities with respect to the Fund and the accounts as to which
the Subadviser exercises investment discretion, (ii) such payment is made
in compliance with Section 28(e) of the Securities Exchange Act of 1934,
as amended, and any other applicable laws and regulations, and (iii) in
the opinion of the Subadviser, the total commissions paid by the Fund
will be reasonable in relation to the benefits to the Fund over the long
term. It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or
sale of a security to be in the best interests of a Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation
to, aggregate the securities to be sold or purchased in order to obtain
the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of securities so sold or purchased,
as well as the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations to the Funds and
to such other clients. The Subadviser will report on such allocations at
the request of the Adviser, the Funds or the respective Fund's Board
providing such information as the number of aggregated trades to which
the Fund was a party, the broker(s) to whom such trades were directed and
the basis of the allocation for the aggregated trades.
(c) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other
instruments from or sell securities or other
2
<PAGE> 3
instruments to a Fund ("Principal Transactions"); provided, however, the
Subadviser may enter into a Principal Transaction with a Fund if (i) the
transaction is permissible under applicable laws and regulations,
including, without limitation, the Investment Company Act and the
Investment Advisers Act and the rules and regulations promulgated
thereunder, and (ii) the transaction receives the express written
approval of the Adviser.
The Subadviser agrees to observe and comply with Rule 17j-1 under
the Investment Company Act and its Code of Ethics, as the same may be
amended from time to time. The Subadviser agrees to provide the Adviser
and the Funds with a copy of such Code of Ethics.
(d) Books and Records. The Subadviser will maintain all books and
records required to be maintained pursuant to the Investment Company Act
and the rules and regulations promulgated thereunder with respect to
transactions made by it on behalf of the Funds including, without
limitation, the books and records required by Subsections (b)(1), (5),
(6), (7), (9), (10) and (11) and Subsection (f) of Rule 31a-1 under the
Investment Company Act and shall timely furnish to the Adviser all
information relating to the Subadviser's services hereunder needed by the
Adviser to keep such other books and records of the Funds required by
Rule 31a-1 under the Investment Company Act. The Subadviser will also
preserve all such books and records for the periods prescribed in Rule
31a-2 under the Investment Company Act, and agrees that such books and
records shall remain the sole property of the respective Fund and shall
be immediately surrendered to a Fund upon request. The Subadviser
further agrees that all books and records maintained hereunder shall be
made available to the Funds or the Adviser at any time upon reasonable
request, including telecopy, during any business day.
(e) Information Concerning Investments and Subadviser. From time to
time as the Adviser or the Funds may request, the Subadviser will furnish
the requesting party reports on portfolio transactions and reports on
Investments held in the portfolio, all in such detail as the Adviser or
the Funds may reasonably request. The Subadviser will make available its
officers and employees to meet with the respective Fund's Board of
Directors at the Funds' principal place of business on due notice to
review the Investments of the Funds.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Funds or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Internal Revenue Code of 1986, as amended (the "Code"), the Investment
Company Act, the Investment Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any
rule or regulation thereunder.
(f) Custody Arrangements. The Subadviser shall provide the Funds'
custodian, on each business day with information relating to all
transactions concerning each Fund's assets.
3
<PAGE> 4
(g) Compliance with Applicable Laws and Governing Documents. In all
matters relating to the performance of this Agreement, the Subadviser and
its directors, officers, partners, employees and interested persons shall
act in conformity with each Fund's Articles of Incorporation, By-Laws,
and currently effective registration statement and with the written
instructions and directions of the respective Fund's Board and the
Adviser, and shall comply with the requirements of the Investment Company
Act, the Investment Advisers Act, the Commodity Exchange Act, the rules
thereunder, and all other applicable federal and state laws and
regulations.
In carrying out its obligations under this Agreement, the Subadviser
shall, solely with regard to those matters within its control, ensure
that each Fund complies with all applicable statutes and regulations
necessary to qualify the Fund as a Regulated Investment Company under
Subchapter M of the Code (or any successor provision), and shall notify
the Adviser immediately upon having a reasonable basis for believing that
a Fund has ceased to so qualify or that it might not so qualify in the
future.
In carrying out its obligations under this Agreement, the Subadviser
shall invest the assets of Series X in such a manner as to ensure that
the Fund complies with the diversification provisions of Section 817(h)
of the Code (or any successor provision) and the regulations issued
thereunder relating to the diversification requirements for variable
insurance contracts and any prospective amendments or other modifications
to Section 817 or regulations thereunder. Subadviser shall notify the
Adviser immediately upon having a reasonable basis for believing that the
Fund has ceased to comply and will take all reasonable steps to
adequately diversify the Fund so as to achieve compliance within the
grace period afforded by Regulation 1.817-5.
The Adviser has furnished the Subadviser with copies of each of the
following documents and will furnish the Subadviser at its principal
office all future amendments and supplements to such documents, if any,
as soon as practicable after such documents become available: (i) the
Articles of Incorporation of each Fund, (ii) the By-Laws of each Fund and
(iii) each Fund's registration statement under the Investment Company Act
and the Securities Act of 1933, as amended, as filed with the Commission.
(h) Voting of Proxies. The Subadviser shall direct the custodian as
to how to vote such proxies as may be necessary or advisable in
connection with any matters submitted to a vote of shareholders of
securities held by the Funds.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Funds or the Adviser in any way or
otherwise be deemed an agent of the Funds or the Adviser.
4. Compensation. The Adviser shall pay to the Subadviser, for the
services rendered hereunder, the fees set forth in Exhibit A attached hereto.
4
<PAGE> 5
5. Expenses. The Subadviser shall bear all expenses incurred by it in
connection with its services under this Agreement and will, from time to time,
at its sole expense employ or associate itself with such persons as it believes
to be particularly fitted to assist it in the execution of its duties
hereunder. However, the Subadviser shall not assign or delegate any of its
duties under this Agreement without the approval of the Adviser and the
respective Fund's Board.
6. Representations and Warranties of Subadviser. The Subadviser
represents and warrants to the Adviser and the Funds as follows:
(a) The Subadviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Subadviser will immediately notify the Adviser of the
occurrence of any event that would disqualify the Subadviser from serving
as an investment adviser of an investment company pursuant to Section
9(a) of the Investment Company Act;
(c) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association;
(d) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of Wisconsin with the power to own
and possess its assets and carry on its business as it is now being
conducted;
(e) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its shareholders, and
no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Subadviser for the
execution, delivery and performance by the Subadviser of this Agreement,
and the execution, delivery and performance by the Subadviser of this
Agreement do not contravene or constitute a default under (i) any
provision of applicable law, rule or regulation, (ii) the Subadviser's
governing instruments, or (iii) any agreement, judgment, injunction,
order, decree or other instrument binding upon the Subadviser;
(f) This Agreement is a valid and binding agreement of the
Subadviser;
(g) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form filed with the Commission
and the information contained therein is accurate and complete in all
material respects and does not omit to state any material fact necessary
in order to make the statements made, in light of the circumstances under
which they were made, not misleading;
5
<PAGE> 6
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association;
(c) The Adviser is a limited liability company duly organized and
validly existing under the laws of the State of Kansas with the power to
own and possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized
by all necessary action on the part of its members, and no action by or
in respect of, or filing with, any governmental body, agency or official
is required on the part of the Adviser for the execution, delivery and
performance by the Adviser of this Agreement, and the execution, delivery
and performance by the Adviser of this Agreement do not contravene or
constitute a default under (i) any provision of applicable law, rule or
regulation, (ii) the Adviser's governing instruments, or (iii) any
agreement, judgment, injunction, order, decree or other instrument
binding upon the Adviser;
(e) This Agreement is a valid and binding agreement of the Adviser;
(f) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the
Commission and the information contained therein is accurate and complete
in all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading;
(g) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV at least 48 hours prior to the execution of this
Agreement.
8. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser and the Adviser
pursuant to Sections 6 and 7 hereof shall survive for the duration of this
Agreement and the parties hereto shall promptly notify each other in writing
upon becoming aware that any of the foregoing representations and warranties
are no longer true.
9. Liability and Indemnification.
(a) Liability. In the absence of willful misfeasance, bad faith or
negligence on the part of the Subadviser or a breach of its duties
hereunder, the Subadviser shall not be
6
<PAGE> 7
subject to any liability to the Adviser or the Funds or any of the
Funds' shareholders, and, in the absence of willful misfeasance, bad
faith or negligence on the part of the Adviser or a breach of its duties
hereunder, the Adviser shall not be subject to any liability to the
Subadviser, for any act or omission in the case of, or connected with,
rendering services hereunder or for any losses that may be sustained in
the purchase, holding or sale of Investments; provided, however, that
nothing herein shall relieve the Adviser and the Subadviser from any of
their obligations under applicable law, including, without limitation,
the federal and state securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Funds, and their respective officers and directors, for any liability
and expenses, including attorneys' fees, which may be sustained as a
result of the Subadviser's willful misfeasance, bad faith, negligence,
breach of its duties hereunder or violation of applicable law, including,
without limitation, the federal and state securities laws or the CEA.
The Adviser shall indemnify the Subadviser and its officers and
directors, for any liability and expenses, including attorneys' fees,
which may be sustained as a result of the Adviser's willful misfeasance,
bad faith, negligence, breach of its duties hereunder or violation of
applicable law, including, without limitation, the federal and state
securities laws or the CEA.
10. Duration and Termination.
(a) Duration. This Agreement shall become effective upon the date
first above written, provided that this Agreement shall not take effect
with respect to a Fund unless it has first been approved (i) by a vote of
a majority of those directors of the Fund who are not parties to this
Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by
vote of a majority of the Fund's outstanding voting securities. This
Agreement shall continue in effect for a period of two years from the
date hereof, subject thereafter to being continued in force and effect
from year to year with respect to each Fund if specifically approved each
year by either (i) the Board of Directors of the Fund, or (ii) by the
affirmative vote of a majority of the Fund's outstanding voting
securities. In addition to the foregoing, each renewal of this Agreement
with respect to a Fund must be approved by the vote of a majority of the
Fund's directors who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. Prior to voting on the renewal of
this Agreement, the Board of Directors of each Fund may request and
evaluate, and the Subadviser shall furnish, such information as may
reasonably be necessary to enable the Fund's Board of Directors to
evaluate the terms of this Agreement.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Board of Directors of a Fund
with respect to that Fund, or by vote of a majority of the
outstanding voting securities of the
7
<PAGE> 8
Fund, or by the Adviser, in each case, upon sixty (60) days'
written notice to the Subadviser;
(ii) By the Adviser upon breach by the Subadviser of any
representation or warranty contained in Section 6 hereof, which
shall not have been cured during the notice period, upon twenty
(20) days written notice;
(iii) By the Adviser immediately upon written notice to the
Subadviser if the Subadviser becomes unable to discharge its duties
and obligations under this Agreement; or
(iv) By the Subadviser upon 180 days written notice to the
Adviser and the Fund.
This Agreement shall not be assigned (as such term is defined in the
Investment Company Act) without the prior written consent of the parties
hereto. This Agreement shall terminate automatically in the event of its
assignment without such consent or upon the termination of the Advisory
Agreement.
11. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Funds pursuant to the
Advisory Agreements and shall oversee and review the Subadviser's performance
of its duties under this Agreement.
12. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of each such amendment with respect to a Fund
shall be approved by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund.
13. Confidentiality. Subject to the duties of the Adviser, the Funds and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Funds and the actions
of the Subadviser, the Adviser and the Funds in respect thereof.
14. Notice. Any notice that is required to be given by the parties to
each other (or to the Funds) under the terms of this Agreement shall be in
writing, delivered, or mailed postpaid to the other party, or transmitted by
facsimile with acknowledgment of receipt, to the parties at the following
addresses or facsimile numbers, which may from time to time be changed by the
parties by notice to the other party:
8
<PAGE> 9
(a) If to the Subadviser:
Strong Capital Management, Inc.
900 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Attention: General Counsel
Facsimile: (414) 359-3948
(b) If to the Adviser:
James R. Schmank
Senior Vice President and Chief Fiscal Officer
Security Management Company, LLC
700 SW Harrison
Topeka, Kansas 66636-0001
Attention: James R. Schmank
Facsimile: (785) 431-3080
(c) If to Security Equity Fund:
Amy J. Lee
Secretary
Security Equity Fund
700 SW Harrison
Topeka, Kansas 66636-0001
Attention: Amy J. Lee, Secretary
Facsimile: (785) 431-3080
(d) If to SBL Fund:
Amy J. Lee
Secretary
SBL Fund
700 SW Harrison
Topeka, Kansas 66636-0001
Attention: Amy J. Lee, Secretary
Facsimile: (785) 431-3080
15. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Kansas.
16. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall together constitute one and the same
instrument.
9
<PAGE> 10
17. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
18. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force and
effect.
19. Certain Definitions.
(a) "Business day." As used herein, business day means any
customary business day in the United States on which the New York Stock
Exchange is open.
(b) Miscellaneous. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the Investment Company Act shall be resolved
by reference to such term or provision of the Investment Company Act and
to interpretations thereof, if any, by the U.S. courts or, in the absence
of any controlling decisions of any such court, by rules, regulation or
order of the Commission validly issued pursuant to the Investment Company
Act. Specifically, as used herein, "investment company," "affiliated
person," "interested person," "assignment," "broker," "dealer" and
"affirmative vote of the majority of the Fund's outstanding voting
securities" shall all have such meaning as such terms have in the
Investment Company Act. The term "investment adviser" shall have such
meaning as such term has in the Investment Advisers Act and the
Investment Company Act, and in the event of a conflict between such Acts,
the most expansive definition shall control. In addition, where the
effect of a requirement of the Investment Company Act reflected in any
provision of this Agreement is relaxed by a rule, regulation or order of
the Commission, whether of special or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or
order.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
SECURITY MANAGEMENT COMPANY, LLC
By: JAMES R. SCHMANK
Name: James R. Schmank
--------------------------------------
Title: Senior VP and Chief Fiscal Officer
Attest: AMY J. LEE
--------------------------------------
Name: Amy J. Lee
Title: Secretary
STRONG CAPITAL MANAGEMENT, INC.
By: STEPHEN J. SHENKENBERG
----------------------------------------
Name: Stephen J. Shenkenberg
Title: Vice President; Assistant Secretary
Attest: DONALD C. TYLER
------------------------------------
Name: Donald C. Tyler
Title: Vice President
11
<PAGE> 12
EXHIBIT A
SUBADVISORY FEE
For all services rendered by the Subadviser hereunder, Adviser shall pay
to Subadviser an annual fee (the "Subadvisory Fee"), as follows:
An annual rate of .50% of the combined average daily net assets of the
Funds under $150 million.
An annual rate of .45% of the combined average daily net assets of the
Funds at or above $150 million but less than $500 million.
An annual rate of .40% of the combined average daily net assets of the
Funds at or above $500 million.
The Subadvisory Fee shall be accrued for each calendar day the Subadviser
renders subadvisory services hereunder and the sum of the daily fee accruals
shall be paid monthly to the Subadviser as soon as practicable following the
last day of each month, by wire transfer if so requested by the Subadviser, but
no later than ten (10) calendar days thereafter. If this Agreement shall be
effective for only a portion of a year, then the Subadviser's fee for said year
shall be prorated for such portion. The daily fee accruals on the first $150
million of the Funds' net assets will be computed by multiplying the fraction
of one (1) over the number of calendar days in the year by the appropriate
annual rate described above and multiplying the product of the net asset value
of the Funds as determined in accordance with each Fund's prospectus as of the
close of business on the previous business day on which the Funds were open for
business. The daily fee accruals on the Funds' net assets equal to or in
excess of $150 million but less than $500 million will be computed by
multiplying the fraction of one (1) over the number of calendar days in the
year by the appropriate annual rate described above and multiplying the product
by the amount by which the average daily net asset value of the Funds, as
determined in accordance with each Fund's prospectus as of the close of
business on the previous business day on which the Funds were open for
business, equals or exceeds $150 million but is less than $500 million. The
daily fee accruals on the Funds' net assets at or above $500 million will be
computed by multiplying the fraction of one (1) over the number of calendar
days in the year by the appropriate annual rate described above and multiplying
the product by the amount by which the average daily net asset value of the
Funds, as determined in accordance with each Fund's prospectus as of the close
of business on the previous business day on which the Funds were open for
business, equals or exceeds $500 million.
12
FUNDS/SBL/sbl-strong/07/31/97
<PAGE> 1
CUSTODY AGREEMENT
DATED JANUARY 1, 1995
BETWEEN
UMB BANK, N.A.
AND
SECURITY MANAGEMENT COMPANY
FAMILY OF FUNDS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
1. APPOINTMENT OF CUSTODIAN 1
2. DEFINITIONS 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. DELIVERY OF CORPORATE DOCUMENTS 2
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
(a) Safekeeping 3
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 6
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 8
(i) Segregated Accounts 9
(j) Depository Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders Communication
Act of 1985 14
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Other Disbursements 15
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
5. SUBCUSTODIANS 15
(a) Domestic Subcustodians 15
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 17
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. STANDARD OF CARE 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Armed Conflict, Sovereign Risk, Etc. 18
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 19
(f) Instructions Appearing to be Genuine 19
(g) Exceptions from Liability 19
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 20
(a) Domestic Subcustodians 20
(b) Liability for Acts and Omissions of Foreign Subcustodians 20
(c) Securities Systems, Interim Subcustodians, Special Subcustodians,
Securities Depositories and Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. INDEMNIFICATION 21
(a) Indemnification by Fund 21
(b) Indemnification by Custodian 21
9. ADVANCES 21
10. LIENS 22
11. COMPENSATION 22
12. POWERS OF ATTORNEY 22
13. TERMINATION AND ASSIGNMENT 23
14. ADDITIONAL FUNDS 23
15. NOTICES 23
16. MISCELLANEOUS 24
</TABLE>
<PAGE> 4
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, between UMB Bank,
n.a., a national banking association with its principal place of business
located at Kansas City, Missouri (hereinafter "Custodian"), and each of the
Funds which have executed the signature page hereof together with such
additional Funds which shall be made parties to this Agreement by the execution
of a separate signature page hereto (individually, a "Fund" and collectively,
the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for the
custody of Assets (as hereinafter defined) owned by such Fund which Assets are
to be held in such accounts as such Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian
of Assets belonging to each such Fund which have been or may be from
time to time deposited with the Custodian. Custodian accepts such
appointment as a custodian and agrees to perform the duties and
responsibilities of Custodian as set forth herein on the conditions
set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills,
rights, script, warrants, interim certificates and all
negotiable or nonnegotiable paper commonly known as Securities
and other instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held
by the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested
telex, a written (including, without limitation, facsimile
transmission) request, direction, instruction or certification
signed or initialed by or on behalf of a Fund by an Authorized
Person; (ii) a telephonic or other oral communication from a
person the Custodian reasonably believes to be an Authorized
Person; or (iii) a communication effected
<PAGE> 5
directly between an electro-mechanical or electronic
device or system (including, without limitation, computers) on
behalf of a Fund. Instructions in the form of oral
communications shall be confirmed by the appropriate Fund by
tested telex or in writing in the manner set forth in clause
(i) above, but the lack of such confirmation shall in no way
affect any action taken by the Custodian in reliance upon such
oral Instructions prior to the Custodian's receipt of such
confirmation. Each Fund authorizes the Custodian to record any
and all telephonic or other oral Instructions communicated to
the Custodian.
(c)(2) "Special Instructions", as used herein, shall mean
Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of a Fund or any other
person designated by the Treasurer of such Fund in writing,
which countersignature or confirmation shall be included on
the same instrument containing the Instructions or on a
separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to
the Custodian at the address and/or telephone, facsimile
transmission or telex number agreed upon from time to time by
the Custodian and each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall
be continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution
does not violate any of the provisions of its respective charter,
articles of incorporation, articles of association or bylaws and all
required corporate action to authorize the execution and delivery of
this Agreement has been taken.
Each Fund has furnished the Custodian with copies, properly certified
or authenticated, with all amendments or supplements thereto, of the
following documents:
(a) Certificate of Incorporation (or equivalent document) of the
Fund as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing
the Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
Each Fund shall promptly furnish the Custodian with copies of any
updates, amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or
Trustees and all amendments or supplements thereto, properly certified
or authenticated, designating certain officers or employees of
<PAGE> 6
each such Fund who will have continuing authority to
certify to the Custodian: (a) the names, titles, signatures and
scope of authority of all persons authorized to give
Instructions or any other notice, request, direction,
instruction, certificate or instrument on behalf of each Fund,
and (b) the names, titles and signatures of those persons
authorized to countersign or confirm Special Instructions on
behalf of each Fund (in both cases collectively, the
"Authorized Persons" and individually, an "Authorized Person").
Such Resolutions and certificates may be accepted and relied
upon by the Custodian as conclusive evidence of the facts set
forth therein and shall be considered to be in full force and
effect until delivery to the Custodian of a similar Resolution
or certificate to the contrary. Upon delivery of a certificate
which deletes or does not include the name(s) of a person
previously authorized to give Instructions or to countersign or
confirm Special Instructions, such persons shall no longer be
considered an Authorized Person authorized to give Instructions
or to countersign or confirm Special Instructions. Unless the
certificate specifically requires that the approval of anyone
else will first have been obtained, the Custodian will be under
no obligation to inquire into the right of the person giving
such Instructions or Special Instructions to do so.
Notwithstanding any of the foregoing, no Instructions or
Special Instructions received by the Custodian from a Fund will
be deemed to authorize or permit any director, trustee,
officer, employee, or agent of such Fund to withdraw any of the
Assets of such Fund upon the mere receipt of such
authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to
Sections 5(b), (c), or (d) of this Agreement, the Custodian shall have
and perform the powers and duties hereinafter set forth in this
Section 4. For purposes of this Section 4 all references to powers
and duties of the "Custodian" shall also refer to any Domestic
Subcustodian appointed pursuant to Section 5(a).
(a) Safekeeping.
The Custodian will keep safely the Assets of each Fund which
are delivered to it from time to time. The Custodian shall
not be responsible for any property of a Fund held or received
by such Fund and not delivered to the Custodian.
(b) Manner of Holding Securities.
(1) The Custodian shall at all times hold Securities of each
Fund either: (i) by physical possession of the share
certificates or other instruments representing such
Securities in registered or bearer form; or (ii) in
book-entry form by a Securities System (as hereinafter
defined) in accordance with the provisions of
sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities
which have been delivered to it in physical form, by
registering the same in the name of the appropriate Fund
or its nominee, or in the name of the Custodian or its
nominee, for whose actions such Fund and Custodian,
respectively, shall be
<PAGE> 7
fully responsible. Upon the receipt of Instructions,
the Custodian shall hold such Securities in street certificate
form, so called, with or without any indication of fiduciary
capacity. However, unless it receives Instructions to the
contrary, the Custodian will register all such portfolio
Securities in the name of the Custodian's authorized nominee.
All such Securities shall be held in an account of the
Custodian containing only assets of the appropriate Fund or
only assets held by the Custodian as a fiduciary, provided that
the records of the Custodian shall indicate at all times the
Fund or other customer for which such Securities are held in
such accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic
Securities owned by a Fund in, and each Fund hereby approves
use of: (a) The Depository Trust Company; (b) The Participants
Trust Company; and (c) any book-entry system as provided in (i)
Subpart 0 of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76,
31 CFR 350.2, or (iii) the book-entry regulations of federal
agencies substantially in the form of 31 CFR 306.115. Upon the
receipt of Special Instructions, the Custodian may deposit
and/or maintain domestic Securities owned by a Fund in any
other domestic clearing agency registered with the Securities
and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be
authorized by the SEC to serve in the capacity of depository or
clearing agent for the Securities or other assets of investment
companies) which acts as a Securities depository. Each of the
foregoing shall be referred to in this Agreement as a
"Securities System", and all such Securities Systems shall be
listed on the attached Appendix A. Use of a Securities System
shall be in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the
following provisions:
(i) The Custodian may deposit the Securities directly
or through one or more agents or Subcustodians
which are also qualified to act as custodians for
investment companies.
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that
such Securities are represented in an account
("Account") of the Custodian in the Securities
System that includes only assets held by the
Custodian as a fiduciary, custodian or otherwise
for customers.
(iii) The books and records of the Custodian shall at
all times identify those Securities belonging to
any one or more Funds which are maintained in a
Securities System.
(iv) The Custodian shall pay for Securities purchased
for the account of a Fund only upon (a) receipt
of advice from the Securities System that such
Securities have been transferred to the Account
of the Custodian in accordance with the rules of
the Securities System, and (b) the
<PAGE> 8
making of an entry on the records of the
Custodian to reflect such payment and transfer for
the account of such Fund. The Custodian shall
transfer Securities sold for the account of a Fund
only upon (a) receipt of advice from the
Securities System that payment for such Securities
has been transferred to the Account of the
Custodian in accordance with the rules of the
Securities System, and (b) the making of an entry
on the records of the Custodian to reflect such
transfer and payment for the account of such
Fund. Copies of all advices from the Securities
System relating to transfers of Securities for the
account of a Fund shall be maintained for such
Fund by the Custodian. The Custodian shall
deliver to a Fund on the next succeeding business
day daily transaction reports which shall include
each day's transactions in the Securities System
for the account of such Fund. Such transaction
reports shall be delivered to such Fund or any
agent designated by such Fund pursuant to
Instructions, by computer or in such other manner
as such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund
pursuant to Instructions, provide such Fund with
reports obtained by the Custodian or any
Subcustodian with respect to a Securities
System's accounting system, internal accounting
control and procedures for safeguarding
Securities deposited in the Securities System.
(vi) Upon receipt of Special Instructions, the
Custodian shall terminate the use of any
Securities System on behalf of a Fund as promptly
as practicable and shall take all actions
reasonably practicable to safeguard the
Securities of such Fund maintained with such
Securities System.
(c) Free Delivery of Assets.
Notwithstanding any other provision of this Agreement and
except as provided in Section 3 hereof, the Custodian, upon
receipt of Special Instructions, will undertake to make free
delivery of Assets, provided such Assets are on hand and
available, in connection with a Fund's transactions and to
transfer such Assets to such broker, dealer, Subcustodian,
bank, agent, Securities System or otherwise as specified in
such Special Instructions.
(d) Exchange of Securities.
Upon receipt of Instructions, the Custodian will exchange
portfolio Securities held by it for a Fund for other
Securities or cash paid in connection with any reorganization,
recapitalization, merger, consolidation, or conversion of
convertible Securities, and will deposit any such Securities
in accordance with the terms of any reorganization or
protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in
definitive form, to surrender Securities for transfer into a
name or nominee name as permitted in Section 4(b)(2), to
effect an
<PAGE> 9
exchange of shares in a stock split or when the par
value of the stock is changed, to sell any fractional shares,
and, upon receiving payment therefor, to surrender bonds or
other Securities held by it at maturity or call.
(e) Purchase of Assets.
(1) Securities Purchases. In accordance with Instructions,
the Custodian shall, with respect to a purchase of
Securities, pay for such Securities out of monies held
for a Fund's account for which the purchase was made,
but only insofar as monies are available therein for
such purpose, and receive the portfolio Securities so
purchased. Unless the Custodian has received Special
Instructions to the contrary, such payment will be made
only upon receipt of Securities by the Custodian, a
clearing corporation of a national Securities exchange
of which the Custodian is a member, or a Securities
System in accordance with the provisions of Section
4(b)(3) hereof. Notwithstanding the foregoing, upon
receipt of Instructions: (i) in connection with a
repurchase agreement, the Custodian may release funds to
a Securities System prior to the receipt of advice from
the Securities System that the Securities underlying
such repurchase agreement have been transferred by
book-entry into the Account maintained with such
Securities System by the Custodian, provided that the
Custodian's instructions to the Securities System
require that the Securities System may make payment of
such funds to the other party to the repurchase
agreement only upon transfer by book-entry of the
Securities underlying the repurchase agreement into such
Account; (ii) in the case of Interest Bearing Deposits,
currency deposits, and other deposits, foreign exchange
transactions, futures contracts or options, pursuant to
Sections 4(g), 4(h), 4(1), and 4(m) hereof, the
Custodian may make payment therefor before receipt of an
advice of transaction; and (iii) in the case of
Securities as to which payment for the Security and
receipt of the instrument evidencing the Security are
under generally accepted trade practice or the terms of
the instrument representing the Security expected to
take place in different locations or through separate
parties, such as commercial paper which is indexed to
foreign currency exchange rates, derivatives and similar
Securities, the Custodian may make payment for such
Securities prior to delivery thereof in accordance with
such generally accepted trade practice or the terms of
the instrument representing such Security.
(2) Other Assets Purchased. Upon receipt of Instructions
and except as otherwise provided herein, the Custodian
shall pay for and receive other Assets for the account
of a Fund as provided in Instructions.
(f) Sales of Assets.
(1) Securities Sold. In accordance with Instructions, the
Custodian will, with respect to a sale, deliver or cause
to be delivered the Securities thus designated as sold
to the broker or other person specified in the
Instructions relating to such sale. Unless the
Custodian has received Special Instructions
<PAGE> 10
to the contrary, such delivery shall be made only upon
receipt of payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank
wire transfer; (b) credit to the account of the Custodian with
a clearing corporation of a national Securities exchange of
which the Custodian is a member; or (c) credit to the Account
of the Custodian with a Securities System, in accordance with
the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the Custodian
of a receipt for such Securities, provided that the Custodian
shall have taken reasonable steps to ensure prompt collection
of the payment for, or return of, such Securities by the broker
or its clearing agent, and provided further that the Custodian
shall not be responsible for the selection of or the failure or
inability to perform of such broker or its clearing agent or
for any related loss arising from delivery or custody of such
Securities prior to receiving payment therefor.
(2) Other Assets Sold. Upon receipt of Instructions
and except as otherwise provided herein, the Custodian shall
receive payment for and deliver other Assets for the account of
a Fund as provided in Instructions.
(g) Options.
(1) Upon receipt of Instructions relating to the
purchase of an option or sale of a covered call option, the
Custodian shall: (a) receive and retain confirmations or other
documents, if any, evidencing the purchase or writing of the
option by a Fund; (b) if the transaction involves the sale of a
covered call option, deposit and maintain in a segregated
account the Securities (either physically or by book-entry in a
Securities System) subject to the covered call option written
on behalf of such Fund; and (c) pay, release and/or transfer
such Securities, cash or other Assets in accordance with any
notices or other communications evidencing the expiration,
termination or exercise of such options which are furnished to
the Custodian by the Options Clearing Corporation (the "OCC"),
the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for
handling such option transactions.
(2) Upon receipt of Instructions relating to the sale
of a naked option (including stock index and commodity
options), the Custodian, the appropriate Fund and the
broker-dealer shall enter into an agreement to comply with the
rules of the OCC or of any registered national securities
exchange or similar organizations(s). Pursuant to that
agreement and such Fund's Instructions, the Custodian shall:
(a) receive and retain confirmations or other documents, if
any, evidencing the writing of the option; (b) deposit and
maintain in a segregated account, Securities (either physically
or by book-entry in a Securities System), cash and/or other
Assets; and (c) pay, release and/or transfer such Securities,
cash or other Assets in accordance with any such agreement and
with any notices or other communications evidencing the
<PAGE> 11
expiration, termination or exercise of such option which
are furnished to the Custodian by the OCC, the securities or
options exchanges on which such options were traded, or such
other organization as may be responsible for handling such
option transactions. The appropriate Fund and the
broker-dealer shall be responsible for determining the quality
and quantity of assets held in any segregated account
established in compliance with applicable margin maintenance
requirements and the performance of other terms of any option
contract.
(h) Futures Contracts.
Upon receipt of Instructions, the Custodian shall enter into a
futures margin procedural agreement among the appropriate
Fund, the Custodian and the designated futures commission
merchant (a "Procedural Agreement"). Under the Procedural
Agreement the Custodian shall: (a) receive and retain
confirmations, if any, evidencing the purchase or sale of a
futures contract or an option on a futures contract by such
Fund; (b) deposit and maintain in a segregated account cash,
Securities and/or other Assets designated as initial,
maintenance or variation "margin" deposits intended to secure
such Fund's performance of its obligations under any futures
contracts purchased or sold, or any options on futures
contracts written by such Fund, in accordance with the
provisions of any Procedural Agreement designed to comply with
the provisions of the Commodity Futures Trading Commission
and/or any commodity exchange or contract market (such as the
Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release Assets from
and/or transfer Assets into such margin accounts only in
accordance with any such Procedural Agreements. The
appropriate Fund and such futures commission merchant shall be
responsible for determining the type and amount of Assets held
in the segregated account or paid to the broker-dealer in
compliance with applicable margin maintenance requirements and
the performance of any futures contract or option on a futures
contract in accordance with its terms.
(i) Segregated Accounts.
Upon receipt of Instructions, the Custodian shall establish
and maintain on its books a segregated account or accounts for
and on behalf of a Fund, into which account or accounts may be
transferred Assets of such Fund, including Securities
maintained by the Custodian in a Securities System pursuant to
Paragraph (b)(3) of this Section 4, said account or accounts
to be maintained (i) for the purposes set forth in Sections
4(g), 4(h) and 4(n) and (ii) for the purpose of compliance by
such Fund with the procedures required by the SEC Investment
Company Act Release Number 10666 or any subsequent release or
releases relating to the maintenance of segregated accounts by
registered investment companies, or (iii) for such other
purposes as may be set forth, from time to time, in Special
Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in
any segregated account referred to in this paragraph, or for
compliance by the Fund with required procedures noted in (ii)
above.
<PAGE> 12
(j) Depository Receipts.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered Securities to the depositary used for
such Securities by an issuer of American Depositary Receipts
or International Depositary Receipts (hereinafter referred to,
collectively, as "ADRs"), against a written receipt therefor
adequately describing such Securities and written evidence
satisfactory to the organization surrendering the same that
the depositary has acknowledged receipt of instructions to
issue ADRs with respect to such Securities in the name of the
Custodian or a nominee of the Custodian, for delivery in
accordance with such instructions.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered ADRs to the issuer thereof, against a
written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the
organization surrendering the same that the issuer of the ADRs
has acknowledged receipt of instructions to cause its
depository to deliver the Securities underlying such ADRs in
accordance with such instructions.
(k) Corporate Actions, Put Bonds, Called Bonds, Etc.
Upon receipt of Instructions, the Custodian shall: (a)
deliver warrants, puts, calls, rights or similar Securities to
the issuer or trustee thereof (or to the agent of such issuer
or trustee) for the purpose of exercise or sale, provided that
the new Securities, cash or other Assets, if any, acquired as
a result of such actions are to be delivered to the Custodian;
and (b) deposit Securities upon invitations for tenders
thereof, provided that the consideration for such Securities
is to be paid or delivered to the Custodian, or the tendered
Securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the
contrary, the Custodian shall take all necessary action,
unless otherwise directed to the contrary in Instructions, to
comply with the terms of all mandatory or compulsory
exchanges, calls, tenders, redemptions, or similar rights of
security ownership, and shall notify the appropriate Fund of
such action in writing by facsimile transmission or in such
other manner as such Fund and Custodian may agree in writing.
The Fund agrees that if it gives an Instruction for the
performance of an act on the last permissible date of a period
established by any optional offer or on the last permissible
date for the performance of such act, the Fund shall hold the
Bank harmless from any adverse consequences in connection with
acting upon or failing to act upon such Instructions.
(l) Interest Bearing Deposits.
Upon receipt of Instructions directing the Custodian to
purchase interest bearing fixed term and call deposits
(hereinafter referred to, collectively, as "Interest Bearing
Deposits") for the account of a Fund, the Custodian shall
purchase such Interest Bearing Deposits in the name of such
Fund with such banks or trust
<PAGE> 13
companies, including the Custodian, any Subcustodian or
any subsidiary or affiliate of the Custodian (hereinafter
referred to as "Banking Institutions"), and in such amounts as
such Fund may direct pursuant to Instructions. Such Interest
Bearing Deposits may be denominated in U.S. dollars or other
currencies, as such Fund may determine and direct pursuant to
Instructions. The responsibilities of the Custodian to a Fund
for Interest Bearing Deposits issued by the Custodian shall be
that of a U.S. bank for a similar deposit. With respect to
Interest Bearing Deposits other than those issued by the
Custodian, (a) the Custodian shall be responsible for the
collection of income and the transmission of cash to and from
such accounts; and (b) the Custodian shall have no duty with
respect to the selection of the Banking Institution or for the
failure of such Banking Institution to pay upon demand.
(m) Foreign Exchange Transactions Other than as Principal.
(1) Upon receipt of Instructions, the Custodian shall settle
foreign exchange contracts or options to purchase and
sell foreign currencies for spot and future delivery on
behalf of and for the account of a Fund with such
currency brokers or Banking Institutions as such Fund
may determine and direct pursuant to Instructions. Each
Fund accepts full responsibility for its use of third
party foreign exchange brokers and for execution of said
foreign exchange contracts and understands that the Fund
shall be responsible for any and all costs and interest
charges which may be incurred as a result of the failure
or delay of its third party broker to deliver foreign
exchange. The Custodian shall have no responsibility
with respect to the selection of the currency brokers or
Banking Institutions with which a Fund deals or, so long
as the Custodian acts in accordance with Instructions,
for the failure of such brokers or Banking Institutions
to comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained
herein, upon receipt of Instructions the Custodian may,
in connection with a foreign exchange contract, make
free outgoing payments of cash in the form of U.S.
Dollars or foreign currency prior to receipt of
confirmation of such foreign exchange contract or
confirmation that the countervalue currency completing
such contract has been delivered or received.
(n) Pledges or Loans of Securities.
(1) Upon receipt of Instructions from a Fund, the Custodian
will release or cause to be released Securities held in
custody to the pledgees designated in such Instructions
by way of pledge or hypothecation to secure loans
incurred by such Fund with various lenders including but
not limited to UMB Bank, n.a.; provided, however, that
the Securities shall be released only upon payment to
the Custodian of the monies borrowed, except that in
cases where additional collateral is required to secure
existing borrowings, further Securities may be released
or delivered, or caused to be released or delivered for
that purpose upon receipt of Instructions. Upon receipt
of Instructions, the Custodian will
<PAGE> 14
pay, but only from funds available for such purpose, any
such loan upon re-delivery to it of the Securities pledged or
hypothecated therefor and upon surrender of the note or notes
evidencing such loan. In lieu of delivering collateral to a
pledgee, the Custodian, on the receipt of Instructions, shall
transfer the pledged Securities to a segregated account for the
benefit of the pledgee.
(2) Upon receipt of Special Instructions, and
execution of a separate Securities Lending Agreement, the
Custodian will release Securities held in custody to the
borrower designated in such Instructions and may, except as
otherwise provided below, deliver such Securities prior to the
receipt of collateral, if any, for such borrowing, provided
that, in case of loans of Securities held by a Securities
System that are secured by cash collateral, the Custodian's
instructions to the Securities System shall require that the
Securities System deliver the Securities of the appropriate
Fund to the borrower thereof only upon receipt of the
collateral for such borrowing. The Custodian shall have no
responsibility or liability for any loss arising from the
delivery of Securities prior to the receipt of collateral.
Upon receipt of Instructions and the loaned Securities, the
Custodian will release the collateral to the borrower.
(o) Stock Dividends, Rights, Etc.
The Custodian shall receive and collect all stock dividends,
rights, and other items of like nature and, upon receipt of
Instructions, take action with respect to the same as directed
in such Instructions.
(p) Routine Dealings.
The Custodian will, in general, attend to all routine and
mechanical matters in accordance with industry standards in
connection with the sale, exchange, substitution, purchase,
transfer, or other dealings with Securities or other property
of each Fund except as may be otherwise provided in this
Agreement or directed from time to time by Instructions from
any particular Fund. The Custodian may also make payments to
itself or others from the Assets for disbursements and
out-of-pocket expenses incidental to handling Securities or
other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted
for to the appropriate Fund.
(q) Collections.
The Custodian shall (a) collect amounts due and payable to
each Fund with respect to portfolio Securities and other
Assets; (b) promptly credit to the account of each Fund all
income and other payments relating to portfolio Securities and
other Assets held by the Custodian hereunder upon Custodian's
receipt of such income or payments or as otherwise agreed in
writing by the Custodian and any particular Fund; (c) promptly
endorse and deliver any instruments required to effect such
collection; and (d) promptly execute ownership and other
certificates and affidavits
<PAGE> 15
for all federal, state, local and foreign tax purposes
in connection with receipt of income or other payments with
respect to portfolio Securities and other Assets, or in
connection with the transfer of such Securities or other
Assets; provided, however, that with respect to portfolio
Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall
use its best efforts to collect amounts due and payable to any
such Fund. The Custodian shall notify a Fund in writing by
facsimile transmission or in such other manner as such Fund and
Custodian may agree in writing if any amount payable with
respect to portfolio Securities or other Assets is not received
by the Custodian when due. The Custodian shall not be
responsible for the collection of amounts due and payable with
respect to portfolio Securities or other Assets that are in
default.
(r) Bank Accounts.
Upon Instructions, the Custodian shall open and operate a bank
account or accounts on the books of the Custodian; provided
that such bank account(s) shall be in the name of the
Custodian or a nominee thereof, for the account of one or more
Funds, and shall be subject only to draft or order of the
Custodian. The responsibilities of the Custodian to any one
or more such Funds for deposits accepted on the Custodian's
books shall be that of a U.S. bank for a similar deposit.
(s) Dividends, Distributions and Redemptions.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to
shareholders who have requested repurchase or redemption of
their shares of each such Fund (collectively, the "Shares"),
the Custodian shall release cash or Securities insofar as
available. In the case of cash, the Custodian shall, upon the
receipt of Instructions, transfer such funds by check or wire
transfer to any account at any bank or trust company
designated by each such Fund in such Instructions. In the
case of Securities, the Custodian shall, upon the receipt of
Special Instructions, make such transfer to any entity or
account designated by each such Fund in such Special
Instructions.
(t) Proceeds from Shares Sold.
The Custodian shall receive funds representing cash payments
received for shares issued or sold from time to time by each
Fund, and shall credit such funds to the account of the
appropriate Fund. The Custodian shall notify the appropriate
Fund of Custodian's receipt of cash in payment for shares
issued by such Fund by facsimile transmission or in such other
manner as such Fund and the Custodian shall agree. Upon
receipt of Instructions, the Custodian shall: (a) deliver all
federal funds received by the Custodian in payment for shares
as may be set forth in such Instructions and at a time agreed
upon between the Custodian and such Fund; and (b) make federal
funds available to a Fund as of specified times agreed upon
from time to time by such Fund and the Custodian, in the
amount of checks received in payment for shares which are
deposited to the accounts of such Fund.
<PAGE> 16
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985.
The Custodian shall deliver or cause to be delivered to the
appropriate Fund all forms of proxies, all notices of
meetings, and any other notices or announcements affecting or
relating to Securities owned by such Fund that are received by
the Custodian, any Subcustodian, or any nominee of either of
them, and, upon receipt of Instructions, the Custodian shall
execute and deliver, or cause such Subcustodian or nominee to
execute and deliver, such proxies or other authorizations as
may be required. Except as directed pursuant to Instructions,
neither the Custodian nor any Subcustodian or nominee shall
vote upon any such Securities, or execute any proxy to vote
thereon, or give any consent or take any other action with
respect thereto.
The Custodian will not release the identity of any Fund to an
issuer which requests such information pursuant to the
Shareholder Communications Act of 1985 for the specific
purpose of direct communications between such issuer and any
such Fund unless a particular Fund directs the Custodian
otherwise in writing.
(v) Books and Records.
The Custodian shall maintain such records relating to its
activities under this Agreement as are required to be
maintained by Rule 31a-1 under the Investment Company Act of
1940 ("the 1940 Act") and to preserve them for the periods
prescribed in Rule 31a-2 under the 1940 Act. These records
shall be open for inspection by duly authorized officers,
employees or agents (including independent public accountants)
of the appropriate Fund during normal business hours of the
Custodian.
The Custodian shall provide accountings relating to its
activities under this Agreement as shall be agreed upon by
each Fund and the Custodian.
(w) Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as each Fund
may request to obtain from year to year favorable opinions
from each such Fund's independent certified public accountants
with respect to the Custodian's activities hereunder and in
connection with the preparation of each such Fund's periodic
reports to the SEC and with respect to any other requirements
of the SEC.
(x) Reports by Independent Certified Public Accountants.
At the request of a Fund, the Custodian shall deliver to such
Fund a written report prepared by the Custodian's independent
certified public accountants with respect to the services
provided by the Custodian under this Agreement, including,
without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding
cash, Securities and other Assets, including cash, Securities
and other Assets deposited and/or maintained in a Securities
System or
<PAGE> 17
with a Subcustodian. Such report shall be of sufficient
scope and in sufficient detail as may reasonably be required by
such Fund and as may reasonably be obtained by the Custodian.
(y) Bills and Other Disbursements.
Upon receipt of Instructions, the Custodian shall pay, or
cause to be paid, all bills, statements, or other obligations
of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic
Subcustodians, Foreign Subcustodians, Special Subcustodians, or
Interim Subcustodians (as each are hereinafter defined) to act on
behalf of any one or more Funds. A Domestic Subcustodian, in
accordance with the provisions of this Agreement, may also appoint a
Foreign Subcustodian, Special Subcustodian, or Interim Subcustodian to
act on behalf of any one or more Funds. For purposes of this
Agreement, all Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians and Interim Subcustodians shall be referred to
collectively as "Subcustodians".
(a) Domestic Subcustodians.
The Custodian may, at any time and from time to time, appoint
any bank as defined in Section 2(a)(5) of the 1940 Act or any
trust company or other entity, any of which meet the
requirements of a custodian under Section 17(f) of the 1940
Act and the rules and regulations thereunder, to act for the
Custodian on behalf of any one or more Funds as a subcustodian
for purposes of holding Assets of such Fund(s) and performing
other functions of the Custodian within the United States (a
"Domestic Subcustodian"). Each Fund shall approve in writing
the appointment of the proposed Domestic Subcustodian; and the
Custodian's appointment of any such Domestic Subcustodian
shall not be effective without such prior written approval of
the Fund(s). Each such duly approved Domestic Subcustodian
shall be listed on Appendix A attached hereto, as it may be
amended, from time to time.
(b) Foreign Subcustodians.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other
entity meeting the requirements of an "eligible foreign
custodian" under Section 17(f) of the 1940 Act and the rules
and regulations thereunder to act for the Custodian on behalf
of any one or more Funds as a subcustodian or sub-subcustodian
(if appointed by a Domestic Subcustodian) for purposes of
holding Assets of the Fund(s) and performing other functions
of the Custodian in countries other than the United States of
America (hereinafter referred to as a "Foreign Subcustodian"
in the context of either a subcustodian or a
sub-subcustodian); provided that the Custodian shall have
obtained written confirmation from each Fund of the approval
of the Board of Directors or other governing body of each such
Fund (which approval may be withheld in the sole
<PAGE> 18
discretion of such Board of Directors or other governing
body or entity) with respect to (i) the identity of any
proposed Foreign Subcustodian (including branch designation),
(ii) the country or countries in which, and the securities
depositories or clearing agencies (hereinafter "Securities
Depositories and Clearing Agencies"), if any, through which,
the Custodian or any proposed Foreign Subcustodian is
authorized to hold Securities and other Assets of each such
Fund, and (iii) the form and terms of the subcustodian
agreement to be entered into with such proposed Foreign
Subcustodian. Each such duly approved Foreign Subcustodian and
the countries where and the Securities Depositories and
Clearing Agencies through which they may hold Securities and
other Assets of the Fund(s) shall be listed on Appendix A
attached hereto, as it may be amended, from time to time. Each
Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be
held in a country in which no Foreign Subcustodian is
authorized to act, in order that there shall be sufficient time
for the Custodian, or any Domestic Subcustodian, to effect the
appropriate arrangements with a proposed Foreign Subcustodian,
including obtaining approval as provided in this Section 5(b).
In connection with the appointment of any Foreign Subcustodian,
the Custodian shall, or shall cause the Domestic Subcustodian
to, enter into a subcustodian agreement with the Foreign
Subcustodian in form and substance approved by each such Fund.
The Custodian shall not consent to the amendment of, and shall
cause any Domestic Subcustodian not to consent to the amendment
of, any agreement entered into with a Foreign Subcustodian,
which materially affects any Fund's rights under such
agreement, except upon prior written approval of such Fund
pursuant to Special Instructions.
(c) Interim Subcustodians.
Notwithstanding the foregoing, in the event that a Fund shall
invest in an Asset to be held in a country in which no Foreign
Subcustodian is authorized to act, the Custodian shall notify
such Fund in writing by facsimile transmission or in such
other manner as such Fund and the Custodian shall agree in
writing of the unavailability of an approved Foreign
Subcustodian in such country; and upon the receipt of Special
Instructions from such Fund, the Custodian shall, or shall
cause its Domestic Subcustodian to, appoint or approve an
entity (referred to herein as an "Interim Subcustodian")
designated in such Special Instructions to hold such Security
or other Asset.
(d) Special Subcustodians.
Upon receipt of Special Instructions, the Custodian shall on
behalf of a Fund, appoint one or more banks, trust companies
or other entities designated in such Special Instructions to
act for the Custodian on behalf of such Fund as a subcustodian
for purposes of: (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities
through the use of a common custodian or subcustodian; (ii)
providing depository and clearing agency services with respect
to certain variable rate demand note Securities, (iii)
providing depository and clearing agency services with respect
to dollar denominated Securities, and (iv) effecting any other
transactions designated by such Fund in such Special
<PAGE> 19
Instructions. Each such designated subcustodian
(hereinafter referred to as a "Special Subcustodian") shall be
listed on Appendix A attached hereto, as it may be amended from
time to time. In connection with the appointment of any
Special Subcustodian, the Custodian shall enter into a
subcustodian agreement with the Special Subcustodian in form
and substance approved by the appropriate Fund in Special
Instructions. The Custodian shall not amend any subcustodian
agreement entered into with a Special Subcustodian, or waive
any rights under such agreement, except upon prior approval
pursuant to Special Instructions.
(e) Termination of a Subcustodian.
The Custodian may, at any time in its discretion upon
notification to the appropriate Fund(s), terminate any
Subcustodian of such Fund(s) in accordance with the
termination provisions under the applicable subcustodian
agreement, and upon the receipt of Special Instructions, the
Custodian will terminate any Subcustodian in accordance with
the termination provisions under the applicable subcustodian
agreement.
(f) Certification Regarding Foreign Subcustodians.
Upon request of a Fund, the Custodian shall deliver to such
Fund a certificate stating: (i) the identity of each Foreign
Subcustodian then acting on behalf of the Custodian; (ii) the
countries in which and the Securities Depositories and
Clearing Agencies through which each such Foreign Subcustodian
is then holding cash, Securities and other Assets of such
Fund; and (iii) such other information as may be requested by
such Fund, and as the Custodian shall be reasonably able to
obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) General Standard of Care.
The Custodian shall be liable to a Fund for all losses,
damages and reasonable costs and expenses suffered or incurred
by such Fund resulting from the gross negligence or willful
misfeasance of the Custodian; provided, however, in no event
shall the Custodian be liable for special, indirect or
consequential damages arising under or in connection with this
Agreement.
(b) Actions Prohibited by Applicable Law, Events Beyond
Custodian's Control, Sovereign Risk, Etc.
In no event shall the Custodian or any Domestic Subcustodian
incur liability hereunder if the Custodian or any Subcustodian
or Securities System, or any subcustodian, Securities System,
Securities Depository or Clearing Agency utilized by the
Custodian or any such Subcustodian, or any nominee of the
Custodian or any Subcustodian (individually, a "Person") is
prevented, forbidden or delayed from performing, or omits to
perform, any act or thing which this Agreement provides shall
be performed or omitted to be performed, by reason of: (i)
any
<PAGE> 20
provision of any present or future law or regulation or
order of the United States of America, or any state thereof, or
of any foreign country, or political subdivision thereof or of
any court of competent jurisdiction (and neither the Custodian
nor any other Person shall be obligated to take any action
contrary thereto); or (ii) any event beyond the control of the
Custodian or other Person such as armed conflict, riots,
strikes, lockouts, labor disputes, equipment or transmission
failures, natural disasters, or failure of the mails,
transportation, communications or power supply; or (iii) any
"Sovereign Risk." A "Sovereign Risk" shall mean
nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar
action by any governmental authority, de facto or de jure; or
enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange
controls, taxes, levies or other charges affecting a Fund's
Assets; or acts of armed conflict, terrorism, insurrection or
revolution; or any other act or event beyond the Custodian's or
such other Person's control.
(c) Liability for Past Records.
Neither the Custodian nor any Domestic Subcustodian shall have
any liability in respect of any loss, damage or expense
suffered by a Fund, insofar as such loss, damage or expense
arises from the performance of the Custodian or any Domestic
Subcustodian in reliance upon records that were maintained for
such Fund by entities other than the Custodian or any Domestic
Subcustodian prior to the Custodian's employment hereunder.
(d) Advice of Counsel.
The Custodian and all Domestic Subcustodians shall be entitled
to receive and act upon advice of counsel of its own choosing
on all matters. The Custodian and all Domestic Subcustodians
shall be without liability for any actions taken or omitted in
good faith pursuant to the advice of counsel.
(e) Advice of the Fund and Others.
The Custodian and any Domestic Subcustodian may rely upon the
advice of any Fund and upon statements of such Fund's
accountants and other persons believed by it in good faith to
be expert in matters upon which they are consulted, and
neither the Custodian nor any Domestic Subcustodian shall be
liable for any actions taken or omitted, in good faith,
pursuant to such advice or statements.
(f) Instructions Appearing to be Genuine.
The Custodian and all Domestic Subcustodians shall be fully
protected and indemnified in acting as a custodian hereunder
upon any Resolutions of the Board of Directors or Trustees,
Instructions, Special Instructions, advice, notice, request,
consent, certificate, instrument or paper appearing to it to
be genuine and to have been properly executed and shall,
unless otherwise specifically provided herein, be entitled to
receive as conclusive proof of any fact or matter required to
be
<PAGE> 21
ascertained from any Fund hereunder a certificate signed
by any officer of such Fund authorized to countersign or
confirm Special Instructions.
(g) Exceptions from Liability.
Without limiting the generality of any other provisions
hereof, neither the Custodian nor any Domestic Subcustodian
shall be under any duty or obligation to inquire into, nor be
liable for:
(i) the validity of the issue of any Securities purchased by
or for any Fund, the legality of the purchase thereof or
evidence of ownership required to be received by any
such Fund, or the propriety of the decision to purchase
or amount paid therefor;
(ii) the legality of the sale of any Securities by or for any
Fund, or the propriety of the amount for which the same
were sold; or
(iii) any other expenditures, encumbrances of Securities,
borrowings or similar actions with respect to any
Fund's Assets;
and may, until notified to the contrary, presume that all
Instructions or Special Instructions received by it are not in
conflict with or in any way contrary to any provisions of any
such Fund's Declaration of Trust, Partnership Agreement,
Articles of Incorporation or By-Laws or votes or proceedings
of the shareholders, trustees, partners or directors of any
such Fund, or any such Fund's currently effective Registration
Statement on file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) Domestic Subcustodians
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or
omissions were performed by the Custodian itself.
(b) Liability for Acts and Omissions of Foreign Subcustodians.
The Custodian shall be liable to a Fund for any loss or damage
to such Fund caused by or resulting from the acts or omissions
of any Foreign Subcustodian to the extent that, under the
terms set forth in the subcustodian agreement between the
Custodian or a Domestic Subcustodian and such Foreign
Subcustodian, the Foreign Subcustodian has failed to perform
in accordance with the standard of conduct imposed under such
subcustodian agreement and the Custodian or Domestic
Subcustodian recovers from the Foreign Subcustodian under the
applicable subcustodian agreement.
<PAGE> 22
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing Agencies.
The Custodian shall not be liable to any Fund for any loss,
damage or expense suffered or incurred by such Fund resulting
from or occasioned by the actions or omissions of a Securities
System, Interim Subcustodian, Special Subcustodian, or
Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the gross
negligence or willful misfeasance of the Custodian.
(d) Defaults or Insolvencies of Brokers, Banks, Etc.
The Custodian shall not be liable for any loss, damage or
expense suffered or incurred by any Fund resulting from or
occasioned by the actions, omissions, neglects, defaults or
insolvency of any broker, bank, trust company or any other
person with whom the Custodian may deal (other than any of
such entities acting as a Subcustodian, Securities System or
Securities Depository and Clearing Agency, for whose actions
the liability of the Custodian is set out elsewhere in this
Agreement) unless such loss, damage or expense is caused by,
or results from, the gross negligence or willful misfeasance
of the Custodian.
(e) Reimbursement of Expenses.
Each Fund agrees to reimburse the Custodian for all
out-of-pocket expenses incurred by the Custodian in connection
with this Agreement, but excluding salaries and usual overhead
expenses.
8. INDEMNIFICATION.
(a) Indemnification by Fund.
Subject to the limitations set forth in this Agreement, each
Fund agrees to indemnify and hold harmless the Custodian and
its nominees from all losses, damages and expenses (including
attorneys' fees) suffered or incurred by the Custodian or its
nominee caused by or arising from actions taken by the
Custodian, its employees or agents in the performance of its
duties and obligations under this Agreement, including, but
not limited to, any indemnification obligations undertaken by
the Custodian under any relevant subcustodian agreement;
provided, however, that such indemnity shall not apply to the
extent the Custodian is liable under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with
respect to Securities, which action involves the payment of
money or which may, in the opinion of the Custodian, result in
the Custodian or its nominee assigned to such Fund being
liable for the payment of money or incurring liability of some
other form, such Fund, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
<PAGE> 23
(b) Indemnification by Custodian.
Subject to the limitations set forth in this Agreement and in
addition to the obligations provided in Sections 6 and 7, the
Custodian agrees to indemnify and hold harmless each Fund from
all losses, damages and expenses suffered or incurred by each
such Fund caused by the gross negligence or willful
misfeasance of the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing
Agency acting either directly or indirectly under agreement with the
Custodian (each of which for purposes of this Section 9 shall be
referred to as "Custodian"), makes any payment or transfer of funds on
behalf of any Fund as to which there would be, at the close of
business on the date of such payment or transfer, insufficient funds
held by the Custodian on behalf of any such Fund, the Custodian may,
in its discretion without further Instructions, provide an advance
("Advance") to any such Fund in an amount sufficient to allow the
completion of the transaction by reason of which such payment or
transfer of funds is to be made. In addition, in the event the
Custodian is directed by Instructions to make any payment or transfer
of funds on behalf of any Fund as to which it is subsequently
determined that such Fund has overdrawn its cash account with the
Custodian as of the close of business on the date of such payment or
transfer, said overdraft shall constitute an Advance. Any Advance
shall be payable by the Fund on behalf of which the Advance was made
on demand by Custodian, unless otherwise agreed by such Fund and the
Custodian, and shall accrue interest from the date of the Advance to
the date of payment by such Fund to the Custodian at a rate agreed
upon in writing from time to time by the Custodian and such Fund. It
is understood that any transaction in respect of which the Custodian
shall have made an Advance, including but not limited to a foreign
exchange contract or transaction in respect of which the Custodian is
not acting as a principal, is for the account of and at the risk of
the Fund on behalf of which the Advance was made, and not, by reason
of such Advance, deemed to be a transaction undertaken by the
Custodian for its own account and risk. The Custodian and each of the
Funds which are parties to this Agreement acknowledge that the purpose
of Advances is to finance temporarily the purchase or sale of
Securities for prompt delivery in accordance with the settlement terms
of such transactions or to meet emergency expenses not reasonably
foreseeable by a Fund. The Custodian shall promptly notify the
appropriate Fund of any Advance. Such notification shall be sent by
facsimile transmission or in such other manner as such Fund and the
Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under
this Agreement. If the Bank advances cash or securities to the Fund
for any purpose or in the event that the Bank or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims
or liabilities in connection with the performance of its duties
hereunder, except such as may arise from its or its nominee's
negligent action, negligent failure to act or willful misconduct, any
<PAGE> 24
Property at any time held for the Custody Account shall
be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly
reimburse the Bank for any such advance of cash or securities
or any such taxes, charges, expenses, assessments, claims or
liabilities upon request for payment, but should the Fund fail
to so reimburse the Bank, the Bank shall be entitled to dispose
of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account
of the Fund with the Bank including, without limitation, the
Custody Account, in connection with any such advance and any
interest on such advance as the Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as
is agreed to in writing by the Custodian and each such Fund
from time to time. Such compensation, together with all amounts
for which the Custodian is to be reimbursed in accordance with
Section 7(e), shall be billed to each such Fund and paid in
cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian
such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their
respective obligations under this Agreement or any applicable
subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement
by notice in writing, delivered or mailed, postage prepaid
(certified mail, return receipt requested) to the other not
less than 90 days prior to the date upon which such termination
shall take effect. Upon termination of this Agreement, the
appropriate Fund shall pay to the Custodian such fees as may be
due the Custodian hereunder as well as its reimbursable
disbursements, costs and expenses paid or incurred. Upon
termination of this Agreement, the Custodian shall deliver, at
the terminating party's expense, all Assets held by it
hereunder to the appropriate Fund or as otherwise designated by
such Fund by Special Instructions. Upon such delivery, the
Custodian shall have no further obligations or liabilities
under this Agreement except as to the final resolution of
matters relating to activity occurring prior to the effective
date of termination.
This Agreement may not be assigned by the Custodian or
any Fund without the respective consent of the other, duly
authorized by a resolution by its Board of Directors or
Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this
Agreement after the date hereof by an instrument in writing to
such effect signed by such Fund or Funds and the Custodian. If
this Agreement is terminated as to one or more of the Funds
(but less than all of the Funds) or if an additional Fund or
Funds shall become a party to this Agreement, there shall be
delivered to each party an Appendix B or an amended Appendix B,
signed by each of the additional Funds (if any) and each of the
remaining Funds as well as the
<PAGE> 25
Custodian, deleting or adding such Fund or Funds, as the
case may be. The termination of this Agreement as to less than
all of the Funds shall not affect the obligations of the
Custodian and the remaining Funds hereunder as set forth on the
signature page hereto and in Appendix B as revised from time to
time.
15. NOTICES.
As to each Fund, notices, requests, instructions and
other writings delivered to The Security Benefit Group of
Companies, 700 Harrison, Topeka, KS 66636-0001 , postage
prepaid, or to such other address as any particular Fund may
have designated to the Custodian in writing, shall be deemed to
have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings
delivered to the Securities Administration Department of the
Custodian at its office at 928 Grand Avenue, Kansas City,
Missouri, or mailed postage prepaid, to the Custodian's
Securities Administration Department, Post Office Box 226,
Kansas City, Missouri 64141, or to such other addresses as the
Custodian may have designated to each Fund in writing, shall be
deemed to have been properly delivered or given to the
Custodian hereunder; provided, however, that procedures for the
delivery of Instructions and Special Instructions shall be
governed by Section 2(c) hereof.
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the
State of Missouri and shall be governed by the laws
of such state.
(b) All of the terms and provisions of this
Agreement shall be binding upon, and inure to
the benefit of, and be enforceable by the respective
successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended,
modified or waived, in any manner except in
writing, properly executed by both parties hereto;
provided, however, Appendix A may be amended from time
to time as Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians, and Securities
Depositories and Clearing Agencies are approved or
terminated according to the terms of this Agreement.
(d) The captions in this Agreement are included for
convenience of reference only, and in no way
define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date
of execution hereof.
(f) This Agreement may be executed simultaneously in
two or more counterparts, each of which will be
deemed an original, but all of which together will
constitute one and the same instrument.
<PAGE> 26
(g) The following terms are defined terms within the
meaning of this Agreement, and the definitions
thereof are found in the following sections of the
Agreement:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(l)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(l)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
</TABLE>
(h) If any part, term or provision of this Agreement
is held to be illegal, in conflict with any law
or otherwise invalid by any court of competent
jurisdiction, the remaining portion or portions shall
be considered severable and shall not be affected, and
the rights and obligations of the parties shall be
construed and enforced as if this Agreement did not
contain the particular part, term or provision held to
be illegal or invalid.
(i) This Agreement constitutes the entire
understanding and agreement of the parties
hereto with respect to the subject matter hereof, and
accordingly supersedes, as of the effective date of
this Agreement, any custodian agreement heretofore in
effect between the Fund and the Custodian.
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement to be
executed by their respective duly authorized officers.
<TABLE>
<CAPTION>
<S> <C>
ATTEST: Security Ultra Fund
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: Security Growth and Income Fund
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: Security Income Series
Limited Maturity Bond Series
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: Security Income Fund
U. S. Government Series
Amy J. Lee By: John D. Cleland
Title: President
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C>
ATTEST: Security Tax-Exempt Fund
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: Security Cash Fund
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S and J
Amy J. Lee By: John D. Cleland
Title: President
ATTEST: UMB BANK, N.A.
R. William Bloom By: David Swan
Title: Senior Vice President
January 11, 1995
</TABLE>
<PAGE> 29
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
<TABLE>
<CAPTION>
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
--------- --------------------- -----------------
Euroclear
<S> <C>
Security Income Fund
Security Ultra Fund Limited Maturity Bond Series
By: John D. Cleland By: John D. Cleland
Title: President Title: President
Security Equity Fund Security Income Fund
Equity Series U. S. Government Series
By: John D. Cleland By: John D. Cleland
Title: President Title: President
Security Growth and Income Fund SBL Fund
By: John D. Cleland By: John D. Cleland
Title: President Title: President
Security Income Fund
Corporate Bond Series UMB BANK, N.A.
By: John D. Cleland By: David Swan
Title: President Title: Senior Vice President
January 11, 1995
</TABLE>
<PAGE> 30
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
<TABLE>
<S> <C> <C>
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
--------- --------------------- -----------------
Euroclear
</TABLE>
Security Income Fund
High Yield Series
By: JAMES R. SCHMANK
Title: Vice President & Treasurer
SBL Fund
Series B
Series E
Series P
By: JAMES R. SCHMANK
Title: Vice President & Treasurer
UMB BANK, N.A.
By: RALPH SANTORO
Title: Vice President
Date: August 15, 1996
<PAGE> 31
Amendment to Custody Agreement
The following open-end management investment companies ("Funds") are hereby
made parties to the Custody Agreement dated January 1, 1995, with UMB Bank,
n.a. ("Custodian"), and agrees to be bound by all the terms and conditions
contained in said Agreement:
List of Funds
Security Income Fund, High Yield Series
SBL Fund, Series P
<TABLE>
<S> <C>
ATTEST: Security Income Fund
High Yield Series
Amy J. Lee
By: John D. Cleland
Title: President
ATTEST: SBL Fund
Series P
Amy J. Lee By: John D. Cleland
Title: President
Date: August 15, 1996
ATTEST: By: David Swan
Title: Senior Vice President
R. W. Bloom Date: April 29, 1996
</TABLE>
<PAGE> 32
Amendment to Custody Agreement
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund
Social Awareness Series
<TABLE>
<S> <C>
ATTEST: Security Equity Fund
Social Awareness Series
Chris Swickard
By: James R. Schmank
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
William Bloemker By: Ralph Santoro
Title: Vice President
Date: August 15, 1996
</TABLE>
<PAGE> 33
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
Net Asset Value Charges
A fee to be computed as of month-end and payable on the last day of
each month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios,
subject to a $100.00 per month minimum per portfolio.
Portfolio Transaction Charges
DTC Book-Entry Transactions* $ 5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal & Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A transaction includes buys, sells, maturities, and free
security movements.
Out of Pocket Expenses
Including, but not limited to, security transfer fees, certificate
fees, shipping/courier fees or charges, FDIC insurance premiums, and
remote system access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment
to the Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
<PAGE> 34
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
- ---------------------------- -----------------------------
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. WM. BLOOM By: PATRICIA A. PETERSON
- ---------------------------- -----------------------------
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE> 35
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
- --------- --------------------- -----------------
Euroclear
Security Equity Fund
Value Series
By: AMY J. LEE
----------------
Title: Secretary
----------------
SBL Fund
Series V
By: AMY J. LEE
----------------
Title: Secretary
----------------
UMB BANK, N.A.
By: RALPH SANTORO
----------------
Title: Vice President
----------------
Date: April 23, 1997
----------------
<PAGE> 36
Amendment to Custody Agreement
The following open-end management investment company ("Funds") is hereby made
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
List of Funds:
Security Equity Fund, Value Series
SBL Fund, Series V
Security Equity Fund
ATTEST: Value Series
CHRIS SWICKARD By: AMY J. LEE
- -------------------------- --------------------------
Title: Secretary
SBL Fund
ATTEST: Series V
CHRIS SWICKARD By: AMY J. LEE
- -------------------------- --------------------------
Title: Secretary
ATTEST: UMB BANK, N.A.
CHRIS SWICKARD By: Ralph Santoro
- -------------------------- --------------------------
Title: Vice President
-----------------------
Date: February 14, 1997
-----------------------
<PAGE> 37
AMENDMENT to APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
- --------- --------------------- -----------------
Euroclear
Security Equity Fund
Small Company Series
By: JAMES R. SCHMANK
--------------------------------
Name: James R. Schmank
--------------------------------
Title: Vice President and Treasurer
--------------------------------
Date: October 7, 1997
--------------------------------
SBL Fund
Series X
By: JAMES R. SCHMANK
--------------------------------
Name: James R. Schmank
--------------------------------
Title: Vice President and Treasurer
--------------------------------
Date: October 7, 1997
--------------------------------
UMB BANK, N.A.
By: RALPH SANTORO
--------------------------------
Title: Vice President
--------------------------------
Date: 9/26/97
--------------------------------
<PAGE> 38
Amendment to Custody Agreement
The following open-end management investment company ("Fund") is hereby made
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund, Small Company Series
SBL Fund, Series X
Security Equity Fund
ATTEST: Small Company Series
AMY J. LEE By: JAMES R. SCHMANK
- ---------------------------- -------------------------------
Title: Vice President and Treasurer
SBL Fund
ATTEST: Series X
AMY J. LEE By: JAMES R. SCHMANK
- ---------------------------- -------------------------------
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
By: RALPH SANTORO
- ---------------------------- -------------------------------
Title: Vice President
-------------------------------
Date: 9/26/97
-------------------------------
<PAGE> 1
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
This Agreement, made and entered into this 1st day of April, 1987, by and
between SBL Fund, a Kansas corporation ("Fund"), and Security Management
Company, a Kansas corporation, ("SMC").
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940; and
WHEREAS, Security Management Company is willing to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to the Fund under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. EMPLOYMENT OF SECURITY MANAGEMENT COMPANY
SMC will provide the Fund with general administrative, fund accounting,
transfer agency, and dividend disbursing services described and set forth
in Schedule A attached hereto and made a part of this agreement by
reference. SMC agrees to maintain sufficient trained personnel and
equipment and supplies to perform such services in conformity with the
current prospectus of the Fund and such other reasonable standards of
performance as the Fund may from time to time specify, and otherwise in an
accurate, timely, and efficient manner.
2. COMPENSATION
As consideration for the services described in Section I, the Fund agrees
to pay SMC a fee as described and set forth in Schedule B attached hereto
and made a part of this agreement by reference, as it may be amended from
time to time, such fee to be calculated and accrued daily and payable
monthly.
3. EXPENSES
A. EXPENSES OF SMC. SMC shall pay all of the expenses incurred in
providing Fund the services and facilities described in this
agreement, whether or not such expenses are billed to SMC or the fund,
except as otherwise provided herein.
B. DIRECT EXPENSES. Anything in this agreement to the contrary
notwithstanding, the Fund shall pay, or reimburse SMC for the payment
of, the following described expenses of the Fund (hereinafter called
"direct expenses") whether or not billed to the Fund, SMC or any
related entity:
<PAGE> 2
1. Fees and expenses of its independent directors and the meetings
thereof;
2. Fees and costs of investment advisory services;
3. Fees and costs of independent auditors and income tax
preparation;
4. Fees and costs of outside legal counsel and any legal counsel
directly employed by the Fund or its Board of Directors;
5. Custodian and banking services, fees and costs;
6. Costs of printing and mailing prospectuses to existing
shareholders, proxy statements and other reports to shareholders,
where such costs are incurred through the use of unaffiliated
vendors or mail services.
7. Fees and costs for the registration of its securities with the
Securities and Exchange Commission and the jurisdictions in which
it qualifies its share for sale, including the fees and costs of
registering and bonding brokers, dealers and salesmen as
required;
8. Dues and expenses associated with membership in the Investment
Company Institute;
9. Expenses of fidelity and liability insurance and bonding covering
Fund;
10. Organizational costs.
4. INSURANCE
The Fund and SMC agree to procure and maintain, separately or as joint
insureds with themselves, their directors, employees, agents and others,
and other investment companies for which SMC acts as investment advisor and
transfer agent, a policy or policies of insurance against loss arising from
breaches of trust, errors and omissions, and a fidelity bond meeting the
requirements of the Investment Company Act of 1940, in the amounts and with
such deductibles as may be agreed upon from time to time, and to pay such
portions of the premiums therefor as amount of the coverage attributable to
each party is to the aggregate amount of the coverage for all parties.
5. REGISTRATION AND COMPLIANCE
A. SMC represents that as of the date of this agreement it is registered
as a transfer agent with the Securities and Exchange Commission
("SEC") pursuant to Subsection 17A of the Securities and Exchange Act
of 1934 and the rules and regulations thereunder, and agrees to
maintain said registration and comply with all
<PAGE> 3
of the requirements of said Act, rules and regulations so long as this
agreement remains in force.
B. The Fund represents that it is a diversified management investment
company registered with the SEC in accordance with the Investment
Company Act of 1940 and the rules and regulations thereunder, and
authorized to sell its shares pursuant to said Act, the Securities Act
of 1933 and the rules and regulations thereunder.
6. LIABILITIES AND INDEMNIFICATION
SMC shall be liable for any actual losses, claims, damages or expenses
(including any reasonable counsel fees and expenses) resulting from SMC's
bad faith, willful misfeasance, reckless disregard of its obligations and
duties, negligence or failure to properly perform any of its
responsibilities or duties under this agreement. SMC shall not be liable
and shall be indemnified and held harmless by the Fund, for any claim,
demand or action brought against it arising out of, or in connection with:
A. Bad faith, willful misfeasance, reckless disregard of its duties or
negligence of the Board of Directors of the Fund, or SMC's acting upon
any instructions properly executed and authorized by the Board of
Directors of the Fund;
B. SMC acting in reliance upon advice given by independent counsel
retained by the Board of Directors of the Fund.
In the event that SMC requests the Fund to indemnify or hold it harmless
hereunder, SMC shall use its best efforts to inform the Fund of the
relevant facts concerning the matter in question. SMC shall use reasonable
care to identify and promptly notify the Fund concerning any matter which
presents, or appears likely to present, a claim for indemnification against
the Fund.
The Fund shall have the election of defending SMC against any claim which
may be the subject of indemnification hereunder. In the event the Fund so
elects, it will so notify SMC and thereupon the Fund shall take over
defenses of the claim, and (if so requested by the Fund, SMC shall incur no
further legal or other claims related thereto for which it would be
entitled to indemnity hereunder provided, however, that nothing herein
contained shall prevent SMC from retaining, at its own expense, counsel to
defend any claim. Except with the Fund's prior consent, SMC shall in no
event confess any claim or make any compromise in any matter in which the
Fund will be asked to indemnify or hold SMC harmless hereunder.
PUNITIVE DAMAGES. SMC shall not be liable to the Fund, or any third
party, for punitive, exemplary, indirect, special or consequential
damages (even if SMC has been advised of the possibility of such
damages) arising from its obligations and the services provided under
this agreement, including but not limited to loss of profits,
<PAGE> 4
loss of use of the shareholder accounting system, cost of capital and
expenses of substitute facilities, programs or services.
FORCE MAJEURE. Anything in this agreement to the contrary
notwithstanding, SMC shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national
emergencies, work stoppages, fire, flood, catastrophe, earthquake,
acts of God, insurrection, war, riot, failure of communication or
interruption.
7. DELEGATION OF DUTIES
SMC may, at its discretion, delegate, assign or subcontract any of the
duties, responsibilities and services governed by this agreement, to its
parent company, Security Benefit Group, Inc., whether or not by formal
written agreement. SMC shall, however, retain ultimate responsibility to
the Fund, and shall implement such reasonable procedures as may be
necessary, for assuring that any duties, responsibilities or services so
assigned, subcontracted or delegated are performed in conformity with the
terms and conditions of this agreement.
8. AMENDMENT
This agreement and the schedules forming a part hereof may be amended at
any time, without shareholder approval, by a writing signed by each of the
parties hereto. Any change in the Fund's registration statements or other
documents of compliance or in the forms relating to any plan, program or
service offered by its current prospectus which would require a change in
SMC's obligations hereunder shall be subject to SMC's approval, which shall
not be unreasonably withheld.
9. TERMINATION
This agreement may be terminated by either party without cause upon 120
days' written notice to the other, and at any time for cause in the event
that such cause remains unremedied for more than 30 days after receipt by
the other party of written specification of such cause.
In the event Fund designates a successor to any of SMC's obligations
hereunder, SMC shall, at the expense and pursuant to the direction of the
Fund, transfer to such successor all relevant books, records and other data
of Fund in the possession or under the control of SMC.
10. SEVERABILITY
If any clause or provision of this agreement is determined to be illegal,
invalid or unenforceable under present or future laws effective during the
term hereof, then such
<PAGE> 5
clause or provision shall be considered severed herefrom and the remainder
of this agreement shall continue in full force and effect.
11. TERM
This agreement initially shall become effective upon its approval by a
majority vote of the Board of Directors of the Fund, including a majority
vote of the Directors who are not "interested persons" of Fund or SMC, as
defined in the Investment Company Act of 1940, and shall continue until
terminated pursuant to its provisions.
12. APPLICABLE LAW
This agreement shall be subject to and construed in accordance with the
laws of the State of Kansas.
SECURITY MANAGEMENT COMPANY
BY: Everett S. Gille, President
ATTEST:
Barbara W. Rankin, Secretary
SBL FUND
BY: Everett S. Gille, President
ATTEST:
Barbara W. Rankin, Secretary
<PAGE> 6
SCHEDULE A
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
Schedule of Administrative and Fund Accounting
Facilities and Services
Security Management Company agrees to provide the Fund the following
Administrative facilities and services:
1. FUND AND PORTFOLIO ACCOUNTING
A. Maintenance of Fund General Ledger and Journal.
B. Preparing and recording disbursements for direct fund expenses.
C. Preparing daily money transfers.
D. Reconciliation of all Fund bank and custodian accounts.
E. Assisting Fund independent auditors as appropriate.
F. Prepare daily projection of available cash balances.
G. Record trading activity for purposes of determining net asset values
and daily dividend.
H. Prepare daily portfolio evaluation report to value portfolio
securities and determine daily accrued income.
I. Determine the daily net asset value per share.
J. Determine the daily, monthly, quarterly, semiannual or annual dividend
per share.
K. Prepare monthly, quarterly, semiannual and annual financial
statements.
L. Provide financial information for reports to the securities and
exchange commission in compliance with the provisions of the
Investment Company Act of 1940 and the Securities Act of 1933, the
Internal Revenue Service and other regulatory agencies as required.
M. Provide financial, yield, net asset value, etc. information to NASD
and other survey and statistical agencies as instructed by the Fund.
<PAGE> 7
N. Report to the Audit Committee of the Board of Directors, if
applicable.
2. LEGAL
A. Provide registration and other administrative services necessary to
qualify the shares of the Fund for sale in those jurisdictions
determined from time to time by the Fund's Board of Directors
(commonly known as "Blue Sky Registration").
B. Provide registration with and reports to the Securities and Exchange
Commission in compliance with the provisions of the Investment Company
Act of 1940 and the Securities Act of 1933.
C. Prepare and review Fund prospectus and Statement of Additional
Information.
D. Prepare proxy statements and oversee proxy tabulation for annual
meetings.
E. Prepare Board materials and maintain minutes of Board meetings.
F. Draft, review and maintain contractual agreements between Fund and
Investment Advisor, Custodian, Distributor and Transfer Agent.
G. Oversee printing of proxy statements, financial reports to
shareholders, prospectuses and Statements of Additional Information.
H. Provide legal advice and oversight regarding shareholder transactions,
administrative services, compliance with contractual agreements and
the provisions of the 1940 and 1933 Acts.
(Notwithstanding the above, outside counsel for the Funds may provide the
services listed above as a direct Fund expense or at the option of the
Funds, the Funds may employ their own counsel to perform any of these
services.)
<PAGE> 8
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company agrees to provide the Fund the following transfer
agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
A. Direct purchases
B. Wire order purchases
C. Direct redemptions
D. Wire order redemptions
E. Draft redemptions
F. Direct exchanges
G. Transfers
H. Certificate issuances
I. Certificate deposits
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money movement
instructions.
6. Handle bounced check collections. Immediately liquidate shares purchased
and return to the shareholder the check and confirmation of the
transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
A. Maintenance of signature cards and appropriate corporate resolutions.
B. Comparison of the signature on the check to the signatures on the
signature card for the purpose of paying the face amount of the check
only.
<PAGE> 9
C. Receiving checks presented for payment and liquidating shares after
verifying account balance.
D. Ordering checks in quantity specified by the Fund for the shareholder.
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Fund's other mailings, including:
A. Dividend and capital gain distributions.
B. Semiannual and annual reports.
C. 1099/year-end shareholder reporting.
D. Systematic withdrawal plan payments.
E. Daily confirmations.
11. Answering all service related telephone inquiries from shareholders and
others, including:
A. General and policy inquiries (research and resolve problems).
B. Fund yield inquiries.
C. Taking shareholder processing requests and account maintenance changes
by telephone as described above.
D. Submit pending requests to correspondence.
E. Monitor online statistical performance of unit.
F. Develop reports on telephone activity.
12. Respond to written inquiries (research and resolve problems); including:
A. Initiate shareholder account reconciliation proceeding when
appropriate.
B. Notify shareholder of bounced investment checks.
C. Respond to financial institutions regarding verification of deposit.
D. Initiate proceedings regarding lost certificates.
<PAGE> 10
E. Respond to complaints and log activities.
F. Correspondence control.
13. Maintaining and retrieving all required past history for shareholders and
provide research capabilities as follows:
A. Daily monitoring of all processing activity to verify back-up
documentation.
B. Provide exception reports.
C. Microfilming.
D. Storage, retrieval and archive.
14. Prepare materials for annual meetings.
A. Address and mail annual proxy and related material.
B. Prepare and submit to Fund and affidavit of mailing.
C. Furnish certified list of shareholders (hard copy or microfilm) and
inspectors of election.
15. Report and remit as necessary for state escheat requirements.
Approved: Fund ---------------------------------------- SMC Everette S. Gille
<PAGE> 11
---------------------------------------------------------------
MODEL: SBL FUNDS
MAINTENANCE FEE...................................... $8.00
TRANSACTIONS......................................... $1.00
DIVIDENDS............................................ $1.00
ADMINISTRATION FEE................................... 0.00045
(BASED ON DAILY NET ASSET VALUE)
---------------------------------------------------------------
<TABLE>
<CAPTION>
MASTER WORKSHEET A B C D E
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1986:
TRANSACTIONS - 82 76 62 71 56
DIVIDENDS - 1 1 1 1 1
SHAREHOLDER ACCTS - 8 8 6 7 5
AVERAGE NET ASSETS - 104,150,857.26 50,141,894.67 36,603,758.20 17,678,037.53 17,393,190.51
INCOME - 2,893,670.06 2,372,681.65 2,258,629.91 2,137,524.29 1,514,339.94
EXPENSES - 670,252.11 301,247.65 227,930.13 121,890.09 113,546.44
SERVICE FEES - 78,494.06 30,063.43 23,589.25 10,053.93 9,232.24
</TABLE>
1986 1986
SERVICE TRANSFER & EXPENSE EXPENSE
FEES ADMINISTRATION PERCENT RATIO RATIO
ACTUAL MODEL INCREASE ACTUAL MODEL
-----------------------------------------------------------------
SBLA 78,494.06 47,014.89 -40.10% 0.644% 0.613%
SBLB 30,063.43 22,704.85 -24.48% 0.601% 0.586%
SBLC 23,589.25 16,582.69 -29.70% 0.623% 0.604%
SBLD 10,053.93 8,083.12 -19.60% 0.690% 0.678%
SBLE 9,232.24 7,923.94 -14.17% 0.653% 0.641%
<PAGE> 12
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security
Management Company (hereinafter referred to as "SMC") are parties to an
Administrative Services and Transfer Agency Agreement dated April 1, 1987, (the
"Administrative Services Agreement") under which SMC agrees to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Services Agreement; and
WHEREAS, on May 5, 1989, the Board of Directors of the Fund voted to amend the
Administrative Services Agreement to provide for payment by the Fund of the fees
of all directors;
NOW THEREFORE, the Fund and the Management Company hereby amend the
Administrative Services Agreement, dated April 1, 1987, effective May 5, 1989,
as follows:
Paragraph 3.B.1. shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
3. EXPENSES
B. DIRECT EXPENSES
1. Fees and expenses of its directors (including the fees of
those directors who are deemed to be "interested persons" of
the Fund as that term is defined in the Investment Company
Act of 1940) and the meetings thereof;
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Services Agreement this 5th day of May, 1989.
SBL FUND
By: MICHAEL J. PROVINES, PRESIDENT
Attest:
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: MICHAEL J. PROVINES, PRESIDENT
Attest:
Amy J. Lee, Secretary
<PAGE> 13
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security
Management Company (hereinafter referred to as "SMC") are parties to an
Administrative Services and Transfer Agency Agreement dated April 1, 1987, as
amended May 5, 1989, (the "Administrative Services Agreement") under which SMC
agrees to provide general administrative, fund accounting, transfer agency, and
dividend disbursing services to the Fund in return for the compensation
specified in the Administrative Services Agreement; and
WHEREAS, on July 27, 1990, the Board of Directors of the Fund voted to amend the
Administrative Services Agreement to provide for payment by the Fund of the fees
of only those directors who are not "interested persons" of the Fund;
NOW THEREFORE, the Fund and SMC hereby amend the Administrative Services
Agreement, dated April 1, 1987, effective July 27, 1990, as follows:
Paragraph 3.B.1. shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
3. EXPENSES
B. DIRECT EXPENSES
1. Fees and expenses of its directors (except the fees of those
directors who are deemed to be "interested persons" of the
Fund as that term is defined in the Investment Company Act
of 1940) and the meetings thereof;
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Services Agreement this 27th day of July, 1990.
SBL FUND
By: MICHAEL J. PROVINES, PRESIDENT
Attest:
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: MICHAEL J. PROVINES, PRESIDENT
Attest:
Amy J. Lee, Secretary
<PAGE> 14
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management
Company") are parties to an Administrative Services and Transfer Agency
Agreement dated April 1, 1987, as amended (the "Administrative Agreement"),
under which the Management Company provides general administrative, fund
accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on February 15, 1991, the Board of Directors of the Fund voted to amend
the Administrative Agreement to provide for an increase in the compensation
payable to the Management Company with respect to Series D of the Fund; and
WHEREAS, on February 15, 1991, the Board of Directors of the Fund authorized the
Fund to offer Series S common stock and approved amendment of the Administrative
Agreement to provide that the Management Company would provide general
administrative, fund accounting, transfer agency and dividend disbursing
services to Series S under the terms and conditions of the Agreement.
NOW, THEREFORE, the Fund and the Management Company hereby amend the
Administrative Agreement dated April 1, 1987, as follows, effective April 30,
1991:
1. Schedule B shall be deleted in its entirety and the attached Schedule
B inserted in lieu thereof.
2. Paragraph 7 shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
<PAGE> 15
DELEGATION OF DUTIES
SMC may, at its discretion, delegate, assign or subcontract any of the
duties, responsibilities and services governed by this agreement, to
its parent company, Security Benefit Group, Inc., whether or not by
formal written agreement, or to any third party, provided that such
arrangement with a third party has been approved by the Board of
Directors of the Fund. SMC shall, however, retain ultimate
responsibility to the Fund, and shall implement such reasonable
procedures as may be necessary, for assuring that any duties,
responsibilities or services so assigned, subcontracted or delegated
are performed in conformity with the terms and conditions of this
agreement.
3. The Administrative Agreement is hereby amended to cover Series S of
the Fund.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Agreement this 26th day of April, 1991.
SBL FUND
By: James R. Schmank
-------------------------------------------
ATTEST: James R. Schmank, Vice President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: James R. Schmank
-------------------------------------------
James R. Schmank, Vice President
ATTEST:
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
<PAGE> 16
SBL FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of SBL Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: .00045 (based on average daily net asset values)
The following charges apply only to Series D of SBL Fund.
Global Administration Fee: In addition to the above fees, Series D shall pay the
greater of .10 percent of its average net assets or $30,000 in the year
beginning April 30, 1991, and ending April 29, 1992; the greater of .10 percent
of its average net assets or $45,000 in the year beginning April 30, 1992, and
ending April 29, 1993; and the greater of .10 percent of its average net assets
or $60,000 thereafter. If this Agreement shall terminate befoer the last day of
a month, compensation for that part of the month this Agreement is in effect
shall be prorated in a manner consistent with the calculation of the fees set
forth above.
<PAGE> 17
AMENDMENT TO
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management
Company") are parties to an Administrative Services and Transfer Agency
Agreement dated April 1, 1987, as amended (the "Administrative Agreement"),
under which the Management Company provides general administrative, fund
accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on July 24, 1992, the Board of Directors of the Fund authorized the
Fund to offer Series J common stock and approved amendment of the Administrative
Agreement to provide that the Management Company would provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to Series J under the terms and conditions of the Agreement.
NOW, THEREFORE, the Fund and Management Company hereby amend the Administrative
Agreement dated April 1, 1987, effective October 1, 1992, to cover Series J of
the Fund.
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Agreement this 1st day of October, 1992.
SBL FUND
By: James R. Schmank
-------------------------------------------
ATTEST: James R. Schmank, Vice President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: James R. Schmank
-------------------------------------------
James R. Schmank, Sr. Vice President
ATTEST:
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
<PAGE> 19
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management
Company") are parties to an Administrative Services and Transfer Agency
Agreement dated April 1, 1987, as amended (the "Administrative Agreement"),
under which the Management Company provides general administrative, fund
accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement; and
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer a new series of common stock, Series K, and approved amendment of
the Administrative Agreement to provide that the Management Company would
provide general administrative, fund accounting, transfer agency, and dividend
disbursing services to Series K under the terms and conditions of the Agreement.
WHEREAS, on April 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer three additional new series of common stock, Series M, N and O,
and approved amendment of the Administrative Agreement to provide that the
Management Company would provide general administrative, fund accounting,
transfer agency and dividend disbursing services to Series M, N, and O under the
terms and conditions of the Agreement.
NOW, THEREFORE, the Fund and the Management Company hereby amend the
Administrative Agreement dated April 1, 1987, as follows, effective May 1, 1995:
1. Schedule B shall be deleted in its entirety and the attached Schedule
B inserted in lieu thereof.
<PAGE> 20
2. The Administrative Agreement is hereby amended to cover Series K, M, N
and O of the Fund.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Agreement this 28th day of April, 1995.
SBL FUND
By: John D. Cleland
-------------------------------------------
ATTEST: John D. Cleland, President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-------------------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
<PAGE> 21
SBL FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of SBL Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: .045% (based on average daily net asset values)
The following charges apply only to Series K, M and N of SBL Fund.
Global Administration Fee: In addition to the above fees, each of Series K, M
and N shall pay an annual fee equal to the greater of .10 percent of its average
net assets or (i) $30,000 in the year ending April 29, 1996; (ii) $45,000 in the
year ending April 29, 1997; and (iii) $60,000 thereafter.
The following charges apply only to Series D of SBL Fund.
Global Administration Fee. In addition to the above fees, Series D shall pay an
annual fee equal to the greater of .10 percent of its average net assets or
$60,000.
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
<PAGE> 22
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (hereinafter referred to as the "Fund") and Security
Management Company (hereinafter referred to as "SMC") are parties to an
Administrative Services and Transfer Agency Agreement dated April 1, 1987, as
amended, (the "Administrative Agreement"), under which SMC provides general
administrative, fund accounting, transfer agency and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Agreement;
WHEREAS, on February 2, 1996, the Board of Directors of the Fund voted to amend
the Administrative Agreement to provide for payment by the Fund for costs
associated with preparing and transmitting electronic filings to the Securities
and Exchange Commission or any other regulating authority;
NOW THEREFORE, the Fund and SMC hereby amend paragraph 3B of the Administrative
Agreement, effective February 2, 1996, by adding the following language at the
end of paragraph 3B:
11. Costs associated with the preparation and transmission of any
electronic filings to the Securities and Exchange Commission or
any other regulating authority.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Agreement this 2nd day of February, 1996.
SBL FUND
By: John D. Cleland
-------------------------------------------
ATTEST: John D. Cleland, President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-------------------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
<PAGE> 23
AMENDMENT TO ADMINISTRATIVE
SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund"), and Security Management Company (the "Management
Company") are parties to an Administrative Services and Transfer Agency
Agreement dated April 1, 1987 (the "Administrative Agreement"), under which the
Management Company provides general administrative, fund accounting, transfer
agency and dividend disbursing services to the Fund in return for the
compensation specified in the Administrative Agreement;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund authorized the Fund
to offer its common stock in a new series designated as Series P, in addition to
its presently offered series of common stock of Series A, Series B, Series C,
Series D, Series E, Series S, Series J, Series K, Series M, Series N and Series
O; and
WHEREAS, on May 3, 1996, the Board of Directors approved the amendment of the
Administrative Agreement to provide that the Management Company would provide
general administrative, fund accounting, transfer agency, and dividend
disbursing services to Series P under the terms and conditions of the
Administrative Agreement;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby amend
the Administrative Agreement dated April 1, 1987, as follows, effective July 1,
1996,
1. Schedule B shall be deleted in its entirety and the attached Schedule
B inserted in lieu thereof.
2. The Administrative Agreement is hereby amnended to cover Series P of
the Fund.
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Agreement this 13th day of May, 1996.
SBL FUND
By: John D. Cleland
-------------------------------------------
ATTEST: John D. Cleland, President
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-------------------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- --------------------------
Amy J. Lee, Secretary
<PAGE> 25
SBL FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of SBL Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Administration Fee: .045% (based on daily net asset value)
The following charges apply only to Series K, M and N of SBL Fund.
Global Administration Fee: In addition to the above fees, each of Series K, M
and N shall pay an annual fee equal to the greater of .10 percent of its average
net assets or (i) $30,000 in the year ending April 29, 1996; (ii) $45,000 in the
year ending April 29, 1997; and (iii) $60,000 thereafter.
The following charges apply only to Series D of SBL Fund.
Global Administration Fee. In addition to the above fees, Series D shall pay an
annual fee equal to the greater of .10 percent of its average net assets or
$60,000.
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
<PAGE> 26
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund") and Security Management Company (the "Management
Company") are parties to an Administrative Services and Transfer Agency
Agreement, dated April 1, 1987, as amended (the "Administrative Agreement"),
under which the Management Company provides general administrative, fund
accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on October 31, 1996, the operations of the Management Company, a Kansas
corporation, will be transferred to Security Management Company, LLC ("SMC,
LLC"), a Kansas limited liability company; and
WHEREAS, SMC, LLC desires to assume all rights, duties and obligations of the
Management Company under the Administrative Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. The Administrative Agreement is hereby amended to substitute SMC, LLC for
Security Management Company, with the same effect as though SMC, LLC were
the originally named management company, effective November 1, 1996;
2. SMC, LLC agrees to assume the rights, duties and obligations of Security
Management Company pursuant to the terms of the Administrative Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Administrative Services and Transfer Agency Agreement this 1st day of November,
1996.
SBL FUND SECURITY MANAGEMENT COMPANY, LLC
By: JOHN D. CLELAND By: JAMES R. SCHMANK
------------------------------- ----------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
AMY J. LEE, SECRETARY AMY J. LEE, SECRETARY
- ---------------------------------- -------------------------------------
Amy J. Lee, Secretary Amy J. Lee, Secretary
<PAGE> 27
AMENDMENT TO
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund") and Security Management Company, LLC (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general administrative,
fund accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as Series V, in
addition to its presently offered series of common stock of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O and Series P; and
WHEREAS, on February 7, 1997, the Board of Directors approved the amendment of
the Administrative Agreement to provide that the Management Company would
provide general administrative, fund accounting, transfer agency, and dividend
disbursing services to Series V under the terms and conditions of the
Administrative Agreement;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby amend
the Administrative Agreement, dated April 1, 1987, as follows, effective April
30, 1997:
1. Schedule B shall be deleted in its entirety and the attached Schedule B
inserted in lieu thereof.
2. The Administrative Agreement is hereby amended to cover Series V of the
Fund.
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 12th day of March, 1997.
SBL FUND
By: JOHN D. CLELAND
-----------------------------------
John D. Cleland, President
ATTEST:
AMY J. LEE
- ----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, LLC
By: JAMES R. SCHMANK
-----------------------------------
James R. Schmank, President
ATTEST:
AMY J. LEE
- ----------------------------------
Amy J. Lee, Secretary
<PAGE> 29
SBL FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of SBL Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: .045% (based on average daily net asset values)
The following charges apply only to Series K, M and N of SBL Fund.
Global Administration Fee: In addition to the above fees, each of Series K, M
and N shall pay an annual fee equal to the greater of .10 percent of its average
net assets or (i) $30,000 in the year ended April 29, 1996; (ii) $45,000 in the
year ending April 29, 1997; and (iii) $60,000 thereafter.
The following charges apply only to Series D of SBL Fund.
Global Administration Fee. In addition to the above fees, Series D shall pay an
annual fee equal to the greater of .10 percent of its average net assets or
$60,000.
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
<PAGE> 30
AMENDMENT TO
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, SBL Fund (the "Fund") and Security Management Company, LLC (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general
administrative, fund accounting, transfer agency and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Agreement;
WHEREAS, on July 25, 1997, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as Series X, in
addition to its presently offered series of common stock of Series A, Series B,
Series C, Series D, Series E, Series S, Series J, Series K, Series M, Series N,
Series O, Series P and Series V; and
WHEREAS, on July 25, 1997, the Board of Directors approved the amendment of the
Administrative Agreement to provide that the Management Company would provide
general administrative, fund accounting, transfer agency, and dividend
disbursing services to Series X under the terms and conditions of the
Administrative Agreement;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby
amend the Administrative Agreement, dated April 1, 1987, as follows, effective
October 15, 1997:
1. Schedule B shall be deleted in its entirety and the attached Schedule B
inserted in lieu thereof.
2. The Administrative Agreement is hereby amended to cover Series X of the
Fund.
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 15th day of September, 1997.
SBL FUND
By: JOHN D. CLELAND
----------------------------
John D. Cleland, President
ATTEST:
AMY J. LEE
- ---------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY, LLC
By: JEFFREY B. PANTAGES
--------------------------------
Jeffrey B. Pantages, President
ATTEST:
AMY J. LEE
- ---------------------
Amy J. Lee, Secretary
<PAGE> 32
SBL FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of SBL Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: .045% (based on average daily net asset values),
except Series X, for which the fee is .09% (based on average daily net asset
values)
The following charges apply only to Series K, M and N of SBL Fund.
Global Administration Fee: In addition to the above fees, each of Series K, M
and N shall pay an annual fee to the greater of .10 percent of its average net
assets or (i) $30,000 in the year ended April 29, 1996; (ii) $45,000 in the
year ending April 29, 1997; and (iii) $60,000 thereafter.
The following charges apply only to Series D of SBL Fund.
Global Administration Fee. In addition to the above fees, Series D shall pay
an annual fee equal to the greater of .10 percent of its average net assets or
$60,000.
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference of
our report dated January 31, 1997 in Post-Effective Amendment No. 34 to the
Registration Statement (Form N-1A) and related prospectus of SBL Fund filed
with the Securities and Exchange Commission under the Securities Act of 1933
(Registration No. 2-59353) and under the Investment Company Act of 1940
(Registration No. 811-2753).
Ernst & Young LLP
Kansas City, Missouri
October 15, 1997
<PAGE> 1
Item 24.b. Exhibit(16)
TOTAL RETURN
SBL FUND, SERIES A
Total Return from June 30, 1987, to June 30, 1997. Assuming initial investment
of $1,000 at offering price at beginning of period 1,000 / 16.78 = 59.5948
shares.
Ending value of initial investment at June 30, 1997, NAV price = 59.5948 shares
x 28.39 = 1,691.90.
Ending value of shares received from reinvestment of all dividends at NAV =
66.43984 shares x 28.39 = 1,886.23.
Total ending redeemable value: 1,691.90
1,886.23
--------
3,578.13
Total Return: 3,578.13 - 1,000 = 2,578.13
2,578.13
--------
1,000 = 257.81%
<PAGE> 2
Item 24.b. Exhibit (16)
SBL FUNDS' 1, 5 AND 10-YEAR AVERAGE ANNUAL RETURN
AS OF JUNE 30, 1997
Series A
1 Year +27.94%
------
1
1000 (1+T) = 1,279.441
1
(1+T) = 1.279441
1+T = 1.279441
T = .2794
5 Year +19.51%
------
5
1000 (1+T) = 2437.99
5)1/5 1/5
((1+T) = (2.43799)
1+T = 1.1951
T = .1951
10 Year +13.60%
------
10
1000 (1+T) = 3578.12
10)1/10 1/10
((1+T) = (3.57812)
1+T = 1.1360
T = .1360
<PAGE> 3
Item 24.b. Exhibit (16)
Series B
1 Year +24.23%
------
1
1000 (1+T) = 1242.29
1
(1+T) = 1.24229
1+T = 1.24229
T = .2423
5 Year +16.06%
------
5
1000 (1+T) = 2105.48
5)1/5 1/5
((1+T) = (2.10548)
1+T = 1.1606
T = .1606
10 Year +13.19%
------
10
1000 (1+T) = 3452.46
10)1/10 1/10
((1+T) = (3.45246)
1+T = 1.1319
T = .1319
Series C
1 Year +5.11%
-----
1
1000 (1+T) = 1051.08
1
(1+T) = 1.05108
1+T = .05108
T = .0511
5 Year +3.50%
-----
5
1000 (1+T) = 1187.65
5)1/5 1/5
((1+T) = (1.18765)
1+T = 1.0350
T = .0350
10 Year +5.24%
-----
10
1000 (1+T) = 1665.90
10)1/10 1/10
((1+T) = (1.66590)
1+T = 1.0524
T = .0524
<PAGE> 4
Item 24.b. Exhibit (16)
Series D
1 Year +17.58%
------
1
1000 (1+T) = 1175.84
1
(1+T) = 1.17584
T = .1758
5 Year +14.32%
------
5
1000 (1+T) = 1952.81
5
(1+T) = 1.95281
5)1/5 1/5
((1+T) = (1.95281)
1+T = 1.1432
T = .1432
10 Year +4.20%
-----
10
1000 (1+T) = 1508.28
10
(1+T) = 1.50828
10)1/10 1/10
((1+T) = (1.50828)
1+T = 1.0420
T = .0420
Series E
1 Year +5.71%
----
1
1000 (1+T) = 1057.13
1
(1+T) = 1.05713
1+T = .05713
T = .0571
5 Year +5.86%
-----
5
1000 (1+T) = 1329.40
5
(1+T) = 1.32940
5)1/5 1/5
((1+T) = (1.32940)
1+T = 1.0586
T = .0586
10 Years +7.58%
-----
10
1000 (1+T) = 2076.54
10
(1+T) = 2.07654
10)1/10 1/10
((1+T) = (2.07654)
1+T = 1.0758
T = .0758
<PAGE> 5
Item 24.b. Exhibit (16)
<TABLE>
<CAPTION>
Series S
1 Year +14.96%
------
<S> <C> <C> <C> <C>
1
1000 (1+T) = 1149.60
1
(1+T) = 1.14960
1+T = 1.14960
T = .1496
5 Years +17.24%
------
5
1000 (1+T) = 2215.24
5
(1+T) = 2.21524
5)1/5 1/5
((1+T) = (2.21524)
1+T = 1.1724
T = .1724
6.16 Years +13.87%
(Since Inception ------
May 1, 1991) 5.67
1000 (1+T) = 2226.314
5.67
(1+T) = 2.226314
5.67)1/5.67 1/6.16
((1+T) = (2.226314)
1+T = 1.1387
T = .1387
Series J
1 Year +8.01%
-----
1
1000 (1+T) = 1080.11
1
(1+T) = 1.08011
1+T = 1.08011
T = .0801
4.75 Years +15.84%
(Since Inception ------
4.75
October 1, 1992) 1000 (1+T) = 2010.21
4.75
(1+T) = 2.01021
4.75)1/4.75 1/4.75
((1+T) = (2.01021)
1+T = 1.1584
T = .1584
</TABLE>
<PAGE> 6
Item 24.b. Exhibit (16)
<TABLE>
<CAPTION>
Series K
1 Year +12.06%
------
<S> <C> <C> <C> <C>
1
1000 (1+T) = 1120.60
1
(1+T) = 1.12060
1+T = 1.12060
T = .1206
2.08 Years +11.44%
(Since Inception ------
2.08
June 1, 1995) 1000 (1+T) = 1253.09
2.08
(1+T) = 1.25309
2.08)1/2.08 1/2.08
((1+T) (1.25309)
1+T = 1.1144
T = .1144
Series M
1 Year +14.74%
------
1
1000 (1+T) = 1147.46
1
(1+T) = 1.14746
1+T = 1.14746
T = .1474
2.08 Years +14.00%
(Since Inception ------
2.08
June 1, 1995) 1000 (1+T) = 1313.84
2.08
(1+T) = 1.31384
2.08)1/2.08 1/2.08
((1+T) (1.31384)
1+T = 1.1400
T = .1400
</TABLE>
<PAGE> 7
Item 24.b. Exhibit (16)
<TABLE>
<S> <C> <C> <C> <C>
Series N
1 Year +21.08%
------
1
1000 (1+T) = 1210.83
1
(1+T) = 1.21083
1+T = 1.21083
T = .2108
2.08 Years +17.85%
(Since Inception ------
June 1, 1995) 2.08
1000 (1+T) = 1351.29
2.08
(1+T) = 1.35129
2.08)1/2.08 1/2.08
((1+T) = (1.35129)
1+T 1.1785
T = .1785
Series O
1 Year +27.31%
------
1
1000 (1+T) = 1273.12
1
(1+T) = 1.27312
1+T = 1.27312
T = .2731
2.08 Years +25.62%
(Since Inception ------
June 1, 1995) 2.08
1000 (1+T) = 1607.95
2.08
(1+T) = 1.60795
2.08)1/2.08 1/2.08
((1+T) = (1.60795)
1+T = 1.2562
T .2562
Series P
.9041 Year +14.70%
(Since Inception ------
August 5, 1996) .9041
1000 (1+T) = 1132.00
.9041
(1+T) 1.13200
.9041)1/.9041 1/.9041
((1+T) = (1.13200)
1+T = 1.1470
T = .1470
T
</TABLE>
<PAGE> 8
Item 24.b. Exhibit (16)
<TABLE>
<S> <C> <C> <C> <C>
Series V (As of
August 31, 1997)
.1671 Year +90.80%
(Since Inception ------
April 30, 1997) .1671
1000 (1+T) = 1,114.00
.1671
(1+T) 1.11400
.1671)1/.1671 1/.1671
((1+T) = (1.11400)
1+T = 1.9080
T = .9080
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 01
<NAME> SERIES A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 537,056
<INVESTMENTS-AT-VALUE> 811,514
<RECEIVABLES> 2,380
<ASSETS-OTHER> 31,798
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 845,692
<PAYABLE-FOR-SECURITIES> 2,094
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,688
<TOTAL-LIABILITIES> 3,782
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 484,290
<SHARES-COMMON-STOCK> 29,650
<SHARES-COMMON-PRIOR> 29,391
<ACCUMULATED-NII-CURRENT> 8,084
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 75,078
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 274,458
<NET-ASSETS> 841,910
<DIVIDEND-INCOME> 4,852
<INTEREST-INCOME> 989
<OTHER-INCOME> 0
<EXPENSES-NET> 3,121
<NET-INVESTMENT-INCOME> 2,720
<REALIZED-GAINS-CURRENT> 24,103
<APPREC-INCREASE-CURRENT> 92,407
<NET-CHANGE-FROM-OPS> 119,230
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,014
<NUMBER-OF-SHARES-REDEEMED> 5,755
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 127,319
<ACCUMULATED-NII-PRIOR> 5,364
<ACCUMULATED-GAINS-PRIOR> 50,975
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,841
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,121
<AVERAGE-NET-ASSETS> 722,209
<PER-SHARE-NAV-BEGIN> 24.31
<PER-SHARE-NII> .09
<PER-SHARE-GAIN-APPREC> 3.99
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 28.39
<EXPENSE-RATIO> .81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 02
<NAME> SERIES B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 747,867
<INVESTMENTS-AT-VALUE> 1,062,628
<RECEIVABLES> 8,026
<ASSETS-OTHER> 32,356
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,103,010
<PAYABLE-FOR-SECURITIES> 3,598
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,998
<TOTAL-LIABILITIES> 5,596
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 660,818
<SHARES-COMMON-STOCK> 26,848
<SHARES-COMMON-PRIOR> 27,020
<ACCUMULATED-NII-CURRENT> 33,604
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 88,231
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 314,761
<NET-ASSETS> 1,097,414
<DIVIDEND-INCOME> 6,343
<INTEREST-INCOME> 8,819
<OTHER-INCOME> 0
<EXPENSES-NET> 4,179
<NET-INVESTMENT-INCOME> 10,983
<REALIZED-GAINS-CURRENT> 30,838
<APPREC-INCREASE-CURRENT> 105,040
<NET-CHANGE-FROM-OPS> 146,861
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,705
<NUMBER-OF-SHARES-REDEEMED> 2,877
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 140,827
<ACCUMULATED-NII-PRIOR> 22,621
<ACCUMULATED-GAINS-PRIOR> 57,392
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,759
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,179
<AVERAGE-NET-ASSETS> 947,990
<PER-SHARE-NAV-BEGIN> 35.40
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> 5.06
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 40.87
<EXPENSE-RATIO> .83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 03
<NAME> SERIES C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 139,162
<INVESTMENTS-AT-VALUE> 139,152
<RECEIVABLES> 2,561
<ASSETS-OTHER> 169
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 141,882
<PAYABLE-FOR-SECURITIES> 3,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 506
<TOTAL-LIABILITIES> 3,506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 128,345
<SHARES-COMMON-STOCK> 10,746
<SHARES-COMMON-PRIOR> 10,246
<ACCUMULATED-NII-CURRENT> 10,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10)
<NET-ASSETS> 138,376
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,659
<OTHER-INCOME> 0
<EXPENSES-NET> 380
<NET-INVESTMENT-INCOME> 3,279
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 44
<NET-CHANGE-FROM-OPS> 3,323
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,654
<NUMBER-OF-SHARES-REDEEMED> 13,154
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 9,704
<ACCUMULATED-NII-PRIOR> 6,761
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 328
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 380
<AVERAGE-NET-ASSETS> 132,346
<PER-SHARE-NAV-BEGIN> 12.56
<PER-SHARE-NII> .316
<PER-SHARE-GAIN-APPREC> .004
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.88
<EXPENSE-RATIO> .58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 04
<NAME> SERIES D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 254,121
<INVESTMENTS-AT-VALUE> 291,575
<RECEIVABLES> 7,443
<ASSETS-OTHER> 16,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 315,303
<PAYABLE-FOR-SECURITIES> 11,008
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 916
<TOTAL-LIABILITIES> 11,924
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 229,253
<SHARES-COMMON-STOCK> 43,813
<SHARES-COMMON-PRIOR> 40,254
<ACCUMULATED-NII-CURRENT> 7,682
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 28,673
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 37,771
<NET-ASSETS> 303,379
<DIVIDEND-INCOME> 3,289
<INTEREST-INCOME> 402
<OTHER-INCOME> 0
<EXPENSES-NET> 1,675
<NET-INVESTMENT-INCOME> 2,016
<REALIZED-GAINS-CURRENT> 17,223
<APPREC-INCREASE-CURRENT> 14,238
<NET-CHANGE-FROM-OPS> 33,477
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,395
<NUMBER-OF-SHARES-REDEEMED> 4,836
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 56,353
<ACCUMULATED-NII-PRIOR> 5,665
<ACCUMULATED-GAINS-PRIOR> 11,450
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,345
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,675
<AVERAGE-NET-ASSETS> 271,304
<PER-SHARE-NAV-BEGIN> 6.14
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> .74
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.92
<EXPENSE-RATIO> 1.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 05
<NAME> SERIES E
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 115,286
<INVESTMENTS-AT-VALUE> 115,667
<RECEIVABLES> 3,737
<ASSETS-OTHER> 903
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 120,307
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 373
<TOTAL-LIABILITIES> 373
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,878
<SHARES-COMMON-STOCK> 9,726
<SHARES-COMMON-PRIOR> 11,171
<ACCUMULATED-NII-CURRENT> 12,904
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,229)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 381
<NET-ASSETS> 120,307
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,790
<OTHER-INCOME> 0
<EXPENSES-NET> 516
<NET-INVESTMENT-INCOME> 4,274
<REALIZED-GAINS-CURRENT> (2,016)
<APPREC-INCREASE-CURRENT> 1,030
<NET-CHANGE-FROM-OPS> 3,288
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,046
<NUMBER-OF-SHARES-REDEEMED> 3,491
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (14,107)
<ACCUMULATED-NII-PRIOR> 8,629
<ACCUMULATED-GAINS-PRIOR> (12,213)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 465
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 516
<AVERAGE-NET-ASSETS> 125,005
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> (.22)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.33
<EXPENSE-RATIO> .83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 06
<NAME> SERIES S
<MULTIPLIER> 1,000
<S> <C>
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