<PAGE>
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. 30 |X|
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Post-Effective Amendment No. 30 |X|
------
(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:
(913) 295-3127
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
SBL Fund SBL Fund
700 Harrison Street 700 Harrison Street
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b)
|X| on February 5, 1997, pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on February 5, 1997, pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on February 5, 1997, pursuant to paragraph (a)(ii) 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 27, 1996.
<PAGE>
SBL FUND
FORM N-1A
CROSS REFERENCE SHEET
Form N-1A
ITEM NUMBER CAPTION
PART A PROSPECTUS
1. Cover Page
2. Not Applicable
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
EXPLANATORY NOTE
This Post-Effective Amendment No. 30
(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 P of the
Registrant to within 6 months of its
effective date. As a result, the Amendment
does not affect the Registrant's other
currently effective prospectus, which
prospectus is hereby incorporated by
reference as most recently filed pursuant to
Rule 497 under the Securities Act of 1933,
as amended.
PART B STATEMENT OF ADDITIONAL INFORMATION
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
<PAGE>
18. Capital Stock and Voting
19. Sale and Redemption of Shares; Determination of Net Asset Value;
Repurchase Agreements
20. Distributions and Federal Income Tax Considerations;
Foreign Taxes
21. Not Applicable
22. Performance Information
23. Financial Statements; Independent Auditors
<PAGE>
Series P
PROSPECTUS
February 5, 1997
[SBL Logo]
<PAGE>
- --------------------------------------------------------------------------------
SBL FUND
SERIES P
Member of the Security Benefit Group of Companies
700 Harrison, Topeka, Kansas 66636-0001
PROSPECTUS
FEBRUARY 5, 1997
Series P (the "Fund") is a series of SBL Fund, a diversified, open-end
management investment company.
The Fund's investment objective is to seek high current income. Capital
appreciation is a secondary objective. The Fund seeks to achieve its objective
by investing primarily in the following types of securities: (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. Under normal circumstances, at least 65 percent of the
Fund's total assets will be invested in high-yielding, high risk debt
securities.
IN ADDITION TO OTHER RISKS, THE HIGH YIELD, HIGH RISK BONDS IN WHICH THE
FUND INVESTS 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 the Fund. It should be read and retained for future
reference. Certain additional information is contained in a Statement of
Additional Information about the Fund, dated February 5, 1997, which 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 (913) 295-3127 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>
- --------------------------------------------------------------------------------
SBL FUND
FINANCIAL HIGHLIGHTS
The following financial highlights for the period August 5, 1996 (date of
inception) to December 31, 1996 are unaudited.
<TABLE>
<CAPTION>
Average
Com-
mission
Net Ratio Ratio Paid
Net Gain Divi- of Of Per
Asset On Sec- Total dends Net Expenses Net Invest-
Value urities From (from Distri- Net Assets to Income Port- ment
Fiscal Begin- Net (Real- Invest- Net butions Return Asset End Of Aver- to folio Secu-
Year ning Invest- ized & ment Invest- (From Of Total Value Total Period age Average Turn- rity
Ended Of ment Unreal- Opera- ment Capital Capi- Distri- End of Return (thou- Net Net over Traded
Dec.31 Period Income ized) tions Income) Gains) tal butions Period (d) sands) Assets Assets Rate (e)
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES P
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
(a)(b)
(c) $15.00 $0.51 $0.48 $0.99 $--- $--- $--- $--- $15.99 6.6% $2,665 0.28% 8.24% 151% $---
</TABLE>
(a) Series P was initially capitalized on August 5, 1996 with a net asset value
of $15 per share. Percentage amounts for the period, except annual return,
have been annualized.
(b) Fund expenses were reduced by the Investment Manager during the period, and
the expense ratio absent such reimbursement would have been .88%.
(c) Net investment income per share has been calculated using the weighted
monthly average number of capital shares outstanding.
(d) Total return information does not take into account (i) any sales charges 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 the period shown.
(e) 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, are excluded. 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.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
SBL FUND
Series P (the "Fund") is a series of SBL Fund, a Kansas corporation,
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 its shares.
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, the Fund will not 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 the Fund currently
foresee any such disadvantages, either to variable life insurance policyowners
or to variable annuity contractowners, the Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such
policyowners and contractowners resulting from changes in state insurance law,
changes in federal income tax 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 OBJECTIVE AND POLICIES OF THE FUND
The investment objective of the Fund 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 the Fund may be modified at any time without
stockholder approval. However, the Fund is subject to certain investment policy
limitations set forth in the Statement of Additional Information, which may not
be changed without stockholder approval. The Fund may borrow money from banks as
a temporary measure for emergency purposes, to facilitate redemption requests,
or for other purposes consistent with its 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, the
Fund may invest in certificates of deposit issued by banks, bank demand
accounts, repurchase agreements and high quality money market instruments.
The investment objective of the Fund is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Fund 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
Fund 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 Fund's total assets will be invested in high-yielding, high risk
debt securities.
The Fund 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." Included in the debt securities which the Fund 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
The Fund 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
Fund 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 Fund's investment in foreign securities, excluding Canadian
securities, will not exceed 25 percent of the Fund's 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 Fund may invest in MBSs, including mortgage pass-through securities and
collateralized mortgage obligations (CMOs). The Fund 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 Fund 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."
The Fund 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 Fund 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 Fund 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 ended 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.
PERCENT OF
INVESTMENT NET ASSETS
Cash and other Assets, Less Liabilities.. 21.6%
Rated Fixed Income Securities
Ba/BB................................. 29.4%
B..................................... 49.0%
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 Fund 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 Fund's policy that not more than 15
percent of the Fund's net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted securities.
The Fund may purchase securities on "when-issued" or "delayed delivery"
basis in excess of customary settlement periods for the type of security
involved. The Fund may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Fund 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 Fund's total
assets. In addition, the Fund 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 Fund 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 Fund will not use futures
contracts for leveraging purposes. The Fund 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 Fund's net asset
value. The Fund may purchase call and put options and write such options on a
"covered" basis. The Fund may also enter into interest rate and index swaps and
purchase or sell related caps, floors and collars. The aggregate market value of
the Fund's portfolio securities covering call or put options will not exceed 25
percent of the Fund's 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 Fund may invest part or all of its assets in U.S.
Government securities, commercial notes or money market instruments. It is
anticipated that the
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
weighted average maturity of the Fund's portfolio will range from 5 to 15 years
under normal circumstances.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by the Fund are described in the "Investment
Objective 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. Also
included is a general description of some of the investment instruments,
techniques and methods which may be used by the Fund. Although the Fund may
employ the techniques, instruments and methods described below, consistent with
its investment objective and policies and any applicable law, it is not required
to do so.
INVESTMENT VEHICLES
CONVERTIBLE SECURITIES AND WARRANTS -- Convertible securities are debt or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
U.S. GOVERNMENT SECURITIES -- The Fund 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. 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.
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.
The Fund 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. 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 Fund 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 fund invested in such securities wishing to sell
them may find it difficult to find a buyer, which may in turn decrease the price
at which they may be sold. IOs and POs
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
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 Fund 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 Fund's investment in MBSs will be
successful, and the Fund's 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.
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 Fund 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, the Fund may dispose of a commitment prior to settlement if the
Investment Manager deems it appropriate to do so. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If the Fund 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 the Fund 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 Fund 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 the Fund 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. Trading
restricted securities pursuant to Rule 144A may enable the Fund 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 the Fund's 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 the
Fund may be permitted to sell it under an effective registration statement. If,
during a period, adverse conditions were to develop, the Fund might obtain a
less favorable price than prevailing when it decided to sell.
The Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager. In making the determination regarding
the liquidity of Rule 144A securities, the Investment Manager 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 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
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Rule 144A securities could have the effect of increasing the amount of a Fund's
assets invested in illiquid securities to the extent that qualified
institutional buyers become uninterested, for a time, in purchasing these
securities.
BRADY BONDS -- The Fund 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. 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.
The Fund may invest in collateralized Brady 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 -- The Fund 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").
The Fund may also invest in participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and the Fund may
not directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by the Investment Manager to be creditworthy. When the
Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by the Fund as the purchaser of an Assignment
may differ from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Fund anticipates 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 Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value.
ZERO COUPON SECURITIES -- The Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. The Fund 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 Fund's income. Accordingly,
for the Fund to qualify for tax treatment as a regulated investment company and
to avoid certain taxes (see "Distributions and Federal Income Tax
Considerations"), the Fund 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 Fund's cash assets or, if necessary, from the proceeds of
sales of portfolio securities. The Fund 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
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
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 -- The Fund may invest in sovereign debt securities of
emerging market governments, including Brady Bonds (provided such securities are
denominated in U.S. dollars). 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 Fund's net asset value, to a greater extent than the volatility
inherent in domestic fixed income securities. A sovereign debtor's willingness
or ability to repay principal and pay interest in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the sovereign debtor's policy toward principal international lenders and
the political constraints to which a sovereign debtor may be subject. Emerging
market governments could default on their sovereign debt. Such sovereign debtors
also may be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a sovereign
debtor's implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due, may result in the cancellation of such third parties' commitments to lend
funds to the sovereign debtor, which may further impair such debtor's ability or
willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Fund's
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Manager intends to manage the Fund in a manner that will minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause the Fund to suffer a loss of interest or principal on any of its
holdings.
In recent years, some emerging market countries have encountered
difficulties in servicing their sovereign debt obligations. Some of these
countries have withheld payments of interest and/or principal of sovereign debt.
These difficulties have also led to agreements to restructure external debt
obligations--in particular, commercial bank loans, typically by rescheduling
principal payments, reducing interest rates and extending new credits to finance
interest payments on existing debt. In the future, holders of emerging market
sovereign debt securities may be requested to participate in similar
rescheduling of such debt. Certain emerging market countries are among the
largest debtors to commercial banks and foreign governments. At times certain
emerging market countries have declared a moratorium on the payment of principal
and interest on external debt; such a moratorium is currently in effect in
certain emerging market countries. There is no bankruptcy proceeding by which a
creditor may collect in whole or in part sovereign debt on which an emerging
market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payment could be affected.
Investors should also be aware that certain sovereign debt instruments in
which the Fund may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Fund may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
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
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
exchanges or over-the-counter in the United States. Investors should consider
carefully the substantial risks involved in investing in securities issued by
companies of foreign nations, which are in addition to the usual risks inherent
in domestic investments. See "Foreign Investment Risks," below.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- -- A repurchase agreement is a contract under which the Fund 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 Fund 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 Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Fund may be
delayed or limited and the Fund may incur additional costs. In such case, the
Fund will be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to limit repurchase agreements to
institutions believed by the Investment Manager to present minimal credit risk.
The Fund also may enter into reverse repurchase agreements with the same
parties with whom it may enter into repurchase agreements. Under a reverse
repurchase agreement, the Fund 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 Fund may decline below the price of the securities the Fund 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 Fund's obligation to repurchase the securities, and the
Fund's use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
The Fund also may enter into "dollar rolls," in which the Fund 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 Fund would forego
principal and interest paid on such securities. The Fund 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 the Fund 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 the Fund's assets
for purposes of calculating compliance with the Fund's borrowing limitation. See
"Borrowing," below.
MANAGEMENT PRACTICES
CASH RESERVES -- The Fund may establish and maintain reserves as the
Investment Manager believes is advisable to facilitate the Fund's 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
foreign money market instruments (provided such instruments are denominated in
U.S. dollars) rated within the top two credit categories by a national rating
organization, or if unrated, of comparable quality as determined by the
Investment Manager.
BORROWING -- The Fund may borrow money from banks as a temporary measure
for emergency purposes, to facilitate redemption requests, or for other purposes
consistent with the Fund's investment objective and program. Such borrowings may
be collateralized with Fund assets. Borrowings will not exceed 33 1/3 percent of
total assets. To the extent that the Fund 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 the Fund's 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. The
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
LENDING OF PORTFOLIO SECURITIES -- The Fund 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 Fund 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.
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 the Fund
purchases a call option, it will pay a premium to the party writing the option
and a
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
commission to the broker selling the option. If the option is exercised by the
Fund, 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, the Fund 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. The Fund 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 Fund's 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 Fund may write only covered call options. This means that the Fund will
own the security subject to the option or an option to purchase the same
underlying security, having an exercise price equal to or less than the exercise
price of the "covered" option, or will establish and maintain with its custodian
for the term of the option, an account consisting of cash or liquid securities
having a value equal to the fluctuating market value of the optioned securities.
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 Fund's 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 Fund may write only covered put
options, which means that the Fund will maintain in a segregated account cash or
liquid securities in an amount not less than the exercise price or the Fund will
own an option to sell the underlying security subject to the option having an
exercise price equal to or greater than the exercise price of the "covered"
option at all times which the put option is outstanding. By writing a put
option, the Fund 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.
The Fund may sell a call option or a put option which it has previously
purchased prior to purchase (in the case of a call) or the sale (in the case of
a put) of the underlying security. Any such sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the call or put which is sold.
FUTURES CONTRACTS AND RELATED OPTIONS -- The Fund may buy and sell futures
contracts (and options on such contracts) to manage exposure to changes in
securities prices 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. The Fund also may write call
options and purchase put options on financial futures contracts as a hedge to
attempt to protect the Fund's securities from a decrease in value. When the Fund
writes a call option on a futures contract, it is undertaking the obligation of
selling a futures contract at a fixed price at any time during a specified
period if the option is exercised. Conversely, the purchaser of a put option on
a futures contract is entitled (but not obligated) to sell a futures contract at
a fixed price during the life of the option.
Financial futures contracts include interest rate futures contracts and
stock index futures contracts. An interest rate futures contract obligates the
seller of the contract to deliver, and the purchaser to take delivery of,
interest rate securities called for in a contract at a specified future time at
a specified price. A stock index assigns relative values to common stocks
included in the index and the index fluctuates with changes in the market values
of the common stocks included. A stock index futures contract is a bilateral
contract pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. An option on a
financial futures contract gives the purchaser the right to assume a position in
the contract (a long position if the option is a call and a short position if
the option is a put) at a specified exercise price at any time during the period
of the option.
REGULATORY MATTERS RELATED TO FUTURES AND OPTIONS -- In connection with its
proposed futures and options transactions, the Fund filed 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
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
exceed 5 percent of the Fund's assets; and (ii) with respect to each futures
contract purchased or long position in an option contract, the Fund 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 the 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.
The Fund 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 -- The Fund may enter into interest rate
and index swaps, the purchase or sale of related caps, floors and collars and
other derivative instruments. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio, as a technique for managing the portfolio's duration (i.e.,
the price sensitivity to changes in interest rates) or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund 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 Fund may
be obligated to pay at a later date.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal.
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.
RISK FACTORS
GENERAL -- The Fund's net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions. The value of fixed
income securities generally fluctuates inversely with interest rate movements.
Longer term bonds held by the Fund are subject to greater interest rate risk.
There is no assurance that the Fund will achieve its investment objective.
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 speculation. For Moody's, Ba
indicates the lowest degree of speculation and D 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. 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.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
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 also may 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, also may 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 Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund 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 Fund 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 Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. 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. The Fund 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 Fund 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.
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.
FUTURES AND OPTIONS RISK -- Futures contracts and options can be highly
volatile and could result in reduction of the Fund's total return, and the
Fund's attempt to use such investments for hedging purposes may not be
successful. Successful futures strategies require the ability to predict future
movements in securities prices, interest rates and other economic factors.
Losses from options and futures could be significant if the Fund is unable to
close out its position due to distortions in the market or lack of liquidity.
The Fund's risk of loss from the use of futures extends beyond its initial
investment and could potentially be unlimited.
The use of futures and options involves investment risks and transaction
costs to which the Fund would not be subject absent the use of these strategies.
If the Investment Manager seeks to protect the Fund against potential adverse
movements in the securities or interest rate markets using these instruments,
and such markets do not move in a direction adverse to the Fund, the Fund could
be left in a less favorable position than if such strategies had not been
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
used. Risks inherent in the use of futures and options include: (a) the risk
that interest rates and securities prices will not move in the directions
anticipated; (b) imperfect correlation between the price of futures and options
and movements in the prices of the securities 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. The
Fund's ability to terminate option positions established in the over-the-counter
market may be more limited than in the case of exchange-traded options and may
also involve the risk that securities dealers participating in such transactions
would fail to meet their obligations to the Fund.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of a hedge. Such correlation, particularly with
respect to options on stock indices and stock index futures, is imperfect, and
such risk increases as the composition of the Fund diverges from the composition
of the relevant index. The successful use of these strategies also depends on
the ability of the Investment Manager 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. The
Fund's 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 Fund, political or social instability, or diplomatic
developments which could affect the investments of the Fund in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, rate of savings and capital reinvestment, resource self-sufficiency
and balance of payments positions.
EMERGING MARKETS RISKS -- Because of the special risks associated with
investing in emerging markets, an investment in the Fund 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
Fund 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 Fund to make intended securities purchases due to settlement problems could
cause the Fund to forego attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
losses to the Fund due to subsequent declines in value of the portfolio security
or, if the Fund 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 Fund's 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 Fund 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.
MANAGEMENT OF THE FUND
The management of the Fund's business and affairs is the responsibility of
the 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 with
$15.5 billion of insurance in force. 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.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Manager manages the Fund's portfolio in accordance with its
stated investment objective and policies and makes all investment decisions. 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 the
Fund, computed on a daily basis and payable monthly.
The Investment Manager also acts as administrative agent for 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.
PORTFOLIO MANAGEMENT
The Fund is managed by the Fixed Income Team of the Investment Manager. The
Fixed Income Team consists of John Cleland, Greg Hamilton, Jane Tedder, Tom
Swank, Steve Bowser, Barb Davison and Elaine Miller. Tom Swank, Portfolio
Manager, has day-to-day responsibility for managing the Fund and has managed the
Fund since its inception in 1996.
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.
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.
DISTRIBUTIONS AND FEDERAL
INCOME TAX CONSIDERATIONS
The Fund intends to 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 its
net investment income and net realized capital gains. Such distributions will be
reinvested on the payable date in additional shares of the Fund 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 of
SBL Fund 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), the Fund is required
to diversify its investments. Generally, a Fund will be required to diversify
its investments so that on
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
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 the Fund fails to meet the diversification
requirements under Code section 817(h), income with respect to life insurance
policies and annuity contracts invested in the Fund 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 the Fund 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 the Fund as a
regulated investment company and to the satisfaction of the Code section 817(h)
diversification requirements may limit the extent to which the Fund will be able
to engage in certain investment practices, including transactions in options,
futures contracts, swaps and other types of derivative securities transactions.
In addition, if the Fund were unable to dispose of portfolio securities due to
settlement problems relating to foreign investments or due to the holding of
illiquid securities, the Fund's 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 the Fund. 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 the Fund 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 are tendered for redemption and no order to purchase shares is
received). The determination is made by dividing the value of the portfolio
securities of the Fund, plus any cash or other assets, less all liabilities, by
the number of shares of the Fund 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
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 the Fund 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. Trading on foreign exchanges 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
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
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.
TRADING PRACTICES AND BROKERAGE
The annualized portfolio turnover rate for Series P for the period August
5, 1996 (date of inception) to December 31, 1996 is 151 percent. Higher
portfolio turnover subjects a fund to increased brokerage costs and may in some
cases, have adverse tax effects on the Fund or its stockholders.
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. The
portfolio turnover rate of the Fund may exceed 100 percent, but is not expected
to do so under normal market conditions.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interest of the Fund. 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 Fund.
Although the Investment Manager may consider sales of shares of the Fund 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 its average annual total return in
advertisements or reports to stockholders or prospective investors. Quotations
of average annual total return for the Fund will be expressed in terms of the
average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5, and 10 years (up to the life of the Fund), and will
assume that all dividends and distributions are reinvested when paid.
Quotations of total return for the Fund will be based on a hypothetical
investment in the Fund 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 the Fund 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 the Fund's 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
the Fund reflects only the performance of a hypothetical investment in the Fund
during a particular time period on which the calculations are based. Performance
information should be considered in light of the Fund's 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
Fund, 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
twelve Series, A, B, C, D, E, S, J, K, M, N, O and P. 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.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
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 P. Security Management Company,
LLC acts as the 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 (913) 295-3127 or 1-800-888-2461, extension 3127.
<PAGE>
SECURITY FUNDS
APPLICATION
1. ACCOUNT REGISTRATION (THE OWNER(S) MUST COMPLETE SECTION 10 "CERTIFICATION
AND SIGNATURE" TO ESTABLISH AN ACCOUNT.)
I hereby authorize the establishment of the account marked below and acknowledge
receipt of the Fund's current prospectus. Check is enclosed for
$ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as
------------------
an initial investment. I am of legal age in the state of my residence and wish
to purchase shares of the Fund indicated below. By the execution of this
application, the undersigned represents and warrants that the investor has full
right, power and authority to make this investment and the undersigned is duly
authorized to sign this application and to purchase or redeem shares of the Fund
on behalf of the investor. No stock certificate is to be issued unless I so
request. See the prospectus for information about an Accumulation Plan which
allows a minimum investment of $100 and subsequent investments of $20.
- -------------------------------------------------------------
Owner/Custodian/Trustee Name (Print)
- -------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------
Joint Owner/Minor Name (Print) [ ] Check if UGMA/UTMA Account
- -------------------------------------------------------------
Social Security Number Date of Birth
2. ADDRESS AND TELEPHONE NUMBER
- ------------------------------ -----------------------------------------------
Street Address Daytime Telephone
(for first individual)
- ------------------------------ Citizenship [ ] U.S. [ ] Other
City, State, Zip Code ----------------
Indicate Country
3. INITIAL INVESTMENT
CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS
SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES)
<TABLE>
<S> <C> <C> <C>
SECURITY EQUITY FUND $ SECURITY LIMITED MATURITY BOND FUND $
------ ------
SECURITY GLOBAL FUND $ SECURITY U.S. GOVERNMENT FUND $
------ ------
SECURITY ASSET ALLOCATION FUND $ SECURITY GLOBAL AGGRESSIVE BOND FUND $
------ ------
SECURITY GROWTH & INCOME FUND $ SECURITY HIGH YIELD FUND $
------ ------
SECURITY ULTRA FUND $ SECURITY TAX-EXEMPT FUND $
------ ------
SECURITY CASH FUND $ SECURITY SOCIAL AWARENESS FUND $
------ ------
SECURITY CORPORATE BOND FUND $
------
</TABLE>
4. DIVIDEND OPTION (CHECK ONE ONLY)
(If no option is selected, distributions will be reinvested into the Fund that
pays them.)
[ ] Reinvest all dividends and capital gains
[ ] Reinvest only capital gains and pay dividends in cash
[ ] Cash payment of dividends and capital gains
[ ] Invest dividends and capital gains into another Security Fund account
(must be same class of shares; if new account, number will be assigned)
Fund Name Account Number
------------------------------------ ------------------
[ ] Send distributions to third party below
Account No. (if applicable)
----------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE)
You are hereby authorized to send a check(s) beginning:
Month Day [ ] 11th or [ ] 26th 19
---------------- ----
(if no date is selected withdrawal will be made on the 26th)
Payable: [ ] monthly [ ] quarterly [ ] semi-annually [ ] annually
Fund Name Fund Name
----------------------------- ------------------------------
Account No. (if known) Account No. (if known)
---------------- ---------------
(if 3 or more funds, please send written instructions)
Level Payment $ ($25 minimum) Level Payment $ ($25 minimum)
-------- --------
Variable Payment based on fixed number Variable Payment based on fixed number
of shares or a percentage of account of shares or a percentage of account
value ($25 minimum) value ($25 minimum)
Number of shares: or Number of shares: or
----------- -----------
Percentage of account value: Percentage of account value:
--------- ---------
Note: For Class B shares, annual withdrawals in excess of 10% of value of
account at time program is established may be subject to a contingent deferred
sales charge.
Complete this section only if you want check payable and sent to another address
(please print):
Name Signature(s) of all registered owners required
----------------------------
Address Individual Signature
------------------------- -------------------------
City, State, Zip Code Joint Owner Signature
------------ ------------------------
6. SECUR-O-MATIC[Registration Mark] BANK DRAFT PLAN
I wish to make investments directly from my checking account. (Please attach a
voided check to this application.)
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Date: [ ] 7th Day of Month [ ] 14th Day of Month [ ] 21st Day of Month
[ ] 28th Day of Month
(if no date is selected investment will be made on the 21st)
Mode: [] Monthly ($20 minimum) [] Bi-Monthly ($40 minimum)
[] Quarterly ($50 minimum) [] Semiannually ($100 minimum)
[] Annually ($200 minimum)
You should notify your bank that you are going to use this service to ensure
they accept preauthorized electronic drafts.
(continued on back)
<PAGE>
7. RIGHTS OF ACCUMULATION
I own shares in other Security Funds which may entitle this purchase to have a
reduced sales charge under the provisions in the Fund Prospectus.
- -------------------------------- --------------------------- -----------------
Current Account Registration Fund Name Account Number(s)
- -------------------------------- --------------------------- -----------------
- -------------------------------- --------------------------- -----------------
8. STATEMENT OF INTENTION
[ ] Please check here if you wish to receive a Statement of Intention. This form
allows you to purchase shares at reduced sales charges if you plan to invest
more than: (Please check one) [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 in installments during the next 13 months (36 months for
purchases of $1 million or more). See the current prospectus for more
information.
9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
If you would like to have telephone exchange and/or redemption privileges,
please mark one or more of the boxes below:
Yes, I want [ ] telephone exchange [ ] telephone redemption privileges.
By checking the applicable box(es) and signing this Application, you authorize
the Investment Manager to honor any telephone request for the exchange and/or
redemption of Fund shares (maximum telephone redemption is $10,000), subject to
the terms of the Fund prospectus. The Investment Manager has established
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. The procedures require
that any person requesting a telephone redemption or exchange provide the
account registration and number and owner's tax identification number and such
request must be received on a recorded line. Neither the Fund, the Investment
Manager nor the Underwriter will be liable for any loss, liability, cost or
expense arising out of any telephone request, provided that the Investment
Manager complied with its procedures. Thus, a stockholder may bear the risk of
loss from a fraudulent or unauthorized request.
10. CERTIFICATION AND SIGNATURE
TAX IDENTIFICATION NUMBER CERTIFICATION
UNDER PENALTIES OF PERJURY I CERTIFY THAT:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me); and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
Signature of Owner Date
- --------------------------------------------------------------------------------
Signature of Joint Owner Date
In case of joint ownership, both must sign. If no form of ownership is indicated
then it will be assumed the ownership is as "joint tenants, with right of
survivorship" and not as "tenants in common."
CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the left if you have
been notified by IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return.
11. INVESTMENT DEALER
I (we) agree to act as dealer under this account in accordance with the
provisions of the Dealer Agreement and appoint Security Distributors, Inc. to
act as my (our) agent pursuant thereto. I (we) represent that the appropriate
prospectus was delivered to the above indicated owner(s).
- --------------------------------------------------------------------------------
Name of Firm (Print)
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Signature of Authorized Dealer
- ----------------------------------------------------- ------------------------
Representative's Name Account Executive Number
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Representative's Telephone Number
SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST.,
TOPEKA, KS 66636-0001
1-800-888-2461, EXT. 3127
Attach Voided Check Here
(Check must be preprinted with the bank account registration)
<PAGE>
[SBL LOGO}
700 SW Harrison St. BULK RATE
Topeka, KS 66636-0001 U.S. POSTAGE PAID
(913) 295-3000 TOPEKA, KS
(800) 888-2461 PERMIT NO. 385
<PAGE>
SBL FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 5, 1997
RELATING TO THE SBL FUND PROSPECTUS DATED AUGUST 5, 1996
AS SUPPLEMENTED NOVEMBER 25, 1996, AND
SERIES P PROSPECTUS DATED FEBRUARY 5, 1997
(913) 295-3127
(800) 888-2461
INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
UNDERWRITER
Security Distributors, Inc.
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>
SBL FUND
A Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997
(RELATING TO THE SBL FUND PROSPECTUS DATED AUGUST 5, 1996,
AS SUPPLEMENTED NOVEMBER 25, 1996, AND THE SERIES P PROSPECTUS
DATED FEBRUARY 5, 1997)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the SBL Fund Prospectus dated August 5, 1996, As
Supplemented November 25, 1996, and the Series P Prospectus dated February 5,
1997. A Prospectus may be obtained by writing or calling Security Distributors,
Inc., 700 SW Harrison, Topeka, Kansas 66636-0001, or by calling (913) 295-3127
or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
Page
What is SBL Fund?....................................... 1
Investment Objectives and Policies of the Series........ 1
Series A (Growth Series)............................. 2
Series B (Growth-Income Series)...................... 2
Series C (Money Market Series)....................... 3
Series D (Worldwide Equity Series)................... 5
Series E (High Grade Income Series).................. 6
Series S (Social Awareness Series)................... 8
Series J (Emerging Growth Series).................... 8
Series K (Global Aggressive Bond Series)............. 9
Series M (Specialized Asset Allocation Series)....... 14
Series N (Managed Asset Allocation Series)........... 16
Series O (Equity Income Series)...................... 20
Series P (High Yield Series)......................... 21
Investment Methods and Risk Factors..................... 23
Investment Policy Limitations........................... 46
Officers and Directors.................................. 48
Remuneration of Directors and Others.................... 50
Sale and Redemption of Shares........................... 50
Investment Management................................... 50
Portfolio Management................................. 53
Code of Ethics....................................... 55
Portfolio Turnover...................................... 56
Determination of Net Asset Value........................ 56
Portfolio Transactions.................................. 57
Distributions and Federal Income Tax Considerations..... 58
Ownership and Management................................ 62
Capital Stock and Voting................................ 62
Custodian, Transfer Agent and Dividend-Paying Agent..... 62
Independent Auditors.................................... 62
Distribution of Variable Insurance Products............. 62
Performance Information................................. 63
Financial Statements.................................... 64
Appendix................................................ 65
<PAGE>
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 twelve series: 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 ("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 46.)
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 50.)
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 entered an
agreement with each of Meridian Investment Management Corporation ("Meridian")
and Templeton/Franklin Investment Services, Inc. ("Templeton") to provide
certain quantitative analytic research services with respect to Series M.
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 and Series P; .5% of
the average net assets of Series C; and 1.00% of the average net assets of
Series D, Series M, Series N and Series O, 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 50 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 46, 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>
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; and (vi) higher yielding, high
risk debt securities (commonly referred to as "junk bonds"). 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>
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."
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.)
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
3
<PAGE>
SERIES C (CONTINUED)
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
some 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 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
4
<PAGE>
SERIES C (CONTINUED)
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 56.) 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. 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.
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
5
<PAGE>
SERIES D (CONTINUED)
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."
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
6
<PAGE>
SERIES E (CONTINUED)
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"). 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 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
7
<PAGE>
SERIES E (CONTINUED)
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."
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 S (SOCIAL AWARENESS SERIES)
The investment objective of Series S is to seek high total return through a
combination of income and capital appreciation by investing 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.
The Series will not invest in securities of companies that: (1) engage in
the production of nuclear energy; (2) engage in the manufacture of weapon
systems; (3) engage in practices that pollute the environment; or (4) engage in
the liquor, tobacco or gambling industries. 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.
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 Investment Manager will not independently evaluate an issuer's
activities to determine if it engages in any practices prohibited by the Series'
social criteria, but will rely on information published by others that publish
information for investors concerning the social policy implications of corporate
activity. The Investment Manager may rely upon information provided by
investment advisory firms that provide social research on U.S. corporations,
such as Kinder, Lydenberg & Domini & Co., 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 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
8
<PAGE>
SERIES J (CONTINUED)
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 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.
9
<PAGE>
SERIES K (CONTINUED)
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 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
10
<PAGE>
SERIES K (CONTINUED)
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 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.
11
<PAGE>
SERIES K (CONTINUED)
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."
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.
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
13
<PAGE>
SERIES K (CONTINUED)
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 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"); 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
14
<PAGE>
SERIES M (CONTINUED)
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.
Series M may invest in real estate investment trusts ("REITs"). Investment
in REITs involves certain special risks. Equity REITs may be affected by any
changes in the value of the underlying property owned by the trusts, while
mortgage REITs may be affected by the quality of any credit extended. Further,
equity and mortgage REITs are dependent upon management skill, are not
diversified, and are therefore subject to the risk of financing single or a
limited number of projects. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation, and the possibility of
failing to qualify for special tax treatment under Subchapter M of the Internal
Revenue Code and to maintain an exemption under the Investment Company Act of
1940. Finally, 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.
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 Investment Manager receives quantitative investment research from
Meridian Investment Management Company ("Meridian"), which research the
Investment Manager uses in strategically allocating 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. The Investment Manager then determines (based on the results of
Meridian's analysis) 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. Although the Investment Manager anticipates relying on much of the
research provided by Meridian, the Investment Manager has ultimate
responsibility for the selection of the investment categories and the sectors
within those categories.
The Investment Manager identifies sectors of the domestic and international
economy (based on the research provided by Meridian) in which the Series will
invest and then determines which equity securities to purchase within the
identified sectors. The Investment Manager may utilize certain analytical
research provided by Templeton/Franklin Investment Services, Inc. ("Templeton")
in selecting equity securities, including gold stocks, for Series M. Templeton's
research is derived from analytical research provided by a third party that is
analyzed and monitored by Templeton. The Investment Manager has ultimate
responsibility for all buy and sell decisions of Series M and may determine not
to use analytical research provided by Templeton.
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.
15
<PAGE>
SERIES M (CONTINUED)
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 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%
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:
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
16
<PAGE>
SERIES N (CONTINUED)
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 (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."
17
<PAGE>
SERIES N (CONTINUED)
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). For a discussion of restricted 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.
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
18
<PAGE>
SERIES N (CONTINUED)
loaned. For a discussion of the limitations on lending and risks of lending, see
"Investment Methods and Risk Factors" - "Lending of Portfolio Securities."
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 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").
19
<PAGE>
SERIES N (CONTINUED)
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."
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 and warrants, when considered consistent with the Series'
investment objective and program. The Series' investments in foreign securities
include non-dollar denominated
20
<PAGE>
SERIES O (CONTINUED)
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.
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 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
21
<PAGE>
SERIES P (CONTINUED)
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 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.
22
<PAGE>
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 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
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. Although the Series intend to invest only in
nations which are considered to have relatively stable and friendly governments,
there is the possibility of expropriation, nationalization or confiscatory
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), political or social instability or
diplomatic developments which could affect investment in securities of issuers
in those nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to U.S. companies. In
many foreign countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. Foreign investments may be subject to taxation
abroad. In addition, the foreign securities markets of many of the countries in
which the Series may invest may also be smaller, less liquid, and subject to
greater price volatility than those in the United States.
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 and P 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, 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 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
23
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
equivalent rating by the Investment Manager. This Series may enter into
repurchase agreements with maturities of over seven days, provided that it may
not 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.
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.
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 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.
24
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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.
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.
25
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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, U.S. Government securities or other high grade, liquid debt obligations
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 reserves 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.
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
26
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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, cash
equivalents, U.S. Government securities or other high grade, liquid debt
obligations 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 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 reserves 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.
27
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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
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, the 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
28
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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, 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
29
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities;
(iv) inadequacy of the facilities of an exchange or the clearing corporation to
handle trading volume; and (v) a decision by one or more exchanges to
discontinue the trading of options or impose restrictions on orders. In
addition, the hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary Series securities transactions.
Each exchange has established limitations governing the maximum number of
call options, whether or not covered, which may be written by a single investor
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or more
accounts or through one or more brokers). An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks. A stock index futures
contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific amount multiplied by the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
securities is made.
RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Series will realize a gain or
a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon the ability
of the Investment Manager or 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
30
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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, cash equivalents, U.S. Government securities, or other high grade, liquid
debt obligations, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
Margin is the amount of funds that must be deposited by the 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
31
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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
32
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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, cash equivalents,
U.S. Government securities or other high grade, liquid debt 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.
33
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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
34
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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.
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
35
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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 high
grade, liquid debt 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.
36
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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.
INTEREST RATE SWAPS AND INTEREST RATE CAPS AND FLOORS. Interest rate swaps
involve the exchange by the Series with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The exchange commitments can involve payments
to be made in the same currency or in different currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from the
party selling the interest rate floor.
HYBRID INSTRUMENTS. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument ("Hybrid Instruments"). Often these Hybrid Instruments are indexed to
the price of a commodity or particular currency or a domestic or foreign debt or
equity securities index. Hybrid Instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of a currency
or commodity at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. The risks of
investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument
37
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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.
38
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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
39
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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. 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
40
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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
41
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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.
42
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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.
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.
43
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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.
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
44
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 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
45
<PAGE>
INVESTMENT METHODS AND RISK FACTORS (CONTINUED)
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 and P 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 or P.
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 and P.
8. Invest in the securities of other investment companies; provided, however,
that this investment limitation does not apply to Series K, M, N, O or P.
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 Fund would exceed 25% of
the value of its assets.
46
<PAGE>
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 and P may enter into forward
currency contracts and other forward commitments and transactions in
futures, options and options on futures.
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.
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. Series K may
borrow money from banks for emergency or temporary purposes or to meet
redemptions in an amount not to exceed 5% of the Series' total assets.
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;
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;
47
<PAGE>
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 FUNDS 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.
WILLIS A. ANTON, JR., Director Partner, Classic Awning & Design. Prior to October 1991,
3616 Yorkway President, Classic Awning & Design.
Topeka, Kansas 66604
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
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 October 1991,
3616 Canterbury Town Road Secretary and Director, Palmer Companies, Inc. (Wholesale
Topeka, Kansas 66610 Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and
5500 SW 7th Street Education).
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director Senior Vice President, Security Benefit Group, Inc. and
1266 South Street Security Benefit Life Insurance Company. Prior to June
Needham, MA 02192 1996, President, Chief Investment Officer and Director,
Security Management Company. Prior to April 1992, Managing
Director, Prudential Life.
HUGH L. THOMPSON, Director President, Washburn University.
1700 College
Topeka, KS 66621
JAMES R. SCHMANK, Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer and
Managing Member Representative, Security Management
Company, LLC; Vice President and Interim Chief Investment
Officer, Security Benefit Group, Inc. and Security Benefit
Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
MARK E. YOUNG, Vice President Vice President - Operations, 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 Portfolio Manager, Security
Management Company, LLC; Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
TERRY A. MILBERGER, Vice President Vice President and Senior Portfolio Manager, Security
Management Company, LLC; 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 Secretary Assistant Vice President, Assistant 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.
GREGORY A. HAMILTON, Assistant Vice President Second Vice President, Security Management Company, LLC,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company. Prior to December 1992, First Vice
President and Manager of Investments Division, Mercantile
National Bank.
THOMAS A. SWANK, Assistant Vice President Second Vice President and Portfolio Manager, Security
Management Company, LLC; Second Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company.
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.
CHRISTOPHER D. SWICKARD, Assistant Secretary 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 Mr. Milberger. Ms. Tedder is also
Vice President of Security Income Fund and Security Equity Fund; Mr. Milberger
is also Vice President of Security Equity Fund; Ms. Shields is also Assistant
Vice President of Security Ultra Fund; Mr. Hamilton is also Assistant Vice
President of Security Tax-Exempt Fund, Security Equity Fund and Security Income
Fund; Mr. Swank is also Assistant Vice President of Security Growth and Income
Fund; and Ms. Davison is also Assistant Vice President of Security Cash 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 50,
for positions held by such persons with the Investment Manager. Mr. Young and
Ms. Lee
49
<PAGE>
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, 1995, and the aggregate compensation paid to each of the Directors during
calendar year 1995 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 $8,650 $0 $0 $17,300
Donald A. Chubb, Jr. 8,750 0 0 17,500
John D. Cleland 0 0 0 0
Jack H. Hamilton 4,625 0 0 8,950
Donald L. Hardesty 8,650 0 0 17,300
Penny A. Lumpkin 9,050 0 0 17,800
Mark L. Morris, Jr. 8,900 0 0 17,800
Jeffrey B. Pantages 0 0 0 0
Harold G. Worswick* 0 0 0 17,800
Hugh L. Thompson 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
*The Fund has accrued deferred compensation in the amount of $9,578 for Mr. Worswick for the calendar year ending
December 31, 1995.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Security Management Company, LLC compensates its officers and directors who
may also serve as officers or directors of the Fund. On January 31, 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
50
<PAGE>
Life, a mutual life insurance company with $15.5 billion of insurance in force,
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 2, 1996. 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 and
Series P; .5% of the average net assets of Series C; and 1.00% of the average
net assets of Series D, Series M, Series N and Series O, computed on a daily
basis and payable monthly. The investment advisory fees set out above for the
Series except Series C are higher than those paid by many other investment
companies with similar investment objectives. During the last three fiscal
years, SBL Fund paid the following amounts to the Investment Manager for its
services: 1995 - $12,436,327; 1994 - $10,141,578; and 1993 - $8,297,437.
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.
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 was
established in 1938 and currently manages over $3.8 billion in assets.
Lexington has entered into a sub-advisory contract with MFR Advisors, Inc.
("MFR"), One World Financial Center, 200 Liberty Street, New York, New York
10281, 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 is the successor firm to Maria
Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a
subsidiary of John Hancock Freedom Securities Corporation and offered in-depth
economic consulting services to clients. MFR currently acts 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 quantitative research agreement
with Meridian Investment Management Corporation ("Meridian"), 12835 East
Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado 80112. Meridian provides
research which the Investment Manager uses in strategically allocating the
assets of Series M among investment categories and market sectors. For the
services provided to Series M, the Investment Manager pays Meridian an amount
equal to .20% of the average net assets of Series M, computed on a daily basis
and payable quarterly. Meridian is a wholly-owned subsidiary of Meridian
Management & Research Corporation.
51
<PAGE>
The Investment Manager has entered into an agreement with
Templeton/Franklin Investment Services, Inc. ("Templeton"), 777 Mariners Island
Boulevard, San Mateo, California 94404, to provide analytical research used by
the Investment Manager in the selection of equity securities for Series M. The
Investment Manager pays Templeton an annual fee equal to .30% of the first
$50,000,000 of average net assets of Series M invested in equity securities and
.25% of such average net assets in excess of $50,000,000 computed daily and
payable monthly. Templeton is an indirect wholly-owned subsidiary of Templeton
Worldwide, Inc. which in turn is a direct wholly-owned subsidiary of Franklin
Resources, Inc.
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 certain investment advisory services to Series N and O. T. Rowe Price is
presently a publicly held company which with its affiliates manages over $95
billion in assets. 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 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 most restrictive expense limitation currently imposed by
state securities regulation, of which the Investment Manager is aware, provides
that the aggregate annual expenses of an investment company shall not exceed 2
1/2% of the first $30 million of the average net assets, 2% of the next $70
million of the average net assets, and 1 1/2% of the remaining average net
assets of the investment company for any fiscal year, determined at least
monthly. 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 the Fund. In addition, the Investment Manager receives the greater of .10% of
the average net assets of Series D or $60,000, calculated daily and payable
monthly. With respect to Series K, M and N, the Investment Manager receives an
additional annual fee equal to the greater of .10% 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; or (iii) $60,000 thereafter. The administrative fees paid by the
Fund during its fiscal years ended December 31, 1995, 1994 and 1993, were
$786,425, $605,515 and $503,080, respectively.
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, 1995, 1994 and
1993, were $18,750, $13,242 and $12,283, respectively.
The Investment Manager has arranged for Lexington to provide certain
administrative services to Series D and Series K of the Fund, pursuant to a
Sub-Administrative Agreement, dated September 1993, as amended effective May 1,
1995. Pursuant to this agreement, Lexington provides certain accounting
functions, the pricing function and related recordkeeping for Series D, Series K
and certain other mutual funds for which the Investment Manager acts as fund
administrator. For such services, the Investment Manager pays Lexington the
following amounts: (i) an annual base fee of $9,000 per series per contract
year, and (ii) the greater of a minimum fund fee
52
<PAGE>
of $47,000 per series per contract year, OR, an amount equal to the following
percentages of the aggregate assets of all of the series:
AGGREGATE ASSET FEE
AVERAGE DAILY NET ASSETS COMPENSATION
Less than $500 million............................ .07%, plus
$500 million but less than $1 billion............. .045%, plus
$1 billion or more................................ .025%
The Fund's total expenses for the fiscal year ended December 31, 1995, were
$3,599,477, $5,770,437, $573,492, $2,134,514, $1,003,115, $255,769, and $713,258
for Series A, B, C, D, E, S, and J, respectively. Such expenses represent .83%,
.83%, .60%, 1.31%, .85%, .86%, and .84% of the average net assets of these
Series, respectively. The annualized expense ratios of Series K, M, N and O
after expense reimbursements for Series K, for the period June 1, 1995 (date of
inception) to December 31, 1995 was as follows: Series K - 1.63%; Series M -
1.94%; Series N - 1.90%; and Series O - 1.40%. None of the foregoing information
is available for Series P as it did not begin operations until August of 1996.
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.
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 President (Interim), 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 Vice President and Senior Portfolio Manager
Gregory A. Hamilton Assistant Vice President Second Vice President
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 Assistant Vice President, Assistant Treasurer
Secretary and Assistant Secretary
Thomas A. Swank Assistant Vice President Second Vice President and Portfolio Manager
Barbara J. Davison Assistant Vice President Compliance Officer, 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 and Chuck Lauber. Terry Milberger, Senior Portfolio Manager, has
day-to-day responsibility for managing Series A and has managed the Series since
1981. John Cleland directs the allocation of SERIES B'S (GROWTH-INCOME SERIES)
investments among common stocks and fixed income securities. The common stock
portion of the Series B 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, Greg Hamilton, Jane Tedder, Tom Swank, Steve
Bowser, Barb Davison and Elaine Miller. Tom Swank, Portfolio Manager, has
day-to-day responsibility for managing the fixed
53
<PAGE>
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. Greg Hamilton has day-to-day
responsibility for managing Series E and has managed the Series since January
1996. 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. 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 and research analysts of the Investment
Manager. Jane Tedder, Senior Portfolio Manager, has day-to-day responsibility
for managing the fixed-income portion of the Series' portfolio and for
supervising the services provided by Meridian and Templeton and has had
responsibility for the Series since January 1996. 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 has day-to-day responsibility for managing the investments of
Series P and has managed the Series since its inception in 1996.
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. He is active in securities industry affairs, having
served as Vice Chairman of the NASD's National Board of Governors and as
District Chairman for the Association's Business Conduct Committee in District
No. 4.
Greg Hamilton has been in the investment field since 1983. He received his
Bachelor of Arts degree in Business from Washburn University in 1984. Prior to
joining Security Management Company, LLC in January of 1993, he was First Vice
President, Treasurer and Portfolio Manager with Mercantile National Bank, Los
Angeles, California, from 1990 to 1993. From 1986 to 1990, he was Managing
Director of Consulting Services for Sendero Corporation, Scottsdale, Arizona.
Prior to Sendero Corporation, he was employed as Fixed Income Research Analyst
at Peoples Heritage Savings and Loan from 1983-1986.
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.
54
<PAGE>
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.
Cindy L. Shields is a Portfolio Manager of the Investment Manager. Ms.
Shields has six years experience in the securities field and joined the
Investment Manager in 1989. 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. 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
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.
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.
55
<PAGE>
PORTFOLIO TURNOVER
Generally, long-term rather than short-term investments will be made by the
Fund for Series A, B, D, E, S, J and P. 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 and M 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%.
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, J and S for the fiscal years ending December 31, 1995,
1994, and 1993, are as follows:
---------------------------------- --------- ------------------ ----------
1995 1994 1993
---------------------------------- --------- ------------------ ----------
Series A......................... 83% 90% 108%
Series B......................... 94% 43% 95%
Series D......................... 169% 82% 70%
Series E......................... 180% 185% 151%
Series S......................... 122% 67% 105%
Series J......................... 202% 91% 117%
Series K......................... 127%* --- ---
Series M......................... 181%* --- ---
Series N......................... 26%* --- ---
Series O......................... 3%* --- ---
---------------------------------- --------- ------------------ ----------
*Annualized portfolio turnover rates for the period June 1, 1995 (date of
inception) through December 31, 1995.
- --------------------------------------------------------------------------------
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. Portfolio turnover information is not yet
available for Series P as it did not begin operations until August of 1996.
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,
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
56
<PAGE>
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. Consequently, the calculation of the net asset value for
Series D 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.
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
57
<PAGE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
TRANSACTIONS DIRECTED TO AND
COMMISSIONS PAID TO BROKER-DEALERS
BROKERAGE COMMISSIONS WHO ALSO PERFORMED SERVICES
PAID TO SECURITY --------------------------------------------
TOTAL BROKERAGE DISTRIBUTORS INC., BROKERAGE
YEAR COMMISSIONS PAID THE UNDERWRITER TRANSACTIONS COMMISSIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 $4,345,806 $0 $402,404,593 $738,594
- ----------------------------------------------------------------------------------------------------------
1994 2,962,073 0 281,022,190 588,781
- ----------------------------------------------------------------------------------------------------------
1993 3,149,263 0 268,428,090 635,512
- ----------------------------------------------------------------------------------------------------------
*Annualized portfolio turnover for the period June 1, 1995 (date of inception) through December 31, 1995.
- ----------------------------------------------------------------------------------------------------------
</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,
58
<PAGE>
and net short-term capital gains in excess of any net long-term capital losses)
and its net tax-exempt interest each taxable year. The Treasury Department is
authorized to promulgate regulations under which foreign currency gains would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly related to investing in securities (or options and
futures with respect to securities). To date, no such regulations have been
issued.
A Series qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Series intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and any net capital
gains.
Generally, regulated investment companies, like the Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Series intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Series in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Series
during January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The
excise tax provisions described above do not apply to a regulated investment
company, like a Series, all of whose shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable contracts. (For this purpose,
any shares of a Series attributable to an investment in the Series not exceeding
$250,000 made in connection with the organization of the Series shall not be
taken into account.) Accordingly, if this condition regarding the ownership of
shares of a Series is met, the excise tax will be inapplicable to that Series.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Series were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Series
would not qualify for the favorable federal income tax treatment afforded
regulated investment companies, or, even if it did so qualify, it might become
liable for federal taxes on undistributed income. In addition, the ability of a
Series to obtain timely and accurate information relating to its investments is
a significant factor in complying with the requirements applicable to regulated
investment companies, in making tax-related computations, and in complying with
the Code Section 817(h) diversification requirements. Thus, if a Series were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, its tax computations might be subject
to revisions (which could result in the imposition of taxes, interest and
penalties), or it might be unable to satisfy the Code Section 817(h)
diversification requirements.
CODE SECTION 817(H) DIVERSIFICATION. To comply with regulations under
Section 817(h) of the Code, each Series will be required to diversify its
investments so that on the last day of each quarter of a calendar year, no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by any
four investments. Generally, securities of a single issuer are treated as one
investment and obligations of each U.S. Government agency and instrumentality
are treated for purposes of Section 817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contractowner's control of the
investments of a separate account may cause the contractowner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contractowner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contractowner's gross income. These future
rules and regulations proscribing investment
59
<PAGE>
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 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
60
<PAGE>
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, 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
61
<PAGE>
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 January 2, 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, 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 twelve
Series: 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. The shares of each Series
represent pro rata beneficial interest in that Series' assets and in the
earnings and profits or losses derived from the investment of such assets. Upon
issuance and sale, such shares will be fully paid and nonassessable. They are
fully transferable and redeemable. These shares have no preemptive rights, but
the stockholders of each Series are entitled to receive dividends as declared
for that Series by the board of directors of the Fund.
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, 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").
62
<PAGE>
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:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures assume that all dividends and distributions are reinvested when
paid.
For the 1- ,5- and 10-year periods ended December 31, 1995, the average
annual total return was the following:
- ----------------------------------- ------------ -------------- ------------
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------- ------------ -------------- ------------
Series A.......................... 36.8% 18.3% 13.4%
Series B.......................... 30.1% 15.1% 13.9%
Series C.......................... 5.4% 3.4% 5.4%
Series D.......................... 10.9% 10.5% 1.8%
Series E.......................... 18.6% 9.3% 8.4%
Series S.......................... 27.7% 11.9%1 ---
Series J.......................... 19.5% 15.7%2 ---
Series K.......................... 7.6%3 --- ---
Series M.......................... 7.1%3 --- ---
Series N.......................... 7.3%3 --- ---
Series O.......................... 17.0%3 --- ---
- ----------------------------------- ------------ -------------- ------------
1 For the period May 1, 1991 (date of inception) through December 31, 1995.
2 For the period October 1, 1992 (date of inception) through December 31,
1995.
3 For the period June 1, 1995 (date of inception) through December 31, 1995.
- ----------------------------------------------------------------------------
Quotations of total return for any Series will also be based on a
hypothetical investment in the Series for a certain period, and will assume that
all dividends and distributions are reinvested when paid. The total return is
calculated by subtracting the value of the investment at the beginning of the
period from the ending value and dividing the remainder by the beginning value.
Performance information is not yet available for Series P as it did not begin
operations until August of 1996.
The total return on an investment made in shares of Series A calculated as
described above for the period from December 31, 1985 to December 31, 1995 was
250.48%.
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.
63
<PAGE>
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 (except for Series P) for the
fiscal year ended December 31, 1995 which are contained in the Annual Report of
SBL Fund and the unaudited financial statements of Series P for the period
August 5, 1996 to December 31, 1996, are incorporated herein by reference. A
copy of the Annual Report for the year ended December 31, 1995, and the
unaudited financial statements of Series P for the period August 5, 1996 to
December 31, 1996, are provided to every person requesting a copy of the
Statement of Additional Information.
64
<PAGE>
APPENDIX
DESCRIPTION OF SHORT-TERM INSTRUMENTS
U.S. GOVERNMENT SECURITIES. Federal agency securities are debt obligations
which principally result from lending programs of the U.S. Government. Housing
and agriculture have traditionally been the principal beneficiaries of federal
credit programs, and agencies involved in providing credit to agriculture and
housing account for the bulk of the outstanding agency securities.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one
year. Three-month bills are currently offered by the Treasury on a 13-week cycle
and are auctioned each week by the Treasury. Bills are issued in bearer form
only and are sold only on a discount basis, and the difference between the
purchase price and the maturity value (or the resale price if they are sold
before maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate.
COMMERCIAL PAPER. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
BANKERS' ACCEPTANCES. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of 10 years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's 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.
65
<PAGE>
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.
66
<PAGE>
December 31, 1996
(Unaudited)
SERIES P (HIGH YIELD)
PRINCIPAL/ MARKET VALUE
# OF SHARES SECURITY DESCRIPTION (U.S. DOLLARS)
- --------------------------------------------------------------------------------
CORPORATE BOND
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 Delta Beverage Group, 9.75% - 2003 51,125
$50,000 Cott Corporation, 9.375% - 2005 51,500
-----------------
102,625
BROADCAST MEDIA - 4.4%
$50,000 Heritage Media Corporation, 8.75% - 2006 48,250
$65,000 Allbritton Communications Company 11.50%, 2004 68,900
-----------------
117,150
CHEMICALS - 3.2%
$80,000 Envirodyne Industries, Inc., 12.00% - 2000 85,100
COMMUNICATION SERVICES - 9.5%
$80,000 Rogers Cablesystems, 9.625% - 2002 83,800
$65,000 Comcast Corporation, 9.125% - 2006 66,462
$50,000 Century Communications, 9.50% - 2005 51,250
$50,000 Cablevision Systems Corporation, 10.75% - 2004 52,000
-----------------
253,512
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%
$50,000 Station Casinos Inc., 10.125% - 2006 50,125
$70,000 Showboat, Inc., 9.25% - 2008 68,862
-----------------
118,987
FINANCIAL SERVICES - 1.9%
$50,000 Dollar Financial Group, 10.875% - 2006 51,500
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
HOUSEHOLD PRODUCTS - 1.2%
$50,000 Semi-Tech Corporation, 0% - 2003 32,875
See accompanying notes.
<PAGE>
December 31, 1996
(Unaudited)
PRINCIPAL/ MARKET VALUE
# OF SHARES SECURITY DESCRIPTION (U.S. DOLLARS)
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 2.0%
$50,000 Iron Mountain Inc., 10.125% - 2006 52,812
MANUFACTURING - 3.8%
$50,000 Shop Vac Corporation, 10.625% - 2003 52,625
$50,000 Sequa Corporation, 9.375% - 2003 50,500
-----------------
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%
$70,000 KIII Communications Corporation, 10.625% - 2002 73,500
$80,000 Golden Books Publishing, 7.65% - 2002 72,200
-----------------
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%
$65,000 Westpoint Stevens Inc., 9.375% - 2005 66,788
$50,000 Pillowtex Corporation, 10.00% - 2006 52,000
-----------------
118,788
TOBACCO - 2.6%
$65,000 Dimon, Inc., 8.875% - 2006 68,006
TRANSPORTATION - 5.5%
$65,000 Teekay Shipping Corporation, 8.32% - 2003 65,000
$75,000 Atlas Air, Inc., 12.25% - 2002 83,156
-----------------
148,156
Total corporate bonds - Series P
(cost $2,186,544) - 84.4% 2,248,775
See accompanying notes.
<PAGE>
December 31, 1996
(Unaudited)
PRINCIPAL/ MARKET VALUE
# OF SHARES SECURITY DESCRIPTION (U.S. DOLLARS)
- --------------------------------------------------------------------------------
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN BANK - 4.7%
$125,000 Federal Home Loan Mortgage Corporation, 5.32% - 1997 124,760
Total government & government agency securities - Series P
(cost $124,760) - 4.7% 124,760
Total investments - Series P
(cost $2,311,304) - 89.1% 2,373,535
Cash and other assets, less
liabilities - Series P - 10.9% 291,570
-----------------
Total net assets
shares outstanding - Series P - 100.0% $2,665,105
=================
See accompanying notes.
<PAGE>
UNAUDITED
BALANCE SHEET
DECEMBER 31, 1996
SERIES P
(HIGH YIELD)
ASSETS
Investments, at value (identified cost $2,311,304)........... $2,373,535
Cash......................................................... 236,877
Receivables:
Interest................................................. 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 and foreign
currency transactions................................. 17,075
Net unrealized appreciation in value of investments
and translation of assets and
liabilities in foreign currency....................... 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
============
<PAGE>
UNAUDITED
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 5 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
SERIES P
(HIGH YIELD)
INVESTMENT INCOME:
Interest........................................................ $ 88,728
---------
Total investment income.................................. 88,728
EXPENSES:
Management fees................................................. 8,605
Custodian fees.................................................. 447
Transfer/maintenance fees....................................... 5
Administration fees............................................. 467
Professional fees............................................... 2,000
Registration fees............................................... 10
---------
Total expenses........................................... 11,534
Less management fees waived..................................... 8,605
---------
Net expenses............................................. 2,929
---------
Net investment income................................. 85,799
NET REALIZED AND UNREALIZED GAIN:
Net realized gain during the period on investments.............. 17,075
---------
Net realized gain........................................ 17,075
Net change in unrealized appreciation during
the period on investments.................................. 62,231
----------
Net unrealized appreciation.............................. 62,231
----------
Net gain.............................................. 79,307
----------
Net increase in net assets resulting from operations $165,105
==========
<PAGE>
UNAUDITED
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD AUGUST 5 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
SERIES P
(HIGH YIELD)
INCREASE IN NET ASSETS FROM OPERATIONS:
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.......................... 165,105
NET ASSETS:
Beginning of period............................................. -----------
End of period $2,665,105
==========
Undistributed net investment income at end of period............ $ 85,798
(a) Shares issued and redeemed
Shares sold........................................... 166,667
----------
Net increase...................................... 166,667
=========
<PAGE>
UNAUDITED
FINANCIAL HIGHLIGHTS
SERIES P
(HIGH YIELD)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD (C):
Net asset value beginning of period............................. $15.00
Net investment income .......................................... .51
Net (realized and unrealized) gain.............................. .48
Total from investment operations................................ .99
Dividends (from net investment income).......................... ---
Distributions (from capital gains).............................. ---
Total distributions............................................. ---
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 (loss) to average net assets(a)............. 8.24%
Portfolio turnover rate......................................... 151%
(a) Fund expenses were reduced by the Investment Manager and the expense
ratio absent such reimbursement would have been .88%.
(b) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(c) 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.
<PAGE>
NOTES TO UNAUDITED 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 twelve 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.
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 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 mean between
the bid and the asked prices. If a mean cannot be determined, the
securities are valued at the best available current 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 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 that securities purchased with 60 days or less to
maturity are valued at amortized cost.
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 Series.
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
<PAGE>
investment securities, dividend and interest income, and certain
expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
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. 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.
D. 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. These differences are primarily due to differing treatments
for expiration of net operating losses and recharacterization of
foreign currency gains and losses.
E. 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.
F. 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 expense disclosed in the Statement of Operations does 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 .75% of the average daily net assets for Series P. For the period
August 5, 1996 to December 31, 1996, SMC waived all of its management fee.
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
<PAGE>
bear under the most restrictive expense limitation imposed by any state in
which shares of the Fund are then offered for sale.
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 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 Fund.
Certain officers and directors of the Fund are also officers and/or
directors of SBL and its subsidiaries, which include Security Management
Company, LLC.
3. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) for income tax
purposes at December 31, 1996, for all securities were as follows:
SERIES P
(HIGH YIELD)
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 to December 31, 1996
(excluding overnight investments and short-term debt securities) are as
follows:
SERIES P
(HIGH YIELD)
Purchases.......................................... $3,400,209
Proceeds from sales................................ 1,232,338
5. FEDERAL TAX STATUS OF DIVIDENDS
The income dividends paid by the Funds are taxable as ordinary income on
the shareholder's tax return. The portion of ordinary income of dividends
(including net short-term capital gains) attributed to the period August
5, 1996 to December 31, 1996, that qualified for the dividends received
deduction for corporate shareholders was 0% of the amount taxable as
ordinary income in accordance with the provisions of the Internal Revenue
Code.
<PAGE>
[CLOCK PHOTOGRAPH]
SBL FUND
ANNUAL REPORT
DECEMBER 31, 1995
* 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>
[CLOCK LOGO]
PRESIDENT'S LETTER
February 15, 1996
To Our Contractholders:
We have just completed one of the best years in history for the combined equity
and fixed income markets. The Standard and Poor's 500 Index rose an amazing
37.58%, and the bellwether thirty-year bond declined almost two full percentage
points from 7.87% to 5.94% over the course of the year. These gains are evidence
of the rewards reaped by patient investors who stood pat and even continued to
invest during the distressing markets of 1994.*
REASONS BEHIND THE OUTSTANDING PERFORMANCE IN 1995
The Federal Reserve Board deserves much of the credit for the success of the
markets during the year. The board's chairman, Alan Greenspan, has done a
commendable job of assessing the condition of the nation's economy and deftly
applying the brakes in the form of restrictive monetary policy as needed to keep
inflation in check. The resulting slow, steady economic growth and stable prices
were an unbeatable combination. Bond market investors' fears of surging
inflation dissipated, and long-term bond rates fell to levels not seen in
several years.
Technology was the year's primary equity market theme, reflective of an
increased focus on productivity in our nation's factories and offices. We have
seen extraordinary technological gains attributable to rapid development of
computer applications in every field from word processing to assembly line
production. These gains have led to more rapid decision making processes and
substitutions for labor which have in turn reduced costs, contributing to
diminished inflation pressures.
CAN THE EUPHORIA CONTINUE?
At the close of 1995, the nation's politicians were locked in combat over an
attempt to agree on a balanced budget, bringing the federal government to an
abrupt halt and creating immeasurable noise in the financial markets. Investors
must keep their eyes focused on the big picture--the economic fundamentals which
continue to augur well for the long-term outlook. Inflation remains well under
control, the economy continues to move at a slow, sustainable rate of growth,
and the Federal Reserve Open Market Committee is likely to recognize that
additional cuts in short-term interest rates are justified.
We believe that earnings comparisons for the fourth quarter of 1995 will on
balance be sufficient to support current market valuations. Earnings in 1996 are
not likely to be as robust as they were during the year; however, they should be
strong enough to sustain the markets at their present levels. There will be some
earnings disappointments, as there always are, generating daily volatility in
individual stock prices which we have come to consider routine. As we move
through the first half of 1996, the focus will be on the extended slow growth of
the economy and the ability of corporations to continue productivity improvement
in order to generate earnings gains in that slow-growth climate.
[UPPER RIGHT HAND CORNER, PHOTO OF JOHN CLELAND]
JOHN CLELAND
THE LONGER TERM GLOBAL VIEW
In the United States, we see an opportunity for the economy to benefit from the
national movement toward less government involvement in all aspects of our
lives. It is clearly possible that in the future the government will get a
smaller share of our total resources, with the greater part going toward
economic growth. The implications of this are enormously positive for financial
markets--lower interest rates due to a smaller government hand in our
pocketbook. Having a greater share of available resources dedicated to economic
growth bodes well for sustained rises in stock and bond prices.
Globally the same trends are at work. European countries are beginning to
recognize that their social welfare systems have grown beyond the capacity of
the people to support them. Growth of the free market system and the elimination
of communism as a viable political structure are strong pluses for global
economic growth. Reallocation of resources to the free market system improves
the lives of citizens and further enhances economic growth and positive
financial markets.
In the following pages our portfolio managers review the factors influencing the
performance of their respective funds in 1995. They also present their
management philosophies and outlooks for the year ahead. Our goal is to provide
you with positive investment results over time and the highest quality service
in the industry. We invite your questions and comments at any time.
Sincerely,
/s/ John D. Cleland
John D. Cleland
President - Security Funds
*Although we have just experienced a very rewarding year, investors should
remember that past performance is no guarantee of future results, and that you
may have a gain or a loss at redemption.
1
<PAGE>
[CLOCK LOGO]
SERIES A (GROWTH SERIES)
February 15, 1996
Dear Contractholder,
Strong financial markets in 1995 led the Growth Series of SBL Fund to a
rewarding 36.76% total return for its investors.* Signs of a slowing economy led
us to seek out higher quality companies with historically consistent growth
records through such periods. With the cyclicals' earnings expansion at its
peak, profits at these top-caliber firms looked much better on a relative basis.
Because of these holdings we enjoyed excellent returns, particularly in the
fourth quarter of the year.
EMPHASIS ON QUALITY SERVED US WELL IN 1995
The consumer nondurables sector was our main emphasis as we sought out high
quality food and health care stocks. Among these were familiar names such as
PepsiCo Inc., McDonald's Corporation, Procter & Gamble Company, Merck Company,
Inc. and Bristol-Myers Squibb Company. In an economic environment of moderate
growth and low inflation, these kinds of companies have shown an ability to
maintain consistent earnings increases.
Technology was perhaps the most newsworthy sector in 1995. We chose to invest in
the technology-related computer services area, represented by companies such as
Computer Sciences Corporation, a computer outsourcing company. We also selected
nonhardware companies such as Microsoft Corporation. We moved out of many of our
technology holdings in the fourth quarter, avoiding losses when the sector's
attractiveness diminished in the eyes of some major institutional investors.
[UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT LARGE CAP TEAM: JOHN
CLELAND, TERRY MILBERGER, CHUCK LAUBER]
THE SECURITY MANAGEMENT LARGE CAP TEAM:
JOHN CLELAND, TERRY MILBERGER, CHUCK LAUBER
A third area in which we were overweighted versus our benchmark index is the
aerospace-defense industry. Many of these corporations are reaping the benefits
of mergers and/or corporate restructurings, both of which lead to strengthened
financial position when well managed. These stocks are a good fit in the value
side of our "growth and value" mix, which is currently about 85% growth and 15%
value.
Exposure to financial company stocks has also proven rewarding this year.
Companies such as Federal National Mortgage Association profit from an
environment of declining interest rates. Lower rates not only contribute to
larger profit margins, but to increased business activity through mortgage
refinancings and new home purchases as well.
2
<PAGE>
[CLOCK LOGO]
SERIES A (GROWTH SERIES)
February 15, 1996
LOOKING AHEAD TO 1996
Going forward, we will continue the same game plan for the forseeable future.
The equity teams at Security Management Company expect economic conditions to
remain much the same at least through the first half of 1996, with slow but
steady growth and stable or declining interest rates. Although we expect
favorable markets, we aren't likely to see the gains that we experienced in
1995. Stock selection will be the key--the market winds will be in our faces
rather than at our backs.
Terry Milberger
Senior Portfolio Manager
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
1 Year 5 Years 10 Years
Series A 36.8% 18.3% 13.4%
* 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.
- --------------------------------------------------------------------------------
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES A VS. S&P 500
SBL FUND SERIES A S&P 500
----------------- -------
$10,000 $10,000
March 1986 $11,040 $11,407
June 1986 $11,651 $12,081
September 1986 $10,296 $11,240
December 1986 $10,639 $11,847
March 1987 $13,315 $14,374
June 1987 $14,034 $15,112
September 1987 $15,033 $16,113
December 1987 $11,310 $12,467
March 1988 $11,967 $13,199
June 1988 $12,694 $14,070
September 1988 $12,300 $14,124
December 1988 $12,458 $14,562
March 1989 $13,661 $15,586
June 1989 $15,117 $16,957
September 1989 $17,498 $18,763
December 1989 $16,805 $19,148
March 1990 $16,154 $18,570
June 1990 $17,105 $19,738
September 1990 $14,058 $17,017
December 1990 $15,151 $18,541
March 1991 $17,817 $21,240
June 1991 $17,817 $21,196
September 1991 $18,877 $22,337
December 1991 $20,621 $24,205
March 1992 $20,872 $23,587
June 1992 $20,597 $24,051
September 1992 $20,640 $24,796
December 1992 $22,916 $26,061
March 1993 $24,078 $27,178
June 1993 $23,816 $27,318
September 1993 $25,269 $28,016
December 1993 $26,058 $28,665
March 1994 $25,164 $27,571
June 1994 $24,743 $27,684
September 1994 $25,963 $29,047
December 1994 $25,627 $29,039
March 1995 $27,981 $31,867
June 1995 $30,640 $34,890
September 1995 $33,015 $37,664
December 1995 $35,049 $39,909
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series A (Growth
Series) on December 31, 1985, and reflects the fees and expenses of Series A. On
December 31, 1995, the value of the investment (assuming reinvestment of all
dividends and distributions) would have been $35,049. By comparison, the same
$10,000 investment would have grown to $39,909 based on the S&P 500 Index's
performance.
3
<PAGE>
[CLOCK LOGO]
SERIES B (GROWTH-INCOME SERIES)
February 15, 1996
Dear Contractholder:
The Growth-Income Series of the SBL Fund provided an outstanding total return in
excess of 30% to its shareholders in 1995.* The portfolio's three-pronged
strategy of growth, value, and income amply rewarded investors with long-term
time horizons who were not frightened away by the difficult market period
experienced in 1994.
GROWTH STOCKS OUTPERFORMED VALUE IN 1995
The greater part of total return in the year just completed was provided by our
growth stock holdings. We focused on higher quality companies with historically
consistent growth records, knowing that this type of company generally
outperforms in periods of slow economic growth and declining interest rates.
Consumer service firms such as Gillette Company (The) and Procter & Gamble
Company, as well as drug and health care companies like Merck Company, Inc. and
Bristol-Myers Squibb Company, are examples of consistent earners in the growth
category.
In the Growth-lncome Series we maintain an orientation toward both growth and
value types of stocks. The value sector was represented by holdings in
aerospace-defense companies which are reaping the benefits of mergers and/or
corporate restructurings, and by issues such as Dial Corporation which we
perceived as mispriced in the markets. Because of this dual emphasis as well as
an allocation of part of the assets to bonds, we devoted a smaller percentage of
assets to the stronger-performing growth sector. This resulted in a slightly
lower total return for the year than in the Growth Series (Series A), but met
the needs of a different type of investor. Allocation during the year was
approximately 60% to growth stocks, 20% to value stocks, and 20% to bonds.
[UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT GROWTH-INCOME TEAM:
CHUCK LAUBER, TERRY MILBERGER, TOM SWANK, JOHN CLELAND]
THE SECURITY MANAGEMENT GROWTH-INCOME TEAM:
CHUCK LAUBER, TERRY MILBERGER, TOM SWANK, JOHN
CLELAND
CONTRIBUTION FROM THE BOND MARKETS IN 1995
The high yield bond portion of the Series benefited from a large decline in
interest rates and from being overweighted in defensive issues. Defensive bonds
are ones issued by higher quality companies in the high-yield universe. They
normally outperform lower rated issues when the economy is growing slowly. We
held fewer bonds in basic industries such as paper and steel, while emphasizing
financial firms and consumer noncyclicals such as hospital management companies.
4
<PAGE>
[CLOCK LOGO]
SERIES B (GROWTH-INCOME SERIES)
February 15, 1996
Consumer-oriented companies were represented in the portfolio by names such as
Carrol's Corporation, the largest owner of Burger King franchises, as well as by
Continental Cablevision, Inc. (the third largest cable company in the United
States), Rogers Communication (the largest media company in Canada), and Tenet
Healthcare. In the finance sector, our First Nationwide Bank preferred stock
holding was one which provided substantial gains for the portfolio.
LOOKING AHEAD TO 1996
The portfolio management teams at Security Management Company expect economic
conditions to remain about the same through at least the first half of 1996,
with slow, steady growth and stable or declining interest rates. Stock and bond
selection will be the key. Diversification throughout the portfolio will play an
important role as well. Although gains may not be as outstanding as in 1995, we
still expect 1996 to be a rewarding year for investors.
Terry Milberger
Senior Portfolio Manager
Tom Swank
Portfolio Manager--High Yield Bonds
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES B VS. S&P 500
SBL FUND SERIES B S&P 500
----------------- -------
$10,000 $10,000
March 1986 $11,381 $11,407
June 1986 $12,135 $12,081
September 1986 $11,431 $11,240
December 1986 $11,917 $11,847
March 1987 $13,925 $14,374
June 1987 $14,476 $15,112
September 1987 $15,234 $16,113
December 1987 $12,355 $12,467
March 1988 $13,425 $13,199
June 1988 $14,439 $14,070
September 1988 $14,352 $14,124
December 1988 $14,736 $14,562
March 1989 $15,814 $15,586
June 1989 $17,120 $16,957
September 1989 $18,502 $18,763
December 1989 $18,923 $19,148
March 1990 $18,586 $18,570
June 1990 $19,041 $19,738
September 1990 $17,555 $17,017
December 1990 $18,083 $18,541
March 1991 $20,499 $21,240
June 1991 $20,928 $21,196
September 1991 $23,088 $22,337
December 1991 $24,906 $24,205
March 1992 $24,702 $23,587
June 1992 $23,737 $24,051
September 1992 $24,928 $24,796
December 1992 $26,472 $26,061
March 1993 $27,579 $27,178
June 1993 $27,865 $27,318
September 1993 $28,954 $28,016
December 1993 $29,012 $28,665
March 1994 $28,154 $27,571
June 1994 $27,148 $27,684
September 1994 $28,145 $29,047
December 1994 $28,145 $29,039
March 1995 $29,969 $31,867
June 1995 $32,567 $34,890
September 1995 $34,925 $37,664
December 1995 $36,607 $39,909
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series B
(Growth-Income Series) on December 31, 1985, and reflects the fees and expenses
of Series B. On December 31, 1995, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $36,607. By
comparison, the same $10,000 investment would have grown to $39,909 based on the
S&P 500 Index's performance.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
1 Year 5 Years 10 Years
Series B 30.1% 15.1% 13.9%
* 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.
- --------------------------------------------------------------------------------
5
<PAGE>
[CLOCK LOGO]
SERIES C (MONEY MARKET SERIES)
February 15, 1996
Dear Contractholder:
Money market funds in 1995 provided interest rates that were competitive with
those of many intermediate-term bonds. The Money Market Series of SBL Fund
returned 5.4% for the year on a high quality portfolio that invested only in
top-tier commercial paper and government agency securities.*
INFLUENCES ON SHORT-TERM FIXED INCOME MARKETS
The Federal Reserve Open Market Committee continued its fight against inflation
throughout 1995 by keeping the target rate on Federal Funds, the excess funds
banks loan each other overnight, between 5.50% and 5.75% throughout the year.
This proved to be good for the economy in general as prices remained stable in a
slow-growth atmosphere. It also kept interest rates on short-term investments
used in money market funds at very attractive levels, considering that inflation
remained around 3% throughout the year.
The Money Market Series, like other money market funds, must invest its assets
in accordance with strict regulatory requirements. These regulations require
that we invest at least 95% of the Series' assets in commercial paper that is
rated in the highest bracket by standard rating agencies. These include names
such as Coca-Cola, General Electric, Wal-Mart, McGraw Hill, and other major
corporations. Additionally we purchase short-term paper issued by agencies of
the Federal government, considered to be of the highest credit quality. As with
other money market funds, safety of principal is our utmost concern.
LOOKING AHEAD TO 1996
We expect that the Federal Reserve will see that it has accomplished its goal of
containing inflation and will begin to lower short-term interest rates in the
early part of 1996. We will continue to search out assets with competitive
yields in order to maximize returns to investors without sacrificing credit
quality.
Jane Tedder
Senior Portfolio Manager
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
1 Year 5 Years 10 Years
Series C 5.4% 3.4% 5.4%
* 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.
- --------------------------------------------------------------------------------
6
<PAGE>
[CLOCK LOGO]
SERIES D (WORLDWIDE EQUITY SERIES)
February 15, 1996
[LEXINGTON MANAGEMENT CORPORATION LOGO]
Subadvisor, Lexington Management Corporation
Portfolio Managers, Richard Sayler and Alan Wapnik
Dear Contractholder:
Worldwide Equity Series enjoyed a strong fourth quarter but still fell short of
the averages due to weak first half performance. The Morgan Stanley Capital
International (MSCI) World Index advanced 4.8% during the fourth quarter and a
strong 20.7% for all of 1995. The average global fund appreciated 1.3% during
the fourth quarter and 16.1% for 1995, according to Lipper Analytical Services,
Inc. Series D gained 3.35% during the fourth quarter and 10.86% for the year.*
GLOBAL STOCK PERFORMANCE IN 1995
The MSCI World Index has a 40% weighting in U.S. equities, which strongly
outperformed international equities in 1995. Since most global funds seek
greater diversification, they tend to underperform the MSCI World Index when U.
S. equities greatly outperform international stocks. The Worldwide Equity Series
underperformed its peers in the first half because of a light weighting in U. S.
equities, particularly in the technology sector. The European equity market,
particularly the United Kingdom, was another strong performer which was
underweighted in the portfolio.
The Series enjoyed a strong fourth quarter because of an overweighting of
Japanese stocks, an underweighting of poorly performing Scandinavian equities,
and an underweighting in certain U.S. technology stocks. We benefited as well
from declining interest rates, particularly in Europe, where a large
concentration of interest sensitive stocks performed well.
European equities had a good year in 1995, although returns could not match
those of the strong United States markets. The MSCI European Index appreciated
21.6% for the year, as European equities were stimulated by falling interest
rates. Ten year German bonds began the year yielding 7.3% and ended 1995 at
5.99%. Growth in Europe slowed throughout the year. Consumer spending remained
weak on the European continent due to structurally high unemployment, at 10% in
Germany, 12% in France, and 23% in Spain. Unemployment remained a problem due to
high labor costs which flourished under restrictive labor laws. Governments are
trying to ease these practices, but it is politically difficult. European
companies are cutting costs by closing or moving production to lower cost
countries.
Japanese stocks performed poorly in the first six months of 1995. The first half
of the year was marked by a terrible earthquake in Kobe (an important industrial
city in Japan) and by the strong yen. Sensing the urgency of a Japanese economy
facing accelerating deflation and possibly depression, Japanese authorities
finally addressed their economic problems. The Bank of Japan aggressively added
liquidity to the system and intervened in currency markets. The Ministry of
Finance announced measures to encourage investment of capital abroad, and the
Japanese government passed a $130 billion fiscal stimulative package. Japanese
equities recovered
7
<PAGE>
[CLOCK LOGO]
SERIES D (WORLDWIDE EQUITY SERIES)
February 15, 1996
during the second half of the year as the yen weakened back to 100 yen to the
dollar and short-term interest rates fell below 1/2%.
LOOKING AHEAD TO 1996
The outlook for 1996 is still constructive. Corporate profits in Japan are set
to surge from depressed levels if Japanese Gross Domestic Product can achieve
even a modest recovery. The Worldwide Equity Series has hedged positions on most
of its Japanese holdings to protect returns in the event of a weak yen. We
believe European equities will also perform well as economic activity remains
subdued; interest rates will help support equities as they continue downward.
U.S. equities are likely to underperform international stocks in 1996 because it
will be difficult for margins to expand further from their current lofty levels.
In our view, the outlook for emerging markets is greatly improved after two
years of negative returns. Valuation levels are reasonable and in places like
Eastern Europe are outstanding.
The Series begins 1996 with an overweight position in Japan, 80% of which is
hedged back into U. S. dollars. Japanese equities offer strong earnings
prospects, and will enjoy the monetary stimulus from the Bank of Japan. The
Series continues to hold approximately 30% in European equities, as interest
sensitive stocks will continue to perform well in a climate of falling interest
rates. Emerging markets will become a bigger focus as prospects have greatly
improved after two years of negative returns. Finally, U.S. stocks comprise 20%
of the Series. We remain underweighted in U.S. issues due to unattractive
valuations when viewed in light of single digit earnings growth forecasts for
1996.
Richard T. Saler and Alan H. Wapnick
Portfolio Managers
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES D VS. MSCI WORLD INDEX AND
LEHMAN BROTHERS HIGH-YIELD INDEX
LEHMAN BROTHERS
SBL FUND SERIES D MSCI WORLD INDEX HIGH-YIELD INDEX
----------------- ---------------- ----------------
$10,000 $10,000 $10,000
March 1986 $10,511 $12,156 $10,901
June 1986 $10,817 $12,965 $11,315
September 1986 $10,664 $13,657 $11,512
December 1986 $10,448 $14,280 $11,715
March 1987 $10,970 $17,515 $12,529
June 1987 $10,493 $18,567 $12,343
September 1987 $10,191 $19,718 $12,065
December 1987 $9,832 $16,674 $12,308
March 1988 $10,364 $18,628 $12,990
June 1988 $10,315 $18,470 $13,298
September 1988 $10,303 $18,548 $13,533
December 1988 $10,315 $20,667 $13,841
March 1989 $10,279 $21,154 $14,007
June 1989 $10,327 $20,884 $14,511
September 1989 $10,090 $23,333 $14,298
December 1989 $9,399 $24,221 $13,953
March 1990 $8,579 $20,775 $13,731
June 1990 $8,651 $22,483 $14,305
September 1990 $7,995 $18,407 $12,832
December 1990 $7,263 $20,219 $12,630
March 1991 $7,848 $22,236 $15,103
June 1991 $7,610 $21,513 $16,197
September 1991 $8,042 $23,060 $17,313
December 1991 $8,188 $24,056 $18,230
March 1992 $7,979 $22,121 $19,548
June 1992 $8,105 $22,551 $20,082
September 1992 $7,725 $22,960 $20,853
December 1992 $7,979 $22,934 $21,060
March 1993 $8,828 $24,935 $22,315
June 1993 $9,274 $26,481 $23,243
September 1993 $9,923 $27,756 $23,724
December 1993 $10,497 $28,238 $24,611
March 1994 $10,582 $28,444 $24,127
June 1994 $10,773 $29,332 $24,047
September 1994 $11,166 $29,997 $24,424
December 1994 $10,783 $29,814 $24,351
March 1995 $10,677 $31,249 $25,802
June 1995 $10,975 $32,623 $27,384
September 1995 $11,955 $34,487 $28,159
December 1995 $11,955 $36,170 $29,032
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series D (Worldwide
Equity Series) on December 31, 1985, and reflects the fees and expenses of
Series D. On December 31, 1995, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $11,955. By
comparison, the same $10,000 investment would have grown to $36,170 based on the
MSCI Index's performance.
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 Brother
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, 1995*
1 Year 5 Years 10 Years
Series D 10.9% 10.5% 1.8%
* 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.
- --------------------------------------------------------------------------------
8
<PAGE>
[CLOCK LOGO]
SERIES E (HIGH GRADE INCOME SERIES)
February 15, 1996
Dear Contractholder:
What a difference a year makes! In 1994 bonds took the worst beating since the
Depression years, but investors who kept their long term goals in mind rode out
the storm. By the end of May 1995, those patient investors had recouped all of
their 1994 losses and then reaped additional gains throughout the balance of the
year. The brave individuals who continued to make regular monthly purchases
through the "dark year" of 1994 can now attest to the benefits of dollar cost
averaging.* At year's end, 1995 had turned out to be an extremely rewarding year
for fixed income investors.
FACTORS DRIVING BOND PERFORMANCE IN 1995
Perhaps the single most important factor behind the 1995 bond market rally was
the realization on the part of investors that inflation was indeed under
control. The Federal Reserve's Open Market Committee remained steadfast in their
fight, holding short term interest rates at or above 5-1/2% throughout the year.
Long term bonds once again became attractive, and investor demand drove their
prices higher.
The High Grade Income Series with its long-term orientation made the most of
rising bond prices, returning 18.60% to its investors in 1995.** The assets were
invested primarily in corporate issues, which tend to outperform government
bonds in rising markets. At year end the portfolio consisted of about 25%
government and Federal agency issues, 1% in cash, and the remaining 74% in
corporates. Within the corporate sector emphasis was placed on single-A rated
issues, which generally gain more than their higher rated counterparts when the
market moves up.
[UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT FIXED-INCOME TEAM:
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
MARKET SECTOR DETAILS
The highest-performing sector of the corporate bond market was industrials,
represented in our portfolio by such names as Eli Lilly, Lockheed Martin, and
Ralston Purina. Industrials as a group were up nearly 23% in 1995. Financial
issues were excellent as well, rising over 20% during the year. This sector of
our portfolio includes banks such as NBD Bancorp and Bank of Montreal, finance
companies like International Lease Finance and General Motors Acceptance
Corporation, and brokerage firms including Morgan Stanley Group and Lehman
Brothers.
The utility sector of the corporate bond market also did very well, increasing
over 22% in value. Our portfolio was underweighted in this area because of my
fear of the impact of changing regulatory restrictions. International issues
were strong performers in the index, but
9
<PAGE>
[CLOCK LOGO]
SERIES E (HIGH GRADE INCOME SERIES)
February 15, 1996
again were underrepresented in our portfolio because of prospectus limitations
which allowed us to invest outside of the United States only in Canadian issues.
LOOKING AHEAD TO 1996
The fixed income portfolio team at Security Management Company is optimistic
about bonds in the months ahead. Although we don't expect the stellar returns
achieved in 1995, we believe that there is still room for interest rates to
decline further, resulting in an increase in bond prices. At this writing, the
debate over a balanced Federal budget is unresolved, and short term interest
rates still remain at historically high levels. Once uncertainty over these two
issues is removed, we think that bonds will stage another rally that could take
long-term interest rates again below 6%. It is possible that rates could go
another 50 basis points lower to 5-1/2%. Combining this upward price movement
with a steady coupon interest stream, we feel that total returns for 1996 will
once again reward patient long-term investors.
Jane Tedder
Senior Portfolio Manager
*Dollar cost averaging does not assure a profit or protect against loss in a
declining market.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES E VS. LEHMAN BROTHERS
GOVERNMENT/CORPORATE INDEX
SBL FUND SERIES E LEHMAN BROTHERS GOVT./CORP. INDEX
----------------- ---------------------------------
$10,000 $10,000
March 1986 $10,353 $10,853
June 1986 $10,362 $10,996
September 1986 $10,768 $11,217
December 1986 $10,962 $11,560
March 1987 $11,175 $11,732
June 1987 $11,027 $11,510
September 1987 $10,646 $11,174
December 1987 $11,221 $11,826
March 1988 $11,510 $12,250
June 1988 $11,649 $12,371
September 1988 $11,874 $12,602
December 1988 $12,034 $12,724
March 1989 $12,120 $12,864
June 1989 $13,105 $13,899
September 1989 $13,143 $14,029
December 1989 $13,466 $14,535
March 1990 $13,328 $14,369
June 1990 $13,883 $14,887
September 1990 $13,777 $14,977
December 1990 $14,368 $15,741
March 1991 $14,848 $16,165
June 1991 $15,107 $16,409
September 1991 $15,953 $17,354
December 1991 $16,805 $18,279
March 1992 $16,595 $18,004
June 1992 $17,224 $18,735
September 1992 $17,931 $19,650
December 1992 $18,056 $19,664
March 1993 $19,123 $20,580
June 1993 $19,789 $21,199
September 1993 $20,660 $21,902
December 1993 $20,335 $21,839
March 1994 $19,406 $21,152
June 1994 $18,830 $20,890
September 1994 $18,827 $20,995
December 1994 $18,925 $21,072
March 1995 $19,829 $22,122
June 1995 $20,831 $23,556
September 1995 $21,294 $24,007
December 1995 $22,446 $25,126
$10,000 OVER TEN YEARS
The chart above assumes a hypothetical $10,000 investment in Series E (High
Grade Income Series) on December 31, 1985, and reflects the fees and expenses of
Series E. On December 31, 1995, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $22,446. By
comparison, the same $10,000 investment would have grown to $25,126 based on the
Lehman Brothers Government/Corporate Index's performance.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995**
1 Year 5 Years 10 Years
Series E 18.6% 9.3% 8.4%
**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>
[CLOCK LOGO]
SERIES J (EMERGING GROWTH SERIES)
February 15, 1996
Dear Contractholder:
The Emerging Growth Series of the SBL Fund provided its investors with a
generous 19.49% return in the year just completed.* Although 1995 was a
wonderful year for the stock markets overall, the larger capitalization
companies outperformed the smaller ones in three of the four quarters. Because
this Series invests primarily in those smaller firms, it lagged the general
stock markets despite its strong performance.
FACTORS WHICH AFFECTED PERFORMANCE IN 1995
An overweighting in health care stocks during the year helped our results. In
this area we focused particularly on medical device manufacturing companies. St.
Jude Medical, a maker of items such as heart valves and pacemakers, increased
62% for the year. Guidant, a company spun off from the large drug manufacturer
Eli Lilly, has received FDA approval for its pectoral implantable defibrillator
and is now selling the product. Guidant was up an astounding 164% in 1995.
Most of the year the portfolio was intentionally underweighted in the retail
sector compared with its benchmark index. We recognized that the retail industry
had a problem of simply too many stores serving consumers--a condition known as
capacity oversupply. Consumer credit has increased to historically very high
levels, curtailing individuals' ability to spend. This, coupled with uncertainty
about job security as layoffs continued throughout the economy, kept shoppers
out of stores. Retail stocks as a group performed poorly much of the year.
[UPPER RIGHT HAND CORNER, PHOTO OF THE SECURITY MANAGEMENT SMALL CAP TEAM:
LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS, JOHN CLELAND]
THE SECURITY MANAGEMENT SMALL CAP TEAM:
LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS,
JOHN CLELAND
The Series was also underweighted in the technology sector during the first half
of the year, which limited our total return compared with the market in general.
As we moved into the second half of 1995, we added technology names to the
portfolio. For example, Bay Networks is the final product of a combination of
two tech firms, and is benefiting from cost-cutting measures put in place after
the consolidation. Many major corporations are in the process of installing
networking systems or upgrading those currently owned; Bay Networks manufactures
the routers and hubs needed to accomplish this.
LOOKING AHEAD TO 1996
It will be hard to match 1995's stock market performance in 1996. Although such
large returns may not be in the cards, we do think that 1996 will be a good year
for equity investors. We believe there are three factors which could lead small
capitalization stocks to outperform the general market: a cut in the
11
<PAGE>
[CLOCK LOGO]
SERIES J (EMERGING GROWTH SERIES)
February 15, 1996
capital gains tax, a rising U.S. dollar versus foreign currencies, and an
expanding domestic economy. We will watch for these events and monitor other
conditions in order to position the portfolio to best benefit our investors.
Cindy Shields
Portfolio Manager
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
1 Year Since Inception
(10-1-92)
Series J 19.5% 15.7%
* 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.
- --------------------------------------------------------------------------------
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES J VS. S&P MIDCAP
AND S&P 500
SBL FUND SERIES J S&P MIDCAP S&P 500
----------------- ---------- -------
$10,000 $10,000 $10,000
December 1992 $12,470 $11,175 $10,510
March 1993 $13,040 $11,541 $10,960
June 1993 $12,980 $11,810 $11,017
September 1993 $13,811 $12,405 $11,299
December 1993 $14,171 $12,735 $11,560
March 1994 $13,191 $12,252 $11,119
June 1994 $12,111 $11,806 $11,164
September 1994 $13,268 $12,605 $11,714
December 1994 $13,448 $12,280 $11,711
March 1995 $13,858 $13,285 $12,851
June 1995 $14,709 $14,444 $14,071
September 1995 $16,490 $15,853 $15,189
December 1995 $16,070 $16,080 $16,095
$10,000 SINCE INCEPTION
This chart references a change in Series J's benchmark index. Series J's new
benchmark index is the Standard & Poor's Midcap stock index. We believe the
capitalization of the stocks in the S&P Midcap more closely reflect the
securities Series J purchases.
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, 1995, the value of the investment (assuming reinvestment of
all dividends and distributions) would have been $16,070. By comparison, the
same $10,000 investment would have grown to $16,080 based on the S&P Midcap
Index's performance and $16,095 based on the S&P500.
12
<PAGE>
[CLOCK LOGO]
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
February 15, 1996
[LEXINGTON MANAGEMENT CORPORATION AND MFR ADVISORS, INC. LOGOS]
SUBADVISORS, MFR ADVISORS, INC., AND LEXINGTON MANAGEMENT
CORPORATION
PORTFOLIO MANAGERS, MARIA FIORINI RAMIREZ AND DENIS JAMISON
Dear Contractholder:
The Global Aggressive Bond Series enjoyed an excellent first seven months. The
Series boasts a 7.6% total return from June 1 through December 31, 1995.* The
Series is off to a fast start in the new year and we are optimistic about the
prospects for all of 1996.
Investors in the Series haven't seen a decline in its income despite a drop in
U.S. interest rates. Yields overseas, particularly in certain transitional
economies, are much higher than those at home. The Series ended 1995 with a
standardized yield well in excess of 9%. We believe this level will be
maintained in the quarters ahead.
THE GLOBAL VIEW
Global bond investing often requires taking some less traveled roads. Over the
years, money managers have sold global and international bond funds as a way of
diversifying investment portfolios and reducing overall risk. They reasoned that
bond price movements in one country--the United States, for example--would move
independently of those in another country, such as Germany. Unfortunately, the
ongoing globalization of the world's economies, the ease with which capital
moves, and the flow of readily accessible financial information help to ensure
greater correlation of returns among the world's developed bond markets.
Therefore, we think investors need to expand their investment parameters and
seek out markets that offer the possibility of noncorrelated returns.
Fortunately, many of these markets offer high current income and profit
potential as well. Of course, many of these markets also present additional
risks.
PORTFOLIO POSITIONING IN 1995
The Global Aggressive Bond Series currently stresses bonds in certain
transitional markets, particularly in Eastern Europe and South Africa. We think
the U. S. bond market, and by extension most of the world's developed markets,
are fully priced. Meanwhile the economies of Eastern Europe and South Africa
need to attract capital and are offering yields and investor incentives to
assure that the capital keeps flowing.
We closed 1995 with major positions in Portugal, Poland, and South Africa.
Together they totaled 26% of the Series' assets. All three economies have strong
growth potential, relatively stable currencies, and governments committed to
fiscal restraint as well as proinvestor economic policies. Moreover, their bond
markets currently provide huge income advantages over those of the traditional
developed markets.
EMPHASIS ON DIVERSIFICATION
Aside from our concentration on transitional
13
<PAGE>
[CLOCK LOGO]
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
February 15, 1996
economies, the Series seeks to strike a balance between developed market and LDC
(less developed country) debt. This diversification tends to mitigate
volatility. Although the past volatility of the Series is not necessarily
indicative of future volatility, over the last seven months the price volatility
of the Series has been comparable to that of ten-year U.S. Treasury Notes.
We thank our investors for their continued loyalty and support.
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
Since Inception
(6-1-95)
Series K 7.6%**
*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.
**The return has not been annualized
- --------------------------------------------------------------------------------
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES K VS. LEHMAN BROTHERS
GLOBAL BOND INDEX
SBL FUND SERIES K LEHMAN BROTHERS GLOBAL BOND INDEX
----------------- ---------------------------------
$10,000 $10,000
June 1995 $9,960 $10,069
July 1995 $10,100 $10,140
August 1995 $10,110 $9,907
September 1995 $10,360 $10,131
October 1995 $10,450 $10,245
November 1995 $10,500 $10,355
December 1995 $10,761 $10,508
$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, 1995, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $10,761. By
comparison, the same $10,000 investment would have grown to $10,508 based on the
Lehman Brothers Global Bond Index's performance.
14
<PAGE>
[CLOCK LOGO]
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
February 15, 1996
[MERIDIAN INVESTMENT MANAGEMENT LOGO]
MANAGED BY SECURITY MANAGEMENT COMPANY
RESEARCH PROVIDED BY MERIDIAN INVESTMENT MANAGEMENT CORPORATION
AND TEMPLETON QUANTITATIVE ADVISORS, INC.
Dear Contractholder:
The Specialized Asset Allocation Series for the period from its inception on
June 1 through December 31 returned 7.10%.* Because of the nature of this
Series, it is difficult to compare its performance to a single market index. The
U.S. stock market was the top performing market globally this year--during the
seven month period since June 1 the S&P 500 returned 17.08% including reinvested
dividends. In contrast, the Financial Times Actuarial World Index excluding the
U.S., a proxy for the performance of international markets as a group, returned
5.02% in U.S. dollars over the same time period.
SECTOR ALLOCATION DURING 1995
The Series ended the year with only slight allocation shifts from its position
at inception. At year end the allocation was 40% to U.S. stocks, 35% to
international stocks, 15% to U.S. bonds, and 10% to real estate (through real
estate investment trusts). During the third quarter 5% of the assets were
reallocated from the U. S. bond category to real estate. The portfolio currently
has no allocation to the other available asset classes (international bonds,
gold, and cash.) A small cash position (usually less than 3%) is maintained for
liquidity purposes, but a deliberately large allocation is not included unless
the portfolio is taking a defensive posture.
The benchmark asset allocation of the Series is 40% U.S. stocks, 25%
international stocks, 20% U.S. bonds, 10% real estate, and 5% cash. At year end
relative to its benchmark allocation the Series is overweighted in international
stocks, moderately underweighted in the U.S. bond market, and has no cash
position. In years such as 1995 when the U.S. stock market vastly outperforms
other sectors, total return of a portfolio diversified among broad sectors will
be less than that of a portfolio invested 100% in the outperforming sector. Over
time, however, a diversified portfolio is expected to reduce risk while
providing competitive returns.
The U.S. stock allocation is divided among thirteen sectors. Included is a
modest technology weighting with 4.3% in computer stocks such as Dell, IBM, and
Sun Microsystems. The most recent sector additions have been Telecommunications
(.9%), Recreation and Leisure (3.7%), and Metals and Mining (2.6%). Holdings in
these groups include Ameritech, GTE and Sprint in Telecommunications; Walt
Disney, Harley Davidson, and Callaway Golf in the Recreation and Entertainment
sectors; and Phelps Dodge, Alcoa, and Magma Copper in the Metals and Mining
category.
LOOKING AHEAD TO 1996
The strategists at Meridian Investment Management Corporation, the provider of
asset
15
<PAGE>
[CLOCK LOGO]
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)
February 15, 1996
allocation research services to the Series, believe there are still pockets of
value within the U. S. market. Several of the sectors within the U. S.
allocation underperformed in 1995. Dr. Craig Callahan, Chief Investment Officer
at Meridian, looks for these areas to play "catch-up" in 1996.
The international equity portion of the Series is currently invested in Japan,
Germany, Hong Kong, Belgium, and the United Kingdom. The Japanese market has
experienced stellar performance recently with the benchmark Nikkei 225 index
jumping from 18,000 in the early part of November to just under 20,000 at the
end of the year. The German and United Kingdom markets also reached new highs in
the fourth quarter of 1995. While these markets have been good performers
lately, they still lag the performance of the U. S. market. We look for our
international equity holdings to perform well in 1996 compared with the domestic
market.
Greg A. Hamilton
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.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES M VS. BLENDED INDEX
AND S&P 500
SBL FUND SERIES M BLENDED INDEX S&P 500
----------------- ------------- -------
$10,000 $10,000 $10,000
June 1995 $10,080 $10,100 $10,200
July 1995 $10,390 $10,400 $10,600
August 1995 $10,390 $10,300 $10,600
September 1995 $10,490 $10,600 $11,100
October 1995 $10,340 $10,500 $11,100
November 1995 $10,610 $10,800 $11,500
December 1995 $10,710 $11,100 $11,700
$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, 1995, the value of the investment
(assuming reinvestment of all dividends and distributions) would have been
$10,710. By comparison, the same $10,000 investment would have grown to $11,700
based on the S&P 500 Index's performance. By comparison, the same $10,000
investment would have grown to $11,100 based the blended index of 40% S&P 500,
25% Financial Times World Index, 20% Lehman Brothers Aggregate Bond Index, 10%
Wilshire Real Estate Securities Index and 5% 91-Day Treasury Bill Yield.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
Since Inception
(6-1-95)
Series M 7.1%**
*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.
**The return has not been annualized.
- --------------------------------------------------------------------------------
16
<PAGE>
[CLOCK LOGO]
SERIES N (MANAGED ASSET ALLOCATION SERIES)
February 15, 1996
[T. ROWE PRICE LOGO]
SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC.
PORTFOLIO MANAGER, NED NORTON
Dear Contractholder:
The investment committee for the Managed Asset Allocation Series meets monthly
to adjust the weightings of stocks, bonds, and money market securities within
the appropriate ranges of the portfolio, based on market conditions and economic
fundamentals. The committee has maintained a strategy of overweighting bonds
because of relatively high stock valuations, while keeping cash equivalents
close to minimum levels. Actual allocations on December 31 are shown in the
Strategy Review section of this letter.
MARKET REVIEW
The economy slowed from 1994's robust pace to an annualized rate of 1.3% in the
second quarter of 1995. Although GDP growth increased to 4.2% in the third
quarter, we view this as something of a rebound from the slow second quarter. We
expect economic growth to be closer to its historical trend between 2.0% and
2.5% in the final quarter of the year. The slowing economy along with relatively
benign inflation resulted in falling interest rates over the year.
Stocks generated exceptional returns during the year. The unmanaged Standard &
Poor's 500 Stock Index registered a total return of 17.08% from June 1 (the date
of inception of the Managed Asset Allocation Series) through the end of the
year. The NASDAQ Composite Index, which tracks smaller company stocks primarily,
posted a return of 21.24% for the same period. International stocks fared worse
overall, as most foreign markets trailed the U. S.
Bonds also enjoyed powerful returns, as the thirty-year Treasury bond fell from
6.64% at the beginning of June to 5.94% at December 31. During the same period
the Lehman Aggregate Bond Index increased 7.84%. Short-term rates declined, as
well, although not to the same extent. The U.S. dollar gained ground against
most major currencies, diminishing returns for U. S. investors in foreign bonds.
STRATEGY REVIEW
The objective of the Managed Asset Allocation Series is to provide the highest
total return consistent with an emphasis on both income and capital
appreciation. The typical asset mix is 60% stocks and 40% bonds, with 10%
variations permitted for each asset class. On December 31, the Series had 50% of
its assets in stocks and 50% in bonds.
We were overweighted in bonds since stock valuations appeared high. However,
this bond concentration held back performance as the stock market continued to
register stunning returns during the latter part of the year, extending their
earlier gains. We continued to favor growth over value stocks, since slowing
economic growth usually favors companies able to sustain earnings momentum even
during an economic slowdown.
17
<PAGE>
[CLOCK LOGO]
SERIES N (MANAGED ASSET ALLOCATION SERIES)
February 15, 1996
Our model's current 44% allocation to fixed income securities is broken down to
include 74% investment grade domestic bonds, 18% high yield bonds, and 8%
foreign bonds. Within our model's 56% equity exposure, we have allocated 54% to
large cap stocks, 18% to small cap issues, and 28% to foreign stocks. We
continue to overweight small cap stocks due to their undervaluations relative to
large capitalization stocks. We also feel that foreign stocks have attractive
growth opportunities.
OUTLOOK
We anticipate a relatively stable interest rate environment in the months ahead.
Should the growth of corporate earnings slow from the current pace, the stock
market could experience the correction that has been long anticipated for some
quarters. We would increase our exposure to stocks in that event. Meanwhile, any
further decline in interest rates in the months ahead will also benefit fixed
income investors. It is unlikely that the impressive returns of the past year
can be sustained indefinitely, but the present economic environment bodes well
for both stocks and bonds.
Ned Notson
Portfolio Manager
Investing in foreign countries involves risks, such as currency fluctuations and
political instability, not associated with investing exclusively in the U.S.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES N VS. S&P 500 AND LEHMAN
BROTHERS AGGREGATE BOND INDEX
LEHMAN BROTHERS
SBL FUND SERIES N S&P 500 AGGREGATE BOND INDEX
----------------- ------- --------------------
$10,000 $10,000 $10,000
June 1995 $10,070 $10,200 $10,100
July 1995 $10,310 $10,600 $10,100
August 1995 $10,230 $10,600 $10,200
September 1995 $10,440 $11,100 $10,300
October 1995 $10,410 $11,100 $10,400
November 1995 $11,360 $11,500 $10,600
December 1995 $10,730 $11,700 $10,700
$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, 1995, the value of the investment (assuming
reinvestment of all dividends and distributions) would have been $10,730. By
comparison, the same $10,000 investment would have grown to $10,700 based on the
Lehman Brothers Aggregate Bond Index's performance and $11,708 based on the S&P
500 Index's performance.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
Since Inception
(6-1-95)
Series N 7.3%**
*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.
**The return has not been annualized.
- --------------------------------------------------------------------------------
18
<PAGE>
[CLOCK LOGO]
SERIES O (EQUITY INCOME SERIES)
February 15, 1996
[T. ROWE PRICE LOGO]
SUBADVISOR, T. ROWE PRICE ASSOCIATES, INC.
PORTFOLIO MANAGER, BRIAN ROGERS
Dear Contractholder.
The equity market performed extremely well in 1995 reflecting strong corporate
earnings, low inflation, a benign interest rate environment, and strong investor
demand. The unmanaged Standard & Poor's 500 Stock Index, which was up 37.58%,
concluded its best year since 1958 and posted one of the strongest 12-month
returns in history.
The Equity Income Series did particularly well over the seven months since its
inception June 1, 1995, with a total return of 17% versus the S&P 500's 17.08%
for the same time period.* Since our conservative investment approach sometimes
lags the broad index in unusually robust markets, we were pleased with the
year's results. Keep in mind that the generally conservative nature of your
Series' investments is also tailored to minimize loss in a declining market. Of
course investors should also remember that this is an equity investment. As
such, its share price is subject to fluctuation.
PORTFOLIO REVIEW
The strong performance of many financial stocks, the positive contribution of
our holdings in the health care sector, and gains generated by
large-capitalization consumer products stocks were among the most important
influences on 1995 results. Our investments in companies such as J.P. Morgan,
First Interstate Bank, Sallie Mae, and Travelers were particularly profitable.
Pharmaceutical stocks also performed extremely well. Some of the successful
investments we made in this sector were trimmed later in the year. After stocks
such as Eli Lilly and Schering Plough appreciated in value, our valuation
discipline encouraged us to reinvest some of the assets into more undervalued
stocks with attractive dividend yields. We also eliminated Halliburton, an oil
well services and engineering firm, following a runup in its share price.
Over the past six months, the prices of many cyclical stocks fell as investors
worried about the durability of corporate earnings in 1996. The decline in the
value of such stocks as Union Camp, Betz Laboratories, International Paper, and
DuPont rendered them exceedingly attractive, in our view.
SUMMARY AND OUTLOOK
We anticipate positive but slowing economic growth along with a more challenging
stock market environment in 1996. Instead of making more detailed economic and
market forecasts, we would like to reiterate our primary emphasis which is on
sound, conservatively based investments. This has been the hallmark of our
approach, in almost any market environment, we believe there will be intriguing
opportunities on which to capitalize profitably. As always, we appreciate your
continued confidence and support.
Brian C. Rogers
Portfolio Manager
Investing in foreign countries involves risks, such as currency fluctuations and
political instability, not associated with investing exclusively in the U.S.
19
<PAGE>
[CLOCK LOGO]
SERIES O (EQUITY INCOME SERIES)
February 15, 1996
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
Since Inception
(6-1-95)
Series O 17.0%**
*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.
**The return has not been annualized.
- --------------------------------------------------------------------------------
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES O VS. S&P 500
SBL FUND SERIES O S&P 500
----------------- -------
$10,000 $10,000
June 1995 $10,060 $10,200
July 1995 $10,250 $10,600
August 1995 $10,400 $10,600
September 1995 $10,790 $11,100
October 1995 $10,910 $11,100
November 1995 $11,360 $11,500
December 1995 $11,700 $11,700
$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, 1995, the value of the investment (assuming reinvestment of all
dividends and distributions) would have been $11,700. By comparison, the same
$10,000 investment would have grown to $11,708 based on the S&P 500 Index's
performance.
20
<PAGE>
[CLOCK LOGO]
SERIES S (SOCIAL AWARENESS SERIES)
February 15, 1996
Dear Contractholders:
The primary goal of the Social Awareness Series is to provide competitive
returns through investment in socially responsible companies. Although many
investors select funds of this nature because of their personal convictions,
they are able to achieve attractive investment results at the same time. In 1995
the Social Awareness Series returned 27.7% to its investors.*
PERFORMANCE OF THE SOCIAL AWARENESS SERIES IN 1995
The orientation of the Social Awareness Series toward larger-capitalization
companies in the year just completed helped its performance, reflecting the
trend in the broader markets. Throughout the year we owned a number of high
quality, consistent growth firms. The portfolio was underweighted in technology
stocks during the first half of the year, which hindered results during that
period. However, we adjusted in midyear and participated in the strong
performance of that market sector. Other industries represented in the portfolio
which made strong contributions to total return were health care and financial
companies.
The socially-aware screening requirements of the Series frequently draw us to
smaller capitalization companies as well, because many younger, smaller firms
from the outset have pursued high standards with respect to human resources
issues and the environment. In times when small-cap companies outperform the
general markets, the Series will do better also. In years such as the one just
completed, when the larger-cap stocks were leaders, we have tended to
underperform the indexes. In 1995 about one-third of the portfolio was invested
in small-cap stocks. Over time, though, we believe the mixture in the Series
will provide competitive returns for our investors.
EXAMPLES OF OUTSTANDING SOCIAL AWARENESS IN CORPORATE AMERICA
One of our holdings, Boston Market (formerly Boston Chicken), is a
rapidly-expanding restaurant chain. The company sets high quality standards for
the food it serves to customers, requiring it to be made fresh each day. In
addition, the company's policy also calls for keeping food trays in the hot and
cold cases at least half full. At the end of the day, there can be as much as 50
to 100 pounds of food remaining which other stores might discard. Boston Market
franchisers instead donate the leftovers to local food banks to be served to the
hungry.
Among our large-cap holdings, Procter & Gamble Company is an excellent example
of a company known for generous giving, diversity in employment, and finally
benefits. In 1994, P&G won the Labor Department's annual EVE award given to
federal contractors for programs that increase equal employment opportunity. In
1995, Working Mother magazine honored Procter & Gamble Company for the ninth
year in its list of 100 best workplaces for working mothers. The company donates
cash and in-kind contributions, as well as funding grants for groups such as
Special Olympics, Children's Defense Fund, National Council of Negro Women and
Students Against Drunk Driving.
21
<PAGE>
[CLOCK LOGO]
SERIES S (SOCIAL AWARENESS SERIES)
February 15, 1996
LOOKING AHEAD TO 1996
The equity portfolio managers at Security Management Company expect large-cap
stocks to outperform in the first part of the year. During this time investors
will continue to move to high quality securities until the uncertainty about the
federal budget and interest rates is resolved. If the Federal Reserve Bank
lowers short-term interest rates and politicians settle on a budget reduction
package, we believe investors will become more confident and small stocks will
rise.
Cindy Shields
Portfolio Manager
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995*
1 Year Since Inception
(4-23-91)
Series S 27.7% 11.9%
* 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.
- --------------------------------------------------------------------------------
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
SERIES S VS. S&P 500 AND
DOMINI SOCIAL INDEX
SBL FUND SERIES S S&P500 DOMINI SOCIAL INDEX
----------------- ------ -------------------
$10,000 $10,000 $10,000
June 1991 $9,560 $9,979 $9,907
September 1991 $10,330 $10,516 $10,570
December 1991 $10,550 $11,396 S11,697
March 1992 $11,130 $11,105 $11,474
June 1992 $10,050 $11,323 $11,463
September 1992 $10,231 $11,674 $12,078
December 1992 $12,275 $12,270 $13,111
March 1993 $12,185 $12,796 $13,706
June 1993 $12,526 $12,861 $13,508
September 1993 $13,480 $13,190 $13,982
December 1993 $13,731 $13,496 $14,231
March 1994 $13,319 $12,981 $13,696
June 1994 $12,808 $13,034 $13,678
September 1994 $13,295 $13,675 $14,308
December 1994 $13,213 $13,672 $14,256
March 1995 $13,998 $15,003 $15,723
June 1995 $15,027 $16,427 $17,274
September 1995 $16,572 $17,733 $18,649
December 1995 $16,879 $18,789 $19,699
$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, 1995, the value of the investment (assuming reinvestment of
all dividends and distributions) would have been $16,879. By comparison, the
same $10,000 investment would have grown to $18,789 based on the S&P 500 Index's
performance and $19,699 based on the Domini Social Index.
22
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES A (GROWTH)
NUMBER MARKET
OF SHARES COMMON STOCKS VALUE
- --------------------------------------------------------------------------------
ADVERTISING - 1.4%
200,000 Omnicom Group, Inc.............. $ 7,450,000
AEROSPACE & DEFENSE - 7.6%
160,000 Allied-Signal, Inc. ............ 7,600,000
100,000 Lockheed Martin Corporation..... 7,900,000
265,000 Loral Corporation............... 9,374,375
100,000 McDonnell Douglas
Corporation................... 9,200,000
120,000 Raytheon Company................ 5,670,000
------------
39,744,375
AGRICULTURE - 0.7%
65,000 Pioneer Hi-Bred International,
Inc. ......................... 3,615,625
AMUSEMENT & RECREATIONAL
SERVICES - 2.0%
240,000 Carnival Cruise Lines, Inc. .... 5,850,000
80,000 Disney (Walt) Company........... 4,720,000
------------
10,570,000
BANKING & FINANCE - 2.6%
100,000 Bankamerica Corporation......... 6,475,000
120,000 Chemical Banking Corporation.... 7,050,000
------------
13,525,000
BROADCASTING - 1.1%
120,000 Viacom, Inc. (Cl.B)............. 5,685,000
CASINOS - 1.0%
150,000 Mirage Resorts, Inc.*........... 5,175,000
CHEMICALS - 9.7%
100,000 Cabot Corporation............... 5,387,500
110,500 Great Lakes Chemical
Corporation................... 7,956,000
120,000 Hercules, Inc. ................. 6,765,000
90,000 Minerals Technologies, Inc. .... 3,285,000
65,000 Monsanto Company................ 7,962,500
35,000 Morton International, Inc. ..... 1,255,625
200,000 Praxair, Inc. .................. 6,725,000
80,000 Sigma Aldrich Corporation....... 3,960,000
400,000 U.S. Industries, Inc.*.......... 7,350,000
------------
50,646,625
COMMUNICATIONS - 1.2%
100,000 AT & T Corporation.............. 6,475,000
COMPUTER SERVICES - 4.2%
150,000 Ceridian Corporation*........... 6,187,500
80,000 Cerner Corporation*............. 1,640,000
100,000 Computer Sciences Corporation*.. 7,025,000
130,000 General Motors Corporation
(Cl.E)........................ 6,760,000
------------
21,612,500
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE - 1.5%
55,000 Microsoft Corporation*.......... $ 4,826,250
75,000 Oracle Systems Corporation*..... 3,178,125
------------
8,004,375
COMPUTER SYSTEMS - 1.2%
70,000 International Business
Machines Corporation.......... 6,422,500
CONSUMER GOODS & SERVICES - 1.0%
100,000 Duracell International, Inc. ... 5,175,000
DRUG DELIVERY - 0.5%
50,000 Elan Corporation PLC ADR*....... 2,431,250
ELECTRIC MACHINERY & ELECTRONIC
COMPONENTS - 3.2%
100,000 General Electric Company........ 7,200,000
90,000 Molex, Inc. .................... 2,857,500
140,000 Varian Associates, Inc. ........ 6,685,000
------------
16,742,500
FERTILIZER - 1.1%
80,000 Potash Corporation of Saskatchewan,
Inc. ......................... 5,670,000
FINANCE - 1.0%
40,000 Federal National Mortgage
Association................... 4,965,000
FOOD & BEVERAGES - 7.6%
100,000 Anheuser-Busch Companies, Inc... 6,687,500
120,000 CPC International, Inc. ........ 8,235,000
150,000 Heinz (H.J.) Company............ 4,968,750
150,000 PepsiCo, Inc. .................. 8,381,250
200,000 Ralcorp Holdings, Inc.* ........ 4,850,000
200,000 Sara Lee Corporation............ 6,375,000
------------
39,497,500
HOSPITAL MANAGEMENT -1.7%
115,000 Columbia Healthcare
Corporation .................. 5,836,250
100,000 Vencor, Inc.*................... 3,250,000
------------
9,086,250
HOUSEHOLD PRODUCTS - 1.2%
75,000 Procter & Gamble Company........ 6,225,000
INSURANCE - 3.9%
75,000 American International Groups,
Inc........................... 6,937,500
127,500 Jefferson Pilot Corporation..... 5,928,750
100,000 MBIA, Inc....................... 7,500,000
------------
20,366,250
MACHINERY - 1.4%
210,000 Deere & Company ................ 7,402,500
See accompanying notes.
23
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES A (GROWTH) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
MANUFACTURING - 1.3%
250,000 Pall Corporation ............... $ 6,718,750
MEDICAL INSTRUMENTS & SUPPLIES - 1.2%
155,000 Baxter International, Inc. ..... 6,490,625
NATURAL GAS - 1.2%
170,000 Coastal Corporation (The) ...... 6,332,500
PAINT & ALLIED PRODUCTS - 1.1%
140,000 Sherwin-Williams Company........ 5,705,000
PERSONAL SERVICES - 0.8%
140,000 Dial Corporation (The).......... 4,147,500
PETROLEUM REFINING - 2.9%
70,000 Mobil Corporation............... 7,840,000
50,000 Royal Dutch Petroleum Company
ADR........................... 7,056,250
------------
14,896,250
PHARMACEUTICALS - 8.2%
75,000 American Home Products
Corporation................... 7,275,000
75,000 Bristol-Myers Squibb Company.... 6,440,625
130,000 Merck & Company, Inc. .......... 8,547,500
200,000 Pharmacia & Upjohn, Inc.*....... 7,750,000
130,000 Schering-Plough Corporation..... 7,117,500
100,000 Smithkline Beecham ADR PLC...... 5,550,000
------------
42,680,625
PHOTOGRAPHIC EQUIPMENT &
SUPPLIES - 2.6%
100,000 Eastman Kodak Company........... 6,700,000
50,000 Xerox Corporation............... 6,850,000
------------
13,550,000
PUBLISHING & PRINTING - 1.0%
250,000 News Corporation, Ltd. (The).... 5,343,750
RESTAURANTS & FOOD SERVICE - 2.9%
180,000 McDonald's Corporation.......... 8,122,500
325,000 Wendy's International, Inc. .... 6,906,250
------------
15,028,750
RETAIL TRADE - 6.1%
250,000 Federated Department Stores,
Inc.* ........................ 6,875,000
220,000 Leggett & Platt, Inc. .......... 5,335,000
30,000 Nike, Inc. (Cl.B)............... 2,088,750
105,000 Safeway, Inc.* ................. 5,407,500
190,000 Vons Companies, Inc.* .......... 5,367,500
220,000 Walgreen Company................ 6,572,500
------------
31,646,250
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TOYS & SPORTING GOODS - 1.3%
175,000 Mattel, Inc. ................... $ 5,381,250
TRANSPORTATION - 3.6%
85,000 Burlington Northern, Inc. ...... 6,630,000
75,000 Conrail Corporation............. 5,250,000
100,000 Union Pacific Corporation....... 6,600,000
------------
18,480,000
UTILITIES--TELEPHONE - 2.0%
350,000 Frontier Corporation ........... 10,500,000
WHOLESALE TRADE - 0.8%
130,000 Sysco Corporation .............. 4,225,000
------------
Total common stocks- Series A
(cost $368,502,550) - 93.8% . 487,613,500
COMMERCIAL PAPER
----------------
$ 500,000 AIG Funding, Inc.,
5.82%, 1-03-96................ 499,676
$1,500,000 Alabama Power Company,
5.585%, 2-08-96............... 1,490,085
$1,500,000 Allegheny Generating Company,
5.635%, 1-16-96............... 1,496,008
$4,500,000 Bell Atlantic Network Funding,
5.65%, 1-29-96................ 4,478,812
$3,500,000 General Electric Company,
5.77%, 1-05-96................ 3,496,634
$3,400,000 GTE Northwest, Inc.,
5.74%, 1-09-96................ 3,394,579
$1,500,000 Harper Group, Inc. (The),
5.665%, 1-19-96............... 1,494,915
$5,200,000 International Lease Finance Corporation,
5.73%, 1-03-96................ 1,998,726
5.785%, 1-03-96............... 1,199,228
5.90%, 1-04-96................ 1,998,361
$7,500,000 Progress Capital Holdings, Inc.,
5.78%, 1-10-96................ 2,495,585
5.70%, 1-24-96................ 4,980,208
$1,000,000 TDK U.S.A. Corporation,
5.65%, 1-30-96................ 995,135
$1,500,000 Toyota Motor Credit Corporation,
5.725%, 1-17-96............... 1,495,706
------------
Total commercial paper - Series A -
(cost $31,514,629) - 6.1%... 31,513,658
------------
Total investments - Series A -
(cost $400,017,179) - 99.9% 519,127,158
------------
Cash and other assets, less
liabilities - Series A - 0.1% 763,942
------------
Total net assets applicable to
24,721,185 shares outstanding -
Series A - 100.0%........... $519,891,100
============
See accompanying notes.
24
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES B (GROWTH-INCOME)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES PREFERRED STOCK VALUE
- --------------------------------------------------------------------------------
BANKING & CREDIT - 0.8%
60,000 First Nationwide Bank, $8.176... $ 6,735,000
-----------
Total preferred stock -Series B
(cost $5,978,750) - 0.8% 6,735,000
CORPORATE BONDS
---------------
ALUMINUM - 0.7%
$5,000,000 Kaiser Aluminum & Chemical
Corporation, 12.75% - 2003.... 5,500,000
AMUSEMENT & RECREATION
SERVICES - 0.6%
$3,000,000 Showboat Inc., 9.25% - 2008..... 3,015,000
$2,000,000 Harrah's Entertainment,
10.875% - 2002................ 2,160,000
------------
5,175,000
COMMUNICATIONS - 3.4%
$5,300,000 Allbritton Communications Company,
11.50% - 2004................. 5,578,250
$3,000,000 Century Communications,
9.50% - 2005.................. 3,082,500
$3,500,000 Comcast Corporation,
9.125% - 2006................. 3,631,250
$4,000,000 Continental Cablevision, Inc.,
11.00% - 2007................. 4,475,000
$2,000,000 Granite Broadcasting Corporation,
12.75% - 2002................. 2,180,000
$2,100,000 Rogers Cable System,
9.625% - 2002................. 2,202,375
$6,000,000 SCI Television, Inc.,
11.00% - 2005................. 6,405,000
------------
27,554,375
CONSUMER GOODS & SERVICES - 0.8%
$3,000,000 International Semi-Tech,
0% - 2003(1).................. 1,627,500
$5,000,000 Westpoint Stevens, 9.375% -
2005.......................... 4,962,500
------------
6,590,000
DIVERSIFIED - 0.6%
$5,000,000 Sequa Corporation,
9.375% - 2003................. 4,600,000
FERTILIZER - 0.7%
$5,000,000 Sherritt Gordon Ltd.,
9.75% - 2003.................. 5,262,500
FINANCE - 1.7%
$4,000,000 Dime Bancorp, Inc.,
10.50% - 2005................. 4,435,000
$4,000,000 Home Holdings, 7.75% - 1998..... 3,600,000
$5,350,000 Keystone Group, Inc.,
9.75% - 2003.................. 5,209,563
------------
13,244,563
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FOOD & BEVERAGE TRADE - 1.1%
$2,500,000 Cott Corporation, 9.375% - 2005. $ 2,500,000
Southland Corporation,
4,000,000 5.00% - 2003.................. 3,345,000
1,000,000 4.50% - 2004.................. 777,500
2,250,000 TLC Beatrice, 11.50% - 2005..... 2,221,875
------------
8,844,375
GROCERY STORES - 1.3%
5,000,000 Pathmark Stores, 9.625% -2003... 4,831,250
6,000,000 Penn Traffic Company, 8.625% -
2003.......................... 5,295,000
------------
10,126,250
HOSPITAL MANAGEMENT - 0.4%
Tenet Healthcare,
1,000,000 9.625% - 2002................. 1,100,000
2,000,000 10.125% - 2005................ 2,215,000
------------
3,315,000
MANUFACTURING - 0.6%
4,000,000 Schuller International Group, Inc.,
10.875% - 2004................ 4,490,000
OIL & GAS COMPANIES - 1.4%
4,000,000 Plains Resources, 12% - 1999.... 4,185,000
6,950,000 Seagull Energy Corporation,
8.625% - 2005................. 6,672,000
------------
10,857,000
PAPER & PACKAGING - 0.3%
2,000,000 Riverwood International Corporation,
10.375% - 2004................ 2,220,000
PLASTIC PRODUCTS - 0.4%
3,000,000 Carlisle Plastics, 10.25% - 1997 3,033,750
PUBLISHING & PRINTING - 1.5%
K-III Communications Corporation,
4,500,000 10.625% - 2002................ 4,781,250
1,000,000 10.25% - 2004................. 1,081,250
5,500,000 Marvel Holdings, 0% - 1998...... 3,960,000
3,000,000 Western Publishing, 7.65% -
2002.......................... 2,122,500
------------
11,945,000
RESTAURANTS - 0.5%
4,000,000 Carrols Corporation, 11.50% -
2003.......................... 4,040,000
STEEL & METAL PRODUCTS - 0.3%
2,500,000 Weirton Steel Corporation,
11.50% - 1998................. 2,575,000
-----------
Total corporate bonds - Series B
(cost $123,843,905) - 16.3%. 129,372,813
See accompanying notes.
25
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES B (GROWTH-INCOME) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS VALUE
- --------------------------------------------------------------------------------
ADVERTISING - 1.4%
300,000 Omnicom Group................... $ 11,175,000
AEROSPACE & DEFENSE - 6.8%
200,000 Allied-Signal, Inc. ............ 9,500,000
150,000 Lockheed Martin Corporation..... 11,850,000
370,000 Loral Corporation............... 13,088,750
120,000 McDonnell Douglas Corporation... 11,040,000
180,000 Raytheon Company................ 8,505,000
------------
53,983,750
AMUSEMENT & RECREATIONAL
SERVICES - 1.3%
180,000 Disney (Walt) Company........... 10,620,000
APPAREL - 0.4%
80,000 Nine West Group, Inc.*.......... 3,000,000
BANKING - 3.0%
130,000 Bankamerica Corporation ........ 8,417,500
150,000 Chemical Banking Corporation ... 8,812,500
30,000 Wells Fargo & Company .......... 6,480,000
------------
23,710,000
BROADCASTING - 1.2%
200,000 Viacom, Inc. (Cl.B)*............ 9,475,000
CASINOS - 0.9%
200,000 Mirage Resorts, Inc.*........... 6,900,000
CHEMICALS - 4.5%
90,500 Great Lakes Chemical Corporation 6,516,000
100,000 Hercules, Inc. ................. 5,637,500
100,000 Monsanto Company................ 12,250,000
35,000 Morton International, Inc. ..... 1,255,625
300,000 Praxair, Inc. .................. 10,087,500
------------
35,746,625
COMMUNICATIONS - 1.1%
135,000 AT & T Corporation.............. 8,741,250
COMPUTER SERVICES - 2.7%
210,000 Ceridian Corporation*........... 8,662,500
250,000 General Motors Corporation
(Cl.E)........................ 13,000,000
-----------
21,662,500
COMPUTER SOFTWARE - 1.5%
100,000 Microsoft Corporation .......... 8,775,000
65,000 Oracle Systems Corporation...... 2,754,375
------------
11,529,375
COMPUTER SYSTEMS - 1.2%
100,000 International Business Machines
Corporation................... 9,175,000
CONSUMER GOODS & SERVICES - 0.8%
120,000 Duracell International, Inc. ... 6,210,000
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
DRUG DELIVERY - 0.3%
50,000 Elan Corporation PLC ADR*....... $ 2,431,250
ELECTRICAL MACHINERY & ELECTRONIC
COMPONENTS - 2.9%
100,000 Cooper Industries, Inc. ........ 3,675,000
140,000 General Electric Company........ 10,080,000
200,000 Varian Associates, Inc. ........ 9,550,000
------------
23,305,000
FERTILIZER - 0.9%
100,000 Potash Corporation of
Saskatchewan, Inc............. 7,087,500
FINANCE - 1.9%
70,000 Federal National Mortgage
Association................... 8,688,750
115,000 Household International, Inc. .. 6,799,375
------------
15,488,125
FOOD & BEVERAGES - 5.8%
130,000 Anheuser-Busch Companies,
Inc. ......................... 8,693,750
150,000 Coca Cola Company (The) ........ 11,137,500
150,000 CPC International, Inc. ........ 10,293,750
187,500 Heinz (H.J.) Company............ 6,210,938
300,000 Sara Lee Corporation............ 9,562,500
------------
45,898,438
HOSPITAL MANAGEMENT & SERVICES - 1.6%
200,000 Columbia Healthcare Corporation. 10,150,000
70,000 Vencor, Inc.* .................. 2,275,000
------------
12,425,000
HOUSEHOLD PRODUCTS - 2.9%
200,000 Gillette Company (The) ......... 10,425,000
150,000 Procter & Gamble Company........ 12,450,000
------------
22,875,000
INSURANCE - 2.0%
105,000 Jefferson Pilot Corporation .... 4,882,500
150,000 MBIA, Inc. ..................... 11,250,000
------------
16,132,500
MACHINERY - 1.5%
150,000 American Standard Companies*.... 4,200,000
225,000 Deere & Company................. 7,931,250
------------
12,131,250
MANUFACTURING - 0.8%
250,000 Pall Corporation................ 6,718,750
MEDICAL INSTRUMENTS & SUPPLIES - 1.2%
220,000 Baxter International, Inc. ..... 9,212,500
OFFICE, COMPUTING & ELECTRONIC
MACHINERY - 1.4%
130,000 Hewlett Packard Company......... 10,887,500
See accompanying notes.
26
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES B (GROWTH-INCOME) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
PERSONAL SERVICES - 0.7%
200,000 Dial Corporation (The) ......... $ 5,925,000
PETROLEUM REFINING - 2.3%
225,000 Coastal Corporation (The) ...... 8,381,250
90,000 Mobil Corporation .............. 10,080,000
------------
18,461,250
PHARMACEUTICALS - 7.2%
100,000 American Home Products
Corporation .................. 9,700,000
120,000 Bristol-Myers SquibbCompany..... 10,305,000
175,000 Merck & Company, Inc. .......... 11,506,250
230,000 Pharmacia & Upjohn, Inc.*....... 8,912,500
150,000 Schering Plough Corporation..... 8,212,500
150,000 Smithkline Beecham ADRPLC....... 8,325,000
------------
56,961,250
PHOTOGRAPHIC EQUIPMENT &
SUPPLIES - 2.1%
125,000 Eastman Kodak Company........... 8,375,000
60,000 Xerox Corporation............... 8,220,000
------------
16,595,000
PUBLISHING & PRINTING - 1.9%
400,000 News Corporation (The).......... 8,550,000
170,000 Time-Warner, Inc. .............. 6,438,750
------------
14,988,750
REAL ESTATE - 1.3%
500,000 Macerich Company................ 10,000,000
RESTAURANTS & FOOD SERVICE - 2.8%
280,000 McDonald's Corporation.......... 12,635,000
450,000 Wendy's International, Inc. .... 9,562,500
------------
22,197,500
RETAIL TRADE - 2.4%
220,000 Albertsons, Inc. ............... 7,232,500
350,000 Federated Department Stores,
Inc.*......................... 9,625,000
30,000 Nike, Inc. (Cl.B)............... 2,088,750
------------
18,946,250
TOYS & SPORTING GOODS - 0.4%
100,000 Mattel, Inc. ................... 3,075,000
TRANSPORTATION - 2.8%
125,000 Burlington Northern, Inc. ...... 9,750,000
90,000 Conrail Corporation ............ 6,300,000
100,000 Union Pacific Corporation....... 6,600,000
----------
22,650,000
UTILITIES--TELEPHONE - 1.6%
450,000 Frontier Corporation ........... 13,500,000
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
WHOLESALE TRADE - 0.5%
130,000 Sysco Corporation............... $ 4,225,000
----------
Total common stocks - Series B
(cost $466,382,415) - 76.0%... 604,046,313
COMMERCIAL PAPER
----------------
$1,500,000 Avnet, Inc., 5.685%, 1-16-96.... 1,495,973
$4,800,000 Consolidated Natural Gas Company,
5.63%, 1-08-96................ 4,793,244
$3,400,000 Duke Power Company, 5.72%,
1-12-96....................... 3,392,977
$7,500,000 GTE California, Inc.,
5.62%, 1-09-96................ 2,995,317
5.66%, 1-09-96................ 4,492,925
$3,300,000 General Electric Capital Corporation,
5.77%, 1-05-96................ 3,296,826
$4,000,000 International Business Machines
Corporation, 5.805%, 1-11-96.. 3,992,260
$6,000,000 International Lease Finance Corporation,
5.73%, 1-03-96................ 4,996,817
5.90%, 1-04-96................ 999,181
$9,500,000 P.H.H. Corporation,
5.75%, 1-11-96................ 3,998,083
5.74%, 1-16-96................ 5,485,092
$7,200,000 Progress Capital Holdings, Inc.,
5.685%, 1-24-96............... 4,183,419
5.70%, 1-24-96................ 2,988,125
$4,500,000 TDK U.S.A. Corporation,
5.65%, 1-30-96................ 4,478,106
$1,800,000 Toyota Motor Credit Corporation,
5.715%, 1-04-96............... 1,798,571
------------
Total commercial paper - Series B
(cost $53,386,916) - 6.7%..... 53,386,916
------------
Total investments - Series B
(cost $649,591,986) - 99.8% 793,541,042
Other assets, less liabilities -
Series B - 0.2%............... 1,571,660
------------
Total net assets applicable to
23,421,450 shares outstanding
- Series B - 100.0%........... $795,112,702
============
SERIES C (MONEY MARKET)
COMMERCIAL PAPER
----------------
AIR TRANSPORTATION - 3.4%
$3,600,000 Harper Group, Inc.,
5.71%, 1-19-96................ $ 797,288
5.66%, 3-14-96................ 2,765,700
------------
3,562,988
See accompanying notes.
27
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES C (MONEY MARKET) (CONTINUED)
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
AUTOMOBILES - 3.8%
$4,000,000 Toyota Motor Credit Corporation,
5.65%, 1-04-96................ $ 1,998,431
5.69%, 1-12-96................ 1,995,891
------------
3,994,322
BUSINESS SERVICES - 6.1%
2,000,000 AI Credit Corporation, 5.63%,
2-02-96....................... 1,988,720
2,500,000 General Electric Capital Corporation,
5.67%, 1-26-96................ 2,488,700
2,000,000 Penney (J.C.) Funding Corporation,
5.65%, 2-15-96 ............... 1,984,853
------------
6,462,273
COMPUTERS - 5.1%
5,400,000 Hewlett Packard Company,
5.65%, 1-04-96................ 1,998,431
5.65%, 1-11-96................ 2,395,017
5.63%, 1-16-96................ 997,100
------------
5,390,548
CONSTRUCTION - 2.8%
3,000,000 Stanley Works, 5.54%, 3-11-96... 2,966,298
DRUGS & TOILETRIES - 8.0%
5,000,000 Allergan, Inc.,
5.725%, 1-17-96............... 996,978
5.67%, 2-06-96................ 3,974,840
3,500,000 Schering Corporation,
5.65%, 1-31-96................ 3,481,713
------------
8,453,531
ELECTRIC COMPANIES & SYSTEMS - 18.6%
4,000,000 Alabama Power Company,
5.62%, 2-08-96................ 993,390
5.65%, 2-13-96................ 992,580
5.57%, 2-15-96................ 1,985,456
4,800,000 Allegheny Generating Company,
5.55%, 1-31-96................ 4,776,320
3,000,000 Allegheny Power System, Inc.,
5.59%, 2-28-96................ 2,970,510
3,500,000 Georgia Power Company,
5.61%, 3-06-96................ 2,472,600
5.60%, 3-14-96................ 987,750
2,000,000 Interstate Power Company,
5.75%, 1-31-96................ 1,989,778
2,500,000 Southern California Edison Company,
5.705%, 1-19-96............... 2,474,644
------------
19,643,028
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRONICS - 8.8%
$5,000,000 Avnet, Inc.,
5.70%, 1-16-96................ $ 1,495,963
5.70%, 1-17-96................ 3,489,375
4,300,000 TDK U.S.A. Corporation,
5.65%, 1-22-96................ 996,130
5.70%, 1-22-96................ 3,287,229
------------
9,268,697
GAS COMPANIES & SYSTEMS - 10.5%
2,000,000 Bay State Gas Company,
5.73%, 1-10-96................ 1,996,499
5,000,000 Michigan Consolidated Gas Company,
5.65%, 1-24-96................ 1,484,698
5.65%, 2-07-96................ 3,477,425
1,600,000 Nicor, Inc.,
5.66%, 2-09-96................ 1,589,687
2,500,000 Northern Illinois Gas Company,
5.65%, 1-12-96................ 2,494,350
------------
11,042,659
GROCERY STORES - 2.8%
3,000,000 Winn Dixie Stores, Inc.,
5.58%, 1-10-96................ 1,996,120
5.66%, 2-08-96................ 993,590
------------
2,989,710
LEASING COMPANIES - 5.7%
3,700,000 International Lease Finance Corporation,
5.67%, 1-02-96................ 2,698,245
5.64%, 2-20-96................ 991,460
2,300,000 P.H.H. Corporation,
5.69%, 1-03-96................ 1,998,380
5.745%, 1-16-96............... 299,186
------------
5,987,271
PRINTING - 3.8%
4,000,000 McGraw Hill, Inc.,
5.65%, 1-09-96................ 3,992,880
TELEPHONE & TELEGRAPH - 6.9%
5,000,000 Bell South Telecommunications,
5.50%, 2-08-96................ 993,889
5.65%, 2-12-96................ 3,972,378
2,300,000 GTE Northwest, Inc.,
5.80%, 1-18-96................ 2,292,960
------------
7,259,227
TOBACCO PRODUCTS - 2.8%
3,000,000 B.A.T. Capital Corporation,
5.68%, 1-23-96................ 2,987,910
------------
Total commercial paper - Series C
(cost $94,018,629) - 89.1%.... 94,001,342
See accompanying notes.
28
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES C (MONEY MARKET) (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER U.S. GOVERNMENT AND MARKET
OF SHARES GOV'T AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
FEDERAL FARM CREDIT BANKS - 9.5%
$2,000,000 5.70%, 1-02-96................ $ 2,000,000
$2,000,000 5.73%, 3-01-96................ 2,000,560
$2,000,000 5.70%, 4-01-96................ 2,001,480
$2,000,000 5.58%, 5-01-96................ 2,001,820
$2,000,000 5.52%, 6-03-96................ 2,001,680
------------
10,005,540
SBA POOL - 1.1%
$1,161,771 SBA Pool GCS #36523, 6.75%,
12-25-12(4)................... 1,161,771
------------
Total U.S. government and
government agency securities -
Series C (cost $11,161,771)
- 10.6%..................... 11,167,311
------------
Total investments - Series C
(cost $105,180,400) - 99.7% 105,168,653
------------
Cash and other assets, less
liabilities - Series C - 0.3% 267,027
------------
Total net assets applicable to
8,541,095 shares outstanding -
Series C - 100.0%........... $105,435,680
============
SERIES D (WORLDWIDE EQUITY)
PREFERRED STOCKS
----------------
GERMANY - 1.9%
18,300 Fielman AG...................... $ 942,052
8,800 SAP AG Preferred................ 1,328,417
2,140 Sto AG.......................... 1,071,861
------------
Total preferred stocks - Series D
(cost $3,422,556) - 1.9%...... 3,342,330
COMMON STOCKS
-------------
AUSTRALIA - 2.0%
401,800 QBE Insurance Group, Ltd........ 1,855,653
493,300 TABCorp Holdings, Ltd........... 1,391,846
10,900 TABCorp Holdings, Ltd. ADR*..... 307,925
------------
3,555,424
AUSTRIA - 1.6%
16,500 Bank Austria AG................. 787,036
31,300 Creditanstalt-Bankverein........ 1,731,489
2,200 Wolford AG...................... 346,165
------------
2,864,690
CANADA - 0.5%
57,100 Jetform Corporation............. 824,381
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
CHILE - 0.9%
122,500 Banco Osorno y La Union ADR..... $1,699,688
DENMARK - 1.4%
18,630 Novo-Nordisk A.S................ 2,544,259
FRANCE - 3.5%
12,074 Cetelem......................... 2,261,952
540 Grand Optical Photoservice...... 52,618
31,100 SGS-Thomson Microelectronics
N.V.*......................... 1,188,717
3,880 Sidel S.A....................... 1,206,988
12,210 Societe Generale de Paris
Holding S.A. "B".............. 1,505,871
------------
6,216,146
GERMANY - 2.2%
155,100 Continental AG.................. 2,157,913
18,800 Deutsche Bank AG................ 888,929
13,730 G.M. Pfaff AG*.................. 959,906
------------
4,006,748
HONG KONG - 1.5%
1,308,000 National Mutuals Asia, Ltd...... 1,184,170
918,000 Semi-Tech (Global), Ltd......... 1,478,156
------------
2,662,326
INDONESIA - 0.7%
731,000 PT Kawasan Industri Jababeka.... 1,184,194
IRELAND - 1.6%
263,900 Allied Irish Banks Plc.......... 1,422,833
594,300 Jefferson Smurfit Group......... 1,395,610
------------
2,818,443
ISRAEL - 1.4%
650 Africa-Israel Investments, Ltd.* 783,777
146,700 Clal Industries, Ltd............ 787,237
9,390 Koor Industries, Ltd............ 932,300
------------
2,503,314
ITALY - 1.8%
105,100 Alleanza Assicurazioni.......... 999,162
36,900 Assicurazioni Generali.......... 892,782
144,000 Bulgari Spa*.................... 1,228,649
------------
3,120,593
JAPAN - 22.6%
83,000 Amada Company, Ltd.............. 819,158
50,000 Amway Japan, Ltd................ 2,109,337
32,000 CSK Corporation................. 1,000,097
65,000 Hino Motors, Ltd................ 546,541
93,000 Joshin Denki Company, Ltd. ..... 1,214,804
571,000 Kawasaki Kisen Kaisha, Ltd.*.... 1,812,172
431,000 Kawasaki Steel Corporation...... 1,501,306
52,000 Komatsu Forklift Company, Ltd... 344,654
56,000 Makino Milling Machine Company,
Ltd. ......................... 478,994
See accompanying notes.
29
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
JAPAN, CONTINUED
165,000 Matsushita Electric Industrial
Company, Ltd.................. $ 2,682,148
149,000 Matsushita Refrigeration
Company, Ltd.................. 1,081,277
126,000 Matsuzakaya Company, Ltd. ...... 1,597,097
460,000 Mitsui Engineering &
Shipbuilding*................. 1,277,407
56,000 Mori Seiki Company, Ltd......... 1,262,505
75,000 National House Industrial
Corporation................... 1,371,553
187,000 Nippon Chemi-Con Corporation*... 1,244,857
67,000 Nippon Electric Glass Company,
Ltd........................... 1,270,634
443,000 Nippon Steel Corporation........ 1,517,388
2,900 Nissen Company, Ltd............. 67,905
79,000 Nitto Denko Corporation......... 1,223,029
65 NTT Data Communications Systems
Corporation................... 2,182,390
62,900 Paris Miki, Inc................. 2,257,949
17,000 Ryohin Keikaku Company, Ltd..... 1,414,611
84,000 Sharp Corporation............... 1,341,074
298,000 Shinmaywa Industries, Ltd....... 2,456,662
24,100 Sony Corporation................ 1,443,435
85,000 Sumitomo Forestry Company....... 1,315,917
314,000 Sumitomo Reality & Development
Company....................... 2,217,900
17,000 Tosoh Corporation............... 81,751
100,000 Yamato Kogyo Company, Ltd....... 967,586
------------
40,102,138
MALAYSIA - 0.4%
332,000 Land & General Holdings Bhd..... 719,322
MEXICO - 1.3%
317,600 Tubos De Acero De Mexico
S.A. ADR...................... 2,223,200
NETHERLANDS - 2.8%
67,200 ABN AMRO Holdings NV............ 3,056,827
14,200 Baan Company, N.V.*............. 642,550
91,300 Elsevier N.V.................... 1,215,818
------------
4,915,195
NEW ZEALAND - 2.2%
1,367,900 Brierley Investments, Ltd....... 1,080,819
670,200 Fisher & Paykel Industries, Ltd. 2,035,029
256,400 Independent Newspapers, Ltd..... 778,546
------------
3,894,394
NORWAY - 1.5%
258,200 Fokus Banken A.S.*.............. 1,391,102
97,700 Saga Petroleum A.S.............. 1,300,553
------------
2,691,655
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
PHILIPPINES - 2.2%
2,018,700 C & P Homes, Inc.*.............. $1,482,639
2,865,000 Filinvest Land, Inc.*........... 918,199
3,214,000 Universal Robina Corporation.... 1,594,125
------------
3,994,963
POLAND - 0.9%
50,100 Bank Rozwoju Eksportu S.A....... 762,480
61,800 Debica S.A...................... 933,019
------------
1,695,499
PORTUGAL - 0.8%
77,100 Portugal Telecom S.A. ADR*...... 1,448,842
SINGAPORE - 1.3%
823,000 Comfort Group, Ltd.............. 698,543
168,000 United Overseas Bank, Ltd....... 1,616,070
------------
2,314,613
SOUTH AFRICA - 0.3%
34,386 Rustenburg Platinum Holdings,
Ltd. ADR...................... 565,956
SPAIN - 1.5%
41,100 Repsol S.A...................... 1,343,303
99,000 Telefonica de Espana............ 1,367,538
------------
2,710,841
SWEDEN - 2.0%
33,500 Astra AB........................ 1,336,410
141,700 Atlas Copco AB.................. 2,175,799
------------
3,512,209
SWITZERLAND - 3.2%
1,060 Nestle S.A...................... 1,172,570
170 Roche Holding AG................ 1,344,820
1,560 Union Bank of Switzerland....... 1,690,507
2,020 Winterrthur Schweizerische
Versicherungs - Gesellschaft.. 1,428,973
------------
5,636,870
THAILAND - 2.2%
211,900 Bangkok Bank, Ltd............... 2,575,115
205,200 Total Access Communication
Plc*.......................... 1,333,800
------------
3,908,915
UNITED KINGDOM - 5.4%
1,316,700 Aegis Group Plc*................ 770,435
219,000 Antofagasta Holdings Plc........ 992,891
260,500 B.A.T. Industries Plc........... 2,291,423
273,000 D.F.S. Furniture Company Plc.... 1,679,906
91,300 RTZ Corporation Plc............. 1,324,580
199,200 Takare Plc...................... 552,680
459,200 Tomkins Plc..................... 2,007,163
------------
9,619,078
See accompanying notes.
30
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES D (WORLDWIDE EQUITY) (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
UNITED STATES - 23.2%
21,300 Aluminum Company of America..... $ 1,126,238
13,400 American Home Products
Corporation................... 1,299,800
13,500 American International Group.... 1,248,750
25,000 Bank of New York Company, Inc. . 1,218,750
22,000 Beneficial Corporation.......... 1,025,750
66,000 Borders Group, Inc.*............ 1,221,000
24,800 Ceridian Corporation*........... 1,023,000
12,300 Chubb Corporation............... 1,190,025
48,600 Diamond Offshore Drilling, Inc. 1,640,250
29,000 Dover Corporation............... 1,069,375
42,900 Ecolab, Inc. ................... 1,287,000
25,200 Eli Lilly & Company............. 1,417,500
7,900 General Re Corporation.......... 1,224,500
26,900 Halliburton Company............. 1,361,813
21,600 Hercules, Inc. ................. 1,217,700
18,100 Hershey Foods Corporation....... 1,176,500
13,100 Hewlett-Packard Company......... 1,097,125
15,200 Johnson & Johnson............... 1,301,500
17,200 Lockheed Martin Corporation..... 1,358,800
40,500 Loral Corporation............... 1,432,688
30,500 Meredith Corporation............ 1,277,188
30,800 Millipore Corporation........... 1,266,650
11,800 Mobil Corporation............... 1,321,600
16,400 NationsBank Corporation......... 1,141,850
23,000 PepsiCo, Inc. .................. 1,285,125
23,700 Pioneer Hi-Bred International, Inc. 1,318,313
14,700 Procter & Gamble Company........ 1,220,100
29,700 Service Corporation International 1,306,800
16,400 Union Pacific Corporation....... 1,082,400
34,100 US Bancorp...................... 1,144,480
29,500 Williams Companies, Inc. ....... 1,294,313
38,600 Winn-Dixie Stores, Inc. ........ 1,423,375
8,700 Xerox Corporation............... 1,191,900
------------
41,212,158
------------
Total common stocks - Series D
(cost $156,580,657) - 92.9% 165,166,054
FOREIGN BONDS
-------------
GERMANY - 1.8%
$4,853,000 Bundesbank Deutschland Republic
Bond, 6.50%, 10-14-05......... 3,294,978
------------
Total foreign bonds - Series D
(cost $3,254,594) - 1.8% 3,294,978
------------
Total investments - Series D
(cost $163,257,807) - 96.6% 171,803,362
Cash and other assets, less
liabilities - Series D - 3.4% 5,977,737
------------
Total net assets applicable to
31,951,961 shares outstanding
- Series D - 100.0% $177,781,099
============
- --------------------------------------------------------------------------------
At December 31, 1995, Series D's investment concentration by industry was as
follows:
Banking................................ 12.2%
Capital Equipment...................... 11.3
Construction & Housing................. 1.6
Consumer Durables...................... 8.6
Consumer Nondurables................... 5.6
Electrical and Electronics............. 4.8
Energy................................. 4.7
Environmental Technology............... 0.7
Financial Services..................... 8.1
Foreign Government Issues.............. 1.8
Health Care............................ 5.5
Materials.............................. 7.0
Merchandising.......................... 6.7
Multi-Industry......................... 5.8
Real Estate............................ 2.4
Services............................... 5.9
Telecommunications..................... 2.3
Transportation......................... 1.6
Cash and other assets, less
liabilities........................ 3.4
------
Total net assets....................... 100.0%
======
SERIES E (HIGH GRADE INCOME)
PRINCIPAL GOVERNMENT AND MARKET
AMOUNT GOVERNMENT AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
CANADIAN GOVERNMENT AGENCIES - 4.2%
$5,000,000 Ontario Province, CDA,
7.00% - 2005.................. $5,325,000
U.S. GOVERNMENT AGENCIES - 7.3%
3,000,000 Federal Home Loan Mortgage
Corporation, 8.82% - 2004..... 3,141,870
4,000,000 Federal National Mortgage Association,
5.65%, 1997................... 4,024,040
Government National Mortgage
Association,
252,095 9% - 2021..................... 266,143
389,580 9% - 2021..................... 411,432
665,800 9.50% - 2009.................. 710,600
525,105 9.50% - 2020.................. 558,058
------------
9,112,143
31
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES E (HIGH GRADE INCOME) (CONTINUED)
PRINCIPAL GOVERNMENT AND GOV'T MARKET
AMOUNT AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES - 13.3%
U.S. Treasury Notes,
$5,000,000 6.125% - 1998................. $ 5,100,350
6,500,000 6.25% - 2000.................. 6,720,219
U.S. Treasury Bonds,
4,800,000 6.25% - 2023.................. 4,937,712
------------
16,758,281
------------
Total government and government
agency securities - Series E -
(cost $30,459,614 )- 24.8% 31,195,424
CORPORATE BONDS
---------------
AEROSPACE & DEFENSE - 4.5%
5,100,000 Lockheed Corporation, 7.875% -
2023.......................... 5,616,375
BANKS - 11.8%
4,000,000 Bank of Montreal, 7.80% - 2007.. 4,450,000
5,000,000 Bank of New York, 6.50% -
2003.......................... 5,106,250
5,000,000 NBD Bancorp, 7.125% - 2007...... 5,331,250
------------
14,887,500
BROKERS, DEALERS & SERVICES - 4.0%
5,000,000 Morgan Stanley Group, Inc.,
7.25% - 2023.................. 5,012,500
COMMUNICATIONS - 5.9%
5,000,000 Southern New England Telecomm.,
7.00% - 2005.................. 5,306,250
2,000,000 U.S. West Capital Funding,
6.75% - 2005.................. 2,065,000
------------
7,371,250
DRUGS - 9.0%
5,500,000 Eli Lilly & Company, 7.25% -
2025.......................... 5,898,750
5,000,000 Rite Aid Corporation, 7.625% -
2005.......................... 5,443,750
------------
11,342,500
ELECTRIC COMPANIES & SYSTEMS - 4.0%
5,000,000 Pacific Gas & Electric Company,
6.25% - 2003.................. 5,018,750
FINANCE - 12.3%
5,000,000 General Motors Acceptance Corporation,
6.625% - 2005................. 5,118,750
5,000,000 International Lease Finance Company,
7.00% - 2000.................. 5,187,500
5,000,000 Norwest Financial, Inc.,
6.75% - 2005.................. 5,200,000
------------
15,506,250
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FOOD & BEVERAGES - 4.3%
$5,000,000 Ralston Purina Company,
7.875% - 2025................. $ 5,468,750
PAPER & LUMBER PRODUCTS - 4.5%
$5,000,000 International Paper Company,
7.875% - 2006................. 5,643,750
RAILROAD - 4.4%
$5,000,000 Union Pacific Company,
7.60% - 2005.................. 5,500,000
SANITARY SERVICES - 4.2%
$5,000,000 Waste Management,
7.00% - 2005.................. 5,325,000
TELEPHONE COMPANIES - 4.3%
$5,000,000 GTE South, Inc.,
7.25% - 2002.................. 5,350,000
UTILITY COMPANIES - 1.0%
$1,000,000 Old Dominion Electric Cooperative,
8.76% - 2022.................. 1,218,750
-----------
Total corporate bonds - Series E -
(cost $87,094,277) - 74.2% 93,261,375
------------
Total investments - Series E -
(cost $117,553,891) - 99.0% 124,456,799
Cash and other assets, less
liabilities - Series E - 1.0% 1,194,986
------------
Total net assets applicable to
9,769,468 shares outstanding -
Series E - 100.0%........... $125,651,785
============
SERIES J (EMERGING GROWTH)
COMMON STOCKS
-------------
ADVERTISING - 0.3%
6,900 Omnicom Group .................. $ 257,025
AIRLINES - 1.1%
45,500 Southwest Airlines Company ..... 1,057,875
BUILDING MATERIALS - 0.3%
5,200 Vulcan Materials ............... 299,650
BUSINESS SERVICES - 5.0%
47,500 Alternative Resources
Corporation*.................. 1,436,875
6,200 Cintas Corporation.............. 275,900
19,500 HBO & Company................... 1,494,188
28,500 Paychex......................... 1,421,438
------------
4,628,401
32
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES J (EMERGING GROWTH) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
CHEMICALS--BASIC - 4.3%
15,500 Air Products & Chemicals, Inc. . $ 817,625
13,000 Cabot Corporation............... 700,375
20,000 IMC Global, Inc. ............... 817,500
51,000 Praxair......................... 1,714,875
------------
4,050,375
CHEMICALS--SPECIALTY - 3.2%
28,500 Sigma Aldrich Corporation ...... 1,410,750
25,500 Vigoro Corporation (The)........ 1,574,625
------------
2,985,375
COMMUNICATIONS EQUIPMENT - 2.8%
37,500 General Instrument*............. 876,563
22,000 Tellabs, Inc.* ................. 814,000
10,300 U.S. Robotics Corporation*...... 903,825
------------
2,594,388
COMPUTER SOFTWARE - 11.7%
17,000 Adobe Systems, Inc. ............ 1,054,000
42,700 Aspect Telecommunications*...... 1,430,450
51,500 Bisys Group, Inc.* ............. 1,583,625
25,500 Cadence Design System, Inc.* ... 1,071,000
22,500 Cognos, Inc.*................... 1,004,063
22,960 First Data Corporation.......... 1,535,450
31,500 Informix*....................... 945,000
22,000 McAffee Associates, Inc.*....... 965,250
13,500 Parametric Technology Company*.. 897,750
18,200 Symantec Corporation*........... 423,150
------------
10,909,738
COMPUTER SYSTEMS - 8.1%
21,750 Bay Networks, Inc.*............. 894,469
14,500 Cisco Systems, Inc.*............ 1,082,063
29,000 Dell Computer Corporation* ..... 1,004,125
48,000 EMC Corporation*................ 738,000
18,500 Micro Warehouse*................ 800,125
29,500 SCI Systems, Inc.*.............. 914,500
17,000 Seagate Technology*............. 807,500
28,000 3Com Corporation*............... 1,305,500
------------
7,546,282
CONSUMER CYCLICALS - 1.9%
17,500 Flightsafety International, Inc. 879,375
20,500 Snap-On Tools Corporation....... 927,625
------------
1,807,000
CONSUMER SERVICES - 1.6%
44,250 CUC International*.............. 1,510,031
DRUG DELIVERY - 0.8%
14,500 Elan Corporation PLC ADR*....... 705,063
ELECTRONICS--INSTRUMENTS - 1.5%
18,000 Thermo Electron Corporation*.... 936,000
10,000 Varian Associates, Inc. ........ 477,500
------------
1,413,500
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRONICS--SEMI-CONDUCTORS - 5.3%
18,500 Applied Materials, Inc.* ....... $ 728,438
34,500 Atmel Corporation*.............. 771,938
48,000 Cypress Semiconductors*......... 612,000
16,500 LSI Logic Corporation*.......... 540,375
21,000 Linear Technology Corporation... 824,250
13,000 Novellus Systems, Inc.* ........ 702,000
23,310 Vishay Intertechnology, Inc.* .. 734,265
------------
4,913,266
ENTERTAINMENT - 1.0%
27,500 Mirage Resorts, Inc.*........... 948,750
FERTILIZER - 1.2%
16,000 Potash Corporation Saskatchewan,
Inc........................... 1,134,000
FINANCIAL SERVICES - 3.8%
49,000 Credit Acceptance Corporation*.. 1,016,750
27,500 Finova Group.................... 1,326,875
26,500 First U.S.A., Inc. ............. 1,175,938
------------
3,519,563
GENERAL MERCHANDISE - 1.4%
59,000 Casey's General Stores, Inc. ... 1,290,625
HMOS - 1.0%
21,500 Foundation Health Corporation*.. 924,500
HEALTH CARE - 2.5%
25,000 Cardinal Health, Inc. .......... 1,368,750
32,500 Healthsouth Corporation*........ 946,563
------------
2,315,313
HOSPITAL MANAGEMENT - 1.3%
33,500 Community Health Systems*....... 1,193,438
HOTEL/MOTEL - 2.6%
16,000 HFS, Inc.*...................... 1,308,000
42,500 La Quinta Inns.................. 1,163,438
------------
2,471,438
HOUSEHOLD FURNISHINGS/APPLIANCES - 1.6%
63,000 Leggett & Platt, Inc. .......... 1,527,750
INSURANCE - 3.0%
30,000 Jefferson-Pilot Corporation..... 1,395,000
19,000 MBIA, Inc. ..................... 1,425,000
------------
2,820,000
MANUFACTURING - 3.2%
23,000 Illinois Tool Works, Inc........ 1,357,000
40,000 Millipore ...................... 1,645,000
------------
3,002,000
MEDICAL - 3.4%
10,000 Cordis Corporation*............. 1,005,000
27,500 Guidant Corporation............. 1,140,750
19,000 Stryker Corporation............. 997,500
------------
3,143,250
See accompanying notes.
33
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES J (EMERGING GROWTH) (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES - 1.4%
6,900 Diebold, Inc. .................. $ 382,088
23,500 Reynolds & Reynolds (Cl.A)...... 913,563
------------
1,295,651
OIL & GAS EXPLORATION- 2.8%
20,000 Anadarko Petroleum Corporation.. 1,082,500
42,000 Sonat, Inc. .................... 1,496,250
------------
2,578,750
PHARMACEUTICALS - 5.1%
18,500 Amgen, Inc.*.................... 1,098,438
10,000 Chiron Corporation*............. 1,105,000
48,500 Dura Pharmaceuticals, Inc.*..... 1,685,375
14,500 Genzyme Corporation*............ 904,438
------------
4,793,251
PUBLISHING - 0.1%
1,600 Scholastic Corporation*......... 124,400
RAILROADS - 1.0%
24,000 Illinois Central Corporation.... 921,000
RESTAURANTS - 2.4%
41,500 Boston Chicken*................. 1,333,188
26,000 Outback Steakhouse, Inc.* ...... 932,750
------------
2,265,938
RETAIL--DRUG STORES - 0.4%
16,500 General Nutrition*.............. 379,500
RETAIL--SPECIALTY - 3.1%
53,500 Staples, Inc.* ................. 1,304,063
68,500 Sunglass Hut International, Inc.* 1,626,875
------------
2,930,938
TELECOMMUNICATIONS - 0.5%
21,500 Vanguard Cellular Systems, Inc.* 435,375
TELEPHONE - 1.0%
28,500 Century Telephone Entertainment,
Inc........................... 904,875
TEXTILES - 1.0%
22,000 Tommy Hilfiger Corporation*..... 932,250
------------
Total common stocks - Series J
(cost $74,918,788) - 92.7% 86,530,524
COMMERCIAL PAPER
----------------
$ 700,000 Allegheny Generating Company,
5.635%, 1-16-96............... 698,137
$1,000,000 Baltimore Gas & Electric Company,
5.80%, 1-04-96................ 999,195
$ 500,000 Duke Power Company,
5.72%, 1-12-96................ 498,967
$2,000,000 General Electric Capital Corporation,
5.77%, 1-05-96................ 1,998,077
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
$2,000,000 International Lease Finance Corporation,
5.73%, 1-03-96................ $ 999,363
5.90%, 1-04-96................ 999,181
1,200,000 P.H.H. Corporation,
5.74%, 1-16-96................ 1,196,747
1,500,000 Progress Capital Holdings, Inc.,
5.78%, 1-10-96................ 998,234
5.675%, 1-18-96............... 498,502
------------
Total commercial paper - Series J
(cost $8,886,403) - 9.5%.... 8,886,403
------------
Total investments - Series J
(cost $83,805,191) - 102.2% 95,416,927
Liabilities, less cash and other
assets - Series J - (2.2%) (2,037,486)
------------
Total net assets applicable to
5,813,574 shares outstanding -
Series J - 100.0%........... $93,379,441
============
SERIES K (GLOBAL AGGRESSIVE BOND)
GOVERNMENT OBLIGATIONS
----------------------
ARGENTINA - 3.5%
$ 350,000 Republic of Argentina,
5.00%, 2023................... $200,156
AUSTRALIA - 4.4%
300,000 Treasury Corporation of Victoria,
10.25%, 2006(3)............... 249,827
BRAZIL - 3.8%
350,000 Republic of Brazil,
7.25%, 2024................... 215,250
CANADA - 2.8%
200,000 Stelco, Inc., 10.40%, 2009(3)... 157,682
ECUADOR - 4.2%
650,000 Republic of Ecuador, 3.00%,
2025.......................... 236,437
GERMANY - 5.1%
400,000 Bendesrepublic Deutschland,
6.50%, 2005(3)................ 287,582
ITALY - 4.4%
410,000,000 Buoni Poliennali Del Tes, 8.50%,
1999(3)....................... 248,711
PHILIPPINES - 3.3%
250,000 Central Bank of Philippines, 5.75%,
2017.......................... 186,250
See accompanying notes.
34
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES K (GLOBAL AGGRESSIVE BOND) (CONTINUED)
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
PORTUGAL - 9.7%
32,500,000 Obrig Do Tes Medio Prazo, 8.875%,
1997(3)....................... $ 216,912
45,000,000 Obrig Do Tes Medio Prazo, 11.875%,
2005(3)....................... 336,538
------------
553,450
SPAIN - 2.7%
20,000,000 Bonos Y Obig Del Estado, 7.40%,
1999(3)....................... 155,418
SOUTH AFRICA - 8.2%
1,000,000 Electricity Supply Commission, 11.0%,
2008(3)....................... 223,595
1,000,000 Republic of South Africa, 12.00%,
2005(3)....................... 243,682
------------
467,277
------------
Total government obligations -
Series K - (cost $2,881,468) -
52.1%....................... 2,958,040
CORPORATE BONDS
---------------
BRAZIL - 6.6%
$ 150,000 Aracruz Celulose S.A., 10.375%,
2002.......................... 143,625
250,000 Centrais Electricas Bras, 8.875%,
2002.......................... 233,750
------------
377,375
COSTA RICA - 3.2%
300,000 Banco Costa Rica, 6.25%, 2010... 183,750
CZECH REPUBLIC - 4.0%
6,000,000 CEz, a.s., 11.30%, 2005(3)...... 225,047
DENMARK - 5.3%
898,000 Nykredit, 8.00%, 2026(3)........ 156,605
950,000 Realkredit Danmark, 6.00%,
2026(3)....................... 142,201
------------
298,806
MEXICO - 2.5%
150,000 Cemex S.A., 8.875%, 1998........ 144,375
UNITED STATES - 2.8%
150,000 Chiquita Brands International, Inc.,
11.50%, 2001.................. 156,750
------------
Total corporate bonds - Series K
(cost $1,363,294) - 24.4% 1,386,103
SHORT-TERM INVESTMENTS
----------------------
GREECE - 4.6%
70,000,000 Hellenic Treasury Bills, 0%,
12-18-96(3)................... 260,000
PRINCIPAL MARKET
AMOUNT SHORT-TERM INVESTMENTS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
HUNGARY - 4.0%
40,000,000 Government of Hungary Treasury
Bills, 0%, 12-20-96(3)........ $ 226,071
MEXICO - 1.6%
712,010 Cetes, 0%, 1-25-96(3)........... 90,792
POLAND - 8.2%
600,000 Government of Poland Treasury Bill,
0%, 2-28-96(3)................ 235,043
700,000 Government of Poland Treasury Bill,
0%, 1-15-96(3)................ 234,431
------------
469,474
UNITED STATES - 1.8%
$100,000 U.S. Treasury Bill, 5.20%,
1-04-96....................... 99,957
------------
Total short-term investments -
Series K (cost $1,161,215)
- 20.2%..................... 1,146,294
------------
Total investments - Series K
(cost $5,405,977) - 96.7% 5,490,437
Cash and other assets, less
liabilities - Series K - 3.3% 187,924
------------
Total net assets applicable to
555,341 shares outstanding
- Series K - 100.0%......... $5,678,361
============
SERIES M (SPECIALIZED ASSET ALLOCATION)
CORPORATE BONDS
---------------
BANKS & CREDIT - 0.8%
$125,000 Nationsbank Corporation,
7.625%, 2005.................. $135,781
COMMUNICATIONS - 0.5%
40,000 News America Holdings,
8.625%, 2003.................. 44,750
40,000 TCI Communications, Inc.,
8.0%, 2005.................... 42,750
------------
87,500
PETROLEUM - 0.7%
110,000 Occidental Petroleum,
6.24%, 2000................... 110,825
------------
Total corporate bonds - Series M
(cost $326,983) - 2.0% 334,106
See accompanying notes.
35
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS VALUE
- --------------------------------------------------------------------------------
APPLIANCES - 2.4%
3,200 Black & Decker Corporation...... $112,800
2,700 Maytag Corporation.............. 54,675
2,500 National Presto Industries...... 99,375
3,500 Toro Company.................... 115,063
------------
381,913
AUTO PARTS & SUPPLIES - 2.8%
4,100 Dana Corporation................ 119,925
2,500 Eaton Corporation............... 134,063
3,000 Modine Manufacturing Company.... 72,000
6,100 Simpson Industries.............. 54,900
3,200 Walbro Corporation.............. 57,600
------------
438,488
BUILDING MATERIALS - 3.6%
2,200 Ameron, Inc. ................... 82,775
4,800 Apogee Enterprises, Inc. ....... 81,600
1,600 Armstrong World Industries, Inc. 99,200
2,050 Butler Manufacturing Company.... 80,463
2,700 Crane Company................... 99,562
2,200 Owens-Corning Fiberglass
Corporation*.................. 98,725
1,800 Ply Gem Industries.............. 29,250
------------
571,575
CHEMICALS (BASIC) - 2.8%
1,100 Arco Chemicals Company.......... 53,488
1,400 Dow Chemicals................... 98,525
500 Du Pont (E.I.) de Nemours
& Company..................... 34,938
3,200 Lyondell Petrochemical Company.. 73,200
1,300 Olin Corporation................ 96,524
2,300 Union Carbide Corporation....... 86,250
------------
442,925
COMPUTER SYSTEMS - 4.3%
2,700 Amdahl Corporation*............. 22,950
1,100 Apple Computer, Inc. ........... 35,062
2,400 Compaq Computer Corporation*.... 115,200
2,300 Dell Computer Corporation*...... 79,637
800 Hewlett Packard Company......... 67,000
1,100 International Business Machines
Corporation................... 100,925
1,500 Quantum Corporation*............ 24,188
2,000 SCI Systems, Inc.*.............. 62,000
2,900 Sequent Computer Systems, Inc.*. 42,050
2,600 Sun Microsystems, Inc.*......... 118,625
2,100 Tandem Computers, Inc.*......... 22,313
------------
689,950
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.3%
600 Baldor Electric Company......... $ 12,075
489 Cooper Cameron Corporation*..... 17,360
716 Cooper Industries, Inc. ........ 26,313
500 General Electric Company........ 36,000
1,300 General Signal Corporation...... 42,087
700 Johnson Controls, Inc........... 48,125
800 Measurex Corporation............ 22,600
------------
204,560
ELECTRONICS - 4.0%
600 AMP, Inc. ...................... 23,025
3,100 Arrow Electronics, Inc.*........ 133,688
1,200 Augat, Inc. .................... 20,550
2,500 Avnet, Inc. .................... 111,875
2,600 Core Industries, Inc............ 33,475
1,200 Fluke (John)Manufacturing
Company....................... 45,300
2,100 Harris Corporation.............. 114,712
3,150 Pioneer Standard
Electronics, Inc. ............ 41,737
900 Varian Associates, Inc.......... 42,975
2,100 Wyle Electronics................ 73,763
------------
641,100
ENTERTAINMENT - 0.3%
800 Disney (Walt) Company........... 47,200
HOUSING--HOME BUILDING - 2.8%
1,375 Clayton Homes, Inc.............. 29,391
2,300 Fleetwood Enterprises, Inc. .... 59,225
5,200 Hechinger Company............... 22,750
1,900 Hughes Supply, Inc. ............ 53,675
400 Lowes Companies, Inc. .......... 13,400
1,700 Oakwood Homes Corporation....... 65,237
1,300 PPG Industries, Inc. ........... 59,475
2,200 Pulte Corporation............... 73,975
300 Sherwin Williams Company........ 12,225
2,500 Del Webb Corporation............ 50,313
------------
439,666
MACHINERY - 4.0%
3,000 Baldwin Technology, Inc.*....... 15,188
3,000 Bearings, Inc. ................. 87,750
800 Briggs & Stratton Corporation... 34,700
2,500 Commercial Intertech
Corporation................... 45,312
2,800 Dover Corporation............... 103,250
1,900 GATX Corporation................ 92,387
2,100 Graco, Inc...................... 64,050
4,300 Parker-Hannifin Corporation..... 147,275
1,500 Trinova Corporation............. 42,938
------------
632,850
36
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
MINING & METALS - 2.6%
700 Alcan Aluminum, Ltd. ........... $ 21,787
1,400 Aluminum Company of
America....................... 74,025
1,200 Asarco, Inc. ................... 38,400
900 Ashland Coal, Inc............... 19,238
2,800 Magma Copper Company*........... 78,050
2,000 Phelps Dodge Corporation........ 124,500
900 Reynolds Metals Company......... 50,963
------------
406,963
RECREATION - 3.7%
5,200 Brunswick Corporation........... 124,800
4,200 CPI Corporation................. 67,200
5,100 Callaway Golf Company........... 115,388
4,500 Handleman Company............... 25,875
3,200 Harcourt General, Inc. ......... 134,000
900 Harley Davidson, Inc. .......... 25,874
2,700 King World Productions, Inc.*... 104,963
------------
598,100
SHOES - 2.4%
7,900 J. Baker, Inc................... 45,425
1,900 Brown Group, Inc. .............. 27,075
1,800 Nike, Inc. ..................... 125,325
3,800 Reebok International, Ltd....... 107,350
2,400 Wolverine Worldwide, Inc. ...... 75,600
------------
380,775
STEEL - 2.2%
2,700 Birmingham Steel Corporation.... 40,163
2,100 Carpenter Technology............ 86,363
1,800 Cleveland Cliffs, Inc. ......... 73,800
1,300 Commercial Metals Company....... 32,175
1,800 Lukens Steel Company............ 51,750
200 Nucor Corporation............... 11,425
2,200 Quanex Corporation.............. 42,624
2,200 Steel Technologies, Inc. ....... 18,975
------------
357,275
TELECOMMUNICATIONS - 0.9%
400 Ameritech Corporation........... 23,600
900 GTE Corporation................. 39,600
1,200 Pacific Telesis Group........... 40,350
1,100 Sprint Corporation ............. 43,862
------------
147,412
Total common stocks - Series M
(cost $6,472,338) - 40.1% 6,380,752
PRINCIPAL
AMOUNT OR
NUMBER U.S. GOVERNMENT & GOVERNMENT MARKET
OF SHARES AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES - 28.0%
Federal Home Loan Mortgage Corporation,
$3,000,000 5.41%, 3-7-96(2).............. $ 2,969,460
$ 68,238 6.0%, 2006.................... 68,461
$ 250,000 7.0%, 2020.................... 254,465
$ 100,000 7.0%, 2021.................... 100,547
Financing Corporation,
$ 90,000 0%, 2010...................... 35,350
Federal National Mortgage Association,
$ 177,345 6.5%, 2008.................... 167,011
$ 140,000 6.5%, 2018.................... 139,964
$ 236,890 6.5%, 2018.................... 231,491
$ 160,000 7.5%, 2020.................... 165,366
$ 170,000 6.95%, 2020................... 171,709
$ 150,000 8.8%, 2025.................... 163,688
------------
4,467,512
U.S. GOVERNMENT SECURITIES - 6.0%
U.S. Treasury Bills,
$ 425,000 4.87%, 4-4-96................. 419,352
U.S. Treasury Notes,
$ 375,000 6.38%, 2002................... 393,577
$ 100,000 5.875%, 2005.................. 102,222
$ 50,000 6.5%, 2005.................... 53,210
------------
968,361
------------
Total U.S. government & government
agency securities - Series M
(cost $5,384,050) - 34.0%... 5,435,873
REAL ESTATE INVESTMENT TRUSTS
-----------------------------
3,500 BRE Properties, Inc. ........... 124,688
5,900 Cambridge Shopping Centres, Ltd. 51,371
5,000 Federal Realty Investment Trust. 113,750
17,400 First Union Real Estate
Investment Trust.............. 121,800
9,400 HRE Properties.................. 124,550
7,300 MGI Properties, Inc. ........... 122,275
6,600 New Plan Realty Trust........... 144,375
5,900 Pennsylvania Real Estate
Investment Trust.............. 122,425
10,000 Santa Anita Realty Enterprises,
Inc. ......................... 118,750
6,700 Security Capital Pacific Trust.. 132,325
7,900 United Realty Trust Dominion.... 118,500
9,300 Washington Real Estate
Investment Trust.............. 147,637
3,700 Weingarten Realty Investors..... 140,600
------------
Total real estate investment trusts
- Series M (cost $1,553,401) -
9.9%........................ 1,583,046
See accompanying notes.
37
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
OF SHARES FOREIGN STOCKS VALUE
- --------------------------------------------------------------------------------
BELGIUM - 6.3%
500 Fortis AG....................... $ 60,824
400 Union Miniere*.................. 26,776
50 Bekaert SA...................... 41,201
100 Cementbedrijven Cimenteries..... 40,351
1,000 Delhaize-LeLion................. 41,456
950 Electrabel...................... 225,967
750 Gevaert Photo Productions....... 46,128
350 Groupe Bruxelles Lambert........ 48,583
500 Kredietbank..................... 136,769
400 Petrofina SA.................... 122,464
250 Royale Belgium.................. 49,951
150 Solvay SA....................... 81,042
200 Tractebel Investment International 82,571
------------
1,004,083
HONG KONG - 6.6%
23,000 Bank of East Asia............... 82,547
12,000 Cathay Pacific Airways ......... 18,314
5,000 Cheung Kong Holdings............ 30,458
20,000 China Light & Power Company..... 92,086
68,000 Chinese Estates................. 44,413
10,000 Dicksons Concept International.. 9,312
10,000 Elec &Eltek International
Holdings...................... 2,018
20,000 Hong Kong & Shanghai Hotels .... 28,971
71,250 Hong Kong Telecommunications.... 127,167
35,000 Hutchinson Whampoa Limited...... 213,207
5,000 Kumagai Gumi.................... 3,621
5,000 Lai-sun Garment International... 4,850
57,000 Oriental Press Group............ 17,324
5,000 Peregrine Investments Holdings.. 6,467
20,000 Sun Hung Kai Properties......... 163,607
180,000 Tai Cheung Holdings ............ 138,516
13,000 Wing Lung Bank.................. 72,802
------------
1,055,680
------------
Total foreign stocks - Series M
(cost $2,022,862) - 12.9% 2,059,763
TEMPORARY CASH INVESTMENTS
--------------------------
431,000 Vista Federal Money Market
Fund.......................... 431,000
------------
Total temporary cash investments -
Series M (cost $431,000) - 2.7% 431,000
------------
Total investments - (cost
$16,190,634) - Series M -
101.6%...................... 16,224,540
Liabilities, less cash and other
assets - Series M - (1.6%) (248,117)
------------
Total net assets applicable to
1,491,500 shares outstanding
- Series M - 100.0%......... $15,976,423
============
SERIES N (MANAGED ASSET ALLOCATION)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
AUTOMOBILES - 0.5%
$ 50,000 Exide Corporation, 10.00%,
2005.......................... $ 53,875
BANKS & CREDIT - 1.0%
100,000 Bankers Trust - NY, 7.25%,
2003.......................... 105,000
BROADCAST MEDIA - 1.0%
50,000 Sinclair Broadcasting, 10.00%,
2005.......................... 51,125
50,000 Young Broadcasting Corporation,
10.125%, 2005................. 52,875
------------
104,000
CHEMICALS--SPECIALTY - 1.0%
50,000 Agricultural Minerals & Chemicals,
10.75%, 2003.................. 55,000
50,000 IMC Fertilizer Group, Inc.,
9.45%, 2011................... 53,313
------------
108,313
ELECTRIC UTILITIES - 4.0%
100,000 Florida Power & Light Company,
5.7%, 1998.................... 100,500
100,000 Monongahela Power, 8.5%,
2022.......................... 106,625
50,000 Southern California Edison, 6.5%,
2001.......................... 51,125
110,000 Texas Utilities, 5.875%, 1998... 110,000
50,000 Wisconsin Electric Power,
5.875%, 1997.................. 50,313
------------
418,563
ENTERTAINMENT - 0.5%
50,000 United Artists, 9.30%, 2015..... 50,125
HEALTH CARE--SERVICES - 0.3%
35,000 Tenet Healthcare Corporation,
8.625%, 2003.................. 36,706
HOTEL/MOTEL - 0.7%
50,000 Bally Park Place Funding,
9.25%, 2004................... 50,500
30,000 Grand Casinos, 10.125%, 2003.... 31,275
------------
81,775
INDUSTRIAL SERVICES - 4.6%
50,000 Coinmach Corporation,
11.75%, 2005.................. 50,500
50,000 Consol Cigar, 10.50%, 2003...... 51,125
50,000 Gulf Canada, 9.625%, 2005....... 52,375
50,000 HMC Acquisition Properties
9.00%, 2007................... 50,500
50,000 Lenfest Communications,
8.375%, 2005.................. 50,188
See accompanying notes.
38
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - (CONTINUED)
$ 25,000 Portola Packaging, Inc., 10.75%,
2005.......................... $ 25,750
$100,000 Price/Costco, Inc., 7.125%,
2005.......................... 104,375
$100,000 Raytheon Company, 6.5%,
2005.......................... 102,875
------------
487,688
MANUFACTURING - 0.5%
$ 50,000 Coltec Industries, 10.25%, 2002. 51,625
MISCELLANEOUS - 0.5%
$ 50,000 McDonald's Corporation, 6.625%,
2005.......................... 51,750
PAPER & FOREST PRODUCTS - 0.5%
$ 50,000 Repap Wisconsin, Inc., 9.25%,
2002.......................... 47,625
SUPERMARKETS - 0.3%
$ 50,000 Pathmark Stores, 0%, 2003(1).... 30,500
TEXTILES - 0.4%
$ 50,000 Dan River, Inc., 10.125%, 2003.. 46,125
------------
Total corporate bonds - Series N
(cost $1,636,881) - 15.8% 1,673,670
PREFERRED STOCKS
----------------
AUTOMOBILES - 0.1%
200 Superior Industries International 5,275
------------
Total preferred stocks - Series N
(cost $6,445) - 0.1% 5,275
COMMON STOCKS
-------------
AEROSPACE & DEFENSE - 0.4%
300 Boeing Company.................. 23,512
300 Northrop Grumman Corporation.... 19,200
------------
42,712
AUTO PARTS & SUPPLIES - 0.1%
200 TRW, Inc. ...................... 15,500
AUTOMOBILES - 1.2%
900 Echlin, Inc. ................... 32,850
300 General Motors Corporation...... 15,863
2,000 Honda Motor Company, Ltd. ADR... 83,500
------------
132,213
BANKS & TRUSTS - 2.3%
200 Baybanks, Inc. ................. 19,650
300 Chase Manhattan Corporation..... 18,188
700 Chemical Banking Corporation.... 41,125
400 Corestates Financial Corporation 15,150
400 First American Corporation...... 18,950
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
BANKS & TRUSTS, CONTINUED
400 First Union Corporation......... $ 22,250
400 J.P. Morgan & Company, Inc. .... 32,100
600 Keycorp......................... 21,750
300 Mellon Bank Corporation......... 16,125
300 Midlantic Corporation........... 19,688
300 Nationsbank Corporation......... 20,887
------------
245,863
BEVERAGES - 1.4%
600 Anheuser-Busch Company, Inc. ... 40,125
800 Coca Cola Company............... 59,400
800 PepsiCo, Inc. .................. 44,700
------------
144,225
BROADCAST MEDIA - 0.6%
300 Capital Cities/ABC, Inc. ....... 37,013
800 Comcast Corporation (Cl.A)
Special....................... 14,550
300 Infinity Broadcasting
Corporation*.................. 11,175
------------
62,738
BUILDING & REAL ESTATE - 0.1%
500 Masco Corporation............... 15,687
CHEMICALS--BASIC - 2.1%
1,300 Akzo Nobel NV-ADR............... 75,400
500 Du Pont (E.I.) De Nemours
& Company..................... 34,938
200 FMC Corporation*................ 13,525
700 Great Lakes Chemical Corporation 50,400
400 Lyondell Petrochemical Company.. 9,150
800 Morton International, Inc. ..... 28,700
200 Olin Corporation................ 14,850
------------
226,963
CHEMICALS--DIVERSIFIED - 0.2%
200 Monsanto Company................ 24,500
CHEMICALS--SPECIALITY - 0.4%
300 Minnesota Mining & Manufacturing
Company....................... 19,875
300 Rohm & Haas Company............. 19,313
300 Wellman, Inc.................... 6,825
------------
46,013
COMMUNICATION EQUIPMENT - 0.1%
200 Tellabs, Inc.*.................. 7,400
COMPUTER SOFTWARE - 0.5%
400 Aspect Telecommunications
Corporation*.................. 13,400
400 Autodesk, Inc. ................. 13,700
200 Parametric Technology*.......... 13,300
200 General Motors (Cl.E)........... 10,400
------------
50,800
See accompanying notes.
39
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
COMPUTER SYSTEMS - 1.2%
900 Compaq Computer Corporation*.... $ 43,200
400 Hewlett Packard Company......... 33,500
200 International Business Machines
Corporation................... 18,350
600 Sun Miscrosystems, Inc.*........ 27,375
------------
122,425
COSMETICS - 0.1%
400 Maybelline, Inc................. 14,500
DRUGS - 0.4%
700 Amgen, Inc.*.................... 41,563
ELECTRIC UTILITIES - 1.7%
5,200 Centerior Energy Corporation.... 46,150
300 Duke Power Company.............. 14,212
600 Empresa Nacional De Electricidad
SA Sponsored ADR.............. 34,350
600 Entergy Corporation............. 17,550
1,200 Niagara Mohawk Power
Corporation................... 11,550
600 Public Service Company of
New Mexico*................... 10,575
1,200 SCE Corporation................. 21,300
400 Texas Utilities Company......... 16,450
400 Unicom Corporation.............. 13,100
------------
185,237
ELECTRICAL EQUIPMENT - 1.7%
300 American Power Conversion
Corporation*.................. 2,850
600 Emerson Electric Company........ 49,050
1,200 General Electric Company........ 86,400
700 Hubbell Inc., (Cl.B)............ 46,025
------------
184,325
ELECTRONIC SYSTEMS - 0.2%
300 Honeywell, Inc.................. 14,587
200 Teradyne, Inc.*................. 5,000
------------
19,587
ELECTRONICS - 2.6%
900 Advanced Micro Devices, Inc.*... 14,850
300 Analog Devices, Inc.*........... 10,612
200 Arrow Electronics, Inc.*........ 8,625
1,200 Hitachi, Ltd. ADR............... 120,600
400 KLA Instruments Corporation*.... 10,425
200 LAM Research Corporation*....... 9,150
200 Motorola, Inc. ................. 11,400
2,000 Phillips Electronics N.V. ADR... 71,750
200 Varian Associates, Inc.......... 9,550
300 Xilinx, Inc.*................... 9,150
------------
276,112
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ENTERTAINMENT - 0.8%
600 Cracker Barrel Old Country
Store, Inc. .................. $10,350
400 Disney (Walt) Company........... 23,600
400 Mirage Resorts, Inc.*........... 13,800
800 Time Warner, Inc................ 30,300
200 Viacom, Inc. (Cl.A)*............ 9,175
------------
87,225
ENVIRONMENTAL - 0.3%
1,000 WMX Technologies, Inc. ......... 29,875
FINANCIAL--BANKS, COMMERCIAL - 0.5%
300 First Bank System, Inc. ........ 14,887
1,000 Norwest Corporation............. 33,000
------------
47,887
FINANCIAL SERVICES - 1.9%
400 American Express Company........ 16,550
1,000 Banco Bilbao Viz SPADR.......... 35,750
1,100 Countrywide Credit Industries,
Inc........................... 23,925
200 Federal National Mortgage
Association................... 24,825
400 Franklin Resources, Inc......... 20,150
500 H & R Block, Inc. .............. 20,250
500 Household International, Inc. .. 29,563
2 Transport Holdings, Inc. (Cl.A)* 81
400 Travelers Group, Inc. .......... 25,150
------------
196,244
FOOD PROCESSING - 1.8%
735 Archer-Daniels-Midland Company.. 13,230
500 Conagra, Inc. .................. 20,625
1,000 Heinz (H.J.) Company............ 33,126
300 Ralston Purina Group............ 18,712
700 Sara Lee Corporation............ 22,313
500 Tyson Foods, Inc. (Cl.A)........ 13,062
800 Unilever PLC - ADR.............. 67,600
------------
188,668
FURNITURE - 0.1%
400 Helig Meyers Company............ 7,349
GENERAL MERCHANDISERS - 0.2%
700 Price/Costco, Inc.*............. 10,675
600 Wal-Mart Stores, Inc. .......... 13,425
------------
24,100
HOUSEHOLD PRODUCTS - 0.7%
500 Colgate Palmolive Company....... 35,125
500 Procter & Gamble Company........ 41,500
------------
76,625
See accompanying notes.
40
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES - 0.1%
200 Leggett & Platt, Inc. .......... $ 4,850
HOUSING--HOME BUILDING - 0.1%
200 Oakwood Homes Corporation....... 7,675
INSURANCE - 2.2%
300 AMBAC, Inc. .................... 14,063
500 American General Corporation.... 17,437
900 American International Group, Inc. 83,250
300 MGIC Investment Corporation..... 16,275
200 Mutual Risk Management, Ltd..... 9,150
400 National Re Corporation......... 15,200
200 Pacificare Health System*....... 17,400
500 Torchmark Corporation........... 22,625
500 United Healthcare Corporation... 32,750
------------
228,150
INTEGRATED PETROLEUM DOMESTIC - 0.7%
400 Atlantic-Richfield Company...... 44,300
1,600 USX Marathon Group.............. 31,200
------------
75,500
INTEGRATED PETROLEUM INTERNATIONAL - 2.7%
600 Exxon Corporation............... 48,075
700 Mobil Corporation............... 78,400
800 Royal Dutch Petroleum
Company ADR................... 112,900
400 Shell Transport & Trading
Company....................... 32,550
300 Texaco, Inc. ................... 23,550
------------
295,475
MACHINERY - 0.2%
200 GATX Corporation................ 9,725
300 Watts Industries, Inc.(Cl.A).... 6,975
------------
16,700
MANUFACTURING - 0.1%
300 Allied-Signal, Inc. ............ 14,250
MEDICAL - 0.3%
600 Columbia/HCA Healthcare
Corporation................... 30,450
METAL FABRICATE/HARDWARE - 0.1%
600 Trimas Corporation.............. 11,325
MINING & METALS - 0.2%
300 Aluminum Company of
America*...................... 15,862
200 Alumas, Inc. ................... 6,125
------------
21,987
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
MISCELLANEOUS - 0.3%
600 Atlanta Gas Light Company....... $ 11,850
300 Coeur d'Alene Mines Corporation. 5,137
200 Komag, Inc.*.................... 9,225
100 York International Corporation*. 4,700
------------
30,912
MISCELLANEOUS CONSUMER SERVICES - 0.2%
400 Service Corporation
International................. 17,600
MISCELLANEOUS CONSUMER DURABLES - 0.4%
500 Corning, Inc.................... 16,000
300 Eastman Kodak Company........... 20,100
200 Tandy Corporation............... 8,300
------------
44,400
MISCELLANEOUS CONSUMER PRODUCTS - 0.5%
500 Jones Apparel Group, Inc.*...... 19,687
200 Philip Morris Companies, Inc. .. 18,100
400 Springs Industries, Inc. (Cl.A). 16,550
------------
54,337
OFFICE EQUIPMENT & SUPPLIES - 0.1%
300 Reynolds & Reynolds Company
(Cl.A)........................ 11,662
OIL - 0.9%
500 Amerada Hess Corporation........ 26,500
400 Helmerich &Payne, Inc. ......... 11,900
400 Schlunberger, Ltd. ............. 27,700
700 Smith International, Inc.*...... 16,450
600 Union Texas Petroleum Holdings,
Inc........................... 11,625
------------
94,175
PACKAGING & CONTAINERS - 0.2%
1,700 Jefferson Smurfit Corporation*.. 16,150
PAPER - 0.2%
500 International Paper Company..... 18,938
PAPER & FOREST PRODUCTS - 0.3%
300 Georgia-Pacific Corporation..... 20,588
200 Weyerhaeuser Company............ 8,650
------------
29,238
PETROLEUM - 0.1%
400 Phillips Petroleum Company...... 13,650
PHARMACEUTICALS - 2.4%
500 Abbott Laboratories............. 20,875
400 American Home Products
Corporation................... 38,800
500 Bristol Myers Squibb Company.... 42,938
600 Merck & Company, Inc. .......... 39,450
900 Perrigo Company*................ 10,687
800 Pfizer, Inc. ................... 50,400
1,100 Smithkline Beecham PLC ADR...... 61,050
------------
264,200
See accompanying notes.
41
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
PUBLISHING - 0.3%
300 Gannett Company, Inc. .......... $ 18,413
200 McGraw-Hill Companies, Inc...... 17,425
------------
35,838
RAILROADS - 0.5%
500 Burlington Northern Santa Fe
Corporation................... 39,000
200 Union Pacific Corporation....... 13,200
------------
52,200
RETAIL--APPAREL - 0.3%
700 Gap, Inc. ...................... 29,400
RETAIL--DEPARTMENT STORES - 0.2%
600 May Department Stores
Company....................... 25,350
RETAIL--FOOD CHAINS - 0.2%
400 McDonald's Corporation.......... 18,050
RETAIL--GENERAL MERCHANDISE - 0.3%
400 Dayton Hudson Corporation....... 30,000
RETAIL--GROCERY - 0.6%
1,000 Albertsons, Inc. ............... 32,875
700 Kroger Company*................. 26,250
------------
59,125
RETAIL--SPECIALTY - 0.5%
1,100 Circuit City Stores, Inc. ...... 30,387
800 Toys "R" Us, Inc.*.............. 17,400
------------
47,787
SEMI-CONDUCTORS - 0.3%
400 Cypress Semiconductor
Corporation*.................. 5,100
400 Intel Corporation............... 22,700
------------
27,800
SPECIALTY MERCHANDISERS - 0.9%
200 Eckerd Corporation*............. 8,925
2,000 LVMH Moet Hennessy Lou ADR...... 83,750
------------
92,675
STEEL - 0.2%
400 Nucor Corporation............... 22,850
TELECOMMUNICATIONS - 3.3%
1,100 AT&T Corporation................ 71,225
300 Ameritech Corporation........... 17,700
300 Bell Atlantic Corporation....... 20,063
900 Bellsouth Corporation........... 39,150
1,000 British Telecom PLC ADR......... 56,500
1,000 GTE Corporation................. 44,000
200 Glenayre Technologies, Inc.*.... 12,450
800 SBC Communications, Inc. ....... 46,000
200 Southern New England
Telecommunications............ 7,950
500 Telecom New Zealand ADR......... 34,687
------------
349,725
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TELEPHONE - 0.2%
400 U.S. West, Inc. ................ $ 14,300
400 U.S. West Media Group*.......... 7,600
------------
21,900
TRANSPORTATION - 0.1%
200 P.H.H. Corporation.............. 9,350
------------
Total common stocks - Series N
(cost $4,323,116) - 43.8%... 4,640,010
U.S. GOVERNMENT & GOVERNMENT
----------------------------
AGENCY SECURITIES
-----------------
U.S. GOVERNMENT AGENCIES - 19.9%
$1,524,000 Federal Home Loan Mortgage
Corporation, 5.58%, 1-02-96... 1,523,767
Government National Mortgage
Association,
$ 51,873 11.50%, 2013.................. 58,123
$ 59,486 8.00%, 2025................... 61,530
$ 122,501 7.00%, 2025................... 123,993
$ 234,136 8.50%, 2025................... 245,585
$ 95,299 7.50%, 2025................... 98,378
------------
2,111,376
U.S. GOVERNMENT SECURITIES - 12.0%
$ 35,000 U.S. Treasury Bond, 6.875%,
2025.......................... 39,458
U.S. Treasury Notes,
$ 225,000 5.75%, 1997................... 227,014
$ 325,000 6.125%, 1997.................. 329,024
$ 75,000 5.625%, 2000.................. 75,699
$ 100,000 6.25%, 2000................... 103,387
$ 75,000 5.875%, 2005.................. 76,667
$ 100,000 6.5%, 2005.................... 106,419
$ 250,000 7.625%, 2025.................. 305,420
------------
1,263,088
------------
Total U.S. government & government
agenccy securities - Series N (cost
$3,331,777) - 31.9%......... 3,374,464
MISCELLANEOUS ASSETS
--------------------
ASSET-BACKED SECURITIES - 0.2%
$ 15,788 Hyundai Auto Receivable Trust,
4.30%, 1998................... 15,621
CLOSED-END FUND - 2.8%
7,000 S&P Midcap 400 Depository
Receipts...................... 304,172
------------
Total miscellaneous assets - Series
N (cost $320,623) - 3.0%.... 319,793
See accompanying notes.
42
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES FOREIGN CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
JAPAN - 0.9%
5,000,000 Interamer Development Bank,
6.00%, 2001(3)................ $ 57,803
3,000,000 KFW International Finance,
6.00%, 1999(3)................ 33,846
------------
Total foreign bonds - Series N
(cost $112,686) - 0.9% 91,649
FOREIGN GOVERNMENT ISSUES
-------------------------
CANADA - 0.4%
60,000 Government Bond, 6.50%, 2004(3). 42,512
GERMANY - 0.9%
125,000 Bundesrepub Deutschland,
7.375%, 2005(3)............... 95,439
------------
Total foreign government issues
Series N (cost $133,118) - 1.3% 137,951
FOREIGN STOCKS
--------------
FRANCE - 0.5%
500 Genril Eaux..................... 49,986
GERMANY - 1.5%
200 Bankgesellschaft Berlin......... 51,145
200 Bayer, AG....................... 53,211
200 M.A.N. AG....................... 55,475
------------
159,829
HONG KONG - 1.1%
11,000 Whampoa Limited................. 67,008
6,000 Swire Pacific Ltd............... 46,560
------------
113,568
JAPAN - 1.0%
7,000 Bridgestone Corporation......... 111,292
MALAYSIA - 0.4%
16,000 Sime Darby Berhad............... 42,537
SWITZERLAND - 1.4%
80 Union Bank of Switzerland....... 86,907
30 SIG Schweizland................. 62,834
------------
149,741
UNITED KINGDOM - 1.3%
15,000 BTR PLC......................... 76,621
22,000 Lonrho Ltd...................... 60,117
------------
136,738
------------
Total foreign stocks - Series N
(cost $755,992) - 7.2%...... 763,691
PRINCIPAL
AMOUNT OR
NUMBER TEMPORARY MARKET
OF SHARES CASH INVESTMENTS VALUE
- --------------------------------------------------------------------------------
4,347 Vista Treasury Plus International
Fund, ........................ $ 4,347
------------
Total temporary cash investments -
Series N (cost $4,347) - 0.0% 4,347
------------
Total investments - Series N
(cost $10,624,985) - 104.0% 11,010,850
------------
Liabilities, less cash and other
assets - Series N - (4.0%) (430,711)
------------
Total net assets applicable
to 985,979 shares outstanding
Series N - 100.0%........... $10,580,139
============
SERIES O (EQUITY INCOME)
CORPORATE BONDS
---------------
REAL ESTATE - 0.8%
$100,000 B.F. Saul Reit, 11.625%, 2002... $103,500
------------
Total corporate bonds - Series O
(cost $103,500) - 0.8% 103,500
CONVERTIBLE BONDS
-----------------
FINANCIAL SERVICES - 0.8%
$100,000 Liberty Property Trust, 8.00%,
2001.......................... 102,625
------------
Total convertible bonds - Series O
(cost $98,875) - 0.8% 102,625
COMMON STOCKS
-------------
AUTO PARTS & SUPPLIES - 0.9%
1,400 Eaton Corporation .............. 75,075
600 TRW, Inc. ...................... 46,500
------------
121,575
AUTOMOBILES - 0.1%
300 Genuine Parts Company........... 12,300
BANKS & TRUSTS - 8.1%
2,700 Banc One Corporation............ 101,925
1,100 Bankers Trust New York
Corporation................... 73,150
1,900 Chase Manhattan Corporation..... 115,187
1,500 Chemical Banking Corporation.... 88,125
1,100 1st Interstate Bancorp.......... 150,150
2,000 J.P. Morgan & Company, Inc. .... 160,500
3,800 Mellon Bank Corporation......... 204,250
1,700 National City Corporation....... 56,313
See accompanying notes.
43
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES O (EQUITY INCOME) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
BANKS & TRUSTS, CONTINUED
1,600 PNC Bank Corporation............ $ 51,600
2,700 S E Banken...................... 22,407
1,700 U.S. Bancorp Oregon............. 57,163
------------
1,080,770
BEVERAGES - 1.6%
2,000 Anheuser-Busch Company, Inc. ... 133,750
2,200 Brown-Forman Corporation
(Cl.B)........................ 80,300
------------
214,050
CHEMICALS (BASIC) - 1.3%
2,500 Du Pont (E.I.) de Nemours
& Company..................... 174,687
CHEMICALS (DIVERSIFIED) - 0.8%
900 Monsanto Company............... 110,250
CHEMICALS (SPECIALTY) - 2.6%
2,400 Betz Laboratories, Inc. ........ 98,400
2,400 Crompton & Knowles
Corporation................... 31,800
2,900 Lubrizol Corporation............ 80,838
2,100 Minnesota Mining & Manufacturing
Company....................... 139,125
------------
350,163
ELECTRIC UTILITIES - 6.1%
1,800 Baltimore Gas & Electric Company 51,300
8,600 Centerior Energy Corporation.... 76,325
1,100 DQE, Inc. ...................... 33,825
1,500 Dominion Res, Inc. ............. 61,875
4,000 Entergy Corporation............. 117,000
1,800 Florida Progress Corporation.... 63,675
2,000 General Public Utilities Corporation 68,000
2,300 Pacific Gas & Electric Company.. 65,263
5,300 Pacificorp...................... 112,625
3,200 SCE Corporation................. 56,800
2,200 Southern Company................ 54,175
1,800 Unicom Corporation.............. 58,950
------------
819,813
ELECTRICAL EQUIPMENT - 3.1%
1,152 Cooper Cameron Corporation*..... 40,896
1,688 Cooper Industries, Inc. ........ 62,034
3,000 General Electric Company........ 216,000
1,500 Hubbell, Inc. (Cl.B)............ 98,625
------------
417,555
ELECTRONIC SYSTEMS - 1.3%
1,000 E G & G, Inc. .................. 24,250
3,200 Honeywell, Inc. ................ 155,600
------------
179,850
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 4.5%
3,700 American Express Company........ $153,087
900 Federal National Mortgage
Association................... 111,713
1,700 H & R Block, Inc. .............. 68,850
500 Household International, Inc. .. 29,563
1,900 Student Loan Marketing New VTG.. 125,162
1,900 Travelers Group, Inc. .......... 119,463
------------
607,838
FOOD PROCESSING - 3.1%
800 CPC International, Inc.......... 54,900
1,800 General Mills................... 103,950
2,250 Heinz (H.J.) Company............ 74,531
2,300 Quaker Oats Company............. 79,350
1,900 Sara Lee Corporation............ 60,563
300 Unilever NY ADR................. 42,225
------------
415,519
FOOD WHOLESALERS - 0.1%
900 Fleming Companies, Inc. ........ 18,562
HOSPITAL SUPPLIES/HOSPITAL
MANAGEMENT - 0.4%
1,300 Bausch & Lomb, Inc. ............ 51,512
INSURANCE - 2.2%
1,000 American General Corporation.... 34,875
4,000 Allmerica Financial Corporation* 108,000
1,200 Loews Corporation............... 94,050
1,500 Provident Companies, Inc.*...... 50,812
300 Unum Corporation................ 16,500
------------
304,237
INTEGRATED PETROLEUM--DOMESTIC - 3.7%
2,300 Atlantic-Richfield Company...... 254,725
1,300 British Petroleum PLC ADR....... 132,762
500 Pennzoil Company................ 21,125
746 Sun Company, Inc. .............. 20,422
3,500 USX Marathon Group.............. 68,250
------------
497,284
INTEGRATED PETROLEUM--INTERNATIONAL - 6.2%
1,400 Chevron Corporation............. 73,500
2,600 Exxon Corporation............... 208,325
1,300 Mobil Corporation............... 145,600
1,300 Royal Dutch Petroleum Company
ADR........................... 183,463
2,900 Texaco, Inc. ................... 227,650
------------
838,538
MACHINERY - 0.6%
800 GATX Corporation................ 38,900
2,100 McDermott International, Inc. .. 46,200
------------
85,100
See accompanying notes.
44
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES O (EQUITY INCOME) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
MEDICAL SUPPLIES - 0.7%
2,400 Baxter International............ $100,500
MINING & METALS - 0.7%
2,200 Newmont Mining Corporation...... 99,550
MISCELLANEOUS CONSUMER DURABLES - 1.6%
3,100 Corning, Inc.................... 99,200
1,800 Eastman Kodak Company........... 120,600
------------
219,800
MISCELLANEOUS CONSUMER PRODUCTS - 2.7%
700 Clorox Company Del.............. 50,138
1,100 Hanson PLC Sponsored ADR........ 16,775
2,400 Philip Morris Companies, Inc.... 217,200
1,800 Tambrand, Inc. ................. 85,950
------------
370,063
OFFICE EQUIPMENT & SUPPLIES - 0.1%
300 Pitney-Bowes, Inc. ............. 14,100
PAPER - 0.9%
3,100 International Paper Company..... 117,412
PAPER & FOREST PRODUCTS - 2.4%
800 Georgia-Pacific Corporation..... 54,900
1,500 Kimberly Clark.................. 124,125
3,100 Union Camp Corporation.......... 147,638
------------
326,663
PHARMACEUTICALS - 7.4%
1,700 American Home Products
Corporation................... 164,900
2,800 Eli Lilly & Company............. 157,500
5,395 Pharmacia & Upjohn, Inc.*....... 209,056
1,100 Schering-Plough Corporation..... 60,225
4,300 Smithkline Beecham PLC-ADR...... 238,650
1,700 Warner Lambert.................. 165,113
------------
995,444
PUBLISHING - 2.6%
600 Deluxe Corporation.............. 17,400
2,300 Dun and Bradstreet.............. 148,925
1,500 Gannett Company, Inc. .......... 92,062
1,100 McGraw-Hill Companies, Inc. .... 95,838
------------
354,225
RAILROADS - 0.8%
1,600 Union Pacific Corporation....... 105,600
RETAIL--DEPARTMENT STORES - 1.8%
2,700 J C Penney...................... 128,587
1,500 May Department Stores Company... 63,375
1,300 Sears Roebuck................... 50,700
------------
242,662
RETAIL--GENERAL MERCHANDISING - 0.3%
600 Dayton Hudson Corporation....... 45,000
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
SAVINGS & LOANS - 0.2%
500 Brooklyn Bancorp, Inc.*......... $ 20,374
TELECOMMUNICATIONS - 3.9%
3,700 Alltel Corporation.............. 109,150
1,400 BCE, Inc. ...................... 48,300
900 Bell Atlantic Corporation....... 60,187
1,700 Bellsouth Corporation........... 73,950
3,700 GTE Corporation................. 162,800
1,900 Southern New England
Telecommunications............ 75,525
------------
529,912
TELEPHONE - 1.0%
700 Pacific Telesis Group........... 23,538
2,400 U.S. West, Inc. ................ 85,800
1,600 U.S. West Media Group........... 30,400
------------
139,738
TOBACCO - 2.2%
3,700 American Brands................. 165,112
800 RJR Nabisco Holdings ........... 24,700
3,100 UST, Inc. ...................... 103,463
------------
293,275
TRANSPORTATION--MISCELLANEOUS - 0.5%
800 Alexander & Baldwin, Inc. ...... 18,400
1,000 P.H.H.Corporation............... 46,750
------------
65,150
TRANSPORTATION--RAIL - 0.4%
800 Conrail, Inc. .................. 56,000
------------
Total common stocks - Series O
(cost $9,401,313) - 76.9% 10,395,071
U.S. GOVERNMENT & GOVERNMENT
----------------------------
AGENCY SECURITIES
-----------------
U.S. GOVERNMENT AGENCIES - 10.0%
$1,360,000 Federal Home Loan Mortgage
Corporation, 5.50%, 1-05-96... 1,359,169
U.S. GOVERNMENT SECURITIES - 1.5%
U.S. Treasury Notes,
$ 100,000 6.125%, 1998.................. 102,006
$ 100,000 6.25%, 2000................... 103,387
------------
205,393
------------
Total U.S. government & government
agency securities - Series O -
(cost $1,561,996) - 11.5%... 1,564,562
See accompanying notes.
45
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES O (EQUITY INCOME) (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES REAL ESTATE INVESTMENT TRUSTS VALUE
- --------------------------------------------------------------------------------
4,400 DeBartolo Realty Corporation.... $ 57,200
2,200 General Growth Property, Inc. .. 45,650
4,000 Simon Property Group............ 97,500
2,200 Weingarten Realty Investors..... 83,600
------------
Total real estate investment
trusts - Series O (cost
$281,712) - 2.1%............ 283,950
FOREIGN STOCKS
--------------
UNITED KINGDOM - 0.5%
25,200 Lonrho Ltd...................... 68,861
------------
Total foreign stocks - Series O
(cost $65,051) - 0.5% 68,861
TEMPORARY CASH INVESTMENTS
--------------------------
483,127 Vista Treasury Institutional
Money Market Fund............. 483,127
------------
Total temporary cash investments
- Series O (cost $483,127) - 3.6% 483,127
COMMERCIAL PAPER
----------------
ELECTRONICS - 0.7%
$100,000 Hewlett-Packard Company,
5.65%, 1-19-96................ 99,718
FINANCIAL SERVICES - 4.4%
$600,000 Corporate Asset Funding,
5.90%, 1-02-96................ 599,902
------------
Total commercial paper - Series O
(cost $699,620) - 5.1% 699,620
------------
Total investments - Series O
(cost $12,695,194) - 101.3% 13,701,316
Liabilities, less cash and other
assets - Series O - (1.3%) (173,694)
------------
Total net assets applicable to
1,156,219 shares outstanding-
Series O - 100.0%........... $13,527,622
============
SERIES S (SOCIAL AWARENESS)
COMMON STOCKS
-------------
ADVERTISING - 1.6%
16,000 Omnicom Group................... $596,000
AIRLINES - 1.3%
20,000 Southwest Airlines Company...... 465,000
SERIES S (SOCIAL AWARENESS) (CONTINUED)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
AMUSEMENT & RECREATIONAL SERVICES - 1.3%
8,000 Disney (Walt) Company........... $ 472,000
BANKING & FINANCE - 2.9%
11,500 Boatmen's Bancshares, Inc. ..... 470,063
14,500 Comerica, Inc. ................. 581,813
------------
1,051,876
BEVERAGES - 1.5%
10,000 PepsiCo, Inc. .................. 558,750
BROADCAST MEDIA - 2.1%
17,312 Clear Channel Communications*... 763,892
BUSINESS SERVICES - 6.6%
18,400 Alternative Resources
Corporation*.................. 556,600
25,000 DeVry, Inc.*.................... 675,000
7,000 HBO & Company................... 536,375
13,500 Paychex......................... 673,313
------------
2,441,288
CHEMICALS--BASIC - 1.8%
19,500 Praxair......................... 655,688
CHEMICALS--SPECIALTY - 1.5%
11,000 Sigma Aldrich Corporation....... 544,500
COMMUNICATIONS EQUIPMENT - 0.8%
3,500 U.S. Robotics Corporation*...... 307,125
COMPUTER SOFTWARE - 6.8%
6,500 Aspect Telecommunications*...... 217,750
4,500 Automatic Data Processing, Inc. 334,125
8,500 Bisys Group, Inc.*.............. 261,375
6,000 Computer Associates International,
Inc........................... 341,250
8,722 First Data Corporation.......... 583,284
7,000 McAffee Associates, Inc.*....... 307,125
3,500 Microsoft Corporation*.......... 307,125
7,000 Symantec Corporation*........... 162,750
------------
2,514,784
COMPUTER SYSTEMS - 3.2%
12,000 Bay Networks, Inc.*............. 493,500
4,000 Sun Microsystems, Inc.* ........ 182,500
11,000 3Com Corporation*............... 512,875
------------
1,188,875
CONSUMER CYCLICALS - 1.0%
12,000 Mattel, Inc. ................... 369,000
CONSUMER SERVICES - 2.2%
14,250 CUC International, Inc.*........ 486,281
10,500 Comnet Cellular*................ 303,188
------------
789,469
COSMETICS - 1.9%
30,000 Guest Supply Company*........... 678,750
See accompanying notes.
46
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES S (SOCIAL AWARENESS)
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
DRUG DELIVERY - 0.8%
6,000 Elan Corporation PLC ADR*....... $ 291,750
ELECTRONICS--SEMI-CONDUCTORS - 3.4%
6,500 Applied Materials, Inc.* ....... 255,938
13,500 Atmel Corporation*.............. 302,063
5,000 Intel Coporation*............... 283,750
13,500 Merix Corporation*.............. 405,000
------------
1,246,751
FINANCIAL SERVICES - 4.5%
5,000 Federal National Mortgage
Association................... 620,625
12,500 Finova Group.................... 603,125
9,500 First USA, Inc. ................ 421,563
------------
1,645,313
FOOD--PROCESSING - 1.4%
7,500 CPC International, Inc.......... 514,688
FOOD--WHOLESALERS - 2.6%
22,500 Richfood Holdings, Inc. ........ 601,875
11,500 Sysco Corporation............... 373,750
------------
975,625
HEALTH CARE - 2.3%
8,000 Cardinal Health, Inc. .......... 438,000
9,000 U.S. Healthcare, Inc. .......... 418,500
------------
856,500
HOSPITAL SUPPLIES/MANAGEMENT - 2.2%
13,000 Community Health Systems, Inc.*. 463,125
12,500 Healthsouth Corporation*........ 364,063
------------
827,188
HOUSEHOLD FURNISHINGS/APPLIANCES - 1.3%
19,600 Leggett & Platt, Inc. .......... 475,300
HOUSEHOLD PRODUCTS - 1.5%
6,500 Procter &Gamble Company......... 539,500
INSURANCE - 5.5%
6,000 American General Group, Inc. ... 555,000
5,500 Chubb Corporation............... 532,125
10,500 Jefferson-Pilot Corporation..... 488,250
6,000 MBIA, Inc. ..................... 450,000
------------
2,025,375
MANUFACTURING - 3.0%
8,000 Illinois Tool Works, Inc. ...... 472,000
15,000 Millipore....................... 616,875
------------
1,088,875
MEDICAL - 3.4%
4,000 Cordis Corporation*............. 402,000
10,500 Guidant Corporation............. 443,625
7,500 Stryker Corporation............. 393,750
------------
1,239,375
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
OIL & GAS EXPLORATION - 4.3%
12,000 Anadarko Petroleum.............. $ 649,500
15,500 Apache Corporation.............. 457,250
13,500 Sonat, Inc. .................... 480,938
------------
1,587,688
PHARMACEUTICALS - 2.1%
7,500 Amgen, Inc. .................... 445,313
5,500 Genzyme Corporation............. 343,063
------------
788,376
POLLUTION CONTROL - 1.4%
26,000 Osmonics, Inc.*................. 529,750
RAILROADS - 1.1%
11,000 Illinois Central Corporation.... 422,125
RESTAURANTS - 3.9%
16,500 Boston Chicken*................. 530,063
12,000 McDonald's Corporation.......... 541,500
10,500 Outback Steakhouse, Inc.*....... 376,688
------------
1,448,251
RETAIL--DRUG STORES - 2.5%
17,500 Rexall Sundown, Inc.*........... 385,000
18,000 Walgreen Company................ 537,750
------------
922,750
RETAIL--GROCERY - 0.9%
10,000 Albertsons, Inc. ............... 328,750
RETAIL--SPECIALTY - 3.1%
20,250 Staples, Inc.*.................. 493,594
28,000 Sunglass Hut International, Inc.* 665,000
------------
1,158,594
TELECOMMUNICATIONS - 2.0%
12,500 Frontier Corporation............ 375,000
9,000 Sprint Corporation.............. 358,875
------------
733,875
TELEPHONE - 1.6%
11,000 U.S. West, Inc. ................ 393,250
11,000 U.S. West Media Group*.......... 209,000
------------
602,250
TEXTILES - 1.0%
8,500 Tommy Hilfiger Corporation*..... 360,188
------------
Total common stock - Series S
(cost $26,362,256) - 92.3% 34,005,834
CERTIFICATES OF DEPOSIT
-----------------------
BANKING - 0.3%
$100,000 South Shore, 5.40%, 3-04-96..... 100,000
------------
Total certificates of deposit - Series S
(cost $100,000) - 0.3%...... 100,000
See accompanying notes.
47
<PAGE>
STATEMENTS OF NET ASSETS
December 31, 1995
SERIES S (SOCIAL AWARENESS) (CONTINUED)
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER VALUE
- --------------------------------------------------------------------------------
$ 500,000 AIG Funding, Inc.,
5.82%, 1-03-96................ $ 499,677
1,300,000 International Lease Finance Corporation,
5.65%, 1-02-96................ 299,805
5.82%, 1-04-96................ 999,181
------------
Total commercial paper - Series S -
(cost $1,798,712) - 4.9%.... 1,798,663
------------
Total investments - Series S
(cost $28,260,968) - 97.5%.. 35,904,497
Cash &other assets, less
liabilities - 2.5%.......... 925,761
------------
Total net assets applicable to
2,233,884 shares outstanding
- Series S - 100.0%......... $36,830,258
============
The identified cost of investments owned at December 31, 1995 was the same for
federal income tax and financial statement purposes, except for Series D for
which the identified cost of investments for federal tax purposes was
$164,082,318.
*Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depository Receipt)
(1) Deferred interest obligation; currently zero coupon under terms of initial
offering.
(2) For Series M, this security has been segregated with the custodian to cover
margin requirements for the following open long financial futures contracts
traded on foreign exchanges as indicated below:
Unrealized
Type Contracts Gain
------------ ----------
Financial Index - DAX (3/96) 7 $ 3,668
Financial Index - TOPIX (3/96) 9 69,219
Financial Index - FTSE (3/96) 6 3,668
----------
$76,555
==========
(3) Principal amount on foreign bond is reflected in local currency (e.g.,
Japanese yen) while market value is reflected in U.S. dollars.
(4) Variable rate security which may be reset the first of each month.
See accompanying notes.
48
<PAGE>
BALANCE SHEET
December 31, 1995
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
SERIES A SERIES B (MONEY (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) MARKET) EQUITY) INCOME)
-------- --------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost $368,502,550,
$596,205,070, $11,161,771, $163,257,807
and $117,553,891, respectively).................. $487,613,500 $740,154,126 $ 11,167,311 $171,803,362 $124,456,799
Short-term commercial paper, at market or at
amortized cost which approximates market value
(identified cost $31,514,629, $53,386,916,
$94,018,629, $0 and $0, respectively)......... 31,513,658 53,386,916 94,001,342 -- --
Cash............................................. 211,500 -- 276,823 4,403,773 308,045
Receivables:
Fund shares sold.............................. 1,106,254 575,222 815,580 325,609 132,586
Securities sold............................... -- -- 6,106 2,170,174 --
Forward foreign exchange contracts............ -- -- -- 1,643,310 --
Interest...................................... 1,225 2,867,367 171,531 54,851 1,660,509
Dividends..................................... 750,349 1,064,615 -- 140,942 --
Miscellaneous................................. 25,331 -- -- -- --
Foreign taxes recoverable..................... -- -- -- 108,705 --
------------ ------------ ------------ ------------ ------------
Total assets.............................. $521,221,817 $798,048,246 $106,438,693 $180,650,726 $126,557,939
============ ============ ============ ============ ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased.......................... $ -- $ -- $ -- $ 2,164,057 $ --
Fund shares redeemed.......................... 978,827 2,389,758 941,362 482,066 795,822
Other liabilities:
Management fees............................... 304,141 469,690 42,574 136,947 74,331
Custodian fees................................ -- -- -- 43,300 --
Transfer and administration fees.............. 18,522 28,432 4,095 6,238 4,695
Professional fees............................. -- 24,302 6,312 3,225 11,574
Miscellaneous................................. 29,227 23,362 8,670 33,794 19,732
------------ ------------ ------------ ------------ ------------
Total liabilities......................... 1,330,717 2,935,544 1,003,013 2,869,627 906,154
Net Assets:
Paid in capital.................................. 366,060,115 543,860,283 100,593,169 156,694,497 121,146,176
Undistributed net investment income ............. 4,755,987 18,308,191 4,854,258 4,447,615 7,651,413
Accumulated undistributed net realized gain (loss)
on sale of investments, futures and foreign
currency transactions......................... 29,965,019 88,995,172 -- 6,453,920 (10,048,712)
Net unrealized appreciation (depreciation)
in value of investments, futures and translation
of assets and liabilities in foreign currency 119,109,979 143,949,056 (11,747) 10,185,067 6,902,908
------------ ------------ ------------ ------------ ------------
Net assets................................ 519,891,100 795,112,702 105,435,680 177,781,099 125,651,785
------------ ------------ ------------ ------------ ------------
Total liabilities and net assets....... $521,221,817 $798,048,246 $106,438,693 $180,650,726 $126,557,939
============ ============ ============ ============ ============
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......................... 24,721,185 23,421,450 8,541,095 31,951,961 9,769,468
Net asset value per share (net assets divided by
shares outstanding).............................. $21.03 $33.95 $12.34 $5.56 $12.86
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
49
<PAGE>
BALANCE SHEET (CONTINUED)
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>
ASSETS
Investments at value (identified cost
$74,918,788, $5,405,977, $16,190,634,
$10,624,985, $11,995,574 and
$26,462,256, respectively).............. $86,530,524 $ 5,490,437 $16,224,540 $11,010,850 $13,001,696 $34,105,834
Short-term commercial paper, at market or at
amortized cost which approximates market
value (identified cost $8,886,403, $0, $0, $0,
$699,620 and $1,798,712, respectively)... 8,886,403 -- -- -- 699,620 1,798,663
Cash........................................ 199,997 56,386 899 -- -- 832,645
Receivables:
Fund shares sold......................... 185,353 21,485 120,438 32,463 184,837 119,416
Securities sold.......................... 1,080,234 1,644,862 -- -- -- --
Interest................................. 1,275 135,908 39,608 58,430 12,304 1,979
Dividends................................ 56,959 -- 7,534 9,378 23,325 40,552
Prepaid expenses......................... 4,051 -- 74 805 605 1,177
Forward foreign exchange contracts....... -- -- 412 -- -- --
Foreign taxes recoverable................ -- -- -- 36 -- --
------------ ----------- ----------- ----------- ----------- -----------
Total assets......................... $96,944,796 $7,349,078 $16,393,505 $11,111,962 $13,922,387 $36,900,266
============ =========== =========== =========== =========== ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for
Securities purchased................... $ 3,409,853 $ 1,629,874 $ 355,533 $ 504,442 $ 356,455 $ --
Fund shares redeemed................... 94,757 27,732 20,365 2,487 18,882 45,762
Forward foreign exchange contracts..... -- -- -- 643 -- --
Other liabilities:
Management fees........................ 53,990 1,469 13,115 8,375 10,074 21,425
Custodian fees......................... -- 6,298 13,108 9,216 5,336 --
Transfer and administration fees....... 3,459 233 3,262 3,009 593 1,460
Professional fees...................... 902 920 3,800 1,644 1,565 569
Miscellaneous.......................... 2,394 4,191 2,370 2,007 1,860 792
Variation margin....................... -- -- 5,529 -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Total liabilities ................. 3,565,355 1,670,717 417,082 531,823 394,765 70,008
Net Assets:
Paid in capital.......................... 76,088,638 5,594,000 15,402,483 10,063,481 12,408,974 27,851,216
Undistributed net investment income...... 218,141 -- 310,231 108,503 106,787 212,751
Accumulated undistributed net realized gain
(loss) on sale of investments, futures and
foreign currency transactions.......... 5,460,926 -- 153,135 22,671 5,739 1,122,762
Net unrealized appreciation
in value of investments, futures and
translation of assets and liabilities in
foreign currency....................... 11,611,736 84,361 110,574 385,484 1,006,122 7,643,529
------------ ----------- ----------- ----------- ----------- -----------
Net assets........................... 93,379,441 5,678,361 15,976,423 10,580,139 13,527,622 36,830,258
------------ ----------- ----------- ----------- ----------- -----------
Total liabilities and net assets... $96,944,796 $7,349,078 $16,393,505 $11,111,962 $13,922,387 $36,900,266
============ =========== =========== =========== =========== ===========
Capital shares authorized................... 250,000,000 50,000,000 50,000,000 50,000,000 50,000,000 250,000,000
Capital shares outstanding.................. 5,813,574 555,341 1,491,500 985,979 1,156,219 2,233,884
Net asset value per share (net assets
divided by shares outstanding)........... $16.06 $10.22 $10.71 $10.73 $11.70 $16.49
============ =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
50
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
SERIES A SERIES B (MONEY (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) MARKET) EQUITY) INCOME)
-------- --------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ....................................... $ 6,692,953 $ 9,939,268 $ -- $ 3,386,174 $ --
Interest......................................... 1,763,958 14,521,341 5,576,937 517,713 8,776,778
------------ ------------ ------------ ------------ ------------
8,456,911 24,460,609 5,576,937 3,903,887 8,776,778
Less foreign tax expense......................... -- -- -- (293,887) --
------------ ------------ ------------ ------------ ------------
Total investment income................... 8,456,911 24,460,609 5,576,937 3,610,000 8,776,778
EXPENSES:
Management fees............................... 3,235,523 5,198,738 474,730 1,634,991 883,723
Custodian fees................................ 20,507 25,790 8,817 164,184 4,712
Transfer/maintenance fees..................... 2,713 2,549 2,482 2,214 2,214
Administration fees........................... 194,131 311,924 42,726 73,574 53,023
Directors' fees............................... 15,684 25,485 3,882 6,540 7,073
Professional fees............................. 14,697 26,097 6,198 183,555 8,105
Reports to shareholders....................... 86,494 128,918 24,749 43,422 28,513
Registration fees............................. 658 1,149 252 11,381 232
Other expenses................................ 29,070 49,787 9,656 14,653 15,520
------------ ------------ ------------ ------------ ------------
Total expenses............................ 3,599,477 5,770,437 573,492 2,134,514 1,003,115
Less earnings credits......................... (9,176) (13,593) (4,917) -- (3,318)
------------ ------------ ------------ ------------ ------------
Net expenses.................................. 3,590,301 5,756,844 568,575 2,134,514 999,797
------------ ------------ ------------ ------------ ------------
Net investment income ................. 4,866,610 18,703,765 5,008,362 1,475,486 7,776,981
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain during the period on:
Investments.................................... 30,112,684 99,034,666 -- 6,503,025 3,043,977
Foreign currency transactions.................. -- -- -- 3,695,084 --
------------ ------------ ------------ ------------ ------------
Net realized gain ........................ 30,112,684 99,034,666 -- 10,198,109 3,043,977
Net change in unrealized appreciation (depreciation)
during the period on:
Investments................................... 97,759,964 63,506,371 16,141 5,872,052 9,249,705
Translation of assets and liabilities
in foreign currencies..................... -- -- -- 1,008,002 --
------------ ------------ ------------ ------------ ------------
Net unrealized appreciation.................. 97,759,964 63,506,371 16,141 6,880,054 9,249,705
------------ ------------ ------------ ------------ ------------
Net gain.................................. 127,872,648 162,541,037 16,141 17,078,163 12,293,682
------------ ------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations...................... $132,739,258 $181,244,802 $5,024,503 $18,553,649 $20,070,663
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
51
<PAGE>
STATEMENT OF OPERATIONS (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>
INVESTMENT INCOME:
Dividends................................ $ 460,543 $ -- $70,639 $47,815 $ 98,551 $ 276,333
Interest................................. 463,257 330,826 179,681 140,789 57,248 199,468
------------ ----------- ----------- ----------- ----------- -----------
923,800 330,826 250,320 188,604 155,799 475,801
Less foreign tax expense................. -- (2,775) -- (713) -- --
------------ ----------- ----------- ----------- ----------- -----------
Total investment income............ 923,800 328,051 250,320 187,891 155,799 475,801
EXPENSES:
Management fees.......................... 638,386 19,237 49,640 40,824 36,274 224,261
Custodian fees........................... 9,718 9,224 13,108 9,216 5,337 5,651
Transfer/maintenance fees................ 2,150 525 864 661 740 1,638
Administration fees...................... 38,303 18,585 19,734 19,337 1,632 13,456
Directors' fees.......................... 2,956 30 154 30 30 1,199
Professional fees........................ 2,496 2,033 5,203 3,046 2,579 1,092
Reports to shareholders.................. 13,425 568 1,270 996 826 5,556
Registration fees........................ 174 1,452 1,460 1,460 1,460 78
Other expenses........................... 5,650 839 2,808 150 134 2,838
Interest................................. -- -- 482 -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Total expenses....................... 713,258 52,493 94,723 75,720 49,012 255,769
------------ ----------- ----------- ----------- ----------- -----------
Less:
Reimbursement of expenses.......... -- (10,260) -- -- -- --
Earnings credits................... (7,599) -- -- -- -- (4,053)
------------ ----------- ----------- ----------- ----------- -----------
Net expenses........................... 705,659 42,233 94,723 75,720 49,012 251,716
------------ ----------- ----------- ----------- ----------- -----------
Net investment income ............... 218,141 285,818 155,597 112,171 106,787 224,085
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the period on:
Investments............................ 11,201,462 26,652 153,135 22,671 5,739 1,728,460
Foreign currency transactions.......... -- (43,375) (6,777) (3,668) -- --
Futures contracts...................... -- -- 161,411 -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)............. 11,201,462 (16,723) 307,769 19,003 5,739 1,728,460
Net change in unrealized appreciation (depreciation)
during the period on:
Investments............................ 3,419,768 84,460 33,906 385,865 1,006,122 5,304,983
Translation of assets and liabilities
in foreign currencies................ -- (99) 113 (381) -- --
Futures contracts...................... -- -- 76,555 -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Net unrealized appreciation ......... 3,419,768 84,361 110,574 385,484 1,006,122 5,304,983
------------ ----------- ----------- ----------- ----------- -----------
Net gain .......................... 14,621,230 67,638 418,343 404,487 1,011,861 7,033,443
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations..... $14,839,371 $353,456 $573,940 $516,658 $1,118,648 $7,257,528
============ =========== =========== =========== =========== ===========
</TABLE>
*Period June 1, 1995 (inception) through December 31, 1995.
See accompanying notes.
52
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
SERIES A SERIES B (MONEY (WORLDWIDE (HIGH GRADE
(GROWTH) (GROWTH-INCOME) 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.
53
<PAGE>
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.
54
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
SERIES C SERIES D
SERIES A SERIES B (MONEY (WORLDWIDE
(GROWTH) (GROWTH-INCOME) MARKET) EQUITY)
-------- --------------- ------- -------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income ............................ $ 3,594,852 $ 12,199,007 $ 4,088,336 $ 651,559
Net realized gain (loss).......................... 14,936,574 (10,039,494) -- 8,056,618
Unrealized depreciation during the year .......... (23,898,664) (19,893,458) (24,293) (6,906,319)
-------------- -------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ........................... (5,367,238) (17,733,945) 4,064,043 1,801,858
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. (6,345,955) (13,997,580) (2,285,848) (142,013)
Net realized gain .................................. (53,406,224) (34,582,256) -- --
-------------- -------------- ------------- -------------
Total distributions to shareholders ............ (59,752,179) (48,579,836) (2,285,848) (142,013)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ..................... 137,670,243 151,207,666 159,237,311 105,002,631
Dividends reinvested ............................. 59,752,179 48,579,836 2,285,848 142,013
Shares redeemed................................... (117,421,291) (121,918,064) (143,724,959) (58,023,788)
-------------- ------------- ------------- -------------
Net increase from capital share
transactions................................ 80,001,131 77,869,438 17,798,200 47,120,856
-------------- ------------- ------------- -------------
Total increase in net assets......... 14,881,714 11,555,657 19,576,395 48,780,701
NET ASSETS:
Beginning of year................................. 317,406,686 583,598,421 99,091,932 98,251,875
-------------- ------------- ------------- -------------
End of year ...................................... $332,288,400 $595,154,078 $118,668,327 $147,032,576
============== ============= ============= =============
Undistributed net investment income at end of year $3,449,740 $11,944,189 $4,039,191 $ --
============== ============= ============= =============
(a) Shares issued and redeemed
Shares sold.................................. 7,557,600 5,322,055 13,052,239 20,369,289
Dividends reinvested......................... 3,645,204 1,784,711 188,835 26,669
Shares redeemed ............................. (6,452,290) (4,309,917) (11,766,086) (11,298,899)
-------------- ------------- ------------- -------------
Net increase............................. 4,750,514 2,796,849 1,474,988 9,097,059
============== ============= ============= =============
</TABLE>
See accompanying notes.
55
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
SERIES E SERIES J SERIES S
(HIGH GRADE (EMERGING (SOCIAL
INCOME) GROWTH) AWARENESS)
------- ------- ---------
<S> <C> <C> <C>
DECREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss) ........................... $ 7,549,504 $ (72,234) $ 168,168
Net realized loss....................................... (13,092,689) (5,682,556) (605,968)
Unrealized appreciation (depreciation) during the year.. (3,021,227) 4,040,585 (373,839)
------------ ------------- ------------
Net decrease in net assets resulting
from operations ................................. (8,564,412) (1,714,205) (811,639)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................... (6,132,050) -- (36,291)
Net realized gain on sale of investments................ (5,483,296) (38,061) (335,692)
------------ ------------- ------------
Total distribution to shareholders.................... (11,615,346) (38,061) (371,983)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares ........................... 73,273,613 59,569,183 10,619,583
Dividends reinvested ................................... 11,615,346 38,061 371,983
Shares redeemed......................................... (70,531,168) (23,011,638) (4,758,892)
------------ ------------- -------------
Net increase from capital share transactions......... 14,357,791 36,595,606 6,232,674
------------ ------------- -------------
Total increase (decrease) in net assets............ (5,821,967) 34,843,340 5,049,052
NET ASSETS:
Beginning of year....................................... 112,900,122 42,096,317 19,490,160
------------ ------------- -------------
End of year ............................................ $107,078,155 $ 76,939,657 $24,539,912
============ ============= =============
Undistributed net investment income at end of year..... $7,450,084 $-- $147,269
============ ============= =============
(a) Shares issued and redeemed
Shares sold....................................... 5,794,969 4,497,042 801,009
Dividends reinvested.............................. 1,006,267 2,848 28,559
Shares redeemed .................................. (5,695,284) (1,746,406) (360,752)
------------ ------------- -------------
Net increase.................................... 1,105,952 2,753,484 468,816
============ ============= =============
</TABLE>
See accompanying notes.
56
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
RATIO OF
FISCAL NET ASSET NET NET GAIN DIVIDENDS DISTRIBUTIONS NET ASSET NET ASSETS RATIO OF NET INCOME
PERIOD VALUE INVESTMENT (LOSS) TOTAL FROM (FROM NET (FROM VALUE END OF EXPENSES (LOSS) PORTFOLIO
ENDED BEGINNING INCOME (REALIZED& INVESTMENT INVESTMENT CAPITAL TOTAL END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER
DEC. 31 OF PERIOD (LOSS) UNREALIZED)OPERATIONS INCOME) GAINS)DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS)NET ASSETS NET ASSETS RATE
SERIES A (GROWTH)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 $12.90 $0.29 $4.34 $4.63 $(0.27) $ --- $(0.27) $17.26 36.1% $235,115 0.87% 1.97% 95%
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%
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%
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%
1995(g) 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%
SERIES B (GROWTH-INCOME)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 $20.21 $0.58 $6.953 $7.533 $(0.66) $(0.233) $(0.893) $26.85 37.7% $348,969 0.86% 3.39% 62%
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%
1993 27.76 0.64 2.009 2.649 (0.679) --- (0.679) 29.73 9.6% 583,599 0.86% 2.63% 95%
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%
1995(g) 26.54 0.79 7.16 7.95 (0.540) --- (0.540) 33.95 30.1% 795,113 0.83% 2.70% 94%
SERIES C (MONEY MARKET)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991(a) $12.74 $0.69 $0.01 $0.70 $(0.92) $ --- $(0.92) $12.52 5.6% $86,610 0.61% 5.42% ---
1992 12.52 0.43 (0.03) 0.40 (0.71) --- (0.71) 12.21 3.2% 87,246 0.61% 3.19% ---
1993 12.21 0.29 0.027 0.317 (0.437) --- (0.437) 12.09 2.6% 99,092 0.61% 2.65% ---
1994 12.09 0.41 0.035 0.445 (0.265) --- (0.265) 12.27 3.7% 118,668 0.61% 3.70% ---
1995(g) 12.27 0.74 (0.085) 0.655 (0.585) --- (0.585) 12.34 5.4% 105,436 0.60% 5.27% ---
SERIES D (WORLDWIDE EQUITY)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991(a)(b) $3.97 $0.15 $0.34 $0.49 $(0.55) $ --- $(0.55) $3.91 12.7% $11,688 1.58% 3.95% 113%
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%
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%
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%
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%
SERIES E (HIGH GRADE INCOME)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 $11.67 $0.76 $1.17 $1.93 $(0.78) $ --- $(0.78) $12.82 17.0% $63,602 0.86% 8.24% 24%
1992 12.82 0.78 0.168 0.948 (0.748) --- (0.748) 13.02 7.4% 81,440 0.86% 7.41% 76%
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%
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%
1995(g) 11.52 0.74 1.36 2.10 (0.76) --- (0.76) 12.86 18.6% 125,652 0.85% 6.60% 180%
</TABLE>
57
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
NET GAIN
FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS
PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM
ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF
DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
SERIES J (EMERGING GROWTH)
1992(c) $10.00 $0.01 $2.46 $2.47 $ --- $ --- $ ---
1993 12.47 (0.01) 1.711 1.701 (0.001) --- ---
1994 14.17 (0.01) (0.713) (0.723) --- (0.007) ---
1995(g) 13.44 0.04 2.58 2.62 --- --- ---
<TABLE>
<CAPTION>
RATIO OF NET
FISCAL NET ASSETS RATIO OF INCOME
PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO
ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE
SERIES J (EMERGING GROWTH) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
1992(c) $ --- $12.47 24.7% $ 7,113 1.06% 0.22% 4%
1993 (0.001) 14.17 13.6% 42,096 0.91% (0.14%) 117%
1994 (0.007) 13.44 (5.1%) 76,940 0.88% (0.11%) 91%
1995(g) --- 16.06 19.5% 93,379 0.84% 0.26% 202%
</TABLE>
NET GAIN
FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS
PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM
ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF
DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
SERIES K (GLOBAL AGGRESSIVE)
1995(a)(e)(f)$10.00 $ 0.54 $ 0.22 $ 0.76 $(0.466) $(0.044) $(0.03)
<TABLE>
<CAPTION>
RATIO OF NET
FISCAL NET ASSETS RATIO OF INCOME
PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO
ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE
SERIES K (GLOBAL AGGRESSIVE) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
1995(a)(e)$(0.540) $ 10.22 7.6% $ 5,678 1.63% 11.03% 127%
</TABLE>
NET GAIN
FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS
PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM
ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF
DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
SERIES M (SPECIALIZED ASSET ALLOCATION)
1995(a)(e)$10.00 $0.169 $0.541 $0.71 $ --- $ --- $ ---
<TABLE>
<CAPTION>
RATIO OF NET
FISCAL NET ASSETS RATIO OF INCOME
PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO
ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE
SERIES M (SPECIALIZED ASSET ALLOCATION) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
1995(a)(e)$ --- $10.71 7.1% $15,976 1.94% 3.2% 181%
</TABLE>
NET GAIN
FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS
PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM
ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF
DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
SERIES N (MANAGED ASSET ALLOCATION)
1995(a)(e)$10.00 $0.156 $0.574 $0.73 $ --- $ --- $ ---
<TABLE>
<CAPTION>
RATIO OF NET
FISCAL NET ASSETS RATIO OF INCOME
PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO
ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE
SERIES N (MANAGED ASSET ALLOCATION) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
1995(a)(e)$ --- $10.73 7.3% $10,580 1.90% 2.8% 26%
</TABLE>
NET GAIN
FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS
PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM
ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF
DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
SERIES O (EQUITY INCOME)
1995(a)(e)$10.00 $0.166 $1.534 $1.70 $ --- $ --- $ ---
<TABLE>
<CAPTION>
RATIO OF NET
FISCAL NET ASSETS RATIO OF INCOME
PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO
ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE
SERIES O (EQUITY INCOME) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
1995(a)(e)$ --- $11.70 17.0% $13,528 1.40% 3.0% 3%
</TABLE>
NET GAIN
FISCAL NET ASSET NET (LOSS) ON DIVIDENDS DISTRIBUTIONS
PERIOD VALUE INVESTMENT SECURITIES TOTAL FROM (FROM NET (FROM
ENDED BEGINNING INCOME (REALIZED & INVESTMENT INVESTMENT CAPITAL RETURN OF
DEC. 31 OF PERIOD (LOSS) UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
SERIES S (SOCIAL AWARENESS)
1991(c) $10.00 $0.05 $0.50 $0.55 $ --- $ --- $ ---
1992(a) 10.55 0.03 1.691 1.721 (0.021) --- ---
1993 12.25 0.02 1.432 1.452 (0.012) --- ---
1994 13.69 0.08 (0.595) (0.515) (0.02) (0.185) ---
1995(g) 12.97 0.09 3.507 3.597 (0.077) --- ---
<TABLE>
<CAPTION>
RATIO OF NET
FISCAL NET ASSETS RATIO OF INCOME
PERIOD NET ASSET END OF EXPENSES TO (LOSS) TO PORTFOLIO
ENDED TOTAL VALUE END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(D)(THOUSANDS) ASSETS ASSETS RATE
SERIES S (SOCIAL AWARENESS) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
1991(c) $ --- $10.55 5.5% $ 2,711 1.00% 1.49% 162%
1992(a) (0.021) 12.25 16.4% 9,653 0.92% 0.24% 110%
1993 (0.012) 13.69 11.9% 19,490 0.90% 0.23% 105%
1994 (0.205) 12.97 (3.7%) 24,539 0.90% 0.75% 67%
1995(g) (0.077) 16.49 27.7% 36,830 0.86% 0.75% 122%
</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) Series J and Series S were initially capitalized on October 1, 1992 and
April 23, 1991, respectively, with net asset values of $10.00 per share.
Percentage amounts for the period have been annualized, except for total
return.
(d) Total return information does not take into account any charges paid at the
time of purchase.
(e) 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.
(f) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been 2.03% for Series K
(g) Expense ratios were calculated without the reduction for custodian fees
earnings credits. Expense ratios with such reductions would have been as
follows:
1995
----
Series A 0.83%
Series B 0.83%
Series C 0.60%
Series E 0.85%
Series J 0.83%
Series S 0.84%
58
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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.
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 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 mean between
the bid and the asked prices. If a mean cannot be determined, the securities are
valued at the best available current 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 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
that securities purchased with 60 days or less to maturity are valued at
amortized cost.
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 Series. Foreign
investments may also subject Series D, K, M and N 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 does 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 in foreign exchange rates on investments 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 and N 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 - Series M utilizes 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 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. In the event of redemptions,
Series M may pay departing shareholders from cash balances and reduce futures
positions accordingly. 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 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.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
E. 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.
F. 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.
G. 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.
H. 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 expense disclosed
in the Statement of Operations does 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 (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. 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 net 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, 1995, 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. As a result, SMC reimbursed Series K
$10,260.
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) $30,000 in the year
ending April 29, 1996, (ii) $45,000 in the year ending April 29, 1997, and (iii)
$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.
3. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) for income tax
purposes at December 31, 1995, for all securities and foreign currency holdings
(including foreign currency receivables and payables) were as follows:
SERIES B SERIES C SERIES D SERIES E
SERIES A (Growth (Money (Worldwide (High Grade
(Growth) Income) Market) Equity) Income)
-------- ------- ------- ------- -------
Aggregate
gross unrealized
appreciation...$119,999,053 $145,071,364 $5,540 $12,077,884 $6,920,235
Aggregate
gross unrealized
depreciation.. (889,074) (1,122,308) (17,287) (4,360,638) (17,327)
------------ ------------ --------- ----------- ----------
Net unrealized
appreciation
(depreciation).$119,109,979 $143,949,056 $(11,747) $7,717,246 $6,902,908
============ ============ ========= ========== ==========
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
------- ----------- ----------- ----------- ------- ---------
Aggregate
gross unrealized
appreciation...$14,009,058 $116,398 $535,407 $512,236 $1,013,116 $8,073,962
Aggregate
gross unrealized
depreciation...(2,397,322) (32,037) (424,833) (126,752) (6,994) (430,433)
----------- -------- --------- --------- ---------- ----------
Net unrealized
appreciation
(depreciation).$11,611,736 $84,361 $110,574 $385,484 $1,006,122 $7,643,529
=========== ======== ========= ========= ========== ==========
60
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
Realized gains and losses are determined on an identified cost basis for
federal income tax purposes. Series A and D hereby designate $14,936,574 and
$1,767,208, respectively as capital gains dividends attributable to the year
ended December 31, 1995, for the purpose of the dividends paid deduction on the
Series' federal income tax return. At December 31, 1995, Series E has a capital
loss carryforward of $10,048,772 which is available to offset future taxable
gains and expires in 2002.
4. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1995, (excluding
overnight investments and short-term debt securities) are as follows:
<TABLE>
<CAPTION>
SERIES M SERIES N
SERIES B SERIES D SERIES E SERIES J SERIES K (Specialized (Managed SERIES O SERIES S
SERIES A (Growth (Worldwide (High Grade (Emerging (Global Asset Asset (Equity (Social
(Growth) Income) Equity) Income) Growth) Aggressive)Allocation) Allocation) Income) Awareness)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases$393,830,712 $628,045,592 $288,646,471 $212,141,293 $161,676,352 $6,866,260 $23,169,751 $11,547,147 $10,251,212 $37,612,078
Proceeds
from
sales $335,823,381 $606,571,375 $255,501,436 $204,716,876 $155,644,178 $2,667,810 $10,950,767 $ 2,468,781 $ 103,432 $32,358,868
</TABLE>
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At December 31, 1995, Series D had the following open forward foreign
exchange contracts to sell currency (excluding foreign currency contracts used
for purchase and sale settlements):
<TABLE>
<CAPTION>
UNREALIZED GAIN
CURRENCY SETTLEMENT DATE CONTRACT AMOUNT CONTRACT RATE CURRENT RATE AT 12-31-95
-------- --------------- --------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Deutsche Mark 05/06/96 $ 3,525,203 1.4064 1.4287 $ 55,023
Japanese Yen 01/31/96 591,547 86.1500 102.8915 96,251
Japanese Yen 02/14/96 3,168,826 90.4200 102.6844 378,478
Japanese Yen 02/20/96 3,390,166 94.2900 102.5956 274,450
Japanese Yen 02/20/96 847,587 95.3600 102.5956 59,776
Japanese Yen 02/20/96 4,129,226 95.3300 102.5956 292,423
Japanese Yen 03/06/96 10,191,843 98.3200 102.3453 400,851
Japanese Yen 06/28/96 8,468,122 99.8450 100.8701 86,058
---------- ----------
$34,312,520 $1,643,310
========== ==========
</TABLE>
6. FEDERAL TAX STATUS OF DIVIDENDS
The income dividends paid by the Funds are taxable as ordinary income on
the shareholder's tax return. The portion of ordinary income of dividends
(including net short-term capital gains) attributed to fiscal year ended
December 31, 1995, that qualified for the dividends received deduction for
corporate shareholders was 28%, 29%, 0%, 11%, 0%, 100%, 0%, 7%, 31%, 8% and
100%, of the amount taxable as ordinary income for Series A, B, C, D, E, J, K,
M, N, O and S, respectively, in accordance with the provisions of the Internal
Revenue Code.
61
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE CONTRACT OWNERS AND BOARD OF DIRECTORS
SBL FUND
We have audited the accompanying balance sheet and statement of net assets of
SBL Fund (comprised of the Series A, B, C, D, E, J, K, M, N, O and S portfolios)
(the Fund) as of December 31, 1995, and the related statements of operations for
the year then ended, statements of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the five
years in the period then ended of the Series A, B, C, D, E, J and S portfolios
and the related statements of operations and changes in net assets and financial
highlights for the period from June 1, 1995 (commencement of operations) to
December 31, 1995 of the Series K, M, N and O. These financial statements and
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 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, 1995, 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 comprising SBL Fund at December 31, 1995, and the
results of their operations, changes in their net assets and the financial
highlights for the periods indicated above in conformity with generally accepted
accounting principles.
Kansas City, Missouri
January 26, 1996
62
<PAGE>
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
Harold G. Worswick
OFFICERS
- --------
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Terry Milberger, Vice President
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Greg A. Hamilton, Assistant Vice President
Cindy L. Shields, Assistant Vice President
Amy J. Lee, Secretary
Brenda M. Luthi, 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}
700 SW Harrison St. BULK RATE
Topeka, KS 66636-0001 U.S. POSTAGE PAID
(913) 295-3112 TOPEKA, KS
(800) 888-2461 PERMIT NO. 385
<PAGE>
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, 1995, and the unaudited financial
statements of Series P for the period August 5, 1996
(date of inception) to December 31, 1996, are
incorporated by reference in Part B of this
Registration Statement.
b. Exhibits:
(1) Articles of Incorporation.(c)
(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) Quantitative Research Agreement -- Meridian(a)
(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)
(c) Analytical Research Agreement--Templeton(b)
(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. 27 to Registration Statement
No. 2-59353 (April 29, 1996).
(c) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 29 to Registration Statement
No. 2-59353 (August 5, 1996).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF JANUARY 31, 1997
(1) (2)
NUMBER OF RECORD
TITLE OF CLASS SHAREHOLDERS
Series A 24
Series B 24
Series C 29
Series D 21
Series E 23
Series S 17
Series J 14
Series K 16
Series M 14
Series N 14
Series O 14
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 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
<PAGE>
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 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
<PAGE>
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.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
James R. Schmank President (Interim), Treasurer, Chief Fiscal Officer and
Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Vice President and Interim Chief Investment Officer
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
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
Jeffrey B. Pantages President, Chief Investment Officer and Director
Security Management Company (until June 1996)
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 and Chief Investment Officer
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
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
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
James W. Lammers Senior Vice President and Director
Security Management Company, LLC
Security Distributors, Inc.
Director (until November 1996)
Security Management Company
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,
Topeka, Kansas
Metropolitan Ballet, Topeka, Kansas
James L. Woods Senior Vice President
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 Vice President
Security Management Company, LLC
Vice President
Security Equity Fund, SBL Fund
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
Jane A. Tedder Vice President and Senior Portfolio Manager
Security Management Company, LLC
Vice President
Security Income Fund, SBL Fund,
Security Equity Fund
Gregory A. Hamilton Second Vice President
Security Management Company, LLC
Assistant Vice President
Security Income Fund, SBL Fund,
Security Equity Fund,
Security Tax-Exempt Fund
Director
Downtown Topeka, Inc., Topeka, Kansas
Trustee
Kansas State University Foundation,
Manhattan, Kansas
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
Director
Everywoman's Resource Center
1002 SW Garfield Avenue
Topeka, Kansas
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.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
Steven M. Bowser Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Thomas A. Swank Second Vice President and Portfolio Manager
Security Management Company, LLC
Second 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
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Ultra Fund, SBL Fund
Larry L. Valencia Assistant Vice President and Senior Research Analyst
Security Management Company, LLC
James P. Schier Assistant Vice President and Senior Research Analyst
Security Management Company, LLC
Martha L. Sutherland Second Vice President
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
*Located at 700 Harrison, Topeka, Kansas 66636-0001
<PAGE>
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.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
Robert M. DeMichele President, Chief Executive Officer and Director
Lexington Global Asset Managers, Inc.
Chairman and Chief Executive Officer
Lexington Management Corporation, Lexington Funds
Distributor, Inc.
Director
Chartwell Recorporation, Navigator's Insurance Group,
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
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
Stuart S. Richardson Chairman of the Board
Lexington Global Asset Managers, Inc.
Director
Lexington Management Corporation
*Located at P.O. Box 1515, Saddle Brook, New Jersey 07663.
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 adviser to no investment
companies other than Registrant.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
- ---------------- ---------------------------------------------------------
Maria Fiorini Ramirez Chief Executive Officer and President
MFR Advisors, Inc.
Director
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.
*Located at One World Financial Center,
200 Liberty Street, New York,New York 10281
<PAGE>
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.
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.
<PAGE>
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) Security Equity Fund
Security Ultra Fund
Security Income Fund
Security Growth & Income Fund
Security Tax-Exempt Fund
Variflex Variable Annuity Account
Varilife Variable Annuity Account
Parkstone Variable Annuity Account
Security Varilife Separate Account
Variflex LS Variable Annuity Account
(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, 700 Harrison, Topeka, Kansas 66636-0001. 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 29th day of January, 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: January 29, 1997
---------------------------------
WILLIS A. ANTON, JR. Director
- ---------------------------------
Willis A. Anton, Jr.
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>
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) None
(5) (a) Investment Advisory Contract
(b) None
(c) None
(d) None
(e) None
(f) None
(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
(c) 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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
CUSTODY AGREEMENT
DATED JANUARY 1, 1995
BETWEEN
UMB BANK, N.A.
AND
SECURITY MANAGEMENT COMPANY
FAMILY OF FUNDS
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. APPOINTMENT OF CUSTODIAN 1
2. DEFINITIONS 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. DELIVERY OF CORPORATE DOCUMENTS 2
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
(a) Safekeeping 3
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 6
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 8
(i) Segregated Accounts 9
(j) Depository Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 14
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Other Disbursements 15
<PAGE>
5. SUBCUSTODIANS 15
(a) Domestic Subcustodians 15
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 17
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. STANDARD OF CARE 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Armed Conflict, Sovereign Risk, Etc. 18
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 19
(f) Instructions Appearing to be Genuine 19
(g) Exceptions from Liability 19
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 20
(a) Domestic Subcustodians 20
(b) Liability for Acts and Omissions of Foreign Subcustodians 20
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. INDEMNIFICATION 21
(a) Indemnification by Fund 21
(b) Indemnification by Custodian 21
9. ADVANCES 21
10. LIENS 22
11. COMPENSATION 22
12. POWERS OF ATTORNEY 22
13. TERMINATION AND ASSIGNMENT 23
14. ADDITIONAL FUNDS 23
15. NOTICES 23
16. MISCELLANEOUS 24
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, between UMB Bank, n.a.,
a national banking association with its principal place of business located at
Kansas City, Missouri (hereinafter "Custodian"), and each of the Funds which
have executed the signature page hereof together with such additional Funds
which shall be made parties to this Agreement by the execution of a separate
signature page hereto (individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for the custody
of Assets (as hereinafter defined) owned by such Fund which Assets are to be
held in such accounts as such Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to
time deposited with the Custodian. Custodian accepts such appointment as a
custodian and agrees to perform the duties and responsibilities of
Custodian as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other
instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex, a
written (including, without limitation, facsimile transmission)
request, direction, instruction or
1
<PAGE>
certification signed or initialed by or on behalf of a Fund by an
Authorized Person; (ii) a telephonic or other oral communication
from a person the Custodian reasonably believes to be an Authorized
Person; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including,
without limitation, computers) on behalf of a Fund. Instructions in
the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set
forth in clause (i) above, but the lack of such confirmation shall
in no way affect any action taken by the Custodian in reliance upon
such oral Instructions prior to the Custodian's receipt of such
confirmation. Each Fund authorizes the Custodian to record any and
all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any
Assistant Treasurer of a Fund or any other person designated by the
Treasurer of such Fund in writing, which countersignature or
confirmation shall be included on the same instrument containing
the Instructions or on a separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission
or telex number agreed upon from time to time by the Custodian and
each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been
taken.
Each Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
2
<PAGE>
Each Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or
Trustees and all amendments or supplements thereto, properly certified or
authenticated, designating certain officers or employees of each such Fund
who will have continuing authority to certify to the Custodian: (a) the
names, titles, signatures and scope of authority of all persons authorized
to give Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of each Fund, and (b) the names, titles
and signatures of those persons authorized to countersign or confirm
Special Instructions on behalf of each Fund (in both cases collectively,
the "Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by the
Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the
Custodian of a similar Resolution or certificate to the contrary. Upon
delivery of a certificate which deletes or does not include the name(s) of
a person previously authorized to give Instructions or to countersign or
confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or
confirm Special Instructions. Unless the certificate specifically requires
that the approval of anyone else will first have been obtained, the
Custodian will be under no obligation to inquire into the right of the
person giving such Instructions or Special Instructions to do so.
Notwithstanding any of the foregoing, no Instructions or Special
Instructions received by the Custodian from a Fund will be deemed to
authorize or permit any director, trustee, officer, employee, or agent of
such Fund to withdraw any of the Assets of such Fund upon the mere receipt
of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform
the powers and duties hereinafter set forth in this Section 4. For purposes
of this Section 4 all references to powers and duties of the "Custodian"
shall also refer to any Domestic Subcustodian appointed pursuant to Section
5(a).
(a) SAFEKEEPING.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by such
Fund and not delivered to the Custodian.
3
<PAGE>
(b) MANNER OF HOLDING SECURITIES.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates
or other instruments representing such Securities in
registered or bearer form; or (ii) in book-entry form by a
Securities System (as hereinafter defined) in accordance with
the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the
same in the name of the appropriate Fund or its nominee, or in
the name of the Custodian or its nominee, for whose actions
such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian
shall hold such Securities in street certificate form, so
called, with or without any indication of fiduciary capacity.
However, unless it receives Instructions to the contrary, the
Custodian will register all such portfolio Securities in the
name of the Custodian's authorized nominee. All such
Securities shall be held in an account of the Custodian
containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the
records of the Custodian shall indicate at all times the Fund
or other customer for which such Securities are held in such
accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a)
The Depository Trust Company; (b) The Participants Trust
Company; and (c) any book-entry system as provided in (i)
Subpart 0 of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76,
31 CFR 350.2, or (iii) the book-entry regulations of federal
agencies substantially in the form of 31 CFR 306.115. Upon the
receipt of Special Instructions, the Custodian may deposit
and/or maintain domestic Securities owned by a Fund in any
other domestic clearing agency registered with the Securities
and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be
authorized by the SEC to serve in the capacity of depository
or clearing agent for the Securities or other assets of
investment companies) which acts as a Securities depository.
Each of the foregoing shall be referred to in this Agreement
as a "Securities System", and all such Securities Systems
shall be listed on the attached Appendix A. Use of a
Securities System shall be in accordance with applicable
Federal Reserve Board and SEC rules and regulations, if any,
and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are
also qualified to act as custodians for investment
companies.
4
<PAGE>
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such
Securities are represented in an account ("Account") of
the Custodian in the Securities System that includes
only assets held by the Custodian as a fiduciary,
custodian or otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or
more Funds which are maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for
the account of a Fund only upon (a) receipt of advice
from the Securities System that such Securities have
been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and
(b) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the
account of such Fund. The Custodian shall transfer
Securities sold for the account of a Fund only upon (a)
receipt of advice from the Securities System that
payment for such Securities has been transferred to the
Account of the Custodian in accordance with the rules
of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such
transfer and payment for the account of such Fund.
Copies of all advices from the Securities System
relating to transfers of Securities for the account of
a Fund shall be maintained for such Fund by the
Custodian. The Custodian shall deliver to a Fund on the
next succeeding business day daily transaction reports
which shall include each day's transactions in the
Securities System for the account of such Fund. Such
transaction reports shall be delivered to such Fund or
any agent designated by such Fund pursuant to
Instructions, by computer or in such other manner as
such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained
by the Custodian or any Subcustodian with respect to a
Securities System's accounting system, internal
accounting control and procedures for safeguarding
Securities deposited in the Securities System.
(vi) Upon receipt of Special Instructions, the Custodian
shall terminate the use of any Securities System on
behalf of a Fund as promptly as practicable and shall
take all actions reasonably practicable to safeguard
the Securities of such Fund maintained with such
Securities System.
5
<PAGE>
(c) FREE DELIVERY OF ASSETS.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of
Special Instructions, will undertake to make free delivery of
Assets, provided such Assets are on hand and available, in
connection with a Fund's transactions and to transfer such Assets
to such broker, dealer, Subcustodian, bank, agent, Securities
System or otherwise as specified in such Special Instructions.
(d) EXCHANGE OF SECURITIES.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid
in connection with any reorganization, recapitalization, merger,
consolidation, or conversion of convertible Securities, and will
deposit any such Securities in accordance with the terms of any
reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in
definitive form, to surrender Securities for transfer into a name
or nominee name as permitted in Section 4(b)(2), to effect an
exchange of shares in a stock split or when the par value of the
stock is changed, to sell any fractional shares, and, upon
receiving payment therefor, to surrender bonds or other Securities
held by it at maturity or call.
(e) PURCHASE OF ASSETS.
(1) SECURITIES PURCHASES. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay
for such Securities out of monies held for a Fund's account
for which the purchase was made, but only insofar as monies
are available therein for such purpose, and receive the
portfolio Securities so purchased. Unless the Custodian has
received Special Instructions to the contrary, such payment
will be made only upon receipt of Securities by the Custodian,
a clearing corporation of a national Securities exchange of
which the Custodian is a member, or a Securities System in
accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, upon receipt of Instructions:
(i) in connection with a repurchase agreement, the Custodian
may release funds to a Securities System prior to the receipt
of advice from the Securities System that the Securities
underlying such repurchase agreement have been transferred by
book-entry into the Account maintained with such Securities
System by the Custodian, provided that the Custodian's
instructions to the Securities System require that the
Securities System may make payment of such funds to the other
party to the repurchase agreement only upon transfer by
book-entry of the Securities underlying the repurchase
agreement into such Account; (ii) in the case of Interest
Bearing Deposits, currency deposits, and
6
<PAGE>
other deposits, foreign exchange transactions, futures
contracts or options, pursuant to Sections 4(g), 4(h), 4(1),
and 4(m) hereof, the Custodian may make payment therefor
before receipt of an advice of transaction; and (iii) in the
case of Securities as to which payment for the Security and
receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the
instrument representing the Security expected to take place in
different locations or through separate parties, such as
commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may
make payment for such Securities prior to delivery thereof in
accordance with such generally accepted trade practice or the
terms of the instrument representing such Security.
(2) OTHER ASSETS PURCHASED. Upon receipt of Instructions and
except as otherwise provided herein, the Custodian shall pay
for and receive other Assets for the account of a Fund as
provided in Instructions.
(f) SALES OF ASSETS.
(1) SECURITIES SOLD. In accordance with Instructions, the
Custodian will, with respect to a sale, deliver or cause to be
delivered the Securities thus designated as sold to the broker
or other person specified in the Instructions relating to such
sale. Unless the Custodian has received Special Instructions
to the contrary, such delivery shall be made only upon receipt
of payment therefor in the form of: (a) cash, certified check,
bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing
corporation of a national Securities exchange of which the
Custodian is a member; or (c) credit to the Account of the
Custodian with a Securities System, in accordance with the
provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the
Custodian of a receipt for such Securities, provided that the
Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such Securities
by the broker or its clearing agent, and provided further that
the Custodian shall not be responsible for the selection of or
the failure or inability to perform of such broker or its
clearing agent or for any related loss arising from delivery
or custody of such Securities prior to receiving payment
therefor.
(2) OTHER ASSETS SOLD. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment
for and deliver other Assets for the account of a Fund as
provided in Instructions.
7
<PAGE>
(g) OPTIONS.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall:
(a) receive and retain confirmations or other documents, if
any, evidencing the purchase or writing of the option by a
Fund; (b) if the transaction involves the sale of a covered
call option, deposit and maintain in a segregated account the
Securities (either physically or by book-entry in a Securities
System) subject to the covered call option written on behalf
of such Fund; and (c) pay, release and/or transfer such
Securities, cash or other Assets in accordance with any
notices or other communications evidencing the expiration,
termination or exercise of such options which are furnished to
the Custodian by the Options Clearing Corporation (the "OCC"),
the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for
handling such option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the
Custodian, the appropriate Fund and the broker-dealer shall
enter into an agreement to comply with the rules of the OCC or
of any registered national securities exchange or similar
organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the
writing of the option; (b) deposit and maintain in a
segregated account, Securities (either physically or by
book-entry in a Securities System), cash and/or other Assets;
and (c) pay, release and/or transfer such Securities, cash or
other Assets in accordance with any such agreement and with
any notices or other communications evidencing the expiration,
termination or exercise of such option which are furnished to
the Custodian by the OCC, the securities or options exchanges
on which such options were traded, or such other organization
as may be responsible for handling such option transactions.
The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets
held in any segregated account established in compliance with
applicable margin maintenance requirements and the performance
of other terms of any option contract.
(h) FUTURES CONTRACTS.
Upon receipt of Instructions, the Custodian shall enter into a
futures margin procedural agreement among the appropriate Fund, the
Custodian and the designated futures commission merchant (a
"Procedural Agreement"). Under the Procedural Agreement the
Custodian shall: (a) receive and retain confirmations, if any,
evidencing the purchase or sale of a futures contract or an option
on a futures contract by such Fund; (b) deposit and maintain in a
segregated account cash, Securities and/or other Assets designated
as initial, maintenance or variation
8
<PAGE>
"margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any
options on futures contracts written by such Fund, in accordance
with the provisions of any Procedural Agreement designed to comply
with the provisions of the Commodity Futures Trading Commission
and/or any commodity exchange or contract market (such as the
Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer
Assets into such margin accounts only in accordance with any such
Procedural Agreements. The appropriate Fund and such futures
commission merchant shall be responsible for determining the type
and amount of Assets held in the segregated account or paid to the
broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option
on a futures contract in accordance with its terms.
(i) SEGREGATED ACCOUNTS.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred
Assets of such Fund, including Securities maintained by the
Custodian in a Securities System pursuant to Paragraph (b)(3) of
this Section 4, said account or accounts to be maintained (i) for
the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for
the purpose of compliance by such Fund with the procedures required
by the SEC Investment Company Act Release Number 10666 or any
subsequent release or releases relating to the maintenance of
segregated accounts by registered investment companies, or (iii)
for such other purposes as may be set forth, from time to time, in
Special Instructions. The Custodian shall not be responsible for
the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance
by the Fund with required procedures noted in (ii) above.
(j) DEPOSITORY RECEIPTS.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered Securities to the depositary used for such
Securities by an issuer of American Depositary Receipts or
International Depositary Receipts (hereinafter referred to,
collectively, as "ADRs"), against a written receipt therefor
adequately describing such Securities and written evidence
satisfactory to the organization surrendering the same that the
depositary has acknowledged receipt of instructions to issue ADRs
with respect to such Securities in the name of the Custodian or a
nominee of the Custodian, for delivery in accordance with such
instructions.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered ADRs to the issuer thereof, against a
written receipt therefor adequately describing the ADRs surrendered
and written evidence satisfactory to the organization surrendering
the same that the issuer of the ADRs has
9
<PAGE>
acknowledged receipt of instructions to cause its depository to
deliver the Securities underlying such ADRs in accordance with such
instructions.
(k) CORPORATE ACTIONS, PUT BONDS, CALLED BONDS, ETC.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer
or trustee thereof (or to the agent of such issuer or trustee) for
the purpose of exercise or sale, provided that the new Securities,
cash or other Assets, if any, acquired as a result of such actions
are to be delivered to the Custodian; and (b) deposit Securities
upon invitations for tenders thereof, provided that the
consideration for such Securities is to be paid or delivered to the
Custodian, or the tendered Securities are to be returned to the
Custodian.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary in Instructions, to comply with the terms
of all mandatory or compulsory exchanges, calls, tenders,
redemptions, or similar rights of security ownership, and shall
notify the appropriate Fund of such action in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance
of an act on the last permissible date of a period established by
any optional offer or on the last permissible date for the
performance of such act, the Fund shall hold the Bank harmless from
any adverse consequences in connection with acting upon or failing
to act upon such Instructions.
(l) INTEREST BEARING DEPOSITS.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred
to, collectively, as "Interest Bearing Deposits") for the account
of a Fund, the Custodian shall purchase such Interest Bearing
Deposits in the name of such Fund with such banks or trust
companies, including the Custodian, any Subcustodian or any
subsidiary or affiliate of the Custodian (hereinafter referred to
as "Banking Institutions"), and in such amounts as such Fund may
direct pursuant to Instructions. Such Interest Bearing Deposits may
be denominated in U.S. dollars or other currencies, as such Fund
may determine and direct pursuant to Instructions. The
responsibilities of the Custodian to a Fund for Interest Bearing
Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other
than those issued by the Custodian, (a) the Custodian shall be
responsible for the collection of income and the transmission of
cash to and from such accounts; and (b) the Custodian shall have no
duty with respect to the selection of the Banking Institution or
for the failure of such Banking Institution to pay upon demand.
10
<PAGE>
(m) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL.
(1) Upon receipt of Instructions, the Custodian shall settle
foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery on behalf of
and for the account of a Fund with such currency brokers or
Banking Institutions as such Fund may determine and direct
pursuant to Instructions. Each Fund accepts full
responsibility for its use of third party foreign exchange
brokers and for execution of said foreign exchange contracts
and understands that the Fund shall be responsible for any and
all costs and interest charges which may be incurred as a
result of the failure or delay of its third party broker to
deliver foreign exchange. The Custodian shall have no
responsibility with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or, so
long as the Custodian acts in accordance with Instructions,
for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained herein,
upon receipt of Instructions the Custodian may, in connection
with a foreign exchange contract, make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency prior
to receipt of confirmation of such foreign exchange contract
or confirmation that the countervalue currency completing such
contract has been delivered or received.
(n) PLEDGES OR LOANS OF SECURITIES.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to
the pledgees designated in such Instructions by way of pledge
or hypothecation to secure loans incurred by such Fund with
various lenders including but not limited to UMB Bank, n.a.;
provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except
that in cases where additional collateral is required to
secure existing borrowings, further Securities may be released
or delivered, or caused to be released or delivered for that
purpose upon receipt of Instructions. Upon receipt of
Instructions, the Custodian will pay, but only from funds
available for such purpose, any such loan upon re-delivery to
it of the Securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan. In lieu
of delivering collateral to a pledgee, the Custodian, on the
receipt of Instructions, shall transfer the pledged Securities
to a segregated account for the benefit of the pledgee.
11
<PAGE>
(2) Upon receipt of Special Instructions, and execution of a
separate Securities Lending Agreement, the Custodian will
release Securities held in custody to the borrower designated
in such Instructions and may, except as otherwise provided
below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case
of loans of Securities held by a Securities System that are
secured by cash collateral, the Custodian's instructions to
the Securities System shall require that the Securities System
deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such
borrowing. The Custodian shall have no responsibility or
liability for any loss arising from the delivery of Securities
prior to the receipt of collateral. Upon receipt of
Instructions and the loaned Securities, the Custodian will
release the collateral to the borrower.
(o) STOCK DIVIDENDS, RIGHTS, ETC.
The Custodian shall receive and collect all stock dividends,
rights, and other items of like nature and, upon receipt of
Instructions, take action with respect to the same as directed in
such Instructions.
(p) ROUTINE DEALINGS.
The Custodian will, in general, attend to all routine and
mechanical matters in accordance with industry standards in
connection with the sale, exchange, substitution, purchase,
transfer, or other dealings with Securities or other property of
each Fund except as may be otherwise provided in this Agreement or
directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from
the Assets for disbursements and out-of-pocket expenses incidental
to handling Securities or other similar items relating to its
duties under this Agreement, provided that all such payments shall
be accounted for to the appropriate Fund.
(q) COLLECTIONS.
The Custodian shall (a) collect amounts due and payable to each
Fund with respect to portfolio Securities and other Assets; (b)
promptly credit to the account of each Fund all income and other
payments relating to portfolio Securities and other Assets held by
the Custodian hereunder upon Custodian's receipt of such income or
payments or as otherwise agreed in writing by the Custodian and any
particular Fund; (c) promptly endorse and deliver any instruments
required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal,
state, local and foreign tax purposes in connection with receipt of
income or other payments with respect to portfolio Securities and
other Assets, or in connection with the transfer of such Securities
or other Assets; provided, however, that with respect to portfolio
Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use
its
12
<PAGE>
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.
13
<PAGE>
(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
14
<PAGE>
limitation, the Custodian's accounting system, internal accounting
control and procedures for safeguarding cash, Securities and other
Assets, including cash, Securities and other Assets deposited
and/or maintained in a Securities System or with a Subcustodian.
Such report shall be of sufficient scope and in sufficient detail
as may reasonably be required by such Fund and as may reasonably be
obtained by the Custodian.
(y) BILLS AND OTHER DISBURSEMENTS.
Upon receipt of Instructions, the Custodian shall pay, or cause to
be paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians,
Foreign Subcustodians, Special Subcustodians, or Interim Subcustodians (as
each are hereinafter defined) to act on behalf of any one or more Funds. A
Domestic Subcustodian, in accordance with the provisions of this Agreement,
may also appoint a Foreign Subcustodian, Special Subcustodian, or Interim
Subcustodian to act on behalf of any one or more Funds. For purposes of
this Agreement, all Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians and Interim Subcustodians shall be referred to collectively
as "Subcustodians".
(a) DOMESTIC SUBCUSTODIANS.
The Custodian may, at any time and from time to time, appoint any
bank as defined in Section 2(a)(5) of the 1940 Act or any trust
company or other entity, any of which meet the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and
regulations thereunder, to act for the Custodian on behalf of any
one or more Funds as a subcustodian for purposes of holding Assets
of such Fund(s) and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"). Each Fund
shall approve in writing the appointment of the proposed Domestic
Subcustodian; and the Custodian's appointment of any such Domestic
Subcustodian shall not be effective without such prior written
approval of the Fund(s). Each such duly approved Domestic
Subcustodian shall be listed on Appendix A attached hereto, as it
may be amended, from time to time.
(b) FOREIGN SUBCUSTODIANS.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other entity
meeting the requirements of an "eligible foreign custodian" under
Section 17(f) of the 1940 Act and the rules and regulations
thereunder to act for the Custodian on behalf of any one or more
Funds as a subcustodian or sub-subcustodian (if appointed by a
Domestic Subcustodian)
15
<PAGE>
for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United
States of America (hereinafter referred to as a "Foreign
Subcustodian" in the context of either a subcustodian or a
sub-subcustodian); provided that the Custodian shall have obtained
written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval
may be withheld in the sole discretion of such Board of Directors
or other governing body or entity) with respect to (i) the identity
of any proposed Foreign Subcustodian (including branch
designation), (ii) the country or countries in which, and the
securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through
which, the Custodian or any proposed Foreign Subcustodian is
authorized to hold Securities and other Assets of each such Fund,
and (iii) the form and terms of the subcustodian agreement to be
entered into with such proposed Foreign Subcustodian. Each such
duly approved Foreign Subcustodian and the countries where and the
Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed
on Appendix A attached hereto, as it may be amended, from time to
time. Each Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be
held in a country in which no Foreign Subcustodian is authorized to
act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate
arrangements with a proposed Foreign Subcustodian, including
obtaining approval as provided in this Section 5(b). In connection
with the appointment of any Foreign Subcustodian, the Custodian
shall, or shall cause the Domestic Subcustodian to, enter into a
subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not
consent to the amendment of, and shall cause any Domestic
Subcustodian not to consent to the amendment of, any agreement
entered into with a Foreign Subcustodian, which materially affects
any Fund's rights under such agreement, except upon prior written
approval of such Fund pursuant to Special Instructions.
(c) INTERIM SUBCUSTODIANS.
Notwithstanding the foregoing, in the event that a Fund shall
invest in an Asset to be held in a country in which no Foreign
Subcustodian is authorized to act, the Custodian shall notify such
Fund in writing by facsimile transmission or in such other manner
as such Fund and the Custodian shall agree in writing of the
unavailability of an approved Foreign Subcustodian in such country;
and upon the receipt of Special Instructions from such Fund, the
Custodian shall, or shall cause its Domestic Subcustodian to,
appoint or approve an entity (referred to herein as an "Interim
Subcustodian") designated in such Special Instructions to hold such
Security or other Asset.
16
<PAGE>
(d) SPECIAL SUBCUSTODIANS.
Upon receipt of Special Instructions, the Custodian shall on behalf
of a Fund, appoint one or more banks, trust companies or other
entities designated in such Special Instructions to act for the
Custodian on behalf of such Fund as a subcustodian for purposes of:
(i) effecting third-party repurchase transactions with banks,
brokers, dealers or other entities through the use of a common
custodian or subcustodian; (ii) providing depository and clearing
agency services with respect to certain variable rate demand note
Securities, (iii) providing depository and clearing agency services
with respect to dollar denominated Securities, and (iv) effecting
any other transactions designated by such Fund in such Special
Instructions. Each such designated subcustodian (hereinafter
referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time.
In connection with the appointment of any Special Subcustodian, the
Custodian shall enter into a subcustodian agreement with the
Special Subcustodian in form and substance approved by the
appropriate Fund in Special Instructions. The Custodian shall not
amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon
prior approval pursuant to Special Instructions.
(e) TERMINATION OF A SUBCUSTODIAN.
The Custodian may, at any time in its discretion upon notification
to the appropriate Fund(s), terminate any Subcustodian of such
Fund(s) in accordance with the termination provisions under the
applicable subcustodian agreement, and upon the receipt of Special
Instructions, the Custodian will terminate any Subcustodian in
accordance with the termination provisions under the applicable
subcustodian agreement.
(f) CERTIFICATION REGARDING FOREIGN SUBCUSTODIANS.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; (ii) the countries in which
and the Securities Depositories and Clearing Agencies through which
each such Foreign Subcustodian is then holding cash, Securities and
other Assets of such Fund; and (iii) such other information as may
be requested by such Fund, and as the Custodian shall be reasonably
able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) GENERAL STANDARD OF CARE.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund
resulting from the gross
17
<PAGE>
negligence or willful misfeasance of the Custodian; provided,
however, in no event shall the Custodian be liable for special,
indirect or consequential damages arising under or in connection
with this Agreement.
(b) ACTIONS PROHIBITED BY APPLICABLE LAW, EVENTS BEYOND CUSTODIAN'S
CONTROL, SOVEREIGN RISK, ETC.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities System,
Securities Depository or Clearing Agency utilized by the Custodian
or any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or
delayed from performing, or omits to perform, any act or thing
which this Agreement provides shall be performed or omitted to be
performed, by reason of: (i) any provision of any present or future
law or regulation or order of the United States of America, or any
state thereof, or of any foreign country, or political subdivision
thereof or of any court of competent jurisdiction (and neither the
Custodian nor any other Person shall be obligated to take any
action contrary thereto); or (ii) any event beyond the control of
the Custodian or other Person such as armed conflict, riots,
strikes, lockouts, labor disputes, equipment or transmission
failures, natural disasters, or failure of the mails,
transportation, communications or power supply; or (iii) any
"Sovereign Risk." A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other
charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's or such other Person's control.
(c) LIABILITY FOR PAST RECORDS.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a
Fund, insofar as such loss, damage or expense arises from the
performance of the Custodian or any Domestic Subcustodian in
reliance upon records that were maintained for such Fund by
entities other than the Custodian or any Domestic Subcustodian
prior to the Custodian's employment hereunder.
(d) ADVICE OF COUNSEL.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all
matters. The Custodian and all Domestic Subcustodians shall be
without liability for any actions taken or omitted in good faith
pursuant to the advice of counsel.
18
<PAGE>
(e) ADVICE OF THE FUND AND OTHERS.
The Custodian and any Domestic Subcustodian may rely upon the
advice of any Fund and upon statements of such Fund's accountants
and other persons believed by it in good faith to be expert in
matters upon which they are consulted, and neither the Custodian
nor any Domestic Subcustodian shall be liable for any actions taken
or omitted, in good faith, pursuant to such advice or statements.
(f) INSTRUCTIONS APPEARING TO BE GENUINE.
The Custodian and all Domestic Subcustodians shall be fully
protected and indemnified in acting as a custodian hereunder upon
any Resolutions of the Board of Directors or Trustees,
Instructions, Special Instructions, advice, notice, request,
consent, certificate, instrument or paper appearing to it to be
genuine and to have been properly executed and shall, unless
otherwise specifically provided herein, be entitled to receive as
conclusive proof of any fact or matter required to be ascertained
from any Fund hereunder a certificate signed by any officer of such
Fund authorized to countersign or confirm Special Instructions.
(g) EXCEPTIONS FROM LIABILITY.
Without limiting the generality of any other provisions hereof,
neither the Custodian nor any Domestic Subcustodian shall be under
any duty or obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or
for any Fund, the legality of the purchase thereof or
evidence of ownership required to be received by any such
Fund, or the propriety of the decision to purchase or amount
paid therefor;
(ii) the legality of the sale of any Securities by or for any
Fund, or the propriety of the amount for which the same were
sold; or
(iii) any other expenditures, encumbrances of Securities,
borrowings or similar actions with respect to any Fund's
Assets;
and may, until notified to the contrary, presume that all
Instructions or Special Instructions received by it are not in
conflict with or in any way contrary to any provisions of any such
Fund's Declaration of Trust, Partnership Agreement, Articles of
Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or
any such Fund's currently effective Registration Statement on file
with the SEC.
19
<PAGE>
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) DOMESTIC SUBCUSTODIANS
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or
omissions were performed by the Custodian itself.
(b) LIABILITY FOR ACTS AND OMISSIONS OF FOREIGN SUBCUSTODIANS.
The Custodian shall be liable to a Fund for any loss or damage to
such Fund caused by or resulting from the acts or omissions of any
Foreign Subcustodian to the extent that, under the terms set forth
in the subcustodian agreement between the Custodian or a Domestic
Subcustodian and such Foreign Subcustodian, the Foreign
Subcustodian has failed to perform in accordance with the standard
of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign
Subcustodian under the applicable subcustodian agreement.
(c) SECURITIES SYSTEMS, INTERIM SUBCUSTODIANS, SPECIAL SUBCUSTODIANS,
SECURITIES DEPOSITORIES AND CLEARING AGENCIES.
The Custodian shall not be liable to any Fund for any loss, damage
or expense suffered or incurred by such Fund resulting from or
occasioned by the actions or omissions of a Securities System,
Interim Subcustodian, Special Subcustodian, or Securities
Depository and Clearing Agency unless such loss, damage or expense
is caused by, or results from, the gross negligence or willful
misfeasance of the Custodian.
(d) DEFAULTS OR INSOLVENCIES OF BROKERS, BANKS, ETC.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by any Fund resulting from or occasioned by
the actions, omissions, neglects, defaults or insolvency of any
broker, bank, trust company or any other person with whom the
Custodian may deal (other than any of such entities acting as a
Subcustodian, Securities System or Securities Depository and
Clearing Agency, for whose actions the liability of the Custodian
is set out elsewhere in this Agreement) unless such loss, damage or
expense is caused by, or results from, the gross negligence or
willful misfeasance of the Custodian.
(e) REIMBURSEMENT OF EXPENSES.
Each Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this
Agreement, but excluding salaries and usual overhead expenses.
20
<PAGE>
8. INDEMNIFICATION.
(a) INDEMNIFICATION BY FUND.
Subject to the limitations set forth in this Agreement, each Fund
agrees to indemnify and hold harmless the Custodian and its
nominees from all losses, damages and expenses (including
attorneys' fees) suffered or incurred by the Custodian or its
nominee caused by or arising from actions taken by the Custodian,
its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to,
any indemnification obligations undertaken by the Custodian under
any relevant subcustodian agreement; provided, however, that such
indemnity shall not apply to the extent the Custodian is liable
under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect
to Securities, which action involves the payment of money or which
may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to such Fund being liable for the payment of
money or incurring liability of some other form, such Fund, as a
prerequisite to requiring the Custodian to take such action, shall
provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) INDEMNIFICATION BY CUSTODIAN.
Subject to the limitations set forth in this Agreement and in
addition to the obligations provided in Sections 6 and 7, the
Custodian agrees to indemnify and hold harmless each Fund from all
losses, damages and expenses suffered or incurred by each such Fund
caused by the gross negligence or willful misfeasance of the
Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing
Agency acting either directly or indirectly under agreement with the
Custodian (each of which for purposes of this Section 9 shall be referred
to as "Custodian"), makes any payment or transfer of funds on behalf of any
Fund as to which there would be, at the close of business on the date of
such payment or transfer, insufficient funds held by the Custodian on
behalf of any such Fund, the Custodian may, in its discretion without
further Instructions, provide an advance ("Advance") to any such Fund in an
amount sufficient to allow the completion of the transaction by reason of
which such payment or transfer of funds is to be made. In addition, in the
event the Custodian is directed by Instructions to make any payment or
transfer of funds on behalf of any Fund as to which it is subsequently
determined that such Fund has overdrawn its cash account with the Custodian
as of the close of business on the date of such payment or transfer, said
overdraft shall constitute an Advance. Any
21
<PAGE>
Advance shall be payable by the Fund on behalf of which the Advance was
made on demand by Custodian, unless otherwise agreed by such Fund and the
Custodian, and shall accrue interest from the date of the Advance to the
date of payment by such Fund to the Custodian at a rate agreed upon in
writing from time to time by the Custodian and such Fund. It is understood
that any transaction in respect of which the Custodian shall have made an
Advance, including but not limited to a foreign exchange contract or
transaction in respect of which the Custodian is not acting as a principal,
is for the account of and at the risk of the Fund on behalf of which the
Advance was made, and not, by reason of such Advance, deemed to be a
transaction undertaken by the Custodian for its own account and risk. The
Custodian and each of the Funds which are parties to this Agreement
acknowledge that the purpose of Advances is to finance temporarily the
purchase or sale of Securities for prompt delivery in accordance with the
settlement terms of such transactions or to meet emergency expenses not
reasonably foreseeable by a Fund. The Custodian shall promptly notify the
appropriate Fund of any Advance. Such notification shall be sent by
facsimile transmission or in such other manner as such Fund and the
Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities
in connection with the performance of its duties hereunder, except such as
may arise from its or its nominee's negligent action, negligent failure to
act or willful misconduct, any Property at any time held for the Custody
Account shall be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly reimburse the Bank
for any such advance of cash or securities or any such taxes, charges,
expenses, assessments, claims or liabilities upon request for payment, but
should the Fund fail to so reimburse the Bank, the Bank shall be entitled
to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund
with the Bank including, without limitation, the Custody Account, in
connection with any such advance and any interest on such advance as the
Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such
Fund and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or
desirable in connection with
22
<PAGE>
the performance by the Custodian or any Subcustodian of their respective
obligations under this Agreement or any applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return
receipt requested) to the other not less than 90 days prior to the date
upon which such termination shall take effect. Upon termination of this
Agreement, the appropriate Fund shall pay to the Custodian such fees as may
be due the Custodian hereunder as well as its reimbursable disbursements,
costs and expenses paid or incurred. Upon termination of this Agreement,
the Custodian shall deliver, at the terminating party's expense, all Assets
held by it hereunder to the appropriate Fund or as otherwise designated by
such Fund by Special Instructions. Upon such delivery, the Custodian shall
have no further obligations or liabilities under this Agreement except as
to the final resolution of matters relating to activity occurring prior to
the effective date of termination.
This Agreement may not be assigned by the Custodian or any Fund without the
respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund
or Funds and the Custodian. If this Agreement is terminated as to one or
more of the Funds (but less than all of the Funds) or if an additional Fund
or Funds shall become a party to this Agreement, there shall be delivered
to each party an Appendix B or an amended Appendix B, signed by each of the
additional Funds (if any) and each of the remaining Funds as well as the
Custodian, deleting or adding such Fund or Funds, as the case may be. The
termination of this Agreement as to less than all of the Funds shall not
affect the obligations of the Custodian and the remaining Funds hereunder
as set forth on the signature page hereto and in Appendix B as revised from
time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to THE SECURITY BENEFIT GROUP OF COMPANIES, 700 HARRISON, TOPEKA,
KS 66636-0001, postage prepaid, or to such other address as any particular
Fund may have designated to the Custodian in writing, shall be deemed to
have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration Department of the Custodian at its office at 928
Grand Avenue, Kansas City, Missouri, or mailed postage prepaid, to the
Custodian's Securities Administration Department, Post Office Box 226,
Kansas City, Missouri 64141, or to such other addresses as the Custodian
may have designated to each Fund in writing, shall be deemed
23
<PAGE>
to have been properly delivered or given to the Custodian hereunder;
provided, however, that procedures for the delivery of Instructions and
Special Instructions shall be governed by Section 2(c) hereof..
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the
respective successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived,
in any manner except in writing, properly executed by both parties
hereto; provided, however, Appendix A may be amended from time to
time as Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians, and Securities Depositories and Clearing Agencies
are approved or terminated according to the terms of this
Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following
sections of the Agreement:
24
<PAGE>
TERM SECTION
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(l)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(l)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court
of competent jurisdiction, the remaining portion or portions shall
be considered severable and shall not be affected, and the rights
and obligations of the parties shall be construed and enforced as
if this Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof,
and accordingly supersedes, as of the effective date of this
Agreement, any custodian agreement heretofore in effect between the
Fund and the Custodian.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement to be
executed by their respective duly authorized officers.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Equity Fund
Equity Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Series
Limited Maturity Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
26
<PAGE>
ATTEST: Security Income Fund
U. S. Government Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S and J
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: UMB BANK, N.A.
R. WILLIAM BLOOM By: DAVID SWAN
Title: Senior Vice President
Date: 1/11/95
27
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
Security Ultra Fund Limited Maturity Bond Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Equity Fund Security Income Fund
Equity Series U. S. Government Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Growth and Income Fund SBL Fund
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Income Fund
Corporate Bond Series UMB BANK, N.A.
By: JOHN D. CLELAND By: DAVID SWAN
Title: President Title: Senior Vice President
Date: 1/11/95
28
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
List of Funds
Security Income Fund, High Yield Series
SBL Fund, Series P
ATTEST: Security Income Fund
High Yield Series
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: SBL Fund
Series P
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: UMB BANK, N.A.
R.WM. BLOOM By: DAVID SWAN
- ----------------------------------- -----------------------------------
Title: Senior Vice President
Date: April 29, 1996
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
High Yield Series
By: JAMES R. 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>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund
Social Awareness Series
ATTEST: Security Equity Fund
Social Awareness Series
CHRIS SWICKARD
- -----------------------------------
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
WILLIAM BLOEMKER By: RALPH SANTORO
- ----------------------------------- -----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
- --------------------------------------------------------------------------------
NET ASSET VALUE CHARGES
A fee to be computed as of month-end and payable on the last day of each
month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios, subject to
a $100.00 per month minimum per portfolio.
PORTFOLIO TRANSACTION CHARGES
DTC Book-Entry Transactions* $5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal and Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A TRANSACTION INCLUDES BUYS, SELLS, MATURITIES, AND FREE SECURITY MOVEMENTS.
OUT OF POCKET EXPENSES
Including, but not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, and remote
system access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment to the
Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
<PAGE>
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. W. BLOOM By: PATRICIA A. PETERSON
- -------------------------------- --------------------------------
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
---------------------------------------------------------------
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Registration Statement (Form N-1A) and related prospectus of SBL Fund and
to the incorporation by reference of our report dated January 26, 1996, with
respect to the financial statements of SBL Fund included in its Annual Report to
Shareholders for the year ended December 31, 1995.
Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
February 5, 1997
<PAGE>
Item 24.b. Exhibit (16)
SBL FUNDS' 1, 5 AND 10-YEAR AVERAGE ANNUAL RETURN
AS OF DECEMBER 31, 1995
Series A
1 Year +36.76%
-------
1000 (1+T) 1 = 1367.64
(1+T) 1 = 1.3676
1+T = 1.3676
T = .3676
5 Year +18.26%
-------
1000 (1+T) 5 = 2313.35
((1+T) 5)1/5 = (2.31335)1/5
1+T = 1.1826
T = .1826
10 Year +13.36%
-------
1000 (1+T) 10 = 3504.27
((1+T) 10)1/10 = (3.50427)1/10
1+T = 1.1336
T = .1336
<PAGE>
Item 24.b. Exhibit (16)
Series B
1 Year +30.07%
-------
1000 (1+T) 1 = 1300.67
(1+T) 1 = 1.30067
1+T = 1.30067
T = .30067
5 Year +15.15%
-------
1000 (1+T) 5 = 2024.42
((1+T) 5)1/5 = (2.02442)1/5
1+T = 1.1515
T = .1515
10 Year +13.85%
-------
1000 (1+T) 10 = 3660.17
((1+T) 10)1/10 = (3.66017)1/10
1+T = 1.385
T = .1385
<PAGE>
Item 24.b. Exhibit (16)
Series C
1 Year +5.41%
------
1000 (1+T) 1 = 1054.08
(1+T) 1 = 1.05408
1+T = 1.05408
T = .0541
5 Year +3.44%
-------
1000 (1+T) 5 = 1184.43
((1+T) 5)1/5 = (1.18443)1/5
1+T = 1.0344
T = .0344
10 Year +5.40%
------
1000 (1+T) 10 = 1693.49
((1+T) 10)1/10 = (1.69349)1/10
1+T = 1.0540
T = .0540
<PAGE>
Item 24.b. Exhibit (16)
Series D
1 Year +10.86%
-------
1000 (1+T) 1 = 1108.63
(1+T) 1 = 1.10863
T = .1086
5 Year +10.48%
-------
1000 (1+T) 5 = 1646.02
(1+T) 5 = 1.64602
((1+T) 5)1/5 = (1.64602)1/5
1+T = 1.1048
T = .1048
10 Years +1.80%
------
1000 (1+T) 10 = 1195.48
(1+T) 10 = 1.19548
((1+T) 10)1/10 = (1.19548)1/10
1+T = 1.018
T = .018
<PAGE>
Item 24.b. Exhibit (16)
Series E
1 Year +18.60%
-------
1000 (1+T) 1 = 1186.03
(1+T) 1 = 1.18603
1+T = 1.18603
T = .1860
5 Year +9.33%
------
1000 (1+T) 5 = 1562.21
(1+T) 5 = 1.56221
((1+T) 5)1/5 = (1.56221)1/5
1+T = 1.0933
T = .0933
10 Years +8.42%
------
1000 (1+T) 10 = 2244.59
(1+T) 10 = 2.24459
((1+T) 10)1/10 = (2.24459)1/10
1+T = 1.0842
T = .0842
<PAGE>
Item 24.b. Exhibit (16)
Series S
1 Year +27.74%
-------
1000 (1+T) 1 = 1277.42
(1+T) 1 = 1.27742
1+T = 1.27742
T = .2774
(Since Inception)
(May 1, 1991)
4.67 Years +11.86%
-------
1000 (1+T) 4.67 = 1687.87
(1+T) 4.67 = 1.68787
((1+T) 4.67)1/4.67 = (1.68787)1/4.67
1+T = 1.1186
T = .1186
<PAGE>
Item 24.b. Exhibit (16)
Series J
1 Year +19.49%
-------
1000 (1+T) 1 = 1194.94
(1+T) 1 = 1.19494
1+T = 1.19494
T = .1949
(Since Inception)
(October 1, 1992)
3.25 Years +15.71%
-------
1000 (1+T) 3.25 = 1606.96
(1+T) 3.25 = 1.60696
((1+T) 3.25)1/3.25 = (1.60696)1/3.25
1+T = 1.1571
T = .1571
<PAGE>
Item 24.b. Exhibit (16)
Series K
1 Year +13.48%
-------
(Since Inception)
(June 1, 1995)
1000 (1+T) .58 = 1076.10
((1+T) .58)1/.58 = (1.07610)1/.58
1+T = 1.1348
T = .1348
Series M
1 Year +12.55%
-------
(Since Inception)
(June 1, 1995)
1000 (1+T) .58 = 1071.00
((1+T) .58)1/.58 = (1.07100)1/.58
1+T = 1.1255
T = .1255
Series N
1 Year +12.92%
-------
(Since Inception)
(June 1, 1995)
1000 (1+T) .58 = 1073.00
((1+T) .58)1/.58 = (1.073)1/.58
1+T = 1.1292
T = .1292
Series O
1 Year +31.09%
-------
(Since Inception)
(June 1, 1995)
1000 (1+T) .58 = 1170.00
((1+T) .58)1/.58 = (1.170)1/.58
1+T = 1.3109
T = .3109
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
SBL FUND, SERIES A
Total Return from December 31, 1985, to December 31, 1995. Assuming initial
investment of $1,000 at offering price at beginning of period 1,000 / 12.30 =
81.300 shares.
Ending value of initial investment at December 31, 1995, NAV price = 81.300
shares x 21.03 = 1,709.73.
Ending value of shares received from reinvestment of all dividends at NAV =
85.358 shares x 21.03 = 1,795.07.
Total ending redeemable value: 1,709.73
1,795.07
--------
3,504.80
Total Return: 3,504.80 - 1,000 = 2,504.80
2,504.80
--------
1,000 = 250.48%
<PAGE>
Item 24.b. Exhibit (16)
SBL SERIES P
AVERAGE ANNUAL RETURN
AS OF DECEMBER 31, 1996
Since Inception, August 5, 1996 = 16.96%
1000 (1+T) .4082 = 1,066.05
(1+T) .4082 = 1.06605
((1+T) .4082)1/.4082 = (1.06605)1/.4082
1+T = 1.1696
T = .1696
Total Return:
Total Return from August 5, 1996, to December 31, 1996. Assuming initial
investment of $1,000 at offering price at beginning of period 1,000 / 15 = 66.67
shares.
Ending value of initial investment at December 31, 1996, NAV price = 66.67
shares x 15.99 = 1,066.05.
1,066.05 - 1,000 = 66.05
66.05 / 1,000 = 6.61%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 001
<NAME> SERIES A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 477,600
<INVESTMENTS-AT-VALUE> 659,651
<RECEIVABLES> 1,879
<ASSETS-OTHER> 54,827
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 716,357
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,766
<TOTAL-LIABILITIES> 1,766
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 476,201
<SHARES-COMMON-STOCK> 29,391
<SHARES-COMMON-PRIOR> 24,721
<ACCUMULATED-NII-CURRENT> 5,364
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 50,975
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 182,051
<NET-ASSETS> 714,591
<DIVIDEND-INCOME> 8,964
<INTEREST-INCOME> 1,486
<OTHER-INCOME> 0
<EXPENSES-NET> 4,980
<NET-INVESTMENT-INCOME> 5,470
<REALIZED-GAINS-CURRENT> 51,089
<APPREC-INCREASE-CURRENT> 62,938
<NET-CHANGE-FROM-OPS> 119,497
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,859
<DISTRIBUTIONS-OF-GAINS> 30,079
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,816
<NUMBER-OF-SHARES-REDEEMED> 8,682
<SHARES-REINVESTED> 1,536
<NET-CHANGE-IN-ASSETS> 194,699
<ACCUMULATED-NII-PRIOR> 4,756
<ACCUMULATED-GAINS-PRIOR> 29,965
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,497
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,980
<AVERAGE-NET-ASSETS> 594,716
<PER-SHARE-NAV-BEGIN> 21.03
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 4.465
<PER-SHARE-DIVIDEND> .194
<PER-SHARE-DISTRIBUTIONS> 1.201
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.31
<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> 002
<NAME> SERIES B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 687,968
<INVESTMENTS-AT-VALUE> 897,689
<RECEIVABLES> 5,730
<ASSETS-OTHER> 56,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 959,786
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,200
<TOTAL-LIABILITIES> 3,200
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 666,852
<SHARES-COMMON-STOCK> 27,020
<SHARES-COMMON-PRIOR> 23,421
<ACCUMULATED-NII-CURRENT> 22,621
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 57,392
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 209,721
<NET-ASSETS> 956,586
<DIVIDEND-INCOME> 12,389
<INTEREST-INCOME> 17,765
<OTHER-INCOME> 0
<EXPENSES-NET> 7,420
<NET-INVESTMENT-INCOME> 22,734
<REALIZED-GAINS-CURRENT> 57,473
<APPREC-INCREASE-CURRENT> 65,772
<NET-CHANGE-FROM-OPS> 145,979
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18,421
<DISTRIBUTIONS-OF-GAINS> 89,076
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,480
<NUMBER-OF-SHARES-REDEEMED> 5,056
<SHARES-REINVESTED> 3,175
<NET-CHANGE-IN-ASSETS> 122,992
<ACCUMULATED-NII-PRIOR> 18,308
<ACCUMULATED-GAINS-PRIOR> 88,995
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,656
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,420
<AVERAGE-NET-ASSETS> 880,217
<PER-SHARE-NAV-BEGIN> 33.95
<PER-SHARE-NII> .83
<PER-SHARE-GAIN-APPREC> 5.16
<PER-SHARE-DIVIDEND> .778
<PER-SHARE-DISTRIBUTIONS> 3.762
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 35.40
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 003
<NAME> SERIES C
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 127,194
<INVESTMENTS-AT-VALUE> 127,140
<RECEIVABLES> 2,423
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 129,570
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 899
<TOTAL-LIABILITIES> 899
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121,965
<SHARES-COMMON-STOCK> 10,246
<SHARES-COMMON-PRIOR> 8,541
<ACCUMULATED-NII-CURRENT> 6,761
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (54)
<NET-ASSETS> 128,672
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,747
<OTHER-INCOME> 0
<EXPENSES-NET> 826
<NET-INVESTMENT-INCOME> 6,921
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (42)
<NET-CHANGE-FROM-OPS> 6,879
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,015
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,992
<NUMBER-OF-SHARES-REDEEMED> 22,692
<SHARES-REINVESTED> 405
<NET-CHANGE-IN-ASSETS> 23,236
<ACCUMULATED-NII-PRIOR> 4,854
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 708
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 827
<AVERAGE-NET-ASSETS> 140,505
<PER-SHARE-NAV-BEGIN> 12.34
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .05
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.56
<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> 004
<NAME> SERIES D
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 218,780
<INVESTMENTS-AT-VALUE> 242,432
<RECEIVABLES> 6,956
<ASSETS-OTHER> 7,499
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 256,887
<PAYABLE-FOR-SECURITIES> 9,243
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 618
<TOTAL-LIABILITIES> 9,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 206,377
<SHARES-COMMON-STOCK> 40,254
<SHARES-COMMON-PRIOR> 31,952
<ACCUMULATED-NII-CURRENT> (946)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,062
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,533
<NET-ASSETS> 247,026
<DIVIDEND-INCOME> 3,532
<INTEREST-INCOME> 842
<OTHER-INCOME> 0
<EXPENSES-NET> 2,786
<NET-INVESTMENT-INCOME> 1,588
<REALIZED-GAINS-CURRENT> 18,197
<APPREC-INCREASE-CURRENT> 13,348
<NET-CHANGE-FROM-OPS> 33,133
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,982
<DISTRIBUTIONS-OF-GAINS> 6,589
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,952
<NUMBER-OF-SHARES-REDEEMED> 9,931
<SHARES-REINVESTED> 2,281
<NET-CHANGE-IN-ASSETS> 69,244
<ACCUMULATED-NII-PRIOR> 4,448
<ACCUMULATED-GAINS-PRIOR> 6,454
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,164
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,786
<AVERAGE-NET-ASSETS> 215,102
<PER-SHARE-NAV-BEGIN> 5.56
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .93
<PER-SHARE-DIVIDEND> .20
<PER-SHARE-DISTRIBUTIONS> .18
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.14
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 005
<NAME> SERIES E
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 122,998
<INVESTMENTS-AT-VALUE> 122,349
<RECEIVABLES> 2,335
<ASSETS-OTHER> 9,931
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 134,615
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 574
<TOTAL-LIABILITIES> 574
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 138,273
<SHARES-COMMON-STOCK> 11,171
<SHARES-COMMON-PRIOR> 9,769
<ACCUMULATED-NII-CURRENT> 8,630
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,213)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (649)
<NET-ASSETS> 134,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,721
<OTHER-INCOME> 0
<EXPENSES-NET> 1,057
<NET-INVESTMENT-INCOME> 8,664
<REALIZED-GAINS-CURRENT> (2,164)
<APPREC-INCREASE-CURRENT> (7,552)
<NET-CHANGE-FROM-OPS> (1,052)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,686
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,820
<NUMBER-OF-SHARES-REDEEMED> 5,068
<SHARES-REINVESTED> 650
<NET-CHANGE-IN-ASSETS> 8,389
<ACCUMULATED-NII-PRIOR> 7,651
<ACCUMULATED-GAINS-PRIOR> (10,049)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,064
<AVERAGE-NET-ASSETS> 126,909
<PER-SHARE-NAV-BEGIN> 12.86
<PER-SHARE-NII> .75
<PER-SHARE-GAIN-APPREC> (.853)
<PER-SHARE-DIVIDEND> .757
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.00
<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> 006
<NAME> SERIES S
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 40,913
<INVESTMENTS-AT-VALUE> 52,098
<RECEIVABLES> 299
<ASSETS-OTHER> 5,323
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,720
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 223
<TOTAL-LIABILITIES> 223
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,360
<SHARES-COMMON-STOCK> 3,013
<SHARES-COMMON-PRIOR> 2,234
<ACCUMULATED-NII-CURRENT> 139
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,813
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,185
<NET-ASSETS> 57,497
<DIVIDEND-INCOME> 312
<INTEREST-INCOME> 225
<OTHER-INCOME> 0
<EXPENSES-NET> 394
<NET-INVESTMENT-INCOME> 143
<REALIZED-GAINS-CURRENT> 3,818
<APPREC-INCREASE-CURRENT> 3,542
<NET-CHANGE-FROM-OPS> 7,503
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 218
<DISTRIBUTIONS-OF-GAINS> 1,127
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,144
<NUMBER-OF-SHARES-REDEEMED> 436
<SHARES-REINVESTED> 71
<NET-CHANGE-IN-ASSETS> 23,356
<ACCUMULATED-NII-PRIOR> 213
<ACCUMULATED-GAINS-PRIOR> 1,123
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 352
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 396
<AVERAGE-NET-ASSETS> 46,967
<PER-SHARE-NAV-BEGIN> 16.49
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 3,073
<PER-SHARE-DIVIDEND> .083
<PER-SHARE-DISTRIBUTIONS> .43
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.08
<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> 007
<NAME> SERIES J
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 108,447
<INVESTMENTS-AT-VALUE> 136,210
<RECEIVABLES> 274
<ASSETS-OTHER> 12,200
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 148,684
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 263
<TOTAL-LIABILITIES> 263
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 115,389
<SHARES-COMMON-STOCK> 8,134
<SHARES-COMMON-PRIOR> 5,814
<ACCUMULATED-NII-CURRENT> 542
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,727
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,763
<NET-ASSETS> 148,421
<DIVIDEND-INCOME> 386
<INTEREST-INCOME> 420
<OTHER-INCOME> 0
<EXPENSES-NET> 1,075
<NET-INVESTMENT-INCOME> (269)
<REALIZED-GAINS-CURRENT> 5,575
<APPREC-INCREASE-CURRENT> 16,151
<NET-CHANGE-FROM-OPS> 21,457
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 237
<DISTRIBUTIONS-OF-GAINS> 5,478
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,392
<NUMBER-OF-SHARES-REDEEMED> 3,389
<SHARES-REINVESTED> 317
<NET-CHANGE-IN-ASSETS> 66,472
<ACCUMULATED-NII-PRIOR> 218
<ACCUMULATED-GAINS-PRIOR> 5,461
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,075
<AVERAGE-NET-ASSETS> 127,911
<PER-SHARE-NAV-BEGIN> 16.06
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 2.83
<PER-SHARE-DIVIDEND> .029
<PER-SHARE-DISTRIBUTIONS> .671
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.25
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 008
<NAME> SERIES K
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 11,910
<INVESTMENTS-AT-VALUE> 12,214
<RECEIVABLES> 472
<ASSETS-OTHER> 113
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,799
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79
<TOTAL-LIABILITIES> 79
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,355
<SHARES-COMMON-STOCK> 1,186
<SHARES-COMMON-PRIOR> 555
<ACCUMULATED-NII-CURRENT> 151
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (107)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 321
<NET-ASSETS> 12,720
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,073
<OTHER-INCOME> 0
<EXPENSES-NET> 77
<NET-INVESTMENT-INCOME> 996
<REALIZED-GAINS-CURRENT> 34
<APPREC-INCREASE-CURRENT> 236
<NET-CHANGE-FROM-OPS> 1,266
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 844
<DISTRIBUTIONS-OF-GAINS> 141
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 968
<NUMBER-OF-SHARES-REDEEMED> 429
<SHARES-REINVESTED> 92
<NET-CHANGE-IN-ASSETS> 7,042
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 69
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 146
<AVERAGE-NET-ASSETS> 9,226
<PER-SHARE-NAV-BEGIN> 10.22
<PER-SHARE-NII> 1.03
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> .77
<PER-SHARE-DISTRIBUTIONS> .13
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 009
<NAME> SERIES M
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 35,116
<INVESTMENTS-AT-VALUE> 37,060
<RECEIVABLES> 1,409
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,469
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 73
<TOTAL-LIABILITIES> 73
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,577
<SHARES-COMMON-STOCK> 3,187
<SHARES-COMMON-PRIOR> 1,492
<ACCUMULATED-NII-CURRENT> 925
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 949
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,945
<NET-ASSETS> 38,396
<DIVIDEND-INCOME> 669
<INTEREST-INCOME> 501
<OTHER-INCOME> 0
<EXPENSES-NET> 385
<NET-INVESTMENT-INCOME> 785
<REALIZED-GAINS-CURRENT> 1,113
<APPREC-INCREASE-CURRENT> 1,834
<NET-CHANGE-FROM-OPS> 3,732
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 333
<DISTRIBUTIONS-OF-GAINS> 154
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,471
<NUMBER-OF-SHARES-REDEEMED> 819
<SHARES-REINVESTED> 43
<NET-CHANGE-IN-ASSETS> 22,420
<ACCUMULATED-NII-PRIOR> 310
<ACCUMULATED-GAINS-PRIOR> 153
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 286
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 385
<AVERAGE-NET-ASSETS> 28,495
<PER-SHARE-NAV-BEGIN> 10.71
<PER-SHARE-NII> .201
<PER-SHARE-GAIN-APPREC> 1.313
<PER-SHARE-DIVIDEND> .119
<PER-SHARE-DISTRIBUTIONS> .055
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.05
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 010
<NAME> SERIES N
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 20,638
<INVESTMENTS-AT-VALUE> 22,490
<RECEIVABLES> 175
<ASSETS-OTHER> 970
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,635
<PAYABLE-FOR-SECURITIES> 241
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50
<TOTAL-LIABILITIES> 291
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,739
<SHARES-COMMON-STOCK> 1,943
<SHARES-COMMON-PRIOR> 986
<ACCUMULATED-NII-CURRENT> 463
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 290
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,852
<NET-ASSETS> 23,344
<DIVIDEND-INCOME> 215
<INTEREST-INCOME> 507
<OTHER-INCOME> 0
<EXPENSES-NET> 254
<NET-INVESTMENT-INCOME> 468
<REALIZED-GAINS-CURRENT> 290
<APPREC-INCREASE-CURRENT> 1,466
<NET-CHANGE-FROM-OPS> 2,224
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 113
<DISTRIBUTIONS-OF-GAINS> 23
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,318
<NUMBER-OF-SHARES-REDEEMED> 373
<SHARES-REINVESTED> 12
<NET-CHANGE-IN-ASSETS> 12,764
<ACCUMULATED-NII-PRIOR> 109
<ACCUMULATED-GAINS-PRIOR> 23
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 255
<AVERAGE-NET-ASSETS> 17,398
<PER-SHARE-NAV-BEGIN> 10.73
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> 1.268
<PER-SHARE-DIVIDEND> .065
<PER-SHARE-DISTRIBUTIONS> .013
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.02
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 011
<NAME> SERIES O
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 57,059
<INVESTMENTS-AT-VALUE> 63,044
<RECEIVABLES> 475
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63,519
<PAYABLE-FOR-SECURITIES> 407
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 735
<TOTAL-LIABILITIES> 1,142
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,929
<SHARES-COMMON-STOCK> 4,451
<SHARES-COMMON-PRIOR> 1,156
<ACCUMULATED-NII-CURRENT> 1,029
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,434
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,985
<NET-ASSETS> 62,377
<DIVIDEND-INCOME> 1,125
<INTEREST-INCOME> 359
<OTHER-INCOME> 0
<EXPENSES-NET> 453
<NET-INVESTMENT-INCOME> 1,031
<REALIZED-GAINS-CURRENT> 1,436
<APPREC-INCREASE-CURRENT> 4,979
<NET-CHANGE-FROM-OPS> 7,446
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 109
<DISTRIBUTIONS-OF-GAINS> 7
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,318
<NUMBER-OF-SHARES-REDEEMED> 1,032
<SHARES-REINVESTED> 9
<NET-CHANGE-IN-ASSETS> 48,849
<ACCUMULATED-NII-PRIOR> 107
<ACCUMULATED-GAINS-PRIOR> 6
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 393
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 453
<AVERAGE-NET-ASSETS> 39,225
<PER-SHARE-NAV-BEGIN> 11.70
<PER-SHARE-NII> .17
<PER-SHARE-GAIN-APPREC> 2.172
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> .002
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.01
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000217087
<NAME> SBL FUND
<SERIES>
<NUMBER> 012
<NAME> SERIES P
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,311
<INVESTMENTS-AT-VALUE> 2,373
<RECEIVABLES> 55
<ASSETS-OTHER> 237
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,665
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,500
<SHARES-COMMON-STOCK> 167
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 86
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62
<NET-ASSETS> 2,665
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 89
<OTHER-INCOME> 0
<EXPENSES-NET> 3
<NET-INVESTMENT-INCOME> 86
<REALIZED-GAINS-CURRENT> 17
<APPREC-INCREASE-CURRENT> 62
<NET-CHANGE-FROM-OPS> 165
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 167
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 165
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11
<AVERAGE-NET-ASSETS> 2,574
<PER-SHARE-NAV-BEGIN> 15.00
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> .48
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.99
<EXPENSE-RATIO> .28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
