<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR ABOUT NOVEMBER 30,
1999
REGISTRATION NOS. 2-38512
811-2125
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 37 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 37 /X/
------------------------
EQUITRUST SERIES FUND, INC.
(Exact name of Registrant as Specified in Charter)
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
(Address of Principal Executive Offices)(Zip Code)
(515) 225-5586
(Registrant's Telephone Number, Including Area Code)
STEPHEN M. MORAIN, ESQUIRE
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
(Name and Address of Agent for Service)
------------------------
COPY TO:
JAMES A. ARPAIA, ESQUIRE
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 NORTH LASALLE STREET
CHICAGO, IL 60601
------------------------
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
EQUITRUST SERIES FUND, INC.
-------------------------------------------
VALUE GROWTH PORTFOLIO
HIGH GRADE BOND PORTFOLIO
HIGH YIELD BOND PORTFOLIO
MANAGED PORTFOLIO
MONEY MARKET PORTFOLIO
BLUE CHIP PORTFOLIO
----------------------------------------------------------------------
SUPPLEMENT TO PROSPECTUS
Dated December 1, 1999
INSTITUTIONAL SHARES
EquiTrust Series Fund, Inc. (the "Fund") currently offers two classes of shares
to provide investors with different purchasing options. These are Traditional
Shares, which are described in the prospectus, and Institutional Shares, which
are described in the prospectus as supplemented by this document.
Institutional Shares are available for purchase exclusively by the following
investors: (a) retirement plans of FBL Financial Group, Inc. and its affiliates;
(b) the following investment advisory clients of EquiTrust Investment Management
Services, Inc. ("EquiTrust"): (1) affiliated and unaffiliated benefit plans,
such as qualified retirement plans, and (2) affiliated and unaffiliated banks
and insurance companies purchasing for their own accounts; (c) employees and
directors of FBL Financial Group, Inc., its affiliates, and affiliated state
Farm Bureau Federations; (d) directors and trustees of the EquiTrust Mutual
Funds; and (e) such other types of accounts as EquiTrust, the Fund's
distributor, deems appropriate. Institutional Shares currently are available for
purchase only from EquiTrust. Share certificates are not available for
Institutional Shares.
The primary differences between the classes of the Fund's shares are due to the
applicability of the contingent deferred sales charge and ongoing expenses,
including asset-based sales charges in the form of Rule 12b-1 distribution fees.
Institutional Shares are not subject to a contingent deferred sales charge or a
Rule 12b-1 distribution fee. Also, there is no administrative services fee
charged to Institutional Shares. As a result of the relatively lower expenses
for Institutional Shares, the level of income dividends per share (as a
percentage of net asset value) and, therefore, the available investment return
will be higher for Institutional Shares than for Traditional Shares.
The following information supplements the indicated sections of the prospectus.
<PAGE>
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
The charts and tables contained in the accompanying prospectus provide some
indication of the risks of investing in the Portfolios by illustrating how the
Portfolios have performed from year to year, and comparing this information to a
broad measure of market performance. Of course, past performance is no
indication or guarantee of the results that the Portfolios may achieve in the
future. Additional information for the Portfolios' Institutional Shares is set
forth below. The performance rate of each Portfolio was calculated after
deducting all fees and charges incurred by the Portfolio. During certain periods
shown, the Adviser reimbursed the Money Market Portfolio for operating expenses
in excess of 1.50% of average daily net assets, thereby lowering expenses for
the Portfolio. The Index figures shown do not reflect any fees or expenses and
you cannot invest directly in any Index.
The following bar charts provide an illustration of the performance of each
Portfolio during the 1998 calendar year, which was the first full year that
Institutional Shares were available for purchase. The tables compare the average
annual total returns of each Portfolio to those of an appropriate broad based
index over the periods shown. Please remember that past performance is no
indicator or guarantee of the results that any Portfolio may achieve in the
future. Future annual returns of the Portfolios may be greater or less than the
returns shown in the charts.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS-VALUE GROWTH PORTFOLIO
1998 CALENDAR YEAR*
<S> <C>
1998 -27.03%
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
<S> <C> <C>
BEST QUARTER: 1Q 1998 6.66%
---------------------------------
WORST QUARTER: 3Q 1998 (22.13)%
---------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was (4.28)%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN LIFE OF CLASS
(FOR PERIODS ENDED DECEMBER 31, 1998) ONE YEAR (INCEPTION 12/1/97)
- ------------------------------------- -------- -------------------
<S> <C> <C>
Value Growth Portfolio...................................... (27.03)% (34.50)%
S&P 500 Index*.............................................. 28.59 % 12.82 %
</TABLE>
- ------------------------
* Standard & Poor's Corporation's Composite Index of 500 Common Stocks (the "S&P
500 Index") is a widely recognized, unmanaged market capitalization-weighted
index of 500 widely held common stocks.
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS-HIGH GRADE BOND PORTFOLIO
1998 CALENDAR YEAR*
<S> <C>
1998 6.45%
</TABLE>
<TABLE>
<CAPTION>
------------------------------
<S> <C> <C>
BEST QUARTER: 3Q 1998 2.94%
------------------------------
WORST QUARTER: 4Q 1998 0.04%
------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was (0.45)%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN LIFE OF CLASS
(FOR PERIODS ENDED DECEMBER 31, 1998) ONE YEAR (INCEPTION 12/1/97)
- ------------------------------------- -------- -------------------
<S> <C> <C>
High Grade Bond Portfolio................................... 6.45% 6.77%
Lehman Brothers Mutual Fund Aggregate Index*................ 8.69% 9.75%
</TABLE>
- ------------------------
* The Lehman Brothers Aggregate Index is a widely recognized, unmanaged index of
fixed income performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS-HIGH YIELD BOND PORTFOLIO
1998 CALENDAR YEAR*
<S> <C>
1998 5.18%
</TABLE>
<TABLE>
<CAPTION>
------------------------------
<S> <C> <C>
BEST QUARTER: 2Q 1998 2.45%
------------------------------
WORST QUARTER: 4Q 1998 0.30%
------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was (1.93)%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN LIFE OF CLASS
(FOR PERIODS ENDED DECEMBER 31, 1998) ONE YEAR (INCEPTION 12/1/97)
- ------------------------------------- -------- -------------------
<S> <C> <C>
High Yield Bond Portfolio................................... 5.18% 5.64%
Lehman Brothers Mutual Fund Corporate/High Yield Index*..... 6.98% 8.00%
</TABLE>
- ------------------------
* The Lehman Brothers Mutual Fund Corporate/High Yield Index is a widely
recognized, unmanaged index of corporate and high yield bond market
performance.
2
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS-MANAGED PORTFOLIO
1998 CALENDAR YEAR*
<S> <C>
1998 -13.92%
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
<S> <C> <C>
BEST QUARTER: 1Q 1998 3.47%
---------------------------------
WORST QUARTER: 3Q 1998 (10.99)%
---------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was 0.23%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN LIFE OF CLASS
(FOR PERIODS ENDED DECEMBER 31, 1998) ONE YEAR (INCEPTION 12/1/97)
- ------------------------------------- -------- -------------------
<S> <C> <C>
Managed Portfolio........................................... (13.92)% (12.75)%
S&P 500 Index*.............................................. 28.59 % 12.82 %
</TABLE>
- ------------------------
* Standard & Poor's Corporation's Composite Index of 500 Common Stocks (the "S&P
500 Index") is a widely recognized, unmanaged market capitalization-weighted
index of 500 widely held common stocks.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS-MONEY MARKET PORTFOLIO
1998 CALENDAR YEAR*
<S> <C>
1998 3.71%
</TABLE>
<TABLE>
<CAPTION>
------------------------------
<S> <C> <C>
BEST QUARTER: 1Q 1998 0.98%
------------------------------
WORST QUARTER: 2Q 1998 0.79%
------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was 2.12%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN LIFE OF CLASS
(FOR PERIODS ENDED DECEMBER 31, 1998) ONE YEAR (INCEPTION 12/1/97)
- ------------------------------------- -------- -------------------
<S> <C> <C>
Money Market Portfolio...................................... 3.71% 3.78%
90-day T-Bill Index*........................................ 5.01% 2.21%
</TABLE>
- ------------------------
* The 90-day T-Bill Index is a widely recognized index of three-month treasury
bills.
3
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS-BLUE CHIP PORTFOLIO
1998 CALENDAR YEAR*
<S> <C>
1998 16.81%
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
<S> <C> <C>
BEST QUARTER: 4Q 1998 17.55%
---------------------------------
WORST QUARTER: 3Q 1998 (14.28)%
---------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was 9.45%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN LIFE OF CLASS
(FOR PERIODS ENDED DECEMBER 31, 1998) ONE YEAR (INCEPTION 12/1/97)
- ------------------------------------- -------- -------------------
<S> <C> <C>
Blue Chip Portfolio......................................... 16.81% 14.86%
S&P 500 Index*.............................................. 28.59% 12.82%
</TABLE>
- ------------------------
* Standard & Poor's Corporation's Composite Index of 500 Common Stocks (the "S&P
500 Index") is a widely recognized, unmanaged market capitalization-weighted
index of 500 widely held common stocks.
4
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolios.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENTS)
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load Imposed on Purchases................. None
Maximum Sales Load Imposed on Reinvested Dividends...... None
Deferred Sales Load..................................... None
Redemption Fee.......................................... None
Exchange Fee............................................ None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT FUND OPERATING
PORTFOLIO FEES 12B-1 FEES OTHER EXPENSES EXPENSES
- ---------------------------------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Value Growth 0.50% None 0.69% 1.19%
High Grade Bond 0.40% None 0.86% 1.26%
High Yield Bond 0.55% None 0.95% 1.50%
Managed 0.60% None 0.87% 1.47%
Money Market 0.25% None 1.97% 2.22%
Blue Chip 0.25% None 0.69% 0.94%
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in each of the Portfolios for the time periods indicated
and then redeem all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Portfolios'
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Growth $121 $378 $ 654 $1,443
High Grade Bond $128 $400 $ 692 $1,523
High Yield Bond $153 $474 $ 818 $1,791
Managed $150 $465 $ 803 $1,757
Money Market $225 $694 $1,190 $2,554
Blue Chip $ 96 $300 $ 520 $1,155
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolios' financial performance through each year shown. Certain information
reflects financial results for a single Portfolio share. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in each of the Portfolios (assuming reinvestment of all dividends and
distributions). This information has been derived from financial statements that
have been audited by Ernst & Young LLP, whose report, along with the Portfolios'
financial statements, is included in the Annual Report, which is available upon
request and incorporated by reference into the Statement of Additional
Information.
<TABLE>
<CAPTION>
VALUE GROWTH HIGH GRADE BOND HIGH YIELD BOND
--------------------- --------------------- ---------------------
YEAR YEAR YEAR
ENDED (12/1/97 - ENDED (12/1/97 - ENDED (12/1/97 -
7/31/99 7/31/98) 7/31/99 7/31/98) 7/31/99 7/31/98)
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period................... $11.08 $ 16.16 $10.57 $10.53 $10.47 $10.52
Income from Investment
Operations:
Net investment income..... 0.19 0.19 0.60 0.42 0.65 0.45
Net realized and
unrealized gain (loss)
on investments.......... (1.01) (2.83) (0.44) 0.04 (0.50) 0.02
------ ------- ------ ------ ------ ------
Total from investment
operations................ (0.82) (2.64) 0.16 0.46 0.15 0.47
Less Distributions:
Dividends from net
investment income....... (0.15) (0.18) (0.60) (0.42) (0.65) (0.45)
Distributions from capital
gains................... (2.26) (0.06) (0.02) (0.07)
Distributions in excess of
net realized gains...... (0.51) (0.08)
------ ------- ------ ------ ------ ------
Total distributions......... (0.66) (2.44) (0.66) (0.42) (0.75) (0.52)
------ ------- ------ ------ ------ ------
Net asset value at end of
period...................... $ 9.60 $ 11.08 $10.07 $10.57 $ 9.87 $10.47
====== ======= ====== ====== ====== ======
Total Return:
Total investment return
based on net asset
value (1)................. (6.83)% (18.97)%(2) 1.47% 4.40%(2) 1.43% 4.62%(2)
Ratios/Supplemental Data:
Net assets at end of period
in thousands.............. $5,399 $ 4,885 $1,521 $1,376 $1,635 $1,454
Ratio of total expenses to
average net assets........ 1.19% 0.73%(2) 1.26% 0.95%(2) 1.50% 1.05%(2)
Ratio of net expenses to
average net assets........ 1.18% 0.73%(2) 1.25% 0.95%(2) 1.49% 1.05%(2)
Ratio of net investment
income to average net
assets.................... 1.48% 0.64%(2) 5.74% 3.89%(2) 6.38% 4.26%(2)
Portfolio turnover rate..... 220% 217%(2) 29% 38%(2) 44% 30%(2)
</TABLE>
- ------------------------
(1) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period.
(2) Period from December 1, 1997 (date Class I operations commenced) through
July 31, 1998. Ratios presented have not been annualized.
(3) Without the Manager's reimbursement of $1,724 of its expenses for the
period indicated, the Money Market Portfolio would have had per share net
investment Income of $.03.
6
<PAGE>
<TABLE>
<CAPTION>
MANAGED MONEY MARKET BLUE CHIP
--------------------- --------------------- ---------------------
YEAR YEAR YEAR
ENDED (12/1/97 - ENDED (12/1/97 - ENDED (12/1/97 -
7/31/99 7/31/98) 7/31/99 7/31/98) 7/31/99 7/31/98)
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period................... $12.13 $14.21 $ 1.00 $ 1.00 $41.37 $36.77
Income from Investment
Operations:
Net investment income..... 0.49 0.34 0.03 0.02 0.38 0.29
Net realized and
unrealized gain (loss)
on investments.......... (1.21) (1.16) 5.84 4.51
------ ------ ------ ------ ------ ------
Total from investment
operations................ (0.72) (0.82) 0.03 0.02 6.22 4.80
Less Distributions:
Dividends from net
investment income....... (0.49) (0.36) (0.03) (0.02) (0.29) (0.17)
Distributions from capital
gains................... (0.90) (0.05) (0.03)
Distributions in excess of
net realized gains...... (0.51) (0.12)
------ ------ ------ ------ ------ ------
Total distributions......... (1.00) (1.26) (0.03) (0.02) (0.46) (0.20)
------ ------ ------ ------ ------ ------
Net asset value at end of
period...................... $10.41 $12.13 $ 1.00 $ 1.00 $47.13 $41.37
====== ====== ====== ====== ====== ======
Total Return:
Total investment return
based on net asset
value (1)................. (5.75)% (6.31)%(2) 3.16% 2.47%(2) 15.18% 13.14%(2)
Ratios/Supplemental Data:
Net assets at end of period
in thousands.............. $2,931 $2,762 $ 735 $ 627 $5,601 $3,613
Ratio of total expenses to
average net assets........ 1.47% 1.03%(2) 2.22%(3) 1.29%(2) 0.94% 0.76%(2)
Ratio of net expenses to
average net assets........ 1.47% 1.03%(2) 1.97% 1.29%(2) 0.94% 0.76%(2)
Ratio of net investment
income to average net
assets.................... 4.78% 2.30%(2) 3.07% 2.37%(2) 0.88% 0.51%(2)
Portfolio turnover rate..... 67% 66%(2) 0% 0%(2) 7% 3%(2)
</TABLE>
- ------------------------
(1) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period.
(2) Period from December 1, 1997 (date Class I operations commenced) through
July 31, 1998. Ratios presented have not been annualized.
(3) Without the Manager's reimbursement of $1,724 of its expenses for the
period indicated, the Money Market Portfolio would have had per share net
investment Income of $.03.
Supplement dated December 1, 1999
7
<PAGE>
- --------------------------------------------------------------------------------
EQUITRUST SERIES FUND, INC.
-------------------------------------------
VALUE GROWTH PORTFOLIO
HIGH GRADE BOND PORTFOLIO
HIGH YIELD BOND PORTFOLIO
MANAGED PORTFOLIO
MONEY MARKET PORTFOLIO
BLUE CHIP PORTFOLIO
----------------------------------------------------------------------
PROSPECTUS
dated December 1, 1999
EquiTrust Series Fund, Inc. (the "Fund") is an open-end, diversified management
investment company consisting of six Portfolios, each with its own investment
objective(s), investment policies, restrictions and attendant risks. This
prospectus describes each Portfolio in some detail -- please read it and retain
it for future reference.
An investment in a Portfolio of the Fund is not a bank deposit and is not
insured, guaranteed, or endorsed by the Federal Deposit Insurance Corporation,
or any other government agency. An investment in a Portfolio of the Fund
involves investment risks, including possible loss of principal.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED SHARES
OF THE FUND OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EquiTrust Mutual Funds
5400 University Avenue
West Des Moines, Iowa 50266
800-247-4170
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
VALUE GROWTH PORTFOLIO...................................... 3
HIGH GRADE BOND PORTFOLIO................................... 6
HIGH YIELD BOND PORTFOLIO................................... 8
MANAGED PORTFOLIO........................................... 10
MONEY MARKET PORTFOLIO...................................... 13
BLUE CHIP PORTFOLIO......................................... 15
FEES AND EXPENSES........................................... 17
INVESTMENT OBJECTIVES, PORTFOLIO STRATEGIES, AND OVERALL
RISKS..................................................... 18
PRINCIPAL RISK FACTORS ASSOCIATED WITH THE PORTFOLIOS'
INVESTMENTS............................................... 22
General Discussion of Risks........................... 22
Risk/Return Curve..................................... 22
OTHER SECURITIES AND INVESTMENT STRATEGIES.................. 24
Repurchase Agreements................................. 26
Foreign Securities.................................... 26
Non-Investment Grade Securities....................... 26
When-Issued and Delayed Delivery Transactions......... 28
Mortgage-Backed Securities............................ 29
Asset-Backed Securities............................... 29
Covered Call Options.................................. 30
Securities Lending.................................... 30
Short-Term Trading.................................... 31
HOW TO BUY SHARES........................................... 31
HOW TO REDEEM SHARES........................................ 32
OTHER SHAREHOLDER SERVICES.................................. 34
Periodic Withdrawal Plan.............................. 34
Automatic Investment Plan............................. 35
Exchange Privilege.................................... 35
Facsimile Requests.................................... 36
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Retirement Plans...................................... 36
Education Plan........................................ 37
PORTFOLIO MANAGEMENT........................................ 37
OTHER INFORMATION........................................... 38
Year 2000............................................. 38
Distributor........................................... 39
Net Asset Value....................................... 39
Investor Education and Protection..................... 40
DISTRIBUTIONS AND TAXES..................................... 41
Distributions......................................... 41
Taxes................................................. 42
CLASSES OF SHARES........................................... 43
FINANCIAL HIGHLIGHTS........................................ 44
ADDITIONAL INFORMATION...................................... Back Cover
Shareholder Inquiries................................. Back Cover
Annual/Semi-Annual Reports to Shareholders............ Back Cover
Statement of Additional Information................... Back Cover
</TABLE>
- -------------------
YIELD AND PURCHASE INFORMATION
U.S. Toll Free (800) 247-4170
Iowa Toll Free (800) 422-3175
Des Moines (515) 225-5586
2
<PAGE>
VALUE GROWTH PORTFOLIO
- --------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - have a longer investment time horizon
- - are willing to accept higher ongoing short-term risk in return for the
potential of higher long-term returns
- - want to diversify your investments
- - are seeking mutual funds for the growth portion of an asset allocation program
or
- - are investing for retirement or other goals that are many years in the future
You may want to invest less of your assets in this Portfolio if you:
- - are investing with a shorter investment time horizon in mind
or
- - are uncomfortable with an investment whose value may vary substantially
(END SIDEBAR)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks long-term capital appreciation.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Portfolio pursues its investment objective by investing primarily (i.e., at
least 65% of total assets) in equity securities of companies that the Adviser
believes have a potential to earn a high return on capital and/or are
undervalued by the market (i.e., "value stocks"). The Portfolio may invest in
securities of companies in cyclical industries during periods when such
securities appear to the Adviser to have strong potential for capital
appreciation. It also may invest in "special situation" companies. Special
situation companies are ones that, in the Adviser's opinion, have potential for
significant future earnings growth but have not performed well in the recent
past. These companies may include ones with management changes, corporate or
asset restructuring, or significantly undervalued assets.
The Adviser's strategy with the Portfolio is based on a value-oriented analysis
of equity securities. Such an analysis focuses upon evaluations of key financial
ratios such as stock price-to-book value, stock price-to-earnings, stock
price-to-cash flow and debt-to-total capital. The Adviser attempts to determine
the fundamental value of an enterprise using the foregoing ratios and by
evaluating the company's balance sheet (E.G., comparing the company's assets
with the purchase price of similar recently acquired assets) as well as by using
dividend discounting models. The Adviser's use of a value-oriented analysis may
often result in the acquisition of equity securities of medium- and smaller-size
companies or of securities of companies that are out of favor in the market.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any mutual fund that invests in equity securities, this Portfolio is
subject to MARKET RISK, the risk that the value of your investment will
fluctuate in response to stock market movements. Like all mutual fund
investments, loss of money upon redemption is a risk of investing in this
Portfolio. Because the Portfolio invests primarily in value stocks, it is
subject to the RISKS OF VALUE INVESTING. Value stocks may never reach what the
Adviser believes is their full market value and, even though they are
undervalued, value stocks may decline further in value. Further, while the
Portfolio's investments in value stocks may limit the overall downside risk of
the Portfolio over time, the Portfolio may produce more modest gains than
riskier stock funds as a trade off for this potentially lower risk. The
3
<PAGE>
- --------------------------------------------------------------------------------
equity securities in which the Portfolio invests include the equity SECURITIES
OF "SPECIAL SITUATION" COMPANIES. The Portfolio's investments in special
situation companies bear the risk that the special situation will not develop as
favorably as expected, or the situation may deteriorate. For example, a merger
with favorable implications may be blocked or a bankruptcy may not be as
profitably resolved as had been expected. Investments in MEDIUM- AND
SMALLER-SIZE COMPANIES are generally considered to offer greater opportunity for
appreciation and to involve greater risk of depreciation than securities of
larger-size companies. Because the securities of most medium- and smaller-size
companies are not as broadly traded as those of larger-size companies, these
securities are often subject to wider and more abrupt fluctuations in market
price. In the past, there have been prolonged periods when these securities have
substantially underperformed or outperformed the securities of larger-size
companies. In addition, medium- and smaller-size companies generally have fewer
assets available to cushion an unforeseen adverse occurrence. Therefore, such an
occurrence may have a disproportionately negative impact on these companies.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the Statement of Additional Information ("SAI"). Before
you invest, please carefully read the sections on "Principal Risk Factors
Associated with the Portfolios' Investments" and "Other Securities and
Investment Strategies."
4
<PAGE>
RISK/RETURN SUMMARY -- VALUE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
The following bar chart provides an illustration of the performance of the Value
Growth Portfolio during each of the last ten years. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Value Growth Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
The table compares the average annual total returns of the Value Growth
Portfolio to those of the Standard & Poor's Corporation's Composite Index of 500
Common Stocks (the "S&P 500 Index") over the periods shown. The S&P 500 Index is
a widely recognized, unmanaged market capitalization-weighted index of 500
widely held common stocks. The S&P 500 Index figures do not reflect any fees or
expenses, and you cannot invest directly in the Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
LAST TEN YEARS*
<S> <C>
89 13.69%
90 5.20%
91 14.40%
92 10.15%
93 26.92%
94 -4.82%
95 27.50%
96 19.38%
97 7.92%
98 -27.59%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
<S> <C> <C>
BEST QUARTER: 1Q 1993 10.60%
- --------------------------------------------
WORST QUARTER: 3Q 1998 (22.28)%
- --------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
*The year-to-date return as of September 30, 1999 was (4.71)%.
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
----- ----- -----
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
VALUE GROWTH PORTFOLIO (27.59)% 2.53% 8.05%
----- ----- -----
S&P 500 INDEX* 28.59% 24.13% 18.77%
----- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Value Growth Portfolio.
5
<PAGE>
HIGH GRADE BOND PORTFOLIO
- --------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are seeking an investment that generates a regular stream of income
- - are seeking higher potential returns than money market funds provide and are
willing to accept moderate risk of volatility
- - want to diversify your investments
- - are seeking a mutual fund for the income portion of an asset allocation
program
or
- - are retired or nearing retirement
You may want to invest less of your assets in this Portfolio if you:
- - are investing for maximum return over a long time horizon
or
- - require absolute stability of your principal
(END SIDEBAR)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks to generate as high a level of current income as is
consistent with investment in a diversified portfolio of high grade
income-bearing debt securities.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
To keep current income relatively stable and to limit share price volatility,
the Portfolio invests primarily (i.e., at least 65% of total assets) in high
grade securities and maintains an intermediate (typically 2-7 year) average
portfolio duration. Under normal circumstances, the Portfolio invests at least
80% of its assets in high grade securities. High grade securities are securities
rated, at the time of purchase, in the three highest rating categories by a
nationally recognized statistical rating organization ("NRSRO") (e.g., A or
higher by either Moody's Investors Service ("Moody's") or Standard & Poor's
("S&P")) or unrated securities that the Adviser determines are of comparable
quality. (See Appendix A to the SAI for an explanation of ratings.) The
Portfolio may invest up to 20% of its total assets in unrated debt securities or
debt securities rated lower than the three highest grades of S&P or Moody's, or
in convertible debt securities, convertible preferred stocks, or non-convertible
preferred stocks rated within the three highest grades of S&P or Moody's.
The Portfolio may invest in a broad range of debt securities of domestic
corporate and government issuers. The corporate securities in which the
Portfolio may invest include debt securities of various types and maturities,
e.g., debentures, notes, mortgage securities, equipment trust certificates and
other collateralized or asset-backed securities. Collateralized securities are
backed by a pool of assets such as loans or receivables which generate cash flow
to cover the payments due on the securities.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with most income mutual funds, the Portfolio is subject to INTEREST RATE
RISK, the risk that the value of an investment will fluctuate with changes in
interest rates. Typically, a rise in interest rates causes a decline in the
market value of income bearing securities. Other factors may affect the market
price and yield of the Portfolio's securities, including investor demand and
domestic and worldwide economic conditions. In addition, the Portfolio is
subject to CREDIT RISK, the risk that issuers of interest-bearing securities may
not be able to meet their interest or principal payment obligations when due.
COLLATERALIZED SECURITIES are subject to certain risks, including a decline in
the value of the collateral backing the security, failure of the collateral to
generate the anticipated cash flow or in certain cases more rapid prepayment
because of events affecting the collateral, such as accelerated prepayment of
mortgages or other loans backing these securities, or destruction of equipment
subject to equipment trust certificates. In the event of prepayment, the
Portfolio will be required to reinvest the proceeds of prepayments at interest
rates prevailing at the time of reinvestment, which may be lower. Like all
mutual fund investments, loss of money upon redemption is a risk of investing in
this Portfolio.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the SAI. Before you invest, please carefully read the
sections, on "Principal Risk Factors Associated with the Portfolios'
Investments" and "Other Securities and Investment Strategies."
6
<PAGE>
RISK/RETURN SUMMARY -- HIGH GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------
The following bar chart provides an illustration of the performance of the High
Grade Bond Portfolio during each of the last ten years. The bar chart indicates
the degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the High Grade Bond Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
The table compares the average annual total returns of the High Grade Bond
Portfolio to those of the Lehman Brothers Mutual Fund Aggregate Index ("Lehman
Aggregate Index") over the periods shown. The Lehman Aggregate Index is a widely
recognized, unmanaged index of fixed income performance. The Lehman Aggregate
Index figures do not reflect any fees or expenses, and you cannot invest
directly in the Lehman Aggregate Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
LAST TEN YEARS*
<S> <C>
89 11.00%
90 7.44%
91 16.16%
92 7.03%
93 7.10%
94 -0.45%
95 12.91%
96 5.42%
97 8.74%
98 6.21%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
<S> <C> <C>
BEST QUARTER: 2Q 1989 5.67%
- --------------------------------------------
WORST QUARTER: 2Q 1994 (1.33)%
- --------------------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was (0.87)%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
(for periods ending --------- ----------- ----------
December 31, 1998)
<S> <C> <C> <C>
HIGH GRADE BOND PORTFOLIO 6.21% 6.47% 8.07%
----- ----- -----
LEHMAN BROTHERS MUTUAL FUND
AGGREGATE INDEX 8.69% 7.13% 9.07%
----- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the High Grade Bond Portfolio.
7
<PAGE>
HIGH YIELD BOND PORTFOLIO
- --------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are seeking higher potential returns than most bond mutual funds provide and
are willing to accept significant risk of volatility
- - want to diversify your investments
- - are seeking a mutual fund for the income portion of an asset allocation
program
or
- - are retired or nearing retirement, if your investment in this Portfolio is
held as part of a diversified investment portfolio
You may want to invest less of your assets in this Portfolio if you:
- - desire relative stability of your principal
or
- - are investing for maximum return over a long time horizon
(END SIDEBAR)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks as high a level of current income as is consistent with
investment in a diversified portfolio of lower-rated, higher-yielding income
bearing securities. The Portfolio also seeks capital appreciation, but only when
consistent with its primary goal.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Portfolio invests primarily (i.e, at least 65% of total assets) in
lower-rated, higher-yielding income bearing debt securities, such as "junk"
bonds. Under normal market conditions, the Portfolio invests more than 80% of
its assets in debt and other income-bearing securities rated lower than
investment grade (and their unrated equivalents) or other high-yielding
securities. Investment grade securites are those rated, at the time of purchase,
in the four highest categories by an NRSRO (e.g., Baa or higher by Moody's or
BBB or higher by S&P) or unrated securities that the Adviser determines are of
comparable quality. The Portfolio generally does not invest in bonds rated CC/Ca
or lower by S&P or Moody's, respectively, unless the Adviser believes that the
financial condition of the issuer or the protection afforded to the security is
stronger than the rating would otherwise indicate. (See Appendix A to the SAI
for an explanation of ratings.)
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
This Portfolio is subject to above-average INTEREST RATE and CREDIT RISKS. You
should expect greater fluctuations in share price, yield and total return
compared to mutual funds holding bonds and other income bearing securities with
higher credit ratings and/or shorter maturities. These fluctuations, whether
positive or negative, may be sharp and unanticipated. Like all mutual fund
investments, loss of money upon redemption is a significant risk of investing in
this Portfolio.
Issuers of NON-INVESTMENT GRADE SECURITIES (I.E., "junk" bonds) are typically in
poor financial health, and their ability to pay interest and principal is
uncertain. Compared to issuers of investment-grade bonds, they are more likely
to encounter financial difficulties and to be materially affected by these
difficulties when they do encounter them. "Junk" bond markets may react strongly
to adverse news about an issuer or the economy, or to the perception or
expectation of adverse news.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the SAI. Before you invest, please carefully read the
sections on "Principal Risk Factors Associated with the Portfolios' Investments"
and "Other Securities and Investment Strategies."
8
<PAGE>
RISK/RETURN SUMMARY -- HIGH YIELD BOND PORTFOLIO
- --------------------------------------------------------------------------------
The following bar chart provides an illustration of the performance of the High
Yield Bond Portfolio during each of the last ten years. The bar chart indicates
the degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the High Yield Bond Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
The table compares the average annual total returns of the High Yield Bond
Portfolio to those of the Lehman Brothers Mutual Fund Corporate/High Yield Index
and the Lehman Brothers U.S. Corporate/ High Yield Index (collectively, the
"Lehman Indices") over the periods shown. The Lehman Indices are widely
recognized, unmanaged indices of corporate and high yield bond market
performance. The Lehman Indices figures do not reflect any fees or expenses, and
you cannot invest directly in the Lehman Indices.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
LAST TEN YEARS*
<S> <C>
89 9.95%
90 2.13%
91 23.31%
92 11.33%
93 14.36%
94 -2.04%
95 12.17%
96 11.72%
97 10.80%
98 4.76%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
<S> <C> <C>
BEST QUARTER: 1Q 1991 8.13%
- --------------------------------------------
WORST QUARTER: 1Q 1994 (2.02)%
- --------------------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was (2.32)%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
(for periods ending --------- ----------- ----------
December 31, 1998)
<S> <C> <C> <C>
HIGH YIELD BOND PORTFOLIO 4.76% 7.35% 9.65%
----- ----- -----
LEHMAN BROTHERS MUTUAL FUND
CORPORATE/HIGH YIELD INDEX 6.98% 7.83% N/A*
----- ----- -----
LEHMAN BROTHERS U.S. CORPORATE/HIGH
YIELD INDEX 1.87% 8.57% 10.55%
----- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the High Yield Bond Portfolio. During certain periods
shown, the Adviser reimbursed the Portfolio for operating expenses in excess of
1.50% of average daily net assets, which lowered expenses for the Portfolio.
* The Lehman Brothers Mutual Fund Corporate/High Yield Index commenced
operations November 30, 1992.
9
<PAGE>
MANAGED PORTFOLIO
- --------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are looking for a more conservative alternative to a growth-oriented mutual
fund
- - want a well-diversified and relatively stable investment allocation
- - need a core investment
- - seek above-average total return over the long term irrespective of its source
or
- - are retired or nearing retirement, if your investment in this Portfolio is
held as part of a diversified investment portfolio
You may want to invest less of your assets in this Portfolio if you:
- - are investing for maximum return over a long time horizon
or
- - require a high degree of stability of your principal
(END SIDEBAR)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Managed Portfolio seeks the highest level of total return through income and
capital appreciation.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Managed Portfolio pursues its objective through a fully managed investment
policy consisting of investment in the following three market sectors:
(1) common stocks and other equity securities, (2) high grade debt securities
and preferred stocks, and (3) money market instruments of the types in which the
Money Market Portfolio may invest.
The Managed Portfolio's investment policy for the equity sector is to invest in
both value-oriented securities of the type in which the Value Growth Portfolio
invests and securities of those companies that display more traditional growth
characteristics such as established records of growth in sales and earnings. The
Portfolio's criteria for selecting debt and money market securities are the same
as those that it employs for the primary investments in the High Grade Bond and
Money Market Portfolios, respectively. There are no restrictions as to the
proportion of one or another type of security which the Portfolio may hold.
Accordingly, at any given time, the Portfolio may be substantially invested in
equity securities, debt securities or money market instruments.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any mutual fund that invests in stocks and bonds, the Portfolio is
subject to MARKET and INTEREST RATE RISKS, the risks that the value of an
investment will fluctuate in response to stock and bond market movements and
changes in interest rates. Loss of money upon redemption is a risk of investing
in this Portfolio.
To the extent that it invests in certain securities, the Portfolio may be
affected by additional risks relating to NON-INVESTMENT GRADE SECURITIES
(above-average credit, market and other risks), SECURITIES OF FOREIGN ISSUERS
(currency, information, natural event and political risks), and MORTGAGE-BACKED
SECURITIES (credit, extension, prepayment and interest rate risks). These risks,
and the risks associated with other higher-risk securities and practices that
the Portfolio may utilize, are described in more detail later in this prospectus
and in the SAI. Before you invest, please carefully read the sections on
"Principal Risk Factors associated with the Portfolios' Investments" and "Other
Securities and Investment Strategies."
EQUITY INVESTMENT RISK
As with any mutual fund that invests in common stocks and other equity
securities, this Portfolio is subject to MARKET RISK, the risk that the value of
your investment will fluctuate in response to stock market movements. Because
the Portfolio may invest some or all of its assets in the same types of equity
securities in which the Value Growth Portfolio invests, this Portfolio may be
subject to the RISKS OF VALUE INVESTING, the risks associated with investing in
the equity SECURITIES of SPECIAL SITUATION COMPANIES, and the risks associated
with investments in MEDIUM- AND SMALLER-SIZED COMPANIES.
10
<PAGE>
- --------------------------------------------------------------------------------
- - Risks of value investing: The risks of value investing include the risk that
value stocks may never reach what the Adviser believes is their full market
value, and even though they are undervalued, the risk that such stock may
decline further in value.
- - Risk of securities of special situation companies: The risks of investing in
special situation companies include the risk that the special situation will
not develop as favorably as expected, or the situation may deteriorate.
- - Risks of medium- and smaller-sized companies: Although investing in such
companies is generally considered to offer greater opportunity for
appreciation than investing in securities of companies with larger market
capitalization, they also generally involved greater risk of depreciation. In
addition, these securities are often subject to wider and more abrupt
fluctuations in market price. In the past, there have been prolonged periods
when these securities have substantially underperformed or outperformed the
securities of larger-size companies. Medium- and smaller-size companies
generally have fewer assets available to cushion an unforeseen adverse
occurrence. Therefore, such an occurrence may have a disproportionately
negative impact on these companies.
INCOME INVESTMENT RISK
As with most mutual funds that invest in income-bearing securities, to the
extent that the Portfolio invests in the income-bearing securities in which the
High Grade Bond Portfolio invests, it may be subject to INTEREST RATE RISK and
CREDIT RISK. Other factors that may affect the market price and yield of the
Portfolio's investments in income-bearing securities include investor demand and
domestic and worldwide economic conditions.
- - Interest rate risk: Interest rate risk is the risk that the value of an
investment will fluctuate with changes in interest rates. Typically, a rise in
interest rates causes a decline in the market value of income-bearing
securities.
- - Credit risk: Credit risk is the risk that issuers of interest bearing
securities may not be able to meet their interest or principal payment
obligations when due.
MONEY MARKET INVESTMENT RISKS
To the extent that the Portfolio invests in money market instruments of the
types in which the Money Market Portfolio may invest, this Portfolio is subject
to interest rate risk and, to some extent, credit risk, although these risks are
relatively low for the money market instruments in which the Portfolio may
invest. However, the Portfolio's investments in money market instruments could
experience a high level of current income volatility because the level of its
current income directly reflects short-term interest rates.
Like all mutual fund investments, loss of money upon redemption is a risk of
investing in this Portfolio. These risks, and the risks associated with other
higher-risk securities that the Portfolio may utilize, are described in more
detail later in this prospectus and in the SAI. Before you invest, please
carefully read the sections on "Principal Risk Factors Associated with the
Portfolios' Investments" and "Other Securities and Investment Strategies."
11
<PAGE>
RISK/RETURN SUMMARY -- MANAGED PORTFOLIO
- --------------------------------------------------------------------------------
The following bar chart provides an illustration of the performance of the
Managed Portfolio during each of the last ten years. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Managed Portfolio may achieve in the future. Future annual
returns may be greater or less than the returns shown in the chart.
The table compares the average annual total returns of the Managed Portfolio to
those of the S&P 500 Index over the periods shown. The S&P 500 Index is a widely
recognized, unmanaged market capitalization-weighted index of 500 widely held
common stocks. The S&P 500 Index figures do not reflect any fees or expenses,
and you cannot invest directly in the Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
LAST TEN YEARS*
<S> <C>
89 7.38%
90 8.04%
91 10.21%
92 13.31%
93 18.90%
94 -3.85%
95 23.93%
96 16.33%
97 10.44%
98 -14.25%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
<S> <C> <C>
BEST QUARTER: 1Q 1993 9.62%
- --------------------------------------------
WORST QUARTER: 3Q 1998 (11.05)%
- --------------------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was (0.01)%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
(for periods ending --------- ----------- ----------
December 31, 1998)
<S> <C> <C> <C>
MANAGED PORTFOLIO (14.25)% 5.55% 8.45%
----- ----- -----
S&P 500 INDEX 28.59% 24.13% 18.77%
----- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Managed Portfolio. During certain periods shown, the
Adviser reimbursed the Portfolio for operating expenses in excess of 1.50% of
average daily net assets, which lowered expenses for the Portfolio.
12
<PAGE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - require stability of principal
- - are seeking a mutual fund for the cash portion of an asset allocation program
- - need to "park" your money temporarily
or
- - consider yourself a saver rather than an investor
You may want to invest less of your assets in this Portfolio if you:
- - are seeking an investment that is likely to outpace inflation
- - are investing for retirement or other goals that are many years in the future
or
- - are investing for growth or maximum current income
(END SIDEBAR)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The MONEY MARKET PORTFOLIO seeks maximum current income consistent with
liquidity and stability of principal. The Portfolio intends to maintain a stable
value of $1.00 per share.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
This Portfolio invests exclusively in U.S. dollar-denominated money market
securities maturing in 13 months or less from the date of purchase, including
those issued by U.S. financial institutions, corporate issuers, the U.S.
Government and its agencies, instrumentalities and municipalities. At least 95%
of the Portfolio's assets must be rated in the highest short-term category (or
its unrated equivalent), and 100% of the Portfolio's assets must be invested in
securities rated in the two highest rating categories. The Portfolio maintains a
dollar-weighted average portfolio maturity of 90 days or less.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any money market fund, the yield paid by the Portfolio will vary with
changes in interest rates. Also, there is a possibility that the Portfolio's
share value could fall below $1.00, which could reduce the value of your
investment.
AN INVESTMENT IN THE PORTFOLIO IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE
PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT
IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE PORTFOLIO. The Portfolio could
experience a high level of current income volatility because the level of its
current income directly reflects short-term interest rates.
Before you invest, please carefully read the sections on "Principal Risk Factors
Associated with the Portfolios' Investments" and "Other Securities and
Investment Strategies."
13
<PAGE>
RISK/RETURN SUMMARY -- MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
The following bar chart provides an illustration of the performance of the Money
Market Portfolio during each of the last ten years. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Money Market Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
The table compares the average annual total returns of the Money Market
Portfolio to those of the 90-day T-Bill Index over the periods shown. The 90-day
T-Bill Index is a widely recognized index of three-month Treasury bills. The
90-day T-Bill Index figures do not reflect any fees or expenses, and you cannot
invest directly in the Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
LAST TEN YEARS*
<S> <C>
89 7.62%
90 6.64%
91 4.34%
92 1.91%
93 1.27%
94 2.17%
95 3.95%
96 3.48%
97 3.70%
98 3.42%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
<S> <C> <C>
BEST QUARTER: 2Q 1989 2.00%
- --------------------------------------------
WORST QUARTER: 2Q 1993 0.30%
- --------------------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was 2.36%%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
(for periods ending --------- ----------- ----------
December 31, 1998)
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO 3.42% 3.34% 3.83%
----- ----- -----
90-DAY T-BILL INDEX 5.01% 5.16% 5.29%
----- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Money Market Portfolio. During certain periods shown,
the Adviser reimbursed the Portfolio for operating expenses in excess of 1.50%
of average daily net assets, which lowered expenses for the Portfolio.
14
<PAGE>
BLUE CHIP PORTFOLIO
- --------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are looking for a stock fund that has both growth and income components
- - are looking for a more conservative alternative to a growth-oriented fund
- - need a core investment
- - seek above-average long-term total return
- - are investing for a higher return over a long time horizon
or
- - are retired or nearing retirement, if your investment in this Portfolio is
held as part of a diversified investment portfolio
You may want to invest less of your assets in this Portfolio if you:
- - are investing with a shorter time horizon in mind
or
- - require a high degree of stability of your principal
(END SIDEBAR)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks long-term growth of capital and income.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Portfolio pursues its objective by investing primarily (i.e., at least 65%
of total assets) in equity securities of well-capitalized, established
companies. The Portfolio focuses on common stocks of approximately 50 large,
well-known companies that the Adviser believes to collectively comprise a
representative cross-section of major industries. Companies of this type are
commonly referred to as "blue chip". Blue chip companies are generally
identified by their substantial capitalization, established history of earnings
and superior management structure. The Adviser selects particular issuers on the
basis of whether they, taken together, reasonably represent a cross-section of
major industries, and not on the basis of any analysis of their economic or
financial strength or the relative value of the securities. Within the limits of
its investment restrictions (found in the SAI), the Portfolio may, from time to
time, hold more than 5% of its assets in the stocks of one or more companies.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any mutual fund that invests in equity securities, this Portfolio is
subject to MARKET RISK, the risk that the value of your investment will
fluctuate in response to stock market movements. The equity securities in which
the Portfolio primarily invests are considered " GROWTH STOCKS." Because of
their perceived return potential, growth stocks are typically in demand and tend
to carry relatively high prices. Growth stocks generally experience greater
share price fluctuations as the market reacts to changing perceptions of the
underlying companies' growth potential and broader economic activity. To the
extent that the Portfolio invests in larger, more established companies, the
Portfolio may underperform in markets that do not favor growth stock funds. Like
all mutual fund investments, loss of money upon redemption is a risk of
investing in this Portfolio.
The Portfolio may also be subject to NON-DIVERSIFICATION RISK, the risk that a
concentration of the Portfolio's investment in a limited number of companies
will expose the Portfolio, to a greater extent than if investments were less
concentrated, to losses arising from adverse developments affecting those
companies.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the SAI. Before you invest, please carefully read the
sections on "Principal Risk Factors Associated with the Portfolios' Investments"
and "Other Securities and Investment Strategies".
15
<PAGE>
RISK/RETURN SUMMARY -- BLUE CHIP PORTFOLIO
- --------------------------------------------------------------------------------
The following bar chart provides an illustration of the performance of the Blue
Chip Portfolio during each of the last ten years. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Blue Chip Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
The table compares the average annual total returns of the Blue Chip Portfolio
to those of the S&P 500 Index over the periods shown. The S&P 500 Index is a
widely recognized, unmanaged market capitalization-weighted index of 500 widely
held common stocks. The S&P 500 Index figures do not reflect any fees or
expenses, and you cannot invest directly in the Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
LAST TEN YEARS*
<S> <C>
89 29.22%
90 -3.56%
91 23.68%
92 6.92%
93 11.97%
94 0.96%
95 32.41%
96 20.30%
97 25.03%
98 16.33%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
<S> <C> <C>
BEST QUARTER: 4Q 1998 17.40%
- --------------------------------------------
WORST QUARTER: 3Q 1998 (14.35)%
- --------------------------------------------
</TABLE>
*The year-to-date return as of September 30, 1999 was 8.86%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
(for periods ending --------- ----------- ----------
December 31, 1998)
<S> <C> <C> <C>
BLUE CHIP PORTFOLIO 16.33% 18.50% 15.73%
----- ----- -----
S&P 500 INDEX 28.59% 24.13% 18.77%
----- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Blue Chip Portfolio.
16
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolios.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption proceeds)(1) 5.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Exchange Fee $5.00
</TABLE>
(1) The deferred sales charge decreases over time so that, the longer you hold
Fund shares, the less the deferred sales charge. The sales charges in each
year are as follows: year 1, 5.00%; year 2, 4.00%; year 3, 4.00%; year 4,
3.00%; year 5, 2.00%; year 6, 1.00%; and year 7 and thereafter, 0.00%.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
<TABLE>
<CAPTION>
ASSETS)
DISTRIBUTION TOTAL ANNUAL
MANAGEMENT ("12b-1") OTHER FUND OPERATING
PORTFOLIO FEES FEES EXPENSES EXPENSES*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Growth 0.50% 0.50% 0.74% 1.74%
High Grade Bond 0.40% 0.50% 0.77% 1.67%
High Yield Bond 0.55% 0.50% 0.90% 1.95%
Managed 0.60% 0.50% 0.85% 1.95%
Money Market 0.25% 0.50% 1.16% 1.91%
Blue Chip 0.25% 0.50% 0.77% 1.52%
</TABLE>
* The Fund's Investment Advisory and Management Services Agreement (the
"Agreement") provides that if the expenses of any Portfolio (including
advisory fees payable under the Agreement, but exclusive of brokerage fees,
distribution ("12b-1") fees, interest, taxes and extraordinary expenses)
exceed 1.50% of the average daily net assets of the Portfolio for a fiscal
year, the Adviser will pay any such expenses in excess of 1.50%. However, the
Adviser is not obligated to reimburse a Portfolio in an amount exceeding its
compensation for such period from the Portfolio under the Agreement. This
reimbursement is a contractual obligation of the Adviser and will remain in
effect for so long as the Agreement continues. During the Fund's most recent
fiscal year, the Adviser did not reimburse any of the Portfolio's expenses
pursuant to such contractual reimbursement.
17
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing the
Portfolios with the cost of investing in other mutual funds. This example
assumes that you invest $10,000 in each of the Portfolios for the time periods
indicated and then redeem all of your shares at the end of these periods.
This example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------- --------- --------- --------- ---------
Value Growth $ 677 $ 948 $ 1,144 $ 2,052
High Grade Bond $ 670 $ 926 $ 1,107 $ 1,976
High Yield Bond $ 698 $ 1,012 $ 1,252 $ 2,275
Managed $ 698 $ 1,012 $ 1,252 $ 2,275
Money Market $ 694 $ 1,000 $ 1,232 $ 2,233
Blue Chip $ 655 $ 880 $ 1,029 $ 1,813
</TABLE>
<TABLE>
<CAPTION>
Assuming no redemption, your costs would be:
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Value Growth $ 177 $ 548 $ 944 $ 2,052
High Grade Bond $ 170 $ 526 $ 907 $ 1,976
High Yield Bond $ 198 $ 612 $ 1,052 $ 2,275
Managed $ 198 $ 612 $ 1,052 $ 2,275
Money Market $ 194 $ 600 $ 1,032 $ 2,233
Blue Chip $ 155 $ 480 $ 829 $ 1,813
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, PORTFOLIO STRATEGIES, AND OVERALL RISKS
- --------------------------------------------------------------------------------
This section, which supplements the overview of each Portfolio presented
earlier in this prospectus, discusses each Portfolio's investment
objective(s), strategy, and overall risks. Each Portfolio's investment
objective(s) cannot be changed without approval of a majority of the
outstanding shares of that Portfolio.
- --------------------------------------------------------------------------------
VALUE GROWTH PORTFOLIO
The Value Growth Portfolio seeks long-term capital appreciation.
The Adviser follows a value approach in investing the Portfolio's assets.
The Adviser attempts to determine the fundamental value of a company by
evaluating key financial ratios, analyzing the
18
<PAGE>
company's balance sheet, and applying dividend discounting models. Based on
this analysis, the Adviser focuses the Portfolio's investments on the equity
securities of companies the Adviser believes have a potential to earn a high
return on capital and/or are undervalued by the market.
The Value Growth Portfolio is subject to moderate levels of stock market
risk and financial risk. Stock market risk is the risk that the value of the
Portfolio's equity investments will fluctuate in response to stock market
movements. Financial risk is the risk that an equity issuer's earning
prospects and overall financial position will deteriorate, causing a decline
in the security's value.
- --------------------------------------------------------------------------------
HIGH GRADE BOND PORTFOLIO
The High Grade Bond Portfolio seeks to generate as high a level of current
income as is consistent with investment in a diversified portfolio of high
grade income-bearing debt securities.
To keep current income relatively stable and to limit share price
volatility, the Adviser invests at least 65% of the Portfolio's total assets
in high grade fixed income securities and typically maintains an average
portfolio duration of two to seven years. The Portfolio may invest up to 20%
of its total assets in unrated debt securities or debt securities rated
lower than the three highest grades of S&P or Moody's, or in convertible
debt securities, convertible preferred stocks, or non-convertible preferred
stocks rated within the three highest grades of S&P or Moody's. The
Portfolio will not directly purchase common stocks. However, it may retain
up to 10% of the value of its assets in common stocks acquired either by
conversion of debt securities or by the exercise of warrants attached to
debt securities.
The High Grade Bond Portfolio is subject to moderate levels of interest rate
risk and relatively low levels of credit risk and current income volatility.
Interest rate risk is the risk that the value of the Portfolio's investments
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of income-bearing securities.
Credit risk is the risk that the issuers of the income-bearing securities in
which the Portfolio is invested will not be able to meet their interest or
principal payment obligations when due. Current income volatility refers to
the degree and rapidity with which changes in overall market interest rates
diminish the level of current income from a portfolio of income-bearing
securities.
- --------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
The High Yield Bond Portfolio seeks as high a level of current income as is
consistent with investment in a diversified portfolio of lower-rated,
higher-yielding income bearing securities. The Portfolio also seeks capital
appreciation, but only when consistent with its primary goal.
Under normal circumstances, more than 80% of the Portfolio's assets will be
invested in fixed-income securities, including convertible and
non-convertible debt securities and preferred stock, and at least 65% of its
assets will be invested in debt securities. The remaining assets may be held
in cash or investment-grade commercial paper, obligations of banks and
savings institutions, U.S. Government securities, government agency
securities and repurchase agreements. The Portfolio does not intend to
invest in common stocks or other equity securities, but may acquire or hold
such securities when acquired in unit offerings with fixed-income securities
or in connection with an actual or proposed conversion or exchange of
fixed-income securities.
19
<PAGE>
The premise of the High Yield Bond Portfolio is that over long periods of
time, a broadly diversified portfolio of lower-rated, higher-yielding debt
securities should, net of capital losses, provide a higher net return than a
similarly diversified portfolio of higher-rated, lower-yielding debt
securities. The Adviser attempts to minimize the risks of lower-rated debt
securities by:
- constructing a portfolio of such securities diversified by industry,
geography, maturity, duration and credit quality;
- performing credit analysis independent of rating agencies and
attempting to acquire securities of issuers whose financial position
is more sound than ratings would indicate; and
- acquiring or disposing of particular securities to take advantage of
anticipated changes and trends in the economy and financial markets.
The Adviser's judgment of the risk of any particular security is a function
of its experience with lower-rated debt securities, its evaluation of
general economic and securities market conditions, and the financial
position of a security's issuer. Under certain market conditions, the
Adviser may sacrifice yield in order to adopt a defensive posture designed
to preserve capital. A defensive posture could include, among other
strategies, acquiring discount securities.
The High Yield Bond Portfolio is subject to relatively high levels of credit
risk, relatively moderate levels of interest rate risk, and relatively low
levels of current income volatility. Credit risk is the risk that the
issuers of the income-bearing securities in which the Portfolio is invested
will not be able to meet their interest or principal payment obligations
when due. Interest rate risk is the risk that the value of the Portfolio's
investments will fluctuate with changes in interest rates. Typically, a rise
in interest rates causes a decline in the market value of income-bearing
securities. Current income volatility refers to the degree and rapidity with
which changes in overall market interest rates diminish the level of current
income from a portfolio of income-bearing securities.
- --------------------------------------------------------------------------------
MANAGED PORTFOLIO
The Managed Portfolio seeks the highest level of total return through income
and capital appreciation.
The Adviser uses a fully managed approach in selecting investments for the
Portfolio. The Adviser may allocate the Portfolio's investments in any
manner among the equity, debt (i.e., income-bearing), and money market
sectors. Therefore, at any given time, the Portfolio may be substantially
invested in equity securities, income-bearing securities, or money market
instruments. The Adviser generally selects the Portfolio's equity
investments using the same approach as for the Value Growth Portfolio,
except that the Managed Portfolio may also invest in the equity securities
of companies that display more traditional growth characteristics. The
Adviser selects the Portfolio's income-bearing securities and money market
instruments using the same approach as for the High Grade Bond Portfolio and
the Money Market Portfolio, respectively.
Because the Portfolio may invest in equity securities, income-bearing
securities, and money market instruments, the Portfolio may be subject to
the risks associated with any or all of these types of investments. The
Managed Portfolio is subject to moderate levels of stock market risk,
financial risk, interest rate risk, and credit risk, and relatively low
levels of current income volatility. However, current income volatility
could be higher if the Portfolio is heavily invested in short-term
20
<PAGE>
money market instruments. Stock market risk is the risk that the value of
the Portfolio's equity investments will fluctuate in response to stock
market movements. Financial risk is the risk that an equity issuer's earning
prospects and overall financial position will deteriorate, causing a decline
in the security's value. Interest rate risk is the risk that the value of
the Portfolio's income-bearing investments will fluctuate with changes in
interest rates. Typically, a rise in interest rates causes a decline in the
market value of income-bearing securities. Credit risk is the risk that the
issuers of the income-bearing securities in which the Portfolio is invested
will not be able to meet their interest or principal payment obligations
when due. Current income volatility refers to the degree and rapidity with
which changes in overall market interest rates diminish the level of current
income from a portfolio of income-bearing securities.
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks maximum current income consistent with
liquidity and stability of principal. The Portfolio intends to maintain a
stable value of $1.00 per share.
The Portfolio invests exclusively in U.S. dollar-denominated money market
securities maturing in 13 months or less from the date of purchase,
including those issued by the U.S. Government and its agencies,
instrumentalities, and municipalities. The Adviser will invest at least 95%
of the Portfolio's assets in money market instruments rated in the highest
short-term category (or the unrated equivalent), and 100% of the Portfolio's
assets in securities rated in the two highest short-term categories. The
Adviser maintains a dollar-weighted average maturity for the Portfolio 90
days or less.
Because it invests in high quality, short-term instruments, the Money Market
Portfolio is subject to little interest rate or credit risk. However, the
Portfolio could experience a high level of current income volatility because
the level of its current income directly reflects short-term interest rates.
Current income volatility refers to the degree and rapidity with which
changes in overall market interest rates diminish the level of current
income from a portfolio of income-bearing securities.
- --------------------------------------------------------------------------------
BLUE CHIP PORTFOLIO
The Blue Chip Portfolio seeks long-term growth of capital and income.
The Adviser focuses the Portfolio's investments on the common stocks of
approximately 50 large, well-known companies, commonly referred to as "blue
chip" companies. Such companies are generally identified by their
substantial capitalization, established history of earnings, and superior
management structure. The Adviser selects the companies in which the
Portfolio invests based upon whether, taken together, such companies
reasonably represent a cross section of major industries.
The Blue Chip Portfolio is subject to moderate levels of stock market risk
and financial risk. Stock market risk is the risk that the value of the
Portfolio's equity investments will fluctuate in response to stock market
movements. Financial risk is the risk that an equity issuer's earning
prospects and overall financial position will deteriorate, causing a decline
in the security's value. The Blue Chip Portfolio is also subject to
non-diversification risk, the risk that a concentration of the Portfolio's
investment in a limited number of companies will expose the Portfolio, to a
greater extent than if investments were less concentrated, to losses arising
from adverse developments affecting those companies.
21
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL RISK FACTORS ASSOCIATED WITH THE PORTFOLIOS' INVESTMENTS
- --------------------------------------------------------------------------------
GENERAL DISCUSSION OF RISKS
EQUITY SECURITIES. For the Portfolios that invest in equity securities, such
securities include common stock, preferred stock, and securities convertible
or exchangeable into common stock, including convertible debt securities,
convertible preferred stock, and warrants or rights to acquire common stock.
To the extent that a Portfolio invests in equity securities, it is subject
to market risk. In general, stock values fluctuate in response to the
fortunes of individual companies and in response to general market and
economic conditions. Accordingly, the value of the equity securities that a
Portfolio holds may decline over short or extended periods. The risk of such
a decline is known as market risk. The U.S. equity markets tend to be
cyclical, with periods when prices generally rise and periods when prices
generally decline. Therefore, the value of an investment in those Portfolios
that hold equity securities may increase or decrease. Equity securities are
also subject to financial risk, which is the risk that the issuer's earnings
prospects and overall financial position will deteriorate, causing a decline
in the security's value.
INCOME-BEARING SECURITIES. To the extent that a Portfolio invests in
income-bearing securities, it is subject to the risk of income volatility,
market risk (interest rate risk), financial risk (credit risk) and, as to
some Portfolio holdings, prepayment/extension risk. Income volatility refers
to the degree and rapidity with which changes in overall market interest
rates diminish the level of current income from a portfolio of
income-bearing securities. In general, market risk is the risk that when
prevailing interest rates decline, the market value of income-bearing
securities (particularly fixed-income securities) tends to increase.
Conversely, when interest rates increase, the market value of income-bearing
securities (particularly fixed-income securities) tends to decline.
Financial risk relates to the ability of an issuer of a debt security to pay
principal and interest on such security on a timely basis and is the risk
that the issuer could default on its obligations and a Portfolio will lose
its investment. The credit risks of an income-bearing security may vary
based on its priority for repayment. In addition, some subordinated
securities such as trust preferred and capital securities notes, permit the
issuer to defer payments under certain circumstances. Prepayment risk and
extension risk are normally present in adjustable rate mortgage loans,
mortgage-backed securities and other asset-backed securities. For example,
homeowners have the option to prepay their mortgages. Therefore, the
duration of a security backed by home mortgages can either shorten
(prepayment risk) or lengthen (extension risk). In general, if interest
rates on new mortgage loans fall sufficiently below the interest rates on
existing outstanding mortgage loans, the rate of prepayment can be expected
to increase. Conversely, if mortgage loan interest rates rise above the
interest rates on existing outstanding mortgage loans, the rate of
prepayment can be expected to decrease. In either case, a change in the
prepayment rate can result in losses to investors.
YEAR 2000. The "Year 2000" problem exists because many data processing
systems were designed using only two digits to signify the year (for
example, "99" for 1999). On January 1, 2000, if these data processing
systems are not corrected, they may incorrectly interpret "00" as the year
1900 rather than the year 2000, leading to computer shutdowns and errors.
There can be no assurance that Year 2000 issues will not affect the issuers
of the securities in which the Fund invests or worldwide markets and
economies.
- --------------------------------------------------------------------------------
RISK/RETURN CURVE
The risk/return curve below demonstrates that, for diversified portfolios of
securities of various types, as short-term risk increases, the potential for
long-term gains also increases. "Short-term risk" refers to the likely
volatility of a portfolio's total return and its potential for gain or loss
over a relatively short time period. "Long-term potential gains" means the
expected average annual total return over a relatively long time period,
such as 20 years.
22
<PAGE>
[CHART]
THIS CURVE DOES NOT INDICATE FUTURE VOLATILITY OR PERFORMANCE. It merely
demonstrates the relationship between the ongoing short-term risk and the
long-term potential for gain of each Portfolio relative to the other
Portfolios and other types of investments.
Each Portfolio has its own investment objective, investment policies,
restrictions and attendant risks. An investor should consider each Portfolio
separately to determine if it is an appropriate investment. NO ONE CAN
ASSURE THAT A PORTFOLIO WILL ACHIEVE ITS INVESTMENT OBJECTIVE(S), AND YOU
SHOULD NOT CONSIDER ANY ONE PORTFOLIO ALONE TO BE A COMPLETE INVESTMENT
PROGRAM. AS WITH ALL MUTUAL FUNDS, THERE IS A RISK THAT YOU COULD LOSE MONEY
BY INVESTING IN A PORTFOLIO. The investment objective(s) of each Portfolio
and those investment restrictions of a Portfolio that are designated as
fundamental cannot be changed without approval of a majority of the
outstanding shares of that Portfolio as defined in the SAI. However, each
Portfolio's investment policies and the strategies by which it pursues its
objective(s), and those investment restrictions not specifically designated
as fundamental, are nonfundamental and may be changed by the Fund's Board of
Directors without shareholder approval.
Notwithstanding its investment objective(s), each Portfolio may, for
temporary defensive purposes, invest all (15% for the Blue Chip Portfolio)
of its assets in cash and/or money market instruments of the type in which
the Money Market Portfolio invests. As a result of taking such a temporary
defensive position, a Portfolio may not achieve its investment objective(s).
23
<PAGE>
- --------------------------------------------------------------------------------
OTHER SECURITIES AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The following table summarizes the other securities and investment strategies
that certain of the Portfolios may employ. This table is supplemented by the
narrative discussion that follows in this prospectus and by the information
included in the SAI under the heading "Investment Objectives, Policies and
Techniques."
<TABLE>
SECURITY OR PRACTICE DESCRIPTION RELATED RISKS
<S> <C> <C>
American Depository Receipts ADRs are receipts typically issued by a Market, currency, information,
(ADRs) U.S. financial institution which natural event and political
evidence ownership of underlying risks (I.E., the risks of
securities of foreign corporate issuers. foreign securities).
Generally, ADRs are in registered form
and are designed for trading in U.S.
markets.
Asset-Backed Securities Securities that represent a Credit, extension, prepayment
participation in, or are secured by and and interest rate risks.
payable from a stream of payments
generated by particular assets.
Capital Securities Securities issued by trusts or other Credit, liquidity and interest
special purpose entities created to rate risks.
invest in junior subordinated debt
securities. Junior subordinated debt
ranks before equity securities, but
after more senior debt in the event of
the issuer's liquidation, and usually
pays a fixed rate of interest.
Foreign Securities Securities of companies organized Market, currency information,
outside of the United States that are natural event, and political
traded on U.S. exchanges and payable or risks.
denominated in U.S. dollars.
Illiquid Securities Any investment that may be difficult or Liquidity, valuation and market
impossible to sell at the time the risks.
Portfolio would like to sell it for the
price at which the Portfolio values it.
Mortgage-Backed Securities Securities backed by pools of mortgages, Credit, extension, prepayment
including pass-through certificates, and interest rate risks.
PACs, TACs, collateralized mortgage
obligations (CMOs), and, when available,
pools of mortgage loans generated by
credit unions.
Non-Investment Grade Securities Investing in debt securities rated below Credit, market, interest rate,
BBB/ Baa by S&P/Moody's (I.E., "junk" liquidity, valuation and
bonds). information risks.
Repurchase Agreements The purchase of a security that the Credit risk.
issuer agrees to buy back later at the
same price plus interest.
</TABLE>
24
<PAGE>
<TABLE>
SECURITY OR PRACTICE DESCRIPTION RELATED RISKS
<S> <C> <C>
Restricted Securities Securities originally issued in a Liquidity, valuation and market
private placement rather than a public risks.
offering. These securities often cannot
be freely traded on the open market.
Securities Lending The lending of securities to financial Delay in, or failure to return,
institutions, which provide cash or lent securities, opportunity
government securities as collateral. risk.
Shares of Other Investment The purchase of shares issued by other Market risk and the layering of
Companies investment companies. These investments fees and expenses.
are subject to the fees and expenses of
both the Portfolio and the other
investment company.
Smaller Capitalization The purchase of securities issued by a Market risk.
Companies company with a market capitalization
(I.E., the price per share of its
common stock multiplied by the number
of shares of common stock outstanding)
of less than $1 billion at the time of
the Fund's investment. The securities
of smaller capitalization companies are
traded on the New York Stock Exchange,
the American Stock Exchange and in the
over-the-counter market.
When-Issued and Delayed The purchase or sale of securities for Market, opportunity and
Delivery Securities delivery at a future date; market value leverage risks.
may change before delivery.
Writing Covered Call Option A call option is the right to purchase Market, correlation, liquidity
Contracts on Securities a security for an agreed-upon price at and opportunity risks.
any time prior to an expiration date.
By writing (selling) a call option, a
Portfolio gives this right to a buyer
for a fee. A "covered" call option
contract is one where the Portfolio
owns the security subject to the option
for as long as the option remains
outstanding.
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements as a means of earning
income for periods as short as overnight. A repurchase agreement is an
agreement under which the Portfolio purchases a security and the seller
agrees, at the time of sale, to repurchase the security at a specified time
and price, thereby determining the yield during the Portfolio's holding
period. Repurchase agreements are subject to credit risk. That is, if a
seller of a repurchase agreement were to default, the Portfolio might
experience losses, including delays and expenses in enforcing its rights. To
minimize this risk, the Adviser (under the review of the Board of Directors)
will review the creditworthiness of the seller and must find such
creditworthiness satisfactory before a Portfolio may enter into a repurchase
agreement.
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FOREIGN SECURITIES
The Value Growth Portfolio and Managed Portfolio each may invest up to 25%
of their net assets in equity and debt securities of foreign issuers, and
the High Grade Bond Portfolio and High Yield Bond Portfolio each may invest
up to 25% of their net assets in debt securities of foreign issuers, to the
extent the purchase of such foreign securities is otherwise consistent with
the Portfolio's investment objectives. Investments are made only in
securities of foreign issuers (i.e., companies organized outside the United
States) that are traded on U.S. exchanges and payable or denominated in U.S.
dollars.
Investments in securities of foreign issuers (including ADRs) may offer
potential benefits not available from investments solely in securities of
domestic issuers. Investing in securities of foreign issuers involves
significant risks that are not typically associated with investing in
domestic securities. The risks of foreign securities investments (including
ADRs) include market, currency, information, natural event, and political
risks. Market risk is the risk that the market value of a security will move
up and down, sometimes rapidly and unpredictably, due to factors that have
nothing to do with the issuer. Currency risk is the risk that fluctuations
in exchange rates between the U.S. dollar and foreign currencies may
negatively affect the U.S. dollar value of an investment. Information risk
is the risk that key information about a security or market is inaccurate or
unavailable. Natural event risk is the risk of losses attributable to
natural disasters, crop failures, and similar events. Political risk is the
risk of losses directly attributable to government actions or political
events of any sort.
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE SECURITIES
The High Yield Bond Portfolio invests a substantial portion of its assets in
income bearing securities offering high current income. Additionally, the
High Grade Bond Portfolio may invest a portion of its assets in such
securities. Such high yielding income bearing securities often do not meet
the high grade or investment grade quality level. Securities falling short
of investment grade are commonly known as "junk bonds." These lower-rated
securities are, on balance, predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with their terms
and generally entail more credit risk (i.e., the risk that the issuer of the
security will default or otherwise not honor a financial obligation) than
higher-rated securities. The market values of such securities tend to
reflect individual corporate developments to a greater extent than do
26
<PAGE>
higher-rated securities, which react primarily to fluctuations in the
general level of interest rates. Such lower-rated securities also tend to be
more sensitive to economic conditions than higher-rated securities. Such
securities are also subject to market risk, which is the risk that their
market value may move up and down, sometimes rapidly and unpredictably, due
to factors that have nothing to do with the issuer. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis,
regarding lower-rated securities may depress prices and diminish liquidity
for such securities. Factors adversely affecting the market value of
lower-rated securities adversely affects a Portfolio's net asset value. In
addition, a Portfolio 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 income bearing securities. Although some risk is inherent in
all securities, holders of income bearing debt securities have a claim on
the assets of the issuer prior to the holders of common stock. Therefore, an
investment in such securities generally entails less financial risk than an
investment in equity securities of the same issuer.
Lower-rated securities may be issued by corporations in the early stages of
their development. They may also be issued in connection with a corporate
reorganization or as part of a corporate takeover. Companies that issue such
high-yielding lower-rated securities are often highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with investment grade securities. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of lower-rated securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. An issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss
due to default by the issuer is significantly greater for the holders of
lower-rated income bearing securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer.
Lower-rated securities are also subject to interest rate risk, which is the
risk of declines in market value of an income bearing investment due to
changes in prevailing interest rates. With fixed-income securities such as
these, a rise in interest rates typically causes a decline in market values,
while a fall in interest rates typically causes an increase in market
values. Lower rated securities are also subject to information risk, which
is the risk that key information about a security or market is inaccurate or
unavailable.
Lower-rated income bearing securities frequently have call or buy-back
features that would permit an issuer to call or repurchase the security from
the Portfolio. If a call were exercised by the issuer during a period of
declining interest rates, a Portfolio would likely have to replace such
called security with a lower-yielding security, thus decreasing the net
investment income to the Portfolio. The premature disposition of a
lower-rated high-yielding security because of a call or buy-back feature,
the deterioration of the issuer's creditworthiness or a default may also
make it more difficult for a Portfolio to time its receipt of income, which
may have tax implications.
A Portfolio may have difficulty disposing of certain lower-rated securities
for which there is a thin trading market. Because not all dealers maintain
markets in all lower-rated securities, there is no established retail
secondary market for many of these securities, and the Adviser anticipates
that they could be sold only to a limited number of dealers or institutional
investors. To the extent there is a secondary trading market for lower-rated
securities, it is generally not so liquid as that for investment grade
securities. The lack of a liquid secondary market may have an adverse impact
on market value of such securities and a Portfolio's ability to dispose of
them when necessary to
27
<PAGE>
meet the Portfolio's liquidity needs, or in response to a specific economic
event such as a deterioration in the creditworthiness of the issuer. The
lack of a liquid secondary market for certain securities may also make it
more difficult for the Adviser to obtain accurate market quotations for
purposes of valuing a Portfolio's assets. Market quotations are generally
available on many high yield issues only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or prices for
actual sales.
It is likely that a major economic recession could severely affect the
market for and the values of lower-rated securities, as well as the ability
of the issuers of such securities to repay principal and pay interest on
them.
A Portfolio may acquire lower-rated securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. As such, lower rated securities may be subject to
liquidity risk, which is the risk that certain securities or other
investments may be difficult or impossible to sell at the time a Portfolio
would like to sell them or at the price the Portfolio values them.
Similarly, lower rated securities may be subject to valuation risk, which is
the risk that the market value of such securities will fall substantially
below a Portfolio's valuation of the investment. The SAI contains more
information about the risks of restricted securities. A Portfolio may
acquire lower-rated securities during an initial offering. Such securities
involve special risks because they are new issues.
Additional information regarding the rating categories for income bearing
debt securities appears in the appendices of the SAI.
- --------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Any of the Portfolios may purchase newly issued securities on a
"when-issued" basis and may purchase or sell securities on a "delayed
delivery" basis. When-issued or delayed delivery transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery to take place at a future date. These transactions
allow the Portfolio to lock in an attractive purchase price or yield on a
security the Portfolio intends to purchase or an attractive sale price on a
security the Portfolio intends to sell. Normally, settlement occurs within
one month of the purchase or sale. During the period between purchase or
sale and settlement, no payment is made or received by a Portfolio and, for
delayed delivery purchases, no interest accrues to the Portfolio. A
Portfolio will only make commitments to purchase securities on a when-issued
or delayed delivery basis with the intention of actually acquiring the
securities, but each Portfolio reserves the right to sell such securities
before the settlement date if this is deemed advisable.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will segregate the security on the
Fund's accounting records, record the transaction and reflect the amount due
and the market value of the security in determining its net asset value.
Likewise, at the time a Portfolio makes the commitment to sell a security on
a delayed delivery basis, it will segregate the security on the Fund's
accounting records, record the transaction and include the proceeds to be
received in determining its net asset value. Accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment
are not reflected in the net asset value so long as the commitment remains
in effect.
When issued and delayed delivery transactions may subject the Portfolios to
market, opportunity and leverage risks. Market risk is the risk that the
market value of a security may move up or
28
<PAGE>
down, sometimes rapidly and unpredictably, due to factors that have nothing
to do with the transaction. Opportunity risk is the risk of missing out on
an investment opportunity because the assets necessary to take advantage of
it are tied up in other investments. Leverage risk is the risk that a
Portfolio's gain or loss on a when-issued or delayed-delivery transaction
may be greater than the actual market gain or loss in the underlying
security.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
The High Grade Bond, High Yield Bond, and Managed Portfolios each may invest
in mortgage-backed securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. Principal and interest
payments made on the mortgages in the underlying mortgage pool are passed
through to the Portfolio. Unscheduled prepayments of principal shorten the
securities' weighted average life and may lower total return. The value of
these securities may also change because of changes in the market's
perception of the creditworthiness of the federal agency that issued them.
Some mortgage-backed 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 High Grade Bond, High Yield Bond, and Managed Portfolios each may also
purchase or sell collateralized mortgage obligations ("CMOs"), which are
obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Depending on the type of CMOs in which the
Portfolio invests, the Portfolio's investment may be subject to a greater or
lesser risk of prepayment (see below) than other types of mortgage-related
securities.
Such securities are subject to credit, extension, prepayment, and interest
rate risks. Credit risk is the risk that the issuer of a security will
default or otherwise not honor a financial obligation. Extension risk is the
risk that a rise in prevailing interest rates will extend the life of an
outstanding mortgage- or other asset-backed security by reducing the
expected number of payments, typically reducing the security's value.
Prepayment risk is the risk that a decline in prevailing interest rates will
shorten the life of an outstanding mortgage- or other asset-backed security
by increasing the expected number of prepayments, thereby reducing the
security's return. Interest rate risk is the risk of declines in market
value of an income-bearing investment due to changes in prevailing interest
rates. With income-bearing securities, a rise in interest rates typically
causes a decline in market values, while a fall in interest rates typically
causes an increase in market values.
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
The High Grade Bond, High Yield Bond, and Managed Portfolios each may invest
in various asset-backed securities, which represent a participation in, or
are secured by and payable from, a stream of payments generated by
particular assets, most often a pool of assets similar to one another such
as motor vehicle receivables, credit card receivables, conditional sales
contracts, equipment lease certificates and equipment trust certificates.
The Adviser expects that other types of asset-backed securities will be
offered to investors in the future.
Such securities are subject to credit, extension, prepayment, and interest
rate risks. Credit risk is the risk that the issuer of a security will
default or otherwise not honor a financial obligation. Extension risk is the
risk that a rise in prevailing interest rates will extend the life of an
outstanding mortgage- or other asset-backed security by reducing the
expected number of
29
<PAGE>
payments, typically reducing the security's value. Prepayment risk is the
risk that a decline in prevailing interest rates will shorten the life of an
outstanding mortgage- or other asset-backed security by increasing the
expected number of prepayments, thereby reducing the security's return.
Interest rate risk is the risk of declines in market value of an
income-bearing investment due to changes in prevailing interest rates. With
income-bearing securities, a rise in interest rates typically causes a
decline in market values, while a fall in interest rates typically causes an
increase in market values.
- --------------------------------------------------------------------------------
COVERED CALL OPTIONS
Each Portfolio (other than the Money Market Portfolio) may write (sell)
covered call options on Portfolio securities representing up to 100% of its
net assets in an attempt to enhance investment performance or to reduce the
risks associated with investments. A call option gives the purchaser the
right to buy, and the writer the obligation to sell, an underlying security
at a particular exercise price during the option period. A Portfolio will
write call options only on a covered basis, which means that the Portfolio
will own the underlying security subject to the call option at all times
during the option period. Options written by a Portfolio will normally have
expiration dates between three and nine months from the date written. Such
options and the securities underlying the options will both be listed on
national securities exchanges, except that certain transactions in debt
securities and related options need not be so listed.
The advantage to a Portfolio of writing covered call options is that the
Portfolio receives a premium that constitutes additional income, which
serves both to enhance investment performance and to offset in whole or in
part any decline in value of the underlying security. However, the
disadvantage is that during the option period the Portfolio would give up
the potential for capital appreciation above the exercise price if the
underlying security were to rise in value; and that, unless a closing
purchase transaction is effected, the Portfolio will be required to continue
to hold the underlying security for the entire option period, and would bear
the risk of loss if the price of the security were to decline. In addition,
such transactions may subject the Portfolios to market, correlation,
liquidity, and opportunity risks. Market risk is the risk that the market
value of a security will move up and down, sometimes rapidly and
unpredictably, due to factors that have nothing to do with the issuer.
Correlation risk is the risk that changes in the value of a hedging
instrument or hedging technique, such as covered call options, will not
match those of the asset being hedged. Liquidity risk is the risk that
certain securities or other investments may be difficult or impossible to
sell at the time a Portfolio would like to sell them or at the price the
Portfolio values them. Opportunity risk is the risk of missing out on an
investment opportunity because the assets necessary to take advantage of it
are tied up in less advantageous investments.
- --------------------------------------------------------------------------------
SECURITIES LENDING
Each Portfolio may from time to time lend securities (but not in excess of
20% of its net assets) from its portfolio to brokers, dealers, and financial
institutions, provided that certain conditions are met. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. In addition, if the Portfolio is not able to get
the securities it lends back from the borrower on a timely basis, the
Portfolio may be exposed to a loss of investment opportunities (i.e.,
opportunity risk).
30
<PAGE>
- --------------------------------------------------------------------------------
SHORT-TERM TRADING
Each Portfolio may sell securities on a short-term basis to take advantage
of market opportunities, to meet anticipated redemption requests, or for
other similar purposes.
It is the Money Market Portfolio's intention, generally, to hold securities
to maturity. Nevertheless, the Portfolio may sell portfolio securities prior
to maturity to realize gains or losses to shorten the Portfolio's average
maturity and may reduce or withhold dividends if it deems such actions
appropriate to maintain a stable net asset value. In addition, the Portfolio
may attempt, from time to time to increase its yield by trading to take
advantage of variations in the markets for short-term money market
instruments.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Shares of the Fund's Portfolios are offered and sold on a continuous basis.
The offering price per share will be set at the net asset value ("NAV") next
determined after a purchase order and payment is received in proper form as
described below. The Fund is open for business on each day the NYSE is open
for trading (except the Friday before and the Monday after Christmas Day (in
1999) and the Monday after New Year's Day and the Friday after Thanksgiving
Day (in 2000)). The Fund reserves the right to reject any purchase order and
to change the minimum purchase requirements at any time.
INITIAL PURCHASE
The minimum initial purchase for each Portfolio account is $250 (which is
waived for retirement accounts), except as subject to Automatic Investment
Plan limitations and accounts opened under bona fide payroll deduction
plans. There is no initial sales charge. An Application is included in the
back of this Prospectus.
Complete the Application and mail it with your check payable to the
appropriate Portfolio of the Fund to: EquiTrust Series Fund, Inc., 5400
University Avenue, West Des Moines, Iowa 50266-5997.
SUBSEQUENT PURCHASES
Send the Fund a check (no minimum) payable to the appropriate Portfolio of
the Fund accompanied by a letter indicating the dollar value of the shares
to be purchased and identifying the Portfolio, the account number and
registered owner(s).
PURCHASES BY WIRE (MONEY MARKET PORTFOLIO ONLY)
Purchases may be made in the Money Market Portfolio by wire transfer. If you
are making an initial purchase, call the toll free number (800) 247-4170 (in
Iowa, call toll free (800) 422-3175, or in the Des Moines metropolitan area,
call 225-5586) to obtain a Money Market Portfolio account number and provide
the Fund with your name, address and social security or tax identification
number. Then, simply instruct your bank to "wire transfer" funds to:
DEUTSCHE BANK, ABA #021001033, DDA ACCOUNT #00220695 MONEY MARKET PORTFOLIO
OF EQUITRUST SERIES FUND, INC., FOR FURTHER CREDIT TO YOUR ACCOUNT
REGISTRATION AND ACCOUNT NUMBER. Finally, if you are
31
<PAGE>
making an initial purchase, complete an Application and mail it to the Fund
at the address listed under "Initial Purchase" above.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
Upon receipt of an executed redemption request in proper form, as described
below, the Fund will redeem shares in your Portfolio account at the next
determined NAV. Requests received in proper form prior to the close of
trading on the a NYSE (generally 3 p.m. Central time) will be effected that
business day. Requests received after that time will be effected the next
business day. Proceeds payable upon redemption will be reduced by the amount
of any applicable contingent deferred sales charge. The Fund intends to pay
redemption proceeds within one business day after receipt of an executed
redemption request in proper form. However, if you sell shares which were
recently purchased with a check, the Fund may delay sending you the
redemption proceeds until this check has cleared, which may take up to
15 days.
You can request redemptions of either a number or dollar value of shares of
a specified Portfolio account by writing to the Fund, 5400 University
Avenue, West Des Moines, Iowa 50266-5997. Any certificates for shares to be
redeemed must be included, duly endorsed. The letter (and certificates, if
any) must be signed exactly as the account is registered and must be
accompanied by such other documentation of authority as the Fund deems
necessary in the case of estates, trusts, guardianships, corporations,
unincorporated associations and pension and profit sharing plans. On a
jointly owned account, all owners must sign. FOR REDEMPTIONS GREATER
THAN $5,000, OR FOR REDEMPTIONS IN ANY AMOUNT BEING DIRECTED TO A
DESTINATION OTHER THAN THE ADDRESS OF RECORD, SIGNATURES OF ACCOUNT OWNERS
MUST BE GUARANTEED. THE FOLLOWING INSTITUTIONS MAY PROVIDE SIGNATURE
GUARANTEES: PARTICIPATING COMMERCIAL BANKS, TRUST COMPANIES, MEMBERS OF A
NATIONAL SECURITIES EXCHANGE, SAVINGS AND LOAN ASSOCIATIONS OR CREDIT
UNIONS, OR A REGISTERED REPRESENTATIVE OF EQUITRUST MARKETING SERVICES, LLC
OR EQUITRUST INVESTMENT MANAGEMENT SERVICES, INC. SIGNATURES MAY NOT BE
GUARANTEED BY A NOTARY PUBLIC.
EXPEDITED REDEMPTION PROCEDURES
You may redeem shares of any Portfolio account by telephone. The proceeds of
shares redeemed (less any contingent deferred sales charge) will be sent by
Federal wire transfer to a single designated account maintained by you at a
domestic commercial bank that is a member of the Federal Reserve System or
by check to your address of record. To effect a redemption, you should call
the Fund at the appropriate number shown on the cover of the Prospectus
between the hours of 8:00 a.m. and 4:30 p.m. (Central Time) on any day when
the Fund is open for business. Requests received by the Fund prior to the
earlier of the close of the NYSE or 3:00 p.m. (Central Time) will result in
shares being redeemed that day at the next determined NAV, and the proceeds
will normally be sent to the designated bank account or your address of
record the following business day. The minimum amount that may be wired is
$1,000, and the minimum that may be sent by check is the lesser of $100 or
the account balance. The Fund reserves the right to change these minimums or
to terminate the wire redemption privilege.
All applications for telephone redemption service must have signatures
guaranteed. The following institutions may provide signature guarantees:
participating commercial banks, trust companies, members of a national
securities exchange, savings and loan associations or credit unions, or a
32
<PAGE>
registered representative of EquiTrust Marketing Services, LLC or EquiTrust
Investment Management Services, Inc. Applications must include such other
documentation of authority as the Fund deems necessary in the case of
estates, trusts, guardianships, corporations, unincorporated associations
and pension and profit sharing plans. If you wish to use this method of
redemption, you must complete the appropriate Application and file it with
the Fund. Once the form is on file, the Fund will honor redemption requests
by any person by telephone (using the toll free numbers listed on the cover
page), telegraph or other method without a signature guarantee from you or
any other person. The Fund is not responsible for the efficiency of the
federal wire system or your bank. To change the name of the single
designated bank account to receive wire redemption proceeds, you must send a
written request with signatures guaranteed to the Fund. The Fund does not
currently charge for wiring funds, although the shareholder will be
responsible for any wire fees charged by the receiving bank. THIS PRIVILEGE
WILL BE INACTIVE FOR TEN BUSINESS DAYS FOLLOWING A CHANGE OF ADDRESS. This
procedure is not available for retirement accounts or shares for which
certificates have been issued.
You may not use expedited redemption procedures until the shares being
redeemed have been on the Fund's books for at least four business days.
There is no such delay in redeeming shares that were purchased by wiring
federal funds.
The Adviser employs procedures designed to confirm that instructions
communicated by telephone are genuine, including requiring certain
identifying information prior to acting upon instructions, recording all
telephone instructions and sending written confirmations of instructions. To
the extent such procedures are reasonably designed and employed to prevent
unauthorized or fraudulent instructions, neither the Adviser nor the Fund
would be liable for any losses from unauthorized or fraudulent instructions.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge may be imposed upon redemption of Fund
shares. No such charge will be assessed upon redemption on any share
appreciation or reinvested dividends. The charge is imposed upon redemptions
of shares based on the lower of their purchase or redemption value in
accordance with the following schedule:
<TABLE>
<CAPTION>
<S> <C>
CONTINGENT
DEFERRED SALES
YEAR OF REDEMPTION AFTER PURCHASE CHARGE
<CAPTION>
<S> <C>
First 5%
Second 4%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
33
<PAGE>
The following example illustrates the operation of the contingent deferred
sales charge. Assume that you purchase $10,000 of a Portfolio's shares and
that 30 months later the value of the account has grown through investment
performance and reinvestment of dividends to $14,000. You then may redeem up
to $4,000 ($14,000 minus $10,000) without incurring a contingent deferred
sales charge. If you redeem $5,000, a contingent deferred sales charge would
be imposed on $1,000 of the redemption. The charge would be imposed at the
rate of 4% ($40) because the redemption occurred in the third year after the
purchase. In determining whether a contingent deferred sales charge is
payable, it is assumed that the redemption is made from the earliest
purchase of shares.
The contingent deferred sales charge will be waived in the event of the
death of the shareholder (including a registered joint owner) with respect
to redemptions in connection with distributions from 401(m), 401(k) or
457(k) accounts sponsored by FBL Financial Group, Inc. or its affiliated
companies, or with respect to withdrawals under the Fund's periodic
withdrawal plan. EquiTrust Investment Management Services, Inc., the Fund's
Distributor, receives all contingent deferred sales charge directly.
INVOLUNTARY REDEMPTIONS
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem a Portfolio account that falls below $250 as a result of
redemptions. Before the Fund effects such an involuntary redemption, you
will be notified in writing and will be allowed 60 days to make additional
purchases to bring the account up to the Portfolio's $250 minimum investment
requirement. Any such involuntary redemption will not be subject to a
contingent deferred sales charge.
REDEMPTIONS IN KIND
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or
in part by the distribution in kind of securities held by the applicable
Portfolio in lieu of cash. Investors may incur brokerage charges on the sale
of securities so received in payment of redemption. A redemption paid in
kind is treated as a sale for federal income tax purposes even though the
shareholder may have received no cash.
- --------------------------------------------------------------------------------
OTHER SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate the
purchase and redemption of shares of its Portfolios. Full details of these
services and copies of the various plans described below can be obtained
from the Fund.
- --------------------------------------------------------------------------------
PERIODIC WITHDRAWAL PLAN
If you own in a single account $5,000 or more of a Portfolio's shares,
you may establish a Periodic Withdrawal Plan to provide for regular
monthly, quarterly or annual payments of a fixed dollar amount or fixed
percent of the account balance (with a minimum $100 annual payment and a
maximum annual withdrawable amount of 10% of your declining account
34
<PAGE>
balance under the plan) to be sent to you or a designated payee. (Account
balance and withdrawal limitations may be waived if the plan is
established using life expectancy factors to calculate a required minimum
distribution.) Shares of a Portfolio held in your account having an NAV
of the amount of the requested payment will be redeemed on or around the
fifth business day before the end of the applicable month and a check
will be mailed to you within seven days thereafter. Depending upon the
size of the payments requested and fluctuations in the NAV of the shares
redeemed, redemptions for the purpose of making such payments may reduce
or even exhaust the account. EquiTrust will waive the contingent deferred
sales charge on redemptions made pursuant to a periodic withdrawal
program. The Fund reserves the right to amend the periodic withdrawal
program on 30 days' notice. The program may be terminated at any time by
you or the Fund.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN
You may elect to participate in the Fund's Automatic Investment Plan.
This plan enables you to automatically purchase shares of the Fund on a
monthly basis. A minimum initial investment of $50 per Portfolio account
is required to establish an automatic investment plan. Minimum monthly
investments of $25 per Portfolio account are necessary to maintain the
plan. The Fund will debit your financial institution account and
subsequently purchase shares of the Fund having an NAV of the amount of
the requested deposit on or around the 16th day of the month. If you are
interested in this plan, you must complete an automatic investment form
available from the Fund. If you elect to participate in the Automatic
Investment Plan, and all shares of an account with that option are
exchanged for shares of another portfolio account, the Automatic
Investment Plan will continue under the account with which the shares
were exchanged, until such time as the Fund is notified in writing to
discontinue the Plan.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
You may exchange all or some shares of a Portfolio for shares of any
other Portfolio in the Fund on the basis of each Portfolio's relative NAV
per share next determined following receipt of an exchange request in
proper form, provided your accounts have like registrations and the
Portfolio's shares are eligible for sale in your state of residence.
There is no minimum amount required to exercise the exchange privilege
between Portfolios, except that shareholders wishing to open an account
in a new Portfolio must meet the minimum purchase requirements described
under "How to Buy Shares." If the exchange involves the establishment of
a new account, an application for that account must be completed and
mailed to the Fund. Shares may be exchanged without any contingent
deferred sales charge but will be subject to a $5.00 exchange fee. This
exchange fee applies even after the contingent deferred sales charge
reaches 0% (i.e., after you held Fund shares for seven years or more).
Amounts exchanged retain their original cost and purchase date for
purposes of the contingent deferred sales charge. If shares of the
Portfolio account being exchanged were acquired at different times, the
shares of the Portfolio account acquired in the exchange will be deemed
to possess the same holding period (or exempt status) for contingent
deferred sales charge purposes as the shares being exchanged. Exercise of
the exchange privilege is treated as a sale for federal income tax
purposes and, depending on the circumstances, you
35
<PAGE>
may realize a capital gain or loss. You are automatically provided the
exchange privilege upon establishment of an account with the Fund. If you
are not interested in the Exchange Privilege you must check the
appropriate box on the Application.
The exchange privilege may be provided after an account has been
established by completing an exchange form (obtainable from the Fund).
Once the privilege has been afforded you, exchanges may be authorized by
telephone by ANY PERSON, not just you (by calling one of the numbers
shown on the front cover, from 8:00 a.m. to 4:30 p.m. (Central Time) on
any day that the Fund is open for business) or by letter (by writing the
Fund at 5400 University Avenue, West Des Moines, Iowa 50266-5997).
Telephone exchange requests received prior to the close of the NYSE
(usually 3:00 p.m., Central Time) will be effected at that day's relative
NAV.
Shares of EquiTrust Money Market Fund, Inc. may be exchanged for shares
of any Portfolio of the Fund without imposition of an exchange fee. The
exchange privilege may be modified or terminated by the Fund at any time.
An exchange application must be on file with EquiTrust Money Market Fund,
Inc.
- --------------------------------------------------------------------------------
FACSIMILE REQUESTS
Facsimile requests (faxes) will be accepted for redemption of shares and
for changes to shareholder account information. Faxes must contain the
appropriate signature(s), signature guarantee(s) and necessary
accompanying documents. The transmission should also include account
number(s) and a return fax number and telephone number. The Application
for Shares, Automatic Investment Form (ACH Agreement), Application for
Expedited Redemption, and any change or redemption that requires the
submission of a certified document must be delivered in original form.
Fax requests will be accepted at 515-226-6209.
- --------------------------------------------------------------------------------
RETIREMENT PLANS
Eligible shareholders of the Fund may participate in a variety of
qualified retirement plans which are available from the Distributor.
Some of the plans currently offered are: Individual Retirement Accounts
(IRAs), Roth IRAs, Simplified Employee Pension Plans (SEPs), Savings
Incentive Match Plans for Employees (SIMPLEs), Tax-Sheltered 403(b)
Plans, Qualified Pension and Profit Sharing Plans (Keogh Plans) and
Public Employer Deferred Compensation Plans. The initial investment to
establish any such plan, and subsequent investments, may be in any
amount (subject to Automatic Investment Plan limitations). Investors
Fiduciary Trust Company ("IFTC") of Kansas City, Missouri, serves as
custodian and provides the required services for IRAs, Roth IRAs, SEPs,
SIMPLEs and Qualified Pension and Profit Sharing Plans. A custodial fee,
currently $10.00, will be collected annually by liquidating shares, or
fractions thereof, from each participant's account(s). Information with
respect to these plans is available upon request from the Fund.
Trustees of qualified retirement plans and 403(b)(7) custodial accounts
are required by law to withhold 20% of the taxable portion of any
distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from IRAs or any part of a
distribution which is transferred directly to another qualified
retirement plan, 403(b)(7)
36
<PAGE>
account or IRA. You should consult your tax adviser regarding this 20%
withholding requirement.
- --------------------------------------------------------------------------------
EDUCATION PLAN
Eligible shareholders of the Fund may participate in Education IRAs,
which are available from the Distributor. The initial investment to
establish this plan, and subsequent investments, may be in any amount
(subject to Automatic Investment Plan limitations). IFTC serves as
custodian and provides the required services for Education IRAs. A
custodial fee, currently $10.00, will be collected annually by
liquidating shares, or fractions thereof, from each participant's
account(s). Information with respect to this plan is available upon
request from the Fund.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
EquiTrust Investment Management Services, Inc., (the "Adviser"), 5400
University Avenue, West Des Moines, Iowa 50266, serves as the Fund's
investment adviser and manager pursuant to an Investment Advisory and
Management Services Agreement. This relationship has existed since the Fund
commenced operations in 1971.
The Adviser is an indirect subsidiary of FBL Financial Group, Inc., an Iowa
corporation. The following individuals are officers and/or directors of the
Adviser and are officers and/or directors of the Fund: Stephen M. Morain,
Thomas R. Gibson, William J. Oddy, Timothy J. Hoffman, Dennis M. Marker,
James W. Noyce, Lou Ann Sandburg, Sue A. Cornick, Kristi Rojohn and Elaine
A. Followwill. The Adviser also acts as the investment adviser to
individuals, institutions and two other investment companies: EquiTrust
Money Market Fund, Inc. and EquiTrust Variable Insurance Series Fund.
Personnel of the Adviser also manage investments for the portfolios of
insurance companies.
The Adviser handles the investment and reinvestment of the Fund's assets,
and is responsible for the overall management of the Fund's business
affairs, subject to the review of the Board of Directors.
Roger F. Grefe and Robert J. Rummelhart serve as managers for various
portfolios of the Fund. Mr. Grefe joined EquiTrust in 1986 and has managed
the Value Growth and Managed Portfolios since their inception in 1987.
Mr. Grefe is a graduate of Coe College in Cedar Rapids, Iowa and is a
Chartered Financial Analyst and Registered Principal of the Adviser.
Mr. Rummelhart has managed both the High Grade Bond and High Yield Bond
Portfolios since their inception in 1987. He received his BA and MBA degrees
from the University of Iowa and is a Chartered Financial Analyst and
Registered Representative of the Adviser.
The Adviser provides investment supervision to the Blue Chip Portfolio
through the use of a team approach. As cash accumulates for investment,
trading personnel are notified to execute the necessary transactions in
order to maintain the relative weights of the equity securities in this
Portfolio.
37
<PAGE>
As compensation for the advisory and management services provided by the
Adviser, the Fund has agreed to pay the Adviser an annual management fee,
accrued daily and payable monthly, based on the average daily net assets of
each Portfolio as follows: .50% of the average daily net assets of the Value
Growth Portfolio, .40% of the average daily net assets of the High Grade
Bond Portfolio, .55% of the average daily net assets of the High Yield Bond
Portfolio, .60% of the average daily net assets of the Managed Portfolio,
.25% of the average daily net assets of the Money Market Portfolio and Blue
Chip Portfolio, respectively.
The Adviser, at its expense, furnishes the Fund with office space and
facilities, equipment, advisory, research and statistical facilities, and
clerical services and personnel to administer the business affairs of the
Fund. The Fund pays its other expenses which include, but are not limited
to, the following: net asset value calculations; portfolio transaction
costs; interest on Fund obligations; miscellaneous reports; membership dues;
reports and notices to shareholders; all expenses of registration of its
shares under federal and state securities laws; investor services (including
allocable telephone and personnel expenses); all taxes and fees payable to
federal, state or other governmental authorities; fees of Directors who are
not affiliated with the Adviser; and the fees and expenses of independent
public auditors, legal counsel, custodian, and transfer and dividend
disbursing agents.
The Adviser has contractually agreed to reimburse any Portfolio to the
extent that the annual operating expenses (including the investment advisory
fee but excluding brokerage, interest, taxes and extraordinary expenses) of
that Portfolio exceed 1.50% of the average daily net assets of that
Portfolio for any fiscal year of the Portfolio. However, the amount
reimbursed shall not exceed the amount of the advisory fee paid by the
Portfolio for such period. This reimbursement obligation will remain in
effect for as long as the Investment Advisory and Management Services
Agreement continues.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
YEAR 2000
Many data processing systems were designed using only two digits to signify
the year (for example, "99" for "1999"). On January 1, 2000, if these data
processing systems are not corrected, they may incorrectly interpret "00" as
the year 1900 rather than the year 2000, leading to computer shutdowns and
errors (commonly known as "year 2000 problems"). To the extent that these
systems conduct forward-looking calculations, such problems may occur prior
to January 1, 2000. In providing investment advisory services to the
Portfolios and other services to the Fund, the Adviser utilizes data
processing systems that may be affected by year 2000 problems. The Adviser
and the Fund also rely on service providers, including banks, custodians and
transfer agents that also may be affected. Like other mutual funds and
financial and business organizations, the Adviser and other service
providers could be adversely affected in their ability to process securities
trades, price securities, provide shareholder account services and otherwise
conduct the Fund's normal business operations if data processing systems
that they use experience year 2000 problems. The Adviser has developed, and
is in the process of implementing, a year 2000 transition plan with respect
to systems that it operates, and is confirming that the Fund's other service
providers are also so engaged. The resources that are being devoted to this
effort are substantial. It is difficult to predict with precision whether
the amount of resources ultimately devoted, or the outcome of
38
<PAGE>
these efforts, will have any negative impact on the Adviser and the Fund. As
of the date of this prospectus, the Adviser does not anticipate that
shareholders will experience negative effects on investments in the
Portfolios, or on the services provided to them on behalf of the Fund, as a
result of year 2000 problems. However, there can be no assurance that the
Adviser will be successful, or that interaction with other service providers
will not impair the Adviser's and the Fund's services on or before
January 1, 2000.
- --------------------------------------------------------------------------------
DISTRIBUTOR
The Adviser also serves as the distributor and principal underwriter of the
Fund's shares ("Distributor"). The Fund pays the Distributor for
distribution services pursuant to a Distribution Plan and Agreement under
Rule 12b-1. Under the Agreement, the Fund pays the Distributor a fee,
payable monthly, at the annual rate of .50% of average daily net assets of
the Traditional Shares of the Fund. Because the fee is continually paid out
of the Portfolios' assets, over time it will increase the cost of your
investment and could potentially cost you more than paying other types of
sales charges.
Pursuant to the Agreement, the Distributor may appoint various broker-dealer
firms to assist in providing distribution services for the Fund. The
Distributor compensates firms for sales of portfolio shares at a commission
rate of up to 4.5%. The Distributor may from time to time pay addtional
commissions, fees or other incentives to firms that sell shares of the Fund.
In some instances, such additional commissions, fees or other incentives may
be offered only to certain firms who sell or are expected to sell during
specified time periods certain minimum amounts of shares of the Fund, or of
other funds underwritten by the Distributor. The Distributor receives any
contingent deferred sales charges. See "How to Redeem Shares." Firms to
which service fees and commissions may be paid include affiliated
broker-dealers.
The Distributor provides information and administrative services for Fund
shareholders of Traditional Shares pursuant to an Administrative Services
Agreement ("Administrative Agreement"). For such services, the Fund pays the
Distributor a fee, payable monthly, at an annual rate of .25% of average
daily net assets of the Traditional Shares of the Fund. The Distributor may
enter into related agreements with various financial services firms, such as
broker-dealer firms or banks ("firms"), to provide services and facilities
for their clients who are shareholders of the Fund. The services and
assistance that may be provided by the Distributor or such firms may
include, but are not limited to, assisting in the establishment and
maintenance of shareholder accounts and records, furnishing information as
to the status of shareholder accounts, processing shareholder service
requests, forwarding purchase and redemption requests, responding to
telephone inquiries, assisting shareholders with tax information and such
other services as may be agreed upon from time to time and as may be
permitted by applicable statute, rule or regulation. The Distributor pays
each firm a service fee, payable monthly, at the annual rate of .15 of 1% on
assets attributable to the firm that have been maintained and serviced in
Fund accounts.
- --------------------------------------------------------------------------------
NET ASSET VALUE
The net asset value ("NAV") per share of each Portfolio is determined as of
the earlier of 3:00 p.m. (Central Time) or the close of the New York Stock
Exchange (the "NYSE"), on each day that (i) the NYSE is open for business
(except the Friday before and the Monday after
39
<PAGE>
Christmas (in 1999), the Monday after New Year's Day and the Friday after
Thanksgiving Day (in 2000) and any day on which the Fund offices are closed
because of a weather-related or comparable type of emergency); and (ii) an
order for purchase or redemption of shares of the Portfolio is received. The
NAV per share of each Portfolio is computed by dividing the total value of
the Portfolio's securities and other assets, less liabilities, by the total
number of outstanding shares of such Portfolio.
The Fund reserves the right to calculate or estimate the NAV of a Portfolio
more frequently than once daily if it is deemed desirable. If the Fund
offices should be closed because of a weather-related or comparable type of
emergency and the Fund is unable to segregate orders and redemption requests
received on that day, the Fund will price those orders and redemptions at
the NAV next determined for each Portfolio.
MONEY MARKET PORTFOLIO. The Money Market Portfolio's securities are valued
using the amortized cost method of valuation. This involves valuing a
security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity.
For a further discussion of the manner in which such values are determined,
see the SAI under the heading "Net Asset Value."
OTHER PORTFOLIOS. Portfolio securities that are traded on a national
exchange are valued at the closing price as of the close of business on the
day the securities are being valued. However, if no trades occur on a given
day, such securities are valued using the mean between the exchange bid and
exchange asked prices. If the mean is not available, exchange traded
securities are valued using the prior day's closing price. Securities, other
than money market instruments, traded in the over-the-counter market are
valued at the mean between the bid and asked prices or yield equivalent as
obtained from one or more dealers that make markets in the securities.
Portfolio securities that are traded both in the over-the-counter market and
on a national exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Values of securities and
assets for which market quotations are not readily available are determined
in good faith by, or under the direction of, the Board of Directors.
Money market instruments are valued at market value, except that debt
instruments maturing in 60 days or less are valued using the amortized cost
method of valuation described above with respect to the Money Market
Portfolio.
- --------------------------------------------------------------------------------
INVESTOR EDUCATION AND PROTECTION
Under the Public Disclosure Program, NASD Regulation ("NASDR") provides
certain information regarding the disciplinary history of NASD member
broker-dealers and their associated persons in response to written,
electronic, or telephonic inquiries. NASDR's toll-free Public Disclosure
Program Hotline telephone number is 1-800-289-9999 and their Web site
address is www.nasdr.com. An investor brochure that includes information
describing the Public Disclosure Program is available from NASDR.
40
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
VALUE GROWTH AND BLUE CHIP PORTFOLIO DISTRIBUTIONS: Each Portfolio
normally follows the practice of distributing substantially all net
investment income and substantially all net short-term and long-term
capital gains, if any, after the close of the Fund's fiscal year.
HIGH GRADE BOND AND HIGH YIELD BOND PORTFOLIO DISTRIBUTIONS: Each
Portfolio normally follows the practice of distributing substantially
all net investment income and net short-term gains monthly, and
distributing substantially all net long-term capital gains after the
close of the Fund's fiscal year.
MANAGED PORTFOLIO DISTRIBUTIONS: The Portfolio normally follows the
practice of distributing substantially all net investment income
quarterly, and distributing substantially all net short-term and
long-term capital gains after the close of the Fund's fiscal year.
MONEY MARKET PORTFOLIO DISTRIBUTIONS: On each day that the NAV per share
of the Money Market Portfolio is determined, the Money Market
Portfolio's net investment income will be declared, as of the close of
the NYSE, as a dividend to shareholders of record prior to the
declaration. Distributions will be distributed monthly. If you withdraw
your entire account, all dividends accrued to the time of withdrawal
will be paid at that time.
Dividends and capital gains distributions are automatically reinvested
in shares of the Portfolio unless you indicate in writing to receive
them in cash; however, no cash payment will be made for dividends in an
amount under $10. Any such dividend amount under $10 will be reinvested
in shares of that same Portfolio.
If you elect to receive dividends and/or capital gains distributions in
cash, from an account that remains open, and the postal or other
delivery service is unable to deliver those monies to your address of
record, or the check remains uncashed for over one year, your
distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares, and
the outstanding check will be voided and reinvested in your account. If
you have elected to receive dividends and/or capital gains distributions
in cash, from an account that is subsequently closed, and the postal or
other delivery service is unable to deliver checks to your address of
record, such check will remain outstanding until it is turned over to
the appropriate state agency for escheat purposes. No interest will
accrue on accounts represented by uncashed distribution or redemption
checks.
HOW DISTRIBUTIONS AFFECT A PORTFOLIO'S NAV. Distributions are paid to
shareholders as of the record date of a distribution from a Portfolio,
regardless of how long the shares have been held. Dividends and capital
gains awaiting distribution are included in each Portfolio's daily NAV.
The share price of a Portfolio drops by the amount of the distribution,
net of any subsequent market fluctuations. You should be aware that
distributions from a taxable mutual fund are not value-enhancing and may
create income tax obligations.
"BUYING A DIVIDEND." If you purchase shares of a Portfolio just before
the distribution, you will pay the full price for the shares and receive
a portion of the purchase price back as a taxable distribution. This is
referred to as "buying a dividend." Unless your account is set up as a
tax-deferred account, dividends paid to you will be included in your
gross income for tax purposes, even though you may not have participated
in the increase in NAV of the Fund, whether or not you reinvested the
dividends.
41
<PAGE>
TAXES
TAXATION OF THE PORTFOLIOS. Because the Fund is a regulated investment
company, the Fund's Portfolios generally pay no federal income tax on
the income and gains that they distribute to you.
TAXATION OF SHAREHOLDERS. To avoid taxation, the Internal Revenue Code
requires each Portfolio to distribute net income and any net capital
gains realized on its investments annually. A Portfolio's income from
dividends and interest and any net realized short-term gains are paid to
shareholders as ordinary income dividends. Net realized long-term gains
are paid to shareholders as capital gains distributions.
Except for those shareholders exempt from federal income taxes,
dividends and capital gain distributions will be taxable to
shareholders, whether paid in cash or reinvested in additional shares of
the Portfolio. You will be notified annually as to the federal income
tax status of dividends and capital gains distributions. Such dividends
and distributions may also be subject to state and local taxes.
Long-term capital gain distributions are taxable as long-term capital
gain regardless of how long you have held shares of the Portfolio.
Long-term capital gain distributions (relating to assets held by the
Portfolio for more than 12 months) made to individual shareholders are
currently taxed at the maximum rate of 20%. Dividends representing net
investment income and net realized short-term capital gains are taxed as
ordinary income at rates up to a maximum marginal rate of 39.6% for
individuals. Any dividends and distributions declared in October,
November or December to shareholders of record as of a date in one of
those months and paid during the following January are treated for
federal income tax purposes as paid on December 31 of the calendar year
in which they are declared.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a 401(k) Plan or IRA, are generally
tax deferred. This means that you are not required to report Portfolio
distributions on your income tax return, but, rather, when your plan
makes payments to you. Special rules apply to payments from Roth and
Education IRAs.
BACKUP WITHHOLDING. When you open an account, Internal Revenue Service
("IRS") regulations require that you provide your taxpayer
identification number ("TIN"), certify that it is correct, and certify
that you are not subject to backup withholding under IRS rules. If you
fail to provide a correct TIN or the proper tax certifications, each
Portfolio is required to withhold 31% of all the distributions
(including dividends and capital distributions) and redemption proceeds
paid to you. Each Portfolio is also required to begin backup withholding
on your account if the IRS instructs it to do so. Amounts withheld are
applied to your federal income tax liability and you may obtain a refund
from the IRS if withholding results in overpayment of taxes.
You are advised to consult your own tax adviser as to the tax
consequences of owning shares of each Portfolio with respect to your
circumstances.
For more information about the tax status of the Portfolios, see "Taxes"
in the SAI.
42
<PAGE>
- --------------------------------------------------------------------------------
CLASSES OF SHARES
- --------------------------------------------------------------------------------
Currently, the Fund offers two classes of shares -- Traditional Shares and
Institutional Shares -- which have different expenses that will affect
performance. Institutional Shares are available for purchase exclusively by
the following investors: (a) retirement plans of FBL Financial Group, Inc.
and its affiliates; (b) the following investment advisory clients of the
Adviser: (1) affiliated and unaffiliated benefit plans such as qualified
retirement plans, and (2) affiliated and unaffiliated banks and insurance
companies purchasing for their own accounts; (c) employees and directors of
FBL Financial Group, its affiliates, and affiliated state Farm Bureau
Federations; (d) directors and trustees of the EquiTrust Mutual Funds; and
(e) such other types of accounts as the Adviser of the Fund deems
appropriate.
43
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each
Portfolio's financial performance for the past five years through July 31st of
each fiscal year shown. Certain information reflects financial results for a
single Portfolio share. The total returns in the tables represent the rate that
an investor would have earned (or lost) on an investment in each of the
Portfolios (assuming reinvestment of all dividends and distributions). This
information has been derived from financial statements that have been audited by
Ernst & Young LLP, whose report, along with the Portfolios' financial
statements, is included in the Annual Report, which is available upon request
and incorporated by reference into the SAI.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------------------
VALUE GROWTH PORTFOLIO HIGH GRADE BOND PORTFOLIO
------------------------------------------------------ ----------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
--------- --------- --------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period............. $ 11.07 $ 15.63 $ 14.68 $ 13.04 $ 13.07 $ 10.57 $ 10.50 $ 10.16 $10.26 $10.13
Income from
Investment
Operations:
Net investment
income........ 0.09 0.13 0.18 0.27 0.43 0.56 0.60 0.60 0.64 0.63
Net realized and
unrealized
gain (loss) on
investments... (0.97) (2.26) 2.89 2.10 0.65 (0.44) 0.07 0.34 (0.10) 0.16
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------
Total from
investment
operations...... (0.88) (2.13) 3.07 2.37 1.08 0.12 0.67 0.94 0.54 0.79
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------
Less
Distributions:
Dividends from
net investment
income........ (0.11) (0.17) (0.18) (0.46) (0.39) (0.56) (0.60) (0.60) (0.64) (0.63)
Distributions
from capital
gains......... (2.26) (1.94) (0.27) (0.72) (0.06)
Distributions in
excess of net
realized
gains......... (0.51) (0.03)
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------
Total
distributions... (0.62) (2.43) (2.12) (0.73) (1.11) (0.62) (0.60) (0.60) (0.64) (0.66)
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------
Net asset value at
end of period...... $ 9.57 $ 11.07 $ 15.63 $ 14.68 $ 13.04 $ 10.07 $ 10.57 $ 10.50 $10.16 $10.26
======== ======== ======== ======= ======= ======= ======= ======= ====== ======
Total Return:
Total investment
return based on
net asset
value (1)....... (7.46)% (16.37)% 21.83% 18.41% 9.36% 1.07% 6.53% 9.56% 5.37% 8.23%
Ratios/Supplemental
Data:
Net assets at end
of period in
thousands....... $ 82,902 $ 92,848 $112,985 $86,534 $70,947 $13,110 $11,510 $10,250 $9,122 $8,345
Ratio of total
expenses to
average net
assets.......... 1.74% 1.60% 1.65% 1.62% 1.62% 1.67% 1.71% 1.82% 1.85% 1.99%
Ratio of net
expenses to
average
net assets...... 1.74% 1.60% 1.65% 1.62% 1.62% 1.66% 1.71% 1.82% 1.85% 1.99%
Ratio of net
investment
income to
average net
assets.......... 0.92% 0.87% 1.18% 1.87% 3.43% 5.33% 5.67% 5.85% 6.19% 6.29%
Portfolio turnover
rate............ 220% 217% 77% 92% 85% 29% 38% 30% 34% 18%
</TABLE>
Note: Per share amounts have been calculated on the basis of monthly per share
amounts (using average monthly outstanding shares) accumulated for the
period.
(1) Total investment return is calculated assuming an initial investment made at
the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Contingent deferred sales charge
is not reflected in the calculation of total investment return.
44
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO MANAGED PORTFOLIO
----------------------------------------------- -----------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period............. $10.48 $10.48 $ 9.99 $10.03 $10.00 $12.15 $14.05 $13.33 $11.85 $11.62
Income from
Investment
Operations:
Net investment
income........ 0.60 0.65 0.70 0.75 0.78 0.47 0.44 0.48 0.46 0.56
Net realized and
unrealized
gain (loss) on
investments... (0.51) 0.07 0.61 (0.01) 0.13 (1.25) (1.00) 1.91 1.54 0.47
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations...... 0.09 0.72 1.31 0.74 0.91 (0.78) (0.56) 2.39 2.00 1.03
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less
Distributions:
Dividends from
net investment
income........ (0.60) (0.65) (0.70) (0.75) (0.78) (0.47) (0.44) (0.46) (0.45) (0.56)
Distributions
from capital
gains......... (0.02) (0.07) (0.12) (0.03) (0.09) (0.90) (1.21) (0.10) (0.14)
Distributions in
excess of net
realized
gains......... (0.08) (0.01) (0.51) (0.10)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions... (0.70) (0.72) (0.82) (0.78) (0.88) (0.98) (1.34) (1.67) (0.55) (0.80)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Capital contribution
from affiliate...... 0.03(2)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at
end of period...... $ 9.87 $10.48 $10.48 $ 9.99 $10.03 $10.39 $12.15 $14.05 $13.33 $11.85
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return:
Total investment
return based on
net asset
value (1)....... 0.87% 7.10% 13.29% 7.67% 9.71% (6.26)% (4.54)% 17.88% 17.30%(2) 9.40%
Ratios/Supplemental
Data:
Net assets at end
of period in
thousands....... $11,734 $10,982 $9,156 $7,349 $6,691 $38,012 $43,602 $40,994 $27,470 $21,105
Ratio of total
expenses to
average
net assets...... 1.95% 1.97% 2.10%(3) 2.22%(3) 2.29%(3) 1.95% 1.83% 1.95% 1.91% 1.94%
Ratio of net
expenses to
average
net assets...... 1.94% 1.97% 2.00% 2.00% 2.00% 1.95% 1.83% 1.95% 1.91% 1.94%
Ratio of net
investment
income to
average net
assets.......... 5.93% 6.17% 6.82% 7.44% 7.83% 4.30% 3.33% 3.48% 3.47% 4.86%
Portfolio turnover
rate............ 44% 30% 45% 30% 23% 67% 66% 74% 81% 69%
</TABLE>
Note: Per share amounts have been calculated on the basis of monthly per share
amounts (using average monthly outstanding shares) accumulated for the
period.
(1) Total investment return is calculated assuming an initial investment made at
the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Contingent deferred sales charge
is not reflected in the calculation of total investment return.
(2) During the year ended July 31, 1996, EquiTrust Investment voluntarily
reimbursed the Managed Portfolio for losses relating to the sale of a
restricted security in the amount of $44,982. The transaction was recorded
as a realized capital loss and an offsetting capital contribution from an
affiliate. The total investment return includes the effect of the capital
contribution of $0.03 per share. The return without the capital contribution
would have been 17.13%.
(3) Without the Manager's reimbursement of a portion of certain of its expenses
for the periods indicated, the High Yield Bond Portfolio would have had per
share net investment income as shown:
<TABLE>
<CAPTION>
PER SHARE
NET INVESTMENT AMOUNT
YEAR INCOME REIMBURSED
--------- ----------------- -----------
<S> <C> <C> <C>
1997 $ 0.69 $ 8,681
1996 0.73 15,361
1995 0.75 18,810
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO BLUE CHIP PORTFOLIO
------------------------------------------------------ ------------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
-------- -------- ---------- ---------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 41.27 $ 37.20 $ 26.26 $ 22.85 $ 18.75
Income from
Investment
Operations:
Net investment
income........ 0.03 0.04 0.03 0.04 0.04 0.13 0.18 0.16 0.17 0.19
Net realized and
unrealized
gain (loss) on
investments... 5.82 4.08 11.22 3.43 4.05
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations...... 0.03 0.04 0.03 0.04 0.04 5.95 4.26 11.38 3.60 4.24
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less
Distributions:
Dividends from
net investment
income........ (0.03) (0.04) (0.03) (0.04) (0.04) (0.16) (0.16) (0.14) (0.19) (0.14)
Distributions
from capital
gains......... (0.05) (0.03) (0.30)
Distributions in
excess of net
realized
gains......... (0.12)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions... (0.03) (0.04) (0.03) (0.04) (0.04) (0.33) (0.19) (0.44) (0.19) (0.14)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at
end of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 46.89 $ 41.27 $ 37.20 $ 26.26 $ 22.85
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return:
Total investment
return based on
net asset
value (1)....... 3.19% 3.65% 3.51% 3.64% 3.60% 14.51% 11.49% 43.77% 15.83% 22.77%
Ratios/Supplemental
Data:
Net assets at end
of period in
thousands....... $ 3,467 $ 2,574 $ 2,466 $ 2,552 $ 2,439 $$55,045 $43,418 $29,863 $14,641 $ 9,657
Ratio of total
expenses to
average net
assets.......... 1.91% 1.95% 2.28%(2) 2.43%(2) 2.20%(2) 1.52% 1.55% 1.74% 1.79% 1.78%
Ratio of net
expenses to
average net
assets.......... 1.89% 1.95% 2.00% 2.00% 2.00% 1.52% 1.55% 1.74% 1.79% 1.78%
Ratio of net
investment
income to
average net
assets.......... 3.13% 3.57% 3.46% 3.58% 3.51% 0.30% 0.49% 0.49% 0.66% 0.92%
Portfolio turnover
rate............ 0% 0% 0% 0% 0% 7% 3% 0% 3% 1%
</TABLE>
Note: Per share amounts have been calculated on the basis of monthly per share
amounts (using average monthly outstanding shares) accumulated for the
period.
(1) Total investment return is calculated assuming an initial investment made at
the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Contingent deferred sales charge
is not reflected in the calculation of total investment return.
(2) Without the Manager's reimbursement of a portion of certain of its expenses
for the periods indicated, the Money Market Portfolio would have had per
share net investment income as shown:
<TABLE>
<CAPTION>
PER SHARE
NET INVESTMENT AMOUNT
YEAR INCOME REIMBURSED
--------- ----------------- -----------
<S> <C> <C> <C>
1997 $ 0.03 $ 8,681
1996 0.03 10,718
1995 0.03 4,948
</TABLE>
46
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
SHAREHOLDER INQUIRIES
You may make inquiries either by contacting your registered representative
or by writing or calling the Fund at the address or telephone numbers as
shown on the front cover.
You may obtain copies of year-end account statements by calling the Fund at
our toll-free number (800) 247-4170 (in Iowa, call toll-free
(800) 422-3175, or in the Des Moines metropolitan area, call 225-5586), or
by writing a letter to the Fund. The prior year statement for regular
accounts, and prior two year statements for fiduciary accounts, will be
provided at no charge to you; thereafter, there will be a charge of $3 per
copy. The cost of the copies will be collected by redemption of shares, or
fractions thereof, from your account. If your account has been closed, the
applicable fees must be remitted with the request.
- --------------------------------------------------------------------------------
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
Additional information about each Portfolio's investments is available in
the Fund's annual and semi-annual reports to shareholders. The Fund's annual
report to shareholders contains a discussion of the market conditions and
investment strategies that significantly affected each Portfolio's
performance during the fiscal year covered by the report.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
The SAI, which contains additional information about the Fund, has been
filed with the SEC and is incorporated herein by reference. Information
about the Fund (including the SAI) can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information about the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Reports
and other information about the Fund are available on the SEC's Internet
site at http://www.sec.gov. and copies of this information are available,
upon paying a duplication fee, by writing the Public Reference Section of
the SEC, Washington, D.C. 20549-6009.
You may obtain a free copy of the Fund's SAI and annual and semi-annual
reports and you may make further inquiries by calling the Fund at
1-800-247-4170 or by writing the Fund at 5400 University Avenue, West Des
Moines, Iowa 50266.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT ADVISER, DISTRIBUTOR, CUSTODIAN
SHAREHOLDER SERVICE, DIVIDEND Deutsche Bank
DISBURSING AND TRANSFER AGENT Global Assets -- Insurance Group
EquiTrust Investment Management 16 Wall Street
Services, Inc. New York, New York 10005
5400 University Avenue
West Des Moines, Iowa 50266
LEGAL COUNSEL INDEPENDENT AUDITORS
Vedder, Price, Kaufman & Kammholz Ernst & Young LLP
222 North LaSalle Street 801 Grand Avenue
Suite 2600 Suite 3400
Chicago, Illinois 60601 Des Moines, Iowa 50309
</TABLE>
Investment Company Act of 1940, File Number 811-2125
<PAGE>
APPLICATION FOR SHARES -- INSTITUTIONAL
PLEASE COMPLETE AND MAIL TO:
EQUITRUST SERIES FUND, INC.
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266-5997
If you have any questions, please call toll-free at 1-800-422-3175 (in Iowa) or
1-800-247-4170 (outside Iowa).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DESIGNATE TYPE OF ACCOUNT & OWNER NAME(S)
/ / INDIVIDUAL OR JOINT ACCOUNT*
- --------------------------------------------------------------
Owner's Name
- ------------------------------------------------------------------------------
Joint Owner's Name
*Joint tenants with Right of Survivorship, The Fund does not accept accounts
registered tenants-in-common
/ / CUSTODIAL ACCOUNT
Uniform Gift or Transfer to Minors Act
/ / EDUCATION IRA ACCOUNT
- --------------------------------------------------------------
Custodian's or Responsible Individual's Name
- ------------------------------------------------------------------------------
Minor's Name
/ / TRUST, CORPORATION OR OTHER ENTITY ACCOUNT
- ------------------------------------------------------------------------------
Name of Trust, Corporation or Other Entity
- ------------------------------------------------------------------------------
Trustee(s') Name or Type of Entity
- ------------------------------------------------------------------------------
Date of Trust Agreement
PROVIDE YOUR TAX IDENTIFICATION NUMBER
- ------------------------------------------------------------------------------
Social Security or Tax ID Number
(Use minor's Social Security number for gifts/transfers to minors and Education
IRAs)
- ------------------------------------------------------------------------------
Joint Owner's or Custodian's Social Security or Tax ID Number
PROVIDE YOUR ADDRESS
- ------------------------------------------------------------------------------
Street or PO Box
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
City, State, Zip Code
PROVIDE YOUR DATE(S) OF BIRTH
- --------------------------------------------------------------
PROVIDE YOUR FARM BUREAU MEMBERSHIP NUMBER (if applicable)
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO SELECTION*
______ Value Growth $ ______________
______ High Grade Bond $ ______________
______ High Yield Bond $ ______________
______ Managed $ ______________
______ Money Market $ ______________
______ Blue Chip $ ______________
*If no Portfolio is designated, the Money Market Portfolio will be selected.
TO REINVEST YOUR DISTRIBUTIONS
Your dividends and capital gains will be reinvested unless you indicate
otherwise. (No cash payment will be made for dividends in an amount less than
$10.)
/ / Cash Dividends / / Cash Capital Gains
- -------------------------------------------------------------------
SPECIAL SHAREHOLDER PRIVILEGES
Exchange Between Funds / / Yes / / No
I authorize exchanges between Portfolios upon instruction from any person by
telephone. If neither box is checked, the telephone exchange privilege will be
provided.
/ / Please send information on the Automatic Investment Plan
/ / Please send information on the Telephone Redemption Plan
(non-qualified accounts only)
- -------------------------------------------------------------------
TAX QUALIFIED PLANS ONLY
A qualified application must be submitted in addition to this form.
/ / SIMPLE / / IRA / / Education IRA
/ / Tax Deferred 403(b) / / SEP / / Roth IRA
/ / Qualified Pension and
Profit Sharing
DESIGNATED BENEFICIARY
(for use with tax qualified plans only)
- ------------------------------------------------------------------------------
Primary Beneficiary Relationship
- ------------------------------------------------------------------------------
Social Security Number Date of Birth
- ------------------------------------------------------------------------------
Contingent Beneficiary Relationship
- ------------------------------------------------------------------------------
Social Security Number Date of Birth
- ------------------------------------------------------------------------------
Contingent Beneficiary Relationship
- ------------------------------------------------------------------------------
Social Security Number Date of Birth
- ------------------------------------------------------------------------------
Spousal Consent of Non-Spouse Beneficiary
- --------------------------------------------------------------------------------
SIGNATURES
I certify that I have received, have read and agree to the terms of the
prospectus for EquiTrust Series Fund, Inc. I have the authority and legal
capacity to purchase mutual fund shares, am of legal age in my state and believe
each investment is suitable for me. Under penalties of perjury, I certify that
the number shown on this form is a true and correct social security or tax
identification number and, to the best of my knowledge, I am not subject to
backup withholding.
- ------------------------------------------------------------------------------
Signature of Applicant
- ------------------------------------------------------------------------------
Signature of Joint Applicant
- ------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Application must be accompanied or preceded by a current prospectus.
(Please Complete Reverse Side)
737-018AI (12/99)
<PAGE>
Distributed by EquiTrust Investment Management Services, Inc.
CONFIDENTIAL CUSTOMER RECORD
___________________________________ __________________________________
Name of Customer Date
These questions are for the purpose of determining the suitability of a Fund
investment for you and are asked pursuant to rules of the securities industry.
Information provided will be treated confidentially.
1. SEX: / / MALE / / FEMALE
2. DATE OF BIRTH: _________________________________________________
3. DEPENDENT CHILDREN: Number ____ Age of youngest ____ Age of oldest ____
4. PRINCIPAL OCCUPATION: ______________________________________________________
5. NAME AND ADDRESS OF EMPLOYER: ______________________________________________
______________________________________________
6. ANNUAL INCOME: / / Less than $10,000 / / $10,000 to $25,000
/ / $25,000 to $50,000 / / $50,000 to $100,000 / / $100,000 or over
7. MARGINAL FEDERAL INCOME TAX BRACKET: / / 15% / / 28% / / 31% / / 36%
/ / 39.6%
8. NET WORTH: / / Less than $25,000 / / $25,000 to $50,000 / / $50,000 to
$100,000 / / $100,000 or over
9. SAVINGS: / / Less than $5,000 / / $5,000 to $10,000 / / $10,000 to $25,000
/ / $25,000 or over
10. OTHER ASSETS:
Amount: / / Less than $10,000 / / $10,000 to $50,000 / / $50,000 to $100,000
/ / $100,000 or over
Description: _______________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
11. INVESTMENT OBJECTIVE: / / Growth of income and capital / / Current income
/ / Long-term capital appreciation / / Liquidity and
stability of principal
/ / Other (Specify) __________________________________
12. VOLATILITY TOLERANCE: / / Low / / Medium / / High
13. INSURANCE ON LIFE OF CUSTOMER: / / Less than $50,000 / / $50,000 to $100,000
/ / $100,000 to $250,000 / / $250,000 or over
14. OTHER INFORMATION YOU WISH US TO CONSIDER:
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
/ / I elect not to provide the information above.
___________________________________________________________________________
Signature of Customer
___________________________________________________________________________
Signature of Joint Customer
737-018AI
<PAGE>
APPLICATION FOR SHARES -- TRADITIONAL
PLEASE COMPLETE AND MAIL TO:
EQUITRUST SERIES FUND, INC.
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266-5997
If you have any questions, please call toll-free at 1-800-422-3175 (in Iowa) or
1-800-247-4170 (outside Iowa).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DESIGNATE TYPE OF ACCOUNT & OWNER NAME(S)
/ / INDIVIDUAL OR JOINT ACCOUNT*
- ------------------------------------------------------
Owner's Name
- -------------------------------------------------------------------
Joint Owner's Name
*Joint tenants with Right of Survivorship. The Fund does not accept accounts
registered tenants-in-common.
/ / CUSTODIAL ACCOUNT
Uniform Gift or Transfer to Minors Act
/ / EDUCATION IRA ACCOUNT
- ------------------------------------------------------
Custodian's or Responsible Individual's Name
- -------------------------------------------------------------------
Minor's Name
/ / TRUST, CORPORATION OR OTHER ENTITY ACCOUNT
- -------------------------------------------------------------------
Name of Trust, Corporation or Other Entity
- -------------------------------------------------------------------
Trustee(s') Name or Type of Entity
- -------------------------------------------------------------------
Date of Trust Agreement
PROVIDE YOUR TAX IDENTIFICATION NUMBER
- -------------------------------------------------------------------
Social Security or Tax ID Number
(Use minor's Social Security number for gifts/transfers to minors and Education
IRAs)
- -------------------------------------------------------------------
Joint Owner's or Custodian's Social Security or Tax ID Number
PROVIDE YOUR ADDRESS
- -------------------------------------------------------------------
Street or PO Box
- -------------------------------------------------------------------
- -------------------------------------------------------------------
City, State, Zip Code
PROVIDE YOUR DATE(S) OF BIRTH
- ------------------------------------------------------
PROVIDE YOUR FARM BUREAU MEMBERSHIP NUMBER (if applicable)
- -------------------------------------------------------------------
- -------------------------------------------------------------------------
PORTFOLIO SELECTION*
Minimum Initial Investment $250 per Portfolio
______ Value Growth $ ______________
______ High Grade Bond $ ______________
______ High Yield Bond $ ______________
______ Managed $ ______________
______ Money Market $ ______________
______ Blue Chip $ ______________
*If no Portfolio is designated, the Money Market Portfolio will be selected.
TO REINVEST YOUR DISTRIBUTIONS
Your dividends and capital gains will be reinvested unless you indicate
otherwise. (No cash payment will be made for dividends in an amount less than
$10.)
/ / Cash Dividends / / Cash Capital Gains
- ----------------------------------------------------------
SPECIAL SHAREHOLDER PRIVILEGES
Exchange Between Funds* / / Yes / / No
I authorize exchanges between Portfolios upon instruction from any person by
telephone. If neither box is checked, the telephone exchange privilege will be
provided. Shares held in certificated form may not be exchanged.
/ / Please send information on the Automatic Investment Plan
/ /Please send information on the Telephone Redemption Plan (non-qualified
accounts only)
*Subject to a $5.00 exchange fee.
- -------------------------------------------------------------------------
TAX QUALIFIED PLANS ONLY
A qualified application must be submitted in addition to this form.
<TABLE>
<S> <C> <C> <C> <C> <C>
/ / SIMPLE / / IRA / / Education IRA
/ / Tax Deferred 403(b) / / SEP / / Roth IRA
/ / Qualified Pension and
Profit Sharing
</TABLE>
DESIGNATED BENEFICIARY
(for use with tax qualified plans only)
- -------------------------------------------------------------------
Primary Beneficiary Relationship
- -------------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------------
Contingent Beneficiary Relationship
- -------------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------------
Contingent Beneficiary Relationship
- -------------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------------
Spousal Consent of Non-Spouse Beneficiary
- -------------------------------------------------------------------------
SIGNATURES
I certify that I have received, have read and agree to the terms of the
prospectus for EquiTrust Series Fund, Inc. I have the authority and legal
capacity to purchase mutual fund shares, am of legal age in my state and believe
each investment is suitable for me. Under penalties of perjury, I certify that
the number shown on this form is a true and correct social security or tax
identification number and, to the best of my knowledge, I am not subject to
backup withholding.
- -------------------------------------------------------------------
Signature of Applicant
- -------------------------------------------------------------------
Signature of Joint Applicant
- -------------------------------------------------------------------
Rep's Signature Branch/Rep Number
- -------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Application must be accompanied or preceded by a current prospectus.
(Please Complete Reverse Side)
737-018AT (12/99)
<PAGE>
Distributed by EquiTrust Investment Management Services, Inc.
CONFIDENTIAL CUSTOMER RECORD
___________________________________ __________________________________
Name of Customer Date
These questions are for the purpose of determining the suitability of a Fund
investment for you and are asked pursuant to rules of the Securities Industry.
The information provided will be treated confidentially.
1. SEX: / / MALE / / FEMALE
2. DATE OF BIRTH: _________________________________________________
3. DEPENDENT CHILDREN: Number _______ Age of youngest _______ Age of oldest
_______
4. PRINCIPAL OCCUPATION: ______________________________________________________
5. NAME AND ADDRESS OF EMPLOYER: ______________________________________________
______________________________________________
6. ANNUAL INCOME: / / Less than $10,000 / / $10,000 to $25,000
/ / $25,000 to $50,000 / / $50,000 to $100,000 / / $100,000 or
over
7. NET WORTH: / / Less than $25,000 / / $25,000 to $50,000 / / $50,000 to
$100,000 / / $100,000 or over
8. SAVINGS: / / Less than $5,000 / / $5,000 to $10,000 / / $10,000 to $25,000
/ / $25,000 or over
9. OTHER ASSETS:
Amount: / / Less than $10,000 / / $10,000 to $50,000 / / $50,000 to $100,000
/ / $100,000 or over
Description: _______________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
10. INVESTMENT OBJECTIVE: / / Growth of income and capital / / Current income
/ / Long-term capital appreciation / / Liquidity and
stability of principal
/ / Other (Specify) __________________________________
11. VOLATILITY TOLERANCE: / / Low / / Medium / / High
12. INSURANCE ON LIFE OF CUSTOMER: / / Less than $50,000 / / $50,000 to $100,000
/ / $100,000 to $250,000 / / $250,000 or over
13. OTHER INFORMATION YOU WISH US TO CONSIDER:
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
/ / I elect not to provide the information above.
______________________________________________________________________________
Signature of Customer
______________________________________________________________________________
Signature of Joint Customer
______________________________________________________________________________
Signature of Representative
737-018AT
<PAGE>
----------------------------
[LOGO]
EquiTrust Series Fund, Inc.
PROSPECTUS
DECEMBER 1, 1999
INVESTMENT MANAGER AND
PRINCIPAL UNDERWRITER
EQUITRUST INVESTMENT
MANAGEMENT SERVICES, INC.
5400 UNIVERSITY AVENUE
WEST DES MOINES, IA 50266
1-800-247-4170 (OUTSIDE IOWA)
1-800-422-3175 (IN IOWA)
1-515-225-5586 (DES MOINES)
737-018(12/99)
<PAGE>
- --------------------------------------------------------------------------------
EQUITRUST SERIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
December 1, 1999
EquiTrust Series Fund, Inc. (the "Fund") is an open-end diversified management
investment company which consists of six Portfolios: Value Growth Portfolio,
High Grade Bond Portfolio, High Yield Bond Portfolio, Managed Portfolio, Money
Market Portfolio and Blue Chip Portfolio. Each Portfolio has distinct investment
objectives and policies, and each is in effect a separate fund issuing its own
shares.
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Prospectus of the Fund dated December 1, 1999.
The audited financial statements of the Fund, including the notes thereto,
contained in the Annual Report to Shareholders of EquiTrust Series Fund for the
fiscal year ended July 31, 1999 were filed with the Securities and Exchange
Commission (the "Commission") on September 22, 1999 and are incorporated by
reference.
A copy of the Prospectus or Annual Report may be obtained without charge by
writing or calling the Fund at the address and telephone number shown below.
Terms not defined herein shall have the meanings given them in the Prospectus.
EquiTrust Mutual Funds
5400 University Avenue
West Des Moines, Iowa 50266
800-247-4170
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND TECHNIQUES.............. 1
The Fund.............................................. 1
Investment Objectives................................. 1
Investment Strategies and Techniques.................. 2
INVESTMENT RESTRICTIONS..................................... 10
Fundamental Policies.................................. 10
Non-Fundamental (Operating) Policies.................. 12
OFFICERS AND DIRECTORS...................................... 13
INVESTMENT ADVISER.......................................... 18
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS............ 21
UNDERWRITING AND DISTRIBUTION EXPENSES...................... 22
PORTFOLIO TURNOVER.......................................... 23
PURCHASES AND REDEMPTIONS................................... 23
NET ASSET VALUE............................................. 24
Money Market Portfolio................................ 24
Other Portfolios...................................... 25
TAXES....................................................... 26
DIVIDENDS AND DISTRIBUTIONS................................. 27
Money Market Portfolio................................ 27
High Grade Bond and High Yield Bond Portfolios........ 27
Value Growth, Blue Chip and Managed Portfolios........ 27
PERFORMANCE INFORMATION..................................... 27
Performance Calculation............................... 29
ORGANIZATION OF THE FUND.................................... 30
SHAREHOLDER VOTING RIGHTS................................... 31
RETIREMENT PLANS............................................ 32
OTHER INFORMATION........................................... 32
Principal Holders of Securities....................... 32
Custodian............................................. 32
Independent Auditors.................................. 33
Accounting Services................................... 33
Shareholder Service Dividend Disbursing and Transfer
Agent................................................ 33
Legal Matters......................................... 33
Registration Statement................................ 33
FINANCIAL STATEMENTS........................................ 33
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
APPENDIX C.................................................. C-1
</TABLE>
i
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND TECHNIQUES
- --------------------------------------------------------------------------------
THE FUND
EquiTrust Series Fund, Inc. (the "Fund") was established as a Maryland
corporation under Articles of Incorporation dated August 14, 1970. The Fund
is an open-end, diversified management investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company
Act"). It is a series-type investment company consisting of the Value Growth
Portfolio, High Grade Bond Portfolio, High Yield Bond Portfolio, Managed
Portfolio, Money Market Portfolio and Blue Chip Portfolio (individually, a
"Portfolio"; collectively, the "Portfolios"). The Board of Directors of the
Fund (the "Board of Directors") may provide for additional portfolios at any
time.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The investment objective(s) of each Portfolio is set forth below.
<TABLE>
<CAPTION>
<S> <C>
Value Growth Portfolio Seeks long-term capital appreciation.
High Grade Bond Portfolio Seeks to generate as high a level of current income as
is consistent with investment in a diversified portfolio
of high grade income bearing debt securities.
High Yield Bond Portfolio Seeks as high a level of current income as is consistent
with investment in a diversified portfolio of
lower-rated, higher-yielding income bearing securities.
The Portfolio also seeks capital appreciation, but only
when consistent with its primary goal.
Managed Portfolio Seeks the highest total return through income and
capital appreciation.
Money Market Portfolio Seeks maximum current income consistent with liquidity
and stability of principal.
Blue Chip Portfolio Seeks growth of capital and income.
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES AND TECHNIQUES
A description of certain investment strategies and techniques applicable to
some or all of the Portfolios is set forth in the Prospectus under the
heading "Principal Risk Factors Associated with the Portfolios' Investments"
and "Other Securities and Investment Strategies." A description of the money
market instruments in which the Money Market Portfolio may invest is
contained in Appendix A to this SAI. A description of the corporate bond and
commercial paper ratings of Moody's Investors Services, Inc. ("Moody's") and
Standard & Poor's Corporation ("Standard & Poor's") is contained in
Appendix C to this SAI.
The following is intended to augment the explanation in the Prospectus of
certain investment strategies and techniques applicable to one or more of
the Portfolios.
SECURITIES OF FOREIGN ISSUERS
The Value Growth Portfolio and Managed Portfolio each may invest up to 25%
of their net assets in equity and debt securities of foreign issuers, and
the High Grade Bond Portfolio and High Yield Bond Portfolio each may invest
up to 25% of their net assets in debt securities of foreign issuers, to the
extent the purchase of such foreign securities is otherwise consistent with
the Portfolio's investment objectives. Investments are made only in
securities of foreign issuers that are traded on U.S. exchanges and payable
or denominated in U.S. dollars.
Investments in securities of foreign issuers (including ADRs) may offer
potential benefits not available from investments solely in securities of
domestic issuers. Investing in securities of foreign issuers involves
significant risks that are not typically associated with investing in
domestic securities. Such investments may be affected by changes in currency
rates and changes in foreign or U.S. laws, in restrictions applicable to
such investments and in exchange control regulations. Foreign issuers are
not generally subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies,
and there may be less publicly available information about a foreign issuer
than about a domestic one. In addition, there is generally less government
regulation of stock exchanges, brokers, and listed and unlisted issuers in
foreign countries than in the U.S. Furthermore, with respect to certain
foreign countries, there is a possibility of expropriation or confiscatory
taxation, imposition of withholding taxes on dividend or interest payments,
limitations on the removal of cash or other assets of a Portfolio, or
political or social instability or diplomatic developments which could
affect investments in those countries. Individual foreign economies also may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Although ADRs acquired by the Portfolios are traded on domestic exchanges,
their values largely reflect the values of the underlying securities on
foreign securities markets. The values of such underlying securities are a
function of a number of factors. Some foreign stock markets (and other
securities markets) may have substantially less volume than, for example,
the New York Stock Exchange (or other domestic markets) and securities of
some foreign issuers may be less liquid than securities of comparable
domestic issuers. Commissions and dealer mark-ups on transactions in foreign
investments may be higher than for similar transactions in the U.S. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, on certain occasions, such procedures
have been unable to keep pace with the volume of securities transactions,
thus making it difficult to conduct such transactions.
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LOANS OF PORTFOLIO SECURITIES
Lending of portfolio securities is a common practice in the securities
industry. Each Portfolio may from time to time lend securities (but not in
excess of 20% of its net assets) from its portfolio to brokers, dealers and
financial institutions, provided that: (i) the loan is secured continuously
by collateral consisting of U.S. Government securities, government agency
securities, or cash or cash equivalents adjusted daily to have a market
value at least equal to the current market value of the securities loaned
plus accrued interest; (ii) the Portfolio may at any time call the loan and
regain the securities loaned; and (iii) EquiTrust Investment Management
Services, Inc., (the "Adviser") (under the review of the Board of Directors)
has reviewed the creditworthiness of the borrower and found such
creditworthiness satisfactory. The collateral will be invested in short-term
securities, the income from which will increase the return to the Portfolio.
The Portfolio will retain all rights of beneficial ownership in the loaned
securities, including voting rights and rights to interest or other
distributions, and will have the right to regain record ownership of loaned
securities to exercise such beneficial rights. The Portfolio may pay
reasonable administrative, custodial and finders' fees to persons
unaffiliated with the Fund in connection with the arranging of such loans.
Unless certain requirements contained in the Internal Revenue Code of 1986,
as amended (the "Code"), are satisfied, the dividends, interest and other
distributions received by the Portfolio on loaned securities may not be
treated for tax purposes as qualified income for the purposes of the 90%
test discussed under "Taxes." Each Portfolio intends to loan portfolio
securities only to the extent that such activity does not jeopardize the
Portfolio's qualification as a regulated investment company under
Subchapter M of the Code.
Securities lending involves the risk that the borrower may fail to return
the securities in a timely manner or at all. As a result, the Fund may lose
money and there may be a delay in recovering the loaned securities. The Fund
could also lose money if it does not recover the securities and the value of
the collateral falls. These events could trigger adverse tax consequences to
the Fund. In addition, if the Fund is not able to get securities that it
lends back from the borrower on a timely basis, the Fund may be exposed to a
loss of investment opportunities.
WRITING COVERED CALL OPTIONS
The writing of covered call options is a conservative investment technique
that is generally considered to involve relatively little risk as compared
to other options transactions. Each Portfolio (other than the Money Market
Portfolio) may write (sell) covered call options on portfolio securities
representing up to 100% of its net assets in an offering to enhance
investment performance or to reduce risks associated with investments. A
call option is a short-term contract, ordinarily having a duration of nine
months or less, which gives the purchaser of the option, in return for a
premium paid, the right to buy, and the writer of the option the obligation
to sell, the underlying security at the exercise price at any time prior to
the expiration of the option period. An option is "covered" if the writer
owns the optioned security.
A Portfolio may write covered call options on debt securities that are
traded over-the-counter. When a Portfolio writes an over-the-counter option,
there is no assurance that the Portfolio will be able to enter into a
closing purchase transaction. It may not always be possible for the
Portfolio to negotiate a closing purchase transaction with the same dealer
for the same exercise price and expiration date as the option which the
Portfolio previously had written. Although the Portfolio may choose to
purchase an option from a different dealer, the Portfolio would then be
subject to the additional credit risk of such dealer. If the Portfolio is
unable to effect a closing purchase
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transaction, it will not be able to sell the underlying security until the
option expires or until it delivers the underlying security upon exercise.
In that event, the assets represented by the underlying security will
temporarily be unavailable to meet any redemption requests.
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return. In return for the premium income, the Portfolio will forego the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price so long as its obligations under the
contract continue, except insofar as the premium represents a profit.
Moreover, in writing the option, the Portfolio will retain the risk of loss
if the price of the security declines, and the premium is intended to offset
any such loss in whole or in part. A Portfolio, in writing call options,
must assume that the call may be exercised at any time prior to the
expiration of its obligations as a writer and that in such circumstances,
the net proceeds realized from the sale of the underlying securities
pursuant to the call may be substantially below the prevailing market price.
Covered call options and the securities underlying options will be listed on
national securities exchanges, except that certain transactions in debt
securities and related options need not be so listed.
A Portfolio may write options that are traded on U.S. and foreign exchanges
and options traded over the counter with broker-dealers who make markets in
these options. The ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the Commission changes its
position, the Portfolios will treat purchased over-the-counter options and
all assets used to cover written over-the-counter options as illiquid
securities, except that with respect to options written with primary dealers
in U.S. Government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid securities
may be calculated with reference to the formula.
Transactions by a Portfolio in options on securities is subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Portfolio may write
may be affected by options written or purchased by other investment advisory
clients of the investment adviser. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in
excess of these limits, and it may impose certain other sanctions.
The writing of options is a highly specialized activity which involves
investment techniques different from those associated with ordinary
portfolio securities transactions. The successful use of covered call
options depends on the Adviser's ability to forecast market movements
correctly. As discussed above, the effective use of covered call options
also depends on the Fund's ability to terminate option positions at times
when the Adviser deems it desirable to do so.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
From time to time, in the ordinary course of business, any of the Portfolios
may purchase newly issued securities appropriate for the Portfolio on a
"when-issued" basis and may purchase or sell securities appropriate for the
Portfolio on a "delayed delivery" basis. When-issued or delayed delivery
transactions involve a commitment by a Portfolio to purchase or sell
particular securities at a specified price with payment and delivery to take
place at a future date. These transactions allow the Portfolio to lock in an
attractive purchase price or yield on a security the Portfolio intends to
purchase or an attractive sale price on a security the Portfolio intends to
sell. Normally,
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settlement occurs within one month of the purchase or sale. During the
period between purchase or sale and settlement, no payment is made or
received by a Portfolio and, for delayed delivery purchases, no interest
accrues to the Portfolio. A Portfolio will only make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities, but each Portfolio reserves the right to
sell such securities before the settlement date if deemed advisable.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will segregate the security on the
Fund's accounting records, record the transaction and reflect the amount due
and the market value of the security in determining its net asset value.
Likewise, at the time a Portfolio makes the commitment to sell a security on
a delayed delivery basis, it will segregate the security on the Fund's
accounting records, record the transaction and include the proceeds to be
received in determining its net asset value. Accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment
are ignored in calculating net asset value so long as the commitment remains
in effect.
The market value of the when-issued or delayed delivery securities at any
time may be more or less than the purchase price to be paid or the sale
price to be received at the settlement date. To the extent that a Portfolio
engages in when-issued or delayed delivery transactions, it will do so for
the purpose of acquiring or selling Portfolio securities consistent with the
Portfolio's investment objectives and policies and not for the purpose of
investment leverage or to speculate on interest rate changes. The investment
adviser does not believe that a Portfolio's net asset value or income will
be adversely affected by the purchase of securities on a when-issued or
delayed delivery basis or the sale of securities on a delayed delivery
basis.
Each Portfolio will establish a segregated account with the Fund's custodian
bank in which it will maintain cash or U.S. Government securities or other
high-grade debt obligations at least equal in value to commitments to
purchase securities on a when-issued or delayed delivery basis; subject to
this requirement, a Portfolio may purchase securities on a when-issued or
delayed delivery basis without limit. To the extent that assets of a
Portfolio are held in cash pending the settlement of a purchase of
securities, that Portfolio would earn no income; however, it is the
investment adviser's intention that each Portfolio will be fully invested to
the extent practicable and subject to the policies stated above. In the case
of a commitment to sell portfolio securities on a delayed delivery basis,
each Portfolio will instruct the custodian to hold the portfolio securities
themselves in a segregated account while the commitment is outstanding.
MORTGAGE-BACKED SECURITIES
The High Grade Bond, High Yield Bond and Managed Portfolios may invest in
mortgage-backed securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. Principal and interest
payments made on the mortgages in the underlying mortgage pool are passed
through to the Portfolio. Unscheduled prepayments of principal shorten the
securities' weighted average life and may lower total return. The value of
these securities may also change because of changes in the market's
perception of the creditworthiness of the federal agency that issued them.
Some mortgage-backed 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 High Grade Bond, High Yield Bond and Managed Portfolios may also
purchase or sell collateralized mortgage obligations ("CMOs"), which are
obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Depending on the type of CMOs in which
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the Portfolio invests, the Portfolio's investment may be subject to a
greater or lesser risk of prepayment than other types of mortgage-related
securities.
The average life of mortgage-backed and other types of mortgage related
securities is likely to be substantially less than the stated maturity of
the mortgages in the underlying pools. During periods of rising interest
rates, the average life of mortgage-backed securities may increase
substantially because they are not likely to be prepaid, which may result in
greater net asset value fluctuation.
ASSET-BACKED SECURITIES
The High Grade Bond, High Yield Bond and Managed Portfolios may invest in
various asset-backed securities, which represent a participation in, or are
secured by and payable from, a stream of payments generated by particular
assets, most often a pool of assets similar to one another, such as motor
vehicle receivables, credit card receivables, conditional sales contracts,
equipment lease certificates and equipment trust certificates. The Adviser
expects that other types of asset-backed securities will be offered to
investors in the future.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements as a means of earning
income for periods as short as overnight. A repurchase agreement is an
agreement under which the Portfolio purchases a security and the seller
agrees, at the time of sale, to repurchase the security at a specified time
and price, thereby determining the yield during the Portfolio's holding
period.
That yield is determined by current short-term rates and may be more or less
than the interest rate on the underlying security. The value of the
underlying securities is marked to market daily. Should the value of the
underlying securities decline, the seller would be required to provide the
Portfolio with additional securities so that the aggregate value of the
underlying securities was at least equal to the repurchase price. The
Portfolios also may enter into a special type of repurchase agreement known
as an "open repurchase agreement." An open repurchase agreement varies from
the typical repurchase agreement in the following respects: (i) the
agreement has no set maturity, but instead matures upon 24 hours' notice to
the seller; and (ii) the repurchase price is not determined at the time the
agreement is entered into, but instead is based on a variable interest rate
and the duration of the agreement.
The Portfolios may enter into repurchase agreements only with banks or
securities dealers and the underlying securities will consist of securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. If a seller of a repurchase agreement were to default,
the Portfolio might experience losses, including delays and expenses in
enforcing its rights. To minimize this risk, the Adviser (under the review
of the Board of Directors) will review the creditworthiness of the seller of
the repurchase agreement and must find such creditworthiness satisfactory
before a Portfolio may enter into the repurchase agreement.
A Portfolio may invest no more than 10% of its assets in repurchase
agreements maturing in more than seven days, and no more than 25% of its
assets in repurchase agreements in which the underlying securities have
maturities in excess of one year, although there is no limit on the
percentage of each Portfolio's assets which may be invested in repurchase
agreements which mature in less than seven days and which have underlying
securities with maturities of less than one year. Open repurchase agreements
are considered to mature in one day.
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OTHER INVESTMENT COMPANIES
Each Portfolio may invest, subject to the investment limitations described
below, in shares of other investment companies which seek to maintain a
$1.00 net asset value per share ("Money Market Funds"). The Portfolios
intend to invest available cash balances in such Money Market Funds. In
addition, the Portfolios may invest in such Money Market Funds for temporary
defensive purposes (for example, when the Adviser believes such a position
is warranted by uncertain or unusual market conditions, or when liquidity is
required to meet unusually high redemption requests) or for other purposes.
No more than 5% of the value of a Portfolio's total assets will be invested
in securities of Money Market Funds. In addition, a Portfolio may hold no
more than 3% of the outstanding voting stock of any Money Market Fund. As a
shareholder of another investment company, a Portfolio would bear, along
with other shareholders, its pro-rata portion of the Money Market Fund's
expenses, including advisory fees, which would increase the cost of holding
Fund shares and decrease the Fund's investment return.
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES
No Portfolio may invest more than 15% of its net assets (10% of total assets
for the Money Market and Blue Chip Portfolios) in illiquid investments.
Illiquid investments are those that cannot be sold within seven days at
approximately the price at which a Portfolio values the investment. Illiquid
investments include most repurchase agreements maturing in more than seven
days, time deposits with a notice or demand period of more than seven days,
certain mortgage-backed securities, certain over-the-counter options
contracts (and segregated assets used to cover such options), and many
restricted securities. Restricted securities have a contractual restriction
on resale or otherwise cannot be resold publicly until registered under the
Securities Act of 1933 (the "1933 Act").
Each of the Portfolios may invest in restricted securities (but not in
excess of 10% of total assets for the Money Market Portfolio and Blue Chip
Portfolio). If restricted securities are illiquid, they are subject to the
liquidity limitations described above. Restricted securities are not,
however, considered illiquid if they are eligible for sale to qualified
institutional purchasers in reliance upon Rule 144A under the 1933 Act and
they are determined to be liquid by the Board of Directors or by the Adviser
pursuant to board approved procedures. Such procedures take into account
trading activity for such securities and the availability of reliable
pricing information, among other factors. To the extent that qualified
institutional purchasers become for a time uninterested in purchasing
certain restricted securities, a Portfolio's holding of such securities may
become illiquid. Even when determined to be liquid, restricted securities
are less liquid than they would be if they were not restricted. Therefore
the purchase price and subsequent valuation of restricted securities
normally reflect a discount from the price at which they would trade if they
were not restricted.
INVESTMENTS IN CAPITAL SECURITIES
Each Portfolio (other than the Blue Chip and Money Market Portfolios) may
invest in capital (trust-preferred) securities. Capital securities are
subordinated securities, generally with a 30 to 50 year maturity and a 5 to
10 year call protection. Dividend payments generally can be deferred by the
issuer for up to 5 years. These securities generally are unsecured and
subordinated to all senior debt securities of the issuer. Therefore,
principal and interest payments on capital securities are subject to a
greater risk of default than senior debt securities.
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LOWER RATED DEBT SECURITIES
The High Yield Bond Portfolio invests a substantial portion of its assets in
income-bearing securities offering high current income. Additionally, the
High Grade Bond Portfolio may invest a portion of its assets in such
securities. Such high yielding income-bearing securities often do not meet
the high grade or investment grade quality level. Securities falling short
of investment grade are commonly known as "junk bonds." These lower rated
securities are, on balance, predominantly speculative with respect to their
capacity to pay interest and repay principal in accordance with their terms
and generally entail more credit risk than higher rated securities. The
market values of such 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. Such
lower rated securities also tend to be more sensitive to economic conditions
than higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated
securities may depress prices and diminish liquidity for such securities.
Factors adversely affecting the market value of lower rated securities
adversely affect a Portfolio's net asset value. In addition, a Portfolio 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 income bearing
securities. Although some risk is inherent in all securities, holders of
income bearing debt securities have a claim on the assets of the issuer
prior to the holders of common stock. Therefore, an investment in such
securities generally entails less financial risk than an investment in
equity securities of the same issuer.
Lower rated securities may be issued by corporations in the early stages of
their development. They may also be issued in connection with a corporate
reorganization or as part of a corporate takeover. Companies that issue such
high yielding lower rated securities are often highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with investment grade securities. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of lower rated securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. An issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss
due to default by the issuer is significantly greater for the holders of
lower rated income bearing securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer.
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Lower rated income bearing securities frequently have call or buy-back
features that would permit an issuer to call or repurchase the security from
the Portfolio. If a call were exercised by the issuer during a period of
declining interest rates, a Portfolio would likely have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the Portfolio. The premature disposition of a lower
rated high yielding security because of a call or buy-back feature, the
deterioration of the issuer's creditworthiness or a default may also make it
more difficult for a Portfolio to time its receipt of income, which may have
tax implications.
A Portfolio may have difficulty disposing of certain lower rated securities
for which there is a thin trading market. Because not all dealers maintain
markets in all lower rated securities, there is no established retail
secondary market for many of these securities, and the Adviser anticipates
that they could be sold only to a limited number of dealers or institutional
investors. To the extent there is a secondary trading market for lower rated
securities, it is generally not so liquid as that for investment grade
securities. The lack of a liquid secondary market may have an adverse impact
on market value of such securities and a Portfolio's ability to dispose of
them when necessary to meet the Portfolio's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness
of the issuer. The lack of a liquid secondary market for certain securities
may also make it more difficult for the Adviser to obtain accurate market
quotations for purposes of valuing a Portfolio's assets. Market quotations
are generally available on many high yield issues only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
It is likely that a major economic recession could severely affect the
market for, and the values of, lower rated securities, as well as the
ability of the issuers of such securities to repay principal and pay
interest thereon.
A Portfolio may acquire lower rated securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. A Portfolio may acquire lower rated securities
during an initial offering. Such securities involve special risks because
they are new issues.
From time to time, there have been proposals for legislation designed to
limit the use of certain high yielding securities in connection with
leveraged buy-outs, mergers and acquisitions, or to limit the deductibility
of interest payments on such securities. Such proposals, if enacted into
law, could reduce the market for such securities generally, could negatively
affect the financial condition of issuers of high yield securities by
removing or reducing a source of future financing and could negatively
affect the value of specific high yield issues. However, the likelihood of
any such legislation or the effect thereof is uncertain.
Zero coupon securities and pay-in-kind bonds involve additional special
obligations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or to a
specified cash payment date when the securities begin paying current
interest (the "cash payment date"), and therefore are issued and traded at a
discount from their face amount or par value. The discount varies depending
upon the time remaining until maturity or cash payment date, prevailing
interest rates, liquidity of the security and the perceived credit quality
of the issuer. The discount, absent financial difficulties of the issuer,
decreases as the final maturity or cash payment date of the security
approaches. The market prices of zero coupon securities are generally more
volatile than those of securities that pay interest periodically, and they
are more likely to respond to changes in interest rates than non-zero coupon
securities having similar maturities and credit quality. The credit risk
factors pertaining to lower-rated securities
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generally also apply to lower-rated zero coupon bonds and pay-in-kind bonds.
Such zero coupon, pay-in-kind or delayed interest bonds carry an additional
risk in that, unlike bonds that pay interest throughout the period to
maturity, a Portfolio will realize no cash until the cash payment date
unless a portion of such securities is sold and, if the issuer defaults, a
Portfolio may obtain no return at all on its investment.
Current federal income tax law requires the holder of zero coupon securities
or of certain pay-in-kind bonds (bonds that pay interest through the
issuance of additional bonds) to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its
qualification as a registered investment company and avoid liability for
federal income and excise taxes, a Portfolio will be required to distribute
income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
TEMPORARY DEFENSIVE POSITIONS
Notwithstanding their investment objective(s), each Portfolio may, for
temporary defensive purposes, invest all (15% for the Blue Chip Portfolio)
of its assets in cash and/or money market instruments of the type in which
the Money Market Portfolio invests.
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INVESTMENT RESTRICTIONS
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FUNDAMENTAL POLICIES
In seeking to achieve its investment objective(s), each Portfolio has
adopted the following investment restrictions. These are fundamental
policies and may not be changed without a majority vote of the outstanding
shares of each Portfolio affected. As used in this SAI and in the
Prospectus, the phrase "majority vote" of a Portfolio (or the Fund) means
the vote of the lesser of (i) 67% of the shares of the Portfolio (Fund)
present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio (Fund). A change in policy affecting
only one Portfolio may be effected by a majority vote of the outstanding
shares of such Portfolio.
Except as noted below, each Portfolio may not:
1. As to 75% of the value of each Portfolio's total assets (with the
exception of the Money Market Portfolio, which is subject to 100% of the
value of its total assets), purchase securities of any issuer (other than
U.S. Government securities or government agency securities) if, as a result,
more than 5% of the value of the Portfolio's assets (taken at value at the
time of investment) would be invested in securities of that issuer.
2. Purchase more than 10% of the voting securities or more than 10% of
any class of securities of any issuer (other than U.S. Government securities
or government agency securities). For the purpose of this restriction, all
outstanding debt securities of an issuer shall be deemed a single class of
security and all preferred stocks of an issuer shall be deemed a single
class of security.
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3. Purchase any security if, immediately after such purchase, more than
25% of the Portfolio's assets would be invested in issuers in the same
industry. This restriction does not apply to U.S. Government securities,
government agency securities, obligations of banks or savings institutions,
or instruments secured by these instruments, such as repurchase agreements
for U.S. Government securities (these instruments are described in Appendix
A).
4. Purchase securities of other investment companies, except (i) by
purchase in the open market involving only customary brokers' commissions
and only if immediately thereafter not more than 5% of such Portfolio's
total assets would be invested in such securities, or (ii) as part of a
merger, consolidation or acquisition of assets.
5. Purchase or sell (although it may purchase securities of issuers
which invest or deal in) interests in oil, gas or other mineral exploration
or development programs, real estate, commodities or commodity contracts.
6. Purchase any securities on margin (except that the Portfolio may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities) or make short sales unless, by
virtue of its ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if the
right is conditional, the sale is made upon the same condition.
7. Purchase or retain the securities of any issuer if any of the
officers or directors of the Fund or any officers or directors of the Fund's
investment adviser own individually more than .50% of the securities of such
issuer and together own more than 5% of the securities of such issuer.
8. Issue senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur pursuant to (9) below.
9. Borrow money, except from banks for temporary or emergency purposes,
and in no event in excess of 5% of its total net assets, or pledge or
mortgage more than 15% of its total assets.
10. Underwrite securities issued by others, except to the extent that it
may be deemed to be a statutory underwriter in the sale of restricted
securities which require registration under the 1933 Act before resale. In
this connection, the Money Market Portfolio or the Blue Chip Portfolio will
not invest more than 10% of the value of its total assets in securities that
are subject to legal or contractual restrictions on resale, or are not
readily marketable.
11. Participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not include the "bunching" of orders
for the sale or purchase of portfolio securities with the other Portfolios
or with other investment company and client accounts managed by the Fund's
investment adviser or its affiliates to reduce brokerage commissions or
otherwise to achieve best overall execution, or to obtain securities on more
favorable terms).
12. Alone, or together with any other Portfolios, make investments for
the purpose of exercising control over, or management of, any issuer.
13. Lend money or securities, except as provided in (14) below (the
making of demand deposits with banks, and the purchase of securities such as
bonds, debentures, commercial paper
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and short-term obligations in accordance with the Portfolio's investment
objectives and policies, shall not be considered the making of a loan). In
addition, each Portfolio may not invest more than 10% of its total assets
(taken at market value at the time of each purchase) in repurchase
agreements maturing in more than seven days.
14. Lend its portfolio securities in excess of 20% of its net assets.
15. Invest in foreign securities, except as follows: the Value Growth
and Managed Portfolios may invest up to 25% of their respective net assets
in foreign equity and debt securities traded on U.S. exchanges and payable
in U.S. dollars, and the High Grade Bond and High Yield Bond Portfolios may
each invest up to 25% of their respective net assets in foreign debt
securities traded on U.S. exchanges and payable in U.S. dollars.
16. Write, purchase or sell puts, calls or combinations thereof, other
than writing covered call options.
17. Invest more than 5% of the value of its total assets in securities
of companies which have a record of less than three years' continuous
operation, including in such three years the operation of any predecessor
company or companies, partnership or individual proprietorship if the
company whose securities are to be purchased by the Fund has come into
existence as a result of a merger, consolidation or reorganization or the
purchase of substantially all of the assets of such predecessor.
The term "government agency securities" for purposes of fundamental policy 3
has the same meaning as that set forth in Appendix A. The term "commodities
or commodity contracts" as used in fundamental policy 5 includes futures
contracts.
- --------------------------------------------------------------------------------
NON-FUNDAMENTAL (OPERATING) POLICIES
The following are non-fundamental (operating) policies approved by the Board
of Directors. Such policies may be changed by the Board of Directors without
approval of the shareholders.
The Value Growth, High Grade Bond, High Yield Bond and Managed Portfolios
shall not invest more than 15% of their respective total net assets in
illiquid securities, except to purchase certain restricted securities that
are eligible for resale pursuant to Rule 144A under the 1933 Act, provided
that such 144A security is, in each case, determined by the Adviser to be a
liquid investment in accordance with appropriate procedures.
The Value Growth Portfolio shall not purchase warrants, valued at the lower
of cost or market, in excess of 5% of the value of the Portfolio's net
assets. Included within that amount, but not to exceed 2% of the value of
the Portfolio's net assets, may be warrants that are not listed on the New
York or American Stock Exchange. Warrants acquired by the Portfolio at any
time in units or attached to securities are not subject to this restriction.
If a percentage increase is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from
a change in values or net assets will not be considered a violation.
12
<PAGE>
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------
The Board of Directors is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on the
directors of investment companies by the Investment Company Act. The Board
of Directors elects officers of the Fund annually. The officers and
directors of the Fund and their principal occupations for the past five
years are as follows. Corporate positions may, in some instances, have
changed during this period. The three directors listed with an asterisk are
"interested persons" as defined in the Investment Company Act.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------------- --------------------------------------
<S> <C> <C>
EDWARD M. WIEDERSTEIN* (51) PRESIDENT AND DIRECTOR Farmer; Chairman and Director, FBL
5400 University Avenue Financial Group, Inc.; President and
West Des Moines, Iowa 50266 Director, Iowa Farm Bureau Federation,
Farm Bureau Life Insurance Company,
FBL Insurance Brokerage, Inc., Farm
Bureau Mutual Insurance Company and
other affiliates of the foregoing;
Director, Multi-Pig Corporation,
Western Agricultural Insurance
Company, Western Ag Insurance
Agency, Inc., Western Farm Bureau Life
Insurance Company, American Ag
Insurance Company, and WellMark Blue
Cross/Blue Shield of Iowa.
RICHARD D. HARRIS* (55) SENIOR VICE PRESIDENT, Senior Vice President,
5400 University Avenue SECRETARY-TREASURER AND Secretary-Treasurer and Director, FBL
West Des Moines, Iowa 50266 DIRECTOR Financial Group, Inc.; Senior Vice
President and Secretary-Treasurer,
Farm Bureau Life Insurance Company and
other affiliates of the foregoing;
other positions with various
affiliates of the foregoing. Former
Director, Public Policy Division, Iowa
Farm Bureau Federation; Director, Iowa
FFA Foundation and Iowa Make-A-Wish
Foundation.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------------- --------------------------------------
<S> <C> <C>
STEPHEN M. MORAIN (54) SENIOR VICE PRESIDENT, General Counsel and Assistant
5400 University Avenue GENERAL COUNSEL AND Secretary, Iowa Farm Bureau
West Des Moines, Iowa 50266 ASSISTANT SECRETARY Federation; General Counsel, Secretary
and Director, Farm Bureau Management
Corporation; Senior Vice President,
General Counsel and Director, FBL
Financial Group, Inc., EquiTrust
Investment Management Services, Inc.
and EquiTrust Marketing Services, LLC;
Senior Vice President and General
Counsel, Farm Bureau Life Insurance
Company, FBL Insurance
Brokerage, Inc. and other affiliates
of the foregoing; Director, Iowa
Agricultural Finance Corporation and
Iowa Business Development Finance
Corporation; Chairman, Edge
Technologies, Inc.
THOMAS R. GIBSON (55) CHIEF EXECUTIVE OFFICER Chief Executive Officer and Director,
5400 University Avenue FBL Financial Group, Inc., EquiTrust
West Des Moines, Iowa 50266 Investment Management Services, Inc.
and EquiTrust Marketing Services, LLC;
Chief Executive Officer, Farm Bureau
Life Insurance Company, Western Farm
Bureau Life Insurance Company, FBL
Insurance Brokerage, Inc. and other
affiliates of the foregoing.
WILLIAM J. ODDY (55) CHIEF OPERATING OFFICER Chief Operating Officer, FBL Financial
5400 University Avenue Group, Inc.; Executive Vice President
West Des Moines, Iowa 50266 and General Manager, Farm Bureau Life
Insurance Company, and other
affiliates of the foregoing; Vice
President, Farm Bureau Mutual
Insurance Company and other affiliates
of the foregoing; Chief Operating
Officer and Director, EquiTrust
Marketing Services, LLC; President and
Director, EquiTrust Investment
Management Services, Inc., FBL Real
Estate Ventures, Ltd. and RIK, Inc.;
Chief Executive Officer, Western
Computer Services, Inc., Director,
American Equity Investment Life
Insurance Company, Berthel Fisher &
Company, Inc. and Berthel Fisher &
Company Financial Services, Inc.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------------- --------------------------------------
<S> <C> <C>
JAMES W. NOYCE (44) CHIEF FINANCIAL OFFICER Chief Financial Officer, FBL Financial
5400 University Avenue Group, Inc., Farm Bureau Life
West Des Moines, Iowa 50266 Insurance Company, and other
affiliates of the foregoing. Chief
Financial Officer, Treasurer and
Director, EquiTrust Investment
Management Services, Inc. and
EquiTrust Marketing Services, LLC. He
holds other positions with various
affiliates of the foregoing.
TIMOTHY J. HOFFMAN (49) VICE PRESIDENT Chief Property/Casualty Officer, FBL
5400 University Avenue Financial Group, Inc.; Executive Vice
West Des Monies, Iowa 50266 President and General Manager, Farm
Bureau Mutual Insurance Company and
other affiliates of the foregoing;
Vice President, Farm Bureau Life
Insurance Company, Western Farm Bureau
Life Insurance Company and other
affiliates of the foregoing; Vice
President and Director, EquiTrust
Investment Management Services, Inc.
and EquiTrust Marketing Services, LLC.
LOU ANN SANDBURG (52) VICE PRESIDENT- Vice President-Investments and
5400 University Avenue INVESTMENTS AND Assistant Treasurer, FBL Financial
West Des Moines, Iowa 50266 ASSISTANT TREASURER Group, Inc., Farm Bureau Life
Insurance Company, and other
affiliates of the foregoing. Vice
President-Investments, EquiTrust
Investment Management Services, Inc.
and EquiTrust Marketing Services, LLC.
She holds other positions with various
affiliates of the foregoing.
DENNIS M. MARKER (48) INVESTMENT VICE Investment Vice President,
5400 University Avenue PRESIDENT, Administration, FBL Financial
West Des Moines, Iowa 50266 ADMINISTRATION AND Group, Inc. and Farm Bureau Life
ASSISTANT SECRETARY Insurance Company; Investment Vice
President-Administration, Secretary
and Director, EquiTrust Investment
Management Services, Inc. and
EquiTrust Marketing Services, LLC. He
holds other positions with various
affiliates of the foregoing.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------------- --------------------------------------
<S> <C> <C>
SUE A. CORNICK (39) MARKET CONDUCT AND Market Conduct and Mutual Funds Vice
5400 University Avenue MUTUAL FUNDS VICE President and Assistant Secretary,
West Des Moines, Iowa 50266 PRESIDENT AND ASSISTANT EquiTrust Investment Management
SECRETARY Services, Inc. and EquiTrust Marketing
Services, LLC.
KRISTI ROJOHN (36) ASSISTANT SECRETARY Assistant Mutual Funds Manager and
5400 University Avenue Assistant Secretary, EquiTrust
West Des Moines, Iowa 50266 Investment Management Services, Inc.
and EquiTrust Marketing Services, LLC.
ELAINE A. FOLLOWWILL (29) ASSISTANT SECRETARY Compliance Assistant and Assistant
5400 University Avenue Secretary, EquiTrust Investment
West Des Moines, Iowa 50266 Management Services, Inc. and
EquiTrust Marketing Services, LLC.
DONALD G. BARTLING (72) DIRECTOR Farmer; Partner, Bartling Brothers
25718 CR 6 Partnership (farming business).
Herman, Nebraska 68029
JOHN R. GRAHAM* (54) DIRECTOR Executive Vice President, Kansas Farm
1512 Country Club Place Bureau, Kansas Farm Bureau Services,
Manhattan, Kansas 66502 Kansas Agricultural Marketing
Association, FB Services Insurance
Agency, Kansas Farm Bureau Life
Insurance Company, Farm Bureau Mutual
Insurance Company and KFB Insurance
Company, Inc.; Chairman, Chief
Executive Officer and Director, FB
Capital Management of Kansas, Inc. and
Graham Capital Management, Inc.;
Director, National Association of
Independent Insurers, Didde
Corporation, Graham Enterprises Inc.,
Fannar Corporation and Farm Bureau
Mutual Insurance Agency of Kansas;
Partner, Arthur-Graham Rental
Properties, CM Brass and G&H Real
Estate Investments; Trustee, Master
Teacher Employee Benefit Pension
Trust.
ERWIN H. JOHNSON (56) DIRECTOR Farmer; Owner and Manager, Center View
1841 March Avenue Farms, Co.; Director, First Security
Charles City, Iowa 50616 Bank and Trust Co., Charles City,
Iowa; Farm Financial Planner, Iowa
State University Cooperative Extension
Service; Financial and Farm Management
Consultant, Iowa State University
Overseas Projects.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------------- --------------------------------------
<S> <C> <C>
KENNETH KAY (56) DIRECTOR Farmer; Salesman, Pioneer Seed Corn;
R.R. 2, Box 75 Voting Delegate, Vice President and
Atlantic, Iowa 50022 former President, Cass County Farm
Bureau; Director, First Whitney
Bank & Trust; Board Member,
Transportation Committee Chairman,
Cass Atlantic Development Corporation.
CURTIS C. PIETZ (66) DIRECTOR Retired Farmer; Investor and Co-Owner,
R.R. 3 Box 79 Storden Seed and Chemical Service,
Lakefield, Minnesota 56150 Inc.; Director, Minnesota Rural
Finance Authority and Minnesota Farm
Bureau Federation; previous Farm
Bureau leadership; active in Farm
Management.
</TABLE>
The officers and directors of the Fund also serve in similar capacities as
officers and directors of EquiTrust Money Market Fund, Inc. and as officers
and trustees of EquiTrust Variable Insurance Series Fund. Several of the
officers and directors also are officers and directors of the Adviser. The
Fund pays no direct remuneration to any officer of the Fund. Each of the
directors not affiliated with the Adviser will be compensated by the Fund.
Each of these unaffiliated directors will receive a fee of $115 plus
expenses for each directors' meeting attended. For the fiscal year ended
July 31, 1999, the Fund paid directors' fees totaling $5,455.
The following table sets forth compensation received by all directors of the
Fund for the fiscal year ended July 31, 1999. The information in the last
column of the table sets forth the total compensation received by all
directors for calendar year 1998 for services as a director of the Fund and
other funds in the EquiTrust family.
TABLE OF DIRECTOR COMPENSATION
<TABLE>
<CAPTION>
PENSION AND
AGGREGATE RETIREMENT BENEFITS TOTAL COMPENSATION
NAME OF COMPENSATION ACCRUED AS PART OF FROM ALL FUNDS IN
DIRECTOR FROM THE FUND FUND EXPENSES THE EQUITRUST FAMILY
<S> <C> <C> <C>
Mr. Bartling $ 460 $0 $1380
Mr. Graham 0 0 0
Mr. Harris 0 0 0
Mr. Johnson 460 0 1380
Mr. Kay 460 0 1380
Mr. Pietz 460 0 1380
Mr. Wiederstein 0 0 0
</TABLE>
Directors and officers of the Fund do not receive any benefits from the Fund
upon retirement nor does the Fund accrue any expenses for pension or
retirement benefits.
17
<PAGE>
As of September 15, 1999, the officers and directors as a group owned less
than 1% of the then outstanding shares of the Fund.
COMMITTEES OF BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee. The Audit
Committee of the Fund recommends the selection of independent auditors for
the Fund, reviews with such independent public accountants the planning,
scope and results of their audit of the Fund's financial statements and the
fees for service performed, reviews the financial statements of the Fund and
receives audit reports. The Audit Committee consists of four members,
Messrs. Bartling, Johnson, Kay and Pietz. The Audit Committee met two times
during the Fund's fiscal year ended July 31, 1999.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
The following information supplements the information set forth in the
Prospectus under the heading "Portfolio Management." Pursuant to an
Investment Advisory and Management Services Agreement dated November 11,
1987 ("Agreement"), EquiTrust Investment Management Services, Inc.
("Adviser") acts as the Fund's investment adviser and manager, subject to
the review of the Board of Directors. The Adviser is a wholly owned
subsidiary of FBL Financial Services, Inc., which is a wholly owned
subsidiary of FBL Financial Group, Inc., an Iowa corporation, 67% of whose
outstanding voting stock is owned by Iowa Farm Bureau Federation, an Iowa
not-for-profit corporation. The following individuals are officers and/or
directors of the Adviser and are officers and/or directors of the Fund:
Stephen M. Morain, Thomas R. Gibson, William J. Oddy, Timothy J. Hoffman,
Dennis M. Marker, James W. Noyce, Lou Ann Sandburg, Sue A. Cornick, Kristi
Rojohn, and Elaine A. Followwill The Adviser also acts as the investment
adviser to individuals, institutions and two other mutual funds: EquiTrust
Money Market Fund, Inc. and EquiTrust Variable Insurance Series Fund.
Personnel of the Adviser also manage investments for the portfolios of
insurance companies.
The Adviser subscribes to leading bond information services and receives
published reports and statistical compilations from the issuers themselves,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Fund or the Adviser's other clients. The Adviser
regards this information and material, however, as an adjunct to its own
research activities.
Under the Agreement, the Adviser regularly provides the Fund with investment
research, advice and supervision, and furnishes an investment program
consistent with the investment objective(s) and policies of each Portfolio,
determining, for each Portfolio, what securities shall be purchased and sold
and what portion of the Portfolio's assets shall be held uninvested, subject
always to: (i) the provisions of the articles of incorporation, the Fund's
by-laws, the Investment Company Act and applicable requirements of the Code;
(ii) the Portfolio's investment objective(s), policies and restrictions; and
(iii) such policies and instructions as the Board of Directors may from time
to time establish. The Adviser also advises and assists the officers of the
Fund in taking such steps as are necessary or appropriate to carry out the
decisions of the Board of Directors (and any committees thereof) regarding
the conduct of the business of the Fund. The Adviser has agreed to arrange
for any of its officers or directors to serve without salary as directors,
officers or agents of the Fund if duly elected to such positions.
The Adviser, at its expense, furnishes the Fund with office space and
facilities, simple business equipment, advisory, research and statistical
facilities and clerical services and personnel to administer the business
affairs of the Fund. As compensation for the Adviser's investment advisory,
18
<PAGE>
management and clerical services, as well as the facilities it provides and
the expenses it assumes, the Agreement provides for the payment of a monthly
fee as described below.
As compensation for the advisory and management services provided by the
Adviser, the Fund has agreed to pay the Adviser an annual management fee,
accrued daily and payable monthly, based on the average daily net assets of
each Portfolio as follows:
<TABLE>
AVERAGE DAILY NET ASSETS
FIRST SECOND OVER
PORTFOLIO $200 MILLION $200 MILLION $400 MILLION
<S> <C> <C> <C>
Value Growth 0.50% 0.45% 0.40%
High Grade Bond 0.40% 0.35% 0.30%
High Yield Bond 0.55% 0.55% 0.50%
Managed 0.60% 0.45% 0.40%
Money Market 0.25% 0.25% 0.25%
Blue Chip 0.25% 0.25% 0.25%
</TABLE>
The Adviser is not required to pay expenses of the Fund other than those set
forth above. Each Portfolio will pay all other expenses incurred in its
operation, including a portion of the Fund's general administrative
expenses, allocated on the basis of the Portfolio's net assets. Expenses
that will be borne directly by the Portfolios include, but are not limited
to, the following: net asset value calculations; portfolio transaction
costs; interest on Fund obligations; miscellaneous reports; membership dues;
all expenses of shareholders' and directors' meetings and of preparing,
printing and mailing proxy statements, reports and notices to shareholders;
all expenses of registering the Fund's shares under federal and state
securities laws; the typesetting costs of printing Fund prospectuses and
supplements thereto; investor services (including allocable telephone and
personnel expenses); all taxes and fees payable to federal, state or other
governmental authorities; the fees and expenses of independent public
auditors, legal counsel, custodian, transfer and dividend disbursing agent
and any registrar; fees of directors who are not affiliated with the
Adviser; insurance premiums for fidelity bond and other coverage of the
Fund's operations; and such non-recurring expenses as may arise including
actions, suits or proceedings affecting the Fund and the legal obligation
the Fund may have to indemnify its officers and trustees with respect
thereto. See "Underwriting and Distribution Expenses" and "Other
Information -- Accounting Services" for a description of certain other Fund
expenses.
The Agreement was approved on November 11, 1987 by a vote of the
shareholders of Farm Bureau Growth Fund, Inc.(1) and on December 1, 1987 by
Farm Bureau Life Insurance Company
-----------------
(1) The Fund, which was incorporated in Maryland on August 14, 1970,
was known as Farm Bureau Growth Fund, Inc. prior to the
effectiveness of Articles of Amendment to its charter on
December 1, 1987 which, among other things, changed its name to
FBL Series Fund, Inc., established eight Portfolios of the Fund
and designated the then current assets, liabilities and
shareholders of Farm Bureau Growth Fund, Inc. as the assets,
liabilities and shareholders of the Growth Common Stock Portfolio
(which has since been renamed Value Growth Portfolio) of FBL
Series Fund, Inc. The meaning of the term "Value Growth Portfolio"
as used herein includes, where appropriate, Farm Bureau Growth
Fund, Inc. prior to December 1, 1987. On May 1, 1998, the Fund
changed its name to EquiTrust Series Fund, Inc.
19
<PAGE>
as the then sole shareholder of each of the other seven Portfolios of the
Fund, and was most recently approved for continuance on November 11, 1999,
by the Board of Directors, including a vote of a majority of the directors
who are not "interested persons" of either party to the Agreement. Unless
earlier terminated as described below, the Agreement will remain in effect
until November 30, 2000. Thereafter, the Agreement will continue in effect,
with respect to a Portfolio, from year to year so long as its continuation
is approved at least annually by (a) the vote of a majority of those
directors who are not parties to the Agreement or "interested persons" of
either party to the Agreement cast in person at a meeting called for the
purpose of voting on such approval, and (b) either (i) the vote of a
majority of the directors or (ii) the vote of a majority of the outstanding
shares of such Portfolio.
The Agreement will be deemed to have been approved or disapproved by the
Shareholders of a Portfolio if a majority of the outstanding shares of such
Portfolio vote for or against approval of the Agreement, notwithstanding (a)
that the Agreement has not been approved or disapproved by a majority of the
outstanding shares of any other Portfolio, and (b) that the Agreement has
not been approved or disapproved by a vote of a majority of the outstanding
shares of the Fund. The Agreement may be terminated without penalty at any
time upon 60 days' notice by either party, and will terminate automatically
upon assignment.
The Agreement provides that the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties, or from reckless
disregard by the Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is
the Adviser's opinion that the terms and conditions of such transactions
will not be influenced by existing or potential custodial or other Fund
relationships.
For the fiscal years ended July 31, 1999, 1998, and 1997, the advisory and
management fee expense was as follows:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1999 1998 1997
<S> <C> <C> <C>
Value Growth $431,802 $589,203 $505,350
High Grade Bond $ 56,910 $ 45,457 $ 38,467
High Yield Bond $ 71,230 $ 58,998 $ 45,477
Managed $254,437 $276,527 $202,879
Money Market $ 9,918 $ 7,315 $ 7,912
Blue Chip $131,256 $ 93,182 $ 51,719
</TABLE>
The Adviser has also agreed to reimburse any Portfolio of the Fund annually
to the extent that the annual operating expenses (including the investment
advisory fee but excluding brokerage, interest, taxes and extraordinary
expenses) of that Portfolio exceed 1.50% of its average daily net assets for
any fiscal year of the Portfolio. However, the amount reimbursed shall not
exceed the amount of the advisory fee paid by the Portfolio for such period.
During its 1997 fiscal year, the Adviser reimbursed $8,681 of the High Yield
Bond Portfolio's expenses and $8,681 of the Money Market Portfolio's
expenses pursuant to this agreement. During the last three fiscal years, the
Adviser did not reimburse any other expenses of any other Portfolio.
20
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
With respect to transactions in portfolio securities, whether through a
broker as agent or with a dealer as principal, the Adviser endeavors to
obtain for the Fund the most favorable prices and efficient execution of
orders. Subject to this primary consideration, the Adviser may place a
Portfolio's transactions with firms that furnish research, statistical and
other services. In particular, the Adviser may direct brokerage transactions
to a specific broker in return for certain data and research-oriented
software. Certain affiliates of the Adviser also place portfolio
transactions with these brokerage firms, and such affiliates share the
benefits of the research and other services obtained from these brokers. The
Adviser regards information which is customarily available only in return
for brokerage elements as among the many elements to be considered in
arriving at investment decisions. No specific value can be determined for
most such information and services and they are deemed supplemental to the
Adviser's own efforts in the performance of its duties under the Agreement.
Any research benefits derived are available for all clients.
Brokerage research services, as provided in Section 28(e) of the Securities
Exchange Act of 1934, may include: advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends; portfolio strategy and performance of accounts;
and the execution of securities transactions and performance of functions
incidental thereto (such as clearance and settlement).
If, in the judgment of the Adviser, the Fund or any Portfolio will be
benefited by such supplemental research services, the Fund or such Portfolio
is authorized to pay greater commissions than another broker or dealer may
charge for the same transaction. Accordingly, while the Adviser generally
seeks reasonably competitive commissions, the Portfolios will not
necessarily be paying the lowest commission available in every case.
Information received from brokerage research will be in addition to and not
in lieu of the services required to be performed by the Adviser under the
Agreement. The expenses of the Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. Neither the Adviser
nor any of its affiliates will receive any brokerage business arising out of
Portfolio transactions for the Fund. The Fund paid brokerage commissions
during the fiscal years ended July 31, 1999, 1998, and 1997 of $674,036,
$686,081 and $306,430, respectively. The increase in brokerage commissions
paid from 1997 to 1998 is due in substantial part to the relatively large
cash position held by the Value Growth Portfolio. In 1998, the Value Growth
Portfolio became more fully invested, thus incurring significantly higher
brokerage commissions than in 1998.
The Portfolios may deal in some instances in securities that are not listed
on a national securities exchange but rather are traded in the
over-the-counter market. The Portfolios may also purchase listed securities
through the "third market" (i.e., from a dealer that is not a member of the
exchange on which a security is listed). Where transactions are executed in
the over-the-counter market or third market, the Adviser will seek to deal
with primary market makers but, when necessary, will utilize the services of
brokers. In all such cases, the Adviser will attempt to negotiate the best
price and execution. Money market instruments are generally traded directly
with the issuer. On occasion, other securities may be purchased directly
from the issuer. The cost of a Portfolio's securities transactions will
consist primarily of brokerage commissions or dealer or underwriter spreads.
21
<PAGE>
Certain investments may be appropriate for certain of the Portfolios and for
other clients advised by the Adviser. Investment decisions for the
Portfolios and such other clients are made with a view to achieving their
respective investment objectives and after consideration of factors such as
their current holdings, availability of cash for investment and the size of
their investments in general. Frequently, a particular security may be
bought or sold for only one client, or in different amounts and at different
times for more than one but less than all clients. Likewise, a particular
security may be bought for one or more clients when one or more other
clients are selling the security. In addition, purchases or sales of the
same security may be made for two or more Portfolios or other clients at the
same time. In such event, such transactions will be allocated among the
Portfolios or other clients in a manner believed by the Adviser to be
equitable to each. In some cases, this procedure could have an adverse
effect on the price or amount of the securities purchased or sold by a
Portfolio. It is the opinion of the Board of Directors that the benefits
available because of the Adviser's organization outweigh any disadvantages
that may arise from exposure to simultaneous transactions. Purchase and sale
orders for a Portfolio may be combined with those of other Portfolios or
other clients of the Adviser in the interest of the most favorable net
results to the Portfolio.
- --------------------------------------------------------------------------------
UNDERWRITING AND DISTRIBUTION EXPENSES
- --------------------------------------------------------------------------------
EquiTrust Investment Management Services, Inc. (the "Distributor") also
serves as principal underwriter for the Fund under an Underwriting Agreement
dated December 31, 1983, and as distributor of the Fund's shares under a
Distribution Plan and Agreement dated December 1, 1987, as amended
December 1, 1997 ("Distribution Agreement"). See "Other Information--
Distributor" in the Prospectus. The Distributor bears all its expenses of
providing services pursuant to the Distribution Agreement, including the
payment of any commissions and the preparation and distribution of
advertising or sales literature, and bears the cost of printing and mailing
prospectuses to persons other than shareholders. The Fund bears the cost of
qualifying and maintaining the qualification of its shares for sale under
the securities laws of the various states and the expense of registering its
shares with the Commission.
The Distribution Agreement continues in effect from year to year so long as
such continuance is approved at least annually by a vote of the Board of
Directors of the Fund, including the Directors who are not "interested
persons" of the Fund and who have no direct or indirect financial interest
in the agreement. The Distribution Agreement automatically terminates in the
event of its assignment and may be terminated at any time without penalty by
the Fund or by the Distributor upon six months' notice. Termination by the
Fund may be by vote of a majority of the Board of Directors, or a majority
of the Directors who are not "interested persons" of the Fund and who have
no direct or indirect financial interest in the Distribution Agreement, or a
"majority of the outstanding voting securities" of the Fund as defined under
the Investment Company Act. The Distribution Agreement may not be amended to
increase the fee to be paid by the Fund without approval by a majority of
the outstanding voting securities of the Fund, and all material amendments
must in any event be approved by the Board of Directors in the manner
described above with respect to the continuation of the Agreement.
Shareholders vote in the aggregate and not by Portfolio with respect to the
Distribution Agreement.
For its services under the Distribution Agreement, the Fund pays the
Distributor a fee, payable monthly, at the annual rate of .50% of the
average daily net assets of the Traditional Shares of the Fund. The
Distribution Agreement is a "compensation type" plan, which means that the
22
<PAGE>
Distributor may receive compensation that is more or less than the actual
expenditures made. Since the Distribution Agreement applies to all
Portfolios, the fees paid by one portfolio may be used to finance
distribution of the shares of another Portfolio, and the distribution fee
payable to the Distributor is allocated among the Portfolios based on
reflective net asset size. The Distributor also provides information and
administrative services for Fund shareholders of Traditional Shares pursuant
to an administrative services agreement. For such services, the Fund pays
the Distributor a fee, payable monthly, at an annual rate of .25% of average
daily net assets of the Traditional Shares of the Fund.
The Fund paid annual distribution fees to the Distributor during the fiscal
years ended July 31, 1999, 1998 and 1997 of $983,702, $1,085,208, and
$880,476, respectively. During the fiscal year ended July 31, 1999, of the
aggregate amount of distribution fees paid to the Distributor, $293,153, was
paid to EquiTrust Marketing Services, LLC, an affiliate of the Distributor,
and the balance of $690,549, was retained by the Distributor. During the
fiscal year ended July 31, 1999, the Distributor incurred expenses in the
approximate amounts noted: $1,182,188 for commissions paid to Dealers for
Fund sales, $1,200,901 for management services, $125,421 for rent, $29,649
for telephone, $22,519 for postage, $43,745 for printing and office
supplies, and $73,544 for furniture and equipment.
During the fiscal years ended July 31, 1999, 1998 and 1997 the Distributor
received $296,670, $195,009, and $117,087, respectively, in contingent
deferred sales charges.
The Distributor also acts as principal underwriter and sole distributor of
the shares of EquiTrust Money Market Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
The portfolio turnover rates for the Portfolios are set forth under
"Financial Highlights" in the Prospectus. Portfolio turnover is calculated
by dividing the lesser of purchases or sales of a Portfolio's securities
during a fiscal year by the average monthly value of the Portfolio's
securities during such fiscal year. In determining the portfolio turnover
rate, all securities whose maturities or expiration dates at the time of
acquisition were one year or less are excluded. Thus, the portfolio turnover
rate measures only that portion of the Portfolio that is considered to be
long-term. Portfolio turnover rates may be affected by factors such as
purchase and redemption requirements and market volatility and may vary
greatly from time to time. Frequency of portfolio turnover will not be a
limiting factor if the investment adviser deems it desirable to purchase or
sell securities. Increased portfolio turnover may result in greater
brokerage commissions and consequent expense to the Portfolio. If any
Portfolio were to derive more than 30% of its gross income from the sale of
securities held less than three months, it might fail to qualify under the
tax laws as a regulated investment company for that year and consequently
would lose certain beneficial tax treatment of its income; however, each
Portfolio intends to continue to qualify as a regulated investment company
each year. See "Taxes."
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
The following supplements the discussion in the Prospectus under the
headings "How to Buy Shares" and "How to Redeem Shares."
23
<PAGE>
EquiTrust Investment Management Services, Inc. serves as Distributor and
principal underwriter of the Fund's shares. The Distributor may use other
broker-dealer firms to assist in providing distribution, including EquiTrust
Marketing Services. Shares of each Portfolio are sold at their respective
net asset value ("NAV") next determined after an order for purchase and
payment are received in proper form.
Shares of each Portfolio are redeemed at their respective NAV next
determined after a request for redemption is received in proper form. The
Fund may suspend the right of redemption or postpone the date of payment,
with respect to the shares of a Portfolio, during any period when
(a) trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or such exchange is closed for trading (other
than customary weekend and holiday closing); (b) an emergency exists, as
determined by the Commission, as a result of which disposal of such
Portfolio's securities, or determination of the NAV of such Portfolio, is
not reasonably practicable; or (c) the Securities and Exchange Commission by
order permits such suspension for the protection of shareholders. In such
event, redemption will be effected at the NAV next determined after the
suspension has been terminated unless the shareholder has withdrawn the
redemption request in writing and the request has been received by EquiTrust
Investment Management Services, Inc., 5400 University Avenue, West Des
Moines, Iowa 50266-5997, prior to the day of such determination of NAV.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
The NAV per share of each Portfolio is determined as of the earlier of 3:00
p.m. (Central Time) or the close of the NYSE, on each day that (i) the NYSE
is open for business (except the Friday before and the Monday after
Christmas (in 1999), the Monday after New Year's Day and the Friday after
Thanksgiving Day (in 2000) and any day on which the Fund's offices are
closed because of a weather-related or comparable type of emergency); and
(ii) an order for purchase or redemption of shares of the Portfolio is
received. The NAV per share of each Portfolio is computed by dividing the
total value of the Portfolio's securities and other assets, less
liabilities, by the total number of outstanding shares of such Portfolio.
The Fund reserves the right to calculate or estimate the NAV of a Portfolio
more frequently than once daily if deemed desirable. If the Fund's offices
should be closed because of a weather-related or comparable type of
emergency and the Fund is unable to segregate orders and redemption requests
received on that day, the Fund will price those orders and redemptions at
the NAV next determined for each Portfolio.
The following supplements the discussion in the Prospectus under the heading
"Other Information -- Net Asset Value."
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
The NAV per share of the Money Market Portfolio is computed by dividing the
total value of the Portfolio's securities and other assets, less liabilities
(including dividends payable), by the number of shares outstanding. The
assets are determined by valuing the portfolio securities at amortized cost,
pursuant to Rule 2a-7 under the Investment Company Act. The amortized cost
method of valuation involves valuing a security at cost at the time of
purchase and thereafter assuming a
24
<PAGE>
constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the
instrument.
The purpose of the amortized cost method of valuation is to attempt to
maintain a constant NAV per share of $1.00. 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
Portfolio would receive if it sold its portfolio securities. Under the
direction of the Board of Directors, certain procedures have been adopted to
monitor and stabilize the price per share. Calculations are made to compare
the value of the portfolio securities, valued at amortized cost, with market
values. Market valuations are obtained by using actual quotations provided
by market makers, estimates of market value, or values obtained from yield
data relating to classes of money market instruments published by reputable
sources at the mean between the bid and asked prices for those instruments.
If a deviation of 1/2 of 1% or more between the Portfolio's $1.00 per share
net asset value and the net asset value calculated by reference to market
valuations were to occur, or if there were any other deviations which the
Board of Directors believed would result in dilution or other unfair results
material to Shareholders, the Board of Directors would consider what action,
if any, should be initiated.
The market value of debt securities usually reflects yields generally
available on securities of similar quality. When yields decline, the market
value of a Portfolio holding higher yielding securities can be expected to
increase; when yields increase, the market value of a Portfolio invested at
lower yields can be expected to decline. In addition, if the Portfolio has
net redemptions at a time when interest rates have increased, the Portfolio
may be forced to sell portfolio securities prior to maturity at a price
below the Portfolio's carrying value. Also, because the Portfolio generally
will be valued at amortized cost rather than market value, any yield quoted
may be different from the yield that would result if the entire Portfolio
were valued at market value, since the amortized cost method does not take
market fluctuations into consideration.
- --------------------------------------------------------------------------------
OTHER PORTFOLIOS
The NAV per share of each Portfolio other than the Money Market Portfolio is
computed by dividing the total value of the Portfolio's securities and other
assets, less liabilities, by the number of Portfolio shares then
outstanding. Securities traded on a national exchange are valued at the last
sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked
prices. Securities, other than money market instruments, traded in the
over-the-counter market are valued at the mean between the bid and asked
prices or at yield equivalent as obtained from one or more dealers that make
markets in the securities. Securities traded both in the over-the-counter
market and on a national exchange are valued according to the broadest and
most representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Securities and assets for
which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of
Directors. Money market instruments are valued at market value, except that
instruments maturing in 60 days or less are valued using the amortized cost
method of valuation.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are allocated specifically to such Portfolio,
and constitute the underlying assets of such Portfolio. The underlying
assets of each Portfolio are segregated on the Fund's books of account and
are charged with the
25
<PAGE>
liabilities of such Portfolio and with a share of the general liabilities of
the Fund. Expenses with respect to any two or more Portfolios are allocated
in proportion to the NAVs of the respective Portfolios except where
allocations of direct expenses can otherwise be fairly made.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
For federal income tax purposes, each Portfolio is treated as a separate
entity. Each Portfolio intends to continue to qualify to be taxed as a
"regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended ("Code"). If a Portfolio qualifies as a regulated
investment company and complies with the provisions of the Code, such
Portfolio will be relieved from federal income tax on the part of its net
ordinary income and net realized capital gain that it distributes to its
shareholders. To qualify for treatment as a "regulated investment company,"
a Portfolio must, among other things, derive in each taxable year at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies (subject to the authority of the Secretary
of the Treasury to exclude foreign currency gains that are not ancillary to
the Portfolio's principal business of investing in stock or securities or
options and futures with respect to such stock or securities), or other
income (including but not limited to gains from options, futures, or forward
contracts) derived with respect to its business of investing in such stocks,
securities, or currencies. In addition, to qualify for treatment as a
"regulated investment company," a Portfolio must derive less than 30% of its
gross income in each taxable year from gains (without deduction for losses)
from the sale or other disposition of securities held for less than three
months. This rule may limit a Portfolio's ability to engage in futures and
options transactions.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The
required distribution is generally the sum of 98% of a Portfolio's net
ordinary income for the calendar year plus 98% of its capital gain net
income for the one year period ending October 31. The Fund intends to
declare or distribute dividends from each Portfolio during the calendar year
in an amount sufficient to prevent imposition of the 4% excise tax.
A portion of the ordinary income distributions from a Portfolio may be
eligible for the "dividends received deduction" available to corporate
shareholders. The aggregate amount eligible for the "dividends received
deduction" may not exceed the aggregate qualifying dividends received by
such Portfolio for the fiscal year. The portion of the income dividends paid
during the fiscal year ended July 31, 1999 that qualified for the "dividends
received deduction" available to corporate shareholders was as follows:
100%, 5%, 32%, and 100% of the income dividends paid by the Value Growth,
High Yield Bond, Managed and Blue Chip Portfolios, respectively.
If a shareholder exchanges shares of a Portfolio for shares of another
Portfolio of the Fund, the shareholder will recognize a gain or loss for
federal income tax purposes measured by the difference between the value of
the shares acquired and the basis of the shares exchanged. Such gain or loss
will generally be a capital gain or loss and will be a long-term gain or
loss if the shareholder has held his or her shares for more than one year.
If a shareholder realizes a loss on the redemption of shares of a Portfolio
and invests in shares of the same Portfolio within 30 days before or after
the redemption, the transactions may be subject to the wash sale rules,
resulting in a postponement of the recognition of such loss for federal
income tax purposes. Any loss recognized on the disposition of shares of a
Portfolio held six months or less will be treated as
26
<PAGE>
long-term capital loss to the extent that the shareholder has received any
long-term capital gain dividends on such shares.
The discussion under "Distributions and Taxes" in the Prospectus, in
conjunction with the foregoing, is a general summary of applicable
provisions of the Code and Treasury Regulations now in effect as currently
interpreted by the courts and the Internal Revenue Service. The Code and
these Regulations, as well as the current interpretations thereof, may be
changed at any time by legislative, judicial or administrative action.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The following supplements the discussion of dividends and distributions in
the Prospectus under the headings Distributions and Taxes -- Distributions."
MONEY MARKET PORTFOLIO
The Money Market Portfolio declares dividends of all its daily net
investment income on each day the Portfolio's NAV per share is determined.
Dividends are payable monthly and are automatically reinvested and
distributed on the last business day of each month.
Net investment income, for dividend purposes, consists of (i) accrued
interest income, plus or minus (ii) amortized purchase discount or premium,
plus or minus (iii) all short-term realized gains or losses and unrealized
appreciation or depreciation on portfolio assets, minus (iv) all accrued
expenses of the Portfolio. Expenses of the Portfolio are accrued daily. So
long as portfolio securities are valued at amortized cost, there will be no
unrealized appreciation or depreciation on such securities.
HIGH GRADE BOND AND HIGH YIELD BOND PORTFOLIOS
Each of these Portfolios declares dividends of all its investment income on
each day the Portfolio's NAV is determined. Dividends are automatically
reinvested and distributed on the last business day of each month. Any
short-term and long-term gains will be declared and distributed
periodically, but in no event less frequently than annually.
VALUE GROWTH, BLUE CHIP AND MANAGED PORTFOLIOS
It is the policy of the Value Growth and Blue Chip Portfolios to distribute
at least annually substantially all its net investment income, if any, and
any net realized capital gains. It is the policy of the Managed Portfolio to
distribute quarterly substantially all its net investment income, if any,
and to distribute substantially all net short-term and long-term gains at
least annually.
Both dividend and capital gain distributions will be made in shares of a
Portfolio unless a shareholder requests payment in cash.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise several types of performance
information for a Portfolio. Each Portfolio, except the Money Market
Portfolio, may advertise "average annual total
27
<PAGE>
return" and "total return." The High Grade Bond and High Yield Bond
Portfolios may also advertise "yield." The Money Market Portfolio may
advertise "yield" and "effective yield." Each of these figures is based upon
historical results and is not necessarily representative of the future
performance of a Portfolio.
Average annual total return and total return measure both the net income
generated by and the effect of any realized and unrealized appreciation or
depreciation of the underlying investments of a Portfolio over the
designated period assuming the reinvestment of all dividends and
distributions during the period. Thus, these figures reflect the change in
value of an investment in the Portfolio during a specified period. Average
annual total return will be quoted for at least one-, five- and ten-year
periods (or, if such periods have not yet elapsed, at the end of a shorter
period corresponding to the life of the Portfolio). Average annual total
return figures represent the average annual percentage change in the value
of a specific dollar amount invested in the Portfolio's shares for the
designated period. Total return figures are not annualized and represent the
aggregate percentage or dollar value change over the period.
Yield is a measure of the net investment income per share earned over a
specific one-month or 30-day period (seven-day period for the Money Market
Portfolio) expressed as a percentage of the Portfolio's NAV per share at the
end of the period (except for the Money Market Portfolio where the NAV per
share at the beginning of the period is used). Yield is an annualized
figure, meaning that it is assumed that the Portfolio generates the same
level of investment income over a one-year period. The effective yield for
the Money Market Portfolio is calculated similarly, but the net investment
income earned is assumed to be compounded when annualized. The Money Market
Portfolio's effective yield will be slightly higher than its yield due to
this compounding. Semi-annual compounding is assumed for Portfolios other
than the Money Market Portfolio.
From time to time, the Fund may include in its sales literature and
shareholder reports for the High Grade Bond and High Yield Bond Portfolios a
quotation of the current "distribution rate" for the Portfolios. The
distribution rate is simply a measure of the level of income and short-term
capital gain dividends distributed for a specified period. It differs from
yield, which is a measure of the income actually earned by the Portfolio's
investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized or unrealized
appreciation or depreciation of, such investments during the period.
Distribution rate, therefore, is not intended to be a complete measure of
performance. Distribution rate may sometimes be greater than yield since,
for instance, it may include short-term gains (which may be non-recurring)
and may not reflect the amortization of bond premiums.
Additionally, from time to time, in advertisements or reports to
shareholders, a Portfolio may compare its performance to that of the
Consumer Price Index or various unmanaged indexes such as the Dow Jones
Industrial Average, the Standard & Poor's 500, the Shearson/Lehman
Government and Corporate Bond Index and the Salomon Brothers High Grade Bond
Index. A Portfolio may also use mutual fund quotation services such as
Lipper Analytical Services, Inc., an independent mutual fund reporting
service, or similar industry services, for purposes of comparing a
Portfolio's rank or performance with that of other mutual funds having
similar investment objectives. Performance comparisons should not be
considered representative of the future performance of any Portfolio.
28
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE CALCULATION
A Portfolio's standardized average annual total return quotation is computed
in accordance with a method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Portfolio for a specified period is determined by assuming a hypothetical
$1,000 investment in the Portfolio's shares on the first day of the period
at the then effective NAV per share ("initial investment"), and computing
the ending redeemable value ("redeemable value") of that investment at the
end of the period using the following formula: ERV = P(l+T)n
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV =ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period at the end of the period (or
fractional portion thereof).
The calculation assumes that all income and capital gains dividends by the
Portfolio have been reinvested at net asset value on the reinvestment dates
during the period and includes all recurring fees that are charged to all
shareholder accounts.
Calculation of a Portfolio's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by
first taking an investment in the Portfolio's shares on the first day of the
period at the then effective net asset value per share ("initial
investment") and computing the ending value ("ending value") of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value,
dividing the difference by the initial investment and expressing the result
as a percentage. This calculation assumes that all income and capital gains
dividends by the Portfolio have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period.
The yield for a Portfolio other than the Money Market Portfolio is computed
in accordance with the formula set forth below, which is a standardized
method prescribed by rules of the Commission. Based upon the 30-day period
ended July 31, 1999 the High Grade Bond Portfolio's yield was 5.38% and the
High Yield Bond Portfolio's yield was 5.50%. A Portfolio's yield is computed
by dividing the net investment income per share earned during the specific
one-month or 30-day period by the offering price per share on the last day
of the period, according to the following formula:
6
Yield = [(a-b +1) -1]
2 ----------------
cd
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the offering price per share on the last day of the period
29
<PAGE>
In computing yield, the Fund follows certain standardized accounting
practices specified by Commission rules. These practices are not necessarily
consistent with those that the Fund uses to prepare its annual and interim
financial statements in accordance with generally accepted accounting
principles.
The Money Market Portfolio's yield is computed in accordance with a standard
method prescribed by rules of the Commission. Under that method, the yield
quotation is based on a seven-day period and is computed as follows. The net
investment income per share (accrued interest on portfolio securities, plus
or minus amortized premium or discount, less accrued expenses) for the
period is divided by the price per share (expected to remain constant at
$1.00) at the beginning of the period ("base period return"), the result is
divided by seven and multiplied by 365, and the resulting yield figure is
carried to the nearest one hundredth of one percent. Realized capital gains
or losses and unrealized appreciation or depreciation of investments are not
included in the calculation.
The Money Market Portfolio's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect
of assumed compounding. The formula for the effective yield is [(base period
return +1) raised to the power of 365/7] -1.
The Money Market Portfolio's yield and effective yield for the seven-day
period ending July 31, 1999 were 3.29% and 3.34%, respectively.
A Portfolio's performance quotations are based upon historical results and
are not necessarily representative of future performance. The Fund's shares
are sold at NAV, and return and NAV will fluctuate except that the Money
Market Portfolio seeks to maintain a $1.00 NAV per share. Factors affecting
a Portfolio's performance include general market conditions, operating
expenses and investment management. Shares of a Portfolio are redeemable at
NAV, which may be more or less than original cost.
Redemptions within the first six years after purchase may be subject to a
contingent deferred sales charge that ranges from 5% the first year to 0%
after six years.
Yield and effective yield do not include the effect of the contingent
deferred sales charge. The standardized average annual total return does
include the effect of the contingent deferred sales charge. Average annual
total return does not, and total return may or may not, include the effect
of the contingent deferred sales charge that may be imposed at the end of
the designated period.
- --------------------------------------------------------------------------------
ORGANIZATION OF THE FUND
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified series management investment company
registered under the Investment Company Act. The Fund was organized as a
corporation under the laws of Maryland on August 14, 1970 and has authorized
capital of 5,000,000,000 shares of common stock, $.001 par value per share.
Currently, the Fund offers two classes of shares--Traditional Shares and
Institutional Shares--which have different expenses that will affect
performance. Institutional Shares are available for purchase exclusively by
the following investors: (a) retirement plans of FBL Financial Group, Inc.
and its affiliates; (b) the following investment advisory clients of
EquiTrust: (1) affiliated and unaffiliated benefit plans such as qualified
retirement plans, and (2) affiliated and unaffiliated
30
<PAGE>
banks and insurance companies purchasing for their own accounts; (c)
employees and directors of FBL Financial Group, Inc., its affiliates, and
affiliated state Farm Bureau Federations; (d) directors and trustees of the
EquiTrust Mutual Funds; and (e) such other types of accounts as EquiTrust
deems appropriate.
The shares of each Portfolio have equal rights and privileges with all other
shares of that Portfolio except that Traditional Shares have separate and
exclusive voting rights with respect to the Fund's Rule 12b-1 Plan, and each
share of a Portfolio represents an equal proportionate interest in that
Portfolio with each other share subject to any preferences (such as
resulting from Rule 12b-1 distribution fees with respect to the Traditional
Shares). Upon liquidation of the Fund or any Portfolio, shareholders of a
Portfolio are entitled to share pro-rata in the net assets of that Portfolio
available for distribution. Shares have no preemptive or conversion rights
and are fully paid and nonassessable by the Fund. The Board of Directors may
establish additional Portfolios at any time. The assets received by the Fund
on the sale of shares of each Portfolio and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors, are allocated
to each Portfolio, and constitute the assets of such Portfolio. The assets
of each Portfolio are required to be segregated on the Fund's books of
account.
- --------------------------------------------------------------------------------
SHAREHOLDER VOTING RIGHTS
- --------------------------------------------------------------------------------
All shares of the Fund have equal voting rights (except that Traditional
Shares have separate and exclusive voting rights with respect to the Fund's
Rule 12b-1 Plan) and may be voted in the election of directors and on other
matters submitted to the vote of shareholders. Under the Fund's corporate
charter, the Fund is not required to hold, and does not expect to hold,
annual shareholders' meetings. However, it will hold special meetings of
shareholders as required or deemed desirable for such purposes as electing
directors, changing fundamental policies or approving an investment
management agreement. As permitted by Maryland law and the Fund's corporate
charter, there will normally be no meetings of shareholders for the purpose
of electing directors unless and until such time as fewer than a majority of
the directors holding office have been elected by shareholders. Each member
of the Board of Directors serves for a term of unlimited duration, subject
to the right of the Board of Directors or the shareholders to remove such
director. The Board of Directors has the power to alter the number of
directors and to appoint successor directors, provided that, immediately
after the appointment of any successor director, at least two-thirds of the
directors have been elected by the shareholders of the Fund. However, if at
any time less than a majority of the directors holding office has been
elected by the shareholders, the directors are required to call a special
meeting of shareholders for the purpose of electing directors to fill any
existing vacancies in the Board. The shares do not have cumulative voting
rights, which means that the holders of a majority of the shares voting for
the election of directors can elect all the directors. No amendment may be
made to the Fund's corporate charter without the affirmative vote of a
majority of the outstanding shares of the Fund.
Shareholders will vote by Portfolio and not in the aggregate, except when
voting in the aggregate is permitted under the laws of the State of Maryland
and the Investment Company Act, such as for the election of directors, or
when voting by class is appropriate.
In matters which only affect a particular Portfolio or class, the matter
shall have been effectively acted upon by a majority vote of that Portfolio
or class, even though: (i) the matter has not been
31
<PAGE>
approved by a majority vote of any other Portfolio or class; or (ii) the
matter has not been approved by a majority vote of the Fund.
As used in the Prospectus and in this SAI, the phrase "majority vote" of a
Portfolio (or of the Fund, as appropriate) means the vote of the lesser of
(i) 67% of the shares of the Portfolio (Fund) present at a meeting if the
holders of more than 50% of the outstanding shares are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio
(Fund).
- --------------------------------------------------------------------------------
RETIREMENT PLANS
- --------------------------------------------------------------------------------
Investors Fiduciary Trust Company of Kansas City, Missouri, serves as
custodian and provides the services required for Individual Retirement Plans
(IRAs), Roth IRAs, Simplified Employee Pension Plans (SEPs), Savings
Incentive Match Plans for Employees (SIMPLEs), Section 403(b) Plans and
Qualified Pension and Profit Sharing Plans ("Keoghs"). An annual maintenance
fee, currently $10, will be collected annually by redemption of shares or
fractions thereof from each participant's account(s). EquiTrust Investment
Management Services, Inc. performs plan services for a portion of the fee
and during the fiscal year ended July 31, 1999 received $199,835 for its
services, of which $60,064 was remitted to Investors Fiduciary Trust
Company. Unusual administrative responsibilities will be subject to such
additional charges as will reasonably compensate the custodian for the
service involved.
Since a retirement investment program involves a commitment covering future
years, it is important that the investor consider his or her needs and
whether the investment objective of the Fund as described in the Prospectus
is likely to fulfill them. Premature termination or curtailment of the plan
may result in adverse tax consequences. Consultation with an attorney or
other tax adviser regarding these plans is recommended. For further
information regarding these plans, contact the Fund.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS OF SECURITIES
As of September 15, 1999, Farm Bureau Life Insurance Company (a wholly owned
subsidiary of FBL Financial Group, Inc., an Iowa corporation) owned 54.45%
of the Money Market Portfolio, 12.52% of the High Yield Bond Portfolio, and
6.57% of the outstanding voting securities of the High Grade Bond Portfolio.
- --------------------------------------------------------------------------------
CUSTODIAN
Deutsche Bank, 16 Wall Street, New York, New York 10005, currently serves as
custodian of all cash and securities owned by the Fund. The custodian
performs no managerial or policy-making functions for the Fund.
32
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
The Fund's independent auditors are Ernst & Young LLP, 801 Grand Avenue,
Suite 3400, Des Moines, Iowa 50309. The independent auditors audit and
report on the Fund's annual financial statements, review certain regulatory
reports and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the Fund.
- --------------------------------------------------------------------------------
ACCOUNTING SERVICES
The Fund has entered into an accounting services agreement with the Adviser
pursuant to which the Adviser performs accounting services for the Fund. In
addition, the agreement provides that the Adviser shall calculate the Fund's
net asset value in accordance with the Fund's current Prospectus and shall
prepare, for Fund approval and use, various tax returns and other reports.
For such services, each Portfolio pays the Adviser an annual fee, payable
monthly, of .05% of the Portfolio's average daily net assets, with the
annual fee payable by a Portfolio not to exceed $30,000. During the fiscal
year ended July 31, 1999, the aggregate amount of such fees paid to the
Adviser was $93,027.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE, DIVIDEND DISBURSING AND TRANSFER AGENT
The Adviser serves as the Fund's shareholder service, transfer and dividend
disbursing agent. EquiTrust in turn has contracted with DST Systems, Inc.
("DST"), an unrelated party, to perform certain services incident to the
maintenance of shareholder accounts. The Fund pays the Adviser an annual fee
of $7.00 to $9.00 per account and miscellaneous activity fees plus
out-of-pocket expenses, a portion of which is paid to DST. During the fiscal
year ended July 31, 1999, the aggregate amount of such fees paid to the
Adviser was $725,887, of which $379,379 was paid to DST.
- --------------------------------------------------------------------------------
LEGAL MATTERS
The firm of Vedder, Price, Kaufman & Kammholz, Chicago, Illinois, is counsel
for the Fund.
- --------------------------------------------------------------------------------
REGISTRATION STATEMENT
The Fund's Prospectus and this SAI omit certain information contained in the
Registration Statement, which the Fund has filed with the Commission under
the 1933 Act, and reference is hereby made to the Registration Statement for
further information with respect to the Fund and the securities offered
hereby. The Registration Statement is available for inspection by the public
at the Commission in Washington, D.C.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited financial statements of the Fund, including the notes thereto,
contained in the Annual Report to Shareholders of EquiTrust Series Fund,
Inc. for the fiscal year ended July 31, 1999, were filed with the Commission
on September 22, 1999 and are incorporated by reference.
Shareholders will receive the Fund's audited annual report and the unaudited
semi-annual report. Additional copies of such reports may be obtained
without charge by contacting the Fund.
33
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A -- MONEY MARKET INSTRUMENTS
- --------------------------------------------------------------------------------
The Money Market Portfolio invests in money market instruments maturing in
13 months or less from the time of investment, including the instruments
described below. In addition, the other Portfolios, subject to their
respective investment objectives, may invest in certain money market
instruments.
U.S. GOVERNMENT SECURITIES: 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 OR INSTRUMENTALITY SECURITIES: Debt securities issued
or guaranteed by agencies or instrumentalities of the U.S. Government.
Although these securities are not direct obligations of the U.S. Government,
some are supported by the full faith and credit of the U.S. Treasury, others
are supported only by the limited right of the issuer to borrow from the
U.S. Treasury, and others depend solely upon the credit of the agency or
instrumentality and not the U.S. Treasury.
OBLIGATIONS OF BANKS OR SAVINGS INSTITUTIONS: Certificates of deposit,
bankers' acceptances and other short-term debt obligations of commercial
banks or savings and loan associations. None of the Portfolios will invest
in any instruments issued by a commercial bank unless the bank has total
assets of at least $100 million and has its deposits insured by the Federal
Deposit Insurance Corporation ("FDIC"). Similarly, the Portfolios will not
invest in any instrument issued by a savings and loan association unless the
savings and loan association has total assets of at least $100 million, has
been issued a charter by the Office of Thrift Supervision ("OTS") or was
formerly a member of the Federal Home Loan Bank System and is now subject to
regulation by the OTS, and is insured by the FDIC. However, the Portfolios
may invest in an obligation of a bank or savings and loan association with
assets of less than $100 million if the principal amount of such obligation
is fully covered by FDIC insurance. The FDIC insures the deposits at banks
and savings and loan associations up to $100,000 per investor. To remain
fully insured as to principal, these investments must currently be limited
to $100,000 per bank. If the principal amount and accrued interest together
exceed $100,000, then the accrued interest in excess of $100,000 will not be
insured.
COMMERCIAL PAPER: Short-term unsecured promissory notes issued by
corporations, primarily to finance short-term credit needs. The Portfolios
will only invest in U.S. dollar-denominated instruments which the Board of
Directors determines present minimal credit risks and which, at the time of
acquisition, generally are:
1. rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"); or
2. rated in one of the two highest rating categories by only one NRSRO if
that NRSRO is the only NRSRO that has rated the instrument or issuer; or
3. in the case of an unrated instrument, determined by the Board of
Directors to be of comparable quality to either of the above; or
A-1
<PAGE>
4. issued by an issuer that has received a rating of the type described in
1 or 2 above on other securities that are comparable in priority and
security to the instrument.
In addition, the Fund will invest in commercial paper issued by major
corporations in reliance on the so-called "private placement" exemption from
registration by Section 4(2) of the 1933 Act ("Section 4(2) paper") subject
to the above noted requirements with respect to ratings. Section 4(2) paper
is restricted as to disposition under the federal securities laws, and
generally is sold to an institutional investor such as the Fund, who agrees
that it is purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold to other institutional investors
through or with the assistance of the issuer or investment dealers who make
a market in the Section 4(2) paper, thus providing liquidity. The Adviser
considers the legally restricted but readily saleable Section 4(2) paper to
be liquid; however, the paper will be treated as illiquid unless, pursuant
to procedures approved by the Board of Directors, a particular investment in
Section 4(2) paper is determined to be liquid. The Adviser monitors the
liquidity of the Fund's investments in Section 4(2) paper on a continuing
basis.
OTHER CORPORATE DEBT SECURITIES: Outstanding nonconvertible corporate debt
securities (e.g., bonds and debentures) which were not issued as short-term
obligations but which have thirteen months or less remaining until maturity.
The Portfolio will only invest in such obligations if the Board of Directors
determines that they present minimal credit risk, are, at the time of
acquisition, rated AA/Aa or better by Standard & Poor's or Moody's and are:
1. determined by the Board of Directors to be of comparable quality to
either 1 or 2 above; or
2. issued by an issuer that has received a rating of the type described in
1 or 2 above on other short-term securities that are comparable in
priority and security to the obligation.
REPURCHASE AGREEMENTS: See "Investment Objectives, Policies and Techniques
-- Investment Strategies and Techniques -- Repurchase Agreements" in the
SAI.
FLOATING AND VARIABLE RATE SECURITIES: The Portfolio may invest in
instruments having rates of interest that are adjusted periodically or that
float continuously or periodically according to formulas intended to
minimize fluctuation in the value of the instruments ("Variable Rate
Securities"). The interest rate on a Variable Rate Security is ordinarily
determined by reference to, or is a percentage of, a specified market rate
such as a bank's prime rate, the 90-day U.S. Treasury Bill rate, or the rate
of return on commercial paper or bank certificates of deposit. Generally,
the changes in the interest rate on Variable Rate Securities 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. Some Variable Rate
Securities have a demand feature ("Variable Rate Demand Securities")
entitling the purchaser to resell the securities at an amount approximately
equal to the principal amount thereof plus accrued interest. As in the case
for other Variable Rate Securities, the interest rate on Variable Rate
Demand Securities varies according to some specified market rate intended to
minimize fluctuation in the value of the instruments. Some of these Variable
Rate Demand Securities are unrated, their transfer is restricted by the
issuer and there is little if any secondary market for the securities. Thus,
any inability of the issuers of such securities to pay on demand could
adversely affect the liquidity of these securities. The Portfolio determines
the maturity of Variable Rate Securities in accordance with Commission rules
which allow the Portfolio to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.
A-2
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B -- COMPOSITION OF BOND PORTFOLIOS BY QUALITY
- --------------------------------------------------------------------------------
The tables below reflect the average composition by quality rating of the
investment securities of the High Yield Bond Portfolio and the High Grade
Bond Portfolio for the fiscal year ended July 31, 1999. Percentages are
weighted averages based upon the portfolio composition at the end of each
month during the year. The percentage of total assets represented by bonds
rated by Moody's and Standard & Poor's ("S&P") is shown. The percentage of
total assets represented by unrated bonds is also shown. Although not
specifically rated by Moody's or Standard & Poor's, U.S. Government
securities are reflected as Aaa and AAA (highest quality) for purposes of
these tables. The category noted as "Cash and Other Assets" includes all
assets other than the rated and unrated bonds reflected in the table
including, without limitation, equity securities, preferred stocks, money
market instruments, repurchase agreements and cash.
The allocations reflected in the tables do not necessarily reflect the view
of the Adviser as to the quality of the bonds in the Portfolios on the date
shown, and they are not necessarily representative of the composition of the
Portfolios at other times. The composition of each Portfolio will change
over time.
HIGH YIELD BOND PORTFOLIO COMPOSITION OF PORTFOLIO BY QUALITY
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF OF
PORTFOLIO BY PORTFOLIO BY
MOODY'S RATING MOODY'S S&P S&P GENERAL DEFINITION
CATEGORY RATINGS RATING CATEGORY RATINGS OF BOND
<S> <C> <C> <C> <C>
Aa................... AA............... High quality
A.................... 2.63% A................ 7.27 % Upper medium grade
Baa.................. 34.34 BBB.............. 29.70 Medium grade
Ba................... 25.44 BB............... 26.46 Lower medium grade
B.................... 24.22 B................ 19.60 Speculative
Caa.................. CCC.............. 1.65 More speculative
Ca................... D................ Highly speculative
Not Rated............ 0.68 Not Rated........ 2.63 Not rated by Moody's
or S&P
Cash and Other Cash and Other
Assets............... 12.69 Assets........... 12.69
-------- -------
100.00% 100.00 %
</TABLE>
B-1
<PAGE>
HIGH GRADE BOND PORTFOLIO COMPOSITION OF PORTFOLIO BY QUALITY
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF OF
PORTFOLIO BY PORTFOLIO BY
MOODY'S RATING MOODY'S S&P S&P GENERAL DEFINITION
CATEGORY RATINGS RATING CATEGORY RATINGS OF BOND
<S> <C> <C> <C> <C>
Aaa.................. 31.28% AAA.............. 31.28 % Highest quality
Aa................... 9.28 AA............... 11.61 High quality
A.................... 32.74 A................ 38.94 Upper medium grade
Baa.................. 15.65 BBB.............. 7.12 Medium grade
Ba................... 2.04 BB............... 2.04 Lower medium grade
Not rated............ Not rated........ Not rated by Moody's
or S&P
Cash and Other Cash and Other
Assets............... 9.01 Assets........... 9.01
-------- -------
100.00% 100.00 %
</TABLE>
The description of each bond quality category set forth in the tables above
is intended to be a general guide and not a definitive statement as to how
Moody's and Standard & Poor's define such rating category. A more complete
description of the rating categories is set forth under "Appendix C --
Description of Corporate Bond Ratings." The ratings of Moody's and Standard
& Poor's represent their opinions as to the capacity to pay interest and
principal of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and do not
evaluate market value risk. After purchase by a Portfolio, an obligation may
cease to be rated or its rating may be reduced. Neither event would require
a Portfolio to eliminate the obligation from its portfolio. An issue may be
unrated simply because the issuer chose not to have it rated, and not
necessarily because it is of lower quality. Unrated issues may be less
marketable.
B-2
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX C -- DESCRIPTION OF CORPORATE BOND RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
Aaa: Bonds that 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 anticipated are unlikely to impair the fundamentally
strong position of such issues.
Aa: Bonds that 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, 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 with Aaa securities.
A: Bonds that are rated A possess many favorable investment
attributes and may be considered as upper medium-grade
obligations. This rating indicates an extremely strong
capacity to pay principal and interest which is considered
adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered 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 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 only
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 rated B generally lack characteristics of a 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 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 rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have
other market shortcomings.
</TABLE>
C-1
<PAGE>
- --------------------------------------------------------------------------------
STANDARD & POOR'S
<TABLE>
<S> <C>
AAA: Bonds rated AAA are highest grade debt obligations. This
rating indicates an extremely strong capacity to pay
principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations.
Capacity to pay principal and interest is very strong, and
in the majority of instances they differ from AAA issues
only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and
interest, although they are more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit
protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligations. 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.
D: Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
NR: Not rated by the indicated rating agency.
</TABLE>
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
P-1: The rating P-1 is the highest commercial paper rating
assigned by Moody's and indicates that, in Moody's opinion,
the issuer or supporting institution has a superior ability
for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the
following characteristics: (1) leading market positions in
well-established industries, (2) high rates of return on
funds employed, (3) conservative capitalization structures
with moderate reliance on debt and ample asset protection,
(4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation and
(5) well-established access to a range of financial markets
and assured sources of alternate liquidity.
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C>
P-2: The rating P-2 indicates that, in Moody's opinion, the
issuer or supporting institution has a strong ability for
repayment of senior short-term debt obligations. Strong
ability for repayment will normally be evidenced by many of
the characteristics listed under the description of "P-1."
Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
</TABLE>
- --------------------------------------------------------------------------------
STANDARD & POOR'S
<TABLE>
<S> <C>
A-1: This designation indicates that the degree of safety
regarding timely payment of debt having an original maturity
of no more than 365 days is either overwhelming or very
strong.
A-2: This designation indicates that capacity for timely payment
of debt having an original maturity of no more than 365 days
is strong; however, the relative degree of safety is not as
high as for issues designated "A-1."
</TABLE>
C-3
<PAGE>
EQUITRUST SERIES FUND, INC.
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <S>
(a) (1) Articles of Incorporation (1)
(2) Articles of Amendment which became effective in 1977
and 1978 (1)
(3) Articles of Amendment which became effective on
November 30, 1987 (1)
(4) Articles Supplementary to the Charter which became
effective on December 1, 1987 (5)
(5) Articles of Amendment which became effective on
November 22, 1991 (1)
(6) Articles Supplementary to the Charter which became
effective on November 25, 1991 (1)
(7) Articles Supplementary to the Charter which became
effective on December 1, 1996 (2)
(8) Articles of Amendment which became effective on
December 1, 1997 (3)
(9) Articles Supplementary to the Charter which became
effective on December 1, 1997 (3)
(10) Articles of Amendment which became effective on
May 1, 1998 (4)
(b) (1) By-laws, as amended (1)
(2) By-laws, as amended August 15, 1996 (2)
(c) Inapplicable
(d) (1) Investment Advisory and Management Services Agreement
dated November 11, 1987 (1)
(2) Amendment to Management Fee Schedule dated December 1,
1996 (2)
(e) (1) Underwriting Agreement dated December 31, 1983 (1)
(2) Form of Dealer Agreement (3)
(3) Administrative Services Agreement dated November 25,
1991 (1)
(4) Administrative Services Agreement, as amended and
restated as of December 1, 1997 (3)
(f) Inapplicable
(g) Custodian Agreement dated January 12, 1993 (1)
(h) (1) Fidelity Bond Joint Insureds Agreement (2)
(2) Joint Insureds D&O and E&O Agreement (1)
(3) Accounting Services Agreement (1)
(4) Shareholder Service, Dividend Distributing and Transfer
Agent Agreement dated September 1, 1995 (1)
*(i) Opinion of Vedder, Price, Kaufman & Kammholz
*(j) Consent of Ernst & Young LLP
(k) Inapplicable
(l) Inapplicable
(m) (1) Distribution and Shareholder Servicing Plan and
Agreement dated as of December 1, 1987 (1)
(2) Distribution and Shareholder Servicing Plan and
Agreement dated December 1, 1987, as amended November 25,
1991 (1)
(3) Distribution Plan and Agreement, amended as of
December 1, 1997 (3)
(n) Financial Data Schedules
(o) Multiple Class Plan adopted pursuant to Rule 18f-3. (3)
*(p) Powers of Attorney for Donald G. Bartling, John R. Graham,
Erwin H. Johnson, Kenneth Kay, and Curtis C. Pietz
</TABLE>
- ------------------------
(1) Incorporated by reference from Post-Effective Amendment No. 30 to the
Registration Statement on Form N-1A, filed on or about December 1, 1995.
C-1
<PAGE>
(2) Incorporated by reference from Post-Effective Amendment No. 32 to the
Registration Statement on Form N-1A, filed on November 27, 1996.
(3) Incorporated by reference from Post-Effective Amendment No. 34 to the
Registration Statement under the Securities Act of 1933 on Form N-1A filed
on November 25, 1997.
(4) Incorporated by reference from Post-Effective Amendment No. 35 to the
Registration Statement under the Securities Act of 1933 on Form N-1A filed
on November 25, 1998.
(5) Incorporated by reference from Post-Effective Amendment No. 36 to the
Registration Statement under the Securities Act of 1933 on Form N-1A filed
on September 30, 1999.
- ------------------------
* Filed herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Inapplicable.
ITEM 25. INDEMNIFICATION.
The Maryland Code, Corporations and Associations, Section 2-418, provides
for indemnification of directors, officers, employees and agents. Article XVI of
the Registrant's Articles of Incorporation restricts indemnification for any
officer or director in cases of willful misfeasance, gross negligence or
reckless disregard of the duties involved in the conduct of their offices.
Article XV of the Registrant's By-Laws provides for indemnification of officers
under certain circumstances.
The Investment Advisory and Management Services Agreement between the
Registrant and EquiTrust Investment Management Services, Inc. ("Adviser")
provides that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties thereunder on the part
of the Adviser, the Adviser shall not be liable for any error of judgment or
mistake of law, or for any loss suffered by the Fund in connection with the
matters to which such Agreement relates.
In addition, the Registrant maintains a directors and officers "errors and
omissions" liability insurance policy under which the Registrant and its
directors and officers are named insureds.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") 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 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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Registrant's investment adviser is EquiTrust Investment Management Services,
Inc. ("EquiTrust"). In addition to its services to Registrant as investment
adviser, underwriter, and shareholder service, transfer and dividend disbursing
agent, all as set forth in parts A and B of this Registration Statement on Form
N-1A, EquiTrust acts as adviser, underwriter and shareholder service, transfer
and dividend disbursing agent for EquiTrust Money Market Fund, Inc., a
diversified open-end management investment company, and EquiTrust Variable
Insurance Series Fund, a diversified open-end series management investment
company.
The principal executive officers and directors of EquiTrust are Stephen M.
Morain, Senior Vice President, General Counsel and Director; William J. Oddy,
President and Director; Dennis M. Marker, Investment Vice President,
Administration, Secretary and Director; Thomas R. Gibson, Chief Executive
C-2
<PAGE>
Officer and Director; Timothy J. Hoffman, Vice President and Director; James W.
Noyce, Chief Financial Officer, Treasurer and Director; and Lou Ann Sandburg,
Vice President-Investments, Assistant Treasurer and Director. A description of
their services as officers and employees of FBL Financial Group, Inc. and its
affiliates is incorporated herein by reference to Part B--Statement of
Additional Information of this Registration Statement on Form N-1A.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) EquiTrust Investment Management Services, Inc., the principal
underwriter for Registrant, also acts as the principal investment adviser,
underwriter and shareholder service, transfer and dividend disbursing agent for
EquiTrust Money Market Fund, Inc., a diversified open-end management investment
company and EquiTrust Variable Insurance Series Fund, a diversified, open-end
series management investment company.
(b) The principal business address of each director and principal officer of
the principal underwriter is 5400 University Avenue, West Des Moines, Iowa
50266. See Item 28 for information on the principal officers of EquiTrust
Investment Management Services, Inc., investment adviser and principal
underwriter for the Registrant.
(c) Inapplicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the offices of the Registrant and the offices of the Adviser,
EquiTrust Investment Management Services, Inc., 5400 University Avenue, West Des
Moines, Iowa 50266.
ITEM 29. MANAGEMENT SERVICES.
Inapplicable.
ITEM 30. UNDERTAKINGS.
(a) Not applicable
(b) Not applicable
(c) Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund has duly caused this registration
statement to be signed on its behalf by the undersigned, duly authorized, in the
City of West Des Moines and State of Iowa, on the 29th day of November, 1999.
<TABLE>
<S> <C> <C>
EQUITRUST SERIES FUND, INC.
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ EDWARD M. WIEDERSTEIN
--------------------------------------------
Edward M. Wiederstein
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacity and on the date indicated.
<TABLE>
<C> <S> <C>
/s/ EDWARD M. WIEDERSTEIN
------------------------------------------- November 29, 1999
Edward M. Wiederstein President and Director (dated)
(Principal Executive
Officer)
</TABLE>
<TABLE>
<C> <S> <C>
/s/ RICHARD D. HARRIS
------------------------------------------- November 29, 1999
Richard D. Harris Senior Vice President, (dated)
Secretary-Treasurer and
Director (Principal
Financial and Accounting
Officer)
</TABLE>
<TABLE>
<C> <S> <C>
/s/ DONALD G. BARTLING
------------------------------------------- November 29, 1999
Donald G. Bartling* Director (dated)
</TABLE>
<TABLE>
<C> <S> <C>
/s/ JOHN R. GRAHAM
------------------------------------------- November 29, 1999
John R. Graham* Director (dated)
</TABLE>
<TABLE>
<C> <S> <C>
/s/ ERWIN H. JOHNSON
------------------------------------------- November 29, 1999
Erwin H. Johnson* Director (dated)
</TABLE>
<TABLE>
<C> <S> <C>
/s/ KENNETH KAY
------------------------------------------- November 29, 1999
Kenneth Kay* Director (dated)
</TABLE>
<TABLE>
<C> <S> <C>
/s/ CURTIS C. PIETZ
------------------------------------------- November 29, 1999
Curtis C. Pietz* Director (dated)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEPHEN M. MORAIN
--------------------------------------
Stephen M. Morain
ATTORNEY-IN-FACT, PURSUANT TO
POWER OF ATTORNEY
FILED HEREWITH
</TABLE>
C-4
<PAGE>
November 29, 1999
EquiTrust Series Fund, Inc.
5400 University Avenue
West Des Moines, Iowa 50266-5997
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No. 37 to the Registration
Statement on Form N-1A under the Securities Act of 1933 being filed by
EquiTrust Series Fund, Inc., a Maryland Corporation (the "Fund") in connection
with the public offering from time to time of any or all of those five billion
authorized shares of common stock, par value $.001 per share ("Shares"), that
have been classified and designated as the Value Growth Portfolio, the Money
Market Portfolio, the High Grade Bond Portfolio, the High Yield Bond
Portfolio, the Blue Chip Portfolio, and the Managed Portfolio (each, a
"Portfolio" and collectively, the "Portfolios"). The Shares have been further
classified and designated as Traditional Shares and Institutional Shares
(each, a "Class" and collectively, the "Classes"), as follows: 625,000,000
have been further classified and designated as Value Growth Portfolio
Traditional Shares and 625,000,000 as Value Growth Portfolio Institutional
Shares; 312,500,000 as Money Market Portfolio Traditional Shares and
312,500,000 as Money Market Portfolio Institutional Shares; 625,000,000 as
High Grade Bond Portfolio Traditional Shares and 625,000,000 as High Grade
Bond Portfolio Institutional Shares; 312,500,000 as High Yield Bond Portfolio
Traditional Shares and 312,500,000 as High Yield Bond Portfolio Institutional
Shares; 312,500,000 as Blue Chip Portfolio Traditional Shares and 312,500,000
as Blue Chip Portfolio Institutional Shares; and 312,500,000 as Managed
Portfolio Traditional Shares and 312,500,000 as Managed Portfolio
Institutional Shares.
We are counsel to the Fund, and in such capacity are familiar with the
Fund's organization and have counseled the Fund regarding various legal matters.
We have examined such Fund records and other documents and certificates as we
have considered necessary or appropriate for the purposes of this opinion. In
our examination of such materials, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies submitted to
us.
Based upon the foregoing, and assuming that the Fund's, Articles of
Incorporation filed August 14, 1970, as amended by the Articles of Amendment
filed August 1, 1977, the Articles
<PAGE>
EquiTrust Series Fund, Inc.
November 29, 1999
Page 2
of Amendment filed July 24, 1978, the Articles of Amendment filed November 25,
1987, the Articles Supplementary filed December 1, 1987, the Articles of
Amendment filed November 25, 1991, the Articles Supplementary filed November
25, 1991, the Articles Supplementary filed November 22, 1996, the Articles
Supplementary filed December 1, 1997, the Articles of Amendment filed December
1, 1997, and the Articles of Amendment filed May 1, 1998 (collectively, the
"Articles"), were duly authorized by the Board of Directors of the Fund; that
the Fund's Bylaws, as amended June 1973, September 1974, January 1977, April
1978, April 1979, April 1980, November 1980, August 13, 1986, August 12, 1987,
November 11, 1987, and August 15, 1996 (the "Bylaws") were duly authorized by
the Board of Directors of the Fund; that the Articles of Transfer filed on
April 28, 1977 between Farm Bureau Mutual Fund, Inc. and Challenger Investment
Fund, Inc. were duly authorized by the Board of Directors of each party
thereto (the "Articles of Transfer"); that the Articles, Bylaws and Articles
of Transfer are presently in full force and effect and have not been amended
in any respect except as provided above; and that the resolutions adopted by
the Board of Directors of the Fund on August 26, 1970, August 12, 1987,
August 15, 1991, and August 14, 1997, relating to organizational matters,
securities matters, and the issuance of shares are presently in full force and
effect and have not been amended in any respect, we advise you and opine that
(a) the Fund is a corporation validly existing under the laws of the State of
Maryland and is authorized to issue Shares in the Portfolios and Classes; and
(b) presently and upon such further issuance of the Shares in accordance with
the Fund's Articles and the receipt by the Fund of a purchase price not less
than the net asset value per Share, and when the pertinent provisions of the
Securities Act of 1933 and such "blue-sky" and securities laws as may be
applicable have been complied with, assuming that the Fund continues to validly
exist as provided in (a) above and assuming that the number of Shares issued by
the Fund does not exceed the number of Shares authorized for each Portfolio and
each Class, the Shares are and will be legally issued and outstanding, fully
paid and nonassessable.
This opinion is solely for the benefit of the Fund, the Fund's Board of
Directors and the Fund's officers and may not be relied upon by any other person
without our prior written consent. We hereby consent to the use of this opinion
in connection with said Post-Effective Amendment.
Very truly yours,
/s/ Vedder, Price, Kaufman & Kammholz
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information" in the Prospectus, and "Financial
Highlights" in the Supplement to Prospectus, for EquiTrust Series Fund, Inc.
both in Part A, and "Other Information - Independent Auditors" in Part B and
to the incorporation by reference of our report dated August 27, 1999 on the
financial statements and financial highlights of EquiTrust Series Fund, Inc.
in Post Effective Amendment No. 37 to Form N-1A Registration Statement under
the Securities Act of 1933 (No. 2-38512) and related Prospectus of EquiTrust
Series Fund, Inc.
/s/ Ernst & Young LLP
Des Moines, Iowa
November 23, 1999
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen M.
Morain as his attorney-in-fact to sign and file on his behalf individually and
in the capacity stated below such registration statements (including
post-effective amendments, exhibits, applications and other documents) with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of EquiTrust
Series Fund, Inc., EquiTrust Money Market Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Signature Title Date
/s/ Donald G Bartling Director, 8-12-99
- --------------------- Equitrust Series Fund, Inc. -------
Donald G. Bartling Equitrust Money Market Fund, Inc.
Trustee,
EquiTrust Variable Insurance Series Fund
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen M.
Morain as his attorney-in-fact to sign and file on his behalf individually and
in the capacity stated below such registration statements (including
post-effective amendments, exhibits, applications and other documents) with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of EquiTrust
Series Fund, Inc., EquiTrust Money Market Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Signature Title Date
/s/ John R. Graham Director, Aug. 12, 1999
- ------------------ -------------
John R. Graham Equitrust Series Fund, Inc.
Equitrust Money Market Fund, Inc.
Trustee,
EquiTrust Variable Insurance Series Fund
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen M.
Morain as his attorney-in-fact to sign and file on his behalf individually and
in the capacity stated below such registration statements (including
post-effective amendments, exhibits, applications and other documents) with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of EquiTrust
Series Fund, Inc., EquiTrust Money Market Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Signature Title Date
/s/ Erwin H. Johnson Director, 8-12-99
- -------------------- Equitrust Series Fund, Inc. -------
Erwin H. Johnson Equitrust Money Market Fund, Inc.
Trustee,
EquiTrust Variable Insurance Series Fund
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen M.
Morain as his attorney-in-fact to sign and file on his behalf individually and
in the capacity stated below such registration statements (including
post-effective amendments, exhibits, applications and other documents) with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of EquiTrust
Series Fund, Inc., EquiTrust Money Market Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Signature Title Date
/s/ Kenneth C. Kay Director, Aug. 12 - 1999
- ------------------ Equitrust Series Fund, Inc. --------------
Kenneth Kay Equitrust Money Market Fund, Inc.
Trustee,
EquiTrust Variable Insurance Series Fund
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen M.
Morain as his attorney-in-fact to sign and file on his behalf individually and
in the capacity stated below such registration statements (including
post-effective amendments, exhibits, applications and other documents) with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of EquiTrust
Series Fund, Inc., EquiTrust Money Market Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Signature Title Date
/s/ Curtis C. Pietz Director, 8/12/99
- ------------------- Equitrust Series Fund, Inc. -------
Curtis C. Pietz Equitrust Money Market Fund, Inc.
Trustee,
EquiTrust Variable Insurance Series Fund
