<PAGE>
VARIABLE
================================================================================
ANNUITY III
1999 ANNUAL REPORT
[SBL LOGO]
SECURITY BENEFIT LIFE
INSURANCE COMPANIY
A Member of The Security Benefit
Group of Companies
<PAGE>
A MESSAGE FROM SECURITY BENEFIT
SECURITY BENEFIT GROUP KNOWS WALL STREET AND MAIN STREET
In 1999, Security Benefit Life Insurance Company had another year of outstanding
financial results. The driving forces behind our tremendous financial
performance were consumers' demand for individual retirement products and the
extension of our money management and customer service competencies.
As consumers focus on their future, they look to SBL as a partner for developing
personal retirement strategies. Our core competencies--money management and
customer service--are very solid and the cornerstone of our stronghold in the
market segments.
SECURITY BENEFIT IS A CLEAR CHOICE
There are many qualities that make partnering with Security Benefit a clear
choice:
* variety of retirement products
* cutting edge service
* pool of flexible and responsive employees
* rich heritage of innovation and creativity
* a rock solid financial foundation
* a strong risk management philosophy
However, if we were asked to capture what makes partnering with SBL a clear
choice in one sentence, here's what we'd say--Security Benefit knows Wall Street
and Main Street.
Wall Street and Main Street are among the most famous streets in America, but
they're known better for their characteristics rather than their location.
Everyone knows that Wall Street is in New York, but Wall Street is more of an
adjective today than it is a noun. What are the characteristics of something
that's Wall Street-like? It's fast paced, risky and high stress.
Likewise, Main Street has become an adjective. The characteristics of something
that's Main Street-like are being friendly, courteous, relaxed, and having a
real interest and concern for your neighbor.
Knowledge of both streets is one of our competitive advantages and it's why we
are positioned for strong growth in the future.
SECURITY BENEFIT KNOWS WALL STREET
Even though SBL operates out of America's Heartland in Topeka, Kansas--the exact
opposite of the Wall Street-like atmosphere--we know Wall Street because of our
experience, technology and people.
EXPERIENCE. We've been in the equities business for a long time. SBL was one of
the first in the industry to introduce a variable annuity and we were on the
front end of the mutual fund explosion.* We're as interested in the return of
customers' investments as we are in the return on customers' investments.
TECHNOLOGY. In today's computer age, we receive financial news and information
at the same time as any other Wall Street professional. When that one important
announcement comes across the wire, we receive the information in real time and
our money managers can react appropriately.
PEOPLE. There's an abundance of investment talent and expertise grown in
America's breadbasket and SBL attracts its fair share. Here, our talent is
moderately insulated from the steady stream of Wall Street noise, so they can
focus on what they do best--manage money.
SECURITY BENEFIT KNOWS MAIN STREET
In order to survive in the financial services industry today, you need to be
good at providing three things:
* products with good performance
* competitive product pricing
* good customer service
But, in order to thrive in the industry, you need to be great at one of those
things.
At Security Benefit, we've got good products with good performance and
competitively priced. But, we've made a conscious decision to be great at
customer service. In 1999, Dalbar, Inc. recognized Security Benefit for its
great customer service--again.
Where does our ability to provide outstanding service stem from? It stems from
everyone at Security Benefit having a deep knowledge of Main Street. Main Street
is part of Americana. Our goal is to provide customers the high-touch,
personalized service you receive when you enter an establishment on Main Street,
USA.
In the year 2000 and beyond, we will invest in initiatives that enhance the
value we offer to customers and make partnering with Security Benefit an even
clearer choice. Thanks for choosing Security Benefit in 1999.
*Variable annuities and mutual funds distributed by Security Distributors, Inc.
<PAGE>
BOARD OF DIRECTORS
HOWARD R. FRICKE
CHAIRMAN OF THE BOARD AND CEO
Security Benefit Life Insurance Company
Topeka, Kansas
SISTER LORETTO MARIE COLWELL
PRESIDENT AND CEO
St. Francis Hospital and Medical Center
Topeka, Kansas
JOHN C. DICUS
CHAIRMAN OF THE BOARD
Capitol Federal Savings & Loan Association
Topeka, Kansas
STEVEN J. DOUGLASS
CHAIRMAN AND CEO
Payless ShoeSource
Topeka, Kansas
WILLIAM W. HANNA
VICE CHAIRPERSON
Koch Industries
Wichita, Kansas
JOHN E. HAYES, JR.
CHAIRMAN OF THE BOARD AND CEO (Ret.)
Western Resources, Inc.
Topeka, Kansas
KRIS A. ROBBINS
PRESIDENT AND COO
Security Benefit Life Insurance Company
Topeka, Kansas
FRANK SABATINI
CHAIRMAN OF THE BOARD AND CEO
Capital City Bank
Topeka, Kansas
ROBERT C. WHEELER
CHAIRMAN AND CEO
Hill's Pet Nutrition, Inc.
Topeka, Kansas
NOTICE OF MEETING OF MEMBERS
The annual meeting of members of Security Benefit Mutual Holding Company (the
"Mutual Holding Company") will be held on Tuesday, June 6, 2000, at 700 SW
Harrison St., Topeka, Kansas, at 1:00 p.m. Each owner of an insurance policy
issued by Security Benefit Life Insurance Company is a member of the Mutual
Holding Company and is entitled to vote, either in person or by proxy, on all
matters coming before the meeting. Proxies are available from the corporate
secretary and must be returned no later than May 31, 2000.
This report is submitted only for the general information of Security Benefit
Life Variable Annuity contractowners and participants and is not authorized for
distribution to the public.
For More Information Call
1-800-888-2461
www.securitybenefit.com
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Contract Owners of SBL Variable
Annuity Account III and The Board of Directors of
Security Benefit Life Insurance Company
We have audited the accompanying individual and combined balance sheets of SBL
Variable Annuity Account III (comprised of the individual series as indicated
therein) as of December 31, 1999, and the related statements of operations and
changes in net assets for the period then ended. These financial statements are
the responsibility of the Security Benefit Life Insurance Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 1999,
by correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
individual series of the SBL Variable Annuity Account III at December 31, 1999,
and the individual and combined results of their operations and changes in their
net assets for the period then ended in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
February 4, 2000
<PAGE>
SBL VARIABLE ANNUITY ACCOUNT III
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BALANCE SHEETS December 31, 1999
- --------------------------------------------------------------------------------
ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
Investments:
SBL Fund:
Series A (Growth Series) - 267,566 shares at net
asset value of $35.51 per share (cost, $8,655).................. $ 9,501
Series B (Growth-Income Series) - 98,185 shares at
net asset value of $24.39 per share (cost, $2,493).............. 2,395
Series C (Money Market Series) - 166,862 shares at
net asset value of $12.04 per share (cost, $2,068).............. 2,009
Series D (Worldwide Equity Series) - 79,803 shares
at net asset value of $9.08 per share (cost, $520).............. 725
Series E (High Grade Income Series) - 52,344 shares
at net asset value of $10.55 per share (cost, $621)............. 552
Series J (Mid Cap Series) - 29,148 shares at net
asset value of $30.15 per share (cost, $590).................... 879
Series K (Global Strategic Income Series) - 8 shares
at net asset value of $9.61 per share (cost, $-0-).............. ---
Series M (Global Total Return Series) - 6,614 shares
at net asset value of $13.09 per share (cost, $81).............. 87
Series N (Managed Asset Allocation Series) - 9,463 shares
at net asset value of $16.94 per share (cost, $140) ............ 159
Series O (Equity Income Series) - 5,333 shares at
net asset value of $17.27 per share (cost, $92)................. 92
Series S (Social Awareness Series) - 7,480 shares at
net asset value of $31.71 per share (cost, $177)................ 237
------
$16,636
Actuarial risk fees receivable.................................... 2
------
Combined assets....................................................... $16,638
======
See accompanying notes.
<PAGE>
SBL VARIABLE ANNUITY ACCOUNT III
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BALANCE SHEETS (CONTINUED) DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NET ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------- ----- ------
Net assets are represented by (NOTE 3):
Growth Series:
Accumulation units.................. 73,481 $128.18 $9,419
Annuity reserves.................... 641 128.18 82 $ 9,501
-----
Growth-Income Series:
Accumulation units.................. 24,391 96.89 2,363
Annuity reserves.................... 326 96.89 32 2,395
-----
Money Market Series:
Accumulation units.................. 62,432 31.13 1,944
Annuity reserves.................... 2,095 31.13 65 2,009
-----
Worldwide Equity Series:
Accumulation units.................. 20,910 33.31 697
Annuity reserves.................... 844 33.31 28 725
-----
High Grade Income Series:
Accumulation units.................. 19,344 28.55 552
Mid Cap Series:
Accumulation units.................. 20,049 43.42 871
Annuity reserves.................... 191 43.42 9 880
-----
Global Strategic Income Series:
Accumulation units.................. 6 14.31 ---
Global Total Return Series:
Accumulation units.................. 5,193 16.67 87
Managed Asset Allocation Series:
Accumulation units.................. 8,559 18.63 160
Equity Income Series:
Accumulation units.................. 4,543 20.27 92
Social Awareness Series:
Accumulation units.................. 6,262 37.88 237
------
Combined net assets..................... $16,638
======
See accompanying notes.
<PAGE>
<TABLE>
SBL VARIABLE ANNUITY ACCOUNT III
====================================================================================================================================
STATEMENTS OF OPERATIONS AND
CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1999
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(IN THOUSANDS)
<CAPTION>
HIGH
GROWTH- MONEY WORLDWIDE GRADE
GROWTH INCOME MARKET EQUITY INCOME MID CAP
SERIES SERIES SERIES SERIES SERIES SERIES
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions......................................... $ 67 $ 66 $ 235 $ --- $ 68 $ ---
Expenses (NOTE 2):
Mortality and expense risk fee.............................. (68) (40) (28) --- (7) ---
Administrative fee.......................................... (1) (1) --- --- --- ---
------------------------------------------------------------------
Net investment income (loss)................................... (2) 25 207 61 ---
Capital gain distributions..................................... 274 1,120 --- 75 --- 117
Realized gain (loss) on investments............................ 787 (1,112) (7) 18 --- 29
Unrealized appreciation (depreciation) on investments.......... (545) (51) (90) 173 (90) 212
------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments......... 516 (43) (97) 266 (90) 358
------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 514 (18) 110 266 (29) 358
Net assets at beginning of year................................ 9,744 3,217 2,063 525 590 670
Variable annuity deposits (NOTES 2 AND 3)...................... 3,858 1,256 5,504 125 16 178
Terminations and withdrawals (NOTES 2 AND 3)................... (4,462) (2,056) (5,629) (186) (25) (316)
Annuity payments (NOTES 2 AND 3)............................... (153) (4) (39) (7) --- (10)
Net mortality guarantee transfer............................... --- --- --- 2 --- ---
------------------------------------------------------------------
Net assets at end of year...................................... $ 9,501 $ 2,395 $ 2,009 $ 725 $552 $ 880
==================================================================
</TABLE>
<PAGE>
<TABLE>
SBL VARIABLE ANNUITY ACCOUNT III
====================================================================================================================================
STATEMENTS OF OPERATIONS AND
CHANGES IN NET ASSETS (CONTINUED) YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<CAPTION>
GLOBAL GLOBAL MANAGED
STRATEGIC TOTAL ASSET EQUITY SOCIAL
INCOME RETURN ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES COMBINED
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions......................................... $--- $ 1 $ 5 $ 2 $ 1 $ 445
Expenses (NOTE 2):
Mortality and expense risk fee.............................. --- --- (1) --- --- (144)
Administrative fee.......................................... --- --- --- --- --- (2)
----------------------------------------------------------------
Net investment income (loss)................................... --- 1 4 2 1 29
Capital gain distributions..................................... --- 2 --- 2 6 1,59
Realized gain (loss) on investments............................ (2) (1) 3 4 4 (277)
Unrealized appreciation (depreciation) on investments.......... --- 6 5 (6) 23 (363)
----------------------------------------------------------------
Net realized and unrealized gain (loss) on investments......... (2) 7 8 --- 33 956
----------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (2) 8 12 2 34 1,255
Net assets at beginning of year................................ 1 9 141 125 120 7,205
Variable annuity deposits (NOTES 2 AND 3)...................... 95 76 35 75 92 11,310
Terminations and withdrawals (NOTES 2 AND 3)................... (94) (6) (28) (110) (9) (12,921)
Annuity payments (NOTES 2 AND 3)............................... --- --- --- --- --- (213)
Net mortality guarantee transfer............................... --- --- --- --- --- 2
----------------------------------------------------------------
Net assets at end of year...................................... $--- $ 87 $160 $ 92 $237 $ 16,638
================================================================
</TABLE>
See accompanying notes.
<PAGE>
SBL VARIABLE ANNUITY ACCOUNT III
================================================================================
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - SBL Variable Annuity Account III (the Account) is a separate
account of Security Benefit Life Insurance Company (SBL). The Account is
registered as a unit investment trust under the Investment Company Act of
1940, as amended. Deposits received by the Account are invested in the SBL
Fund, a mutual fund not otherwise available to the public. As directed by the
owners, amounts deposited may be invested in shares of Series A (Growth
Series - emphasis on capital appreciation), Series B (Growth-Income Series -
emphasis on capital appreciation with secondary emphasis on income), Series C
(Money Market Series - emphasis on capital preservation while generating
interest income), Series D (Worldwide Equity Series - emphasis on long-term
capital growth through investment in foreign and domestic common stocks and
equivalents), Series E (High Grade Income Series - emphasis on current income
with security of principal), Series J (Mid Cap Series - emphasis on capital
appreciation), Series K (Global Strategic Income Series - emphasis on high
current income with secondary emphasis on capital appreciation), Series M
(Global Total Return Series - emphasis on high total return consisting of
capital appreciation and current income), Series N (Managed Asset Allocation
Series - emphasis on high level of total return), Series O (Equity Income
Series - emphasis on substantial dividend income and capital appreciation)
and Series S (Social Awareness Series - emphasis on capital appreciation).
During 1999, the former Emerging Growth Series, Global Aggressive Bond
Series, and Specialized Asset Allocation Series were renamed Mid Cap Series,
Global Strategic Income Series and Global Total Return Series, respectively.
Under the terms of the investment advisory contracts, portfolio investments
of the underlying mutual fund are made by Security Management Company, LLC
(SMC), a limited liability company controlled by its members, SBL and
Security Benefit Group, Inc., a wholly-owned subsidiary of SBL.
SMC has engaged T. Rowe Price Associates, Inc. to provide sub-advisory
services for the Managed Asset Allocation Series and the Equity Income
Series; and OppenheimerFunds, Inc. to provide sub-advisory services to the
Worldwide Equity Series. Meridian Investment Management Corporation
(Meridian) served as subadvisor for the Global Strategic Income Series and
the Global Total Return Series until May 15, 1999 when Meridian was replaced
by Wellington Management Company, LLP.
INVESTMENT VALUATION - Investments in mutual fund shares are carried in the
balance sheet at market value (net asset value of the underlying mutual
fund). The first-in, first-out cost method is used to determine gains and
losses. Security transactions are accounted for on the trade date.
The cost of investments purchased and proceeds from investments sold for the
year ended December 31 were as follows:
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
Growth Series ...................... $4,572 $5,057
Growth-Income Series ............... 2,442 2,101
Money Market Series ................ 5,945 5,902
Worldwide Equity Series ............ 205 196
High Grade Income Series ........... 83 31
Mid Cap Series ..................... 296 328
Global Strategic Income Series ..... 306 305
Global Total Return Series ......... 79 6
Managed Asset Allocation Series .... 40 30
Equity Income Series ............... 80 111
Social Awareness Series ............ 98 8
ANNUITY RESERVES - Annuity reserves relate to contracts that have matured and
are in the payout stage. Such reserves are computed on the basis of published
mortality tables using assumed interest rates that will provide reserves as
prescribed by law. In cases where the payout option selected is life
contingent, SBL periodically recalculates the required annuity reserves, and
any resulting adjustment is either charged or credited to SBL and not to the
Account.
REINVESTMENT OF DIVIDENDS - Dividends and capital gain distributions paid by
the mutual fund to the Account are reinvested in additional shares of each
respective series. Dividend income and capital gain distributions are
recorded as income on the ex-dividend date.
FEDERAL INCOME TAXES - The operations of the Account are included in the
operations of SBL. Under current law, no federal income taxes are allocated
by SBL to the operations of the Account.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee of $30 per year for each contract, except
for certain contracts based on a minimum account value and the period of time
the contract has been in force. Mortality and expense risks assumed by SBL
are compensated for by a fee equivalent to an annual rate ranging from 0.85%
to 1.2% of the net asset value of each contract, of which 0.7% is for
assuming mortality risks and the remainder is for assuming expense risks.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law either from purchase payments or from the amount applied
to effect an annuity at the time annuity payments commence.
3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
UNITS
-----
Growth Series:
Variable annuity deposits .......................................... 31
Terminations, withdrawals, annuity payments and expense charges .... 39
Growth-Income Series:
Variable annuity deposits .......................................... 12
Terminations, withdrawals, annuity payments and expense charges .... 21
Money Market Series:
Variable annuity deposits .......................................... 182
Terminations, withdrawals, annuity payments and expense charges .... 186
Worldwide Equity Series:
Variable annuity deposits .......................................... 5
Terminations, withdrawals, annuity payments and expense charges .... 8
High Grade Income Series:
Variable annuity deposits .......................................... 1
Terminations, withdrawals, annuity payments and expense charges .... 1
Mid Cap Series:
Variable annuity deposits .......................................... 5
Terminations, withdrawals, annuity payments and expense charges .... 10
Global Strategic Income Series:
Variable annuity deposits .......................................... 7
Terminations, withdrawals, annuity payments and expense charges .... 7
Global Total Return Series:
Variable annuity deposits .......................................... 5
Terminations, withdrawals, annuity payments and expense charges .... 1
Managed Asset Allocation Series:
Variable annuity deposits .......................................... 2
Terminations, withdrawals, annuity payments and expense charges .... 2
Equity Income Series:
Variable annuity deposits .......................................... 4
Terminations, withdrawals, annuity payments and expense charges .... 6
Social Awareness Series:
Variable annuity deposits .......................................... 3
Terminations, withdrawals, annuity payments and expense charges .... 1
