<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
File No. 333-70813
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ Pre-Effective Amendment No. 1 / / Post-Effective Amendment No.__
(CHECK APPROPRIATE BOX OR BOXES.)
EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER:
FRANKLIN LIFE VARIABLE ANNUITY FUND A AMERICAN GENERAL SERIES PORTFOLIO COMPANY
AREA CODE AND TELEPHONE NUMBER:
(800) 528-2011, Ext. 2591 (713) 526-5251
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
c/o The Franklin Life Insurance Company 2929 Allen Parkway
#1 Franklin Square Houston, Texas 77019
Springfield, Illinois 62713
NAME AND ADDRESS OF AGENT FOR SERVICE:
Elizabeth E. Arthur, Esquire Nori L. Gabert, Esquire
The Franklin Life Insurance Company The Variable Annuity Life Insurance
#1 Franklin Square Company
Springfield, Illinois 62713 2929 Allen Parkway
Houston, Texas 77019
COPIES OF ALL COMMUNICATIONS TO:
Stephen E. Roth, Esquire John A. Dudley, Esquire
Sutherland Asbill & Brennan LLP Sullivan & Worcester LLP
1275 Pennsylvania Avenue, N.W. 1025 Connecticut Avenue, N.W.
Washington, D.C. 20004-2415 Washington, D.C. 20036
TITLE OF SECURITIES BEING REGISTERED: Units of interest in variable annuity
contracts; and shares of common stock
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as possible after effectiveness of this registration statement
It is proposed that this filing will become effective on March 1, 1999,
pursuant to Rule 488(a) under the Securities Act of 1933.
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT NOTICE: Please complete the
enclosed Proxy and return it as soon as possible.
For your convenience you may vote by faxing your Proxy to
Shareholder Communications Corporation
at 1-800-733-1885
- --------------------------------------------------------------------------------
Dear Contract Owner:
Enclosed you will find a Notice and Proxy Statement/Prospectus for special
meetings of contract owners of Franklin Life Variable Annuity Fund A ("Fund A"),
Franklin Life Variable Annuity Fund B ("Fund B"), and Franklin Life Money Market
Variable Annuity Fund C ("Fund C") (collectively, the "Funds"), to be held
on April 8, 1999. There is an important matter on which you, as a contract
owner of Fund A, Fund B, or Fund C, are being asked to vote -- approval of a
reorganization of the Funds into a unit investment trust which would invest
in shares of specified portfolios of American General Series Portfolio Company.
After reviewing this matter carefully, the Board of Managers of each of the
Funds unanimously recommends that you vote FOR the proposal.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF VOTES YOU HOLD. PLEASE
TAKE A FEW MINUTES TO REVIEW THIS MATERIAL, CAST YOUR VOTE ON THE ENCLOSED PROXY
AND RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR, IF MORE CONVENIENT,
PLEASE FAX YOUR VOTE, FOLLOWING THE INSTRUCTIONS IN THE BOX AT THE TOP OF THIS
PAGE. YOUR PROMPT RESPONSE IS NEEDED SO THAT THE NECESSARY QUORUM AND VOTE WILL
BE OBTAINED.
The Funds have retained Shareholder Communications Corporation, a
professional proxy solicitation firm, to assist contract owners in the voting
process. As the date of the meetings approaches, if we have not already heard
from you, you may receive a telephone call from Shareholder Communications
Corporation reminding you to exercise your right to vote.
Elizabeth E. Arthur
Secretary
Springfield, Illinois
March 1, 1999
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
FRANKLIN LIFE VARIABLE ANNUITY FUND B
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
c/o The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
_________________________________
NOTICE OF SPECIAL MEETINGS OF CONTRACT OWNERS
To owners of variable annuity contracts issued by The Franklin Life
Insurance Company eligible to vote in connection with certain separate accounts
established by The Franklin Life Insurance Company.
The Board of Managers of each of Franklin Life Variable Annuity Fund A,
Franklin Life Variable Annuity Fund B, and Franklin Life Money Market Variable
Annuity Fund C (each, a "Fund" and collectively, the "Funds") hereby gives
notice that they intend to hold special meetings of owners of the variable
annuity contracts eligible to vote in connection with the Funds on
April 8, 1999 at 1:00 p.m., Central Standard Time, at The Franklin
Life Insurance Company's home office at #1 Franklin Square, Springfield,
Illinois 62713. The special meetings are for the purposes of considering and
acting on the following matters, as set forth in the accompanying Proxy
Statement/Prospectus:
1. To approve or to disapprove an Agreement and Plan of Reorganization
and related transactions whereby:
- Franklin Life Variable Annuity Fund A will be renamed and
restructured into a single unit investment trust comprising three
investment divisions (the "Continuing Fund");
- each Fund's assets will be transferred to one of the three
investment divisions in the Continuing Fund such that contract
owners' interests will continue as interests in the Continuing
Fund; and
- each investment division will invest exclusively in shares of
either the Stock Index Fund or the Money Market Fund of American
General Series Portfolio Company.
2. To consider and act upon such other business as may properly come
before the special meetings or any adjournment(s) or postponement(s)
thereof.
The Proxy Statement/Prospectus dated March 1, 1999 that accompanies this
notice discusses the proposed Agreement and Plan of Reorganization and
related transactions in detail.
As a contract owner of record at the close of business on February 1, 1999,
you have the right to vote at the special meetings or any adjournment(s) or
postponement(s) thereof. If you do not expect to attend the special meetings in
person, please complete, sign and date the accompanying proxy, and return it
immediately in the enclosed postage-paid envelope so that you may be represented
at the special meetings. RETURNING THE PROXY WILL NOT RESTRICT OR IMPAIR YOUR
RIGHT TO REVOKE THE PROXY OR TO ATTEND AND VOTE PERSONALLY AT THE SPECIAL
MEETINGS. If you later decide to attend the special meetings in person, you may
vote at the special meetings even though you previously submitted a proxy. The
Board of Managers of each of the Funds is soliciting the proxy.
<PAGE>
SPECIAL NOTICE: To take action on the proposed Agreement and Plan of
Reorganization and related transactions, it is necessary that contract owners
entitled to cast at least 50% of all votes eligible to be cast with respect to
each of the Funds, voting separately, be present in person or represented by
proxy at the special meetings. To be implemented, each Fund must approve the
Agreement and Plan of Reorganization by the requisite vote of persons eligible
to vote with respect to that Fund. THEREFORE, THE BOARD OF MANAGERS OF EACH
FUND URGENTLY REQUESTS THAT CONTRACT OWNERS COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY SO THAT THE NECESSARY QUORUM AND VOTE WILL BE OBTAINED.
By Order of the Board of Managers of each of
Franklin Life Variable Annuity Fund A
Franklin Life Variable Annuity Fund B
Franklin Life Money Market Variable Annuity Fund C
/s/ Elizabeth E. Arthur
-----------------------
Elizabeth E. Arthur
Secretary
Springfield, Illinois
March 1, 1999
2
<PAGE>
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
<PAGE>
March 1, 1999
PROXY STATEMENT
of
FRANKLIN LIFE VARIABLE ANNUITY FUND A
FRANKLIN LIFE VARIABLE ANNUITY FUND B
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PROSPECTUS
of
FRANKLIN LIFE VARIABLE ANNUITY FUND A AMERICAN GENERAL SERIES PORTFOLIO
c/o The Franklin Life Insurance COMPANY
Company 2929 Allen Parkway
#1 Franklin Square Houston, Texas 77019
Springfield, Illinois 62713 (800) 633-8960
(800) 528-2011
The Boards of Managers of Franklin Life Variable Annuity Fund A, Franklin
Life Variable Annuity Fund B, and Franklin Life Money Market Variable Annuity
Fund C (each, a "Fund" and collectively, the "Funds") are furnishing this Proxy
Statement/Prospectus to owners of certain individual variable annuity contracts
(the "Contracts") issued by The Franklin Life Insurance Company through the
Funds, to solicit the enclosed proxies for use at the special meetings (the
"Meetings") of such owners to be held on April 8, 1999 at 1:00 p.m.,
Central Standard Time, at The Franklin Life Insurance Company's home office at
#1 Franklin Square, Springfield, Illinois 62713.
The Meetings are being held for the purposes set forth below and in the
accompanying Notice of the Special Meetings.
Owners of the variable annuity contracts ("Contract Owners") are being
asked to approve or to disapprove an Agreement and Plan of Reorganization (the
"Agreement") and related transactions (together, the Agreement and related
transactions are the "Reorganization") whereby:
- Franklin Life Variable Annuity Fund A will be restructured into a
single unit investment trust comprising three investment divisions
("Subaccount A," "Subaccount B," and "Subaccount C") and renamed as
Franklin Life Variable Annuity Fund (the "Continuing Fund");
- each Fund's assets will be liquidated and transferred to one of the
three Subaccounts such that Contract Owners' interests will continue
as interests in the Continuing Fund; and
- each Subaccount will invest exclusively in shares of a specified
portfolio of American General Series Portfolio Company as follows:
Subaccount A and Subaccount B will invest exclusively in shares of the
Stock Index Fund, and Subaccount C will invest exclusively in shares
of the Money Market Fund.
- --------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES, AND HAS NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
1
<PAGE>
American General Series Portfolio Company (the "Series Company") is a
mutual fund that currently consists of several investment portfolios including
the Stock Index Fund and the Money Market Fund (together, the Stock Index Fund
and the Money Market Fund are referred to herein as the "Series Company Funds").
If Contract Owners approve the Reorganization, then immediately following
the consummation of the Reorganization, each Contract Owner will have an
interest in the number of units in a Subaccount of the Continuing Fund having a
value equal to the value of that Contract Owner's interest in Franklin Life
Variable Annuity Fund A, Franklin Life Variable Annuity Fund B, or Franklin Life
Money Market Variable Annuity Fund C, respectively, immediately prior to the
Reorganization.
This combination Proxy Statement/Prospectus concisely sets forth
information about the Reorganization, the proposed future operation of the
Continuing Fund, and the Series Company Funds that the persons entitled to vote
in respect of each of the Funds (the "Fund Voters") should know before casting
their votes. Please retain this Proxy Statement/Prospectus for future
reference. Copies of the current prospectus for each of the Funds, and the
current prospectus for the Series Company are attached as appendices to this
Proxy Statement/Prospectus and are incorporated herein by reference.
The Boards of Managers have filed a Statement of Additional Information
relating to matters discussed in this Proxy Statement/Prospectus with the
Securities and Exchange Commission. The Statement of Additional Information is
dated the same date as this Proxy Statement/Prospectus and is incorporated
herein by reference. The Statement of Additional Information is available upon
oral or written request and without charge. The Franklin Life Insurance Company
("The Franklin") will also furnish, without charge, a copy of a Fund's Annual
Report dated December 31, 1998 to a Fund Voter upon request. Please direct such
a request (for the Statement and/or Annual Report) to The Franklin Life
Insurance Company, #1 Franklin Square, Springfield, Illinois 62713, Attention:
Box 1018 (telephone 800-528-2011, Extension 2591). Direct other inquiries about
the Funds to The Franklin at the same address or telephone number.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
General Information Regarding Proxy Solicitation . . . . . . . . . . . . . . 5
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Comparative Fee Table -- Fund A and Stock Index Fund . . . . . . . . . . 10
Comparative Fee Table -- Fund B and Stock Index Fund . . . . . . . . . . 11
Comparative Fee Table -- Fund C and Money Market Fund . . . . . . . . . 12
Comparing Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 14
PRINCIPAL RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
THE PROPOSED REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 16
Description of the Reorganization . . . . . . . . . . . . . . . . . . . 16
Reasons for the Transactions . . . . . . . . . . . . . . . . . . . . . . 18
Actual and Pro Forma Capitalization . . . . . . . . . . . . . . . . . . 20
Comparing Investment Objectives, Policies and Restrictions . . . . . . . 20
Comparative Performance . . . . . . . . . . . . . . . . . . . . . . . . 26
INFORMATION ON THE FUNDS AND THE SERIES COMPANY . . . . . . . . . . . . . . . 27
Management of the Funds and the Series Company . . . . . . . . . . . . . 28
Organization and Operation of the Series Company Funds . . . . . . . . . 29
Characteristics of Series Company Shares . . . . . . . . . . . . . 29
Dividends, Distributions, and Taxes . . . . . . . . . . . . . . . . 29
Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 30
Certain Ownership Interests . . . . . . . . . . . . . . . . . . . . 31
Sale of the Contracts and Series Company Shares . . . . . . . . . . . . 31
Deductions, Charges, Fees, and Expenses . . . . . . . . . . . . . . . . 31
Deductions and Charges Under the Contracts . . . . . . . . . . . . 31
Contracts Issued Through Fund A . . . . . . . . . . . . . . . . . . 32
Contracts Issued Through Fund B . . . . . . . . . . . . . . . . . . 32
Contracts Issued Through Fund C . . . . . . . . . . . . . . . . . . 32
Fees and Expenses of the Series Company Funds . . . . . . . . . . . 33
Supplementary Financial Information . . . . . . . . . . . . . . . . . . 33
Financial Highlights for the Funds . . . . . . . . . . . . . . . . 33
Financial Highlights for the Series Company Funds . . . . . . . . . 34
AVAILABILITY OF CERTAIN OTHER INFORMATION . . . . . . . . . . . . . . . . . . 35
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
Appendix A - Agreement and Plan of Reorganization
Appendix B - Prospectus for Franklin Life Variable Annuity Fund A
Appendix C - Prospectus for Franklin Life Variable Annuity Fund B
Appendix D - Prospectus for Franklin Life Money Market Variable Annuity Fund C
Appendix E - Prospectus for American General Series Portfolio Company
3
<PAGE>
DEFINITIONS
Agreement - The Agreement and Plan of Reorganization among each of the
Funds and The Franklin.
Continuing Fund - Franklin Life Variable Annuity Fund. This is the successor
to Franklin Life Variable Annuity Fund A, after it is
restructured into a unit investment trust and combined with
Fund B and Fund C.
Contracts - One of the variable annuity contracts issued by The Franklin
Life Insurance Company through the Funds.
Contract Owner - An owner of a variable annuity contract issued by The
Franklin through the Funds.
The Franklin - The Franklin Life Insurance Company
Funds (Fund A,
Fund B, Fund C) - Franklin Life Variable Annuity Fund A, Franklin Life
Variable Annuity Fund B; and Franklin Life Money Market
Variable Annuity Fund C
Fund Voters - Persons eligible to vote in respect to any of the Funds
Reorganization - The Agreement and related transactions whereby Fund A will
be restructured into a unit investment trust (the
Continuing Fund), each Fund's assets will be liquidated and
transferred to the Continuing Fund, and the Continuing
Fund will purchase shares of the Series Company Funds.
Series Company - American General Series Portfolio Company
Series Company
Funds - The Stock Index Fund and the Money Market Fund of American
General Series Portfolio Company.
Subaccount - One of the three investment divisions of the Continuing
Fund.
VALIC - The Variable Annuity Life Insurance Company, the investment
adviser to the Series Company Funds.
4
<PAGE>
GENERAL INFORMATION REGARDING PROXY SOLICITATION
The Board of Managers of each of Fund A, Fund B, and Fund C is furnishing
this Proxy Statement/Prospectus in connection with the Boards' solicitation of
proxies for use at Meetings of Fund Voters eligible to vote in respect of the
Contracts issued by The Franklin through the Funds.
If you complete, sign, date, and return the enclosed proxy, you may
nevertheless revoke it at any time before it is exercised by providing written
notice to The Franklin or by voting in person at the Meetings. Any later-dated
proxy The Franklin receives will revoke a prior proxy. The proxy solicitation
will be done by mail but may also be done by telephone, telegram, facsimile, or
personal interview conducted by The Franklin's personnel or outside contractors
employed to assist in the solicitation. The Franklin will pay the expenses of
the proxy solicitation, and these expenses will not be passed on to the Funds.
The Franklin expects such expenses to be approximately $40,000.
The Franklin has entered into an agreement with Shareholder Communications
Corporation ("SCC"), a professional proxy solicitation firm, to assist in the
proxy solicitation. SCC will provide services including telephone calls to
Contract Owners who have not returned proxies and remailing of proxy materials
to Contract Owners who have discarded or misplaced the originally mailed
materials. In return for providing these services, SCC will receive a fee and
reimbursement of its expenses incurred in the proxy solicitation.
The separate rules and regulations governing each of the Funds provide that
the number of accumulation units credited to Contract Owners will determine the
number of votes that may be cast with respect to a Contract before annuity
payments begin. After annuity payments begin, the number of votes that may be
cast is based on the amount of assets supporting the Contract and held in the
respective Fund to meet the obligations related to the Contract, divided by the
accumulation unit value for the particular Fund. Fractional votes will be
counted.
As of December 31, 1998, there were 109,896.4574 votes entitled to be cast
at the Meetings with respect to Fund A, 13,838.5872 votes entitled to be cast
with respect to Fund B, and 62,851.2220 votes entitled to be cast with respect
to Fund C. As of that date, the following persons were entitled to cast 5% or
more of the total votes of each of the respective Funds. The Franklin and the
Funds do not anticipate that the information provided in the table below will
vary materially by the record date of the Meetings:
5
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name and Address of Contract Percent of
Owner Number of Votes Voting Power
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund A: None
- --------------------------------------------------------------------------------
Fund B: Mr. Gonzalo R. Reynoso (1) 856.6460 6.19%
Mrs. Juanita S. Reynoso 877.1990 6.34%
553 Hackney Hill Street
Globe, Arizona 85501
- --------------------------------------------------------------------------------
Fund C: Beverly A. DeBlase 5,628.7411 8.96%
209 Yorkshire Pl.
Bellevue, Ohio 44811
- --------------------------------------------------------------------------------
</TABLE>
Following the Reorganization, the persons in the table above will own units of
interest in the Continuing Fund that represent less than 1% of the shares of
the Stock Index Fund and the Money Market Fund.
Before annuity payments begin, Contract Owners have the right to vote at
the Meetings. After annuity payments begin under a Contract, if the annuitant
is not the Contract Owner, the annuitant has the right to instruct the Contract
Owner as to voting matters, but the Contract Owner retains the right to vote at
the Meetings.
The Boards of Managers will vote all proxies executed, dated and
returned to The Franklin prior to the beginning of the Meetings on April 8,
1999 in accordance with instructions marked thereon. If instructions are not
marked thereon, the Boards of Managers will vote proxies "FOR" the proposal
to be voted on at the Meetings. Abstentions will not count as votes "FOR" or
"AGAINST" the proposal; however, abstentions will be counted to determine
whether a quorum is present at the Meetings.
To take action on the proposed Reorganization, it is necessary that
Contract Owners entitled to cast at least 50% of all votes eligible to be cast
with respect to each of the Funds, voting separately, be present in person or
represented by proxy at the Meetings. Approval of the Agreement and the
Reorganization requires, with respect to each of the Funds, the affirmative vote
of the lesser of:
- 67% of the votes cast at the Meetings; or
- more than 50% of the total eligible votes.
The requisite vote of the Fund Voters of each Fund must approve the
Reorganization before the Reorganization will be implemented.
The Boards of Managers may adjourn the Meetings for the purpose of further
proxy solicitation, or for any other purpose, if 50% of the total eligible votes
for any Fund are not represented at the
- ----------------------
(1) In accordance with interpretations of the Securities and Exchange
Commission of the concept of "beneficial ownership," G. Reynoso and J. Reynoso
might each be deemed to be the beneficial owner of the contract owned by the
other.
6
<PAGE>
Meetings. The Boards of Managers will vote proxies in favor of any adjournment
unless you provide other instructions. At any subsequent reconvening of the
meetings, the Boards of Managers will vote proxies in the same manner as the
proxies would have been voted at the original meetings, unless you revoke the
proxies before the subsequent meetings.
SYNOPSIS
The Board of Managers of each Fund (which consists of the same individuals
for each Fund) has authorized the Reorganization. During the five business days
prior to the closing date of the Reorganization (currently scheduled for April
30, 1999), each Fund will convert its assets into cash. For much of this
period, Contract Owners would be "out of the market" and would not be affected
by any positive or negative investment experience of securities that were
converted into cash. On the closing date:
- the cash accumulated with respect to Fund A will be allocated to and
used by Subaccount A to purchase shares of the Stock Index Fund of the
Series Company;
- the cash accumulated with respect to Fund B will be allocated to and
used by Subaccount B to purchase shares of the Stock Index Fund of the
Series Company; and
- the cash accumulated with respect to Fund C will be allocated to and
used by Subaccount C to purchase shares of the Money Market Fund of
the Series Company.
Immediately after the Reorganization, interests in Subaccount A, Subaccount
B, and Subaccount C, respectively, having a value identical to the Contract
Owners' interests in the Funds immediately before the Reorganization will
represent Fund A, Fund B, and Fund C Contract Owners' interests.
The Series Company is a management investment company (commonly known as a
"mutual fund") managed by The Variable Annuity Life Insurance Company ("VALIC"),
which is an affiliate of The Franklin. VALIC is responsible for each of the
Series Company Funds' day to day operations and makes the investment decisions
for the Money Market Fund. VALIC has engaged an investment sub-adviser, Bankers
Trust Company ("Bankers Trust") to make investment decisions for the Stock Index
Fund.
The Contracts are no longer being sold, however, The Franklin continues to
accept additional payments in accordance with contractual provisions. Shares in
each Series Company Fund are offered only to separate accounts of VALIC and its
affiliates, or employee thrift plans maintained by VALIC or American General
Corporation. See "Sale of the Contracts and Series Company Shares" below.
There will be no change in the value of your Contract and no change in a
your benefits under the Contract as a result of the Reorganization. The
Reorganization also will not affect exchange rights, redemption procedures, and
other features of the Contracts. The Franklin believes that the Reorganization
will not result in adverse tax consequences to Contract Owners.
The following paragraphs describe each Fund's investment objective and the
investment objective of the relevant Series Company Funds:
7
<PAGE>
- The investment objective of each of Franklin Life Variable Annuity
Fund A ("Fund A") and Franklin Life Variable Annuity Fund B ("Fund B")
is long-term appreciation of capital through investment appreciation
and the retention and reinvestment of income.
The Stock Index Fund seeks long-term capital growth through investment
in common stocks that, as a group, are expected to provide investment
results closely corresponding to the performance of the Standard &
Poor's 500 Stock Index-Registered Trademark- ("S&P 500")(2)
- The investment objective of Franklin Life Money Market Variable
Annuity Fund C ("Fund C") is long-term compounding of income through
retention and reinvestment of income from investments in a diversified
portfolio of short-term money market securities yielding a high level
of current income to the extent consistent with the preservation of
capital and the maintenance of liquidity.
The Money Market Fund of the Series Company seeks liquidity,
protection of capital and current income through investments in
short-term money market instruments.
The Franklin will pay all costs and expenses associated with effecting the
Reorganization. The Franklin will not pay any costs or expenses associated with
unrealized positive investment experience during the time when Contract Owners
are "out of the market" as described above. The charges provided for in the
Contracts will not increase as a result of the Reorganization, and in certain
cases will be reduced. For example, in anticipation of the approval of the
Reorganization, beginning in October 1998 The Franklin began waiving the
imposition and receipt of all sales loads, surrender or deferred sales charges,
and administration fees specified in each Contract. Mortality and expense risk
fees deducted under the Contracts will remain unchanged.
Because each of the Funds will no longer be a management investment
company, The Franklin will no longer serve as the investment manager to each
Fund and, consequently, The Franklin will not receive an investment
management fee from assets of the Funds after the Reorganization. However,
an investment advisory fee and a charge for "other expenses" is deducted from
the assets of each Series Company Fund. Based on the current levels of these
fees and charges, the investment advisory fee and the charge for "other
expenses" for the Stock Index Fund may be lower than the investment
management fee for Funds A and B; and the investment advisory fee and the
charge for "other expenses" for the Money Market Fund may be higher than the
investment management fee for Fund C. However, if the Reorganization is
approved, The Franklin will place a limit on each Subaccount's expenses to
ensure that Contract Owners do not incur post-Reorganization expenses that
are higher than the pre-Reorganization expenses. The Franklin will effect
this expense limitation by making any necessary adjustments so that a
Subaccount's total annual expenses (as a percentage of average net assets)
will never exceed the corresponding Fund's total annual expenses (as a
percentage of average net assets) for the year ended December 31, 1998. See
"Comparing Fees and Expenses," and "Supplementary Financial Information"
below.
The following comparative fee tables for the 12-month period ended December
31, 1998 illustrate:
- the charges and deductions under the Contract for each Fund during
that period;
- the fees and expenses of the corresponding Series Company Fund; and
- ------------------
(2) Standard & Poor's-Registered Trademark-, S&P-Registered Trademark-, S&P
500-Registered Trademark-, and Standard & Poor's 500-Registered Trademark- are
trademarks of The McGraw-Hill Companies, Inc. The Stock Index Fund is not
sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard &
Poor's makes no representation regarding the advisability of investing in the
Stock Index Fund.
8
<PAGE>
- the charges and deductions under the Contract for each Subaccount
(including the fees and expenses of the Series Company Funds) restated
as if the Reorganization had been in effect during that period.
9
<PAGE>
COMPARATIVE FEE TABLE -- FUND A AND STOCK INDEX FUND
<TABLE>
<CAPTION>
STOCK SUBACCOUNT A OF
(For the 12-month period ended December 31, 1998) INDEX CONTINUING FUND
FUND A FUND (pro forma)
<S> <C> <C> <C>
CONTRACT OWNER TRANSACTIONS EXPENSES (WAIVED SINCE OCTOBER 1998)
Maximum Sales Load Imposed on Purchases (as a percentage of 5.00% (A)
purchase payments) 6.00% (B) --- ---
Maximum Administration Fee (as a percentage of purchase 4.00% (A)
payments) 3.00% (B) --- ---
FUND A ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees 0.44% --- ---
Mortality Fees 0.90% --- 0.90%
Expense Risk Fees 0.10% --- 0.10%
Other Expenses ---
Total Fund A (or Subaccount A) Annual Expenses 1.44% --- 1.00%
STOCK INDEX FUND ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees --- 0.27% 0.27%
Other Expenses --- 0.04% 0.04%
Total Stock Index Fund Annual Expenses --- 0.31% ---
TOTAL SUBACCOUNT A (PRO FORMA) ANNUAL EXPENSES (C) --- --- 1.31%
</TABLE>
(A) Single Stipulated Payment Contract
(B) Periodic Stipulated Payment Contract
(C) If the Reorganization is approved, The Franklin will implement an expense
limitation whereby Subaccount A's total annual expenses (as a percentage
of average net assets) after the Reorganization, will not exceed Fund A's
total annual expenses (as a percentage of average net assets) for the year
ended December 31,1998.
10
<PAGE>
COMPARATIVE FEE TABLE -- FUND B AND STOCK INDEX FUND
<TABLE>
<CAPTION>
STOCK SUBACCOUNT B OF
(For the 12-month period ended December 31, 1998) INDEX CONTINUING FUND
FUND B FUND (pro forma)
<S> <C> <C> <C>
CONTRACT OWNER TRANSACTIONS EXPENSES (WAIVED SINCE OCTOBER 1998)
Maximum Sales Load Imposed on Purchases (as a 5.00% (A);
percentage of purchase payments) 15.00% to 1.00%,
10.00% to 3.00%,
6.00% to 3.00%,
4.00% to 3.00% (B) --- ---
Maximum Administration Fee (as a percentage of purchase $100 (A);
payments, for Periodic Stipulated Payment Contracts) 0.00% to 10.00%,
3.00% to 10.00%,
3.00% to 6.00%,
3.00% to 5.00% (C) --- ---
FUND B ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees 0.44% --- ---
Mortality Fees 0.90% --- 0.90%
Expense Risk Fees 0.10% --- 0.10%
Other Expenses ---
Total Fund B (or Subaccount B) Annual Expenses 1.44% --- 1.00%
STOCK INDEX FUND ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees --- 0.27% 0.27%
Other Expenses --- 0.04% 0.04%
Total Stock Index Fund Annual Expenses --- 0.31% ---
TOTAL SUBACCOUNT B (PRO FORMA) ANNUAL EXPENSES (D) --- --- 1.31%
</TABLE>
(A) Single Stipulated Payment Contract
(B) Periodic Stipulated Payment Contract. 15.00% to 1.00% (for a Contract with
a stipulated payment period of 12 or more years; 4.33% aggregate over all years
for a 12-year Contract); 10.00% to 3.00% (for a Contract with a stipulated
payment period of 9 to 11 years; 4.44% aggregate over all years for a 9-year
Contract); 6.00% to 3.00% (for a Contract with a stipulated payment period
of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract); and
4.00% to 3.00% (for a Contract with a stipulated payment period of 2 to 5 years;
4.00% aggregate over all years for a 2-year Contract).
(C) Periodic Stipulated Payment Contract. 0.00% to 10.00% (for a Contract with
a stipulated payment period of 12 or more years; 4.67% aggregate over all years
for a 12-year Contract); 3.00% to 10.00% (for a Contract with a stipulated
payment period of 9 to 11 years; 4.44% aggregate over all years for a 9-year
Contract); 3.00% to 6.00% (for a Contract with a stipulated payment period
of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract); and
3.00% to 5.00% (for a Contract with a stipulated payment period of 2 to 5 years;
5.00% aggregate over all years for a 2-year Contract).
(D) If the Reorganization is approved, The Franklin will implement an
expense limitation whereby Subaccount B's total annual expenses (as a
percentage of average net assets) after the Reorganization, will not exceed
Fund B's total annual expenses (as a percentage of average net assets) for the
year ended December 31,1998.
11
<PAGE>
COMPARATIVE FEE TABLE -- FUND C AND MONEY MARKET FUND
<TABLE>
<CAPTION>
MONEY SUBACCOUNT C OF
(For the 12-month period ended December 31, 1998) MARKET CONTINUING FUND
FUND C FUND (pro forma)
<S> <C> <C> <C>
CONTRACT OWNER TRANSACTIONS EXPENSES (WAIVED SINCE OCTOBER 1998)
6.00% (B)
Maximum Deferred Sales Load (A) 8.00% (C) --- ---
$100 (D)
Maximum Administration Fee (E) --- ---
FUND C ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees 0.375% --- ---
Mortality Fees 0.90% --- 0.90%
Expense Risk Fees 0.165% --- 0.165%
Other Expenses --- ---
Total Fund C (or Subaccount C) Annual Expenses 1.44% --- 1.065%
MONEY MARKET FUND ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees --- 0.50% 0.50%
Other Expenses --- 0.05% 0.05%
Total Money Market Fund Annual Expenses --- 0.55% ---
TOTAL SUBACCOUNT C (PRO FORMA) ANNUAL EXPENSES (after expense limitation) (F) --- --- 1.44%
</TABLE>
(A) Expressed as a percentage of the lesser of: (1) the Cash Value of the part
of the Contract surrendered, or (2) the Stipulated Payments made during the
immediately preceding 72 months represented by the part of the Contract
surrendered (or the Stipulated Payment in the case of a Single Stipulated
Payment Contract).
(B) Single Stipulated Payment Contract. For total redemptions, percentage
decreases each Contract Year after the second until reaching zero for Contract
Year 5 and thereafter; for partial redemptions, percentage decreases to 4.00%
for Contract Year 3 and thereafter.
(C) Periodic Stipulated Payment Contract. For total redemptions, percentage
decreases each Contract Year after the third until reaching zero for Contract
Year 7 and thereafter; for partial redemptions, percentage decreases to 4.00%
for Contract Year 5 and thereafter.
(D) Single Stipulated Payment Contract.
(E) Periodic Stipulated Payment Contract. $20 per Contract Year plus $1 per
Stipulated Payment ($.50 if by bank draft or by employer or military
preauthorized automatic deduction).
(F) If the Reorganization is approved, The Franklin will implement an expense
limitation whereby Subaccount C's total annual expenses (as a percentage of
average net assets) after the Reorganization, will not exceed Fund C's total
annual expenses (as a percentage of average net assets) for the year ended
December 31,1998. Without this expense limitation, Total Subaccount C
(ProForma) Annual Expenses would be 1.615%.
12
<PAGE>
EXAMPLES
The following examples show expenses that reflect application of the
sales charges, surrender and deferred sales charges, and administrative fees
that The Franklin began waiving under the Contracts in October 1998. The waiver
will only affect Fund A and Fund B Contract Owners to the extent they make
future payments under the Contracts. The waiver will only affect Fund C
Contract Owners to the extent that they make withdrawals that would be subject
to the deferred sales load. The pro forma information for Subaccount C reflects
application of the expense limitation that The Franklin will implement if the
Reorganization is approved. The first row of figures is for Single Stipulated
Payment Contracts, and the second row of figures is for Periodic Stipulated
Payment Contracts.
A. You would pay the following expenses (based on expenses for the 12-month
period ended December 31, 1998) on a $10,000 investment in your Contract,
assuming a 5% annual return on assets, if you surrender your Contract at the end
of the applicable time period.
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------------
Fund A (actual) Subaccount A of the Continuing Fund (pro forma)
- ------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------------------------------------------------------- ----------------------------------------------------------
$1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
$1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------------
Fund B (actual) Subaccount B of the Continuing Fund (pro forma)
- ------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------------------------------------------------------- ----------------------------------------------------------
$1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
$1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------------
Fund C (actual) Subaccount C of the Continuing Fund (pro forma)
- ------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------------------------------------------------------- ----------------------------------------------------------
$244 $548 $873 $1,795 $145 $452 $781 $1,712
- ------------------------------------------------------- ----------------------------------------------------------
$145 $491 $858 $1,878 $145 $452 $781 $1,712
- ------------------------------------------------------- ----------------------------------------------------------
</TABLE>
B. You would pay the following expenses (based on expenses for the 12-month
period ended December 31, 1998) on a $10,000 investment in your Contract,
assuming a 5% annual return on assets, if you do not surrender your Contract at
the end of the applicable time period:
13
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------------
Fund A (actual) Subaccount A of the Continuing Fund (pro forma)
- ------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------------------------------------------------------- ----------------------------------------------------------
$1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
$1,032 $1,312 $1,611 $2,458 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------------
Fund B (actual) Subaccount B of the Continuing Fund (pro forma)
- ------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------------------------------------------------------- ----------------------------------------------------------
$1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
$1,624 $1,884 $2,164 $2,955 $133 $412 $713 $1,569
- ------------------------------------------------------- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------------
Fund C (actual) Subaccount C of the Continuing Fund (pro forma)
- ------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------- ----------------------------------------------------------
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
- ------------------------------------------------------- ----------------------------------------------------------
$244 $548 $873 $1,795 $145 $452 $781 $1,712
- ------------------------------------------------------- ----------------------------------------------------------
$145 $491 $858 $1,878 $145 $452 $781 $1,712
- ------------------------------------------------------- ----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PLEASE DO NOT CONSIDER THESE EXAMPLES AS A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
COMPARING FEES AND EXPENSES
The overall costs to Contract Owners after the Reorganization will not
be higher, and may be lower than they were before the Boards of Managers
proposed the Reorganization. For example, in anticipation of the approval of
the Reorganization, beginning in October 1998 The Franklin began waiving the
imposition and receipt of all sales loads, surrender or deferred sales
charges, and administration fees specified in each Contract. This waiver
will continue whether or not the Fund Voters in each Fund approve the
Reorganization. Therefore, Contract Owners in the Continuing Fund may make
additional purchases without incurring any sales load on such purchases, and
also may make surrenders without having deductions made for surrender or
deferred sales charges. Further, purchase payments made in the Continuing
Fund will not be subject to any administration fees, and the Contracts will
not be subject to any annual administration fee.
In addition, after the Reorganization is approved, The Franklin will
implement an expense limitation whereby each Subaccount's total annual
expenses (as a percentage of average net assets) after the Reorganization,
will not exceed the corresponding Fund's total annual expenses (as a
percentage of average net assets) for the year ended December 31,1998.
Under the Contracts, the Franklin currently imposes three charges specified
as annual percentages of each Fund's average net assets:
- a mortality risk fee equal to 0.90% for each of the Funds;
14
<PAGE>
- an expense risk fee equal to 0.10% for Fund A and Fund B, and 0.165%
for Fund C; and
- an investment management fee equal to 0.44% for Fund A and Fund B,
and 0.375% for Fund C.
The Franklin guarantees that the charges for the mortality risk fee for all
Funds and the expense risk fee for Fund A and Fund B will not increase.
The total annual expenses for each Fund include the investment
management fee, mortality risk fee, and expense risk fee. There is no charge
imposed against the assets of the Funds for "other expenses." After the
Reorganization, The Franklin will continue to impose the 0.90% mortality risk
fee and the 0.10% (or 0.165%) expense risk fee against the assets of each of
the Subaccounts of the Continuing Fund. However, The Franklin will no longer
impose the 0.44% (or 0.375%) investment management fee against the assets of
the Subaccounts of the Continuing Fund. Instead, the Stock Index Fund's
investment advisory fee (out of which VALIC pays the investment sub-advisory
fee) will be charged indirectly against the assets of Subaccounts A and B of
the Continuing Fund; and the Money Market Fund's investment advisory fee will
be charged indirectly against the assets of Subaccount C of the Continuing
Fund. Therefore, the total annual expenses for each Subaccount of the
Continuing Fund will include an indirect charge for the investment advisory
fees of the corresponding Series Company Fund, plus the mortality risk fee
and the expense risk fee for that Subaccount. However, as previously stated,
The Franklin will implement an expense limitation whereby each Subaccount's
total annual expenses (as a percentage of average net assets) after the
Reorganization, will not exceed the corresponding Fund's total annual
expenses (as a percentage of average net assets) for the year ended December
31,1998.
VALIC calculates the investment advisory fee charged to the Stock Index
Fund and the Money Market Fund as a percentage of these Funds' average daily net
asset value. For the 12-month period ended December 31, 1998, the investment
advisory fee (as a percentage of average net assets) was 0.27% for the Stock
Index Fund, and 0.50% for the Money Market Fund.
Pursuant to the Investment Sub-Advisory Agreement between VALIC and Bankers
Trust on behalf of the Stock Index Fund, VALIC pays Bankers Trust a monthly fee
computed at the annual rate of 0.02% of the first $2 billion in Stock Index Fund
assets and 0.01% on assets over $2 billion. The Series Company does not pay a
separate fee to Bankers Trust.
Total annual expenses for the Series Company Funds include the investment
advisory fee plus a fee for "other expenses." For the Series Company Funds, the
fee for "other expenses" during the 12-month period ended December 31, 1998 were
0.04% of the average net assets of the Stock Index Fund, and 0.05% of average
net assets of the Money Market Fund.
Using the percentages for the 12-month period ended December 31, 1998
(and including The Franklin's post-Reorganization expense limitation for
Subaccount C), the total annual expenses after the Reorganization would be
1.31% for Subaccount A, 1.31% for Subaccount B, and 1.44% for Subaccount C.
In sum, the total annual expenses after the Reorganization for Subaccount A
and Subaccount B would be lower than the total annual expenses for Fund A and
Fund B: 1.31% for Subaccount A vs. 1.44% for Fund A; and 1.31% for Subaccount
B vs. 1.44% for Fund B. Total annual expenses after the Reorganization for
Subaccount C (including the post-Reorganization expense limitaion) would be
the same as the total annual expenses for Fund C: 1.44% for Subaccount C vs.
1.44% for Fund C. See the "Comparative Fee Tables" above.
15
<PAGE>
PRINCIPAL RISK FACTORS
The principal risk factors involved in investing in a Subaccount of the
Continuing Fund and, therefore, indirectly in a Series Company Fund will be
similar to the principal risk factors currently associated with investing in a
Fund. Those risk factors are that the investments made by each Series Company
Fund's investment manager may not appreciate in value or will, in fact, lose
value. Specifically, the investments are subject to three general types of
investment risks:
- FINANCIAL RISK, which refers to the ability of the issuer of a
security to pay principal and interest when due or to maintain or
increase dividends;
- MARKET RISK, which refers to the degree to which the price of a
security will react to changes in conditions in the securities markets
and to changes in the overall level of interest rates; and
- CURRENT INCOME VOLATILITY, which refers to the degree to which and the
timing by which changes in the overall level of interest rates or, in
the case of certain derivative instruments, other underlying economic
variables or indices affect the current income from an investment.
In addition, by investing in a Subaccount of the Continuing Fund and,
therefore, indirectly in a Series Company Fund, Contract Owners will continue
to be exposed to certain risk factors that are currently associated with
investing in a Fund. For example, although unlikely, one or more of the
Series Company Funds may fail to qualify as a regulated investment company in
any particular year and may thereby incur federal tax liability on income and
capital gains distributed to shareholders. In that case, the Contracts would
also fail to qualify as annuity contracts for federal income tax purposes
resulting in the loss of their tax-favored status. See, "Organization and
Operation of the Series Company Funds -- Dividends, Distributions and Taxes,"
below. This would adversely affect the investment performance of the
disqualified Series Company Fund(s) and therefore the investment performance
of the corresponding Subaccounts of the Continuing Fund. Also, Series
Company Fund shares currently are, and will continue to be, owned by separate
accounts of other insurance companies to fund variable annuity contracts and
variable life insurance policies. While it is conceivable that, in the
future, it may be disadvantageous to the Continuing Fund to be invested in
the Series Company Funds simultaneously with such other separate accounts,
The Franklin currently does not see any such disadvantages.
THE PROPOSED REORGANIZATION
DESCRIPTION OF THE REORGANIZATION
The Reorganization involves converting the net assets of each Fund into
cash, designating the cash associated with each Fund as the initial assets of a
Subaccount of the Continuing Fund, and purchasing shares of a specified Series
Company Fund in return for a Subaccount's cash. If the Fund Voters of each Fund
approve the Reorganization, the Funds will no longer hold securities and other
instruments directly but rather will hold similar investments indirectly through
the intermediate vehicle of the Series Company Funds. Those investments will be
managed by VALIC (and Bankers Trust for the Stock Index Fund), instead of The
Franklin, the current investment manager for each of the Funds.
At present, each Fund:
16
<PAGE>
- is a diversified management investment company, as such companies are
defined in the Investment Company Act of 1940, as amended (the "1940
Act");
- is supervised by a Board of Managers having a majority of members who
are not "interested persons" (I.E., who are drawn from outside) of The
Franklin; and
- invests in securities and other instruments in accordance with
objectives outlined in a prospectus.
Please refer to the separate prospectuses for Fund A, Fund B, and Fund C,
respectively, which accompany this Proxy Statement/Prospectus as Appendices B,
C, and D, respectively, and are incorporated herein by reference.
If the Fund Voters of each Fund approve the Reorganization, Fund A would be
renamed as Franklin Life Variable Annuity Fund and restructured as a unit
investment trust that will be subdivided into three Subaccounts, each
corresponding to and investing solely in shares of a particular Series Company
Fund. Please refer to the prospectus for the Series Company Fund which
accompanies this Proxy Statement/Prospectus as Appendix E and is incorporated
herein by reference.
The net asset value per share of the corresponding Series Company Fund will
determine the value of a unit in each Subaccount of the Continuing Fund. The
total value of the accumulation units a Contract Owner has in each Fund
immediately prior to the Reorganization will be no different than the total
value of the accumulation units the same Contract Owner will have in the
appropriate Subaccount of the Continuing Fund immediately after the
Reorganization. The total value of the annuity units a Contract Owner has in
each Fund immediately prior to the Reorganization will be no different than the
total value of the annuity units the same Contract Owner will have in the
appropriate Subaccount of the Continuing Fund immediately after the
Reorganization.
As of 3:00 p.m. Central Standard Time on the closing date, all of the
assets of each Fund will have been liquidated into cash and the cash will be
transferred to the Subaccounts of the Continuing Fund and used to purchase the
number of shares of the Stock Index Fund or the Money Market Fund having an
aggregate net asset value equal to the cash contributed. The Franklin will pay
any brokerage commissions related to the liquidation of the Funds' assets.
More information on the Reorganization is contained in a document entitled
"Agreement and Plan of Reorganization," which has been approved and adopted by
the Board of Managers of each of the Funds and entered into by The Franklin (in
its capacity as the insurance company of which the Funds are a part under state
insurance law) and the Funds. The Agreement is attached to this Proxy
Statement/Prospectus as Appendix A. Approval of the Agreement and the
Reorganization by the Fund Voters of each Fund is a prerequisite to the
implementation of the Reorganization. The Reorganization may be postponed from
time to time or canceled for any reason with the consent of the parties thereto.
Federal Tax Consequences of the Reorganization
The Franklin does not believe that the proposed Reorganization will
result in the realization of taxable income or loss to The Franklin, the
Funds, the Continuing Fund, or the Series Company. Neither The Franklin, as
the legal owner of the assets held in the Funds, nor the Funds themselves,
which are not taxed as entities separate from The Franklin, should realize
gain or loss on the liquidation of the assets held in the Funds by virtue of
section 817(b) of the Internal Revenue Code. Under that section, the tax
basis to The Franklin of each asset held by the Funds is always equal to its
fair market value, so that when such asset is liquidated, no gain or loss is
realized. The use of the cash proceeds derived from the liquidation of the
assets of the Funds to purchase shares of the Series Company should not give
rise to taxable gain or loss to The Franklin or the Continuing Fund, and
should not give rise to taxable gain or loss to the Series Company because
under section 1032(a) of the Internal Revenue Code the issuance of shares of
a corporation in exchange for money or other property does not give rise to
gain or loss. If, contrary to The Franklin's expectations, the proposed
Reorganization were to result in taxable income to The Franklin, the Funds,
or the Continuing Fund, The Franklin would not make any charge to the Funds,
the Continuing Fund or to Contract Owners for Federal income taxes resulting
from the proposed Reorganization.
The Franklin also does not believe that the proposed Reorganization
will result in tax consequences to Contract Owners. The proposed
Reorganization itself will not result in a distribution from Contracts
currently supported by the Funds that would give rise to taxable income to
Contract Owners.
If, following an affirmative vote of the Contract Owners, an Owner
wished to redeem such Contract Owner's interests rather than be invested in
the Series Company Funds, such Contract Owner could either surrender the
Contract or exchange the Contract for another policy issued by a different
insurance company. In general, the surrender of a Contract would result in
taxation of any gain accumulated under the Contract and, in certain cases, in
the imposition of an additional 10-percent tax on such gain. If, however, a
Policy were to be exchanged for another policy, the Contract Owner might not
incur current tax with respect to the transaction if the transaction
qualified as a tax-exempt exchange under section 1035(a) of the Internal
Revenue Code. Contract Owners considering such a transaction should consult a
tax adviser.
17
<PAGE>
REASONS FOR THE TRANSACTIONS
The following combination of circumstances led the Board of Managers of
each Fund to propose the Reorganization:
- The asset base of the Funds will not increase substantially in the
foreseeable future because no new Contracts are being sold (although
continuing payments are accepted on existing Contracts).
- The portfolio manager primarily responsible for making investment
management decisions for the Funds has indicated a desire to
discontinue serving in this capacity.
- Since the Funds are separate entities, administration costs for the
Funds cannot benefit from economies of scale.
Based on these circumstances, the Board of Managers of each of the Funds decided
to reevaluate how each Fund should be managed. The respective Boards of
Managers determined that, rather than continuing to operate each Fund as an
actively managed portfolio, it would be more effective to restructure the Funds
into a single unit investment trust containing subaccounts that invest in
actively or passively managed investment portfolios.
If the Fund Voters in each Fund approve the Reorganization, each Subaccount
of the Continuing Fund will invest its assets indirectly in securities through a
Series Company Fund rather than directly in securities, as each Fund currently
does.
The Reorganization should benefit Contract Owners by enabling them to
participate in investment portfolios with a substantially larger asset base than
that currently held by each of the Funds. As of December 31, 1998 the net
assets in Fund A, Fund B, and Fund C were $13,541,500, $2,036,706 and $1,545,779
respectively; while the net assets of the Stock Index Fund and the Money Market
Fund as of that date were $4,100,922,683, and $273,628,208, respectively. The
Board of Managers of each Fund anticipates that the larger asset base available
through investments in the Series Company Funds will increase investment
opportunities for and broaden diversification of the funding medium for the
Contracts.
The larger asset base would be especially advantageous with respect to Fund
C. The amount of assets that Fund C may invest in the securities of any one
issuer is restricted by Fund C's fundamental investment restrictions and the
regulations of the Securities and Exchange Commission and the Internal Revenue
Service. Under the most restrictive of these provisions, Fund C generally may
not invest more than 5% of its assets in the securities of any issuer, except
that it may invest up to 55% of its assets in securities issued or guaranteed as
to principal by the United States government. As of December 31, 1998, Fund C's
total assets were $1,554,073, and the maximum amount that Fund C was
permitted to invest in commercial paper of any one issuer was approximately
$77,700. Due to market conditions, it is more difficult to purchase an issue of
commercial paper in an amount less than $100,000. It is possible that the
shrinking pool of commercial paper investments available to Fund C due to its
size may impair the future investment performance of Fund C.
Various practical difficulties make it infeasible to use any of the Funds,
as they are currently structured, as the funding vehicle for insurance products
other than variable annuity contracts issued by
18
<PAGE>
The Franklin. The Series Company Funds, however, currently are and will
continue to be used for variable annuity contracts and variable life insurance
policies issued by other insurance companies affiliated with The Franklin.
Therefore, more assets currently are available to be invested in the Series
Company Funds than are available to be invested in the current Funds alone. The
Franklin and the Board of Managers of each Fund believe that this will result in
economies of scale (particularly in view of the declining assets of the Funds
under the current circumstances in which no new Contracts are being sold).
As managers of portfolios significantly larger than each Fund, VALIC (and
Bankers Trust with respect to the Stock Index Fund) may be able to expend larger
resources cost-effectively to attain higher performance for the Series Company
Funds than for the Funds, although there is no guarantee that higher
performance will be achieved. The Boards of Managers of the respective Funds
also considered the favorable investment performance of the Series Company Funds
compared to the investment performance of the respective Funds over the past
several years. See, "Comparative Performance," below.
The Fund C Board of Managers chose the Money Market Fund as the investment
vehicle for Fund C Contract Owners' interests because the Money Market Fund and
Fund C's investment objectives and policies are reasonably consistent with each
other.
The respective Boards of Managers for Fund A and Fund B selected the Stock
Index Fund as the investment vehicle for interests of Contract Owners of Fund A
and Fund B because the Stock Index Fund has somewhat similar investment
objectives and policies to Fund A and Fund B, and because it is the respective
Boards' belief that shareholders find S&P 500 index funds attractive since these
funds are designed for investors who want to pursue growth of capital through a
portfolio of securities that broadly represents the U.S. stock market, as
measured by the S&P 500. In addition, index funds generally have lower
portfolio transaction costs (brokerage and other trading costs), and a lower
expense ratio (including advisory fees, distribution charges and operating
expenses), than actively managed funds.
Using the Series Company Funds as the investment vehicles for the
Continuing Fund would facilitate the addition of new investment options, if the
Board of Directors of The Franklin should choose to do so in the future.
Although the Board of Directors does not intend to pursue this avenue at this
time, it would be administratively simpler and less costly to add (and maintain)
new investment options in the form of new unmanaged subaccounts of the
Continuing Fund investing in additional portfolios of the Series Company, or
portfolios of other mutual funds, than to add new investment options in the form
of new managed funds (structured as management investment companies).
In summary, The Franklin and the Board of Managers of each Fund expect the
Reorganization to result in increased investment opportunities, economies and
efficiencies which will benefit Contract Owners.
The Franklin and the Board of Managers of each Fund believe that the
interests of Contract Owners immediately following the Reorganization will
not materially differ from their interests immediately prior to the
Reorganization. Contract Owners will still have an interest in a diverse
portfolio of investments with respect to each Subaccount of the Continuing
Fund. The value of Contract Owners' interests will not be changed by the
Reorganization. In the opinion of The Franklin, the Reorganization will not
have any direct or indirect adverse tax consequences for Contract Owners.
Furthermore, the overall level of fees and expenses borne, directly or
indirectly, by each of the Contract Owners will not be higher (and may be
lower) after the Reorganization than before the Reorganization was proposed.
19
<PAGE>
ACTUAL AND PRO FORMA CAPITALIZATION
The following tables show the actual capitalization of the Funds, the Stock
Index Fund, and the Money Market Fund on December 31, 1998, as well as the pro
forma capitalization of the Subaccounts, the Stock Index Fund and the Money
Market Fund on that date after giving effect to the Reorganization:
<TABLE>
<CAPTION>
CAPITALIZATION FUND A FUND B FUND C SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
(as of Dec. 31, 1998)(3) (actual) (actual) (actual) (pro forma) (pro forma) (pro forma)
<S> <C> <C> <C> <C> <C> <C>
Net Assets $13,541,500 $2,036,706 $1,545,779 $13,541,500 $2,036,706 $1,545,779
Net Asset Value $ 123.03 $ 147.18 $ 24.59 $ 37.54 $ 37.54 $ 1.00
Units or Shares
Outstanding 109,896 13,839 62,851 360,722 54,254 1,545,779
<CAPTION>
STOCK INDEX STOCK INDEX MONEY MARKET MONEY MARKET
CAPITALIZATION FUND FUND FUND FUND
(as of Dec. 31, 1998) (actual) (pro forma) (actual) (pro forma)
<S> <C> <C> <C> <C>
Net Assets $4,100,922,683 $4,116,500,889 $273,628,208 $ 275,173,987
Net Asset Value $ 37.54 $ 37.54 $ 1.00 $ 1.00
Units or Shares
Outstanding 109,229,305 109,644,281 273,628,208 275,173,987
</TABLE>
COMPARING INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objective of both Fund A and Fund B is long-term
appreciation of capital through investment appreciation and the retention and
reinvestment of income. Fund A and Fund B seek to achieve their investment
objective by investing in equity securities, mainly common stocks. The Stock
Index Fund of the Series Company seeks long-term capital growth through
investment in common stocks that, as a group, are expected to provide investment
results closely corresponding to the performance of the S&P 500. The respective
Boards of Managers of Fund A and Fund B believe that although the investment
objective and policies of Fund A and Fund B are similar but not identical to
those of the Stock Index Fund, Contract Owners of Fund A and Fund B should find
the Stock Index Fund attractive because:
(1) the Stock Index Fund is designed for investors who want to keep
expenses low while seeking long-term growth of capital through a
portfolio of securities that, as a group, are expected to provide
investment results closely corresponding to the performance of the S&P
500 Index; and
(2) the fundamental investment restrictions of the Stock Index Fund are
not materially different from those of Fund A and Fund B.
- -----------------------
(3) Net assets of Fund A include annuity reserves, therefore the number of
units outstanding multiplied by the net asset value does not equal the net
assets. For the other Funds and Subaccounts, the number of units or shares
outstanding multiplied by the net asset value does not equal the net assets due
to rounding.
20
<PAGE>
Fund C's investment objective is long-term compounding of income through
retention and reinvestment of income from investments in a diversified portfolio
of short-term money market securities yielding a high level of current income to
the extent consistent with the preservation of capital and the maintenance of
liquidity. The Money Market Fund of the Series Company seeks liquidity,
protection of capital and current income through investments in short-term money
market instruments. The Board of Managers of Fund C believes that the
investment objective, policies, and restrictions of the Money Market Fund are
not materially different from the investment objective, policies, and
restrictions of Fund C.
Currently, each Fund's investment policy is to invest directly in
individual securities selected by The Franklin, the investment manager to each
Fund. It is currently a fundamental investment restriction of each Fund that
the Fund may not invest more than 5% of its assets in any one issuer, except
that up to 25% of each Fund's total assets may be invested without regard to
such 5% limitation.(4) In addition, each Fund currently has a non-fundamental
investment restriction that the Fund will not invest in the securities of other
investment companies.(5) The Boards of Managers of the Funds may deem approval
of the Reorganization by Fund Voters of each Fund as an approval of a change in
the investment policies and restrictions of the Funds to require investment
entirely and solely in specific mutual fund portfolios.
The following table compares the fundamental investment restrictions of
Fund A and Fund B to the fundamental investment restrictions of the Stock Index
Fund.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND A AND FUND B STOCK INDEX FUND
- --------------------------------------------------------------------------------
<S> <C>
Fund will not concentrate its Stock Index Fund may not invest more
investments in any one industry or than 25% of the value of its total
group of related industries, and no assets in the securities of issuers
more than 25% of the value of the primarily engaged in any one industry.
Fund's assets will be invested in any
one industry or group of related
industries.
- --------------------------------------------------------------------------------
Fund will not issue senior securities, Stock Index Fund may not issue senior
except that the Fund may borrow money securities, except in connection with
as set forth in the paragraph investments in options and futures
immediately below. contracts.
- --------------------------------------------------------------------------------
Fund will not borrow money except for Stock Index Fund may not borrow money
temporary or emergency purposes from except as a temporary measure for
banks, and any such borrowings will extraordinary or emergency purposes
not be used to purchase investment (such as to meet redemption requests
securities and will not exceed 5% of which might otherwise require the
the value of the Fund's assets. disadvantageous sale of portfolio
securities) and then not in excess of
5% of the Stock Index Fund's total
assets.
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------
(4) A fundamental investment restriction is one that cannot be changed without
the affirmative vote of the holders of a majority of the outstanding voting
shares of the respective Fund. For this purpose, a "majority" of shares means
the lesser of: (a) 67% or more of the voting shares present at a meeting, if the
holders of more than 50% of such votes are present or represented by proxy; or
(b) more than 50% of the voting shares.
(5) A non-fundamental investment restriction may be changed by action of the
Board of Managers of the Fund.
21
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND A AND FUND B STOCK INDEX FUND
- --------------------------------------------------------------------------------
<S> <C>
Fund will not underwrite securities of Stock Index Fund may not underwrite
other issuers, except that the Fund securities of other issuers except
may acquire portfolio securities under where the sale of restricted portfolio
circumstances where, if sold, it might securities constitutes an underwriting
be deemed to be an underwriter for under the federal securities laws.
purposes of the Securities Act of
1933. No such securities will be
acquired except where parties other
than the Fund shall have agreed to
bear any and all costs of registration
under the Securities Act of 1933. No
more than 10% of the value of the
Fund's assets will at any time be
invested in such securities.
- --------------------------------------------------------------------------------
Fund will not engage in the purchase Stock Index Fund may not acquire real
and sale of interests in real estate, estate or real estate contracts,
except that the Fund may engage in the although the Stock Index Fund may
purchase and sale of readily acquire obligations that are secured
marketable interests in real estate by real estate or securities issued by
investment trusts or similar companies investing in real estate,
securities, which may be deemed to such as real estate investment trusts.
represent indirect interests in real
estate.
- --------------------------------------------------------------------------------
Fund will not engage in the making of Stock Index Fund may not lend money,
loans to other persons, except that except by purchasing debt obligations
the Fund may acquire privately placed in which the Fund may invest
corporate debt securities of a type consistent with its investment
customarily purchased by institutional objective and policies or by
investors. The foregoing does not purchasing securities subject to
restrict the purchase by the Fund of a repurchase agreements. Stock Index
portion of an issue of publicly Fund may not make loans to other
distributed bonds, debentures or other persons, except than it may lend its
securities, whether or not the portfolio securities to broker-dealers
purchase is made upon the original and other financial institutions in an
issuance of such securities. amount up to 30% of the value of its
total assets.
- --------------------------------------------------------------------------------
Fund will not engage in the purchase Stock Index Fund may not purchase or
or sale of commodities or commodity sell commodities (except in connection
contracts. with investments in options and
futures contracts) or invest in oil,
gas or mineral exploration programs.
- --------------------------------------------------------------------------------
With respect to 75% of its assets, Stock Index Fund may not invest more
Fund will not purchase the securities than 5% of the value of its total
of any one issuer, other than assets in the securities of any one
obligations issued or guaranteed by issuer. This does not include
the U.S. Government and its agencies obligations issued or guaranteed by
and instrumentalities, if such the U.S. Government or any of its
purchase would cause more than 5% of agencies or instrumentalities.
the Fund's assets to be invested in
the securities of such issuer.
- --------------------------------------------------------------------------------
With respect to 75% of its assets, Stock Index Fund may not purchase more
Fund will not acquire more than 10% of than 10% of the outstanding voting
the outstanding voting securities of securities, or any other class of
any one issuer, other than obligations securities, of any one issuer. This
issued or guaranteed by the U.S. does not include obligations issued or
Government and its agencies and guaranteed by the U.S. Government or
instrumentalities. any of its agencies or
instrumentalities.
- --------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
In addition to the fundamental investment restrictions cited above, the
Stock Index Fund has fundamental investment restrictions which provide that the
Stock Index Fund may not:
- mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings made under this
restriction;
- acquire more than 3% of the voting securities of any single other
investment company or invest more than 10% of the value of the Stock
Index Fund's assets in the securities of other investment companies
(5% in the case of each such other company);
- acquire securities for the purpose of influencing the management of,
or exercising control over, the issuer;
- effect short sales of securities or purchase securities on margin,
except in connection with investment in options and futures contracts;
or
- enter into a financial futures contract (by exercise of any option or
otherwise) or acquire any options thereon, if, immediately thereafter,
the total of the initial margin deposits required with respect to open
futures positions, at the time such positions were established, plus
the sum of the premiums paid for all unexpired options on futures
contracts would exceed 5% of the value of its total assets.
The following table compares the fundamental investment restrictions of
Fund C to the fundamental investment restrictions of the Money Market Fund.
- --------------------------------------------------------------------------------
FUND C MONEY MARKET FUND
- --------------------------------------------------------------------------------
Fund C will not concentrate its Money Market Fund may not invest
investments in any one industry or group more than 25% of the value of its
of related industries, and no more than total assets in the securities of
25% of the value of Fund C's assets will issuers primarily engaged in any one
be invested in any one industry or group industry, except investments in
of related industries, except that there obligations issued or guaranteed by
is no limitation with respect to the U.S. Government, its agencies,
investments in obligations issued or or instrumentalities.
guaranteed by the U.S. Government or its
agencies or instrumentalities, or in
bankers' acceptances, repurchase
agreements or certificates of deposit of
domestic banks. For purposes of this
restriction, telephone, gas and electric
utilities, banks, savings associations,
personal credit institutions, business
credit institutions, and insurance
companies shall each be considered a
separate industry.
- --------------------------------------------------------------------------------
Fund C will not issue senior securities, Money Market Fund may not issue
except that Fund C may borrow money as senior securities.
set forth in the paragraph immediately
below.
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
FUND C MONEY MARKET FUND
- --------------------------------------------------------------------------------
Fund C will not borrow money except for Money Market Fund may not borrow
temporary or emergency purposes, and any money except as a temporary measure
such borrowings will not be used to for extraordinary or emergency
purchase investment securities and will purposes (such as to meet redemption
not exceed 5% of the value of Fund C's requests which might otherwise
assets; provided, however, that Fund C require the disadvantageous sale of
may borrow money up to one-third of its portfolio securities) and then not
assets, not to increase its income but in excess of 5% of its total assets.
to meet redemption requests which might
otherwise require untimely dispositions
of portfolio securities. So long as
such borrowings exceed 5% of the value
of Fund C's assets, Fund C will not make
any new investments. In addition, to
the extent such borrowings exceed the 5%
limit and cause a subsequent reduction
of the required asset coverage, Fund C
will reduce the amount of its borrowings
to comply with the appropriate asset
coverage required under the 1940 Act.
- --------------------------------------------------------------------------------
Fund C will not pledge, hypothecate, Money Market Fund may not mortgage,
mortgage or otherwise encumber its pledge or hypothecate more than 5%
assets except in an amount not in excess of the value of its total assets,
of 15% of the value of its assets to and then only to secure borrowings
secure borrowings made in accordance made under this restriction.
with the borrowing restrictions
described above.
- --------------------------------------------------------------------------------
Fund C will not underwrite securities of Money Market Fund may not underwrite
other issuers, except that Fund C may securities of other issuers except
acquire portfolio securities under where the sale of restricted
circumstances where, if sold, it might portfolio securities constitutes an
be deemed to be an underwriter for underwriting under the federal
purposes of the Securities Act of 1933. securities laws.
No such securities will be acquired
except where parties other than Fund C
shall have agreed to bear any and all
costs of registration under the
Securities Act of 1933. No more than
10% of the value of Fund C's assets will
at any time be invested in such
securities.
- --------------------------------------------------------------------------------
Fund C will not engage in the purchase Money Market Fund may not acquire
and sale of interests in real estate, real estate or real estate
except that Fund C may engage in the contracts, although the Fund may
purchase and sale of money market acquire obligations that are secured
securities secured by real estate or by real estate or securities issued
interests therein or securities issued by companies investing in real
by companies that invest in real estate estate, such as real estate
or interests therein. investment trusts.
- --------------------------------------------------------------------------------
Fund C will not engage in the making of Money Market Fund may not lend
loans to other persons, except that Fund money, except by purchasing debt
C may acquire qualified debt obligations obligations in which the Fund may
or other money market securities and invest consistent with its
enter into repurchase agreements investment objective and policies or
(provided that the aggregate value of by purchasing securities subject to
repurchase agreements maturing in more repurchase agreements. Money Market
than seven days will not exceed 10% of Fund may not make loans to other
Fund C's total assets), and may lend its persons, except than it may lend its
portfolio securities (provided that such portfolio securities to broker-
loans do not in the aggregate exceed 20% dealers and other financial
of the value of Fund C's assets) if such institutions in an amount up to 30%
loans are made according to the of the value of its total assets.
guidelines of the Securities and
Exchange Commission and the Board of
Managers of the Fund, including
maintaining collateral from the borrower
equal at all times to the current market
value of the securities loaned.
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
FUND C MONEY MARKET FUND
- --------------------------------------------------------------------------------
Fund C will not engage in the purchase Money Market Fund may not purchase
or sale of commodities or commodity or sell commodities or commodity
contracts or invest in oil, gas or other contracts or invest in oil, gas or
mineral exploration or development mineral exploration programs.
programs.
- --------------------------------------------------------------------------------
Fund C will not purchase securities No comparable fundamental investment
(other than repurchase agreements of not restriction.
more than seven days' duration) for
which there exists no readily available
market, or for which there are legal or
contractual restrictions on resale, if
as a result of any such purchase, more
than 10% of the value of Fund C's assets
would be invested in such securities.
- --------------------------------------------------------------------------------
Fund C will not purchase securities on Money Market Fund may not purchase
margin, except for such short-term securities on margin.
credits as are necessary for the
clearance of transactions.
- --------------------------------------------------------------------------------
Fund C will not make short sales of Money Market Fund may not effect
securities or write, purchase or sell short sales of securities. Money
puts, calls, straddles, spreads or Market Fund may not invest in
combinations thereof. warrants, or write, purchase or sell
puts, calls, straddles, spreads or
combinations thereof.
- --------------------------------------------------------------------------------
Fund C will not purchase the securities Money Market Fund may not invest
of any one issuer, other than more than 5% of the value of its
obligations issued or guaranteed by the total assets in the securities of
U.S. Government and its agencies and any one issuer. This does not
instrumentalities, if such purchase include obligations issued or
would cause more than 5% of Fund C's guaranteed by the U.S. Government or
assets to be invested in the securities any of its agencies or
of such issuer, except that up to 25% of instrumentalities.
Fund C's total assets taken at current
value may be invested without regard to
such 5% limitation.
- --------------------------------------------------------------------------------
Fund C will not acquire more than 10% of Money Market Fund may not purchase
the outstanding voting securities of any more than 10% of the outstanding
one issuer, other than obligations voting securities, or any other
issued or guaranteed by the U.S. class of securities, of any one
Government and its agencies and issuer. This does not include
instrumentalities, except that up to 25% obligations issued or guaranteed by
of Fund C's total assets taken at the U.S. Government or any of its
current value may be invested without agencies or instrumentalities.
regard to such 10% limitation.
- --------------------------------------------------------------------------------
In addition to the fundamental investment restrictions cited above, the
Money Market Fund has fundamental investment restrictions which provide that the
Money Market Fund may not:
- purchase any security which matures more than 13 months from the date
of purchase;
- acquire securities for the purpose of influencing the management of,
or exercising control over, the issuer; or
- acquire more than 3% of the voting securities of any single other
investment company or invest more than 10% of the value of the Money
Market Fund's assets in the securities of other investment companies
(5% in the case of each such other company).
If the Fund Voters of each Fund approve the Reorganization, Contract Owners
may lose the protections of certain fundamental policies and restrictions of the
respective Fund (and become subject to
25
<PAGE>
additional investment risk) to the extent that the corresponding policies and
restrictions of the Series Company Funds impose less severe limitations than
those of the Funds. However, as stated above, the Series Company Funds also
have certain fundamental restrictions not included among the fundamental
restrictions of the Funds.
The prospectuses and statements of additional information for the Funds and
the Series Company Funds located in Appendices B, C, D, and E contain more
complete descriptions of the investment objectives, policies, and restrictions
of each of the Funds and the corresponding Series Company Funds.
COMPARATIVE PERFORMANCE
The following tables show the actual and pro forma historic performance of
the Funds, for 12-month periods ended December 31, 1998, using various measures
appropriate for the Series Company Funds in which each Subaccount of the
Continuing Fund will solely invest if the Reorganization is approved. The pro
forma performance figures (shown in the right column) are derived from the
actual performance of each of the Series Company Funds as adjusted to reflect
the mortality and expense risk fees of the Continuing Fund, but do not reflect
sales charges, surrender or deferred sales loads and administration fees under
the Contracts since these charges and fees would not be imposed on the
Continuing Fund. In other words, the pro forma performance figures show how the
Reorganization might have affected historic performance if it had been
consummated at an earlier time. Although past performance is no guarantee of
future results, Fund Voters may wish to compare this pro forma performance of
the Continuing Fund with the actual performance of the Funds (shown in the left
column of performance figures)(6):
<TABLE>
<CAPTION>
FUND C SUBACCOUNT C
(actual) (pro forma)
<S> <C> <C>
YIELD AND EFFECTIVE YIELD
(for periods ended December 31, 1998)
Yield (7-day period) 3.30% 3.64%
Effective Yield (7-day period) 3.35% 3.71%
</TABLE>
- ------------------------
(6) Average annual total return for Funds A and B was impacted by the necessity
of holding an amount of assets in cash in order to handle redemptions, and by
the inability of these Funds to reinvest dividends and capital gains in the
stock market due to these Funds' cash outflow.
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
AVERAGE ANNUAL TOTAL RETURN (for periods
ended December 31, 1998) FUND A SUBACCOUNT A
(actual) (pro forma)
One Year 24.99% 28.43%
Five Years 18.08% 23.74%
Ten Years 14.48% 18.47%
FUND B SUBACCOUNT B
(actual) (pro forma)
One Year 33.08% 28.43%
Five Years 20.53% 23.74%
Ten Years 16.33% 18.47%
</TABLE>
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
- --------------------------------------------------------------------------------
INFORMATION ON THE FUNDS AND THE SERIES COMPANY
The Board of Directors of The Franklin established each of the Funds as a
"separate account" by resolutions pursuant to the provisions of the Illinois
Insurance Code. The Franklin established Fund A on November 5, 1969, Fund B on
April 1, 1970, and Fund C on July 23, 1981.
Under the provisions of the Illinois Insurance Code: (1) the income, gains
and losses of each Fund are credited to or charged against the amounts allocated
to the Fund in accordance with the terms of the respective Contracts, without
regard to The Franklin's other income, gains or losses; and (2) the assets of
each Fund are not chargeable with liabilities arising out of The Franklin's
other business activities.
Each Fund is registered with the Securities and Exchange Commission under
the 1940 Act as an open-end, diversified management investment company -- a type
of separate account known as a "managed account." (Securities and Exchange
Commission registration does not involve supervision of the management or the
investment practices or policies of the investment company.) The Franklin no
longer offers new Contracts through the Funds. Additional information about
each Fund is contained in the Fund's prospectus (which accompanies this Proxy
Statement/Prospectus as either Appendix B, C, or D and is incorporated herein by
reference), and in the Fund's statement of additional information referred to in
the Fund's prospectus.
VALIC incorporated the Series Company in Maryland on December 7, 1984. The
Series Company is registered with the Securities and Exchange Commission as an
open-end management investment company. The Series Company offers its shares of
common stock exclusively to variable annuity and variable life insurance
separate accounts of VALIC and its affiliated insurance companies. As a
"series" type of investment company, the Series Company issues distinct series
of shares, each of which represents an interest in a separate diversified
portfolio or "pool" of investments. Additional
27
<PAGE>
information is contained in the prospectus for the Series Company (which
accompanies this Proxy Statement/Prospectus as Appendix E and is incorporated
herein by reference), and in the statement of additional information referred to
in the prospectus.
MANAGEMENT OF THE FUNDS AND THE SERIES COMPANY
Each Fund is managed by a Board of Managers. The Franklin acts as
investment manager for each Fund under an investment management agreement
between each Fund and The Franklin. For a complete discussion of each Fund's
investment advisory arrangements, see the respective prospectuses of the Funds
which accompany this Proxy Statement/Prospectus as Appendices B, C and D.
The Series Company is managed by a Board of Directors. VALIC serves as
investment adviser for all of the portfolios currently offered by the Series
Company. Bankers Trust serves as investment sub-adviser to the Stock Index
Fund. For a more complete discussion of the Series Company Funds' investment
advisory arrangements, see the Series Company prospectus which accompanies this
Proxy Statement/Prospectus as Appendix E.
At such time as the Reorganization takes effect, The Franklin's investment
management agreement with each Fund will end, since the Subaccounts of the
Continuing Fund will then invest only in shares of the specified Series Company
Funds. Because each Subaccount of the Continuing Fund will invest in either the
Stock Index Fund or the Money Market Fund and the Continuing Fund will not make
any direct investments in securities, the Continuing Fund will have no
discretion in investment decisions and no need for investment management or
advice.
Pursuant to Investment Advisory Agreements dated September 30, 1987 and May
1, 1992, respectively, VALIC serves as investment adviser for the Money Market
Fund and the Stock Index Fund. VALIC is a stock life insurance company
organized on May 1, 1969 under the Texas Insurance Code. VALIC's primary
business consists of offering fixed and variable (and combinations thereof)
retirement annuity contracts. VALIC is an indirect wholly owned subsidiary of
American General Corporation, and an affiliate of The Franklin. VALIC's
principal business address is 2929 Allen Parkway, Houston, Texas 77019. VALIC
is a registered investment adviser under the Investment Advisers Act of 1940, as
amended.
The Series Company's Investment Advisory Agreements terminate automatically
in the event of assignment. The Investment Advisory Agreements also may be
terminated as to any Series Company Fund at any time without the payment of any
penalty by the Series Company's Board of Directors, by vote of a majority of a
Series Company Fund's outstanding voting securities, or by VALIC, on not more
than 60 days' written notice, nor less than 30 days' written notice, or upon
such shorter notice as may be mutually agreed upon. Otherwise, the Investment
Advisory Agreements will continue in force with respect to any Series Company
Fund so long as its continuance is approved at least annually by
- the Series Company's Board of Directors, OR a majority of that Series
Company Fund's outstanding voting securities (as defined in the 1940
Act), AND
- the affirmative vote of a majority of the members of the Series
Company's Board of Directors who are not parties to the agreement or
"interested persons" of any such party (as defined in the 1940 Act).
28
<PAGE>
In general, Bankers Trust, the investment sub-adviser to the Stock Index
Fund, performs similar investment advisory services for the Stock Index Fund as
The Franklin currently does for the Funds. Bankers Trust has day-to-day
responsibility for making investment decisions and placing investment orders for
the Stock Index Fund. Bankers Trust is also responsible for making sure that
purchases and sales of Stock Index Fund investments are made in a manner
consistent with the current investment objective and policies of the Stock Index
Fund.
Bankers Trust uses its best efforts to seek to execute portfolio
transactions at prices that are advantageous to the Stock Index Fund and at
commission rates that are reasonable in relation to the benefits received.
Bankers Trust will attempt to achieve this result by selecting broker-dealers to
execute transactions on the basis of: the size and type of the transaction; the
nature and character of the markets for the security to be purchased or sold;
the execution efficiency, settlement capability, and financial condition of the
broker-dealer; the broker-dealer's execution services rendered on a continuing
basis; and the reasonableness of any commissions. The availability of research
or other services or payment of Stock Index Fund expenses may also be considered
in selecting broker-dealers.
ORGANIZATION AND OPERATION OF THE SERIES COMPANY FUNDS
CHARACTERISTICS OF SERIES COMPANY SHARES. Shares issued by the Series
Company are divided into separate series representing interests in separate
portfolios. Each issued and outstanding share of a series is entitled to
participate equally in dividends and distributions from such series and in the
net assets of such series (I.E., the assets remaining after satisfaction of
outstanding liabilities) upon a liquidation or dissolution. For these purposes,
and for purposes of determining the purchase and redemption prices of shares,
any assets which are not clearly allocable to a particular series will be
allocated in the manner determined by the Series Company's Board of Directors.
Accrued liabilities that are not allocable to one or more series will generally
be allocated among the portfolios in proportion to their relative net assets
before adjustment for such unallocated liability. In the event that any series
incurred liabilities in excess of its assets, the other series could be liable
for such excess. Similarly, each Subaccount of the Continuing Fund could
perhaps be liable for claims arising out of another Subaccount's operations.
The Series Company's authorized capital consists of 13,000,000,000 shares
of capital stock. The Series Company has authorized the issuance of
1,000,000,000 shares by each of the Stock Index Fund and the Money Market Fund.
Shares currently entitle their holders to one vote per share; however, separate
votes will be taken by each series on matters affecting an individual series.
The Series Company is not required to hold shareholder meetings annually,
although shareholder meetings may be called for purposes such as electing or
removing Directors, changing fundamental investment policies, or approving
certain agreements.
DIVIDENDS, DISTRIBUTIONS, AND TAXES. Each series of the Series Company
intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") so
that it will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to qualify as a regulated investment
company and avoid being subject to federal income or excise taxes, each series
intends to distribute substantially all of its net investment income and net
realized capital gains within each calendar year as well as on a fiscal year
basis, and intends to comply with other tax rules applicable to regulated
investment companies. Income and capital gains distributions are reinvested in
additional shares of the series. This is done to preserve the tax-advantaged
status of the variable contracts that invest in the particular series. The
Money Market Fund may distribute any net realized short-term capital gains once
a year or more often as necessary, to maintain its net asset value at
29
<PAGE>
$1.00. The Money Market Fund does not anticipate distributing long-term capital
gains. Such distributions to The Franklin in respect of the Subaccounts of the
Continuing Fund will be reinvested in additional full and fractional shares of
the Series Company Fund to which they relate. Shares of each Series Company
Fund which are purchased with reinvested distributions paid by such Fund will be
held in the corresponding Subaccount of the Continuing Fund, and will be
appropriately credited to the investment performance of that Subaccount for the
benefit of Contract Owners.
To qualify for treatment as a regulated investment company, each Series
Company Fund must, among other things, derive in each taxable year at least 90%
of its gross income from certain categories of income, including dividends,
interest, and gains from the sale or other disposition of "securities";
diversify its portfolio assets; and distribute substantially all of its earnings
to shareholders. Each series will be treated as a separate entity for federal
income tax purposes. Therefore, the investments and results of the Series
Company Funds will not be aggregated for purposes of determining whether they
meet the foregoing requirements.
Although each Series Company Fund intends to operate in such a way that it
will have no federal income tax liability, if any such liability is nevertheless
incurred, the investment performance of such Fund would be adversely affected,
to the detriment of Contract Owners. This risk does not currently exist for
Contract Owners, since the Funds, unlike the Series Company Funds, need not
qualify as a regulated investment company. Indeed, the Funds are not treated
for tax purposes as an entity separate from The Franklin, which is taxed as an
insurance company under different provisions of the Code.
VOTING OF SHARES. The current voting procedures with respect to the Funds
are set forth under "General Information Regarding Proxy Solicitation," above.
Each share of each series of the Series Company is currently entitled to
one vote, and the votes of all series are cast on an aggregate basis except on
matters where the interests of the series differ. Where the interests of the
series differ, the voting is on a series-by-series basis. Approval or
disapproval by the shareholders in one Series Company Fund on such a matter
would not generally be a prerequisite of approval or disapproval by shareholders
in another Series Company Fund; and shareholders in a Series Company Fund not
affected by a matter generally would not be entitled to vote on that matter.
Examples of matters which would require a series-by-series vote are changes in a
fundamental investment policy of a particular Series Company Fund and approval
of an investment advisory agreement for a particular Series Company Fund.
If the Fund Voters in each Fund approve the Reorganization, The Franklin
will offer Contract Owners the opportunity to instruct The Franklin as to how
the Series Company Funds' shares allocable to their Contracts and held by The
Franklin in the Continuing Fund will be voted. The number of shares held in
each Subaccount of the Continuing Fund deemed attributable to each Contract
Owner for this purpose will be determined by dividing the total value of the
Contract's accumulation units (or, after annuity payments commence, the amount
of Contract reserves) allocable to that Subaccount by the net asset value of one
share of the corresponding Series Company Fund as of the record date.
Fractional votes will be counted. Shares of the Series Company Funds in any
Subaccount that are not attributable to the Contracts or for which no voting
instructions are timely received by The Franklin will be voted in the same
proportion as the shares for which voting instructions are timely received under
the Contracts. Thus, although voting instructions will be reflected somewhat
differently after the Reorganization than before, The Franklin believes that
this will not result in any significant diminution of Contract Owners' voting
privileges.
30
<PAGE>
Notwithstanding the foregoing, The Franklin anticipates that the
Reorganization will result in dilution of the voting influence which Contract
Owners have with respect to the funding medium for their Contracts. This
dilution is attributable to the fact that other separate accounts have voting
interests in the Series Company Funds, and shares of the Series Company Funds
which are held in separate accounts of insurance companies other than The
Franklin will be voted in accordance with instructions of the owners of policies
or contracts issued by such other companies.
CERTAIN OWNERSHIP INTERESTS. As of December 31, 1998, The Franklin owned
no Contract participating in the investment experience of Fund A, Fund B, or
Fund C, respectively. As of December 31, 1998, no member of the Board of
Managers nor any officer of any Fund owned any Contract participating in the
investment experience of Fund A, Fund B, or Fund C.
SALE OF THE CONTRACTS AND SERIES COMPANY SHARES
The Contracts were sold by The Franklin's agents, who were licensed to sell
variable annuities and were registered representatives of Franklin Financial
Services Corporation ("Franklin Financial"). Franklin Financial is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), is a member of the National Association of Securities Dealers, Inc.
("NASD"), and was the principal underwriter of the Funds. The Contracts are no
longer being sold; however, The Franklin continues to accept additional
Stipulated Payments in accordance with contractual provisions. The Franklin
currently does not intend to issue new Contracts following the consummation of
the Reorganization.
Shares in each Series Company Fund are offered only to registered and
unregistered separate accounts of VALIC and its affiliates, or employee thrift
plans maintained by VALIC or American General Corporation. The Variable Annuity
Marketing Company ("VAMCO") serves as the Series Company's distributor. VAMCO
is registered as a broker-dealer under the 1934 Act, and is a member of the
NASD. VAMCO accepts orders for shares at their net asset value, as no sales
commission or load is charged.
DEDUCTIONS, CHARGES, FEES, AND EXPENSES
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS.
If the Fund Voters for each Fund approve the Reorganization, certain
Fund annual expenses, such as the investment management fee, will not be
incurred directly by the Continuing Fund but, in effect, will be replaced by
the Series Company Funds' fees and expenses.(7) Other deductions and charges,
such as the mortality and expense risk fees, will continue to apply after the
Reorganization. In addition, the Contracts' sales loads, surrender or
deferred sales charges, and administration fees were waived beginning in
October 1998. The deductions and charges that remain applicable after the
Reorganization are described below.
The Franklin offered two types of Contracts through each Fund:
- Contracts under which annuity payments to the annuitant commence
immediately ("immediate variable annuities"). Contract Owners could
only purchase immediate variable annuities with a single payment to
The Franklin.
- -----------------------
(7) The Franklin will implement an expense limitation whereby each
Subaccount's total annual expenses (as a percentage of average net assets)
after the Reorganization, will not exceed the corresponding Fund's total
annual expenses (as a percentage of average net assets) for the year ended
December 31,1998.
31
<PAGE>
- Contracts under which annuity payments to the annuitant commence in
the future ("deferred variable annuities"). Contract Owners could
purchase deferred variable annuities with either periodic payments or
single payments to The Franklin.
CONTRACTS ISSUED THROUGH FUND A. The Contracts offered through Fund A
("Fund A Contracts") were sold for use in connection with certain qualified
plans and trusts accorded special tax treatment or as individual retirement
annuities under the Internal Revenue Code (the "Code") as follows:
- in connection with qualified employee pension and profit-sharing
trusts described in Section 401(a) and tax-exempt under Section 501(a)
of the Code, and qualified annuity plans described in Section 403(a)
of the Code;
- in connection with qualified pension, profit-sharing and annuity plans
established by self-employed persons;
- in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section
403(b) of the Code; or
- as Individual Retirement Annuities described in Section 408(b) of the
Code, including Simplified Employee Pensions described in Section
408(k) of the Code.
CONTRACTS ISSUED THROUGH FUND B. The Contracts offered through Fund B
("Fund B Contracts") were designed primarily to assist in retirement planning
for individuals. Fund B Contracts were not designed for use in connection with
employer-related plans or qualified plans and trusts accorded special tax
treatment under the Code.
CONTRACTS ISSUED THROUGH FUND C. The Contracts offered through Fund C
("Fund C Contracts") were designed primarily to assist in retirement planning
for individuals. Fund C Contracts were sold for use as individual retirement
annuities or in connection with trusts and retirement or deferred compensation
plans which may or may not qualify for favorable tax treatment under the Code.
Tax-Qualified Fund C Contracts were sold for use in the same markets that were
available under Fund A Contracts.
PREMIUM TAXES. At the time any premium taxes are payable by The Franklin
on the consideration received from the sale of the Contracts, the amount thereof
will be deducted from the Stipulated Payments. Premium taxes ranging up to 5%
of each payment are charged by various jurisdictions in which The Franklin is
transacting business and in which it has offered Fund A Contracts, Fund B
Contracts, and Fund C Contracts.
MORTALITY AND EXPENSE RISK FEES. The Franklin assumes the risk that
annuity payments will continue for a longer period than anticipated because the
annuitant lives longer than expected, and also assumes the risk that the
administration deduction may be insufficient to cover the actual administration
expenses under the Contracts. For assuming these risks, The Franklin imposes a
daily charge against the value of the accumulation unit and the annuity unit.
For Fund A Contracts and Fund B Contracts, this charge is at the combined annual
rate of 1.002% (.002745% on a daily basis). The Franklin will not increase this
charge regardless of the actual mortality and expense experience. For assuming
the mortality and expense risks under Fund C Contracts, The Franklin imposes a
daily charge against the value of the accumulation unit and the annuity unit at
the current combined annual rate of 1.065%
32
<PAGE>
(.002918% on a daily basis). The Franklin may increase this charge under Fund C
Contracts at any time up to a maximum of 1.750%.
FEES AND EXPENSES OF THE SERIES COMPANY FUNDS
INVESTMENT ADVISORY FEE. Just as each Fund (prior to the
Reorganization) is responsible for paying an investment management fee, each
Series Company Fund is responsible for paying an investment advisory fee.
Under the Investment Advisory Agreements, the Series Company retains VALIC:
- to manage the investment of the assets of the Series Company Funds;
- to maintain a trading desk; and
- to place orders for the purchase and sale of portfolio securities.
VALIC also provides other services including furnishing the services of
personnel the Series Company requires; preparing any reports and statements
required by law; and conducting any other activity that the Series Company may
need to continue operations.
OTHER EXPENSES. The Series Company pays all expenses not specifically
assumed by VALIC under the Investment Advisory Agreements. Examples of the
expenses that the Series Company pays include: transfer agency fees; custodial
fees; fees of outside legal and auditing firms; the costs of shareholder
reports; and the expenses of servicing shareholder accounts. The Series Company
allocates investment advisory fees, Securities and Exchange Commission filing
fees, interest expenses and state filing fees to the series of the Series
Company that incurs such charges, and allocates all other expenses among the
separate series based on the net assets of each series in relation to the Series
Company's net assets.
SUPPLEMENTARY FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS FOR THE FUNDS. As a supplement to the condensed
financial information for each Fund contained in the respective Fund's
prospectus (accompanying this Proxy Statement/Prospectus as Appendices B, C, and
D), the following data are presented for the year ended December 31, 1998:
33
<PAGE>
SELECTED DATA PER ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD
(for the year ended December 31, 1998)
<TABLE>
<CAPTION>
FUND A FUND B FUND C
<S> <C> <C> <C>
PER ACCUMULATION UNIT DATA:
Investment income ($) 1.72 1.78 1.20
Expenses ($) 1.54 1.78 0.34
----- ------ -----
Net investment income ($) 0.18 0.00 0.86
Net realized and unrealized gain on investments($) 24.42 36.59 --
----- ------ -----
Net increase in accumulation unit value ($) 24.60 36.59 0.86
Accumulation unit value at beginning of period($) 98.43 110.59 23.73
----- ------ -----
Accumulation unit value at end of period ($) 123.03 147.18 24.59
RATIOS:
Ratio of expenses to average net assets (%) 1.44 1.44 1.44
Ratio of net investment income to average net
assets (%) 0.17 -- 3.57
Portfolio turnover rate (%) 1.42 0.87 --
Number of accumulation units outstanding at end
of period 109,896 13,839 62,851
</TABLE>
FINANCIAL HIGHLIGHTS FOR THE SERIES COMPANY FUNDS. The following data are
presented for the year ended December 31, 1998 and supplement the complete
fiscal years of financial highlights for the Series Company Funds contained in
the prospectus accompanying this Proxy Statement/Prospectus as Appendix E:
STOCK INDEX FUND AND MONEY MARKET FUND
SELECTED DATA PER SHARE OUTSTANDING THROUGHOUT THE PERIOD
(for the year ended December 31, 1998)
<TABLE>
<CAPTION>
STOCK INDEX MONEY
FUND MARKET FUND
<S> <C> <C>
PER SHARE DATA
Net asset value, beginning of period ($) 29.70 1.00
Income from investment operations:
Net investment income ($) 0.19 0.04
Net realized and unrealized gain on investment
transactions ($) 7.99 --
34
<PAGE>
<CAPTION>
STOCK INDEX MONEY
FUND MARKET FUND
<S> <C> <C>
Total from investment operations ($) 8.18 0.04
Less distributions from:
Net investment income (0.19) (0.04)
Net realized gains on investment transactions (0.15) --
--------- -------
Total distributions (0.34) (0.04)
--------- -------
Net asset value, end of period ($) 37.54 1.00
TOTAL RETURN (%) 28.43 5.15
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 4,100,923 273,628
Ratio of operating expenses, to average net assets (%) 0.31 0.55
Ratio of net investment income to average net assets (%) 1.22 5.07
Portfolio turnover rate (%) 6 --
</TABLE>
AVAILABILITY OF CERTAIN OTHER INFORMATION
The Funds and the Series Company are subject to various reporting and
filing requirements pursuant to statutes administered by the Securities and
Exchange Commission. You can inspect and copy the balance of this registration
statement, of which this Proxy Statement/Prospectus forms a part, as well as
reports, proxy statements, and other information filed with the Securities and
Exchange Commission by the Funds or the Series Company at the public reference
facilities maintained by the Securities and Exchange Commission at: 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may obtain copies of such material from the
Securities and Exchange Commission at prescribed rates by writing to the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
THE BOARD OF MANAGERS OF EACH OF THE FUNDS RECOMMENDS A VOTE FOR THE
REORGANIZATION.
OTHER MATTERS
The Board of Managers of each Fund knows of no other matters which are
likely to be brought before the Special Meetings. In the event any other
matters do properly come before the Special Meetings, however, the persons named
in the enclosed proxy will vote the proxies in accordance with their best
judgment.
35
<PAGE>
PROXY OF CONTRACT OWNER
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF CONTRACT
OWNERS OF FRANKLIN LIFE VARIABLE ANNUITY FUND A TO BE HELD ON
April 8, 1999
[Contract Owner] Proxy Number:
[Address] ----------------------
[City, State, Zip Code] Contract Number:
--------------------
Units:
----------------
The undersigned Contract Owner of Franklin Life Variable Annuity Fund A
(the "Fund"), having received Notice of the Special Meeting of Contract
Owners of the Fund and the Proxy Statement/Prospectus accompanying such
Notice, each dated March 1, 1999, hereby constitutes and appoints Robert G.
Spencer and Elizabeth E. Arthur, and each of them, true and lawful attorneys
or attorney of the undersigned, with power of substitution, to attend and to
cast all votes entitled to be cast by the undersigned, for and in the name,
place and stead of the undersigned, at the Special Meeting of Contract Owners
of the Fund to be held on April 8, 1999 at 1:00 p.m., Central Standard Time,
at The Franklin Life Insurance Company's home office at #1 Franklin Square,
Springfield, Illinois 62713, and at any and all adjournments thereof, with
all powers the undersigned would possess if personally present.
All previous proxies given with respect to all votes entitled to be cast by
the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL
VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR
EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be
marked FOR each proposal. This proxy may be revoked at any time prior to the
Special Meeting by executing a subsequent proxy, or by notifying the Secretary
of the Fund in writing, or by voting in person at the Special Meeting.
Please mark, sign, date, and return all proxy forms promptly in the
enclosed envelope. Please sign exactly as your name appears on this form. To
vote on the proposal, using blue or black ink, indicate your choice by marking
an "X" in the appropriate box as follows: /X/
THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED.
- --------------------------------------------------------------------------------
For Against Abstain
- --------------------------------------------------------------------------------
1. Proposal to approve an Agreement and Plan of
Reorganization and related transactions whereby: / / / / / /
(1) Franklin Life Variable Annuity Fund A,
presently a management investment company, will
be renamed and restructured as a single unit
investment trust comprising three investment
divisions and will be combined with Franklin
Life Variable Annuity Fund B and Franklin Life
Money Market Variable Annuity Fund C; and (2)
each investment division will invest exclusively
in shares of either the Stock Index Fund or the
Money Market Fund of the American General Series
Portfolio Company.
- --------------------------------------------------------------------------------
Signature: Signature:
------------------------ ---------------------------
Dated:
----------------------
<PAGE>
PROXY OF CONTRACT OWNER
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF CONTRACT
OWNERS OF FRANKLIN LIFE VARIABLE ANNUITY FUND B TO BE HELD ON
April 8, 1999.
[Contract Owner] Proxy Number:
[Address] ----------------------
[City, State, Zip Code] Contract Number:
--------------------
Units:
----------------
The undersigned Contract Owner of Franklin Life Variable Annuity Fund B
(the "Fund"), having received Notice of the Special Meeting of Contract
Owners of the Fund and the Proxy Statement/Prospectus accompanying such
Notice, each dated March 1, 1999, hereby constitutes and appoints Robert G.
Spencer and Elizabeth E. Arthur, and each of them, true and lawful attorneys
or attorney of the undersigned, with power of substitution, to attend and to
cast all votes entitled to be cast by the undersigned, for and in the name,
place and stead of the undersigned, at the Special Meeting of Contract Owners
of the Fund to be held on April 8, 1999 at 1:00 p.m., Central Standard Time,
at The Franklin Life Insurance Company's home office at #1 Franklin Square,
Springfield, Illinois 62713, and at any and all adjournments thereof, with
all powers the undersigned would possess if personally present.
All previous proxies given with respect to all votes entitled to be cast by
the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL
VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR
EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be
marked FOR each proposal. This proxy may be revoked at any time prior to the
Special Meeting by executing a subsequent proxy, or by notifying the Secretary
of the Fund in writing, or by voting in person at the Special Meeting.
Please mark, sign, date, and return all proxy forms promptly in the
enclosed envelope. Please sign exactly as your name appears on this form. To
vote on the proposal, using blue or black ink, indicate your choice by marking
an "X" in the appropriate box as follows: /X/
THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED.
- --------------------------------------------------------------------------------
For Against Abstain
- --------------------------------------------------------------------------------
1. Proposal to approve an Agreement and Plan of
Reorganization and related transactions whereby: / / / / / /
(1) Franklin Life Variable Annuity Fund A,
presently a management investment company, will
be renamed and restructured as a single unit
investment trust comprising three investment
divisions and will be combined with Franklin
Life Variable Annuity Fund B and Franklin Life
Money Market Variable Annuity Fund C; and (2)
each investment division will invest exclusively
in shares of either the Stock Index Fund or the
Money Market Fund of the American General Series
Portfolio Company.
- --------------------------------------------------------------------------------
Signature: Signature:
------------------------ ---------------------------
Dated:
----------------------
<PAGE>
PROXY OF CONTRACT OWNER
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF CONTRACT
OWNERS OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C TO BE HELD ON
April 8, 1999.
[Contract Owner] Proxy Number:
[Address] ----------------------
[City, State, Zip Code] Contract Number:
--------------------
Units:
----------------
The undersigned Contract Owner of Franklin Life Money Market Variable
Annuity Fund C (the "Fund"), having received Notice of the Special Meeting of
Contract Owners of the Fund and the Proxy Statement/Prospectus accompanying
such Notice, each dated March 1, 1999, hereby constitutes and appoints Robert
G. Spencer and Elizabeth E. Arthur, and each of them, true and lawful
attorneys or attorney of the undersigned, with power of substitution, to
attend and to cast all votes entitled to be cast by the undersigned, for and
in the name, place and stead of the undersigned, at the Special Meeting of
Contract Owners of the Fund to be held on April 8, 1999 at 1:00 p.m., Central
Standard Time, at The Franklin Life Insurance Company's home office at #1
Franklin Square, Springfield, Illinois 62713, and at any and all adjournments
thereof, with all powers the undersigned would possess if personally present.
All previous proxies given with respect to all votes entitled to be cast by
the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL
VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR
EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be
marked FOR each proposal. This proxy may be revoked at any time prior to the
Special Meeting by executing a subsequent proxy, or by notifying the Secretary
of the Fund in writing, or by voting in person at the Special Meeting.
Please mark, sign, date, and return all proxy forms promptly in the
enclosed envelope. Please sign exactly as your name appears on this form. To
vote on the proposal, using blue or black ink, indicate your choice by marking
an "X" in the appropriate box as follows: /X/
THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED.
- --------------------------------------------------------------------------------
For Against Abstain
- --------------------------------------------------------------------------------
1. Proposal to approve an Agreement and Plan of
Reorganization and related transactions whereby: / / / / / /
(1) Franklin Life Variable Annuity Fund A,
presently a management investment company, will
be renamed and restructured as a single unit
investment trust comprising three investment
divisions and will be combined with Franklin
Life Variable Annuity Fund B and Franklin Life
Money Market Variable Annuity Fund C; and (2)
each investment division will invest exclusively
in shares of either the Stock Index Fund or the
Money Market Fund of the American General Series
Portfolio Company.
- --------------------------------------------------------------------------------
Signature: Signature:
------------------------ ---------------------------
Dated:
----------------------
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
FOR
FRANKLIN LIFE VARIABLE ANNUITY FUND A
FRANKLIN LIFE VARIABLE ANNUITY FUND B
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
OF
THE FRANKLIN LIFE INSURANCE COMPANY
This Agreement and Plan of Reorganization (the "Agreement"), is
entered into as of the 5th day of January, 1999, by and among The Franklin Life
Insurance Company ("The Franklin"), a stock life insurance company organized and
existing under the laws of the State of Illinois, Franklin Life Variable Annuity
Fund A ("Fund A"), Franklin Life Variable Annuity Fund B ("Fund B"), and
Franklin Life Money Market Variable Annuity Fund C ("Fund C").
WHEREAS, each of Fund A, Fund B, and Fund C (collectively, the
"Funds") is a managed separate account established and existing under the
insurance laws of the State of Illinois, is registered with the Securities and
Exchange Commission (the "Commission") as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and is the funding vehicle for certain variable annuity contracts
issued by The Franklin (the "Contracts"); and
WHEREAS, Fund A and Fund B each invest primarily in common stocks to
achieve the investment objective of long-term appreciation of capital through
investment appreciation and the retention and reinvestment of income, and Fund C
invests in short-term money market securities to achieve the investment
objective of long-term compounding of income through retention and reinvestment
of income from investments in a diversified portfolio of short-term money market
securities yielding a high level of current income to the extent consistent with
the preservation of capital and the maintenance of liquidity; and
WHEREAS, the American General Series Portfolio Company (the "Series
Company") is a mutual fund that is currently comprised of several investment
portfolios, including the Stock Index Fund and the Money Market Fund (each, a
"Portfolio"), and is registered with the Commission as an open-end management
investment company under the 1940 Act; and
WHEREAS, the Stock Index Fund tracks the Standard & Poor's 500
Index-Registered Trademark- ("S&P 500") to achieve the investment objective of
long-term capital growth through investment in common stocks that, as a group,
are expected to provide investment results closely corresponding to the
performance of the S&P 500; and the Money Market Fund seeks liquidity,
protection of capital and current income through investments in short-term money
market instruments; and
WHEREAS, the Series Company serves as an investment vehicle for
variable annuity contracts or variable life insurance policies issued by The
Variable Annuity Life Insurance
1
<PAGE>
Company ("VALIC") or one of its affiliates, or employee thrift plans maintained
by VALIC or American General Corporation; and
WHEREAS the Boards of Managers of each Fund has considered and
approved the actions contemplated by this Agreement and has authorized that Fund
to enter into this Agreement; and
WHEREAS, the Board of Directors of The Franklin has considered and
approved the actions contemplated by this Agreement and has authorized The
Franklin to enter into this Agreement;
NOW THEREFORE, in consideration of the mutual promises made herein,
the parties hereto agree as follows:
ARTICLE I: CLOSING DATE
SECTION 1.01. The reorganization contemplated by this Agreement shall
be effective on such date as may be mutually agreed upon in writing by all
parties to this Agreement (the "Closing Date"). The time on the Closing Date as
of which the reorganization is consummated is referred to hereinafter as the
"Effective Time."
SECTION 1.02. The parties agree to use their best efforts to obtain
all regulatory approvals and approvals of persons entitled to vote with respect
to each Fund ("Fund Voters"), and to perform all other acts necessary or
desirable to complete the reorganization as of the Closing Date.
ARTICLE II: TRANSACTIONS
SECTION 2.01. Prior to the Effective Time, Fund A will be renamed as
"Franklin Life Variable Annuity Fund" or such other name specified by the Board
of Managers of Fund A (hereafter, the "Continuing Fund"), and will be
reorganized into a single unit investment trust separate account comprising
three investment divisions ("Subaccount A," "Subaccount B," and "Subaccount C").
SECTION 2.02. Prior to the Effective Time: (1) all of the assets
(including securities and other investments held or in transit, receivables for
sold investments, dividends, interest receivables and any other assets) of Fund
A will be converted into cash and transferred to Subaccount A of the Continuing
Fund; (2) all of the assets (including securities and other investments held or
in transit, receivables for sold investments, dividends, interest receivables
and any other assets) of Fund B will be converted into cash and transferred to
Subaccount B of the Continuing Fund; and (3) all of the assets (including
securities and other investments held or in transit, receivables for sold
investments, dividends, interest receivables and any other assets) of Fund C
will be converted into cash and transferred to Subaccount C of the Continuing
Fund.
2
<PAGE>
SECTION 2.03. As of the Effective Time, The Franklin, on behalf of
the Continuing Fund, will transfer all cash (except for a minimal amount needed
to keep bank accounts open) of: (1) Subaccount A to the Stock Index Fund; (2)
Subaccount B to the Stock Index Fund; and (3) Subaccount C to the Money Market
Fund.
SECTION 2.04. In return for the cash received on behalf of Subaccount
A and Subaccount B of the Continuing Fund, The Franklin will receive from the
Series Company, on behalf of each such Subaccount, shares in the Stock Index
Fund. In return for the cash received on behalf of Subaccount C, The Franklin
will receive from the Series Company, on behalf of such Subaccount, shares in
the Money Market Fund. The number of shares in each Portfolio of the Series
Company to be received shall be determined by dividing (1) the amount of cash
transferred on behalf of each Subaccount of the Continuing Fund, by (2) the per
share value of the corresponding Portfolio of the Series Company's shares
(computed in the manner set forth in the currently effective registration
statement for the Series Company) as of the Closing Date or such other date
required by law.
SECTION 2.05. As of the Effective Time, The Franklin shall cause the
shares of the Series Company it receives pursuant to Section 2.04 of this
Agreement to be duly and validly recorded and held on its records as assets of
the Continuing Fund, such that the interest of each owner of a Contract
("Contract Owner") in each Subaccount of the Continuing Fund after the Closing
Date will then be equivalent in value to that Contract Owner's former interest
in each Fund. The Franklin shall take all action necessary to ensure that such
interests in the Continuing Fund, immediately following the Effective Time, are
duly and validly recorded on the Contract Owner's individual account records.
SECTION 2.06. The Series Company's shares to be issued hereunder may,
upon instructions from The Franklin, be issued in open account form by book
entry without the issuance of certificates or may be represented by
certificates.
SECTION 2.07. If, at any time after the Closing Date, the Continuing
Fund or The Franklin shall determine that any further action is necessary or
desirable to complete the reorganization contemplated by this Agreement, the
appropriate entity or entities shall take all such actions which are considered
reasonable and necessary to complete the reorganization.
SECTION 2.08. Following the Closing Date: (1) The Franklin will not
provide investment advisory services to the Continuing Fund and, therefore, will
not charge the Continuing Fund for investment advisory services; and (2) The
Franklin will continue to charge the Continuing Fund for mortality and expense
risks assumed by The Franklin and for any premium taxes with respect to the
Contracts.
3
<PAGE>
ARTICLE III: WARRANTIES AND CONDITIONS
SECTION 3.01. The Franklin and the Funds, as appropriate, make the
following representations and warranties, which shall survive the Closing Date
and bind their respective successors and assigns (I.E., the Continuing Fund):
(a) The Franklin and the Funds are validly organized and established,
and in good standing under the laws of the State of Illinois, and are fully
empowered and qualified to carry out their business in all jurisdictions where
they do so, including to enter into this Agreement and to effect the
reorganization contemplated hereby (provided that all necessary approvals
referred to in Section 3.02 of this Agreement are obtained).
(b) Each Fund is duly registered and in good standing as an
investment company under the 1940 Act.
(c) The Contracts are validly issued and non-assessable, and all of
the Contracts issued through each Fund have been offered and sold in material
compliance with applicable requirements of the federal securities laws.
(d) All corporate and other proceedings necessary and required to be
taken by or on the part of The Franklin and the Funds to authorize and carry out
this Agreement and to effect the reorganization have been duly and properly
taken.
(e) There are no suits, actions, or proceedings pending or threatened
against any party to this Agreement which, to its knowledge, if adversely
determined, would materially and adversely affect its financial condition, the
conduct of its business, or its ability to carry out its obligations hereunder.
(f) There are no investigations or administrative proceedings by the
Commission or by any insurance or securities regulatory body of any state or
territory or of the District of Columbia pending against any party to this
Agreement which, to its knowledge, would lead to any suit, action, or proceeding
that, if adversely determined, would materially and adversely affect its
financial condition, the conduct of its business, or its ability to carry out
its obligations hereunder.
(g) If any party to this Agreement becomes aware, prior to the
Effective Time, of any suit, action, or proceeding, of the types described in
paragraphs (e) or (f) above, instituted or commenced against it, such party
shall immediately notify and advise all other parties to this Agreement.
(h) Each party shall make available all information concerning itself
which may be required in any application, registration statement, or other
filing with a governmental body to be made by the parties to this Agreement, in
connection with any of the transactions contemplated by
4
<PAGE>
this Agreement and shall join in all such applications or filings, subject to
reasonable approval by its counsel. Each party represents and warrants that to
its knowledge all of such information so furnished shall be correct in all
material respects and that it shall not omit any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
(i) From the date of this Agreement through the Closing Date, each of
the Funds will conduct its business in accordance with such Fund's governing
Rules and Regulations and in substantial compliance with the Illinois Insurance
Laws and the terms of the Contracts issued through each Fund, and The Franklin
will conduct its business in accordance with its Bylaws and in substantial
compliance with the Illinois Insurance Laws.
(j) Except with respect to contracts entered into in connection with
the investment advisory services of the Funds which shall terminate on or prior
to the Closing Date, no party is engaged currently, and the execution, delivery
and performance of this Agreement by each party will not result, in a material
violation of any such party's charter, by-laws, or any material agreement,
indenture, instrument, contract, lease or other undertaking to which such party
is bound, and to such party's knowledge, the execution, delivery and performance
of this Agreement will not result in the acceleration of any obligation, or the
imposition of any penalty, under any material agreement, indenture, instrument,
contract, lease, judgment or decree to which any such party may be a party or to
which it is bound.
(k) This Agreement is a valid obligation of The Franklin and the
Funds and is legally binding upon them in accordance with its terms.
SECTION 3.02. The obligations of the parties hereunder shall be
subject to satisfaction of each of the following conditions:
(a) The representations contained herein shall be true as of and at
the Effective Time with the same effect as though made at such time, and such
parties shall have performed all obligations required by this Agreement to be
performed by each of them prior to such time.
(b) The Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act nor instituted any proceeding seeking
to enjoin consummation of the reorganization contemplated hereby.
(c) The appropriate parties shall have received orders from the
Commission providing such exemptions and approvals as they and their counsel
reasonably deem necessary, including exemptions from Section 17(a) of the 1940
Act, and shall have made all necessary filings, if any, with, and received all
necessary approvals from, state securities or insurance authorities.
(d) Fund A shall have filed with the Commission a registration
statement on Form N-14 under the Securities Act of 1933, as amended (the "1933
Act"), and such pre-effective amendments thereto as may be necessary or
desirable to effect the purposes of the reorganization;
5
<PAGE>
and the appropriate parties shall have taken all actions necessary for such
filings to become effective; and no reason shall be known by the parties which
would prevent the filings from becoming effective in a timely manner.
(e) At a meeting of Fund Voters called for such purpose (or any
adjournments thereof), a majority of the outstanding voting securities (as
defined in the 1940 Act and the rules thereunder) of each of the Funds, voting
separately, shall have voted in favor of approving this Agreement and the
reorganization contemplated hereby.
(f) Each party shall have furnished, as reasonably requested by any
other party, legal opinions, officers' certificates, certified copies of board
and committee resolutions, certificates of good standing or "all fees paid" or
similar certificates, and other closing documentation as may be appropriate for
a transaction of this type.
ARTICLE IV: COSTS
SECTION 4.01. The Franklin shall bear all expenses incurred by it and
by each of the Funds in connection with effecting the reorganization
contemplated by this Agreement (including, without limitation, any expenses
incurred by it and each of the Funds in connection with: actions taken pursuant
to Section 2.07 of this Agreement; preparation and filing of registration
statements, applications, and amendments thereto on behalf of any and all
parties hereto; all legal, accounting, and data processing services for The
Franklin and each of the Funds necessary to effect the reorganization; and all
expenses incurred in connection with liquidating the Funds' assets as described
in Section 2.02).
ARTICLE V: TERMINATION
SECTION 5.01. This Agreement may be terminated and the reorganization
abandoned at any time prior to the Effective Time, notwithstanding approval by
Fund Voters:
(a) by mutual consent of the parties hereto; or
(b) by any of the parties if any condition set forth in Section 3.02
of this Agreement has not been fulfilled by the other parties.
SECTION 5.02. At any time prior to the Effective Time, any of the
terms or conditions of this Agreement may be waived by the party or parties
entitled to the benefit thereof if such waiver will not have a material adverse
effect on the interests of Contract Owners.
6
<PAGE>
ARTICLE VI: GENERAL
SECTION 6.01. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 6.02. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of Illinois, without regard to its
principles of conflicts of law.
* * *
7
<PAGE>
IN WITNESS WHEREOF, as of the day and year first above written, each
of the parties has caused this Agreement to be executed on its behalf by its
Chairman, President, or Vice President and attested by its Secretary or
Assistant Secretary, all thereunto duly authorized.
THE FRANKLIN LIFE INSURANCE COMPANY
Attest:
/s/ Elizabeth E. Arthur By: /s/ William A. Simpson
- ------------------------------- ----------------------------------------
Title: Assistant Secretary Title: Chairman and Chief Executive
Officer
FRANKLIN LIFE VARIABLE ANNUITY FUND A
Attest:
/s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer
- ------------------------------- ----------------------------------------
Title: Secretary, Title: Chairman, Board of Managers
Board of Managers
FRANKLIN LIFE VARIABLE ANNUITY FUND B
Attest:
/s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer
- ------------------------------- ----------------------------------------
Title: Secretary, Title: Chairman, Board of Managers
Board of Managers
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY
FUND C
Attest:
/s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer
- ------------------------------- ----------------------------------------
Title: Secretary, Title: Chairman, Board of Managers
Board of Managers
8
<PAGE>
APPENDIX B
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PROSPECTUS
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(USED IN CONNECTION WITH QUALIFIED
TRUSTS OR PLANS OR AS INDIVIDUAL
RETIREMENT ANNUITIES) ISSUED BY
#1 Franklin Square
Springfield, Illlinois 62713
Telephone (800) 528-2011
THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE
ANNUITY CONTRACTS FOR USE IN CONNECTION WITH CERTAIN QUALIFIED PLANS AND TRUSTS
ACCORDED SPECIAL TAX TREATMENT OR AS INDIVIDUAL RETIREMENT ANNUITIES UNDER THE
INTERNAL REVENUE CODE (SEE "FEDERAL INCOME TAX STATUS", BELOW FOR MORE
INFORMATION). THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY
PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE
VARIABLE ANNUITY FUND A (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS.
THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM APPRECIATION OF
CAPITAL THROUGH INVESTMENT APPRECIATION AND THE RETENTION AND REINVESTMENT OF
INCOME. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. GENERALLY,
THE FUND'S INVESTMENTS WILL CONSIST OF EQUITY SECURITIES, MAINLY COMMON STOCKS.
- -------------------------------------------------------------------------------
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A
STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 37 OF THIS PROSPECTUS.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . 5
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . 8
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Description of the Separate Account. . . . . . . . . . . . . . . . . . 10
Deductions and Charges Under the Contracts . . . . . . . . . . . . . . 11
A. Sales and Administration Deductions. . . . . . . . . . . . . 11
B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . 11
C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . 12
D. Investment Management Service Charge . . . . . . . . . . . . 12
E. Transfers to Other Contracts . . . . . . . . . . . . . . . . 12
F. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 13
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
B. Deferred Variable Annuity Accumulation Period. . . . . . . . 15
C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . 22
Investment Policies and Restrictions of the Fund . . . . . . . . . . . 25
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . 27
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . 28
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . 29
B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . . 29
C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . 29
D. Individual Retirement Annuities. . . . . . . . . . . . . . . 30
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . 31
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . 34
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . 34
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . 35
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . 36
Table of Contents of Statement of Additional Information . . . . . . . 37
</TABLE>
- ------------------------------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE
FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR
FRANKLIN LIFE VARIABLE ANNUITY FUND A TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN ANY
AUTHORIZED SUPPLEMENTAL SALES MATERIAL.
2
<PAGE>
SPECIAL TERMS
The following is a glossary of certain terms used in this Prospectus:
ACCUMULATION UNIT--A measure used to determine the value of a Contract
Owner's interest in the Fund prior to the initial Annuity Payment Date.
ANNUITY PAYMENT DATE--The date the first monthly Annuity Payment is to be
made to the Variable Annuitant, and the same day of each month thereafter so
long as the annuity is due. Depending on the Settlement Option elected,
Annuity Payment Dates may occur on a periodic basis other than monthly.
ANNUITY PAYMENTS--Periodic payments made to a Variable Annuitant pursuant to
a Contract. In certain circumstances, Annuity Payments may be paid to a
Beneficiary after the death of a Variable Annuitant.
ANNUITY UNIT--A measure used to determine the value of Annuity Payments after
the first.
BENEFICIARY--The person or persons designated by the Contract Owner to whom
any payment due on death is payable.
CASH VALUE--The value of all Accumulation Units or Annuity Units attributable
to a Contract.
CODE--The Internal Revenue Code of 1986, as amended.
CONTRACT--An individual variable annuity contract issued by Franklin Life
Variable Annuity Fund A that is offered by this Prospectus.
CONTRACT ANNIVERSARY--An anniversary of the Effective Date of the Contract.
CONTRACT OWNER--Except in cases where the Contract is issued to a trustee of
a qualified employees' trust or pursuant to a qualified annuity plan, the
Contract Owner is the individual Variable Annuitant to whom the Contract is
issued. In cases where the Contract is issued to a trustee of a qualified
employees' trust or pursuant to a qualified annuity plan, the Contract Owner
will be respectively the trustee or the employer establishing such trust or
plan, and the employee named as the Variable Annuitant of such Contract is
referred to herein as the employee. When the term "Contract Owner" is used in
the context of voting rights, it includes the owners of all contracts which
depend in whole or in part on the investment performance of the Fund.
CONTRACT YEAR--Each year starting with the Effective Date and each Contract
Anniversary thereafter.
DEFERRED VARIABLE ANNUITY--An annuity contract which provides for Annuity
Payments to commence at some future date. Included are periodic payment
deferred contracts and single payment deferred contracts.
EFFECTIVE DATE--The date shown on the Schedule Page of the Contract as the
date the first Contract Year begins.
FIXED-DOLLAR ANNUITY--An annuity contract which provides for Annuity Payments
which remain fixed as to dollar amount throughout the Annuity Payment period.
HOME OFFICE--The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.
IMMEDIATE VARIABLE ANNUITY--An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.
3
<PAGE>
INDIVIDUAL RETIREMENT ANNUITY--An annuity contract described in Section
408(b) of the Code. Individual Retirement Annuities may also qualify as
Simplified Employee Pensions.
PERIODIC STIPULATED PAYMENT CONTRACT--An annuity contract which provides that
payments made to purchase the contract will be made in periodic instalments
rather than in a single sum.
QUALIFIED CONTRACTS--Contracts issued under Qualified Plans.
QUALIFIED PLANS--Retirement plans which receive favorable tax treatment under
the Code and which are described on page 9, below.
ROLLOVER CONTRIBUTION--A transfer pursuant to Sections 402(c), 403(a)(4),
403(b)(8) or 408(d)(3) of the Code.
SETTLEMENT OPTION OR OPTIONS--Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.
SIMPLIFIED EMPLOYEE PENSION--An Individual Retirement Annuity which meets the
additional requirements of Section 408(k) of the Code.
SINGLE STIPULATED PAYMENT CONTRACT--An annuity contract which provides that
the total payment to purchase the contract will be made in a single sum
rather than in periodic instalments. Included are single payment immediate
contracts and single payment deferred contracts.
STIPULATED PAYMENTS--The payment or payments provided to be made to The
Franklin under a Contract.
THE FRANKLIN--The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.
VALUATION DATE--Each date as of which the Accumulation Unit value is
determined. This value is determined on each day (other than a day during
which no Contract or portion thereof is tendered for redemption and no order
to purchase or transfer a Contract is received by the Fund) in which there is
a sufficient degree of trading in the securities in which the Fund invests
that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, as of the close of trading on
that day.
VALUATION PERIOD--The period commencing on a Valuation Date and ending on the
next Valuation Date.
VARIABLE ANNUITANT--Any natural person with respect to whom a Contract has
been issued and a Variable Annuity has been, will be or (but for death) would
have been effected thereunder. In certain circumstances, a Variable Annuitant
may elect to receive Annuity Payments on a fixed-basis or a combination of a
fixed and variable basis.
VARIABLE ANNUITY--An annuity contract which provides for a series of periodic
annuity payments, the amounts of which may increase or decrease as a result
of the investment experience of a separate account.
4
<PAGE>
TABLE OF DEDUCTIONS AND CHARGES
<TABLE>
<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of
purchase payments)
Single Stipulated Payment Contract 5.00%
Periodic Stipulated Payment Contract 6.00%
Administration Fee (as a percentage of purchase payments)
Single Stipulated Payment Contract 4.00% ($100
maximum)
Periodic Stipulated Payment Contract 3.00%
Annual Expenses
(as a percentage of average net assets)
Management Fees 0.44%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.10%
----
Total Annual Expenses 1.44%
</TABLE>
Example
<TABLE>
<CAPTION>
If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
Single Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
Periodic Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The Table of Deductions and Charges is intended to assist Contract Owners in
understanding the various fees and expenses that they bear directly or
indirectly. Additional deductions may be made from Stipulated Payments for any
premium taxes payable by The Franklin on the consideration received from the
sale of the Contracts. See "Premium Taxes," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," below. The example assumes that a single Stipulated Payment of
$1,000 is made at the beginning of the periods shown. (It should be noted that
The Franklin will not actually issue a Single Stipulated Payment Contract unless
the single payment is at least $2,500.) This assumption applies even with
respect to Periodic Stipulated Payment Contracts, which would normally require
additional payments. The example also assumes a constant investment return of 5%
and the expenses might be different if the return of the Fund averaged 5% over
the periods shown but fluctuated during such periods. The amounts shown in the
example represent the aggregate amounts that would be paid over the life of a
Contract if the Contract were surrendered at the end of the applicable time
periods.
5
<PAGE>
- -------------------------------------------------------------------------------
SUMMARY
THE CONTRACTS
The individual variable annuity contracts (the "Contracts") being offered
by this Prospectus are for use in connection with certain qualified plans and
trusts accorded special tax treatment under the Code or as Individual Retirement
Annuities. See "Federal Income Tax Status," below. The basic purpose of the
Contracts is to provide Annuity Payments which will vary with the investment
performance of Franklin Life Variable Annuity Fund A (the "Fund"). The Contracts
provide Annuity Payments for life commencing on an initial Annuity Payment Date
selected by the Contract Owner; other Settlement Options are provided. See
"Introduction," and "The Contracts," below. At any time within 10 days after
receipt of a Contract, the Contract Owner may return the Contract and receive a
refund of any premium paid on the Contract. See "Right to Revocation of
Contract," below.
THE FUND AND ITS INVESTMENT OBJECTIVES
The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term appreciation of capital
through investment appreciation and retention and reinvestment of income.
Generally, the Fund's investments will consist of equity securities, mainly
common stocks. The value of investments held in the Fund is subject to the risk
of changing economic conditions as well as the risk inherent in management's
ability to anticipate such changes. See "Investment Policies and Restrictions of
the Fund," below.
INVESTMENT ADVISER; PRINCIPAL UNDERWRITER
The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities and
income protection policies. Franklin Financial Services Corporation, a
wholly-owned subsidiary of The Franklin, is the principal underwriter for the
Fund. The Franklin is an indirect wholly-owned subsidiary of American General
Corporation. See "Investment Management Service Charge," and "Distribution of
the Contracts," below.
DEDUCTIONS AND CHARGES
The deductions and charges applicable to a Contract are illustrated in the
Table of Deductions and Charges that appears immediately before this Summary. In
the case of Periodic Stipulated Payment Contracts, a deduction equal to 6% of
each periodic payment is made for sales expenses and a deduction equal to 3% of
each such payment is made for administrative expenses. The combined deductions
amount to 9.89% of the net amount invested assuming no premium taxes are
applicable (6.59% for sales expenses and 3.30% for administrative expenses). In
the case of a Single Stipulated Payment Contract, a deduction equal to 5% of the
total single payment is made for sales expenses and a deduction equal to 4%
(with a maximum of $100) of such payment is made for administrative expenses
(for a combined total of 9%). In the case of the minimum Single Stipulated
Payment Contract sold, the combined deductions amount to 9.89% of the net amount
invested assuming no premium taxes are applicable (5.49% for sales expenses and
4.40% for administrative expenses). Any applicable state or local taxes on the
Stipulated Payments (currently, up to 5%) also are deducted from the single or
periodic Stipulated Payments. The amount remaining after deductions is allocated
to the Fund. See "Sales and Administration Deductions," "Transfers to Other
Contracts," and "Premium Taxes," below.
- -------------------------------------------------------------------------------
6
<PAGE>
- -------------------------------------------------------------------------------
The Contracts include The Franklin's undertaking that deductions for sales
and administrative expenses will not be increased regardless of the actual
expenses incurred, and that the Annuity Payments will be paid for the lifetime
of the Variable Annuitant (and, in the case of a joint and last survivor
annuity, for the joint lives of the persons specified) commencing on the
selected initial Annuity Payment Date based on the mortality assumptions
contained in the Contract, regardless of the actual mortality experience among
the Variable Annuitants. In exchange for these undertakings, a charge of 1.002%
of net asset value on an annual basis is made daily against the Fund (consisting
of 0.900% for The Franklin's assurances of annuity rates or mortality factors
and 0.102% for The Franklin's assurances of expense factors). A charge of 0.438%
of net asset value on an annual basis is also made daily against the Fund for
investment management services by The Franklin. The charges for annuity rate
assurances, expense assurances and investment management services thus aggregate
1.440% of net asset value on an annual basis. See "Mortality and Expense Risk
Charge," and "Investment Management Service Charge," below.
MINIMUM PERMITTED INVESTMENT
Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under which
the periodic Stipulated Payment is currently $10 ($120 on an annual basis). See
"Purchase Limits," below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," below), redeem all or part of the Contract and receive the
Cash Value (equal to the number of Accumulation Units credited to the part of
the Contract redeemed times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received) less federal
income tax withholding, if applicable. For information as to Accumulation Units,
see "Value of the Accumulation Unit," below. Subject to certain limitations, the
Contract Owner may elect to have all or a portion of the amount due upon a total
redemption of a Contract applied under certain Settlement Options or applied
toward the purchase of other annuity or insurance products offered by The
Franklin. Federal tax penalties may apply to certain redemptions. See
"Redemption," "Transfers to and from Other Contracts," "Settlement Options," and
"Federal Income Tax Status," below.
TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate Contracts if
Stipulated Payments are less than $120 in each of three consecutive Contract
Years (excluding the first Contract Year) and if the Cash Value is less than
$500 at the end of such three-year period. Different termination provisions
apply in the case of Individual Retirement Annuities. See "Termination by The
Franklin," below.
- -------------------------------------------------------------------------------
7
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
The financial information in this table for each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. This table should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $1.910 $ 1.685 $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ .235
Expenses 1.312 1.090 .875 .773 .773 .723 .654 .569 .528 .454
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Net Investment
income .598 .595 1.073 .635 .458 .341 .540 .757 .815 .781
Net realized and
unrealized gain
(loss) on
securities 16.346 11.690 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043
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Net change in
accumulation unit
value 16.944 12.285 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824
Accumulation unit
value:
Beginning of year 81.485 69.200 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004
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End of year $98.429 $81.485 $69.200 $53.988 $53.593 $53.023 $51.912 $37.134 $39.664 $31.828
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---------------------------------------------------------------------------------------------------
Ratio of expenses to
average net
assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net
investment
income to
average net
assets .66% .79% 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47%
Portfolio turnover
rate .70% 4.77% 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96%
Number of
accumulation
units outstanding
at end of year 124,714 139,945 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265
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</TABLE>
------------------------------------
FINANCIAL STATEMENTS
The financial statements for the Fund and The Franklin and the reports of
the independent auditors and accountants for the Fund and The Franklin are
included in the Statement of Additional Information.
8
<PAGE>
INTRODUCTION
FRANKLIN LIFE VARIABLE ANNUITY FUND A
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
The Contracts offered by this Prospectus are designed primarily to assist
in retirement planning for individuals. The Contracts provide Annuity Payments
for life commencing on a selected Annuity Payment Date; other Settlement Options
are available. The amount of the Annuity Payments will vary with the investment
performance of the assets of the Fund, a separate account which has been
established by The Franklin under Illinois insurance law. For the primary
investment objective of the Fund, see "Investment Policies and Restrictions of
the Fund," below.
The Qualified Contracts described in this Prospectus will not knowingly be
sold other than for use:
(1) in connection with qualified employee pension and profit-sharing trusts
described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and
qualified annuity plans described in Section 403(a) of the Code;
(2) in connection with qualified pension, profit-sharing and annuity plans
established by self-employed persons ("H.R. 10 Plans");
(3) in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of the
Code; or
(4) as Individual Retirement Annuities described in Section 408(b) of the
Code, including Simplified Employee Pensions described in Section 408(k) of the
Code.
Pursuant to this Prospectus, The Franklin offers two types of Contracts:
those under which Annuity Payments to the Variable Annuitant commence
immediately-"Immediate Variable Annuities"-and those under which Annuity
Payments to the Variable Annuitant commence in the future-"Deferred Variable
Annuities." Deferred Variable Annuities may be purchased either with periodic
Stipulated Payments or with a single Stipulated Payment, while Immediate
Variable Annuities may only be purchased with a single Stipulated Payment.
The Franklin is a legal reserve stock life insurance company organized
under the laws of the State of Illinois in 1884. The Franklin issues individual
life insurance, annuity and accident and health insurance policies, group
annuities and group life insurance and offers a variety of whole life, life,
retirement income and level and decreasing term insurance plans. Its Home Office
is located at #1 Franklin Square, Springfield, Illinois 62713.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
9
<PAGE>
Subject to the terms of any plan pursuant to which a Contract is issued,
the Contract Owner may elect to have a portion of the Stipulated Payment or
Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity.
Fixed-Dollar Annuity contracts do not, however, participate in the Fund and the
contracts are transferred to the general account of The Franklin. In cases where
both a Fixed-Dollar and a Variable Annuity are provided under the same contract,
either annuity may be terminated and the Cash Value attributable thereto
obtained or other Settlement Option elected by the Contract Owner, at any time
prior to commencement of Annuity Payments by The Franklin; under these
circumstances, the other annuity may be continued in effect, provided that the
annual stipulated payment allocated to the other annuity satisfies The
Franklin's usual underwriting practices. These practices presently require that
each periodic Stipulated Payment which purchases the Variable Annuity be at
least $10. See generally "Redemption," "Settlement Options," and "Federal Income
Tax Status-Individual Retirement Annuities," below.
Unless otherwise indicated in this Prospectus, the discussion of the
Contracts herein refers to Variable Annuity Contracts, or to the Variable
Annuity portion in cases where both a variable and a Fixed-Dollar Annuity are
provided in the same contract, and not to any Fixed-Dollar Annuity. Provisions
relating to a Fixed-Dollar Annuity and a Variable Annuity are separate, and
neither is dependent upon the other in its operation.
The discussion of Contract terms herein in many cases summarizes those
terms. Reference is made to the full text of the Contract forms, which are filed
with the Securities and Exchange Commission as exhibits to the Registration
Statement under the Securities Act of 1933 and the Investment Company Act of
1940 of which this Prospectus is a part. The exercise of certain of the Contract
rights herein described may be subject to the terms and conditions of any
Qualified Plan under which such Contract may be purchased. This Prospectus
contains no information concerning any such Qualified Plan. Further information
relating to some Qualified Plans may be obtained from the disclosure documents
required to be distributed to employees under the Employee Retirement Income
Security Act of 1974.
DESCRIPTION OF THE SEPARATE ACCOUNT
The Fund was established as a separate account on November 5, 1969 by
resolution of the Board of Directors of The Franklin pursuant to the
provisions of the Illinois Insurance Code. The Fund is an open-end
diversified management investment company registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. Such
registration does not involve supervision of the management or investment
practices or policies of the Fund or of The Franklin by the Commission. The
Board of Managers of the Fund must be elected annually by Contract Owners. A
majority of the members of the Board of Managers are persons who are not
otherwise affiliated with The Franklin. See "Management," below. The Fund
meets the definition of a "Separate Account'' under the federal securities
laws.
Under the provisions of the Illinois Insurance Code: (i) the income,
gains or losses of the Fund are credited to or charged against the amounts
allocated to the Fund in accordance with the terms of the Contracts, without
regard to the other income, gains or losses of The Franklin; and (ii) the
assets of the Fund are not chargeable with liabilities arising out of The
Franklin's other business activities, including liabilities of any other
separate account which may be established. These assets are held with
relation to the Contracts described in this Prospectus and such other
Variable Annuity contracts as may be issued by The Franklin and designated by
it as participating in the Fund. All obligations arising under the
Contracts, including the promise to make Annuity Payments, are general
corporate obligations of The Franklin. Accordingly, all of The Franklin's
assets (except those allocated to other separate accounts which have been or
may be established) are available to meet its obligations and expenses under
the Contracts participating in the Fund.
The Franklin is taxed as a "life insurance company" under the Code. The
Fund is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are
10
<PAGE>
considered separately from the other operations of The Franklin in computing The
Franklin's tax liability and the Fund is not affected by federal income taxes
paid by The Franklin with respect to its other operations. The operations of the
Fund are treated separately from the other operations of The Franklin for
accounting and financial statement purposes. Under existing law, no federal
income tax is payable by The Franklin on investment income and realized capital
gains of the Fund. See "Federal Income Tax Status," below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
The Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular contract. For example, the sales deductions may
not fully cover all of the sales and distribution expenses actually incurred by
The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
A. SALES AND ADMINISTRATION DEDUCTIONS
Deductions will be made as follows for sales expenses with respect to the
Contracts and for administrative expenses with respect to Contracts and the
Fund:
(1) Under Single Stipulated Payment Contracts, a deduction of 4%
(with a maximum of $100) is made from the single payment for administrative
expenses. In addition, a sales expense deduction of 5% of the total payment
is made from the payment. In the case of the minimum Single Stipulated
Payment Contract sold, the combined deductions for administrative expenses
and sales expenses amount to 9.89% of the net amount invested (5.49% for
sales expenses and 4.40% for administrative expenses) assuming no premium
taxes are applicable.
(2) Under Periodic Payment Contracts, a deduction of 6% is made from
each payment for sales expenses and 3% for administrative expenses. The
combined deductions for sales and administrative expenses amount to 9.89%
of the net amount invested (6.59% for sales expenses and 3.30% for
administrative expenses) assuming no premium taxes are applicable.
Deductions for sales expenses are made pursuant to a Sales Agreement
with Franklin Financial Services Corporation ("Franklin Financial"), a
wholly-owned subsidiary of The Franklin and the principal underwriter of the
Fund. See "Distribution of the Contracts," below, and in the Statement of
Additional Information. The above deductions for administrative expenses, and
charges for mortality and expense risk assurances discussed under "Mortality
and Expense Risk Charge," below, are made pursuant to an Administration
Agreement dated June 30, 1971 between the Fund and The Franklin. The
Administration Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.
The total deductions made in respect of sales expenses of Franklin
Financial in 1995, 1996 and 1997 were $20,566, $14,575 and $11,286,
respectively, and all such amounts were retained on behalf of Franklin
Financial.
The administration deductions are designed to cover the actual expenses
of administering the Contracts and the Fund. The aggregate dollar amounts of
the administration deductions for the fiscal years ended December 31, 1995,
1996 and 1997 were $10,279, $7,285 and $5,640, respectively.
B. PREMIUM TAXES
At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof will
be deducted from the Stipulated Payments. Premium
11
<PAGE>
taxes ranging up to 5% are charged by various jurisdictions in which The
Franklin is transacting business and in which it may, after appropriate
qualification, offer Contracts.
C. MORTALITY AND EXPENSE RISK CHARGE
While Annuity Payments will reflect the investment performance of the
Fund, they will not be affected by adverse mortality experience or by any
excess in the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," below, which the Fund
will bear). The Franklin assumes these risks for the duration of the Contract
and the annuity rate, mortality and expense risk deductions and charges set
forth herein will not be increased regardless of the actual mortality and
expense experience. The mortality risk charge is imposed regardless of
whether or not the payment option selected involves a life contingency.
For assuming these risks, The Franklin imposes a daily charge against
the value of the Accumulation Unit and the Annuity Unit. (For further
information as to the Accumulation Unit and the Annuity Unit, see "Deferred
Variable Annuity Accumulation Period" and "Annuity Period," below.) These
charges are at the current combined annual rate of 1.002% (.002745% on a
daily basis), of which .900% is for annuity rate and mortality assurances
and .102% is for expense assurances. If the money collected from this charge
is not needed, it will be to The Franklin's gain and may be used to cover
contract distribution expenses.
During 1995, 1996 and 1997, The Franklin earned and was paid $97,809,
$108,769 and $119,981, respectively, by reason of these charges. Such charges
during 1997 were equal to 1.002% of average net assets.
D. INVESTMENT MANAGEMENT SERVICE CHARGE
The Franklin acts as investment manager of the Fund. For acting as such,
The Franklin makes a charge against the Fund at the annual rate of 0.438% of
the Fund's assets, computed by imposing a daily charge of 0.0012% against the
value of the Accumulation Unit and of the Annuity Unit, in determining those
values.
The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting
held on April 17, 1995, and renewal to January 31, 1999 by the Board of
Managers of the Fund at its meeting on January 19, 1998. The Investment
Management Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.
During 1995, 1996 and 1997, The Franklin earned and was paid $42,758,
$47,550 and $52,451, respectively, under the Investment Management Agreement
then in effect.
E. TRANSFERS TO OTHER CONTRACTS
Subject to any limitations in a Qualified Plan, Contracts may be
redeemed prior to the death of the Variable Annuitant and the initial Annuity
Payment Date and the Cash Value (less the required amount of federal income
tax withholding, if any) may be applied to the purchase of certain other
Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued
by The Franklin. Franklin Life Money Market Variable Annuity Fund C and
Franklin Life Variable Annuity Fund B, other separate accounts of The
Franklin funding Variable Annuity contracts, no longer issue new contracts.
12
<PAGE>
It is not clear whether gain or loss will be recognized for federal
income tax purposes upon the redemption of a Contract, another annuity
contract or a life insurance contract issued by The Franklin for purposes of
applying the redemption proceeds to the purchase of another contract issued
by The Franklin. Federal tax penalties may also apply to such redemptions.
Since the income and withholding tax consequences of such redemption and
purchase depend on many factors, any person contemplating redemption of a
Contract or another contract issued by The Franklin for purposes of
purchasing a different contract issued by The Franklin (or any other
contract) is advised to consult a qualified tax advisor prior to the time of
redemption.
F. MISCELLANEOUS
The Fund's total expenses for 1997 were $172,432, or 1.440% of average net
assets during 1997.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on the
cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. In the case of Deferred Variable Annuity Contracts, the annuity
rate table is set forth in the Contract (but see below). In the case of
Immediate Variable Annuities, the table is that used by The Franklin on the
date of issue of the Contract. The amount of the Annuity Payments will not be
affected by mortality experience adverse to The Franklin or by an increase in
The Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant
under an annuity with a life contingency or one providing for a number of
Annuity Payments certain will receive the value of a fixed number of Annuity
Units each month, determined as of the initial Annuity Payment Date on the
basis of the applicable annuity rate table and the then value of his or her
account. The value of Annuity Units, and thus the amounts of the monthly
Annuity Payments, will, however, reflect investment gains and losses and
investment income occurring after the initial Annuity Payment Date, and thus
the amount of the Annuity Payments will vary with the investment experience
of the Fund. See "Annuity Period," below.
Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS,
have held that the use of gender-based mortality tables to determine benefits
under an employer-related retirement or benefit plan may violate Title VII of
the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans
sponsored by employers subject to Title VII generally may not provide
different benefits for similarly-situated men and women.
The Contracts described in this Prospectus incorporate annuity rate
tables which reflect the age and sex of the Variable Annuitant and the
Settlement Option selected. Such sex-distinct tables continue to be
appropriate for use, for example, under Contracts which are not purchased in
connection with an "employer-related" plan subject to NORRIS (such as
individual retirement annuities not sponsored by an employer). However, in
order to enable subject employers to comply with NORRIS, The Franklin will
provide "unisex" annuity rate tables for use under Contracts purchased in
connection with "employer-related" plans. Persons contemplating purchase of a
Contract, as well as current Contract Owners,
13
<PAGE>
should consult a legal advisor regarding the applicability and implications of
NORRIS in connection with their purchase and ownership of a Contract.
2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC
STIPULATED PAYMENTS
Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. The Contract
Owner may increase the amount of a Stipulated Payment on an annualized basis
under a Periodic Stipulated Payment Contract (except in the case of an
Individual Retirement Annuity, which cannot be increased above the amounts
described under "Purchase Limits," immediately below) up to an amount on an
annualized basis equal to twice the amount of the first Stipulated Payment on
an annualized basis. Similarly, subject to the limitations described under
"Purchase Limits," immediately, below, the amount of a Periodic Stipulated
Payment may be decreased by the Contract Owner on any date a Stipulated Payment
is due. Unless otherwise agreed to by The Franklin, the mode of Stipulated
Payment may be changed only on a Contract Anniversary.
The Contract Owner may continue making Stipulated Payments after the agreed
number of Stipulated Payments has been made, but The Franklin will not accept
Stipulated Payments after age 75. Submission of a Stipulated Payment in an
amount different from that of the previous payment, subject to the aforesaid
limits, will constitute notice of the election of the Contract Owner to make
such change.
3. ASSIGNMENT OR PLEDGE
A Contract may not be assigned by the Contract Owner except when issued
to a trustee in connection with certain types of plans designed to qualify
under Section 401 of the Code or when made pursuant to a qualified domestic
relations order rendered by a state court in satisfaction of family support
obligations. In general, a pledge or assignment made with respect to certain
Contracts may, depending on such factors as the amount pledged or assigned,
be treated as a taxable distribution. See "Individual Retirement Annuities,"
below, for special rules applicable thereto. Moreover, in certain instances,
pledges or assignments of a Qualified Contract may result in the imposition
of certain tax penalties. See generally "The Contracts: Qualified Plans,"
below.
Persons contemplating the assignment or pledge of a Contract are advised to
consult a qualified tax advisor concerning the federal income tax consequences
thereof.
4. PURCHASE LIMITS
Currently, no periodic Stipulated Payment may be less than $10 ($120 on an
annual basis). Under the terms of the Contract, The Franklin may increase the
minimum periodic Stipulated Payment to $20 ($240 on an annual basis). No single
Stipulated Payment may be less than $2,500, except that in the case of a
deferred Single Stipulated Payment Contract to be used as an Individual
Retirement Annuity funded with a Rollover Contribution, the total Stipulated
Payment applicable to the Variable Annuity, prior to administration and sales
deductions, must be at least $1,000 unless, with consent of The Franklin, a
smaller single Stipulated Payment is permitted. In the case of a Contract issued
for use as an Individual Retirement Annuity, annual premium payments may not, in
general, exceed $2,000. However, if the Individual Retirement Annuity is a
Simplified Employee Pension, annual premium payments may not exceed $30,000.
Single Stipulated Payment Contracts are not available as Individual Retirement
Annuities except for those funded with Rollover Contributions and except for
those to be used as Simplified Employee Pensions.
14
<PAGE>
5. TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate any Contract, other
than a Contract issued for use as an Individual Retirement Annuity, if total
Stipulated Payments paid are less than $120 in each of three consecutive
Contract Years (excluding the first Contract Year) and if the Cash Value is less
than $500 at the end of such three-year period. Under the terms of the
Contract, The Franklin may terminate such Contract if total Stipulated Payments
paid are less than $240 in each of such three consecutive Contract Years and if
the Cash Value is less than $500 at the end of such three-year period. The
Franklin must give 31 days' notice by mail to the Contract Owner of such
termination. The Franklin will not exercise any right to terminate such Contract
if the value of the Contract declines to less than $500 as a result of a decline
in the market value of the securities held by the Fund.
The Franklin reserves the right to terminate any Contract issued for use as
an Individual Retirement Annuity if no Stipulated Payments have been received
for any two Contract Years and if the first monthly Annuity Payment, determined
at the initial Annuity Payment Date, arising from the Stipulated Payments
received prior to such two-year period would be less than $20.
Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less federal income tax withholding, if
applicable. For certain tax consequences upon such payment, see "Federal Income
Tax Status," below.
6. RIGHT TO REVOCATION OF CONTRACT
A Contract Owner has the right to revoke the purchase of a Contract within
10 days after receipt of the Contract, and upon such revocation will be
entitled to a return of the entire amount paid. The request for revocation must
be made by mailing or hand-delivering the Contract and a written request for
its revocation within such 10-day period either to The Franklin Life Insurance
Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713,
or to the agent from whom the Contract was purchased. In general, notice of
revocation given by mail is deemed to be given on the date of the postmark, or,
if sent by certified or registered mail, the date of certification or
registration.
7. New Contracts No Longer Being Issued
The Fund no longer issues new Contracts.
B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD
1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE
EXPENSES
During the accumulation period--the period before the initial Annuity
Payment Date--deductions from Stipulated Payments for sales and administrative
expenses are made as specified under "Deductions and Charges Under the
Contracts," above. In addition, any applicable premium taxes, also as specified
above under that caption, are deducted from the Stipulated Payments. The
balance of each Stipulated Payment is credited to the Contract Owner in the form
of Accumulation Units.
The number of a Contract Owner's Accumulation Units is determined by
dividing the net amount of Stipulated Payments credited to his or her Contract
by the value of an Accumulation Unit at the end of the Valuation Period during
which the Stipulated Payment is received, except that, in the case of the
original application for a Variable Annuity Contract, the value of an
Accumulation Unit within two business days after receipt of the application
will be used if the application and all information necessary to process the
application are complete upon receipt. If the application and such information
are not complete upon receipt, The Franklin, within five days after the receipt
of an original application and initial payment at the Home Office of The
Franklin, will attempt to complete the application and will either accept the
application or reject the application and return the initial payment.
15
<PAGE>
The number of Accumulation Units so determined will not be changed by any
subsequent change in the dollar value of an Accumulation Unit, but the dollar
value of an Accumulation Unit may vary from day to day depending upon the
investment experience of the Fund.
2. VALUATION OF A CONTRACT OWNER'S CONTRACT
The Cash Value of a Contract at any time prior to the initial Annuity
Payment Date can be determined by multiplying the total number of Accumulation
Units credited to the account by the current Accumulation Unit value. The
Contract Owner bears the investment risk, that is, the risk that market values
may decline. There is no assurance that the Cash Value of the Contract will
equal or exceed the Stipulated Payments made. A Contract Owner may obtain from
the Home Office of The Franklin information as to the current value of an
Accumulation Unit and the number of Accumulation Units credited to his or her
Contract.
3. VALUE OF THE ACCUMULATION UNIT
The value of an Accumulation Unit was set at $10 effective July 1, 1971.
Accumulation Units currently are valued each Valuation Date (each day in which
there is a sufficient degree of trading in the securities in which the Fund
invests that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, other than a day during which no
Contract or portion thereof is tendered for redemption and no order to purchase
or transfer a Contract is received by the Fund, as of the close of trading on
that day). After the close of trading on a Valuation Date, or on a day when
Accumulation Units are not valued, the value of an Accumulation Unit is equal to
its value as of the immediately following Valuation Date. The value of an
Accumulation Unit on the last day of any Valuation Period is determined by
multiplying the value of an Accumulation Unit on the last day of the immediately
preceding Valuation Period by the Net Investment Factor (defined below) for the
current Valuation Period.
At each Valuation Date a gross investment rate for the Valuation Period
then ended is determined from the investment performance of the Fund for the
Valuation Period. Such rate is equal to (i) accrued investment income for the
Valuation Period, plus capital gains and minus capital losses for the period,
whether realized or unrealized, on the assets of the Fund (adjusted by a
deduction for the payment of any applicable state or local taxes as to the
income or capital gains of the Fund) divided by (ii) the value of the assets of
the Fund at the beginning of the Valuation Period. The gross investment rate may
be positive or negative.
The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of the
Valuation Period as a charge against the gross investment rate. This charge is
made by The Franklin for providing investment management services, annuity rate
or mortality assurances and expense assurances. See "Deductions and Charges
Under the Contracts," above.
The net investment factor for the Valuation Period is the sum of 1.00000000
plus the net investment rate for the Valuation Period ("Net Investment Factor").
The net investment rate may be negative if the combined capital losses,
Valuation Period deductions and increase in the tax reserve exceed investment
income and capital gains. Thus, the Net Investment Factor may be less than
1.00000000, and the value of an Accumulation Unit at the end of a Valuation
Period may be less than the value for the previous Valuation Period.
16
<PAGE>
4. VALUATION OF FUND ASSETS
In determining the value of the assets of the Fund, each security traded on
a national securities exchange is valued at the last reported sale price on the
Valuation Date. If there has been no sale on such day, then the value of such
security is taken to be the current bid price at the time as of which the value
is being ascertained. Any security not traded on a securities exchange but
traded in the over-the-counter market is valued at the current bid price on the
Valuation Date. Any securities or other assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Managers.
5. REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may, subject to any limitations on early settlement contained in an applicable
Qualified Plan, redeem the Contract, in whole or in part, by submission of the
Contract and a written request for its redemption to The Franklin's Home Office,
and will receive the Cash Value of the part of the Contract redeemed. Early
withdrawal of certain amounts attributable to Contracts issued pursuant to an
annuity purchase plan meeting the requirements of Code Section 403(b) may be
prohibited. See "Federal Income Tax Status," below. The Cash Value of a Contract
or part thereof redeemed prior to the initial Annuity Payment Date is the number
of Accumulation Units credited to the Contract (or that part so redeemed) times
the value of an Accumulation Unit at the end of the Valuation Period in which
the request for redemption is received. Except in limited circumstances
discussed below, the payment of the Cash Value will be made within seven days
after the date a properly completed and documented request for redemption is
received by The Franklin at its Home Office. The right of redemption may be
suspended or the date of payment postponed during any periods when the New York
Stock Exchange is closed (other than customary weekend and holiday closings);
when trading in the markets the Fund normally utilizes is restricted, or an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Fund's investments or determination of its net asset value is
not reasonably practicable; or for such other periods as the Securities and
Exchange Commission by order may permit to protect Contract Owners.
Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity, a request for partial redemption, if no other indication is obtained
from the Contract Owner, will be treated as a pro rata request for partial
redemption of the Variable Annuity and the Fixed-Dollar Annuity.
In lieu of a single payment of the amount due upon redemption of a
Contract, the Contract Owner may elect, at any time prior to the initial Annuity
Payment Date and during the lifetime of the Variable Annuitant, to have all or
any portion of the amount due applied under any available Settlement Option. See
"Settlement Options," below. However, no Settlement Option may be elected upon
redemption without surrender of the entire Contract.
The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal income
tax withholding and federal tax penalties. See "Federal Income Tax Status,"
below.
6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH
In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving beneficiary will
be paid by The Franklin within seven days of receipt by The Franklin of written
notice of such death. The death proceeds payable will be the Cash Value of the
Contract determined as of the date on which written notice of death is received
by The Franklin by mail if such date is a Valuation Date; if such date is not a
Valuation Date, the determination will be made on the next following Valuation
Date. There is no assurance that the Cash Value of a Contract will equal or
exceed the Stipulated Payments made. For payment of death proceeds in the event
no Beneficiary is
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<PAGE>
surviving at the death of the Variable Annuitant, see "Change of Beneficiary or
Mode of Payment of Proceeds; Death of Beneficiaries," below. The Code imposes
certain requirements concerning payment of death benefits payable before the
initial Annuity Payment Date in the case of Qualified Contracts. Under those
Contracts, death benefits will be paid as required by the Code and as specified
in the governing plan documents. The terms of such documents should be consulted
to determine the death benefits and any limitations the plan may impose. You
should consult your legal counsel and tax advisor regarding these requirements.
Subject to the foregoing, the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," below. If the Contract Owner has not made
such an election, the Beneficiary may do so after the death of the Variable
Annuitant. The Contract Owner or the Beneficiary, whichever selects the method
of settlement, may designate contingent Beneficiaries to receive any other
amounts due should the first Beneficiary die before completion of the specified
payments. If neither the Contract Owner nor the Beneficiary elects payment of
death proceeds under an available Settlement Option, payment will be made to the
Beneficiary in a single sum.
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.
In the event of the death of the Variable Annuitant after the initial
Annuity Payment Date, payments under a Contract will be made as described in
"Settlement Options," below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described under
"Termination by The Franklin," above, and subject to the right of The Franklin
to pay the value of the Contract Owner's account in a single sum at the initial
Annuity Payment Date if the value on such date is less than $2,000, the Contract
Owner may elect, prior to the death of the Variable Annuitant and prior to the
initial Annuity Payment Date, either of the following options:
(a) to exercise any of the available Settlement Options described
under "Settlement Options," below, or redeem the Contract as described
under "Redemption," above; or
(b) to have the Contract continued from the date of failure to make
a Stipulated Payment as a paid-up annuity to commence on the initial
Annuity Payment Date stated in the Contract.
If no option is elected by the Contract Owner within 31 days after
failure to make a Stipulated Payment, the Contract will automatically be
continued under the paid-up annuity option.
8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)
A Contract Owner, by making one Stipulated Payment, may reinstate a
Periodic Stipulated Payment Contract as to which there has been a failure to
make a Stipulated Payment, if the Contract at the time of the payment is being
continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits.
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9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or Settlement
Option, or, if agreed to by The Franklin, change to a mode of payment different
from one of the Settlement Options, subject to applicable limitations under the
Code and any governing Qualified Plan.
If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all or
a portion of the amount due in settlement of the Contract applied under any of
the available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," below, and "Deferred Variable Annuity
Contracts," below.
Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may apply
under the particular Settlement Option. Upon the death of the original Variable
Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments
that are due under the Settlement Option elected will be continued to the
Beneficiary or, if elected by the Contract Owner (or, if so designated by the
Contract Owner, by the Beneficiary), the Cash Value of the Contract, as
described under such Settlement Option below, will be paid to the Beneficiary in
one lump sum. Upon the death of any Beneficiary to whom payments are being made
under a Settlement Option, a single payment equal to the then remaining Cash
Value of the Contract, if any, will be paid to the executors or administrators
of the Beneficiary, unless other provision has been specified and accepted by
The Franklin. For a discussion of payments if no Beneficiary is surviving at the
death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment
of Proceeds; Death of Beneficiaries," immediately above.
Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant prior
to the initial Annuity Payment Date, may also be made under an available
Settlement Option in certain circumstances. See "Redemption," above, and
"Payment of Accumulated Value at Time of Death," above.
Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except that Settlement Options may be selected only on
a fixed basis under a Contract issued for use as an Individual Retirement
Annuity. Under an Option which is paid on a fixed basis, there is no sharing in
the investment experience of the Fund and, upon commencement of payments,
participation in the Fund terminates (the subject Contract will be transferred
to the general account of The Franklin). Settlement under the First, Second,
Third, Fourth or Fifth Option below is subject to satisfactory proof of age of
the person or persons to whom the Annuity Payments are to be made.
The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid in
a single sum in the discretion of The Franklin, except in the case of a deferred
Single Stipulated Payment Contract funded with a Rollover Contribution not in
excess of $2,000. See "Purchase Limits," above. Further, if at any time payments
under a Settlement Option become less than $25 per payment, The Franklin has the
right to change the frequency of payment to such intervals as will result in
payments of at least $25.
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In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," below, and "Immediate
Variable Annuity Contracts," below.
The distribution rules which Qualified Plans must satisfy in order to be
tax-qualified under the Code may limit the utilization of certain Settlement
Options, or may make certain Settlement Options unavailable, in the case of
Contracts issued in connection therewith. These distribution rules could affect
such factors as the commencement of distributions and the period of time over
which distributions may be made. All Settlement Options are offered subject to
the limitations of the distribution rules.
The Statement of Additional Information describes certain limitations on
Settlement Options based on The Franklin's current understanding of the
distribution rules generally applicable to Contracts purchased under this
Prospectus for use as Individual Retirement Annuities or issued in connection
with Section 403(b) annuity purchase plans. See "Limitations on Settlement
Options" in the Statement of Additional Information. Persons considering the
purchase of a Contract and Contract Owners contemplating election of a
Settlement Option are urged to obtain and read the Statement of Additional
Information. Various questions exist, however, about the application of the
distribution rules to distributions from the Contracts and their effect on
Settlement Option availability thereunder. Persons contemplating the purchase of
a Contract are advised to consult a qualified tax advisor concerning the effect
of the distribution rules on the Settlement Option or Options he or she is
contemplating.
Neither this Prospectus nor the Statement of Additional Information,
however, describes limitations on Settlement Options based on applicable
distribution rules in the case of Contracts issued in connection with qualified
pension and profit-sharing plans under Section 401(a) of the Code and annuity
plans under Section 403(a) of the Code. Under those Contracts, available
Settlement Options are limited to those Options specified in the governing plan
documents. The terms of such documents should be consulted to determine
Settlement Option availability and any other limitations the plan may impose on
early redemption of the Contract, payment in settlement thereof, or similar
matters. Generally, limitations comparable to those described in the Statement
of Additional Information for Individual Retirement Annuities and Section 403(b)
annuity purchase plans also apply with respect to such qualified pension,
profit-sharing and annuity plans (including H.R. 10 Plans).
Persons contemplating election of the Fifth or Sixth Option should consult
a qualified tax advisor to determine whether the continuing right of redemption
under any such Option might be deemed for tax purposes to result in the
"constructive receipt" of the Cash Value of the Contract.
FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime
of the Variable Annuitant, ceasing with the last Annuity Payment due prior to
the death of the Variable Annuitant. This Option offers the maximum level of
monthly Annuity Payments since there is no guarantee of a minimum number of
Annuity Payments or provision for any continued payments to a Beneficiary upon
the death of the Variable Annuitant. It would be possible under this Option for
the Variable Annuitant to receive only one Annuity Payment if he or she died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if he or she died after the second Annuity Payment Date but before the third
Annuity Payment Date, and so forth.
SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN.
An annuity payable monthly during the lifetime of the Variable Annuitant
including the commitment that if, at the death of the Variable Annuitant,
Annuity Payments have been made for less than 120 months, 180 months or 240
months (as selected by the Contract Owner in electing this Option), Annuity
Payments shall be continued during the remainder of the selected period to the
Beneficiary. The cash value under this Settlement Option is the present value of
the current dollar amount of any unpaid Annuity Payments certain.
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THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during
the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment
due prior to the death of the Variable Annuitant, provided that, at the death of
the Variable Annuitant, the Beneficiary will receive a payment of the then
dollar value of the number of Annuity Units equal to the excess, if any, of (a)
over (b) where (a) is the total amount applied under this Option divided by the
Annuity Unit value at the initial Annuity Payment Date and (b) is the number of
Annuity Units represented by each Annuity Payment multiplied by the number of
Annuity Payments made.
For example, if $10,000 were applied on the first Annuity Payment Date to the
purchase of an annuity under this Option, the Annuity Unit value at the initial
Annuity Payment Date were $2.00, the number of Annuity Units represented by each
Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of
the Variable Annuitant's death and the value of an Annuity Unit on the Valuation
Date following the Variable Annuitant's death were $2.05, the amount paid to the
Beneficiary would be $9,623.73, computed as follows:
<TABLE>
<S><C>
($10.000 - (30.55 x 10)) X 2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
------
$2.00
</TABLE>
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if both the Variable Annuitant and the secondary variable annuitant died after
the second Annuity Payment Date but before the third Annuity Payment Date, and
so forth.
FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly
to the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part at any time by the
Contract Owner for the aforesaid cash value of the part of the Contract
redeemed. See "Redemption," above.
It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due under
this Option. Further, although not contractually required to do so, The Franklin
currently follows a practice, which may be discontinued at any time, of
permitting persons receiving Annuity Payments under this Option to elect to
convert such payments to a Variable Annuity involving a life contingency under
the First, Second, Third or Fourth Options above if, and to the extent, such
other Options are otherwise available to such person.
SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will
be paid to the Variable Annuitant in equal annual, semiannual, quarterly or
monthly Annuity Payments of a designated dollar amount (not less than $75 a year
per $1,000 of the original amount due) until the remaining balance (adjusted
each Valuation Period by the Net Investment Factor for the period) is less than
the amount of one Annuity Payment, at which time such balance will be paid and
will be the final Annuity Payment under this Option. Upon the death of the
Variable Annuitant, payments will be continued to the Beneficiary until such
remaining balance is paid. The cash value under this Settlement Option is the
amount of proceeds then remaining with The Franklin. A Contract under which
Annuity Payments are being made under this Settlement Option may be redeemed at
any time by the Contract Owner for the aforesaid cash value.
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Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, above, which applies
in its entirety to the Sixth Option as well.
SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit
with The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by the
amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.
Periodic payments received under this Option may be treated like interest
for federal income tax purposes. Interest payments are fully taxable and are
not subject to the general rules applicable to the taxation of annuities
described in "Federal Income Tax Status," below. Persons contemplating election
of this Seventh Option are advised to consult a qualified tax advisor concerning
the availability and tax effect of this election.
11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY
ACCUMULATION UNITS
Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been
issued on the same Contract, on any Contract Anniversary during the accumulation
period of the Contract, the Contract Owner may have the cash value of his
Fixed-Dollar Annuity transferred in whole or in part to his Variable Annuity to
purchase Variable Annuity Accumulation Units at net asset value, without any
sales or administrative deductions. However, any such partial transfer of cash
value must be at least $500. (A similar privilege, but available four times in
one contract year, permits transfer of Variable Annuity Accumulation Unit values
to establish values under a Fixed-Dollar Annuity issued on the same Contract.)
C. ANNUITY PERIOD
1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF
ANNUITY PAYMENTS
(a) DEFERRED VARIABLE ANNUITY CONTRACTS
A Contract Owner selects a Settlement Option and an initial Annuity Payment
Date prior to the issuance of the Deferred Variable Annuity Contract, except
that Contracts issued in connection with qualified pension and profit-sharing
plans (including H.R. 10 Plans) under Section 401(a) of the Code and annuity
plans (including H.R. 10 Plans) under Section 403(a) of the Code provide for
Annuity Payments to commence at the date and under the Settlement Option
specified in the plan. The Contract Owner may defer the initial Annuity Payment
Date and continue the Contract to a date not later than the Contract Anniversary
on which the attained age of the Variable Annuitant is 75 unless the provisions
of the Code or any governing Qualified Plan require Annuity Payments to commence
at an earlier date. See "Limitations on Settlement Options" in the Statement of
Additional Information. The Franklin will require satisfactory proof of age of
the Variable Annuitant prior to the initial Annuity Payment Date.
(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS
The Franklin offers three forms of Immediate Variable Annuity Contracts:
the life annuity, the life annuity with 120, 180 or 240 monthly payments certain
and the joint and last survivor life annuity. For a description of these forms
of annuity, see the First, Second and Fourth Options under "Settlement Options,"
above.
Under an Immediate Variable Annuity, the first Annuity Payment is made to
the Variable Annuitant one month after the Effective Date of the Contract,
unless the period selected by the Contract Owner for
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<PAGE>
the frequency of Annuity Payments is more than one month, in which case the
first Annuity Payment will be made after a period equal to the period so
selected from the Effective Date (subject in every case to the survival of the
Variable Annuitant, except in cases where a guaranteed payment period is
provided).
2. THE ANNUITY UNIT
The Annuity Unit is a measure used to value the First Option (including the
automatic life annuity) and the Second, Third, Fourth and Fifth Options, if
elected on a variable basis.
The value of the Annuity Unit as of July 1, 1971 was fixed at $1.00 and for
each day thereafter is determined by multiplying the value of the Annuity Unit
on the preceding day by the "Annuity Change Factor" for the Valuation Period
ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the
tenth preceding day. The "Annuity Change Factor" for any Valuation Period is
equal to the amount determined by dividing the Net Investment Factor for that
Valuation Period by a number equal to 1.0 plus the interest rate for the number
of calendar days in such Valuation Period at the effective annual rate of
3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the
Annuity Change Factor is effected in order to cancel out the assumed net
investment rate of 3-1/2% per year which is built into the annuity tables
specified in the Contract. See "Determination of Amount of First Monthly Annuity
Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net
Investment Rate," below.
Annuity Units are valued in respect of each Annuity Payment Date as of a
Valuation Date not less than 10 days prior to the Annuity Payment Date in
question in order to permit calculation of amounts of Annuity Payments and
mailing of checks in advance of their due dates.
3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
When Annuity Payments commence under a Deferred Variable Annuity
Contract, the value of the Contract Owner's account is determined as the
product of the value of an Accumulation Unit on the first Annuity Payment
Date and the number of Accumulation Units credited to the Contract Owner's
account as of such Annuity Payment Date.
The Contract utilizes tables indicating the dollar amount of the first
monthly Annuity Payment under each Settlement Option for each $1,000 of Cash
Value of the Contract. The first monthly Annuity Payment varies according to the
Settlement Option selected (see "Settlement Options," above) and the "adjusted
age" of the Variable Annuitant. The first monthly Annuity Payment may also vary
according to the sex of the Variable Annuitant. See "Annuity Payments," above.
(The Contracts provide for age adjustment based on the year of birth of the
Variable Annuitant and any joint Variable Annuitant; a person's actual age when
Annuity Payments commence may not be the same as the "adjusted age" used in
determining the amount of the first Annuity Payment.)
For Contracts utilizing sex-distinct annuity tables, the tables for the
First, Second, Third and Fourth Options are determined from the Progressive
Annuity Table assuming births in the year 1900 and a net investment rate of
3-1/2% a year. The tables for the Fifth Option are based on a net investment
rate of 3% for the General Account and 3-1/2% for the Separate Account. The
total first monthly Annuity Payment is determined by multiplying the number of
thousands of dollars of Cash Value of the Contract Owner's Contract by the
amount of the first monthly Annuity Payment per $1,000 of value from the tables
in the Contract.
The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," immediately, above. Thus, there will be a double
effect of the investment experience of
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<PAGE>
the Fund during the 10-day period referred to in the preceding sentence, since
that experience will be included (as part of the value of an Accumulation Unit)
in valuing the Contract Owner's Contract on the initial Annuity Payment Date and
(as part of the changes in value of an Annuity Unit) in determining the second
monthly Annuity Payment. Also, the number of Annuity Units (and hence the amount
of Annuity Payments) will be affected by the net asset values of the Fund
approximately 10 days prior to the initial Annuity Payment Date even though
changes in those net asset values have occurred during that 10-day period, and
even though the value of the Accumulation Units used to determine the Cash Value
of the Contract will reflect those changes. See "Amount of Second and Subsequent
Monthly Annuity Payments (Deferred Variable Annuity Contracts Only)," below.
Each Contract contains a provision that the first monthly Annuity Payment
will not be less than 103% of the first monthly Annuity Payment available under
a then currently issued Immediate Variable Annuity of The Franklin if a single
Stipulated Payment were made equal to the value which is being applied under the
Contract to provide annuity benefits. This provision assures the Variable
Annuitant that if at the initial Annuity Payment Date the annuity rates then
applicable to new Immediate Variable Annuity Contracts are significantly more
favorable than the annuity rates provided in his or her Contract, the Variable
Annuitant will be given the benefit of the new annuity rates.
4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
The number of Annuity Units credited to a Contract on the initial Annuity
Payment Date remains fixed during the annuity period, and as of each subsequent
Annuity Payment Date the dollar amount of the Annuity Payment is determined by
multiplying this fixed number of Annuity Units by the then value of an Annuity
Unit.
5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE
ANNUITY CONTRACTS ONLY)
In the case of Immediate Variable Annuities, the number of Annuity Units
per month purchased is specified in the Contract. The number of such units is
determined by: (1) multiplying the net single Stipulated Payment (after
deductions for sales and administrative expenses and premium taxes) by the
applicable annuity factor from the annuity tables then used by The Franklin for
Immediate Variable Annuity Contracts, and (2) dividing such product by the value
of the Annuity Unit as of the date of issue of the Contract. This number of
Annuity Units remains fixed for each month during the annuity period, and the
dollar amount of the Annuity Payment is determined as of each Annuity Payment
Date by multiplying this fixed number of Annuity Units by the value of an
Annuity Unit as of each such Annuity Payment Date.
Annuity Units are valued as of a Valuation Date not less than 10 days prior
to the Effective Date of the Contract, pursuant to the procedure discussed under
"The Annuity Unit," above. Thus, the number of Annuity Units (and hence the
amount of the Annuity Payments) will be affected by the net asset value of the
Fund approximately 10 days prior to the Effective Date of the Contract, even
though changes in those net asset values have occurred during that 10-day
period.
As of the date of this Prospectus, The Franklin was using, in connection
with the determination of the number of Annuity Units per month purchased under
Immediate Variable Annuity Contracts, the 1955 American Annuity Table with
assumed 4-1/2% interest, the purchase rates in such table being increased by
0.5% (which percentage is decreased 0.2% for each year of age at the Effective
Date in excess of 70 years for male Variable Annuitants and in excess of 75
years for female Variable Annuitants). However, in lieu of such table, The
Franklin will provide "unisex" annuity rate tables for use under Contracts
purchased in connection with employer-related plans subject to the decision of
the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity
Payments," above.
The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.
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<PAGE>
6. ASSUMED NET INVESTMENT RATE
The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose
Annuity Payments are measured by Annuity Units will be level.
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following are the fundamental investment policies of the Fund:
(1) The primary objective of the Fund in making investments is long-term
appreciation of capital. Occasional investments for the purpose of seeking
short-term capital appreciation may also be made.
(2) Realization of current investment return is a secondary objective,
subordinate to the primary objective.
(3) Any investment income and realized capital gains (net of any capital
gains tax) will be retained and reinvested.
(4) The Fund's policy is to be substantially fully invested. Generally,
the Fund's investments will consist of equity securities, mainly common stocks.
The purchase of common stock may be made both in rising and declining markets.
When it is determined, however, that investments of other types may be
advantageous in reaching the Fund's objectives, on the basis of combined
considerations of risk, income and appreciation, investments may be made in
bonds, debentures, notes or other evidences of indebtedness, issued publicly or
placed privately, of a type customarily purchased for investment by
institutional investors, including United States Government securities, in
corporate preferred stock or in certificates of deposit, or funds may be
retained in cash. Such debt securities may, or may not, be convertible into
stock or be accompanied by stock purchase options or warrants.
(5) Temporary investments may be made in United States Government
securities, certificates of deposit, short-term corporate debt securities
(subject to fundamental restriction (4), below) and other similar securities,
pending investment in the above-mentioned securities.
While The Franklin is obligated to make Annuity Payments in accordance with
selected Settlement Options, the amount of the Annuity Payments is not
guaranteed but is a variable amount. Since, historically, the value of a
diversified portfolio of common stocks held for an extended period of time has
tended to rise during periods of inflation and growth in the economy, the
Annuity Payment under a Variable Annuity should tend to conform more closely to
changes in the cost of living and the level of the economy than payments under a
Fixed-Dollar Annuity would do. However, there is no assurance that this
objective can be attained. There have been times when the cost of living has
increased while securities prices have decreased and times when the cost of
living and the level of the economy have gone up or down with no direct
correlation to the value of securities in general or to any particular type or
class of securities. The value of investments held in the Fund will fluctuate
daily and is subject to the risk of changing economic conditions as well as the
risks inherent in the ability of management to anticipate changes in those
conditions. The value of investments in common stock has historically fluctuated
more greatly than the value of investments in securities such as bonds,
debentures, notes, other evidences of indebtedness, preferred stock and
certificates of deposit, and hence investments in common stocks offer
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greater opportunities for appreciation and greater risk of depreciation. There
is no assurance that the Cash Value of the Contract during the years prior to
the Variable Annuitant's retirement or the aggregate amount received during the
years following the initial Annuity Payment Date will equal or exceed the
Stipulated Payments on the Contract.
The investment policies of the Fund include a provision that investments
may be made in securities other than common stocks if they are advantageous in
reaching the Fund's objectives, on the basis of combined considerations of risk,
income and appreciation. No assurance can be given, however, that investment in
such other securities will accomplish such objectives. Investments may be made
in bonds, debentures, notes or other evidences of indebtedness, issued publicly
or placed privately, of a type customarily purchased for investment by
institutional investors, including United States Government securities, and may
also be made in corporate preferred stock or in certificates of deposit, or
funds may be retained in cash. Such debt securities may, or may not, be
convertible into stock or be accompanied by stock purchase options or warrants.
Funds may also be temporarily invested in United States Government securities,
certificates of deposit, short-term corporate debt securities (subject to
certain restrictions) and other similar securities, pending long-term
investment. Although debt securities and preferred stocks of the type in which
the Fund would invest are generally considered to present less risk than common
stocks, the value of such securities is subject to market fluctuations as a
result of money market rates, the demand for such securities and factors
relating to the individual issuers of such securities. In the event the Fund
invests in such securities, such factors may limit the ability of the Fund to
convert such securities to cash and reinvest in other types of securities.
Historically, the Fund has not invested significant amounts in debt securities
or preferred stocks except for short-term investments in debt securities pending
ultimate long-term application of funds for investment purposes.
The following are the fundamental investment restrictions applicable to the
Fund:
(1) The Fund will not concentrate its investments in any one industry or
group of related industries, and no more than 25% of the value of the Fund's
assets will be invested in any one industry or group of related industries.
(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3) immediately below.
(3) The Fund will not borrow money except for temporary or emergency
purposes from banks, and any such borrowings will not be used to purchase
investment securities and will not exceed 5% of the value of the Fund's assets.
(4) The Fund will not underwrite securities of other issuers, except
that the Fund may acquire portfolio securities under circumstances where, if
sold, it might be deemed to be an underwriter for purposes of the Securities
Act of 1933. No such securities will be acquired except where parties other
than the Fund shall have agreed to bear any and all costs of registration
under the Securities Act of 1933. (However, it should be noted that even
though an agreement to register has been obtained, enforcement of such an
agreement may prove unfeasible or may involve delays which could adversely
affect the Fund's ability to resell such securities or the price at which
such securities might be resold.) No more than 10% of the value of the Fund's
assets will at any time be invested in such securities.
(5) The Fund will not engage in the purchase and sale of interests in
real estate, except that the Fund may engage in the purchase and sale of
readily marketable interests in real estate investment trusts or similar
securities, which may be deemed to represent indirect interests in real
estate.
(6) The Fund will not engage in the making of loans to other persons,
except that the Fund may acquire privately placed corporate debt securities of a
type customarily purchased by institutional investors. Such securities, if
required to be registered under the Securities Act of 1933 prior to public
distribution, will be included in the 10% limitation specified in fundamental
restriction (4), above. The
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foregoing does not restrict the purchase by the Fund of a portion of an issue of
publicly distributed bonds, debentures or other securities, whether or not the
purchase is made upon the original issuance of such securities.
(7) The Fund will not engage in the purchase or sale of commodities or
commodity contracts.
(8) The Fund will not purchase the securities of any one issuer, other
than obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up to
25% of the Fund's total assets taken at current value may be invested without
regard to such 5% limitation.
(9) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by the
United States Government and its agencies or instrumentalities, except that up
to 25% of the Fund's total assets taken at current value may be invested without
regard to such 10% limitation.
The fundamental investment policies and the fundamental investment
restrictions stated above may not be changed without approval by a vote of a
majority of the votes available to the Contract Owners. This means that the
policies or restrictions in question may not be changed without the approval of
the lesser of (a) the Contract Owners holding 67% or more of the voting power of
the Contract Owners present or represented at a meeting if Contract Owners
holding more than 50% of the total voting power of all Contract Owners in the
Fund are present or represented by proxy, or (b) Contract Owners holding more
than 50% of the total voting power of all Contract Owners in the Fund.
The following investment restrictions are not fundamental and may be
changed by action of the Board of Managers of the Fund:
(10) All securities in which the Fund invests shall be permissible for the
Fund under the Illinois Insurance Code. The Illinois Insurance Code provides
that investments of a separate account, like the Fund, are free of the
restrictions or provisions generally applicable to insurance companies under
that Code, and does not currently provide any special investment restrictions
applicable to separate accounts. However, no investment permitted under the
Illinois Insurance Code is thereby exempted from the other investment
restrictions specified under this caption.
(11) The Fund will not invest in companies for the purpose of exercising
control or management.
(12) The Fund will not invest in the securities of other investment
companies.
(13) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.
(14) The Fund will not make short sales of securities.
(15) The Fund will not invest in corporate debt (other than commercial
paper) or preferred stock that is rated lower than one of the three top grades
by Moody's Investors Services, Inc. or Standard & Poor's Corporation and the
Fund will not invest in commercial paper rated lower than one of the two top
grades by such rating agencies.
FEDERAL INCOME TAX STATUS
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INTRODUCTION
The Contracts are designed for use by individuals in connection with
Qualified Plans under the Code. The federal income tax treatment of the
Contracts and payments received thereunder depends on various factors,
including, among other factors, the tax status of The Franklin, the type of
retirement plan or program in connection with which the Contracts are used and
the form in which payments are received. The discussion of federal income taxes
contained in this Prospectus, which focuses on rules applicable to Contracts
purchased under this Prospectus, is general in nature and is based on existing
federal income tax law, which is subject to change. The tax discussion is not
intended as tax advice. The applicable federal income tax law is complex and
contains many special rules and exceptions in addition to the general rules
summarized herein. For these reasons, various questions about the applicable
rules exist. Accordingly, each person contemplating the purchase of a Contract
is advised to consult with a qualified tax advisor concerning federal income
taxes and any other federal, state or local taxes that may be applicable.
THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code. Since
the operations of the Fund are part of the overall operations of The Franklin,
the Fund is subject to tax as part of The Franklin for federal income tax
purposes. Thus, the Fund is not taxed separately as a "regulated investment
company" under the Code.
Under the Code a life insurance company like The Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.
Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to the
Fund. Under the Code, no federal income tax is payable by The Franklin on such
investment income or on realized capital gains of the Fund on assets held in the
Fund. However, if changes in the federal tax laws or interpretations thereof
result in The Franklin being taxed on income or gains attributable to the Fund,
then The Franklin may impose a charge against the Fund (with respect to some or
all Contracts) in order to set aside provisions to pay such taxes.
THE CONTRACTS: QUALIFIED PLANS
The manner in which payments received under a Contract are taxed for federal
income tax purposes depends on the form of payment. If payments are received in
the form of an annuity, then, in general, under Section 72 of the Code, such
payment is taxable to the recipient as ordinary income to the extent that such
payment exceeds the portion, if any, of the cost basis of the Contract that is
allocable to that payment. A payment received on account of partial redemption
of an annuity contract generally is taxable in whole or part. The taxation of a
partial redemption is governed by complex rules and a qualified tax advisor
should be consulted prior to a proposed partial redemption. If the Variable
Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Qualified Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.
Generally, payment of the proceeds of a Qualified Contract in a lump sum
instead of in the form of an annuity, either at or before maturity, also is
taxable as ordinary income to the extent the lump sum exceeds the cost basis of
the Qualified Contract. Taxation may be deferred, however, to the extent, if
any, that "rollover" treatment is available and elected for a particular
distribution.
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Under a provision of federal income tax law effective for Contracts entered
into after October 21, 1988, distributions from a Contract are generally not
subject to aggregation with distributions from other annuity contracts issued by
The Franklin (or its affiliates) for the purpose of determining the taxability
of distributions not in the form of an annuity.
The Qualified Contracts are designed for use in connection with several
types of Qualifed Plans, as described generally below.
A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS
Under pension and profit-sharing plans that qualify under Section 401(a) of
the Code and annuity purchase plans that qualify under Section 403(a) of the
Code (collectively "Corporate Qualified Plans"), amounts contributed by an
employer to the Corporate Qualified Plan on behalf of an employee and any gains
thereon are not, in general, taxable to the employee until distribution.
Generally, the cost basis of an employee under a Corporate Qualified Plan will
equal the amount of non-deductible contributions, if any, that the employee made
to the Corporate Qualified Plan. These retirement plans may permit the purchase
of the Contracts to accumulate retirement savings under the plans. Adverse tax
consequences to the plan, to the participant, or both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments.
The Code imposes an additional tax of 10% on the taxable portion of any
early withdrawal from a Corporate Qualified Plan made by a Variable Annuitant
before age 59-1/2, death, or disability. The additional income tax on early
withdrawals will not apply however to certain distributions including (a)
distributions beginning after separation from service that are part of a series
of substantially equal periodic payments made at least annually for the life of
the Variable Annuitant or the joint lives of the Variable Annuitant and his or
her Beneficiary, and (b) distributions made to Variable Annuitants after
attaining age 55 and after separating from service. Further, additional
penalties may apply to distributions made on behalf of a "5-percent owner" (as
defined by Section 416(i)(1)(B) of the Code).
If a lump sum payment of the proceeds of a Contract qualifies as a "lump
sum distribution" under the Code, special tax rules (including limited capital
gain and income averaging treatment in some circumstances) may apply.
B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)
Self-employed persons (including members of partnerships) are permitted to
establish and participate in Corporate Qualified Plans under Sections 401(a) and
403(a) of the Code. Corporate Qualified Plans in which self-employed persons
participate are commonly referred to as "H.R. 10 Plans."
The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately
above. Some special rules apply, however, in the case of self-employed persons
which, for example, affect certain "lump sum distribution" and "rollover" rules.
C. SECTION 403(b) ANNUITIES
Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c) (3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.
If the requirements of Section 403(b) are satisfied, amounts contributed by
the employer to purchase an annuity contract for an employee, and any gains
thereon, are not, subject to certain limitations, taxable to the employee until
distributed to the employee. However, these payments may be subject to
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FICA (Social Security) taxes. Generally, the cost basis of an employee under a
Section 403(b) annuity contract will equal the amount of any non-deductible
contributions the employee made toward the contract plus any employer
contributions that were taxable to the employee because they exceeded excludable
amounts.
Federal tax law imposes limitations on distributions from Section 403(b)
annuity contracts. Withdrawals of amounts attributable to contributions made
pursuant to a salary reduction agreement in connection with a Section 403(b)
annuity contract will be permitted only (1) when an employee attains age 59-1/2,
separates from service, dies or becomes totally and permanently disabled or (2)
in the case of hardship. A withdrawal made in the case of hardship may not
include income attributable to the contributions. However, these limitations
generally do not apply to distributions which are attributable to assets held as
of December 31, 1988. In general, therefore, contributions made prior to January
1, 1989, and earnings on such contributions through December 31, 1988, are not
subject to these limitations. In addition, these limitations do not apply to
contributions made other than by a salary reduction agreement. A number of
questions exist concerning the application of these rules. Anyone considering a
withdrawal from a Contract issued in connection with a Section 403(b) annuity
plan should consult a qualified tax advisor.
The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," above, also applies to Section
403(b) annuity contracts.
D. INDIVIDUAL RETIREMENT ANNUITIES
1. SECTION 408(b) INDIVIDUAL RETIREMENT ANNUITIES
Under Sections 408(b) and 219 of the Code, special tax rules apply to
Individual Retirement Annuities. As described below, certain contributions to
such annuities (other than Rollover Contributions) are deductible within certain
limits and the gains on contributions (including Rollover Contributions) are not
taxable until distributed. Generally, the cost basis in an Individual Retirement
Annuity will equal the amount of non-deductible contributions (other than
rollovers), if any, made to the Individual Retirement Annuity. Under special
rules, all individual retirement plans will be treated as one plan for purposes
of these rules.
Section 408(b) sets forth various requirements that an annuity contract
must satisfy before it will be treated as an Individual Retirement Annuity.
Although final regulations that interpret some of these requirements have been
adopted, other regulations have been proposed that interpret the additional
requirement that, under a Section 408(b) Individual Retirement Annuity, the
premiums may not be fixed. These proposed regulations, which contain certain
ambiguities, may, of course, be changed before they are issued in final form.
ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS
PROSPECTUS MEET THE REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND
THE CURRENTLY PROPOSED REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT
THE CONTRACTS QUALIFY AS INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(b)
PENDING THE ISSUANCE OF COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.
Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general, be
allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if less).
This deduction is phased out at certain income levels for individuals who are
active participants in employer-related retirement plans. These income levels
vary depending on an individual's marital and tax filing status and are
scheduled to gradually increase in the future. Individuals who may not make
deductible contributions to an Individual Retirement Annuity may, instead, make
non-deductible contributions (up to the applicable maximum described above) on
which earnings will accumulate on a tax-deferred basis. If the Individual
Retirement Annuity includes non-deductible contributions, distributions will be
divided on a pro rata basis between taxable and non-taxable amounts. Special
rules apply if, for example, an
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individual contributes to an Individual Retirement Annuity for his or her own
benefit and to another Individual Retirement Annuity for the benefit of his or
her spouse.
Individual Retirement Annuities are subject to limitations on the time when
distributions must commence. In addition, the 10% penalty tax on early
withdrawals described under "Qualified Pension, Profit-Sharing and Annuity
Plans," above, also applies to Individual Retirement Annuities, except that the
circumstances in which the penalty tax will not apply are different in certain
respects. Further, for any year in which a Contract Owner borrows any money
under or by use of the Individual Retirement Annuity, the Contract ceases to
qualify under Section 408(b), and an amount equal to the fair market value of
the Contract as of the first day of such year will be includible in the Contract
Owner's gross income for such year.
The sale of a Contract for use with an Individual Retirement Annuity may be
subject to special disclosure requirements of the Internal Revenue Service.
Purchasers of a Contract for use with Individual Retirement Annuities will be
provided with supplemental information required by the Internal Revenue Service
or other appropriate agency. Such purchasers will have the right to revoke
their purchase within 7 days of the earlier of the establishment of the
Individual Retirement Annuity or their purchase. A Qualified Contract issued in
connection with an Individual Retirement Annuity will be amended as necessary to
conform to the requirements of the Code. Purchasers should seek competent
advice as to the suitability of the Contract for use with Individual Retirement
Annuities.
2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS
An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers may
contribute to the Individual Retirement Annuities of their employees subject to
the limitations in Section 408(j). An employee may exclude the employer's
contribution on his or her behalf to a Simplified Employee Pension from gross
income subject to certain limitations. Elective deferrals under a Simplified
Employee Pension are to be treated like elective deferrals under a cash or
deferred arrangement under Section 401(k) of the Code and are subject to a
$7,000 limitation, adjusted for inflation. In general, the employee may also
contribute and deduct an additional amount not in excess of the lesser of (a)
$2,000 or (b) 100% of compensation, subject to the phaseout discussed above, if
the Simplified Employee Pension meets the qualifications for an Individual
Retirement Annuity.
In general, except as stated in this section, the rules discussed in
"Section 408(b) Individual Retirement Annuities," immediately above, apply to a
Simplified Employee Pension.
INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from Qualified Plans or Contracts issued in connection therewith, to the extent
the distributions are taxable and are not otherwise subject to withholding as
wages ("Distributions"). See "The Contracts: Qualified Plans," above, regarding
the taxation of Distributions.
Federal income tax is generally required to be withheld from all or any
portion of a Distribution made on or after January 1, 1993 that constitutes an
"eligible rollover distribution." An "eligible rollover distribution"
generally includes any distribution from a qualified trust described in Section
401(a) of the Code, a qualified annuity plan described in Section 403(a) of the
Code or a qualified annuity contract described in Section 403(b) of the Code
except for (i) a distribution which is one of a series of substantially equal
periodic instalments payable at least annually for the life (or over the life
expectancy) of the Variable Annuitant or for the joint lives (or over the joint
life expectancies) of the Variable Annuitant and his or her Beneficiary, or for
a specified period of 10 years or more or (ii) a minimum distribution required
pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not
includible in gross income (for example, the return of non-deductible
contributions). Any eligible rollover distribution
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which is not rolled over directly from a Section 401(a) qualified trust, a
Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity
contract to an "eligible retirement plan" is subject to mandatory federal income
tax withholding in an amount equal to 20% of the eligible rollover distribution.
An "eligible retirement plan" generally includes a qualified trust described in
Section 401(a) of the Code, a qualified annuity plan described in Section 403(a)
of the Code, an individual retirement account described in Section 408(a) of the
Code or an Individual Retirement Annuity described in Section 408(b) of the
Code. Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United States
or any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Variable Annuitant or Beneficiary properly elects in
accordance with the prescribed procedures not to have withholding apply. In the
absence of a proper election not to have withholding apply, the amount to be
withheld from a Distribution which is not an eligible rollover distribution
depends upon the type of payment being made. Generally, in the case of a
periodic payment which is not an eligible rollover distribution, the amount to
be withheld from such payment is the amount that would be withheld therefrom
under specified wage withholding tables if the payment were a payment of wages
for the appropriate payroll period. In the case of a nonperiodic payment which
is not an eligible rollover distribution, the amount to be withheld is generally
equal to 10% of the amount of the Distribution.
The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of a Variable
Annuitant or if the Distribution is an eligible rollover distribution from a
qualified annuity contract under Section 403(b) of the Code. Any Variable
Annuitant or Beneficiary considering a Distribution should consult a qualified
tax advisor.
MANAGEMENT
The Fund is managed by a Board of Managers elected annually by the Contract
Owners. The Board of Managers currently has four members. The members of the
Board of Managers also serve as the Board of Managers of Franklin Life Variable
Annuity Fund B, a separate account of The Franklin having investment objectives
similar to the Fund but the assets of which are not held with respect to
Variable Annuity Contracts accorded special tax treatment, and of Franklin Life
Money Market Variable Annuity Fund C, a separate account of The Franklin having
investments in money market securities.
The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and Regulations,
the Board of Managers is authorized to take various actions on behalf of the
Fund, including the entry into contracts for the purpose of services with
respect to the Fund under circumstances where the approval of such contracts is
not required to be submitted to the Contract Owners. Subject to the authority of
the Board of Managers, officers and employees of The Franklin are responsible
for overall management of the Fund's business affairs.
VOTING RIGHTS
All Contract Owners will have the right to vote upon:
(1) The initial approval of any investment management agreement and any
amendment thereto.
(2) Ratification of an independent auditor for the Fund.
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(3) Any change in the fundamental investment policies or fundamental
investment restrictions of the Fund.
(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).
(5) Termination of the investment management agreement (such termination
may also be effected by the Board of Managers).
(6) Any other matter submitted to them by the Board of Managers.
The number of votes which a Contract Owner may cast as to any Contract,
except after the initial Annuity Payment Date, is equal to the number of
Accumulation Units credited to the Contract. With respect to any Contract as to
which Annuity Payments measured by Annuity Units have commenced, the Contract
Owner may cast a number of votes equal to (i) the amount of the assets in the
Fund to meet the Variable Annuity obligations related to such Contract, divided
by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a
Contract Owner will decline during the Annuity Payment period as the amount of
assets in the Fund required to meet the Annuity Payments decreases and, in
addition, will decline as the value of an Accumulation Unit increases.
Fractional votes will be counted.
An employee covered by an H.R. 10 Plan, if not the Contract Owner, will
have the right to instruct the Contract Owner with respect to all votes
attributable to the Contract. An employee covered by a Contract issued in
connection with a qualified pension or profit-sharing plan described in Section
401 of the Code will have the right to instruct the Contract Owner with respect
to votes attributable to his or her payments to the plan, if any, and, to the
extent authorized by the terms of the plan, with respect to any additional votes
under the Contract. If Annuity Payments are being made under an annuity to a
person who is not a Contract Owner, that person will have the right to instruct
the Contract Owner with respect to votes attributable to the amount of the
assets in the Fund to meet the Annuity Payments related to the Contract.
Contract Owners will cast votes with respect to which instructions have
been received in accordance with such instructions. Votes with respect to which
employees, Variable Annuitants or other persons to whom payments are being made
under a Contract are entitled to instruct the Contract Owner, but for which the
Contract Owner has received no instructions, shall be cast by the Contract Owner
for or against each proposal to be voted on in the same proportion as votes for
which instructions have been received by such Contract Owner. If no one is
entitled to instruct the Contract Owner, or if the Contract Owner receives no
instructions, all votes which the Contract Owner is entitled to cast may be cast
at his or her sole discretion. Neither the Fund nor The Franklin has any duty to
inquire as to the instructions received or the authority of the Contract Owner
to cast such votes; except to the extent that the Fund or The Franklin has
actual knowledge to the contrary, the votes cast by Contract Owners will be
considered valid and effective as among the Fund, The Franklin and other persons
having voting rights with respect to the Fund.
Should assets be maintained in the Fund with respect to contracts other
than those offered by this Prospectus, contract owners under such contracts
would be entitled to vote, and their votes would be computed in a similar
manner. Assets maintained by The Franklin in the Fund in excess of the amounts
attributable to the Contracts or other contracts of The Franklin will entitle
The Franklin to vote and its vote would be computed in a similar manner. The
Franklin will cast its votes in the same proportion as the votes cast by
Contract Owners and the owners of such other contracts.
The number of votes which each Contract Owner may cast at a meeting shall
be determined as of a record date to be chosen by the Board of Managers within
120 days of the date of the meeting. At least 20 days' written notice of the
meeting will be given to Contract Owners of record. To be entitled to vote or to
receive notice, a Contract Owner must have been such on the record date.
33
<PAGE>
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial") serves as
"principal underwriter" (as that term is defined in the Investment Company Act
of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The
Sales Agreement is described under "Distribution of The Contracts" in the
Statement of Additional Information. Franklin Financial, located at #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin.
The Fund no longer offers new Contracts. Commissions are paid to
registered representatives of Franklin Financial with respect to Stipulated
Payments received by The Franklin under the Contracts to a maximum of 5% of such
Stipulated Payments.
STATE REGULATION
As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country
into six geographic zones. A representative of each such zone may participate in
the examination.
In addition, The Franklin is subject to the insurance laws and regulations
of the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.
For certain provisions of Illinois law applicable to the Fund's
investments, see "Investment Policies and Restrictions of the Fund," above.
REPORTS TO OWNERS
The Franklin will mail to the Contract Owner, at the last known address of
record at the Home Office of The Franklin, at least annually, a report
containing such information as may be required by any applicable law or
regulation and a statement showing the then Cash Value of his or her Contract.
FUNDAMENTAL CHANGES
Upon compliance with applicable law, including obtaining any necessary
affirmative vote of Contract Owners in each case: (a) the Fund may be operated
in a form other than as a "management company" under the Investment Company Act
of 1940 (including operation as a "unit investment trust"); (b) the Fund may be
deregistered under the Investment Company Act of 1940 in the event such
registration is no longer required; or (c) the provisions of the Contracts may
be modified to assure qualification under the pertinent provisions of the Code
or to comply with other applicable federal or state laws. In the event of any
such fundamental change, The Franklin may make appropriate amendments to the
Contracts to give effect to such change or take such other action as may be
necessary in this respect.
The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund B ("Fund B") and Franklin Life Money
Market Variable Annuity Fund C ("Fund C"), have approved resolutions whereby
Contract Owners will be asked during 1998 to approve or to disapprove an
Agreement and Plan of Reorganization (the "Agreement") and related transactions
(together, the Agreement and related transactions are the "Reorganization")
whereby: (i) the Fund will be
34
<PAGE>
restructured into a single unit investment trust consisting of three
subaccounts; (ii) the assets of each of the Fund, Fund B and Fund C will be
liquidated and the proceeds transferred to one of the three subaccounts in the
restructured Fund (so that the interests of Contract Owners and of Fund B and
Fund C contract owners will continue as interests in the restructured Fund); and
(iii) each subaccount will invest exclusively in shares of a specified mutual
fund portfolio.
Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund having
a value equal to the value of that Contract Owner's interest in a Fund
immediately prior to the Reorganization.
YEAR 2000 TRANSITION
Like all financial services providers, The Franklin utilizes systems that
may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers that also may be
affected. The Franklin and its affiliates have developed, and are in the
process of implementing, a Year 2000 transition plan, and are confirming that
their 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
these efforts, will have any negative impact on The Franklin. However, as of
the date of this prospectus, it is not anticipated that Contract Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of the Year 2000 transition implementation.
The Franklin currently anticipates that its systems will be Year 2000 compliant
on or about December 31, 1998, but there can be no assurance that The Franklin
will be successful, or that interaction with other service providers will not
impair The Franklin's services at that time.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and sales
practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation, the
outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending litigation
should not have a material adverse effect on the Fund or on The Franklin's
financial position; however, it is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings could
have a material adverse effect on The Franklin's results of operations for a
given period. No provision has been made in the consolidated financial
statements related to this pending litigation because the amount of loss, if
any, from these actions cannot be reasonably estimated at this time.
The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama continues to increase and creates the
potential for an unpredictable judgment in any given suit.
REGISTRATION STATEMENT
35
<PAGE>
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and other
legal instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION
The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby. All such other contracts, however, will be
designed for use in connection with certain Qualified Plans or as Individual
Retirement Annuities.
The Franklin will not knowingly permit moneys which are not "tax-benefited"
to be allocated to the Fund. The Franklin will transfer any portion of a
Contract allocated to the Fund to the general account of The Franklin, less a
deduction for federal income taxes payable on the portion so transferred, if, at
any time, the plan or arrangement with respect to which the Contract was sold
fails to meet the requirements of the Code. The Franklin will promptly notify
the Contract Owner of such transfer. The Contract Owner may elect to (1) leave
the funds so transferred in the general account, (2) redeem his Contract, or (3)
apply the funds so transferred to the purchase of a variable annuity contract
offered by Franklin Life Variable Annuity Fund B. See "Redemption," and
"Transfers to Other Contracts," above.
36
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
<S> <C>
General Information . . . . . . . . . . . . . . . . . 2
Investment Objectives. . . . . . . . . . . . . . . . . 2
Limitations on Settlement Options. . . . . . . . . . . 2
Management . . . . . . . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services . . . . . . . . 6
Distribution of The Contracts. . . . . . . . . . . . . 7
Portfolio Turnover and Brokerage . . . . . . . . . . . 8
Safekeeper of Securities . . . . . . . . . . . . . . . 9
Legal Matters. . . . . . . . . . . . . . . . . . . . . 9
Experts. . . . . . . . . . . . . . . . . . . . . . . . 9
Index to Financial Statements. . . . . . . . . . . . . F-1
</TABLE>
37
<PAGE>
PROSPECTUS
FRANKLIN LIFE
VARIABLE ANNUITY FUND A
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
FOR USE WITH CERTAIN QUALIFIED
PLANS AND TRUSTS ACCORDED SPECIAL
TAX TREATMENT AND AS INDIVIDUAL
RETIREMENT ANNUITIES
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
- -------------------------------------------------------------------------------
Complete and return this form to:
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591
Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Variable Annuity Fund A.
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Street)
- -------------------------------------------------------------------------------
(City) (State) (Zip Code)
- -------------------------------------------------------------------------------
<PAGE>
APPENDIX C
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PROSPECTUS
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT USED IN CONNECTION WITH QUALIFIED
TRUSTS OR PLANS) ISSUED BY
#1 Franklin Square
Springfield, Illinois 62713
Telephone (800) 528-2011
THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE
ANNUITY CONTRACTS PROVIDING ANNUITY INSTALLMENTS FOR LIFE COMMENCING ON A
MATURITY DATE SELECTED BY THE CONTRACT OWNER; OTHER SETTLEMENT OPTIONS ARE ALSO
PROVIDED. THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY
PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE
VARIABLE ANNUITY FUND B (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS.
THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM APPRECIATION OF
CAPITAL THROUGH INVESTMENT APPRECIATION AND THE RETENTION AND REINVESTMENT OF
INCOME. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. GENERALLY,
THE FUND'S INVESTMENTS WILL CONSIST OF EQUITY SECURITIES, MAINLY COMMON STOCKS.
----------------------------------
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A
STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 37 OF THIS PROSPECTUS.
-----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms.............................................................. 3
Table of Deductions and Charges............................................ 5
Summary.................................................................... 7
Per-Unit Income and Changes in Accumulation Unit Value..................... 9
Introduction............................................................... 10
Description of the Separate Account........................................ 11
Deductions and Charges Under the Contracts................................. 11
A. Sales and Administration Deductions............................. 11
B. Premium Taxes................................................... 14
C. Mortality and Expense Risk Charge............................... 14
D. Investment Management Service Charge............................ 15
E. Transfers to Other Contracts.................................... 15
F. Miscellaneous................................................... 15
The Contracts.............................................................. 15
A. General......................................................... 15
B. Deferred Variable Annuity Accumulation Period................... 17
C. Annuity Period.................................................. 25
Investment Policies and Restrictions of the Fund........................... 27
Federal Income Tax Status.................................................. 30
Management................................................................. 33
Voting Rights.............................................................. 33
Distribution of the Contracts.............................................. 34
State Regulation........................................................... 34
Reports to Owners.......................................................... 34
Fundamental Changes........................................................ 34
Year 2000 Transition....................................................... 35
Legal Proceedings.......................................................... 35
Registration Statement..................................................... 36
Other Variable Annuity Contracts........................................... 36
Table of Contents of Statement of Additional Information................... 37
</TABLE>
- --------------------------------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED
BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION
OR FRANKLIN LIFE VARIABLE ANNUITY FUND B TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND
IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL.
2
<PAGE>
SPECIAL TERMS
The following is a glossary of certain terms used in this Prospectus:
ACCUMULATION UNIT-A measure used to determine the value of a Contract Owner's
interest in the Fund prior to the initial Annuity Payment Date.
ANNUITY PAYMENT DATE-The date the first monthly Annuity Payment is to be made to
the Variable Annuitant, and the same day of each month thereafter so long as the
annuity is due. Depending on the Settlement Option elected, Annuity Payment
Dates may occur on a periodic basis other than monthly.
ANNUITY PAYMENTS-Periodic payments made to a Variable Annuitant pursuant to a
Contract. In certain circumstances, Annuity Payments may be paid to a
Beneficiary after the death of a Variable Annuitant.
ANNUITY UNIT-A measure used to determine the value of Annuity Payments after the
first.
BENEFICIARY-The person or persons designated by the Contract Owner to whom any
payment due on death is payable.
CASH VALUE-The value of all Accumulation Units or Annuity Units attributable to
a Contract.
CODE-The Internal Revenue Code of 1986, as amended.
CONTRACT-An individual variable annuity contract issued by Franklin Life
Variable Annuity Fund B that is offered by this Prospectus.
CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract.
CONTRACT OWNER-The Contract Owner is the individual Variable Annuitant to whom
the contract is issued or his or her assignee, or if an owner other than the
Variable Annuitant is designated in the application for the Contract, such other
person. When the term "Contract Owner" is used in the context of voting rights,
it includes the owners of all Contracts which depend in whole or in part on the
investment performance of the Fund.
CONTRACT YEAR-Each year starting with the Effective Date and each Contract
Anniversary thereafter.
DEFERRED VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence at some future date. Included are periodic payment deferred
contracts and single payment deferred contracts.
EFFECTIVE DATE-The date shown on the Schedule Page of the Contract as the date
the first Contract Year begins.
FIXED-DOLLAR ANNUITY-An annuity contract which provides for Annuity Payments
which remain fixed as to dollar amount throughout the Annuity Payment period.
HOME OFFICE-The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.
IMMEDIATE VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.
INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of
the Code.
PERIODIC STIPULATED PAYMENT CONTRACT-An annuity contract which provides that
payments made to purchase the contract will be made in periodic instalments
rather than in a single sum.
SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.
3
<PAGE>
SINGLE STIPULATED PAYMENT CONTRACT-An annuity contract which provides that the
total payment to purchase the contract will be made in a single sum rather than
in periodic instalments. Included are single payment immediate contracts and
single payment deferred contracts.
STIPULATED PAYMENTS-The payment or payments provided to be made to The Franklin
under a Contract.
THE FRANKLIN-The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.
VALUATION DATE-Each date as of which the Accumulation Unit value is determined.
This value is determined on each day (other than a day during which no Contract
or portion thereof is tendered for redemption and no order to purchase or
transfer a Contract is received by the Fund) in which there is a sufficient
degree of trading in the securities in which the Fund invests that the value of
an Accumulation Unit might be materially affected by changes in the value of the
Fund's investments, as of the close of trading on that day.
VALUATION PERIOD-The period commencing on a Valuation Date and ending on the
next Valuation Date.
VARIABLE ANNUITANT-Any natural person with respect to whom a Contract has been
issued and a Variable Annuity has been, will be or (but for death) would have
been effected thereunder. In certain circumstances, a Variable Annuitant may
elect to receive Annuity Payments on a fixed-basis or a combination of a fixed
and variable basis.
VARIABLE ANNUITY-An annuity contract which provides for a series of periodic
annuity payments, the amounts of which may increase or decrease as a result of
the investment experience of a separate account.
4
<PAGE>
TABLE OF DEDUCTIONS AND CHARGES
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases (as a
percentage of purchase payments)
Single Stipulated Payment Contract 5.00%
Periodic Stipulated Payment Contract 15.00% to 1.00% (for a Contract
with a stipulated payment period of
12 or more years; 4.33% aggregate
over all years for a 12-year
Contract)
10.00% to 3.00% (for a Contract
with a stipulated payment period of
9 to 11 years; 4.44% aggregate over
all years for a 9-year Contract)
6.00% to 3.00% (for a Contract with
a stipulated payment period of 6 to
8 years; 4.50% aggregate over all
years for a 6-year Contract)
4.00% to 3.00% (for a Contract with
a stipulated payment period of 2 to
5 years; 4.00% aggregate over all
years for a 2-year Contract)
Administration Fee (as a percentage of
purchase payment)
Single Stipulated Payment Contract $100
Periodic Stipulated Payment Contract 0.00% to 10.00% (for a Contract
with a stipulated payment period of
12 or more years; 4.67% aggregate
over all years for a 12-year
Contract)
3.00% to 10.00% (for a Contract
with a stipulated payment period of
9 to 11 years; 4.44% aggregate over
all years for a 9-year Contract)
3.00% to 6.00% (for a Contract with
a stipulated payment period of 6 to
8 years; 4.50% aggregate over all
years for a 6-year Contract)
3.00% to 5.00% (for a Contract with
a stipulated payment period of 2 to
5 years; 5.00% aggregate over all
years for a 2-year Contract)
5
<PAGE>
Annual Expenses
(as a percentage of average net assets)
<TABLE>
<S> <C>
Management Fees 0.44%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.10%
-----
Total Annual Expenses 1.44%
</TABLE>
Example
<TABLE>
<CAPTION>
If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
Single Stipulated Payment Contract $ 162 $ 189 $ 217 $ 297
Periodic Stipulated Payment Contracts:
Stipulated Payment Period:
12 years or more $ 162 $ 189 $ 217 $ 297
9 to 11 years $ 162 $ 189 $ 217 $ 297
6 to 8 years $ 123 $ 151 $ 180 $ 263
2 to 5 years $ 103 $ 131 $ 162 $ 247
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The Table of Deductions and Charges is intended to assist Contract Owners
in understanding the various fees and expenses that they bear directly or
indirectly. Additional deductions may be made from Stipulated Payments for any
premium taxes payable by The Franklin on the consideration received from the
sale of the Contracts. See "Premium Taxes," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," below. The example assumes that a single Stipulated Payment of
$1,000 is made at the beginning of the periods shown. (It should be noted that
The Franklin will not actually issue a Single Stipulated Payment Contract unless
the single payment is at least $2,500.) This assumption applies even with
respect to Periodic Stipulated Payment Contracts, which would normally require
additional payments. The example also assumes a constant investment return of 5%
and the expenses might be different if the return of the Fund averaged 5% over
the periods shown but fluctuated during such periods. The amounts shown in the
example represent the aggregate amounts that would be paid over the life of a
Contract if the Contract were surrendered at the end of the applicable time
periods.
6
<PAGE>
SUMMARY
THE CONTRACTS
The individual variable annuity contracts (the "Contracts") being offered
by this Prospectus are designed for retirement planning for individuals. They
are not designed for use in connection with employer-related plans or qualified
plans and trusts (including Individual Retirement Annuities) accorded special
tax treatment under the Code. The basic purpose of the Contracts is to provide
Annuity Payments which will vary with the investment performance of Franklin
Life Variable Annuity Fund B (the "Fund"). The Contracts provide Annuity
Payments for life commencing on an initial Annuity Payment Date selected by the
Contract Owner; other Settlement Options are provided. In the event of death
prior to the initial Annuity Payment Date, the contract value is paid to the
Beneficiary. Periodic Stipulated Payment Contracts and Single Stipulated Payment
Contracts are offered. See "Introduction," and "The Contracts," below. At any
time within 10 days after receipt of a Contract, the Contract Owner may return
the Contract and receive a refund of any premium paid on the Contract.
Additional refund rights apply to Periodic Stipulated Payment Contracts having a
Stipulated Payment Period of more than five years. See "Withdrawal by the
Contract Owner," below.
Contracts held by a person (such as a corporation or partnership) who is
not a natural person are subject to special federal income tax treatment and the
income on such Contracts allocable to Stipulated Payments made after February
28, 1986 may, subject to certain exceptions, be taxable to the Contract Owner in
the year earned. This special rule does not apply to Contracts held by natural
persons. See "Federal Income Tax Status," below.
THE FUND AND ITS INVESTMENT OBJECTIVES
The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term appreciation of capital
through investment appreciation and retention and reinvestment of income.
Generally, the Fund's investments will consist of equity securities, mainly
common stocks. The value of investments held in the Fund is subject to the risk
of changing economic conditions as well as the risk inherent in management's
ability to anticipate such changes. See "Investment Policies and Restrictions of
the Fund," below.
INVESTMENT ADVISER; PRINCIPAL UNDERWRITER
The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities and
income protection policies. Franklin Financial Services Corporation, a
wholly-owned subsidiary of The Franklin, is the principal underwriter for the
Fund. The Franklin is an indirect wholly-owned subsidiary of American General
Corporation. See "Investment Management Service Charge," and "Distribution of
the Contracts," below.
DEDUCTIONS AND CHARGES
The deductions and charges applicable to a Contract are illustrated in the Table
of Deductions and Charges that appears immediately before this summary. In the
case of Periodic Stipulated Payment Contracts, a deduction, which varies
depending upon the length of the Stipulated Payment period agreed upon in the
Contract and the Contract Year with respect to which the payment is scheduled
to be made, is made for sales and administrative expenses. Over the entire life
of a 12-year Periodic Stipulated Payment Contract, total deductions equal to
4.33% of all periodic payments are made for sales expenses and total deductions
equal to 4.67% of all periodic payments are made for administrative expenses
(for a combined total of 9%); the combined total deductions amount to 9.89% of
the net amount invested assuming no premium taxes are applicable (4.76% for
sales expenses and 5.13% for administrative expenses). During the first four
years of a 12-year contract, however, combined total deductions amount to
17.65%. In the case of a Single Stipulated Payment Contract, a deduction
equal to 5% of the total single payment is made for sales expenses and
a deduction of $100 is made for
7
<PAGE>
administrative expenses (for a combined total, in the case of a minimum Single
Stipulated Payment Contract sold, of 9%). In the case of a minimum Single
Stipulated Payment Contract sold, the combined deductions amount to 9.89% of
the net amount invested assuming no premium taxes are applicable (5.49% for
sales expenses and 4.40% for administrative expenses). Any applicable state or
local taxes on the Stipulated Payments (currently, up to 5%) also are deducted
from the Single or Periodic Stipulated Payments. The amount remaining after
deductions is allocated to the Fund. See "Sales and Administration Deductions,"
"Transfers to Other Contracts," and "Premium Taxes," below.
The Contracts include The Franklin's undertaking that deductions for sales
and administrative expenses will not be increased regardless of the actual
expenses incurred, and that the Variable Annuity Payments will be paid for the
lifetime of the Variable Annuitant (and, in the case of a joint and last
survivor annuity, for the joint lives of the persons specified) commencing on
the selected initial Annuity Payment Date based on the mortality assumptions
contained in the Contract, regardless of the actual mortality experience among
the Variable Annuitants. In exchange for these undertakings, a charge of 1.002%
of net asset value on an annual basis is made daily against the Fund
(consisting of 0.900% for The Franklin's assurances of annuity rates or
mortality factors and 0.102% for The Franklin's assurances of expense factors).
A charge of 0.438% of net asset value on an annual basis is also made daily
against the Fund for investment management services by The Franklin. The charges
for annuity rate assurances, expense assurances and investment management
services thus aggregate 1.440% of net asset value on an annual basis. See
"Mortality and Expense Risk Charge," and "Investment Management Service Charge,"
below.
MINIMUM PERMITTED INVESTMENT
The minimum single Stipulated Payment is $2,500. The minimum Periodic
Stipulated Payment Contract sold is one under which the periodic Stipulated
Payment (after an initial $20 payment) is currently $10 ($120 on an annual
basis). See "Purchase Limits," below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may redeem all or part of the Contract and receive the Cash Value
(equal to the number of Accumulation Units credited to the part of the
Contract redeemed) times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received less federal
income tax withholding, if applicable. For information as to Accumulation
Units, see "Value of the Accumulation Unit," below. Subject to certain
limitations, the Contract Owner may elect to have all or a portion of the
amount due upon a total redemption of a Contract applied under certain
Settlement Options or applied toward the purchase of other annuity or insurance
products offered by The Franklin. Federal tax penalties may apply to certain
redemptions. See "Redemption," "Transfers to and from Other Contracts,"
"Settlement Options, "The Contracts," and "Federal Income Tax Status," below.
TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate Contracts the Cash
Value of which has been less than $500 for three years if the Stipulated
Payments in the amount of $120 have not been made in each of the three contract
years of such period, but The Franklin has agreed not to exercise this right in
certain cirumstances. See "Termination by The Franklin," below.
8
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
The financial information in this table for each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. This table should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $2.025 $1.777 $2.043 $1.569 $1.305 $1.120 $1.197 $1.303 $1.271 $1.102
Expenses 1.447 1.169 .935 .850 .841 .766 .691 .595 .541 .463
----------------------------------------------------------------------------------------------------
Net Investment income .578 .608 1.108 .719 .464 .354 .506 .708 .730 .639
Net realized and unrealized
gain (loss) on securities 23.136 13.251 14.278 (.943) 1.697 1.236 13.776 (1.871) 7.822 .016
----------------------------------------------------------------------------------------------------
Net change in accumulation
unit value 23.714 13.859 15.386 (.224) 2.161 1.590 14.282 (1.163) 8.552 .655
Accumulation unit value:
Beginning of year 86.875 73.016 57.630 57.854 55.693 54.103 39.821 40.984 32.432 31.777
----------------------------------------------------------------------------------------------------
End of year $110.589 $86.875 $73.016 $57.630 $57.854 $55.693 $54.103 $39.821 $40.984 $32.432
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income
to average net assets .58% .75% 1.71% 1.22% .80% .67% 1.05% 1.71% 1.94% 1.99%
Portfolio turnover rate .67% 3.35% 22.26% 82.18% 61.50% 60.64% 24.18% 28.41% 64.08% 81.20%
Number of accumulation units
outstanding at end of year 16,323 18,648 21,059 23,165 26,542 29,973 31,205 48,192 53,877 61,038
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL STATEMENTS
The Financial Statements for the Fund and The Franklin and the reports of
the independent auditors and accountants for the Fund and The Franklin are
included in the Statement of Additional Information.
9
<PAGE>
INTRODUCTION
FRANKLIN LIFE VARIABLE ANNUITY FUND B
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
The Contracts offered by this Prospectus are designed primarily to assist
in retirement planning for individuals. They are not designed for use in
connection with employer-related plans or qualified plans and trusts (including
Individual Retirement Annuities) accorded special tax treatment under the Code.
The Contracts provide Annuity Payments for life commencing on a selected Annuity
Payment Date; other Settlement Options are available. The amount of the
Annuity Payments will vary with the investment performance of the assets of the
Fund, a separate account which has been established by The Franklin Life
Insurance Company ("The Franklin") under Illinois insurance law. For the
primary investment objective of the Fund, see "Investment Policies and
Restrictions of the Fund," below.
Pursuant to this Prospectus, The Franklin offers two types of Contracts:
those under which Annuity Payments to the Variable Annuitant commence
immediately-"Immediate Variable Annuities"-and those under which Annuity
Payments to the Variable Annuitant commence in the future-"Deferred Variable
Annuities." Deferred Variable Annuities may be purchased either with periodic
Stipulated Payments or with a single Stipulated Payment, while Immediate
Variable Annuities may only be purchased with a single Stipulated Payment.
The Franklin is a legal reserve stock life insurance company organized
under the laws of the State of Illinois in 1884. The Franklin issues individual
life insurance, annuity and accident and health insurance policies, group
annuities and group life insurance and offers a variety of whole life, life,
retirement income and level and decreasing term insurance plans. Its Home Office
is located at #1 Franklin Square, Springfield, Illinois 62713.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
The Contract Owner may elect to have a portion of the Stipulated Payment or
Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity.
Fixed-Dollar Annuity Contracts do not, however, participate in the Fund and the
Contracts are transferred to the general account of The Franklin. In cases
where both a Fixed-Dollar and a Variable Annuity are provided under the same
Contract, either annuity may be terminated and the Cash Value obtained or other
Settlement Option elected by the Contract Owner, at any time prior to
commencement of annuity instalments by The Franklin; under these circumstances,
the other annuity may be continued in effect, provided that the annual
Stipulated Payment allocated to the other annuity satisfies The Franklin's
usual underwriting practices. These practices presently require that each
periodic Stipulated Payment (other than the first payment, which must be at
least $20) which purchases the Variable Annuity be at least $10. See generally
"Redemption," and "Settlement Options," below.
Unless otherwise indicated in this Prospectus, the discussion of the
Contracts herein refers to Variable Annuity Contracts, or to the Variable
Annuity portion in cases where both a Variable and a Fixed-Dollar Annuity are
provided in the same Contract, and not to any Fixed-Dollar Annuity. Provisions
relating to a Fixed-Dollar Annuity and a Variable Annuity are separate, and
neither is dependent upon the other in its operations.
10
<PAGE>
The discussion of Contract terms herein in many cases summarizes those
terms. Reference is made to the full text of the Contract forms, which are
filed with the Securities and Exchange Commission as exhibits to the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of which this Prospectus is a part.
DESCRIPTION OF THE SEPARATE ACCOUNT
The Fund was established as a separate account on April 1, 1970 by
resolution of the Board of Directors of The Franklin pursuant to the provisions
of the Illinois Insurance Code. The Fund is an open-end diversified management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940. Such registration does not involve
supervision of the management or investment practices or policies of the Fund
or of The Franklin by the Commission. The Board of Managers of the Fund must
be elected annually by Contract Owners. A majority of the members of the Board
of Managers are persons who are not otherwise affiliated with The Franklin. See
"Management," below. The Fund meets the definition of a "Separate Account" under
the federal securities laws.
Under the provisions of the Illinois Insurance Code: (i) the income, gains
or losses of the Fund are credited to or charged against the amounts allocated
to the Fund in accordance with the terms of the Contracts, without regard to the
other income, gains or losses of The Franklin; and (ii) the assets of the Fund
are not chargeable with liabilities arising out of The Franklin's other
business activities, including liabilities of any other separate account which
may be established. These assets are held with relation to the Contracts
described in this Prospectus and such other Variable Annuity contracts as may
be issued by The Franklin and designated by it as participating in the Fund.
All obligations arising under the Contracts, including the promise to make
Annuity Payments, are general corporate obligations of The Franklin.
Accordingly, all of The Franklin's assets (except those allocated to other
separate accounts which have been or may be established) are available to meet
its obligations and expenses under the Contracts participating in the Fund.
The Franklin is taxed as a "life insurance company" under the Code. The
Fund is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are considered separately from the other
operations of The Franklin in computing The Franklin's tax liability and the
Fund is not affected by federal income taxes paid by The Franklin with respect
to its other operations. The operations of the Fund are treated separately from
the other operations of The Franklin for accounting and financial statement
purposes. Under existing law, no federal income tax is payable by The Franklin
on investment income and realized capital gains of the Fund. See "Federal
Income Tax Status," below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
The Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular Contract. For example, the sales deductions may
not fully cover all of the sales and distribution expenses actually incurred by
The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
A. SALES AND ADMINISTRATION DEDUCTIONS
Deductions will be made as follows for sales expenses with respect to the
Contracts and administrative expenses with respect to the Contracts and the
Fund:
(1) Under Single Stipulated Payment Contracts, a deduction of $100 is made
from the single payment for administrative expenses. In addition, a sales
expense deduction of 5% of the total payment is made from the single Stipulated
Payment. In the case of the minimum Single Stipulated Payment Contract sold
(which is $2,500), the combined deductions for administrative expenses and sales
expenses amount to 9.89% of the net amount invested (5.49% for sales expenses
and 4.40% for administrative expenses) assuming no premium taxes are applicable.
11
<PAGE>
(2) Under Periodic Stipulated Payment Contracts, a sales and administration
deduction is made from each Stipulated Payment. The amount of the deduction
varies depending upon the length of the stipulated payment period agreed upon in
the Contract and the Contract Year with respect to which a payment is scheduled
to be made. The deductions are applied whether the Stipulated Payment is made on
time or in arrears. Prepayments will not be accepted. The following tables
indicate the deductions made:
<TABLE>
<CAPTION>
STIPULATED PAYMENT PERIOD OF 12 OR MORE YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 17.65% 0.00% 17.65% 15% 0% 15%
2 to 4 5.88% 11.76% 17.65% 5% 10% 15%
5 5.56% 5.56% 11.11% 5% 5% 10%
6 to 10 3.19% 3.19% 6.38% 3% 3% 6%
11 or subsequent 1.04% 3.13% 4.17% 1% 3% 4%
AGGREGATE OVER ALL
YEARS FOR A
12-YEAR CONTRACT: 4.76% 5.13% 9.89% 4.33% 4.67% 9%
STIPULATED PAYMENT PERIOD OF 9-11 YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
1 11.78% 5.88% 17.65% 10% 5% 15%
2 5.88% 11.76% 17.65% 5% 10% 15%
3 to 4 5.56% 5.56% 11.11% 5% 5% 10%
5 to 11 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
9-YEAR CONTRACT: 4.88% 4.88% 9.76% 4.44% 4.44% 8.89%
STIPULATED PAYMENT PERIOD OF 6-8 YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
1 6.74% 5.62% 12.36% 6% 5% 11%
2 5.62% 6.74% 12.36% 5% 6% 11%
3 to 4 5.56% 5.56% 11.11% 5% 5% 10%
5 or subsequent 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
6-YEAR CONTRACT: 4.95% 4.95% 9.89% 4.50% 4.50% 9%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
STIPULATED PAYMENT PERIOD OF 2-5 YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 to 4 4.40% 5.49% 9.89% 4% 5% 9%
5 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
2-YEAR CONTRACT: 4.40% 5.49% 9.89% 4% 5% 9%
</TABLE>
NOTE: The foregoing tables assume that no premium taxes are payable in the
jurisdiction in question. See discussion under "Premium Taxes," below.
Percentage figures may not add due to rounding.
Deductions for sales expenses are made pursuant to a Sales Agreement with
Franklin Financial Services Corporation ("Franklin Financial"). See
"Distribution of the Contracts," below, and in the Statement of Additional
Information. Deductions for administrative expenses, and for mortality and
expense risk assurances discussed under "Mortality and Expense Risk Charge,"
below, are made pursuant to an Administration Agreement dated March 23, 1972
between the Fund and The Franklin. The Administration Agreement is described
under "Investment Advisory and Other Services" in the Statement of Additional
Information.
The Franklin will not accept more than the stipulated dollar amounts of
payments on any Contract except in the case of a Contract having a Stipulated
Payment period of 12 or more years. In the case of monthly Stipulated Payment
Contracts, where the Stipulated Payment per month (subsequent to the initial
payment) is less than $20, the initial monthly payment must be at least $20, and
the total payments to be received during the first Contract Year will be twelve
times the amount of the Stipulated Payment per month (subsequent to the initial
payment). This will be done either by ending the first Contract Year earlier
than twelve months after the receipt of the initial Stipulated Payment or by
omitting certain monthly payments which otherwise would follow the initial
payment. The purpose of this procedure is to prevent the imposition of total
deductions over the life of the contract in an amount in excess of the amounts
set forth in the tables above opposite the items "Aggregate over all years" for
sample Contracts.
The table below illustrates, in the case of assumed Contracts for 10 years
and for 15 years providing for stipulated monthly payments amounting to $50 per
month, the allocation of the cumulative payments and deductions at the end of
certain specified periods of time. In Contracts for less than nine years, the
amounts deducted from the earlier Stipulated Payments are less than those
deducted from the Stipulated Payments in the earlier periods for the Contracts
illustrated in the table, and, accordingly, in those Contracts proportionately
more of the total Stipulated Payments would be invested at the end of one, two
and five years than in the case of the illustrations given.
10 YEAR CONTRACT
<TABLE>
<CAPTION>
AT THE END OF. . . . . . . . . 10 YEARS 1 YEAR 2 YEARS 5 YEARS
(120 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL PAYMENTS . . . . . . . . . $6,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00%
DEDUCT:
SALES EXPENSE DEDUCTION . . . . 258.00 4.30% 62.50 9.61% 92.50 7.40% 169.50 5.555%
ADMINISTRATION DEDUCTION. . . . 258.00 4.30% 35.00 5.39% 92.50 7.40% 169.50 5.555%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS. . . . . . . . $ 516.00 8.60% $ 97.50 15.00% $ 185.00 14.80% $ 339.00 11.110%
NET AMOUNT INVESTED. . . . . . . $5,484.00 91.40% $552.50 85.00% $1,065.00 85.20% $2,711.00 88.890%
</TABLE>
13
<PAGE>
15 YEAR CONTRACT
<TABLE>
<CAPTION>
AT THE END OF . . . . . . . . . 15 YEARS 1 YEAR 2 YEARS 5 YEARS
(180 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL PAYMENTS . . . . . . . . . $9,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00%
DEDUCT:
SALES EXPENSE DEDUCTION . . . . 330.00 3.67% 92.50 14.23% 122.50 9.80% 211.50 6.935%
ADMINISTRATION DEDUCTION. . . . 390.00 4.33% 5.00 0.77% 65.00 5.20% 211.50 6.935%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS. . . . . . . . $ 720.00 8.00% $ 97.50 15.00% $ 187.50 15.00% $ 423.00 13.870%
NET AMOUNT INVESTED. . . . . . . $8,280.00 92.00% $552.50 85.00% $1,062.50 85.00% $2,627.00 86.130%
</TABLE>
NOTE: The foregoing table assumes that no premium taxes are payable in the
jurisdiction in question. See the discussion under "Premium Taxes,"
below. The percentages shown are percentages of the total payments
made.
The total deductions made in respect of sales expenses of Franklin
Financial in 1995, 1996 and 1997 were $825, $370 and $402, respectively, and all
such amounts were retained on behalf of Franklin Financial.
The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1995, 1996 and
1997 were $1,316, $632 and $689, respectively.
B. PREMIUM TAXES
At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof will
be deducted from the Stipulated Payments. Premium taxes ranging up to 5% are
charged by various jurisdictions in which The Franklin is transacting business
and in which it may, after appropriate qualification, offer Contracts.
C. MORTALITY AND EXPENSE RISK CHARGE
While Annuity Payments will reflect the investment performance of the Fund,
they will not be affected by adverse mortality experience or by any excess in
the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," immediately below, which
the Fund will bear). The Franklin assumes these risks for the duration of the
Contract and the annuity rate, mortality and expense risk deductions and
charges set forth herein will not be increased beyond the stated maximum with
respect thereto regardless of the actual mortality and expense experience. The
mortality risk charge is imposed regardless of whether or not the payment option
selected involves a life contingency.
For assuming these risks, The Franklin imposes a daily charge against the
value of the Accumulation Unit and the Annuity Unit. (For further information
as to the Accumulation Unit and the Annuity Unit, see "Deferred Variable
Annuity Accumulation Period" and "Annuity Period," below.) These charges are at
the combined annual rate of 1.002% (.002745% on a daily basis), of which .900%
is for annuity rate and mortality assurances and .102% is for expense
assurances. If the money collected from this charge is not needed, it will be
to The Franklin's gain and may be used to cover contract distribution expenses.
During 1995, 1996 and 1997, The Franklin earned and was paid $14,273,
$15,752 and $17,759, respectively, by reason of these charges. Such charges
during 1997 were equal to 1.002% of average net assets.
14
<PAGE>
D. INVESTMENT MANAGEMENT SERVICE CHARGE
The Franklin acts as investment manager of the Fund. For acting as such,
The Franklin makes a charge against the Fund at the annual rate of 0.438% of
the Fund's assets, computed by imposing a daily charge of 0.0012% against the
value of the Accumulation Unit and of the Annuity Unit in determining those
values. The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting held
on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of
the Fund at its meeting on January 19, 1998. The Investment Management
Agreement is described under "Investment Advisory and Other Services" in the
Statement of Additional Information.
During 1995, 1996 and 1997, The Franklin earned and was paid $6,240, $6,886
and $7,765, respectively, under the Investment Management Agreement then in
effect.
E. TRANSFERS TO OTHER CONTRACTS
Contracts may be redeemed prior to the death of the Variable Annuitant and
the initial Annuity Payment Date and the Cash Value (less the required amount
of federal income tax withholding, if any) may be applied to the purchase of
certain other Variable Annuities, Fixed-Dollar Annuities or life insurance
contracts issued by The Franklin. Franklin Life Variable Annuity Fund A and
Franklin Life Money Market Variable Annuity Fund C, other separate accounts of
The Franklin funding Variable Annuity contracts, no longer issue new Variable
Annuity contracts.
It is not clear whether gain or loss will be recognized for federal income
tax purposes upon the redemption of a Contract, another annuity contract or
life insurance contract issued by The Franklin for purposes of applying the
redemption proceeds to the purchase of another contract issued by The Franklin.
Federal tax penalties may also apply to such redemptions. Since the income and
withholding tax consequences of such redemption and purchase depend on many
factors, any person contemplating redemption of a Contract or another contract
issued by The Franklin for purposes of purchasing a different contract issued by
The Franklin (or any other contract) is advised to consult a qualified tax
advisor prior to the time of redemption. Contract Owners who are not natural
persons should also consider whether such a redemption would cause them to lose
certain advantages applicable to stipulated payments made on or before February
28, 1986. See "Federal Income Tax Status-The Contracts," below.
F. MISCELLANEOUS
The Fund's total expenses for 1997 were $25,524, or 1.440% of average
net assets during 1997.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on
the cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, which reflects the age and sex of the
Variable Annuitant and the type of Settlement Option selected, and (ii) the
investment performance of the Fund. In the case of Deferred Variable
Annuities, the annuity rate table is set forth in the Contract. In the case
of Immediate Variable Annuities, the table is that used by The Franklin on the
15
<PAGE>
date of issue of the Contract. The amount of the Annuity Payments will not be
affected by mortality experience adverse to The Franklin or by an increase in
The Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant under
an annuity with a life contingency or one providing for a number of Annuity
Payments certain will receive the value of a fixed number of Annuity Units
each month, determined as of the initial Annuity Payment Date on the basis of
the applicable annuity rate table and the then value of his or her account. The
value of Annuity Units, and thus the amounts of the monthly Annuity Payments,
will, however, reflect investment gains and losses and investment income
occurring after the initial Annuity Payment Date, and thus the amount of the
Annuity Payments will vary with the investment experience of the Fund. See
"Annuity Period," below.
2. DECREASE BY CONTRACT OWNER IN AMOUNT OF PERIODIC STIPULATED PAYMENTS;
INCREASE BY CONTRACT OWNER IN NUMBER OF PERIODIC STIPULATED PAYMENTS
Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. Subject to the
limitations described under "Purchase Limits," below, the amount of a periodic
Stipulated Payment may be decreased by the Contract Owner on any date a
Stipulated Payment is due. Submission of a Stipulated Payment in an amount less
than that of the previous Stipulated Payment, subject to the aforesaid purchase
limits, will constitute notice of the election of the Contract Owner to make
such change. After such a decrease, the Contract Owner is permitted to increase
his periodic Stipulated Payments up to, but not in excess of, the amount
originally provided in the Contract. Unless otherwise agreed to by The
Franklin, the mode of Stipulated Payment may be changed only on a Contract
Anniversary.
In the case of Contracts having a Stipulated Payment period of 12 years or
more, the Contract Owner may continue making Stipulated Payments after the
agreed amount of Stipulated Payments has been made, subject to the limitation
that no more than twice the amount of Stipulated Payments specified in the
Contract will be received by The Franklin, and The Franklin reserves the right
not to accept the Stipulated Payments after age 75. The deductions for sales and
administrative expenses from these additional Stipulated Payments will be that
applicable to Stipulated Payments in the final agreed year for Stipulated
Payments as set forth in the table as to Stipulated Payment periods of 12 or
more years under "Sales and Administration Deductions," above. No similar
privilege is available with respect to Contracts having a Stipulated Payment
period of less than 12 years.
3. ASSIGNMENT OR PLEDGE
A Contract may be assigned by the Contract Owner or pledged by him or her
as collateral security as provided in the Contract. The Franklin will make
Contract loans only as provided under "Contract Loans," below. Assignments or
pledges of the Contract and Contract loans will be treated as distributions
that may be taxable. Moreover, in certain instances, pledges or assignments of
the Contract and Contract Loans may result in the imposition of certain tax
penalties. See "Federal Income Tax Status-The Contracts," below.
Persons contemplating the assignment or pledge of a Contract are advised to
consult a qualified tax advisor concerning the federal income tax consequences
thereof.
4. PURCHASE LIMITS
No single Stipulated Payment may be less than $2,500. Currently, no
periodic Stipulated Payment may be less than $120 on an annual basis, $60 on a
semiannual basis, and $30 on a quarterly basis; and, in the case of monthly
Stipulated Payment contracts, the initial payment must be at least $20 and each
subsequent periodic payment at least $10. Under the terms of the Contract, The
Franklin may increase the minimum periodic Stipulated Payment to $20 ($240 on an
annual basis).
5. TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate any Contract if
total Stipulated Payments paid are less
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than $120 in each of three consecutive Contract Years (excluding the first
Contract Year) and if the Cash Valueis less than $500 at the end of such
three-year period. Under the terms of the Contract, The Franklin may terminate
such Contract if total Stipulated Payments paid are less than $240 in each of
such three consecutive Contract Years and if the Cash Value is less than $500
at the end of such three-year period. The Franklin must give 31 days' notice
by mail to the Contract Owner of such termination. The Franklin will not
exercise any right to terminate such Contract if the value of the Contract
declines to less than $500 as a result of a decline in the market value of the
securities held by the Fund.
Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less federal income tax withholding and
any indebtedness, if applicable. For certain tax consequences upon such
payment, see "Federal Income Tax Status," below.
6. WITHDRAWAL BY THE CONTRACT OWNER
A Contract Owner has the right to revoke the purchase of a Contract within
10 days after receipt of the Contract, and upon such revocation will be entitled
to a return of the entire amount paid.
In addition, with respect to any Periodic Stipulated Payment Contract
having a Stipulated Payment period of more than five years, The Franklin will
send to the Contract Owner of such Contract, within 60 days after the Date of
Issue, a statement of charges to be deducted from the Stipulated Payments and a
notice of the right to withdraw from the Contract, which may be exercised by
surrendering the Contract within 45 days after the mailing of the notice. In
the case of such surrender, the Contract Owner will be entitled to the Cash
Value of the Contract, plus an amount, payable by The Franklin or by Franklin
Financial Services Corporation, distributor of the Contracts, equal to the
difference between the gross payments made on the Contract and the net amount
invested. The Franklin has guaranteed the obligations of Franklin Financial
Services Corporation in this respect and accordingly, in connection with The
Franklin's ability to meet these obligations, the financial statements of The
Franklin contained herein should be considered. Payments upon such surrender
may be subject to federal income tax withholding and federal tax penalties.
See "Income Tax Withholding," below and "Federal Income Tax Status-The
Contracts," below.
Any request for revocation or withdrawal must be made by mailing or
hand-delivering the Contract and a written request for revocation or withdrawal
within the applicable time period either to The Franklin Life Insurance
Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713,
or to the agent from whom the Contract was purchased. In general, notice of
revocation given by mail is deemed to be given on the date of the postmark, or,
if sent by certified or registered mail, the date of certification or
registration.
7. NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD
1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE
EXPENSES
During the accumulation period-the period before the initial Annuity
Payment Date-deductions from Stipulated Payments for sales and administrative
expenses are made as specified under "Deductions and Charges Under the
Contracts," above. In addition, any applicable premium taxes, also as specified
above under that caption, are deducted from the Stipulated Payments. The balance
of each Stipulated Payment is credited to the Contract Owner in the form of
Accumulation Units.
The number of a Contract Owner's Accumulation Units is determined by
dividing the net amount of Stipulated Payments credited to his or her Contract
by the value of an Accumulation Unit at the end of the Valuation Period during
which the Stipulated Payment is received, except that, in the case of the
original application for a Variable Annuity Contract, the value of an
Accumulation Unit within two business days after receipt of the application
will be used if the application and all information necessary to process the
application
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<PAGE>
are complete upon receipt. If the application and such information are not
complete upon receipt, The Franklin, within five days after the receipt of an
original application and initial payment at the Home Office of The Franklin,
will attempt to complete the application and will either accept the application
or reject the application and return the initial payment.
The number of Accumulation Units so determined will not be changed by any
subsequent change in the dollar value of an Accumulation Unit, but the dollar
value of an Accumulation Unit may vary from day to day depending upon the
investment experience of the Fund.
2. VALUATION OF A CONTRACT OWNER'S CONTRACT
The Cash Value of a Contract at any time prior to the initial Annuity
Payment Date can be determined by multiplying the total number of Accumulation
Units credited to the account by the current Accumulation Unit value. The
Contract Owner bears the investment risk, that is, the risk that market values
may decline. There is no assurance that the Cash Value of the Contract will
equal or exceed the Stipulated Payments made. A Contract Owner may obtain from
the Home Office of The Franklin information as to the current value of an
Accumulation Unit and the number of Accumulation Units credited to his or her
Contract.
3. VALUE OF THE ACCUMULATION UNIT
The value of an Accumulation Unit was set at $10 effective July 1, 1971.
Accumulation Units currently are valued each Valuation Date (each day in which
there is a sufficient degree of trading in the securities in which the Fund
invests that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, other than a day during which
no Contract or portion thereof is tendered for redemption and no order to
purchase or transfer a Contract is received by the Fund, as of the close of
trading on that day). After the close of trading on a Valuation Date, or on a
day when Accumulation Units are not valued, the value of an Accumulation Unit
is equal to its value as of the immediately following Valuation Date. The
value of an Accumulation Unit on the last day of any Valuation Period is
determined by multiplying the value of an Accumulation Unit on the last day of
the immediately preceding Valuation Period by the Net Investment Factor
(defined below) for the current Valuation Period.
At each Valuation Date a gross investment rate for the Valuation Period
then ended is determined from the investment performance of the Fund for the
Valuation Period. Such rate is equal to (i) accrued investment income for the
Valuation Period, plus capital gains and minus capital losses for the period,
whether realized or unrealized, on the assets of the Fund (adjusted by a
deduction for the payment of any applicable state or local taxes as to the
income or capital gains of the Fund) divided by (ii) the value of the assets of
the Fund at the beginning of the Valuation Period. The gross investment rate
may be positive or negative.
The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of the
Valuation Period as a charge against the gross investment rate. This charge is
made by The Franklin for providing investment management services, annuity
rate or mortality assurances and expense assurances. See "Deductions and
Charges Under the Contracts," above.
The net investment factor for the Valuation Period is the sum of 1.00000000
plus the net investment rate for the Valuation Period ("Net Investment
Factor").
The net investment rate may be negative if the combined capital losses,
Valuation Period deductions and increase in the tax reserve exceed investment
income and capital gains. Thus, the Net Investment Factor may be less than
1.00000000, and the value of an Accumulation Unit at the end of a Valuation
Period may be less than the value for the previous Valuation Period.
4. VALUATION OF FUND ASSETS
In determining the value of the assets of the Fund, each security traded
on a national securities exchange is
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<PAGE>
valued at the last reported sale price on the Valuation Date. If there has been
no sale on such day, then thevalue of such security is taken to be the current
bid price at the time as of which the value is being ascertained. Any security
not traded on a securities exchange but traded in the over-the-counter market
is valued at the current bid price on the Valuation Date. Any securities or
other assets for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Managers.
5. REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may redeem the Contract in whole, or in part, by submission of the Contract
and a written request for its redemption to The Franklin's Home Office, and will
receive the Cash Value of the part of the Contract redeemed. The Cash Value of
a Contract or part thereof redeemed prior to the initial Annuity Payment Date
is the number of Accumulation Units credited to the Contract (or that part so
redeemed) times the value of an Accumulation Unit at the end of the Valuation
Period in which the request for redemption is received. Except in the limited
circumstances described below, the payment of the Cash Value will be made
within seven days after the date a properly completed and documented request
for redemption is received by The Franklin at its Home Office. The right of
redemption may be suspended or the date of payment postponed during any periods
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings); when trading in the markets the Fund normally utilizes is
restricted, or an emergency exists as determined by the Securities and Exchange
Commission so that disposal of the Fund's investments or determination of its
net asset value is not reasonably practicable; or for such other periods as the
Securities and Exchange Commission by order may permit to protect Contract
Owners.
Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity, a request for partial redemption, if no other indication is obtained
from the Contract Owner, will be treated as a pro rata request for partial
redemption of the Variable Annuity and the Fixed-Dollar Annuity.
In lieu of a single payment of the amount due upon redemption of a
Contract, the Contract Owner may elect, at any time prior to the initial
Annuity Payment Date and during the lifetime of the Variable Annuitant, to have
all or any portion of the amount due applied under any available Settlement
Option. See "Settlement Options," below. However, no Settlement Option may be
elected upon redemption without surrender of the entire Contract.
The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal
income tax withholding and federal tax penalties. See "Federal Income Tax
Status," below.
6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH
In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving beneficiary will
be paid by The Franklin within seven days of receipt by The Franklin of written
notice of such death. The death proceeds payable will be the Cash Value of the
Contract determined as of the date on which written notice of death is received
by The Franklin by mail if such date is a Valuation Date; if such date is not a
Valuation Date, the determination will be made on the next following Valuation
Date. There is no assurance that the Cash Value of a Contract will equal or
exceed the Stipulated Payments made. For the method of valuation of
Accumulation Units, see "Crediting Accumulation Units; Deductions for Sales and
Administration Expenses," above.
The Code imposes certain distribution requirements which affect the payment
of death benefits. See "Settlement Options," below. Subject to these
requirements, the Contract Owner may, at any time prior to the initial Annuity
Payment Date, elect that all or any portion of such death proceeds be paid to
the Beneficiary under any one of the available Settlement Options. If the
Contract Owner has not made such an election, the Beneficiary may do so after
the death of the Variable Annuitant. The Contract Owner or the Beneficiary,
whichever selects the method of settlement, may designate contingent
Beneficiaries to receive any other amounts due should the first Beneficiary die
before completion of the specified payments. If neither the Contract
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<PAGE>
Owner nor the Beneficiary elects payment of death proceeds under an available
Settlement Option, payment will be made to the Beneficiary in a single sum.
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described
under "Termination by The Franklin," above, and subject to the right of The
Franklin to pay the value of the Contract Owner's account in a single sum at
the initial Annuity Payment Date if the value on such date is less than $2,000,
the Contract Owner may elect, prior to the death of the Variable Annuitant and
prior to the initial Annuity Payment Date, either of the following options:
(a) to exercise any of the available Settlement Options described under
"Settlement Options," below, or redeem the Contract as described under
"Redemption," above; or
(b) to have the Contract continued from the date of failure to make a
Stipulated Payment as a paid-up annuity to commence on the initial Annuity
Payment Date stated in the Contract.
If no option is elected by the Contract Owner within 31 days after failure
to make a Stipulated Payment, the Contract will automatically be continued
under the paid-up annuity option.
Under a single stipulated payment deferred contract, the Contract Owner may
terminate his Contract and exercise any of the Settlement Options described
below at any time prior to the initial Annuity Payment Date.
8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)
A Contract Owner, by making one Stipulated Payment, may reinstate a
Periodic Stipulated Payment Contract as to which there has been a failure to
make a Stipulated Payment, if the Contract at the time of the payment is being
continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits. Following reinstatement, the
Contract Owner may exercise any of the options upon failure to make Stipulated
Payments or Settlement Options described herein. Sales and administration
deductions from Stipulated Payments made upon or after reinstatement will be
equivalent to those that would have been made if the payments had been made at
the time originally stipulated.
9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or
Settlement Option, or, if agreed to by The Franklin, change to a mode of payment
different from one of the Settlement Options.
If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.
20
<PAGE>
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all
or a portion of the amount due in settlement of the Contract applied under any
of the available Settlement Options described below. If the Contract Owner
fails to elect a Settlement Option, payment automatically will be made in the
form of a life annuity. See "First Option," below, and "Deferred Variable
Annuity Contracts," below.
Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may apply
under the particular Settlement Option. Upon the death of the original Variable
Annuitant after the initial Annuity Payment Date, any remaining Annuity
Payments that are due under the Settlement Option elected will be continued to
the Beneficiary or, if elected by the Contract Owner (or, if so designated by
the Contract Owner, by the Beneficiary), the Cash Value of the Contract, as
described under such Settlement Option below, will be paid to the Beneficiary
in one lump sum. Upon the death of any Beneficiary to whom payments are being
made under a Settlement Option, a single payment equal to the then remaining
Cash Value of the Contract, if any, will be paid to the executors or
administrators of the Beneficiary, unless other provision has been specified
and accepted by The Franklin. For a discussion of payments if no Beneficiary is
surviving at the death of the Variable Annuitant, see "Change of Beneficiary or
Mode of Payment of Proceeds; Death of Beneficiaries," immediately above.
Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant prior
to the initial Annuity Payment Date, may also be made under an available
Settlement Option in certain circumstances. See "Redemption," above, and
"Payment of Accumulated Value at Time of Death," above.
Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except the Seventh Option, which is available on a
fixed basis only. Under an Option which is paid on a fixed basis, there is no
sharing in the investment experience of the Fund and, upon commencement of
payments, participation in the Fund terminates (the subject Contract will be
transferred to the general account of The Franklin). Settlement under the
First, Second, Third, Fourth or Fifth Option below is subject to satisfactory
proof of age of the person or persons to whom the Annuity Payments are to be
made.
The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid in
a single sum in the discretion of The Franklin. Further, if at any time
payments under a Settlement Option become less than $25 per payment, The
Franklin has the right to change the frequency of payment to such intervals as
will result in payments of at least $25.
In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," below, and "Immediate
Variable Annuity Contracts," below.
Persons contemplating election of the Fifth, Sixth or Seventh Option should
consult a qualified tax advisor to determine whether the continuing right of
redemption under any such Option might be deemed for tax purposes to result in
the "constructive receipt" of the Cash Value of the Contract or proceeds
remaining on deposit with The Franklin.
In general, certain distribution requirements are imposed by the Code in the
case of annuity contracts issued after January 18, 1985 in order for the
contracts to qualify as "annuity contracts" under the Code. Certain questions
exist about the application of these rules to distributions from the Contracts
and their effect on Settlement Option availability thereunder.
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Under these distribution requirements, if the Contract Owner of a Contract
issued after January 18, 1985 dies on or after the date Annuity Payments
commence but before the entire interest in the Contract has been distributed,
then the remaining portion of such interest must be distributed at least as
rapidly as under the method of distribution being used as of the date of his or
her death. Also, if the Contract Owner of such a Contract dies before the
commencement of Annuity Payments, then the entire interest in the Contract must
be distributed within five years after the date of death. Under a special
exception, this 5-year distribution rule is deemed satisfied if (i) any portion
of the Contract Owner's interest is payable to a designated beneficiary, (ii)
that interest is distributed to the designated beneficiary over the life of
such beneficiary (or over a period not extending beyond the beneficiary's life
expectancy) and (iii) such distributions begin not later than one year after
the death of the Contract Owner. If the designated beneficiary is the surviving
spouse of the Contract Owner and such surviving spouse dies before Annuity
Payments to the spouse commence, the surviving spouse will be treated as the
Contract Owner for purposes of these distribution rules. Also, if the Contract
Owner is not an individual, then the Variable Annuitant shall be treated as the
Contract Owner in applying these distribution requirements and a change in the
Variable Annuitant shall be treated as the death of the Contract Owner.
The effect of the distribution requirements described above is that, in the
case of Contracts issued after January 18, 1985, Settlement Option availability
will be limited as necessary to comply with the applicable distribution rules.
For example, under these rules, it appears that the First Option (Life Annuity)
would not be available to a designated beneficiary under such a Contract unless
distributions to the beneficiary begin not later than one year after the date
of the Contract Owner's death. Other Settlement Options may be restricted or
unavailable as well under the distribution rules. All Settlement Options under
Contracts issued after January 18, 1985 are offered subject to the limitations
of the distribution rules. Persons contemplating the purchase of a Contract
should consult a qualified tax advisor concerning the effect of the
distribution rules on the Settlement Option or Options he or she is
contemplating.
FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime
of the Variable Annuitant, ceasing with the last Annuity Payment due prior to
the death of the Variable Annuitant. This Option offers the maximum level of
monthly Annuity Payments since there is no guarantee of a minimum number of
Annuity Payments or provision for any continued payments to a Beneficiary upon
the death of the Variable Annuitant. It would be possible under this Option for
the Variable Annuitant to receive only one Annuity Payment if he or she died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if he or she died after the second Annuity Payment Date but before the third
Annuity Payment Date, and so forth.
SECOND OPTION-LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN.
An annuity payable monthly during the lifetime of the Variable Annuitant
including the commitment that if, at the death of the Variable Annuitant,
Annuity Payments have been made for less than 120 months, 180 months or 240
months (as selected by the Contract Owner in electing this Option), Annuity
Payments shall be continued during the remainder of the selected period to the
Beneficiary. The cash value under this Settlement Option is the present value
of the current dollar amount of any unpaid Annuity Payments certain.
THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during
the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment
due prior to the death of the Variable Annuitant, provided that, at the death of
the Variable Annuitant, the Beneficiary will receive a payment of the then
dollar value of the number of Annuity Units equal to the excess, if any, of (a)
over (b) where (a) is the total amount applied under this Option divided by the
Annuity Unit value at the initial Annuity Payment Date and (b) is the number of
Annuity Units represented by each Annuity Payment multiplied by the number of
Annuity Payments made.
For example, if $10,000 were applied on the first Annuity Payment Date to
the purchase of an annuity under this Option, the Annuity Unit value at the
initial Annuity Payment Date were $2.00, the number of Annuity Units
represented by each Annuity Payment were 30.55, 10 Annuity Payments were paid
prior to the date of the Variable Annuitant's death and the value of an Annuity
Unit on the Valuation Date following the Variable Annuitant's death were $2.05,
the amount paid to the Beneficiary would be $9,623.73, computed as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
$10,000
(------ - (30.55 X 10)) X $2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
$2.00
</TABLE>
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FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant
died before the second Annuity Payment Date, or to receive only two Annuity
Payments if both the Variable Annuitant and the secondary variable annuitant
died after the second Annuity Payment Date but before the third Annuity
Payment Date, and so forth.
FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly
to the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part at any time by the
Contract Owner for the aforesaid cash value of the part of the Contract
redeemed. See "Redemption," above.
It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due under
this Option. Further, although not contractually required to do so, The
Franklin currently follows a practice, which may be discontinued at any time,
of permitting persons receiving Annuity Payments under this Option to elect to
convert such payments to a Variable Annuity involving a life contingency under
the First, Second, Third or Fourth Options, above, if, and to the extent, such
other Options are otherwise available to such person.
SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be
paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly
Annuity Payments of a designated dollar amount (not less than $75 a year per
$1,000 of the original amount due) until the remaining balance (adjusted each
Valuation Period by the Net Investment Factor for the period) is less than the
amount of one Annuity Payment, at which time such balance will be paid and will
be the final Annuity Payment under this Option. Upon the death of the Variable
Annuitant, payments will be continued to the Beneficiary until such remaining
balance is paid. The cash value under this Settlement Option is the amount of
proceeds then remaining with The Franklin. A Contract under which Annuity
Payments are being made under this Settlement Option may be redeemed at any time
by the Contract Owner for the aforesaid cash value.
Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, immediately above,
which applies in its entirety to the Sixth Option as well.
SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit
with The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by
the amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.
Periodic payments received under this Option may be treated like interest for
federal income tax purposes. Interest payments are fully taxable and are not
subject to the general rules applicable to the taxation of annuities described
in "Federal Income Tax Status," below. Persons contemplating election of this
Seventh Option are advised to consult a qualified tax advisor concerning the
availability and tax effect of its election.
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<PAGE>
11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY
ACCUMULATION UNITS
Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been
issued on the same Contract, on any Contract Anniversary during the accumulation
period of the Contract, the Contract Owner may have the unloaned cash value of
his Fixed-Dollar Annuity transferred in whole or in part to his Variable Annuity
to purchase Variable Annuity Accumulation Units at net asset value, without any
sales or administrative deductions. However, any such partial transfer of cash
value must be at least $500. (A similar privilege, but available four times in
one contract year, permits transfer of Variable Annuity Accumulation Unit values
to establish values under a Fixed-Dollar Annuity issued on the same Contract.)
12. CONTRACT LOANS
While the Contract is in force, prior to the initial Annuity Payment Date or
the death of the Variable Annuitant, The Franklin will make a contract loan on
the sole security of the Contract.
Upon receiving a request for a contract loan, The Franklin will convert
Accumulation Units under the Contract to a fixed-dollar contract loan account in
an amount necessary to provide a sufficient "loan value" for the proposed loan.
The maximum amount which may be borrowed on a Contract (the "loan value") is
that amount which, when added to any existing contract loan and interest on the
total contract loan to the next Contract Anniversary, will equal what the Cash
Value of the contract loan account would be on such anniversary. The Contract,
except to the extent so converted, has no loan value and The Franklin will not
make loans or arrange for the making of loans thereon.
The Accumulation Units in the contract loan account do not participate in
the investment experience of the Fund, but receive interest credits at the rate
then paid by The Franklin upon Fixed-Dollar Annuity accumulations. At the
current time, that rate is 4-1/2% per annum during the first five contract
years, 4% per annum for the sixth through tenth contract years, and 3-1/2% per
annum thereafter.
Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity under the same Contract, unless he otherwise indicates, a contract loan
request will be considered a request for a loan on each annuity and will be
allocated pro rata according to the loan values available under each annuity.
Whenever the total contract loan is equal to or exceeds the Cash Value, the
Contract shall terminate, but in no event shall such termination take effect
until 31 days after notice shall have been mailed to the last known address of
the Contract Owner and any known assignee.
On Contracts currently being issued in South Carolina the interest rate on
the principal of the contract loan is 7.4% per annum payable in advance to the
end of the current Contract Year, and annually in advance thereafter. In all
other states the rate is adjustable. This means that the rate may be changed
each policy year, effective on the Contract Anniversary. The adjustable loan
interest rate will be reflective of the rates then available to The Franklin for
corporate bonds as indicated by the "Moody's Corporate Bond Yield Average."
Interest not paid when due will be added to the principal of the loan and bear
the same rate of interest. Upon a repayment of the contract loan prior to the
date through which interest has been paid in advance, the Contract Owner will
receive a pro rata credit for the unearned interest.
It should be noted that the annual rate of interest charged on contract
loans is in excess of the interest credited by The Franklin upon the contract
loan account; thus, there is, in effect, a continuing net charge against the
Contract Owner of the difference between the two rates while the contract loan
is outstanding.
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The whole or any part of the contract loan may be repaid at any time while
the Contract is in force prior to its maturity. Where variable Accumulation
Units have been converted into a contract loan account prior to the making of a
contract loan, repayments of the loan will result in the conversion of
accumulation units under the contract loan account to variable Accumulation
Units at net asset value without any sales or administration deduction, unless
the Contract Owner elects that such conversion shall not take place. The
Contract Owner has the power to designate whether a payment made by him or her
is to be applied as a Stipulated Payment (within the limitations on Stipulated
Payments set forth under "Annuity Payments," above, "Decrease by Contract Owner
in Amount of Periodic Stipulated Payments; Increase by Contract Owner in Number
of Periodic Stipulated Payments," above) or as a repayment in the contract loan
account. In the case of payments by a Contract Owner having a contract loan
outstanding which are not identified, The Franklin will make inquiry as to the
intention of the Contract Owner.
Contract loans will be treated as distributions that may be taxable. See
"Federal Income Tax Status," below. Any Contract Owner contemplating obtaining a
contract loan is advised to consult a qualified tax advisor concerning the
possibly unfavorable federal income tax treatment of contract loan proceeds and
interest payments with respect thereto.
C. ANNUITY PERIOD
1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY
PAYMENTS
(a) DEFERRED VARIABLE ANNUITY CONTRACTS
A Contract Owner selects a Settlement Option and an initial Annuity Payment
Date prior to the issuance of the Deferred Variable Annuity Contract. The
Contract Owner may defer the initial Annuity Payment Date and continue the
Contract to a date not later than the Contract Anniversary on which the attained
age of the Variable Annuitant is 75. The Franklin will require satisfactory
proof of age of the Variable Annuitant prior to the initial Annuity Payment
Date.
(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS
The Franklin offers three forms of Immediate Variable Annuity Contracts: the
life annuity, the life annuity with 120, 180 or 240 monthly payments certain and
the joint and last survivor life annuity. For a description of these forms of
annuity, see the First, Second and Fourth Options under "Settlement Options,"
above.
Under an Immediate Variable Annuity, the first Annuity Payment is made to
the Variable Annuitant one month after the Effective Date of the Contract,
unless the period selected by the Contract Owner for the frequency of Annuity
Payments is more than one month, in which case the first Annuity Payment will be
made after a period equal to the period so selected from the Effective Date
(subject in every case to the survival of the Variable Annuitant, except in
cases where a guaranteed payment period is provided).
2. THE ANNUITY UNIT
The Annuity Unit is a measure used to value the First Option (including the
automatic life annuity) and the Second, Third, Fourth and Fifth Options, if
elected on a variable basis.
The value of the Annuity Unit as of July 1, 1971 was fixed at $1.00 and for
each day thereafter is determined by multiplying the value of the Annuity Unit
on the preceding day by the "Annuity Change Factor" for the Valuation Period
ending on the tenth preceding day or by 1.0 if no Valuation Period ended on
the tenth preceding day. The "Annuity Change Factor" for any Valuation Period
is equal to the amount determined by dividing the Net Investment Factor for
that Valuation Period by a number equal to 1.0 plus the interest rate for the
number of calendar days in such Valuation Period at the effective annual rate
of 3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating
the Annuity Change Factor is effected in order to cancel out the assumed net
investment rate of 3-1/2% per year which is built into the annuity tables
specified in the Contract.
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See "Determination of Amount of First Monthly Annuity Payment (Deferred
Variable Annuity Contracts Only)," below, and "Assumed Net Investment Rate,"
below.
Annuity Units are valued in respect of each Annuity Payment Date as of a
Valuation Date not less than 10 days prior to the Annuity Payment Date in
question in order to permit calculation of amounts of Annuity Payments and
mailing of checks in advance of their due dates.
3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
When Annuity Payments commence under a Deferred Variable Annuity Contract,
the value of the Contract Owner's account is determined as the product of the
value of an Accumulation Unit on the first Annuity Payment Date and the number
of Accumulation Units credited to the Contract Owner's account as of such
Annuity Payment Date.
The Contract utilizes tables indicating the dollar amount of the first
monthly Annuity Payment under each Settlement Option for each $1,000 of Cash
Value of the Contract. The first monthly Annuity Payment varies according to the
Settlement Option selected (see "Settlement Options," above) and the "adjusted
age" of the Variable Annuitant. The first monthly Annuity Payment may also vary
according to the sex of the Variable Annuitant. See "Annuity Payments," above.
(The Contracts provide for age adjustment based on the year of birth of the
Variable Annuitant and any joint Variable Annuitant; a person's actual age when
Annuity Payments commence may not be the same as the "adjusted age" used in
determining the amount of the first Annuity Payment.)
The tables for the First, Second, Third and Fourth Options are determined
from the Progressive Annuity Table assuming births in the year 1900 and a net
investment rate of 3-1/2% a year. The tables for the Fifth Option are based on
a net investment rate of 3% for the General Account and 3-1/2% for the Separate
Account. The total first monthly Annuity Payment is determined by multiplying
the number of thousands of dollars of Cash Value of the Contract Owner's
Contract by the amount of the first monthly Annuity Payment per $1,000 of
value from the tables in the Contract.
The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," above. Thus, there will be a double effect of the
investment experience of the Fund during the 10-day period referred to in the
preceding sentence, since that experience will be included (as part of the
value of an Accumulation Unit) in valuing the Contract Owner's Contract on the
initial Annuity Payment Date and (as part of the changes in value of an
Annuity Unit) in determining the second monthly Annuity Payment. Also, the
number of Annuity Units (and hence the amount of Annuity Payments) will be
affected by the net asset values of the Fund approximately 10 days prior to the
initial Annuity Payment Date even though changes in those net asset values
have occurred during that 10-day period, and even though the value of the
Accumulation Units used to determine the Cash Value of the Contract will
reflect those changes. See "Amount of Second and Subsequent Monthly Annuity
Payments (Deferred Variable Annuity Contracts Only)," immediately below.
Each Contract contains a provision that the first monthly Annuity Payment
will not be less than 103% of the first monthly Annuity Payment available under
a then currently issued Immediate Variable Annuity of The Franklin if a single
Stipulated Payment were made equal to the value which is being applied under
the Contract to provide annuity benefits. This provision assures the Variable
Annuitant that if at the initial Annuity Payment Date the annuity rates then
applicable to new Immediate Variable Annuity Contracts are significantly more
favorable than the annuity rates provided in his or her Contract, the Variable
Annuitant will be given the benefit of the new annuity rates.
4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
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The number of Annuity Units credited to a Contract on the initial Annuity
Payment Date remains fixed during the annuity period, and as of each subsequent
Annuity Payment Date the dollar amount of the Annuity Payment is determined by
multiplying this fixed number of Annuity Units by the then value of an Annuity
Unit.
5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY
CONTRACTS ONLY)
In the case of Immediate Variable Annuities, the number of Annuity Units
per month purchased is specified in the Contract. The number of such units is
determined by: (1) multiplying the net single Stipulated Payment (after
deductions for sales and administrative expenses and premium taxes) by the
applicable annuity factor from the annuity tables then used by The Franklin for
Immediate Variable Annuity Contracts, and (2) dividing such product by the value
of the Annuity Unit as of the date of issue of the Contract. This number of
Annuity Units remains fixed for each month during the annuity period, and the
dollar amount of the Annuity Payment is determined as of each Annuity Payment
Date by multiplying this fixed number of Annuity Units by the value of an
Annuity Unit as of each such Annuity Payment Date.
Annuity Units are valued as of a Valuation Date not less than 10 days prior
to the date of issue of the Contract, pursuant to the procedure discussed under
"The Annuity Unit," above. Thus, the number of Annuity Units (and hence the
amount of the Annuity Payments) will be affected by the net asset value of the
Fund approximately 10 days prior to the Date of Issue of the Contract, even
though changes in those net asset values have occurred during that 10-day
period.
As of the date of this Prospectus, The Franklin was using, in connection
with the determination of the number of Annuity Units per month purchased under
Immediate Variable Annuity Contracts, the 1955 American Annuity Table with
assumed 4-1/2% interest, the purchase rates in such table being increased by
0.5% (which percentage is decreased 0.2% for each year of age at the Date of
Issue in excess of 70 years for male Variable Annuitants and in excess of 75
years for female Variable Annuitants).
The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.
6. ASSUMED NET INVESTMENT RATE
The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts
whose Annuity Payments are measured by Annuity Units will be level.
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following are the fundamental investment policies of the Fund:
(1) The primary objective of the Fund in making investments is long-term
appreciation of capital. Occasional investment for the purpose of seeking
short-term capital appreciation may also be made.
(2) Realization of current investment return is a secondary objective,
subordinate to the primary objective.
(3) Any investment income and realized capital gains (net of any capital
gains tax) will be retained and reinvested.
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(4) The Fund's policy is to be substantially fully invested. Generally, the
Fund's investments will consist of equity securities, mainly common stocks. The
purchase of common stocks may be made both in rising and declining markets. When
it is determined, however, that investments of other types may be advantageous
in reaching the Fund's objectives, on the basis of combined considerations of
risk, income and appreciation, investments may be made in bonds, debentures,
notes or other evidences of indebtedness, issued publicly or placed privately,
of a type customarily purchased for investment by institutional investors,
including United States Government securities, in corporate preferred stock or
in certificates of deposit, or funds may be retained in cash. Such debt
securities may, or may not, be convertible into stock or be accompanied by
stock purchase options or warrants.
(5) Temporary investments may be made in United States Government
securities, certificates of deposit, short-term corporate debt securities
(subject to fundamental restriction (3), below) and other similar securities,
pending investment in the above mentioned securities.
While The Franklin is obligated to make Annuity Payments in accordance with
selected Settlement Options, the amount of the Annuity Payments is not
guaranteed but is a variable amount. Since, historically, the value of
a diversified portfolio of common stocks held for an extended period of time has
tended to rise during periods of inflation and growth in the economy, the
Annuity Payments under a Variable Annuity should tend to conform more closely to
changes in the cost of living and the level of the economy than payments under a
Fixed-Dollar Annuity would do. However, there is no assurance that this
objective can be attained. There have been times when the cost of living has
increased while securities prices have decreased and times when the cost of
living and the level of the economy have gone up or down with no direct
correlation to the value of securities in general or to any particular type or
class of securities. The value of investments held in the Fund will fluctuate
daily and is subject to the risk of changing economic conditions as well as the
risks inherent in the ability of management to anticipate changes in those
conditions. The value of investments in common stock has historically
fluctuated more greatly than the value of investments in securities such as
bonds, debentures, notes, other evidences of indebtedness, preferred stock and
certificates of deposit, and hence investments in common stocks offer greater
opportunities for appreciation and greater risk of depreciation. There is no
assurance that the Cash Value of the Contract during the years prior to the
Variable Annuitant's retirement or the aggregate amount received during the
years following the initial Annuity Payment Date will equal or exceed the
Stipulated Payments on the Contract.
The investment policies of the Fund include a provision that investments may
be made in securities other than common stocks if they are advantageous in
reaching the Fund's objectives, on the basis of combined considerations of
risk, income and appreciation. No assurance can be given, however, that
investment in such other securities will accomplish such objectives.
Investments may be made in bonds, debentures, notes or other evidences of
indebtedness, issued publicly or placed privately, of a type customarily
purchased for investment by institutional investors, including United States
Government securities, and may also be made in corporate preferred stock or in
certificates of deposit, or funds may be retained in cash. Such debt securities
may, or may not, be convertible into stock or be accompanied by stock purchase
options or warrants. Funds may also be temporarily invested in United States
Government securities, certificates of deposit, short-term corporate debt
securities (subject to certain restrictions) and other similar securities,
pending long-term investment. Although debt securities and preferred stocks of
the type in which the Fund would invest are generally considered to present
less risk than common stocks, the value of such securities is subject to market
fluctuations as a result of money market rates, the demand for such securities
and factors relating to the individual issuers of such securities. In the event
the Fund invests in such securities, such factors may limit the ability of the
Fund to convert such securities to cash and reinvest in other types of
securities. Historically, the Fund has not invested significant amounts in debt
securities or preferred stocks except for short-term investments in debt
securities pending ultimate long-term application of funds for investment
purposes.
The following are the fundamental investment restrictions applicable to the
Fund:
(1) The Fund will not concentrate its investments in any one industry or
group of related industries, and no more than 25% of the value of the Fund's
assets will be invested in any one industry or group of related industries.
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(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3) immediately below.
(3) The Fund will not borrow money except for temporary or emergency
purposes from banks, and any such borrowings will not be used to purchase
investment securities and will not exceed 5% of the value of the Fund's assets.
(4) The Fund will not underwrite securities of other issuers, except that
the Fund may acquire portfolio securities under circumstances where, if sold,
it might be deemed to be an underwriter for purposes of the Securities Act of
1933. No such securities will be acquired except where parties other than the
Fund shall have agreed to bear any and all costs of registration under the
Securities Act of 1933. (However, it should be noted that even though an
agreement to register has been obtained, enforcement of such an agreement may
prove unfeasible or may involve delays which could adversely affect the Fund's
ability to resell such securities or the price at which such securities might
be resold.) No more than 10% of the value of the Fund's assets will at any time
be invested in such securities.
(5) The Fund will not engage in the purchase and sale of interests in real
estate, except that the Fund may engage in the purchase and sale of readily
marketable interests in real estate investment trusts or similar securities,
which may be deemed to represent indirect interests in real estate.
(6) The Fund will not engage in the making of loans to other persons,
except that the Fund may acquire privately placed corporate debt securities of
a type customarily purchased by institutional investors. Such securities, if
required to be registered under the Securities Act of 1933 prior to public
distribution, will be included in the 10% limitation specified in fundamental
restriction (4), above. The foregoing does not restrict the purchase by the
Fund of a portion of an issue of publicly distributed bonds, debentures or
other securities, whether or not the purchase is made upon the original
issuance of such securities.
(7) The Fund will not engage in the purchase or sale of commodities or
commodity contracts.
(8) The Fund will not purchase the securities of any one issuer, other
than obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up
to 25% of the Fund's total assets taken at current value may be invested
without regard to such 5% limitation.
(9) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by
the United States Government and its agencies or instrumentalities, except that
up to 25% of the Fund's total assets taken at current value may be invested
without regard to such 10% limitation.
The fundamental investment policies and the fundamental investment
restrictions stated above may not be changed without approval by a vote of a
majority of the votes available to the Contract Owners. This means that the
policies or restrictions in question may not be changed without the approval of
the lesser of (a) the Contract Owners holding 67% or more of the voting power
of the Contract Owners present or represented at a meeting if Contract Owners
holding more than 50% of the total voting power of all Contract Owners in the
Fund are present or represented by proxy, or (b) Contract Owners holding more
than 50% of the total voting power of all Contract Owners in the Fund.
The following investment restrictions are not fundamental and may be
changed by action of the Board of Managers of the Fund:
(10) All securities in which the Fund invests shall be permissible for the
Fund under the Illinois Insurance Code. The Illinois Insurance Code provides
that investments of a separate account, like the Fund, are free of the
restrictions or provisions generally applicable to insurance companies under
that Code, and does not currently provide any special investment restrictions
applicable to separate accounts. However, no investment permitted under the
Illinois Insurance Code is thereby exempted from the other investment
restrictions specified under this caption.
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(11) The Fund will not invest in companies for the purpose of exercising
control or management.
(12) The Fund will not invest in the securities of other investment
companies.
(13) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.
(14) The Fund will not make short sales of securities.
(15) The Fund will not invest in corporate debt (other than commercial
paper) or preferred stock that is rated lower than one of the three top grades
by Moody's Investors Services, Inc. or Standard & Poor's Corporation and the
Fund will not invest in commercial paper rated lower than one of the two top
grades by such rating agencies.
FEDERAL INCOME TAX STATUS
INTRODUCTION
The Contracts are designed for retirement planning for individuals. The
federal income tax treatment of the Contracts and payments received thereunder
depends on various factors, including, among other factors, the tax status of
The Franklin and the form in which payments are received. The discussion of
federal income taxes contained in this Prospectus, which focuses on rules
applicable to Contracts purchased under this Prospectus, is general in nature
and is based on existing federal income tax law, which is subject to change.
The tax discussion is not intended as tax advice. The applicable federal income
tax law is complex and contains many special rules and exceptions in addition
to the general rules summarized herein. For these reasons, various questions
about the applicable rules exist. Accordingly, each person contemplating the
purchase of a Contract is advised to consult with a qualified tax advisor
concerning federal income taxes and any other federal, state or local taxes
that may be applicable.
THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code. Since
the operations of the Fund are part of the overall operations of The Franklin,
the Fund is subject to tax as part of The Franklin for federal income tax
purposes. Thus, the Fund is not taxed separately as a "regulated investment
company" under the Code.
Under the Code a life insurance company like The Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.
Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to
the Fund. Under the Code, no federal income tax is payable by The Franklin on
such investment income or on realized capital gains of the Fund on assets held
in the Fund. However, if changes in the federal tax laws or interpretations
thereof result in The Franklin being taxed on income or gains attributable to
the Fund, then The Franklin may impose a charge against the Fund (with respect
to some or all Contracts) in order to set aside provisions to pay such taxes.
THE CONTRACTS
Payments received under a Contract are subject to tax under Code Section
72. Under the Code, an increase in the value of the Contract Owner's Contract
ordinarily is not taxable to the Contract Owner until received by him or her as
annuity payments, a lump sum or a partial redemption. A special rule, however,
applies to certain annuity contracts held by a person (such as a corporation or
partnership) who is not a natural person. With respect to contributions (i.e.,
Stipulated Payments) made after February 28, 1986 to a Contract held by a
non-natural person, the Contract is not treated as an "annuity contract" for
certain federal income tax purposes and
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the income on the Contract for any taxable year allocable to such contributions
is treated as ordinary income taxable to the Contract Owner during such year.
This special rule, however, does not apply to any annuity contract which, among
other exceptions: (1) is an immediate annuity that is purchased with a single
premium or annuity consideration, that has an annuity starting date commencing
no later than one year from the date of the purchase of the Contract and which
provides for a series of substantially equal periodic payments (to be made not
less frequently than annually) during the annuity period; (2) is acquired by
the estate of a decedent by reason of the decedent's death; or (3) is held by a
trust or other entity as an agent for a natural person. Non-natural persons now
holding or contemplating the future purchase of a Contract are advised to
consult a qualified tax advisor concerning the tax consequences of such holding
or purchase.
If payments under a Contract are received in the form of an annuity, then,
in general, each payment is taxable as ordinary income to the extent that such
payment exceeds the portion of the cost basis of the annuity contract that is
allocable to that payment. Payment of the proceeds of an annuity contract in a
lump sum either before or at maturity is taxable as ordinary income to the
extent the lump sum exceeds the cost basis of the annuity contract. If the
Variable Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made
after that point will be fully taxable. If, however, the Annuity Payments
cease after the initial Annuity Payment Date by reason of the death of the
Variable Annuitant, the amount of any unrecovered cost basis in the Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.
A payment received on account of a partial redemption of an annuity
contract generally is taxable as ordinary income in whole or part. Also, if
prior to the initial Annuity Payment Date, (i) an annuity contract is assigned
or pledged, (ii) a contract loan is obtained or (iii) a Contract issued after
April 22, 1987 is transferred without adequate consideration, then the amount
assigned, pledged, borrowed or transferred may similarly be taxable. Special
rules may apply with respect to investments in a Contract made before August
14, 1982. Because the applicable tax treatment is complex, a qualified tax
advisor should be consulted prior to a partial withdrawal, assignment, pledge,
contract loan or contract transfer.
In addition, under a provision of federal tax law effective for annuity
contracts entered into after October 21, 1988, all annuity contracts (other than
contracts held in connection with certain qualified plans and trusts (including
Individual Retirement Annuities) accorded special treatment under the Code)
issued by the same company (or affiliates) to the same contract owner during any
calendar year will generally be treated as one annuity contract for the purpose
of determining the amount of any distribution not in the form of an annuity that
is includable in gross income. This rule may have the effect of causing more
rapid taxation of the distributed amounts from such combination of contracts.
It is not certain how this rule will be applied or interpreted by the Internal
Revenue Service. In particular, it is not clear if or how this rule applies to
Immediate Variable Annuities or "split" annuity arrangements. Accordingly, a
qualified tax advisor should be consulted about the application and effect of
this rule.
Further, in general, in the case of a payment received under a Contract, a
penalty may be imposed equal to 10% of the taxable portion of the payment.
However, the 10% penalty does not apply in various circumstances. For example,
the penalty is generally inapplicable to payments that are: (i) made on or
after age 59-1/2; (ii) allocable to investments in the Contract before August
14, 1982; (iii) made on or after the death of the Contract Owner (or when the
Contract Owner is not an individual, the death of the Variable Annuitant); (iv)
made incident to disability; (v) part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or the
life expectancy) of the Variable Annuitant or the joint lives (or joint life
expectancies) of the Variable Annuitant and his or her beneficiary; or (vi)
made under a Contract purchased with a single premium and which has an annuity
starting date commencing no later than one year from the purchase date of the
annuity and which provides for a series of substantially equal periodic payments
(to be made not less frequently than annually) during the annuity period.
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A Contract will not be treated as an annuity contract for purposes of
certain Code sections, including Section 72, for any period (and any subsequent
period) for which the investments made by the Fund attributableto such Contract
are not, in accordance with Code Section 817(h) and the Treasury regulations
thereunder, adequately diversified. Although certain questions exist about the
diversification standards, The Franklin believes that the Fund presently
satisfies those standards and intends that the Fund will continue to be
adequately diversified for those purposes.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The Internal Revenue Service has stated
in published rulings that a variable contract owner will be considered the owner
of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
for the investments of a segregated asset account may cause the investor [i.e.,
the Owner], rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular Sub-Accounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from those described by the Internal Revenue Service in rulings
in which it was determined that contract owners were not owners of separate
account assets. For example, a Contract Owner has additional flexibility in
allocating premium payments and account values. These differences could result
in a Contract Owner being treated as the owner of a pro rata portion of the
assets of the Fund. In addition, The Franklin does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Franklin therefore reserves the
right to modify the Contract as necessary to attempt to prevent a Contract Owner
from being considered the owner of a pro rata share of the assets of the Fund.
In order to be treated as an annuity contract for federal income tax
purposes, section 72(s) of the Code requires the Contracts to provide that (a)
if any Contract Owner dies on or after the annuity date but prior to the time
the entire interest in the Contract has been distributed, the remaining portion
of such interest will be distributed at least as rapidly as under the method of
distribution being used as of the date of such owner's death; and (b) if any
Contract Owner dies prior to the annuity date, the entire interest in the
Contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of an
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Contract Owner's death. The "designated beneficiary" refers to a natural
person designated by the owner as a Beneficiary and to whom ownership of the
Contract passes by reason of death. However, if the "designated beneficiary"
is the surviving spouse of the deceased Contract Owner, the Contract may be
continued with the surviving spouse as the new Contract Owner.
The Contracts contain provisions which are intended to comply with the
requirements of section 72(s) of the Code, although no regulations interpreting
these requirements have yet been issued. The Franklin intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code section 72(s) when clarified by regulation or otherwise.
FUTURE LEGISLATION
Although the likelihood of legislative change is uncertain, there is
always the possiblity that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Contract.
32
<PAGE>
INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from the Contracts to the extent the distributions are taxable and are not
otherwise subject to withholding as wages ("Distributions"). See "The
Contracts" immediately above, regarding the taxation of Distributions.
However, except in the case of certain payments delivered outside the United
States or any possession of the United States, no withholding is required from
any Distribution if the payee properly elects, in accordance with prescribed
procedures, not to have withholding apply.
In the absence of a proper election not to have withholding apply, the
amount to be withheld from a Distribution depends on the type of payment being
made. Generally, in the case of periodic payments, the amount to be withheld
from each payment is the amount that would be withheld therefrom under
specified wage withholding tables if the payment were a payment of wages for
the appropriate payroll period. In the case of most other Distributions,
including partial redemptions and lump sum payments, the amount to be withheld
is equal to 10% of the amount of the Distribution.
MANAGEMENT
The Fund is managed by a Board of Managers elected annually by the
Contract Owners. The Board of Managers currently has four members. The members
of the Board of Managers also serve as the Board of Managers of Franklin Life
Variable Annuity Fund A, a separate account of The Franklin having investment
objectives similar to the Fund but the assets of which are held solely with
respect to Variable Annuity Contracts used in accordance with certain qualified
plans and trusts or individual retirement annuities accorded special tax
treatment under the Code, and of Franklin Life Money Market Variable Annuity
Fund C, a separate account of The Franklin having investments in money market
securities.
The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and Regulations,
the Board of Managers is authorized to take various actions on behalf of the
Fund, including the entry into contracts for the purpose of services with
respect to the Fund under circumstances where the approval of such contracts is
not required to be submitted to the Contract Owners. Subject to the authority
of the Board of Managers, officers and employees of The Franklin are
responsible for overall management of the Fund's business affairs.
VOTING RIGHTS
All Contract Owners will have the right to vote upon:
(1) The initial approval of any investment management agreement and any
amendment thereto.
(2) Ratification of an independent auditor for the Fund.
(3) Any change in the fundamental investment policies or fundamental
investment restrictions of the Fund.
(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).
(5) Termination of the investment management agreement (such termination
may also be effected by the Board of Managers).
(6) Any other matter submitted to them by the Board of Managers.
The number of votes which a Contract Owner may cast as to any Contract,
except after the initial Annuity Payment Date, is equal to the number of
Accumulation Units credited to the Contract. With respect to any Contract as
to which Annuity Payments measured by Annuity Units have commenced, the
Contract Owner may cast a number of votes equal to (i) the amount of the assets
in the Fund to meet the Variable Annuity obligations
33
<PAGE>
related to such Contract, divided by (ii) the value of an Accumulation Unit.
Accordingly, the voting rights of a Contract Owner will decline during the
Annuity Payment period as the amount of assets in the Fund required to meet the
Annuity Payments decreases and, in addition, will decline as the value of an
Accumulation Unit increases. Fractional votes will be counted.
Should assets be maintained in the Fund with respect to contracts other
than those offered by this Prospectus, contract owners under such contracts
would be entitled to vote, and their votes would be computed in a similar
manner. Assets maintained by The Franklin in the Fund in excess of the amounts
attributable to the Contracts or other contracts of The Franklin will entitle
The Franklin to vote and its vote would be computed in a similar manner. The
Franklin will cast its votes in the same proportion as the votes cast by
Contract Owners and the owners of such other contracts.
The number of votes which each Contract Owner may cast at a meeting shall
be determined as of a record date to be chosen by the Board of Managers within
120 days of the date of the meeting. At least 20 days' written notice of the
meeting will be given to Contract Owners of record. To be entitled to vote or
to receive notice, a Contract Owner must have been such on the record date.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services ("Franklin Financial") Corporation serves as
"principal underwriter" (as that term is defined in the Investment Company Act
of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The
Sales Agreement is described under "Distribution of The Contracts" in the
Statement of Additional Information. Franklin Financial, located at #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State
of Delaware and is a wholly-owned subsidiary of The Franklin.
The Fund no longer offers new Contracts. Commissions are paid to
registered representatives of Franklin Financial with respect to Stipulated
Payments received by The Franklin under the Contracts to a maximum of 4% of
such Stipulated Payments.
STATE REGULATION
As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country
into six geographic zones. A representative of each such zone may participate
in the examination.
In addition, The Franklin is subject to the insurance laws and regulations
of the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.
For certain provisions of Illinois law applicable to the Fund's
investments, see "Investment Policies and Restrictions of the Fund," above.
REPORTS TO OWNERS
The Franklin will mail to the Contract Owner, at the last known address of
record at the Home Office of The Franklin, at least annually, a report
containing such information as may be required by any applicable law or
regulation and a statement showing the then Cash Value of his or her Contract.
FUNDAMENTAL CHANGES
Upon compliance with applicable law, including obtaining any necessary
affirmative vote of Contract Owners in each case: (a) the Fund may be
operated in a form other than as a "management company" under
34
<PAGE>
the Investment Company Act of 1940 (including operation as a "unit investment
trust"); (b) the Fund may be deregistered under the Investment Company Act of
1940 in the event such registration is no longer required; or (c) the
provisions of the Contracts may be modified to comply with other applicable
federal or state laws. In the event of any such fundamental change, The
Franklin may make appropriate amendments to the Contracts to give effect to
such change or take such other action as may be necessary in this respect.
The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life
Money Market Variable Annuity Fund C ("Fund C"), have approved resolutions
whereby Contract Owners will be asked during 1998 to approve or to disapprove
an Agreement and Plan of Reorganization (the "Agreement") and related
transactions (together, the Agreement and related transactions are the
"Reorganization") whereby: (i) the Fund will be restructured into a single unit
investment trust consisting of three subaccounts; (ii) the assets of each of
the Fund, Fund A and Fund C will be liquidated and the proceeds transferred to
one of the three subaccounts in the restructured Fund (so that the interests of
Contract Owners and of Fund A and Fund C contract owners will continue as
interests in the restructured Fund); and (iii) each subaccount will invest
exclusively in shares of a specified mutual fund portfolio.
Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund
having a value equal to the value of that Contract Owner's interest in a Fund
immediately prior to the Reorganization.
YEAR 2000 TRANSITION
Like all financial services providers, The Franklin utilizes systems that
may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers that also may
be affected. The Franklin and its affiliates have developed, and are in the
process of implementing, a Year 2000 transition plan, and are confirming that
their 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
these efforts, will have any negative impact on The Franklin. However, as of
the date of this prospectus, it is not anticipated that Contract Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of Year 2000 transition implementation. The
Franklin currently anticipates that its systems will be Year 2000 compliant on
or about December 31, 1998, but there can be no assurance that The Franklin
will be successful, or that interaction with other service providers will not
impair The Franklin's services at that time.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation, the
outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending litigation
should not have a material adverse effect on the Fund or on The Franklin's
financial position; however, it is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on The Franklin's results of operations
for a given period. No provision has been made in the consolidated financial
statements related to this pending litigation because the amount of loss, if
any, from these actions cannot be reasonably estimated at this time.
The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
35
<PAGE>
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive
damage awards, that bear little or no relation to actual economic damages
incurred by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and
other legal instruments are summaries. For a complete statement of the terms
thereof, reference is made to such instruments as filed.
OTHER VARIABLE ANNUITY CONTRACTS
The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby.
36
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
<S> <C>
General Information................................... 2
Investment Objectives................................. 2
Management............................................ 3
Investment Advisory and Other Services................ 4
Distribution of The Contracts......................... 6
Portfolio Turnover and Brokerage...................... 7
Safekeeper of Securities.............................. 7
Legal Matters......................................... 8
Experts............................................... 8
Index to Financial Statements......................... F-1
</TABLE>
37
<PAGE>
PROSPECTUS
FRANKLIN LIFE
VARIABLE ANNUITY FUND B
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT FOR USE IN CONNECTION WITH
QUALIFIED TRUSTS OR PLANS)
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
Complete and return this form to:
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591
Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Variable Annuity Fund B.
________________________________________________________________________________
(Name)
________________________________________________________________________________
(Street)
________________________________________________________________________________
(City) (State) (Zip Code)
<PAGE>
APPENDIX D
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PROSPECTUS
<PAGE>
FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
#1 Franklin Square
Springfield, Illinois 62713
Telephone (800) 528-2011
THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE ANNUITY
CONTRACTS FOR USE AS INDIVIDUAL RETIREMENT ANNUITIES OR IN CONNECTION WITH
TRUSTS AND RETIREMENT OR DEFERRED COMPENSATION PLANS WHICH MAY OR MAY NOT
QUALIFY FOR SPECIAL FEDERAL TAX TREATMENT UNDER THE INTERNAL REVENUE CODE (SEE
"FEDERAL INCOME TAX STATUS'' BELOW FOR MORE INFORMATION). THE BASIC PURPOSE OF
THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY PAYMENTS WHICH WILL VARY WITH THE
INVESTMENT PERFORMANCE OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
(THE "FUND''). THE FUND NO LONGER OFFERS NEW CONTRACTS.
THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM COMPOUNDING OF
INCOME THROUGH RETENTION AND REINVESTMENT OF INCOME FROM INVESTMENTS IN A
DIVERSIFIED PORTFOLIO OF SHORT-TERM MONEY MARKET SECURITIES YIELDING A HIGH
LEVEL OF CURRENT INCOME TO THE EXTENT CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND THE MAINTENANCE OF LIQUIDITY. THERE IS NO ASSURANCE THAT THIS
OBJECTIVE WILL BE ATTAINED.
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A
STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 41 OF THIS PROSPECTUS.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED
BY THE UNITED STATES GOVERNMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Special Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . . . 5
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . . . 9
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of the Separate Account. . . . . . . . . . . . . . . . . . . . 11
Deductions and Charges Under the Contracts . . . . . . . . . . . . . . . . 11
A. Administration Deductions. . . . . . . . . . . . . . . . . . . . 11
B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 12
C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . . . 12
D. Investment Management Service Charge . . . . . . . . . . . . . . 12
E. Contingent Deferred Sales Charge . . . . . . . . . . . . . . . . 12
F. Transfers to Other Contracts . . . . . . . . . . . . . . . . . . 13
G. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 14
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
B. Deferred Variable Annuity Accumulation Period. . . . . . . . . . 16
C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . . . 23
Investment Policies and Restrictions of the Fund . . . . . . . . . . . . . 25
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . 31
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . . . 31
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . . . 32
B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . . . . 32
C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . . . 32
D. Individual Retirement Annuities. . . . . . . . . . . . . . . . . 33
The Contracts: Non-Qualified Plans. . . . . . . . . . . . . . . . . . 34
Required Distributions. . . . . . . . . . . . . . . . . . . . . . . . 35
Aggregation of Contracts. . . . . . . . . . . . . . . . . . . . . . . 35
Future Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . . 36
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . . . 38
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . . . 40
Yield Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Table of Contents of Statement of Additional Information . . . . . . . . . 41
Appendix. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE
FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C TO MAKE ANY REPRESENTATIONS
IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL.
2
<PAGE>
SPECIAL TERMS
The following is a glossary of certain terms used in this Prospectus:
ACCUMULATION UNIT-A measure used to determine the value of a Contract Owner's
interest in the Fund prior to the initial Annuity Payment Date.
ANNUITY PAYMENT DATE-The date the first monthly Annuity Payment is to be made to
the Variable Annuitant, and the same day of each month thereafter so long as the
annuity is due. Depending on the Settlement Option elected, Annuity Payment
Dates may occur on a periodic basis other than monthly.
ANNUITY PAYMENTS-Periodic payments made to a Variable Annuitant pursuant to a
Contract. In certain circumstances, Annuity Payments may be paid to a
Beneficiary after the death of a Variable Annuitant.
ANNUITY UNIT-A measure used to determine the value of Annuity Payments after the
first.
BANK DRAFT-A draft preauthorized by the Contract Owner and a bank of his or her
selection in the amount of a periodic Stipulated Payment, which, at the time
each periodic Stipulated Payment is due, is submitted by The Franklin directly
to such bank for payment.
BENEFICIARY-The person or persons designated by the Contract Owner to whom any
payment due on death is payable.
CASH VALUE-The value of all Accumulation Units or Annuity Units attributable to
a Contract.
CODE-The Internal Revenue Code of 1986, as amended.
CONTRACT-An individual variable annuity contract issued by Franklin Life Money
Market Variable Annuity Fund C that is offered by this Prospectus.
CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract.
CONTRACT OWNER-Except in cases where the Contract is issued to a trustee of a
qualified employees' trust or pursuant to a qualified annuity plan, the Contract
Owner is the individual Variable Annuitant to whom the Contract is issued. In
cases where the Contract is issued to a trustee of a qualified employees' trust
or pursuant to a qualified annuity plan, the Contract Owner will be respectively
the trustee or the employer establishing such trust or plan, and the employee
named as the Variable Annuitant of such Contract is referred to herein as the
employee. When the term "Contract Owner" is used in the context of voting
rights, it includes the owners of all contracts which depend in whole or in part
on the investment performance of the Fund.
CONTRACT YEAR-Each year starting with the Effective Date and each Contract
Anniversary thereafter.
DEFERRED VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence at some future date. Included are periodic payment deferred
contracts and single payment deferred contracts.
EFFECTIVE DATE-The date shown on the Schedule Page of the Contract as the date
the first Contract Year begins.
FIXED-DOLLAR ANNUITY-An annuity contract which provides for Annuity Payments
which remain fixed as to dollar amount throughout the Annuity Payment period.
3
<PAGE>
HOME OFFICE-The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.
IMMEDIATE VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.
INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of
the Code. Individual Retirement Annuities may also qualify as Simplified
Employee Pensions.
NON-QUALIFIED CONTRACTS-Contracts issued under Non-Qualified Plans.
NON-QUALIFIED PLANS-Retirement or deferred compensation plans or arrangements
which do not receive favorable tax treatment under the Code.
PERIODIC STIPULATED PAYMENT CONTRACT-An annuity contract which provides that
payments made to purchase the contract will be made in periodic instalments
rather than in a single sum.
QUALIFIED CONTRACTS-Contracts issued under Qualified Plans.
QUALIFIED PLANS-Retirement plans which receive favorable tax treatment under the
Code and which are described on page 10, below.
ROLLOVER CONTRIBUTION-A transfer pursuant to Sections 402(c), 403(a)(4),
403(b)(8) or 408(d)(3) of the Code.
SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.
SIMPLIFIED EMPLOYEE PENSION-An Individual Retirement Annuity which meets the
additional requirements of Section 408(k) of the Code.
SINGLE STIPULATED PAYMENT CONTRACT-An annuity contract which provides that the
total payment to purchase the contract will be made in a single sum rather than
in periodic instalments. Included are single payment immediate contracts and
single payment deferred contracts.
STIPULATED PAYMENTS-The payment or payments provided to be made to The Franklin
under a Contract.
THE FRANKLIN-The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.
VALUATION DATE-Each date as of which the Accumulation Unit value is determined.
This value is determined on each day (other than a day during which no Contract
or portion thereof is tendered for redemption and no order to purchase or
transfer a Contract is received by the Fund) in which there is a sufficient
degree of trading in the securities in which the Fund invests that the value of
an Accumulation Unit might be materially affected by changes in the value of the
Fund's investments, as of the close of trading on that day.
VALUATION PERIOD-The period commencing on a Valuation Date and ending on the
next Valuation Date.
VARIABLE ANNUITANT-Any natural person with respect to whom a Contract has been
issued and a Variable Annuity has been, will be or (but for death) would have
been effected thereunder. In certain circumstances, a Variable Annuitant may
elect to receive Annuity Payments on a fixed-basis or a combination of a fixed
and variable basis.
VARIABLE ANNUITY-An annuity contract which provides for a series of periodic
annuity payments, the amounts of which may increase or decrease as a result of
the investment experience of a separate account.
4
<PAGE>
TABLE OF DEDUCTIONS AND CHARGES
Contract Owner Transaction Expenses
Deferred Sales Load (as a percentage of the lesser of (i) the Cash Value of
the part of the Contract surrendered or (ii) the Stipulated Payments made
during the immediately preceding 72 months represented by the part of the
Contract surrendered (or the Stipulated Payment in the case of a Single
Stipulated Payment Contract))
<TABLE>
<CAPTION>
Contract Total Partial
Year Redemption Redemption
---- ---------- ----------
<S> <C> <C> <C>
Single Stipulated Payment 1 6.00% 6.00%
Contract 2 6.00% 6.00%
3 4.00% 4.00%
4 2.00% 4.00%
5 and 0.00% 4.00%
thereafter
Periodic Stipulated Payment 1 8.00% 8.00%
Contract 2 8.00% 8.00%
3 8.00% 8.00%
4 6.00% 6.00%
5 4.00% 4.00%
6 2.00% 4.00%
7 and 0.00% 4.00%
thereafter
</TABLE>
Administration Fee (as a charge against purchase
payments)
<TABLE>
<S> <C>
Single Stipulated Payment Contract $100
Periodic Stipulated Payment Contract $20 per Contract Year plus $1 per
Stipulated Payment ($.50 if by Bank
Draft or by employer or military
preauthorized automatic deduction)
Annual Expenses
(as a percentage of average net assets)
Management Fees 0.38%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.17%
-----
Total Annual Expenses 1.45%
-----
</TABLE>
Example
<TABLE>
<S> <C> <C> <C> <C>
If you surrender your contract at the end of the
applicable time period: 1 year 3 years 5 years 10 years
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Single Stipulated Payment Contract $ 169 $ 181 $ 171 $ 255
Periodic Stipulated Payment Contracts: $ 181 $ 191 $ 221 $ 359
If you do not surrender your contract: 1 year 3 years 5 years 10 years
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
Single Stipulated Payment Contract $ 113 $ 141 $ 171 $ 255
Periodic Stipulated Payment Contracts: $ 36 $ 106 $ 177 $ 359
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The Table of Deductions and Charges is intended to assist Contract Owners in
understanding the various fees and expenses that they bear directly or
indirectly. Additional deductions may be made from Stipulated Payments for any
premium taxes payable by The Franklin on the consideration received from the
sale of the Contracts. See "Premium Taxes," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," below. The example assumes that a single Stipulated Payment of
$1,000 is made at the beginning of the periods shown. (It should be noted that
The Franklin will not actually issue a Single Stipulated Payment Contract unless
the single payment is at least $2,500.) This assumption applies even with
respect to Periodic Stipulated Payment Contracts, which would normally require
additional payments. The example also assumes a constant investment return of 5%
and the expenses might be different if the return of the Fund averaged 5% over
the periods shown but fluctuated during such periods. The amounts shown in the
example represent the aggregate amounts that would be paid over the life of a
Contract if the Contract were surrendered at the end of the applicable time
periods.
6
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
THE CONTRACTS
The individual variable annuity contracts (the "Contracts") being offered by
this Prospectus are for use as Individual Retirement Annuities or in connection
with trusts and retirement or deferred compensation plans which may or may not
qualify for special tax treatment under the Code. See "Federal Income Tax
Status," below. The basic purpose of the Contracts is to provide Annuity
Payments which will vary with the investment performance of Franklin Life Money
Market Variable Annuity Fund C (the "Fund"). The Contracts provide Annuity
Payments for life commencing on an initial Annuity Payment Date selected by the
Contract Owner; other Settlement Options are provided. See "Introduction," and
"The Contracts," below. At any time within 10 days after receipt of a
Contract, the Contract Owner may return the Contract and receive a refund of any
premium paid on the Contract. See "Right to Revocation of Contract," below.
THE FUND AND ITS INVESTMENT OBJECTIVES
The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term compounding of income
through retention and reinvestment of income from investments in a diversified
portfolio of short-term money market securities, yielding a high level of
current income to the extent consistent with the preservation of capital and the
maintenance of liquidity. There is no assurance that this objective will be
attained. In keeping with the primary investment objective of investing in
short-term money market securities, at least 80% of the Fund's portfolio will be
invested in securities with maturities or remaining maturities of one year or
less and not more than 20% will be invested in securities with maturities or
remaining maturities of between one and two years. While preservation of capital
is a primary investment objective of the Fund and the money market securities in
which the Fund invests generally are considered to have low principal risk, such
securities are not completely risk-free. There is the risk of the failure of
issuers to meet their principal and interest obligations. Commercial paper
generally carries the highest risk of money market securities. The Fund may
invest in Eurodollar C.D.'s and in securities issued by the Government of Canada
and Canadian banks, which involve certain risks relating to marketability,
possible adverse political and economic developments and possible restrictions
on international currency transactions. See "Investment Policies and
Restrictions of the Fund," below.
SPECIAL INVESTMENT CONSTRAINTS
It is anticipated that the combination of the restrictions on the amount that
the Fund may invest in the securities of any one issuer and the relatively small
and decreasing size of the Fund's assets will make it more difficult for the
Fund's investment adviser to secure appropriate commercial paper investments,
which have historically constituted a substantial portion of the Fund's
investments. It is possible that the shrinking pool of commercial paper
investments available to the Fund due to its size may impair the future
investment performance of the Fund. See "Investment Policies and Restrictions
of the Fund - Special Investment Constraints," below.
INVESTMENT ADVISER; PRINCIPAL UNDERWRITER
The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities and
income protection policies. Franklin Financial Services Corporation, a
wholly-owned subsidiary of The Franklin, is the principal underwriter for the
Fund. The Franklin is an indirect wholly-owned subsidiary of American General
Corporation. See "Investment Management Service Charge," and "Distribution of
the Contracts," below.
DEDUCTIONS AND CHARGES
The deductions and charges applicable to a Contract are illustrated in the
Table of Deductions and Charges that appears immediately before this summary.
There are no deductions for sales charges made from Stipulated Payments under
the Contracts. However, a contingent deferred sales charge, applied against the
lesser of the Cash Value or Stipulated Payments made during the immediately
preceding 72 months, is deducted in the event of certain redemptions. In the
case of Periodic Stipulated Payment Contracts, such charges for total
redemptions start at 8% for the first three Contract Years and then decline by
2% increments per year through the sixth Contract Year, with no such
charge being imposed after the end of the sixth Contract Year. In the case of
Single Stipulated Payment Contracts, such charges for total redemptions start at
6% for the first two Contract Years and then decline by 2% increments per year
through the fourth Contract Year, with no such charge being imposed after the
end of the fourth Contract Year. The contingent deferred sales charges applied
to partial redemptions are identical to those applied to total redemptions,
except that such charges remain at a constant 4% subsequent to the fifth
Contract Year in the case of Periodic Stipulated Payment Contracts, and the
third Contract Year in the case of Single Stipulated Payment
- --------------------------------------------------------------------------------
7
<PAGE>
Contracts. Contingent deferred sales charges are waived in the case of partial
redemptions of an amount in any 12-month period up to 10% of Cash Value as of
the date of the first partial redemption during such 12-month period, death of
the Variable Annuitant and where proceeds of a total redemption are used to
purchase another Variable Annuity, Fixed-Dollar Annuity or life insurance
contract issued by The Franklin. See "Contingent Deferred Sales Charge,"
"Redemption," and "Transfers to Other Contracts," below.
A deduction of $20 per Contract Year (subject to increase by The Franklin to
a maximum of $30 per Contract Year) and a transaction fee of $1.00 per
Stipulated Payment ($.50 if by Bank Draft or by employer or military
preauthorized automatic deduction from compensation) in the case of Periodic
Stipulated Payment Contracts, and a one-time deduction of $100 in the case of
Single Stipulated Payment Contracts, is made from Stipulated Payments for
administrative expenses. Any applicable state or local premium taxes on the
Stipulated Payments (currently up to 5%) are also deducted from the single or
periodic Stipulated Payments. The amount remaining after all such deductions and
fees is allocated to the Fund. See "Redemption," "Administration Deductions,"
"Contingent Deferred Sales Charge," and "Premium Taxes," below.
The charges for annuity rate and mortality assurances, expense assurances and
investment management services currently aggregate 1.440% on an annual basis and
are made daily against the net asset value of the Fund. These charges consist of
.900% for The Franklin's assurance of annuity rates or mortality factors, .165%
(subject to increase by The Franklin up to a maximum of .850%) for The
Franklin's assurances of expense factors, and .375% (subject to increase by The
Franklin up to a maximum of .500%) for investment management services by The
Franklin. See "Mortality and Expense Risk Charge," and "Investment Management
Service Charge," below.
MINIMUM PERMITTED INVESTMENT
Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under which
the periodic Stipulated Payment is $30 ($360 on an annual basis). See "Purchase
Limits," below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," below), redeem all or part of the Contract and receive the
Cash Value (equal to the number of Accumulation Units credited to the part of
the Contract redeemed times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received) less any
applicable contingent deferred sales charge, unpaid administration deductions,
and federal income tax withholding. Partial redemptions must be in amounts not
less than $500. For information as to Accumulation Units, see "Value of the
Accumulation Unit," below. Subject to certain limitations, the Contract Owner
may elect to have all or a portion of the amount due upon a total redemption of
a Contract applied under certain Settlement Options or applied toward the
purchase of other annuity or insurance products offered by The Franklin. Federal
tax penalties may apply to certain redemptions. See "Redemption," "Contingent
Deferred Sales Charge," "Transfers to and from Other Contracts," "Settlement
Options," and "Federal Income Tax Status," below.
TERMINATION BY THE FRANKLIN
The Franklin reserves the right to terminate Contracts if Stipulated Payments
are less than $360 in each of three consecutive Contract Years (excluding the
first Contract Year) and if the Cash Value less any surrender charge is less
than $500 at the end of such three-year period. Different termination provisions
apply in the case of Individual Retirement Annuities. See "Termination by The
Franklin," below.
8
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
The financial information in this table for each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. This table should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ 1.204 $ 1.162 $ 1.203 $ .846 $ .617 $ .746 $ 1.140 $ 1.501 $ 1.542 $ 1.186
Expenses .337 .326 .309 .303 .294 .286 .278 .265 .244 .230
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956
Net increase in accumulation
unit value .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956
Acumulation unit value:
Beginning of year 22.866 22.030 21.136 20.593 20.270 19.819 18.948 17.712 16.414 15.458
End of year $23.733 $22.866 $22.030 $21.136 $20.593 $20.270 $19.810 $18.948 $17.712 $16.414
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment
income to average
net assets 3.73% 3.71% 4.17% 2.58% 1.58% 2.32% 4.46% 6.71% 7.65% 5.98%
Number of accumulation
units outstanding
at end of year 80,944 87,386 104,641 132,646 159,929 210,310 247,150 270,271 307,850 362,718
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL STATEMENTS
The financial statements for the Fund and The Franklin and the reports of the
independent auditors and accountants for the Fund and The Franklin are included
in the Statement of Additional Information.
9
<PAGE>
INTRODUCTION
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
The Qualified and Non-Qualified Contracts offered by this Prospectus are
designed primarily to assist in retirement planning for individuals. The
Contracts provide Annuity Payments for life commencing on a selected Annuity
Payment Date; other Settlement Options are available. The amount of the Annuity
Payments will vary with the investment performance of the assets of the Fund, a
separate account which has been established by The Franklin under Illinois
insurance law. For the primary investment objective of the Fund, see "Investment
Policies and Restrictions of the Fund," below.
The Qualified Contracts described in this Prospectus will not knowingly be
sold other than for use:
(1) in connection with qualified employee pension and profit-sharing trusts
described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and
qualified annuity plans described in Section 403(a) of the Code;
(2) in connection with qualified pension, profit-sharing and annuity plans
established by self-employed persons ("H.R. 10 Plans");
(3) in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of the
Code; or
(4) as Individual Retirement Annuities described in Section 408(b) of the
Code, including Simplified Employee Pensions described in Section 408(k) of the
Code.
Pursuant to this Prospectus, The Franklin offers two types of Qualified and
Non-Qualified Contracts: those under which Annuity Payments to the Variable
Annuitant commence immediately-"Immediate Variable Annuities"-and those under
which Annuity Payments to the Variable Annuitant commence in the
future-"Deferred Variable Annuities." Deferred Variable Annuities may be
purchased either with periodic Stipulated Payments or with a single Stipulated
Payment, while Immediate Variable Annuities may only be purchased with a single
Stipulated Payment. Periodic Stipulated Payment Contracts are written to provide
various agreed periods during which the Stipulated Payments are to be made, with
a minimum of two years.
The Franklin is a legal reserve stock life insurance company organized under
the laws of the State of Illinois in 1884. The Franklin issues individual life
insurance, annuity and accident and health insurance policies, group annuities
and group life insurance and offers a variety of whole life, life, retirement
income and level and decreasing term insurance plans. Its Home Office is located
at #1 Franklin Square, Springfield, Illinois 62713.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of the Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
The discussion of Contract terms herein in many cases summarizes those terms.
Reference is made to the full text of the Contract forms, which are filed with
the Securities and Exchange Commission as exhibits to the Registration Statement
under the Securities Act of 1933 and the Investment Company Act of 1940 of which
this Prospectus is a part. The exercise of certain of the Qualified Contract
rights herein described may be subject to the terms and conditions of any
Qualified Plan under which such Qualified Contract may be purchased. This
Prospectus contains no information concerning any such Qualified Plan. Further
information relating to some Qualified Plans may be obtained from the disclosure
documents required to be distributed to employees under the Employee Retirement
Income Security Act of 1974.
10
<PAGE>
DESCRIPTION OF THE SEPARATE ACCOUNT
The Fund was established as a separate account on July 23, 1981 by resolution
of the Board of Directors of The Franklin pursuant to the provisions of the
Illinois Insurance Code. The Fund is an open-end diversified management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940. Such registration does not involve
supervision of the management or investment practices or policies of the Fund or
of The Franklin by the Commission. The Board of Managers of the Fund must be
elected annually by Contract Owners. A majority of the members of the Board of
Managers are persons who are not otherwise affiliated with The Franklin. See
"Management," below. The Fund meets the definition of a "Separate Account"
under the federal securities laws.
Under the provisions of the Illinois Insurance Code: (i) the income, gains
or losses of the Fund are credited to or charged against the amounts allocated
to the Fund in accordance with the terms of the Contracts, without regard to the
other income, gains or losses of The Franklin; and (ii) the assets of the Fund
are not chargeable with liabilities arising out of The Franklin's other business
activities, including liabilities of any other separate account which may be
established. These assets are held with relation to the Contracts described in
this Prospectus and such other Variable Annuity contracts as may be issued by
The Franklin and designated by it as participating in the Fund. All obligations
arising under the Contracts, including the promise to make Annuity Payments, are
general corporate obligations of The Franklin. Accordingly, all of The
Franklin's assets (except those allocated to other separate accounts which have
been or may be established) are available to meet its obligations and expenses
under the Contracts participating in the Fund.
The Franklin is taxed as a "life insurance company" under the Code. The Fund
is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are considered separately from the other
operations of The Franklin in computing The Franklin's tax liability and the
Fund is not affected by federal income taxes paid by The Franklin with respect
to its other operations. The operations of the Fund are treated separately from
the other operations of The Franklin for accounting and financial statement
purposes. Under existing law, no federal income tax is payable by The Franklin
on investment income and realized capital gains of the Fund. See "Federal Income
Tax Status," below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
The Franklin deducts the charges described below to cover costs and expenses,
services provided, and risks assumed under the Contracts. The amount of a
charge may not necessarily correspond to the costs associated with providing the
services or benefits indicated by the designation of the charge or associated
with the particular Contract. For example, the contingent deferred sales charge
may not fully cover all of the sales and distribution expenses actually incurred
by The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
A. ADMINISTRATION DEDUCTIONS
Deductions from Stipulated Payments will be made as follows for
administrative expenses with respect to the Contracts and the Fund such as
preparation of the Contracts, custodial and transfer fees, salaries, rent,
postage, telephone and legal, accounting and periodic reporting fees:
(1) Under Single Stipulated Payment Contracts, a one-time deduction of $100.
(2) Under Periodic Stipulated Payment Contracts, a deduction of $20 per
Contract Year (subject to increase at any time by The Franklin to a maximum of
$30 per Contract Year) and a transaction fee of $1.00 per Stipulated Payment
($.50 if by Bank Draft or by employer or military preauthorized automatic
deduction from compensation).
The above deductions for administrative expenses, and charges for mortality
and expense risk assurances discussed under "Mortality and Expense Risk
Charge," below, are made pursuant to an Administration Agreement dated December
3, 1981 between the Fund and The Franklin. The Administration Agreement is
described under "Investment Advisory and Other Services" in the Statement of
Additional Information.
11
<PAGE>
The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1995, 1996 and
1997 were $1,060, $820 and $1,512, respectively.
B. PREMIUM TAXES
At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof
will be deducted from the Stipulated Payments. Premium taxes ranging up to 5%
are charged by various jurisdictions in which The Franklin is transacting
business and in which it may, after appropriate qualification, offer
Contracts.
C. MORTALITY AND EXPENSE RISK CHARGE
While Annuity Payments will reflect the investment performance of the Fund,
they will not be affected by adverse mortality experience or by any excess in
the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," immediately below, which
the Fund will bear). The Franklin assumes these risks for the duration of the
Contract and the annuity rate, mortality and expense risk deductions and charges
set forth herein will not be increased beyond the stated maximum with respect
thereto regardless of the actual mortality and expense experience. The mortality
risk charge is imposed regardless of whether or not the payment option selected
involves a life contingency.
For assuming these risks, The Franklin imposes a daily charge against the
value of the Accumulation Unit and the Annuity Unit. (For further information as
to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity
Accumulation Period" and "Annuity Period," below.) These charges are at the
current combined annual rate of 1.065% (.002918% on a daily basis), of which
.900% is for annuity rate and mortality assurances and .165% (subject to
increase at any time by The Franklin up to a maximum of 1.750%) is for expense
assurances. If the money collected from this charge is not needed, it will be
to The Franklin's gain and may be used to cover contract distribution expenses.
During 1995, 1996 and 1997, The Franklin earned and was paid $27,136, $23,215
and $20,938, respectively, by reason of these charges. Such charges during 1997
were equal to 1.065% of average net assets.
D. INVESTMENT MANAGEMENT SERVICE CHARGE
The Franklin acts as investment manager of the Fund. For acting as such, The
Franklin makes a charge against the value of the Accumulation Unit and of the
Annuity Unit at an annual rate of up to .500%. The Franklin has agreed to forego
initially a portion of this charge and currently makes a charge against the
value of the Accumulation Unit and of the Annuity Unit at the annual rate of
.375% (.001027% on a daily basis). This charge may be increased up to .500% on
an annual basis only upon at least 30 days' prior written notice to Contract
Owners. The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting held
on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of
the Fund at its meeting on January 19, 1998. The Investment Management Agreement
is described under "Investment Advisory and Other Services" in the Statement of
Additional Information.
During 1995, 1996 and 1997, The Franklin earned and was paid $9,551, $8,171
and $7,370, respectively, under the Investment Management Agreement then in
effect.
E. CONTINGENT DEFERRED SALES CHARGE
There are no deductions for sales charges made from Stipulated Payments
under the Contracts. However, commissions on the sale of the Contracts are
paid by The Franklin to agents of Franklin Financial Services
12
<PAGE>
Corporation pursuant to an Agreement dated December 3, 1981. See "Distribution
of the Contracts" in the Statement of Additional Information. In addition,
Franklin Financial Services Corporation incurs certain sales expenses, such as
sales literature preparation and related costs, in connection with the sale of
the Contracts pursuant to a Sales Agreement dated January 31, 1995. Because the
Contracts are normally purchased for the long term, it is expected that these
costs will be recovered over time. If, however, a Contract is totally or
partially redeemed in certain circumstances prior to the initial Annuity Payment
Date, a means is provided for Franklin Financial Services Corporation to recover
sales expenses at that time.
Upon redemption of a Periodic Stipulated Payment Contract, the charges
determined as follows will be applied against the lesser of the Cash Value of
the part of the Contract redeemed or the Stipulated Payments made during the
immediately preceding 72 months represented by that part of the Contract
redeemed:
<TABLE>
<CAPTION>
Contract Percentage Charge
Year Total Redemption Partial Redemption
- --------------------------------------------------------------------------------
<S> <C> <C>
1 8% 8%
2 8% 8%
3 8% 8%
4 6% 6%
5 4% 4%
6 2% 4%
7 and thereafter 0% 4%
</TABLE>
Upon redemption of a Single Stipulated Payment Contract, the charges
determined as follows will be applied against the lesser of the Cash Value of
the part of the Contract redeemed or the Stipulated Payment:
<TABLE>
<CAPTION>
Contract Percentage Charge
Year Total Redemption Partial Redemption
- --------------------------------------------------------------------------------
<S> <C> <C>
1 6% 6%
2 6% 6%
3 4% 4%
4 2% 4%
5 and thereafter 0% 4%
</TABLE>
The above charges are not, however, applied to distributions made upon the
death of the Variable Annuitant, to partial redemption of an amount in any
twelve-month period up to 10% of the Cash Value as of the date of the first
partial redemption in such twelve-month period, or to certain transfers
described below. Partial redemptions must be in amounts not less than $500.
In no event will the total amount of contingent deferred sales charges paid
under a Contract exceed 9% of total Stipulated Payments made under such Contract
in the first twelve Contract Years (or such fewer Contract Years over which
Stipulated Payments are made).
The deferred sales charges were $108 during 1995. There were no deferred
sales charges during 1996 and 1997. Franklin Financial Services Corportion
paid no allowances to unaffiliated dealers in connection with the sale of the
Contracts during 1995, 1996 and 1997.
F. TRANSFERS TO OTHER CONTRACTS
Subject to any limitations in a Qualified Plan, Contracts may be
redeemed prior to the death of the Variable Annuitant and the initial Annuity
Payment Date and the Cash Value (less the required amount of federal income
tax withholding, if any) may be applied to the purchase of certain other
Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued
by The Franklin. Franklin Life Variable Annuity Fund A and Franklin Life
Variable Annuity Fund B, other separate accounts of The Franklin funding
Variable Annuity contracts, no longer issue new contracts. If a Contract is
fully redeemed and such Cash Value is immediately applied to the purchase of
such other contracts, no contingent deferred sales charge for redeeming the
Fund C Contract will apply. Any sales deductions under such
13
<PAGE>
other contracts will apply to amounts transferred as if such amounts were a
single stipulated payment under such other contracts (however, total sales
deductions on the transferred funds will in no instance exceed 9% of all
Stipulated Payments made under the Fund C Contract with respect to such
transferred funds); provided, however, that if such a transfer occurs after the
sixth Contract Year in the case of Periodic Stipulated Payment Contracts or the
fourth Contract Year in the case of Single Stipulated Payment Contracts, The
Franklin will waive the sales deductions of such other contract with respect
to such transferred funds.
It is not clear whether gain or loss will be recognized for federal income
tax purposes upon the redemption of a Fund C Contract, another annuity contract
or life insurance contract issued by The Franklin for purposes of applying the
redemption proceeds to the purchase of another contract issued by The Franklin.
Federal tax penalties may also apply to such redemptions. Since the income and
withholding tax consequences of such redemption and purchase depend on many
factors, any person contemplating redemption of a Fund C Contract or another
contract issued by The Franklin for purposes of purchasing a different contract
issued by The Franklin (or any other contract) is advised to consult a qualified
tax advisor prior to the time of redemption.
G. MISCELLANEOUS
The Fund's total expenses for 1997 were $28,308, or 1.44% of average net
assets during 1997.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative practices
of The Franklin with respect thereto are discussed in the following paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on the
cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. In the case of Deferred Variable Annuity Contracts, the annuity
rate table is set forth in the Contract (but see below). In the case of
Immediate Variable Annuities, the table is that used by The Franklin on the
date of issue of the Contract. The amount of the Annuity Payments will not
be affected by mortality experience adverse to The Franklin or by an increase
in The Franklin's expenses related to the Fund or the Contracts in excess of
the expense deductions provided for in the Contracts. The Variable Annuitant
under an annuity with a life contingency or one providing for a number of
Annuity Payments certain will receive the value of a fixed number of Annuity
Units each month, determined as of the initial Annuity Payment Date on the
basis of the applicable annuity rate table and the then value of his or her
account. The value of Annuity Units, and thus the amounts of the monthly
Annuity Payments, will, however, reflect investment gains and losses and
investment income occurring after the initial Annuity Payment Date, and thus
the amount of the Annuity Payments will vary with the investment experience
of the Fund. See "Annuity Period," below.
Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have
held that the use of gender-based mortality tables to determine benefits
under an employer-related retirement or benefit plan may violate Title VII of
the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans
sponsored by employers subject to Title VII generally may not provide
different benefits for similarly-situated men and women.
The Contracts described in this Prospectus incorporate annuity rate tables
which reflect the age and sex of the Variable Annuitant and the Settlement
Option selected. Such sex-distinct tables continue to be appropriate for use,
for example, under Contracts which are not purchased in connection with an
"employer-related" plan subject to NORRIS (such as individual retirement
annuities not sponsored by an employer). However, in order to enable subject
employers to comply with NORRIS, The Franklin will provide "unisex" annuity
rate tables for use under Contracts purchased in connection with
"employer-related" plans. Persons contemplating purchase of a Contract, as
well as current Contract Owners, should consult a legal advisor regarding the
applicability and implications of NORRIS in connection with their purchase
and ownership of a Contract.
14
<PAGE>
2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC
STIPULATED PAYMENTS
Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. The Contract
Owner may increase the amount of a Stipulated Payment on an annualized basis
under a Periodic Stipulated Payment Contract (except in the case of an
Individual Retirement Annuity, which cannot be increased above the amounts
described under "Purchase Limits," immediately below) up to an amount on an
annualized basis equal to ten times the amount of the first Stipulated Payment
on an annualized basis. Similarly, subject to the limitations described under
"Purchase Limits," immediately below, the amount of a periodic Stipulated
Payment may be decreased by the Contract Owner on any date a Stipulated Payment
is due. Unless otherwise agreed to by The Franklin, the mode of Stipulated
Payment may be changed only on a Contract Anniversary.
The Contract Owner may continue making Stipulated Payments after the agreed
number of Stipulated Payments has been made, but The Franklin will not accept
Stipulated Payments after age 75. Submission of a Stipulated Payment in an
amount different from that of the previous payment, subject to the aforesaid
limits, will constitute notice of the election of the Contract Owner to make
such change.
3. ASSIGNMENT OR PLEDGE
A Qualified Contract may not be assigned by the Contract Owner except when
issued to a trustee in connection with certain types of plans designed to
qualify under Section 401 of the Code or when made pursuant to a qualified
domestic relations order rendered by a state court in satisfaction of family
support obligations. In general, a pledge or assignment made with respect to
certain Qualified Contracts may, depending on such factors as the amount pledged
or assigned, be treated as a taxable distribution. See "Individual Retirement
Annuities," below, for special rules applicable thereto. Moreover, in certain
instances, pledges or assignments of a Qualified Contract may result in the
imposition of certain tax penalties. See generally "The Contracts: Qualified
Plans," below.
A Non-Qualified Contract may be assigned by the Contract Owner or pledged by
him or her as collateral security as provided in the Non-Qualified Contract.
Assignments or pledges of a Non-Qualified Contract will be treated as
distributions that may be taxable. Moreover, in certain instances, pledges or
assignments of a Non-Qualified Contract may result in the imposition of certain
tax penalties. See "The Contracts: Non-Qualified Plans," below.
Persons contemplating the assignment or pledge of a Qualified Contract or a
Non-Qualified Contract are advised to consult a qualified tax advisor concerning
the federal income tax consequences thereof.
4. PURCHASE LIMITS
No periodic Stipulated Payment may be less than $30 ($360 on an annual
basis). No single Stipulated Payment may be less than $2,500, except that in
the case of a deferred Single Stipulated Payment Contract to be used as an
Individual Retirement Annuity funded with a Rollover Contribution, the total
Stipulated Payment applicable to the Variable Annuity, prior to
administration deductions, must be at least $1,000 unless with consent of The
Franklin a smaller single Stipulated Payment is permitted. In the case of a
Qualified Contract issued for use as an Individual Retirement Annuity, annual
premium payments may not, in general, exceed $2,000. However, if the
Individual Retirement Annuity is a Simplified Employee Pension, annual
premium payments may not exceed $30,000. Single Stipulated Payment Contracts
are not available as Individual Retirement Annuities except for those funded
with Rollover Contributions and except for those to be used as Simplified
Employee Pensions.
5. TERMINATION BY THE FRANKLIN
The Franklin reserves the right to terminate any Contract, other than a
Contract issued for use as an Individual Retirement Annuity, if total Stipulated
Payments paid are less than $360 in each of three consecutive Contract Years
(excluding the first Contract Year) and if the Cash Value less any surrender
charge is less than $500 at the end of such three-year period. The Franklin must
give 31 days' notice by mail to the Contract Owner of such termination. The
Franklin will not exercise any right to terminate such Contract if the value of
the Contract declines to less than $500 as a result of a decline in the market
value of the securities held by the Fund.
15
<PAGE>
The Franklin reserves the right to terminate any Contract issued for use as
an Individual Retirement Annuity if no Stipulated Payments have been received
for any two Contract Years and if the first monthly Annuity Payment, determined
at the initial Annuity Payment Date, arising from the Stipulated Payments
received prior to such two-year period would be less than $20.
Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less any unpaid administration deductions.
For certain tax consequences upon such payment, see "Federal Income Tax
Status," below.
6. RIGHT TO REVOCATION OF CONTRACT
A Contract Owner has the right to revoke the purchase of a Contract within 10
days after receipt of the Contract, and upon such revocation will be entitled to
a return of the entire amount paid. The request for revocation must be made by
mailing or hand-delivering the Contract within such 10-day period either to The
Franklin Life Insurance Company, Cashiers Department, #1 Franklin Square,
Springfield, Illinois 62713, or to the agent from whom the Contract was
purchased. In general, notice of revocation given by mail is deemed to be given
on the date of the postmark, or, if sent by certified or registered mail, the
date of certification or registration.
7. NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD
1. CREDITING ACCUMULATION UNITS; DEDUCTION FOR ADMINISTRATIVE EXPENSES
During the accumulation period-the period before the initial Annuity
Payment Date-deductions from Stipulated Payments for administrative expenses
are made as specified under "Deductions and Charges Under the Contracts,"
above. In addition, any applicable premium taxes, also as specified above
under that caption, are deducted from the Stipulated Payments. The balance of
each Stipulated Payment is credited to the Contract Owner in the form of
Accumulation Units.
The number of a Contract Owner's Accumulation Units is determined by dividing
the net amount of Stipulated Payments credited to his or her Contract by the
value of an Accumulation Unit at the end of the Valuation Period during which
the Stipulated Payment is received, except that, in the case of the original
application for a Variable Annuity Contract, the value of an Accumulation Unit
within two business days after receipt of the application will be used if the
application and all information necessary to process the application are
complete upon receipt. If the application and such information are not complete
upon receipt, The Franklin, within five days after the receipt of an original
application and initial payment at the Home Office of The Franklin, will attempt
to complete the application and will either accept the application or reject the
application and return the initial payment.
The number of Accumulation Units so determined will not be changed by any
subsequent change in the dollar value of an Accumulation Unit, but the dollar
value of an Accumulation Unit may vary from day to day depending upon the
investment experience of the Fund.
16
<PAGE>
2. VALUATION OF A CONTRACT OWNER'S CONTRACT
The Cash Value of a Contract at any time prior to the initial Annuity Payment
Date can be determined by multiplying the total number of Accumulation Units
credited to the account by the current Accumulation Unit value. The Contract
Owner bears the investment risk, that is, the risk that market values may
decline. There is no assurance that the Cash Value of the Contract will equal or
exceed the Stipulated Payments made. A Contract Owner may obtain from the Home
Office of The Franklin information as to the current value of an Accumulation
Unit and the number of Accumulation Units credited to his or her Contract.
3. VALUE OF THE ACCUMULATION UNIT
The value of an Accumulation Unit was set at $10 effective July 1, 1981.
Accumulation Units currently are valued each Valuation Date (each day in which
there is a sufficient degree of trading in the securities in which the Fund
invests that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, other than a day during which no
Contract or portion thereof is tendered for redemption and no order to purchase
or transfer a Contract is received by the Fund, as of the close of trading on
that day). After the close of trading on a Valuation Date, or on a day when
Accumulation Units are not valued, the value of an Accumulation Unit is equal to
its value as of the immediately following Valuation Date. The value of an
Accumulation Unit on the last day of any Valuation Period is determined by
multiplying the value of an Accumulation Unit on the last day of the immediately
preceding Valuation Period by the Net Investment Factor (defined below) for the
current Valuation Period.
At each Valuation Date a gross investment rate for the Valuation Period then
ended is determined from the investment performance of the Fund for the
Valuation Period. Such rate is equal to (i) accrued investment income for the
Valuation Period, plus capital gains and minus capital losses for the period,
whether realized or unrealized, on the assets of the Fund (adjusted by a
deduction for the payment of any applicable state or local taxes as to the
income or capital gains of the Fund) divided by (ii) the value of the assets of
the Fund at the beginning of the Valuation Period. The gross investment rate may
be positive or negative.
The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of the
Valuation Period as a charge against the gross investment rate. This charge is
made by The Franklin for providing investment management services, annuity rate
or mortality assurances and expense assurances and may be increased by The
Franklin to a maximum of 2.250% on an annual basis. See "Deductions and Charges
Under the Contracts," above.
The net investment factor for the Valuation Period is the sum of 1.00000000
plus the net investment rate for the Valuation Period ("Net Investment
Factor").
The net investment rate may be negative if the combined capital losses,
Valuation Period deductions and increase in the tax reserve exceed investment
income and capital gains. Thus, the net investment factor may be less than
1.00000000, and the value of an Accumulation Unit at the end of a Valuation
Period may be less than the value for the previous Valuation Period.
4. VALUATION OF FUND ASSETS
The value of the assets of the Fund is the value of the securities held by
the Fund plus any cash or other assets minus all liabilities.
The money market securities in which the Fund invests are traded primarily in
the over-the-counter market. Portfolio securities will be valued using the best
method currently available as determined by the Board of Managers of the Fund.
Securities with a maturity or remaining maturity of 60 days or less (including
master demand notes) are valued on an amortized cost basis. Under this method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of securities purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity); thereafter the
Fund assumes a constant proportionate amortization in value until maturity of
any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the security. In periods of declining interest rates,
the daily yield on portfolio securities valued on an amortized cost basis
17
<PAGE>
may tend to be higher than the yield derived by using a method of valuation
based upon market prices and estimates; in periods of rising interest rates, the
daily yield on portfolio securities valued on an amortized cost basis may tend
to be lower than the yield derived by using a method of valuation based upon
market prices and estimates. For purposes of valuation, the maturity of a
variable rate certificate of deposit is deemed to be the next coupon date on
which the interest rate is to be adjusted. Securities with a remaining maturity
of more than 60 days currently are valued on each Valuation Date generally at
the mean between the most recent bid and asked prices or yield equivalent as
obtained from dealers that make markets in such securities. Investments for
which market quotations are not readily available as of the close of trading on
relevant markets on each Valuation Date are valued at prices deemed best to
reflect their fair value as determined in good faith by or under the direction
of the Board of Managers of the Fund in a manner authorized by the Board of
Managers and applied on a consistent basis. The Board of Managers of the Fund
has determined that the fair value of Eurodollar certificates of deposit
generally will be the market price thereof at the close of trading on European
exchanges, unless events between such close and the close of trading on the New
York Stock Exchange require a different valuation, in which case the Board of
Managers will promptly consider what other method of valuation should be applied
to determine fair value.
The Board of Managers monitors on an ongoing basis the methods of valuation
used to determine what action, if any, should be taken to assure that portfolio
securities of the Fund are valued at fair value as determined in good faith by
the Board of Managers.
5. REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may, subject to any limitations on early settlement contained in an applicable
Qualified Plan, redeem the Contract, in whole or in part (but, if in part, not
less than $500), by submission of the Contract and a written request for its
redemption to The Franklin's Home Office, and will receive the Cash Value of the
part of the Contract redeemed, less any applicable contingent deferred sales
charges and unpaid administration deductions referred to under "Deductions and
Charges Under the Contracts," above. Early withdrawal of certain amounts
attributable to Contracts issued pursuant to an annuity purchase plan meeting
the requirements of Code Section 403(b) may be prohibited. See "Federal Income
Tax Status," below. The Cash Value of a Contract or part thereof redeemed prior
to the initial Annuity Payment Date is the number of Accumulation Units credited
to the Contract (or that part so redeemed) times the value of an Accumulation
Unit at the end of the Valuation Period in which the request for redemption is
received. Except in limited circumstances discussed below, the payment of the
Cash Value will be made within seven days after the date a properly completed
and documented request for redemption is received by The Franklin at its Home
Office. The right of redemption may be suspended or the date of payment
postponed during any periods when the New York Stock Exchange is closed (other
than customary weekend and holiday closings); when trading in the markets the
Fund normally utilizes is restricted, or an emergency exists as determined by
the Securities and Exchange Commission so that disposal of the Fund's
investments or determination of its net asset value is not reasonably
practicable; or for such other periods as the Securities and Exchange Commission
by order may permit to protect Contract Owners.
In lieu of a single payment of the amount due upon redemption of a Contract,
the Contract Owner may elect, at any time prior to the initial Annuity Payment
Date and during the lifetime of the Variable Annuitant, to have all or any
portion of the amount due applied under any available Settlement Option. See
"Settlement Options," below. However, no Settlement Option may be elected upon
redemption without surrender of the entire Contract.
The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal income
tax withholding and federal tax penalties. See "Federal Income Tax Status,"
below.
18
<PAGE>
6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH
In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving Beneficiary will
be paid by The Franklin within seven days of receipt by The Franklin of written
notice of such death. The death proceeds payable will be the Cash Value of the
Contract determined as of the date on which written notice of death is received
by The Franklin by mail if such date is a Valuation Date; if such date is not a
Valuation Date, the determination will be made on the next following Valuation
Date. There is no assurance that the Cash Value of a Contract will equal or
exceed the Stipulated Payments made. No contingent deferred sales charge is made
in the case of such death. For payment of death proceeds in the event no
Beneficiary is surviving at the death of the Variable Annuitant, see "Change of
Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," below. The
Code imposes certain requirements concerning payment of death benefits payable
before the initial Annuity Payment Date in the case of Qualified Contracts.
Under those Contracts, death benefits will be paid as required by the Code and
as specified in the governing plan documents. The terms of such documents should
be consulted to determine the death benefits and any limitations the plan may
impose. You should consult your legal counsel and tax advisor regarding these
requirements.
Subject to the foregoing the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," below. If the Contract Owner has not made
such an election, the Beneficiary may do so after the death of the Variable
Annuitant. The Contract Owner or the Beneficiary, whichever selects the method
of settlement, may designate contingent Beneficiaries to receive any other
amounts due should the first Beneficiary die before completion of the specified
payments. If neither the Contract Owner nor the Beneficiary elects payment of
death proceeds under an available Settlement Option, payment will be made to the
Beneficiary in a single sum.
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below
In the event of the death of the Variable Annuitant after the initial Annuity
Payment Date, payments under a Contract will be made as described in "Settlement
Options," below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described under
"Termination by The Franklin," above, and subject to the right of The Franklin
to pay the value of the Contract Owner's account in a single sum at the initial
Annuity Payment Date if the value on such date is less than $2,000, the Contract
Owner may elect, prior to the death of the Variable Annuitant and prior to the
initial Annuity Payment Date, either of the following options:
(a) to exercise any of the available Settlement Options described under
"Settlement Options," below, or redeem the Contract as described under
"Redemption," above; or
(b) to have the Contract continued from the date of failure to make a
Stipulated Payment as a paid-up annuity to commence on the initial Annuity
Payment Date stated in the Contract.
If no option is elected by the Contract Owner within 31 days after failure to
make a Stipulated Payment, the Contract will automatically be continued under
the paid-up annuity option.
8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)
A Contract Owner, by making one Stipulated Payment, may reinstate a Periodic
Stipulated Payment Contract as to which there has been a failure to make a
Stipulated Payment, if the Contract at the time of the payment is being
continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits. Administration deductions will
not accrue during Contract Years in which no Stipulated Payments are made.
19
<PAGE>
9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or Settlement
Option, or, if agreed to by The Franklin, change to a mode of payment different
from one of the Settlement Options, subject to applicable limitations under the
Code and any governing Qualified Plan.
If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the lifetime
of the Variable Annuitant, the Contract Owner may elect to have all or a portion
of the amount due in settlement of the Contract applied under any of the
available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," below, and "Deferred Variable Annuity
Contracts," below.
Annuity Payments under a Settlement Option are made to the Variable Annuitant
during his or her lifetime, or for such shorter period that may apply under the
particular Settlement Option. Upon the death of the original Variable Annuitant
after the initial Annuity Payment Date, any remaining Annuity Payments that are
due under the Settlement Option elected will be continued to the Beneficiary or,
if elected by the Contract Owner (or, if so designated by the Contract Owner, by
the Beneficiary), the Cash Value of the Contract, as described under such
Settlement Option below, will be paid to the Beneficiary in one lump sum. Upon
the death of any Beneficiary to whom payments are being made under a Settlement
Option, a single payment equal to the then remaining Cash Value of the Contract,
if any, will be paid to the executors or administrators of the Beneficiary,
unless other provision has been specified and accepted by The Franklin. For a
discussion of payments if no Beneficiary is surviving at the death of the
Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds;
Death of Beneficiaries," immediately above.
Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant prior
to the initial Annuity Payment Date, may also be made under an available
Settlement Option in certain circumstances. See "Redemption," above, and
"Payment of Accumulated Value at Time of Death," above.
Available Settlement Options may be selected on a fixed or variable basis or
a combination thereof, except the Seventh Option, which is available on a fixed
basis only. Under an Option which is paid on a fixed basis, there is no sharing
in the investment experience of the Fund and, upon commencement of payments,
participation in the Fund terminates (the subject Contract will be transferred
to the general account of The Franklin). Settlement under the First, Second,
Third, Fourth or Fifth Option below is subject to satisfactory proof of age of
the person or persons to whom the Annuity Payments are to be made.
The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid in
a single sum in the discretion of The Franklin, except in the case of a deferred
Single Stipulated Payment Contract funded with a Rollover Contribution not in
excess of $2,000. See "Purchase Limits," above. Further, if at any time
payments under a Settlement Option become less than $25 per payment, The
Franklin has the right to change the frequency of payment to such intervals as
will result in payments of at least $25.
In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," below, and "Immediate
Variable Annuity Contracts," below.
20
<PAGE>
The distribution rules which Qualified Plans must satisfy in order to be
tax-qualified under the Code may limit the utilization of certain Settlement
Options, or may make certain Settlement Options unavailable, in the case of
Qualified Contracts issued in connection therewith. Similarly, the distribution
rules which Non-Qualified Contracts must satisfy in order to qualify as "annuity
contracts" under the Code may also limit available Settlement Options under
Non-Qualified Contracts. These distribution rules could affect such factors as
the commencement of distributions and the period of time over which
distributions may be made. All Settlement Options are offered subject to the
limitations of the distribution rules.
The Statement of Additional Information describes certain limitations on
Settlement Options based on The Franklin's current understanding of the
distribution rules generally applicable to Non-Qualified Contracts and to
Qualified Contracts purchased under this Prospectus for use as Individual
Retirement Annuities or issued in connection with Section 403(b) annuity
purchase plans. See "Limitations on Settlement Options" in the Statement of
Additional Information. Persons considering the purchase of a Contract and
Contract Owners contemplating election of a Settlement Option are urged to
obtain and read the Statement of Additional Information. Various questions
exist, however, about the application of the distribution rules to distributions
from the Contracts and their effect on Settlement Option availability
thereunder. Persons contemplating the purchase of a Contract should consult a
qualified tax advisor concerning the effect of the distribution rules on the
Settlement Option or Options he or she is contemplating.
Neither this Prospectus nor the Statement of Additional Information, however,
describes limitations on Settlement Options based on applicable distribution
rules in the case of Qualified Contracts issued in connection with qualified
pension and profit-sharing plans under Section 401(a) of the Code and annuity
plans under Section 403(a) of the Code. Under those Contracts, available
Settlement Options are limited to those Options specified in the governing plan
documents. The terms of such documents should be consulted to determine
Settlement Option availability and any other limitations the plan may impose on
early redemption of the Qualified Contract, payment in settlement thereof, or
similar matters. Generally, limitations comparable to those described in the
Statement of Additional Information for Individual Retirement Annuities and
Section 403(b) annuity purchase plans also apply with respect to such qualified
pension, profit-sharing and annuity plans (including H.R. 10 Plans).
Persons contemplating election of the Fifth, Sixth or Seventh Option should
consult a qualified tax advisor to determine whether the continuing right of
redemption under any such Option might be deemed for tax purposes to result in
the "constructive receipt" of the Cash Value of the Contract or proceeds
remaining on deposit with The Franklin.
FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime of
the Variable Annuitant, ceasing with the last Annuity Payment due prior to the
death of the Variable Annuitant. This Option offers the maximum level of monthly
Annuity Payments since there is no guarantee of a minimum number of Annuity
Payments or provision for any continued payments to a Beneficiary upon the death
of the Variable Annuitant. It would be possible under this Option for the
Variable Annuitant to receive only one Annuity Payment if he or she died before
the second Annuity Payment Date, or to receive only two Annuity Payments if he
or she died after the second Annuity Payment Date but before the third Annuity
Payment Date, and so forth.
SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN. An
annuity payable monthly during the lifetime of the Variable Annuitant including
the commitment that if, at the death of the Variable Annuitant, Annuity Payments
have been made for less than 120 months, 180 months or 240 months (as selected
by the Contract Owner in electing this Option), Annuity Payments shall be
continued during the remainder of the selected period to the Beneficiary. The
cash value under this Settlement Option is the present value of the current
dollar amount of any unpaid Annuity Payments certain.
THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during the
lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due
prior to the death of the Variable Annuitant, provided that, at the death of the
Variable Annuitant, the Beneficiary will receive a payment of the then dollar
value of the number of Annuity Units equal to the excess, if any, of (a) over
(b) where (a) is the total amount applied under this Option divided by the
Annuity Unit value at the initial Annuity Payment Date and (b) is the number of
Annuity Units represented by each Annuity Payment multiplied by the number of
Annuity Payments made.
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<PAGE>
For example, if $10,000 were applied on the first Annuity Payment Date to the
purchase of an annuity under this Option, the Annuity Unit value at the initial
Annuity Payment Date were $2.00, the number of Annuity Units represented by each
Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of
the Variable Annuitant's death and the value of an Annuity Unit on the Valuation
Date following the Variable Annuitant's death were $2.05, the amount paid to the
Beneficiary would be $9,623.73, computed as follows:
<TABLE>
<CAPTION>
<S><C>
($10,000 - (30.55 X 10)) X $2.05 = (5,000 - 305.5) X 2.05 = 4,694.5 X $2.05 = $9,623.73
-------
$2.00
</TABLE>
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if both the Variable Annuitant and the secondary variable annuitant died after
the second Annuity Payment Date but before the third Annuity Payment Date, and
so forth.
FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to
the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part (but, if in part, not less
than $500) at any time by the Contract Owner for the aforesaid cash value of the
part of the Contract redeemed. See "Redemption," above.
It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due under
this Option. Further, although not contractually required to do so, The Franklin
currently follows a practice, which may be discontinued at any time, of
permitting persons receiving Annuity Payments under this Option to elect to
convert such payments to a Variable Annuity involving a life contingency under
the First, Second, Third or Fourth Options above if, and to the extent, such
other Options are otherwise available to such person.
SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be
paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly
Annuity Payments of a designated dollar amount (not less than $75 a year per
$1,000 of the original amount due) until the remaining balance (adjusted each
Valuation Period by the Net Investment Factor for the period) is less than the
amount of one Annuity Payment, at which time such balance will be paid and will
be the final Annuity Payment under this Option. Upon the death of the Variable
Annuitant, payments will be continued to the Beneficiary until such remaining
balance is paid. The cash value under this Settlement Option is the amount of
proceeds then remaining with The Franklin. A Contract under which Annuity
Payments are being made under this Settlement Option may be redeemed at any time
by the Contract Owner for the aforesaid cash value.
Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, above, which
applies in its entirety to the Sixth Option as well.
SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit with
The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by the
amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.
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Periodic payments received under this Option may be treated like interest for
federal income tax purposes. Interest payments are fully taxable and are not
subject to the general rules applicable to the taxation of annuities described
in "Federal Income Tax Status," below. Persons contemplating election of this
Seventh Option are advised to consult a qualified tax advisor concerning the
availability and tax effect of its election.
C. ANNUITY PERIOD
1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY
PAYMENTS
(a) DEFERRED VARIABLE ANNUITY CONTRACTS
A Contract Owner selects a Settlement Option and an initial Annuity Payment
Date prior to the issuance of the Deferred Variable Annuity Contract, except
that Qualified Contracts issued in connection with qualified pension and
profit-sharing plans (including H.R. 10 Plans) under Section 401(a) of the Code
and annuity plans (including H.R. 10 Plans) under Section 403(a) of the Code
provide for Annuity Payments to commence at the date and under the Settlement
Option specified in the plan. The Contract Owner may defer the initial Annuity
Payment Date and continue the Contract to a date not later than the Contract
Anniversary on which the attained age of the Variable Annuitant is 75 unless the
provisions of the Code or any governing Qualified Plan require Annuity Payments
to commence at an earlier date. See "Limitations on Settlement Options" in the
Statement of Additional Information. The Franklin will require satisfactory
proof of age of the Variable Annuitant prior to the initial Annuity Payment
Date.
(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS
The Franklin offers three forms of Immediate Variable Annuity Contracts: the
life annuity, the life annuity with 120, 180 or 240 monthly payments certain and
the joint and last survivor life annuity. For a description of these forms of
annuity, see the First, Second and Fourth Options under "Settlement Options,"
above.
Under an Immediate Variable Annuity, the first Annuity Payment is made to the
Variable Annuitant one month after the Effective Date of the Contract, unless
the period selected by the Contract Owner for the frequency of Annuity Payments
is more than one month, in which case the first Annuity Payment will be made
after a period equal to the period so selected from the Effective Date (subject
in every case to the survival of the Variable Annuitant, except in cases where a
guaranteed payment period is provided).
2. THE ANNUITY UNIT
The Annuity Unit is a measure used to value the First Option (including the
automatic life annuity) and the Second, Third, Fourth and Fifth Options, if
elected, on a variable basis.
The value of the Annuity Unit as of July 1, 1981 was fixed at $1.00 and for
each day thereafter is determined by multiplying the value of the Annuity Unit
on the preceding day by the "Annuity Change Factor" for the Valuation Period
ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the
tenth preceding day. The "Annuity Change Factor" for any Valuation Period is
equal to the amount determined by dividing the Net Investment Factor for that
Valuation Period by a number equal to 1.0 plus the interest rate for the number
of calendar days in such Valuation Period at the effective annual rate of
3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the
Annuity Change Factor is effected in order to cancel out the assumed net
investment rate of 3-1/2% per year which is built into the annuity tables
specified in the Contract. See "Determination of Amount of First Monthly Annuity
Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net
Investment Rate," below.
Annuity Units are valued in respect of each Annuity Payment Date as of a
Valuation Date not less than 10 days prior to the Annuity Payment Date in
question in order to permit calculation of amounts of Annuity Payments and
mailing of checks in advance of their due dates.
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3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
When Annuity Payments commence under a Deferred Variable Annuity Contract,
the value of the Contract Owner's account is determined as the product of the
value of an Accumulation Unit on the first Annuity Payment Date and the number
of Accumulation Units credited to the Contract Owner's account as of such
Annuity Payment Date.
The Contract utilizes tables indicating the dollar amount of the first
monthly Annuity Payment under each Settlement Option for each $1,000 of Cash
Value of the Contract. The first monthly Annuity Payment varies according to the
Settlement Option selected (see "Settlement Options," above) and the "adjusted
age" of the Variable Annuitant. The first monthly Annuity Payment may also vary
according to the sex of the Variable Annuitant. See "Annuity Payments," above.
(The Contracts provide for age adjustment based on the year of birth of the
Variable Annuitant and any joint Variable Annuitant; a person's actual age when
Annuity Payments commence may not be the same as the "adjusted age" used in
determining the amount of the first Annuity Payment.)
For Contracts utilizing sex-distinct annuity tables, the tables for the
First, Second, Third and Fourth Options are determined from the Progressive
Annuity Table assuming births in the year 1900 and a net investment rate of
3-1/2% a year. The tables for the Fifth Option are based on a net investment
rate of 3% for the General Account and 3-1/2% for the Separate Account. The
total first monthly Annuity Payment is determined by multiplying the number of
thousands of dollars of Cash Value of the Contract Owner's Contract by the
amount of the first monthly Annuity Payment per $1,000 of value from the tables
in the Contract.
The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," above. Thus, there will be a double effect of the
investment experience of the Fund during the 10-day period referred to in the
preceding sentence, since that experience will be included (as part of the value
of an Accumulation Unit) in valuing the Contract Owner's Contract on the initial
Annuity Payment Date and (as part of the changes in value of an Annuity Unit) in
determining the second monthly Annuity Payment. Also, the number of Annuity
Units (and hence the amount of Annuity Payments) will be affected by the net
asset values of the Fund approximately 10 days prior to the initial Annuity
Payment Date even though changes in those net asset values have occurred during
that 10-day period, and even though the value of the Accumulation Units used to
determine the Cash Value of the Contract will reflect those changes. See "Amount
of Second and Subsequent Monthly Annuity Payments (Deferred Variable Annuity
Contracts Only)," immediately below.
Each Contract contains a provision that the first monthly Annuity Payment
will not be less than 103% of the first monthly Annuity Payment available under
a then currently issued Immediate Variable Annuity of The Franklin if a single
Stipulated Payment were made equal to the value which is being applied under the
Contract to provide annuity benefits. This provision assures the Variable
Annuitant that if at the initial Annuity Payment Date the annuity rates then
applicable to new Immediate Variable Annuity Contracts are significantly more
favorable than the annuity rates provided in his or her Contract, the Variable
Annuitant will be given the benefit of the new annuity rates.
4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
The number of Annuity Units credited to a Contract on the initial Payment
Date remains fixed during the annuity period, and as of each subsequent Annuity
Payment Date the dollar amount of the Annuity Payment is determined by
multiplying this fixed number of Annuity Units by the then value of an Annuity
Unit.
5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY
CONTRACTS ONLY)
In the case of Immediate Variable Annuities, the number of Annuity Units
per month purchased is specified in the Contract. The number of such units is
determined by: (1) multiplying the net single Stipulated Payment (after
deductions for administrative expenses and premium taxes) by the applicable
annuity factor from the annuity
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tables then used by The Franklin for Immediate Variable Annuity Contracts, and
(2) dividing such product by the value of the Annuity Unit as of the date of
issue of the Contract. This number of Annuity Units remains fixed for each month
during the annuity period, and the dollar amount of the Annuity Payment is
determined as of each Annuity Payment Date by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit as of each such Annuity Payment
Date.
Annuity Units are valued as of a Valuation Date not less than 10 days prior
to the Effective Date of the Contract, pursuant to the procedure discussed under
"The Annuity Unit," above. Thus, the number of Annuity Units (and hence the
amount of the Annuity Payments) will be affected by the net asset value of the
Fund approximately 10 days prior to the Effective Date of the Contract, even
though changes in those net asset values have occurred during that 10-day
period.
As of the date of this Prospectus, The Franklin was using, in connection with
the determination of the number of Annuity Units per month purchased under
Immediate Variable Annuity Contracts, the 1955 American Annuity Table with
assumed 4-1/2% interest, the purchase rates in such table being increased by
0.5% (which percentage is decreased 0.2% for each year of age at the Effective
Date in excess of 70 years for male Variable Annuitants and in excess of 75
years for female Variable Annuitants). However, in lieu of such table, The
Franklin will provide "unisex" annuity rate tables for use under Contracts
purchased in connection with employer-related plans subject to the decision of
the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity
Payments," above.
The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.
6. ASSUMED NET INVESTMENT RATE
The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose
Annuity Payments are measured by Annuity Units will be level.
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The long-term compounding of income from investments in a diversified
portfolio of short-term money market securities yielding a high level of current
income to the extent consistent with preservation of capital and the maintenance
of liquidity is the primary investment objective of the Fund. This objective
does not necessarily require investment in long-term securities since the nature
of annuity contracts themselves connotes a long-term relationship; the continual
retention and reinvestment of proceeds from matured short-term securities
provides the long-term compounding of income. The Board of Managers of the Fund
has determined that, in keeping with the primary investment objective of
investing in short-term money market securities, at least 80% of the Fund's
portfolio will be invested in securities having maturities or remaining
maturities of one year or less and not more than 20% will be invested in
securities having maturities or remaining maturities of between one and two
years. The Board of Managers of the Fund will give consideration to the
creditworthiness of the issuers of all money market securities in which the Fund
proposes to invest prior to such investment. The Fund's investment authority is
also limited by regulations of the Securities and Exchange Commission. See
"Legal Restrictions," below.
The following investment policies summarize the instruments in which the Fund
may invest in order to achieve its primary investment objective, all of which
will be in United States dollar obligations:
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(a) OBLIGATIONS OF THE UNITED STATES GOVERNMENT AND ITS AGENCIES:
Obligations issued by or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities. These include a variety of
securities issued by the United States Treasury which are direct obligations of
the United States Government and which differ only in their interest rates,
maturities and times of issuance. Treasury Bills have a maturity of one year or
less, Treasury Notes have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than five years. These also include
securities issued or guaranteed by United States Government agencies or
instrumentalities such as the Federal Home Loan Mortgage Corporation, Federal
Home Loan Bank, Federal National Mortgage Association, Government National
Mortgage Association and the Farmers Home Administration. Some obligations of
United States Government agencies and instrumentalities are supported by the
full faith and credit of the United States Treasury; others, by the right of the
issuer or guarantor to borrow from the United States Treasury; while still
others are supported only by the credit of the agency or instrumentality.
Accordingly, depending upon the particular obligations of United States agencies
and instrumentalities purchased, at any given time the Fund's investment in
these obligations may be supported only by the credit of such agencies or
instrumentalities.
(b) BANK OBLIGATIONS: Negotiable time deposits, negotiable certificates of
deposit (including certificates of deposit issued by London branches of United
States banks- "Eurodollar C.D.'s"), bankers' acceptances, and short-term notes
of banks (domestic or Canadian) having total assets in excess of one billion
dollars (U.S.) as of the date of their most recently published financial
statements (including foreign branches of domestic banks). While normally these
large domestic banks will be members of the Federal Reserve System and have
deposits insured by the Federal Deposit Insurance Corporation, these are not
investment requirements. Accordingly, the securities purchased by the Fund and
issued by domestic banks may or may not be insured by the Federal Deposit
Insurance Corporation, or, if insured, may not be insured for the full amount
purchased. (The purchase of obligations issued by foreign branches of domestic
banks, including Eurodollar C.D.'s, and by Canadian banks involves investment
considerations that are different in some respects from those associated with
obligations of domestic issuers, including the possible imposition of
withholding taxes on interest income or exchange controls, expropriation,
confiscatory taxation, the possible adoption of foreign governmental
restrictions which might adversely affect the payment of principal and interest
on such obligations, limitations on the removal of funds, or other adverse
political or economic developments. In addition, it may be more difficult to
obtain and enforce a judgment against a Canadian bank or foreign branch of a
domestic bank. To the extent the Fund purchases Eurodollar C.D.'s, consideration
will be given to their marketability and possible restrictions on international
currency transactions.) Eurodollar C.D.'s will be considered to be one industry
for the purpose of the fundamental restrictions set out below, and thus no more
than 25% of the Fund's assets at the time of purchase will be invested in
Eurodollar C.D.'s.
(c) SAVINGS ASSOCIATION OBLIGATIONS: Negotiable time deposits, negotiable
certificates of deposit, and other short-term notes of domestic mutual savings
banks and savings and loan associations having total assets in excess of one
billion dollars (U.S.) as of the date of their most recently published financial
statements. The deposits of these savings associations may or may not be insured
by the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation. Accordingly, the securities purchased by the Fund and
issued by savings associations may or may not be insured, or, if insured, may
not be insured for the full amount purchased.
(d) COMMERCIAL PAPER: Short-term obligations of domestic issuers which at
the time of investment are (i) rated A-1 or A-2 by Standard & Poor's Corporation
or Prime-1 or Prime-2 by Moody's Investors Service, Inc., or (ii) if not rated,
issued by a company which at the date of investment has any outstanding debt
securities rated at least AA by Standard & Poor's or Aa by Moody's. (See
Appendix for an explanation of these ratings.) Commercial paper obligations may
include variable amount master demand notes which are obligations that permit
the investment of fluctuating amounts by the Fund at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and the borrower.
These notes permit daily changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to the full amount provided
by the note agreement, or to decrease the amount, and the borrower may repay up
to the full amount of the note without penalty. The borrower is typically a
large industrial or finance company which also issues commercial paper.
Generally these notes provide that the interest rate is set daily by the
borrower; the rate is usually the same or similar to the interest rate on
commercial paper being issued by the borrower. Because variable amount master
demand notes are direct lending arrangements between the lender and
borrower, it is not generally contemplated that such instruments will be traded,
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and there is no secondary market for these notes, although they are redeemable
(and thus immediately repayable by the borrower) at the face value, plus accrued
interest, at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, the Fund considers earning
power, cash flow and other liquidity ratios of the issuer. The Fund will only
invest in master demand notes of domestic issuers. If master demand notes are
rated by credit rating agencies, the Fund will invest in them only if such notes
meet the Fund's rating standards for investment in all commercial paper,
described above. If master demand notes are not rated, the Fund will invest in
such notes only if the issuer thereof has, at the date of investment, any
outstanding debt securities rated at least AA by Standard & Poor's or Aa by
Moody's. The Fund does not have any specific limits on the amount it may invest
in master demand notes. (See Appendix for an explanation of these ratings.)
(e) OTHER CORPORATE DEBT SECURITIES: Other marketable, nonconvertible
corporate debt securities of domestic issuers, including bonds and debentures,
which at the time of purchase have two years or less remaining to maturity and
are rated at least AA by Standard & Poor's or Aa by Moody's. (See Appendix for
an explanation of these ratings.)
(f) CANADIAN GOVERNMENT SECURITIES: United States dollar denominated
securities, such as bonds and Treasury bills, issued or guaranteed by the
Government of Canada, a province of Canada, or their instrumentalities or
political subdivisions. Some of these securities may be supported by the full
faith and credit of the Canadian Government while others may be supported
only by the credit of the province, instrumentality or political subdivision.
Accordingly, depending upon the particular securities issued by Canadian
provinces, instrumentalities or political subdivisions purchased, at any
given time the Fund's investment in these securities may be supported only by
the credit of such provinces, instrumentalities or political subdivisions.
See "Bank Obligations" above regarding investment considerations involving
Canadian issues.
(g) REPURCHASE AGREEMENTS: A short-term investment in which the purchaser
(i.e., the Fund) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and at a set price, thereby
determining the yield during the purchaser's holding period. Repurchase
agreements usually are for short periods, such as one week or less, but may be
longer. The Fund may enter into repurchase agreements with a member bank of the
Federal Reserve System or a United States securities dealer. The Fund will not
enter into repurchase agreements of more than one week's duration if more than
10% of its total net assets would then be so invested-considering only the
remaining days to maturity of existing repurchase agreements. Repurchase
agreements are fully collateralized by the underlying debt securities and are
considered to be loans under the Investment Company Act of 1940. The underlying
securities could be any of those described above (normally securities of the
United States Government or its agencies and instrumentalities).
In addition, the Fund may lend portfolio securities to brokers, dealers and
financial institutions provided that cash, or equivalent collateral, equal to at
least 100% of the market value of the securities loaned is maintained by the
borrower with the Fund. During the time such securities are on loan, the
borrower will pay the Fund any income accruing thereon and the Fund may invest
the cash collateral and earn additional income or the Fund may receive an
agreed-upon fee from the borrower who has delivered equivalent collateral. Loans
will be subject to termination at the Fund's or the borrower's option. The Fund
will retain all rights of beneficial ownership as to the loaned portfolio
securities, including voting rights and rights to distributions, and will have
the right to regain record ownership of loaned securities to exercise such
beneficial rights. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
The Board of Managers of the Fund has set guidelines and standards for review
of investments in repurchase agreements and the creditworthiness of the seller
thereof, and monitors the actions of the Fund's investment advisor in entering
into repurchase agreements. Repurchase agreements may involve certain risks in
the event of bankruptcy or other default by the seller, including possible
delays and expenses in liquidating the collateral, decline in collateral value
and loss of interest.
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The Fund will make portfolio investments primarily in anticipation of or in
response to changing economic and money market conditions and trends. Investment
yields on relatively short-term obligations such as will compromise the Fund's
portfolio are subject to substantial and rapid fluctuation. The value of the
Fund's assets generally will vary inversely to changes in interest rates. If
interest rates increase after a security is purchased, the security, if sold,
may return less than its cost. Thus, current yield levels should not be
considered representative of yields for any future period of time. Because of
the variability of interest rates and the risks inherent in investing in money
market securities, including those risks discussed above with respect to
securities of foreign branches of domestic banks and of Canadian banks, there
can be no assurance that the Fund's investment objective will be attained. In
addition, to the extent that investments are made in instruments of
non-governmental issuers (and of governmental issuers, except those instruments
backed by the full faith and credit of that government), these assets, despite
their favorable credit ratings, are subject to some risk of default. Moreover,
should many Contract Owners redeem their Contracts or transfer from the Fund to
some other annuity product of The Franklin at about the same time, the Fund
might have to sell portfolio securities at a time when it would be
disadvantageous to do so, and at a lower price than if such securities were held
to maturity. There can be no assurance that the Cash Value of the Contracts
during the years prior to the Variable Annuitant's initial Annuity Payment Date
or the aggregate amount received during the years following the initial Annuity
Payment Date will equal or exceed the Stipulated Payments made under the
Contracts.
Except as limited by the fundamental investment restrictions below, the
foregoing investment policies are not fundamental and the Board of Managers of
the Fund may change such policies without approval of the Contract Owners.
However, the primary investment objective is fundamental and may not be changed
without such approval.
The following are the fundamental investment restrictions applicable to the
Fund:
(1) The Fund will not concentrate its investments in any one industry or
group of related industries, and no more than 25% of the value of the Fund's
assets at the time of purchase will be invested in any one industry or group of
related industries, except that there is no limitation with respect to
investments in obligations issued or guaranteed by the United States Government
or its agencies or instrumentalities, or in bankers' acceptances, repurchase
agreements or certificates of deposit of domestic banks. For purposes of this
restriction, telephone, gas and electric utilities each shall be considered a
separate industry. In addition, banks, savings associations, personal credit
institutions, business credit institutions and insurance companies shall each be
considered a separate industry.
(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3), below.
(3) The Fund will not borrow money except for temporary or emergency
purposes, and any such borrowings will not be used to purchase investment
securities and will not exceed 5% of the value of the Fund's assets; provided,
however, that the Fund may borrow money up to one-third of its assets, not to
increase its income but to meet redemption requests which might otherwise
require untimely dispositions of portfolio securities. So long as such
borrowings exceed 5% of the value of the Fund's assets, the Fund will not make
any new investments. In addition, to the extent such borrowings exceed the 5%
limit and cause a subsequent reduction of the required asset coverage, the Fund
will reduce the amount of its borrowings to comply with the appropriate asset
coverage required under the Investment Company Act of 1940.
(4) The Fund will not pledge, hypothecate, mortgage or otherwise encumber
its assets except in an amount not in excess of 15% of the value of its assets
to secure borrowings made in accordance with investment restriction (3) above.
(5) The Fund will not underwrite securities of other issuers, except that
the Fund may acquire portfolio securities under circumstances where, if sold, it
might be deemed to be an underwriter for purposes of the Securities Act of 1933.
No such securities will be acquired except where parties other than the Fund
shall have agreed to bear any and all costs of registration under the Securities
Act of 1933. (However, it should be noted that even though an agreement to
register has been obtained, enforcement of such an agreement may prove
unfeasible or may involve delays which could adversely affect the Fund's ability
to resell such securities or the price at which such securities might be
resold.) No more than 10% of the value of the Fund's assets will at any time be
invested in such securities.
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(6) The Fund will not engage in the purchase and sale of interests in real
estate, except that the Fund may engage in the purchase and sale of money market
securities secured by real estate or interests therein or securities issued by
companies that invest in real estate or interests therein.
(7) The Fund will not engage in the making of loans to other persons,
except that the Fund may acquire qualified debt obligations or other money
market securities and enter into repurchase agreements referred to above
(provided, however, that the aggregate value of repurchase agreements
maturing in more than seven days will not exceed 10% of the Fund's total
assets), and may lend its portfolio securities (provided that such loans do
not in the aggregate exceed 20% of the value of the Fund's assets) if such
loans are made according to the guidelines of the Securities and Exchange
Commission and the Board of Managers of the Fund, including maintaining
collateral from the borrower equal at all times to the current market value
of the securities loaned.
(8) The Fund will not engage in the purchase or sale of commodities or
commodity contracts or invest in oil, gas or other mineral exploration or
development programs.
(9) The Fund will not purchase securities (other than under repurchase
agreements of not more than seven days' duration-considering only the remaining
days to maturity of each existing repurchase agreement-or master demand notes)
for which there exists no readily available market, or for which there are legal
or contractual restrictions on resale (excepting from this restriction
securities that are subject to such resale restrictions but which, in the
judgment of The Franklin, are readily redeemable on demand), if as a result of
any such purchase, more than 10% of the value of the Fund's assets would be
invested in such securities.
(10) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.
(11) The Fund will not make short sales of securities or write, purchase or
sell puts, calls, straddles, spreads or combinations thereof.
(12) The Fund will not purchase the securities of any one issuer, other than
obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up to
25% of the Fund's total assets taken at current value may be invested without
regard to such 5% limitation.
(13) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by the
United States Government and its agencies or instrumentalities (for this
purpose, all indebtedness of an issuer shall be deemed a single class); except
that up to 25% of the Fund's total assets taken at current value may be invested
without regard to such 10% limitation.
The primary investment objective and the fundamental investment restrictions
stated above may not be changed without approval by a vote of a majority of the
votes available to the Contract Owners. This means that the objective or
restrictions in question may not be changed without the approval of the lesser
of (a) the Contract Owners holding 67% or more of the voting power of the
Contract Owners present or represented at a meeting if Contract Owners holding
more than 50% of the total voting power of all Contract Owners in the Fund are
present or represented by proxy, or (b) Contract Owners holding more than 50% of
the total voting power of all Contract Owners in the Fund.
The following investment restrictions are not fundamental and may be changed
by action of the Board of Managers of the Fund:
(14) All securities in which the Fund invests shall be permissible for the
Fund under the Illinois Insurance Code. The Illinois Insurance Code provides
that investments of a separate account, like the Fund, are free of the
restrictions or provisions generally applicable to insurance companies under
that Code, and does not currently provide any special investment restrictions
applicable to separate accounts. However, no investment permitted under the
Illinois Insurance Code is thereby exempted from the other investment
restrictions specified under this caption.
(15) The Fund will not invest in companies for the purpose of exercising
control or management.
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(16) The Fund will not invest in the securities of other investment
companies.
(17) The Fund will not invest more than 5% of the value of its assets in
securities of issuers (other than issuers of United States agency securities)
which, with their predecessors, have a record of less than three years'
continuous operation.
If a percentage restriction 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 of portfolio securities or net assets will not be considered a
violation.
LEGAL RESTRICTIONS
The Securities and Exchange Commission imposes restrictions on the investment
authority of money market funds, such as the Fund, which are more restrictive
than the policies and restrictions of the Fund described above. In general, such
restrictions provide that a money market fund may not purchase any instrument
with a remaining maturity greater than 13 months or maintain a dollar-weighted
average portfolio maturity which exceeds ninety days. In addition, money market
funds are limited to making investments in United States dollar-denominated
investments which its board of directors determines present minimal credit risk
and which are at the time of acquisition rated (or which have been issued by an
issuer that has been rated) in one of the two highest rating categories by at
least two national rating agencies or, if unrated, that the money market fund's
board of directors determines are of comparable quality to a security so rated.
Money market funds are also generally prohibited from acquiring a security if,
after such acquisition, (i) more than 5% of the money market fund's assets would
be invested in the securities of the issuer of the acquired security, or (ii) if
the acquired security is not rated in the highest category by at least two
national rating agencies or is not an unrated security of comparable quality,
more than 1% of the money market fund's assets would be invested in the
securities of the issuer of the acquired security or more than 5% of the money
market fund's assets would be invested in securities that are not rated in the
highest category by at least two national rating agencies or that are not of
comparable quality. The foregoing percentage restrictions do not apply to
securities issued or guaranteed as to principal by the United States or by an
instrumentality of the United States and such securities may be purchased with
remaining maturities of up to two years. The acquisition of a security that is
rated by only one national rating agency must be approved by the money market
fund's board of directors.
SPECIAL INVESTMENT CONSTRAINTS
The amount of assets that the Fund may invest in the securities of any one
issuer is restricted by the Fund's fundamental investment restrictions and the
regulations of the Securities and Exchange Commission and the Internal Revenue
Service. See "Federal Income Tax Status - The Contracts: Non-Qualified Plans,"
below. Under the most restrictive of these provisions, the Fund generally may
not invest more than 5% of its assets in the securities of any issuer, except
that it may invest up to 55% of its assets in securities issued or guaranteed as
to principal by the United States government. It is anticipated that the
combination of these restrictions and the relatively small and decreasing size
of the Fund's assets will make it more difficult for the Fund's investment
adviser to secure appropriate commercial paper investments, which have
historically constituted a substantial portion of the Fund's investments. As of
December 31, 1997, the Fund's total assets were $1,921,249 (compared to total
assets of $1,968,663 as of June 30, 1997 and total assets of $2,001,016 as of
December 31, 1996), and the maximum amount that the Fund was permitted to invest
in the commercial paper of any one issuer was approximately $96,062. Due to
market conditions, it is more difficult to purchase an issue of commercial paper
in an amount less than $100,000. It is possible that the shrinking pool of
commercial paper investments available to the Fund due to its size may impair
the future investment performance of the Fund.
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FEDERAL INCOME TAX STATUS
INTRODUCTION
The Contracts are designed for use by individuals in connection with
Qualified Plans or Non-Qualified Plans under the Code. The federal income tax
treatment of the Contracts and payments received thereunder depends on various
factors, including, among other factors, the tax status of The Franklin, the
type of retirement plan or program in connection with which the Contracts are
used and the form in which payments are received. The discussion of federal
income taxes contained in this Prospectus, which focuses on rules applicable to
Contracts purchased under this Prospectus, is general in nature and is based on
existing federal income tax law, which is subject to change. The tax discussion
is not intended as tax advice. The applicable federal income tax law is complex
and contains many special rules and exceptions in addition to the general rules
summarized herein. For these reasons, various questions about the applicable
rules exist. Accordingly, each person contemplating the purchase of a Contract
is advised to consult with a qualified tax advisor concerning federal income
taxes and any other federal, state or local taxes that may be applicable.
THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code. Since
the operations of the Fund are part of the overall operations of The Franklin,
the Fund is subject to tax as part of The Franklin for federal income tax
purposes. Thus, the Fund is not taxed separately as a "regulated investment
company" under the Code.
Under the Code a life insurance company like The Franklin is generally taxed
at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.
Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to the
Fund. Under the Code, no federal income tax is payable by The Franklin on such
investment income or on realized capital gains of the Fund on assets held in the
Fund. However, if changes in the federal tax laws or interpretations thereof
result in The Franklin being taxed on income or gains attributable to the Fund,
then The Franklin may impose a charge against the Fund (with respect to some or
all Contracts) in order to set aside provisions to pay such taxes.
THE CONTRACTS: QUALIFIED PLANS
The manner in which payments received under a Contract are taxed for federal
income tax purposes depends on the form of payment. If payments are received in
the form of an annuity, then, in general, under Section 72 of the Code, such
payment is taxable to the recipient as ordinary income to the extent that such
payment exceeds the portion, if any, of the cost basis of the Contract that is
allocable to that payment. A payment received on account of partial redemption
of an annuity contract generally is taxable in whole or part. The taxation of a
partial redemption is governed by complex rules and a qualified tax advisor
should be consulted prior to a proposed partial redemption. If the Variable
Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Qualified Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.
Generally, payment of the proceeds of a Qualified Contract in a lump sum
instead of in the form of an annuity, either at or before maturity, also is
taxable as ordinary income to the extent the lump sum exceeds the cost basis of
the Qualified Contract. Taxation may be deferred, however, to the extent, if
any, that "rollover" treatment is available and elected for a particular
distribution.
The Qualified Contracts are designed for use in connection with several types
of Qualified Plans, as described generally below.
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A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS
Under pension and profit-sharing plans that qualify under Section 401(a) of
the Code and annuity purchase plans that qualify under Section 403(a) of the
Code (collectively "Corporate Qualified Plans"), amounts contributed by an
employer to the Corporate Qualified Plan on behalf of an employee and any gains
thereon are not, in general, taxable to the employee until distribution.
Generally, the cost basis of an employee under a Corporate Qualified Plan will
equal the amount of non-deductible contributions, if any, that the employee made
to the Corporate Qualified Plan. These retirement plans may permit the purchase
of the Contracts to accumulate retirement savings under the plans. Adverse tax
consequences to the plan, to the participant, or both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments.
The Code imposes an additional tax of 10% on the taxable portion of any early
withdrawal from a Corporate Qualified Plan made by a Variable Annuitant before
age 59-1/2, death, or disability. The additional income tax on early withdrawals
will not apply however to certain distributions including (a) distributions
beginning after separation from service that are part of a series of
substantially equal periodic payments made at least annually for the life of the
Variable Annuitant or the joint lives of the Variable Annuitant and his or her
Beneficiary, and (b) distributions made to Variable Annuitants after attaining
age 55 and after separating from service. Further, additional penalties may
apply to distributions made on behalf of a "5-percent owner" (as defined by
Section 416(i)(1)(B) of the Code).
If a lump sum payment of the proceeds of a Contract qualifies as a "lump sum
distribution" under the Code, special tax rules (including limited capital gain
and income averaging treatment in some circumstances) may apply.
B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)
Self-employed persons (including members of partnerships) are permitted to
establish and participate in Corporate Qualified Plans under Sections 401(a) and
403(a) of the Code. Corporate Qualified Plans in which self-employed persons
participate are commonly referred to as "H.R. 10 Plans."
The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately
above. Some special rules apply, however, in the case of self-employed persons
which, for example, affect certain "lump sum distribution" and "rollover"
rules.
C. SECTION 403(b) ANNUITIES
Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c)(3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.
If the requirements of Section 403(b) are satisfied, amounts contributed by
the employer to purchase an annuity contract for an employee, and any gains
thereon, are not, subject to certain limitations, taxable to the employee until
distributed to the employee. However, these payments may be subject to FICA
(Social Security) taxes. Generally, the cost basis of an employee under a
Section 403(b) annuity contract will equal the amount of any non-deductible
contributions the employee made toward the contract plus any employer
contributions that were taxable to the employee because they exceeded excludable
amounts.
Federal tax law imposes limitations on distributions from Section 403(b)
annuity contracts. Withdrawals of amounts attributable to contributions made
pursuant to a salary reduction agreement in connection with a Section 403(b)
annuity contract will be permitted only (1) when an employee attains age 59-1/2,
separates from service, dies or becomes totally and permanently disabled or (2)
in the case of hardship. A withdrawal made in the case of hardship may not
include income attributable to the contributions. However, these limitations
generally do not apply to distributions which are attributable to assets held as
of December 31, 1988. In general, therefore, contributions made prior to January
1, 1989, and earnings on such contributions through December 31, 1988, are not
subject to these limitations. In addition, these limitations do not apply to
contributions made other than by a salary reduction agreement. A number of
questions exist concerning the application of these rules. Anyone considering a
withdrawal from a Contract issued in connection with a Section 403(b) annuity
plan should consult a qualified tax advisor.
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The 10% penalty tax on early withdrawals described under "Qualified Pension,
Profit-Sharing and Annuity Plans," immediately above, also applies to Section
403(b) annuity contracts.
D. INDIVIDUAL RETIREMENT ANNUITIES
1. SECTION 408(b) INDIVIDUAL RETIREMENT ANNUITIES
Under Sections 408(b) and 219 of the Code, special tax rules apply to
Individual Retirement Annuities. As described below, certain contributions to
such annuities (other than Rollover Contributions) are deductible within
certain limits and the gains on contributions (including Rollover Contributions)
are not taxable until distributed. Generally, the cost basis in an Individual
Retirement Annuity will equal the amount of non-deductible contributions (other
than rollovers), if any, made to the Individual Retirement Annuity. Under
special rules, all individual retirement plans will be treated as one plan for
purposes of these rules.
Section 408(b) sets forth various requirements that an annuity contract must
satisfy before it will be treated as an Individual Retirement Annuity. Although
final regulations that interpret some of these requirements have been adopted,
other regulations have been proposed that interpret the additional requirement
that, under a Section 408(b) Individual Retirement Annuity, the premiums may not
be fixed. These proposed regulations, which contain certain ambiguities, may,
of course, be changed before they are issued in final form. ACCORDINGLY, WHILE
THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE
REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED
REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS
INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(B) PENDING THE ISSUANCE OF
COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.
Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general, be
allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if less).
This deduction is phased out at certain income levels for individuals who are
active participants in employer-related retirement plans. These income levels
vary depending on an individual's marital and tax filing status and are
scheduled to gradually increase in the future. Individuals who may not make
deductible contributions to an Individual Retirement Annuity may, instead, make
non-deductible contributions (up to the applicable maximum described above) on
which earnings will accumulate on a tax-deferred basis. If the Individual
Retirement Annuity includes non-deductible contributions, distributions will be
divided on a pro rata basis between taxable and non-taxable amounts. Special
rules apply if, for example, an individual contributes to an Individual
Retirement Annuity for his or her own benefit and to another Individual
Retirement Annuity for the benefit of his or her spouse.
Individual Retirement Annuities are subject to limitations on the time when
distributions must commence. In addition, the 10% penalty tax on early
withdrawals described under "Qualified Pension, Profit-Sharing and Annuity
Plans," above, also applies to Individual Retirement Annuities, except that the
circumstances in which the penalty tax will not apply are different in certain
respects. Further, for any year in which a Contract Owner borrows any money
under or by use of the Individual Retirement Annuity, the Contract ceases to
qualify under Section 408(b), and an amount equal to the fair market value of
the Contract as of the first day of such year will be includible in the Contract
Owner's gross income for such year.
The sale of a Contract for use with an Individual Retirement Annuity may be
subject to special disclosure requirements of the Internal Revenue Service.
Purchasers of a Contract for use with Individual Retirement Annuities will be
provided with supplemental information required by the Internal Revenue Service
or other appropriate agency. Such purchasers will have the right to revoke
their purchase within 7 days of the earlier of the establishment of the
Individual Retirement Annuity or their purchase. A Qualified Contract issued in
connection with an Individual Retirement Annuity will be amended as necessary to
conform to the requirements of the Code. Purchasers should seek competent
advice as to the suitability of the Contract for use with Individual Retirement
Annuities.
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2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS
An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers
may contribute to the Individual Retirement Annuities of their employees
subject to the limitation in Section 408(j). An employee may exclude the
employer's contribution on his or her behalf to a Simplified Employee Pension
from gross income subject to certain limitations. Elective deferrals under a
Simplified Employee Pension are to be treated like elective deferrals under a
cash or deferred arrangement under Section 401(k) of the Code and are subject
to a $7,000 limitation, adjusted for inflation. In general, the employee may
also contribute and deduct an additional amount not in excess of the lesser
of (a) $2,000 or (b) 100% of compensation, subject to the phaseout discussed
above, if the Simplified Employee Pension meets the qualifications for an
Individual Retirement Annuity.
In general, except as stated in this section, the rules discussed in "Section
408(b) Individual Retirement Annuities," immediately above, apply to a
Simplified Employee Pension.
THE CONTRACTS: NON-QUALIFIED PLANS
In the case of Non-Qualified Contracts issued in connection with retirement
or deferred compensation plans which are Non-Qualified Plans, the provisions of
the Plan generally determine the tax treatment of Plan participants.
For example, contributions to, or deferred compensation in connection with,
Non-Qualified Plans may or may not be currently taxable to participants.
Payments received under a Non-Qualified Contract are subject to tax under
Section 72 of the Code. If payments are received in the form of an annuity,
then, in general, each payment is taxable as ordinary income to the extent that
such payment exceeds the portion of the cost basis of the annuity contract that
is allocable to that payment. Payment of the proceeds of an annuity contract in
a lump sum either before or at maturity is taxable as ordinary income to the
extent the lump sum exceeds the cost basis of the annuity contract. If the
Variable Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Contract will
generally be allowed as a deduction to the Variable Annuitant for his or her
last taxable year.
A payment received on account of a partial redemption of an annuity contract
generally is taxable as ordinary income in whole or in part. Also, if prior to
the initial Annuity Payment Date, (i) an annuity contract is assigned or
pledged, or (ii) a Contract issued after April 22, 1987 is transferred without
adequate consideration, then the amount assigned, pledged or transferred may
similarly be taxable. Special rules may apply with respect to investments in a
Contract made before August 14, 1982. Because the applicable tax treatment is
complex, a qualified tax advisor should be consulted prior to a partial
withdrawal, assignment, pledge, or contract transfer.
Further, in general, in the case of a payment received under a Non-Qualified
Contract, a penalty may be imposed equal to 10% of the taxable portion of the
payment. However, the 10% penalty does not apply in various circumstances. For
example, the penalty is generally inapplicable to payments that are: (i) made on
or after age 59-1/2; (ii) allocable to investments in the Contract before August
14, 1982, (iii) made on or after the death of the holder; (iv) made incident to
disability; (v) part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or the life expectancy) of the
Variable Annuitant or the joint lives (or joint life expectancies) of the
Variable Annuitant and his or her beneficiary; or (vi) made under a Contract
purchased with a single premium and which has an annuity starting date
commencing no later than one year from the purchase date of the annuity and
which provides for a series of substantially equal periodic payments (to be made
not less frequently than annually) during the annuity period.
A Non-Qualified Contract will not be treated as an annuity contract for
purposes of certain Code sections, including Section 72, for any period (and any
subsequent period) for which the investments made by the Fund attributable to
such Non-Qualified Contract are not, in accordance with Code Section 817(h) and
the Treasury regulations thereunder, adequately diversified. Although certain
questions exist about the diversification standards, The Franklin believes that
the Fund presently satisfies those standards and intends that the Fund will
continue to be adequately diversified for those purposes.
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In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The Internal Revenue Service has stated
in published rulings that a variable contract owner will be considered the owner
of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
for the investments of a segregated asset account may cause the investor [i.e.,
the Owner], rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular Sub-Accounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from those described by the Internal Revenue Service in rulings
in which it was determined that contract owners were not owners of separate
account assets. For example, a Contract Owner has additional flexibility in
allocating premium payments and account values. These differences could result
in a Contract Owner being treated as the owner of a pro rata portion of the
assets of the Fund. In addition, The Franklin does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Franklin therefore reserves the
right to modify the Contract as necessary to attempt to prevent a Contract Owner
from being considered the owner of a pro rata share of the assets of the Fund.
REQUIRED DISTRIBUTIONS
In order to be treated as an annuity contract for federal income tax
purposes, section 72(s) of the Code requires Non-Qualified Contracts to provide
that (a) if any Contract Owner dies on or after the annuity date but prior to
the time the entire interest in the Contract has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of such owner's death; and (b)
if any Contract Owner dies prior to the annuity date, the entire interest in the
Contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of an
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Contract Owner's death. The "designated beneficiary" refers to a natural person
designated by the owner as a Beneficiary and to whom ownership of the Contract
passes by reason of death. However, if the "designated beneficiary" is the
surviving spouse of the deceased Contract Owner, the Contract may be continued
with the surviving spouse as the new Contract Owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Franklin intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code section 72(s) when clarified by regulation or
otherwise. Other rules may apply to Qualified Contracts.
AGGREGATION OF CONTRACTS
Under a provision of the federal tax law effective for annuity contracts
entered into after October 21, 1988, all annuity contracts (other than contracts
held in connection with Qualified Plans) issued by the same company (or
affiliates) to the same contract owner during any calendar year will generally
be treated as one annuity contract for the purpose of determining the amount of
any distribution, not in the form of an annuity, that is includable in gross
income. This rule may have the effect of causing more rapid taxation of the
distributed amounts from such combination of contracts. It is not certain how
this rule will be applied or interpreted by the Internal Revenue Service. In
particular, it is not clear if or how this rule applies to Immediate Variable
Annuity Contracts or "split" annuity arrangements. Accordingly, a qualified
tax advisor should be consulted about the application and effect of this rule.
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FUTURE LEGISLATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Contract.
INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from Qualified Plans and Non-Qualified Plans, or Contracts issued in connection
therewith, to the extent the distributions are taxable and are not otherwise
subject to withholding as wages ("Distributions"). See "The Contracts:
Qualified Plans," above, and "The Contracts: Non-Qualified Plans," above,
regarding the taxation of Distributions.
Federal income tax is generally required to be withheld from all or any
portion of a Distribution made on or after January 1, 1993 that constitutes an
"eligible rollover distribution." An "eligible rollover distribution"
generally includes any distribution from a qualified trust described in Section
401(a) of the Code, a qualified annuity plan described in Section 403(a) of the
Code or a qualified annuity contract described in Section 403(b) of the Code
except for (i) a distribution which is one of a series of substantially equal
periodic instalments payable at least annually for the life (or over the life
expectancy) of the Variable Annuitant or for the joint lives (or over the joint
life expectancies) of the Variable Annuitant and his or her Beneficiary, or for
a specified period of 10 years or more or (ii) a minimum distribution required
pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not
includible in gross income (for example, the return of non-deductible
contributions). Any eligible rollover distribution which is not rolled over
directly from a Section 401(a) qualified trust, a Section 403(a) qualified
annuity plan or a Section 403(b) qualified annuity contract to an "eligible
retirement plan" is subject to mandatory federal income tax withholding in an
amount equal to 20% of the eligible rollover distribution. An "eligible
retirement plan" generally includes a qualified trust described in Section
401(a) of the Code, a qualified annuity plan described in Section 403(a) of the
Code, an individual retirement account described in Section 408(a) of the Code
or an Individual Retirement Annuity described in Section 408(b) of the Code.
Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United States
or any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Variable Annuitant or Beneficiary properly elects in
accordance with the prescribed procedures not to have withholding apply. In the
absence of a proper election not to have withholding apply, the amount to be
withheld from a Distribution which is not an eligible rollover distribution
depends upon the type of payment being made. Generally, in the case of a
periodic payment which is not an eligible rollover distribution, the amount to
be withheld from such payment is the amount that would be withheld therefrom
under specified wage withholding tables if the payment were a payment of wages
for the appropriate payroll period. In the case of a nonperiodic payment which
is not an eligible rollover distribution, the amount to be withheld is generally
equal to 10% of the amount of the Distribution.
The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of a Variable
Annuitant or if the Distribution is an eligible rollover distribution from a
qualified annuity contract under Section 403(b) of the Code. Any Variable
Annuitant or Beneficiary considering a Distribution should consult a qualified
tax advisor.
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MANAGEMENT
The Fund is managed by a Board of Managers elected annually by the
Contract Owners. The Board of Managers currently has four members. The
members of the Board of Managers also serve as the Board of Managers of
Franklin Life Variable Annuity Fund A and Franklin Life Variable Annuity Fund
B, separate accounts of The Franklin having investment objectives of
long-term appreciation of capital through investment appreciation and
retention and reinvestment of income derived mainly from investments in
equity securities, particularly common stocks. The assets of Fund A are held
with respect to Variable Annuity contracts used in connection with certain
qualified plans and trusts or individual retirement annuities accorded
special tax treatment under the Code and those of Fund B are held with
respect to Variable Annuity contracts used for retirement planning for
individuals and not in connection with qualified plans and trusts, individual
retirement annuities or employer-related plans that are accorded such special
tax treatment.
The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and
Regulations, the Board of Managers is authorized to take various actions on
behalf of the Fund, including the entry into contracts for the purpose of
services with respect to the Fund under circumstances where the approval of
such contracts is not required to be submitted to the Contract Owners.
Subject to the authority of the Board of Managers, officers and employees of
The Franklin are responsible for overall management of the Fund's business
affairs.
VOTING RIGHTS
All Contract Owners will have the right to vote upon:
(1) The initial approval of any investment management agreement and any
amendment thereto.
(2) Ratification of an independent auditor for the Fund.
(3) Any change in the primary investment objective or fundamental investment
restrictions of the Fund.
(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).
(5) Termination of the investment management agreement (such termination may
also be effected by the Board of Managers).
(6) Any other matter submitted to them by the Board of Managers.
The number of votes which a Contract Owner may cast as to any Contract,
except after the initial Annuity Payment Date, is equal to the number of
Accumulation Units credited to the Contract. With respect to any Contract as to
which Annuity Payments measured by Annuity Units have commenced, the Contract
Owner may cast a number of votes equal to (i) the amount of the assets in the
Fund to meet the Variable Annuity obligations related to such Contract, divided
by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a
Contract Owner will decline during the Annuity Payment period as the amount of
assets in the Fund required to meet the Annuity Payments decreases and, in
addition, will decline as the value of an Accumulation Unit increases.
Fractional votes will be counted.
An employee covered by an H.R. 10 Plan, if not the Contract Owner, will have
the right to instruct the Contract Owner with respect to all votes attributable
to the Qualified Contract. An employee covered by a Qualified Contract issued in
connection with a qualified pension or profit-sharing plan described in Section
401 of the Code will have the right to instruct the Contract Owner with respect
to votes attributable to his or her payments to the plan, if any, and, to the
extent authorized by the terms of the plan, with respect to any additional votes
under the Qualified Contract. If Annuity Payments are being made under an
annuity to a person who is not a Contract Owner, that person will have the right
to instruct the Contract Owner with respect to votes attributable to the amount
of the assets in the Fund to meet the Annuity Payments related to the Contract.
37
<PAGE>
Qualified Contract Owners will cast votes with respect to which instructions
have been received in accordance with such instructions. Votes with respect to
which employees, Variable Annuitants or other persons to whom payments are being
made under a Qualified Contract are entitled to instruct the Contract Owner, but
for which the Contract Owner has received no instructions, shall be cast by the
Contract Owner for or against each proposal to be voted on in the same
proportion as votes for which instructions have been received by such Contract
Owner. If no one is entitled to instruct the Contract Owner, or if the Contract
Owner receives no instructions, all votes which the Contract Owner is entitled
to cast may be cast at his or her sole discretion. Neither the Fund nor The
Franklin has any duty to inquire as to the instructions received or the
authority of the Contract Owner to cast such votes; except to the extent that
the Fund or The Franklin has actual knowledge to the contrary, the votes cast by
Contract Owners will be considered valid and effective as among the Fund, The
Franklin and other persons having voting rights with respect to the Fund.
Should assets be maintained in the Fund with respect to contracts other than
those offered by this Prospectus, contract owners under such contracts would be
entitled to vote, and their votes would be computed in a similar manner. Assets
maintained by The Franklin in the Fund in excess of the amounts attributable to
the Contracts or other contracts of The Franklin will entitle The Franklin to
vote and its vote would be computed in a similar manner. The Franklin will cast
its votes in the same proportion as the votes cast by Contract Owners and the
owners of such other contracts.
The number of votes which each Contract Owner may cast at a meeting shall be
determined as of a record date to be chosen by the Board of Managers within 120
days of the date of the meeting. At least 20 days' written notice of the meeting
will be given to Contract Owners of record. To be entitled to vote or to receive
notice, a Contract Owner must have been such on the record date.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial") serves as
"principal underwriter" (as that term is defined in the Investment Company Act
of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The
Sales Agreement is described under "Distribution of The Contracts" in the
Statement of Additional Information. Franklin Financial, located at #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin.
The Fund no longer offers new Contracts. Commissions are paid to registered
representatives of Franklin Financial with respect to Stipulated Payments
received by The Franklin under the Contracts to a maximum of 2% of such
Stipulated Payments.
STATE REGULATION
As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the
country into six geographic zones. A representative of each such zone may
participate in the examination.
In addition, The Franklin is subject to the insurance laws and regulations of
the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.
For certain provisions of Illinois law applicable to the Fund's investments,
see "Investment Policies and Restrictions of the Fund," above.
REPORTS TO OWNERS
The Franklin will mail to the Contract Owner, at the last known address of
record at the Home Office of The Franklin, at least annually, a report
containing such information as may be required by any applicable law or
regulation and a statement showing the then Cash Value of his or her Contract.
38
<PAGE>
FUNDAMENTAL CHANGES
Upon compliance with applicable law, including obtaining any necessary
affirmative vote of Contract Owners in each case: (a) the Fund may be operated
in a form other than as a "management company" under the Investment Company Act
of 1940 (including operation as a "unit investment trust"); (b) the Fund may be
deregistered under the Investment Company Act of 1940 in the event such
registration is no longer required; or (c) the provisions of the Contracts may
be modified to assure qualification under the pertinent provisions of the Code
or to comply with other applicable federal or state laws. In the event of any
such fundamental change, The Franklin may make appropriate amendments to the
Contracts to give effect to such change or take such other action as may be
necessary in this respect.
The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life
Variable Annuity Fund B ("Fund B"), have approved resolutions whereby Contract
Owners will be asked during 1998 to approve or to disapprove an Agreement and
Plan of Reorganization ("the Agreement") and related transactions (together, the
Agreement and related transactions are the "Reorganization") whereby: (i) the
Fund will be restructured into a single unit investment trust consisting of
three subaccounts; (ii) the assets of each of the Fund, Fund A and Fund B will
be liquidated and the proceeds transferred to one of the three subaccounts in
the restructured Fund (so that the interests of Contract Owners and of Fund A
and Fund B contract owners will continue as interests in the restructured Fund);
and (iii) each subaccount will invest exclusively in shares of a specified
mutual fund portfolio.
Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund having
a value equal to the value of the Contract Owner's interest in a Fund
immediately prior to the Reorganization.
YEAR 2000 TRANSITION
Like all financial services providers, The Franklin utilizes systems that may
be affected by Year 2000 transition issues and it relies on service providers,
including banks, custodians, and investment managers that also may be affected.
The Franklin and its affiliates have developed, and are in the process of
implementing, a Year 2000 transition plan, and are confirming that their 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 these efforts, will
have any negative impact on The Franklin. However, as of the date of this
prospectus, it is not anticipated that Contract Owners will experience negative
effects on their investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation. The Franklin
currently anticipates that its systems will be Year 2000 compliant on or about
December 31, 1998, but there can be no assurance that The Franklin will be
successful, or that interaction with other service providers will not impair The
Franklin's services at that time.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation,
the outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending
litigation should not have a material adverse effect on the Fund or on The
Franklin's financial position; however, it is possible that settlements or
adverse determinations in one or more of these actions or other future
proceedings could have a material adverse effect on The Franklin's results of
operations for a given period. No provision has been made in the
consolidated financial statements related to this pending litigation because
the amount of loss, if any, from these actions cannot be reasonably estimated
at this time.
39
<PAGE>
The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama continues to increase and creates the
potential for an unpredictable judgment in any given suit.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and other
legal instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION
The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby.
In the event that a plan intended to qualify as a Qualified Plan under the
Code fails to meet the applicable qualification requirements under the Code
(including Section 818(a)) or in the event a Qualified Plan ceases to qualify
thereunder, The Franklin shall have the right, upon receiving notice of such
non-qualification, to treat any such Contract issued in connection with such a
plan as a Non-Qualified Contract participating in the Fund.
YIELD INFORMATION
In accordance with regulations adopted by the Securities and Exchange
Commission, the Fund has computed an annualized yield and an effective yield for
a seven-day period ending on the date of the Fund's most recent balance sheet.
The annualized yield is computed by determining the net change, exclusive of
realized gains and losses from the sale of investments, unrealized appreciation
and depreciation on investments, and income other than investment income, in the
value of a hypothetical pre-existing account having a balance of one
Accumulation Unit at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the seven-day
period (the "base period return") and multiplying this result by 365/7 to
obtain an annualized yield. The annualized yield for the seven calendar day
period ended December 31, 1997 was 3.93%. The effective yield is computed by
compounding the base period return by adding one, raising the sum to a power
equal to 365 divided by 7, and substracting one from the result. The effective
yield for the seven calendar day period ended December 31, 1997 was 4.00%. The
effective yield is higher because it represents a compound yield, i.e., it
assumes that the increase in account value represented by the base period return
is reinvested.
Yield as determined with respect to a portfolio composed primarily of money
market securities normally will fluctuate on a daily basis and is affected by
changes in interest rates on money market securities, average portfolio
maturities, the type and quality of portfolio securities held and the expenses
of the Fund. Therefore, the yield for any given past period should not be
considered as a representation of the yield for any future period.
In addition, although yield information may be useful in reviewing the Fund's
performance and in providing a basis for comparison with other investment
alternatives, it should be kept in mind that the Fund's yield cannot be compared
to the yield on bank deposits and other investments which pay fixed yields for a
stated period of time and that other investment companies may calculate yield on
additional bases. When comparing the yields of investment companies,
40
<PAGE>
consideration should be given to the quality and maturity of the portfolio of
securities of each company as well as to the type of expenses incurred. In this
connection, it should be noted that the accrued expenses of the Fund differ from
those incurred under conventional money market funds that do not offer variable
annuity contracts in that additional charges are made against the Fund relating
to The Franklin's assumption of mortality and expense risks under the Contract.
See "Mortality and Expense Risk Charge," above. In addition, the yield
information contained herein does not reflect administration deductions from
Stipulated Payments or deductions for premium taxes, which would reduce the
yield and effective yield contained herein. Furthermore, unlike investments in
conventional money market funds which may be held on a non-qualified basis by
the investor, investment income earned by the Fund during the accumulation
period is not currently taxable to holders of Contracts. See "Federal Income Tax
Status," above.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
----------------------
<S> <C>
General Information . . . . . . . . . . . . . . . . . . 3
Investment Objectives . . . . . . . . . . . . . . . . . 3
Limitations on Settlement Options . . . . . . . . . . . 3
Management. . . . . . . . . . . . . . . . . . . . . . . 5
Investment Advisory and Other Services. . . . . . . . . 7
Distribution of The Contracts . . . . . . . . . . . . . 8
Portfolio Turnover and Brokerage. . . . . . . . . . . . 9
Safekeeper of Securities. . . . . . . . . . . . . . . . 10
Legal Matters . . . . . . . . . . . . . . . . . . . . . 10
Experts . . . . . . . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements . . . . . . . . . . . . . F-1
</TABLE>
41
<PAGE>
APPENDIX-DEBT SECURITY RATINGS
STANDARD & POOR'S CORPORATION-BOND RATINGS
AAA-Highest grade. Capacity to pay principal and interest is extremely
strong. AA-High grade. Capacity to pay principal and interest is very strong,
and in the majority of instances these bonds differ from AAA issues only in a
small degree. A-Strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.
MOODY'S INVESTORS SERVICE, INC.-BOND RATINGS
Aaa-Best quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt-edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. Aa-High quality by all standards. 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. A-Upper medium grade. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. An A-1 rating (highest quality) by Standard & Poor's indicates that the
degree of safety regarding timely repayment is strong. An A-2 rating indicates
that capacity for timely payment is satisfactory, although the relative degree
of safety is not as high as for issues designated A-1. An A-3 rating indicates
adequate capacity for repayment but with more vulnerability to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Issuers (or institutions supplying credit support) rated
Prime-1 (Moody's highest rating) have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics: (1) leading market positions in
well-established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structure 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. Issuers
(or institutions supplying credit support) rated Prime-2 have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers (or institutions supplying credit support) rated Prime-3 have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
42
<PAGE>
PROSPECTUS
FRANKLIN LIFE MONEY
MARKET VARIABLE
ANNUITY FUND C
INDIVIDUAL VARIABLE
ANNUITY CONTRACTS
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
- --------------------------------------------------------------------------------
Complete and return this form to:
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591
Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Money Market Variable Annuity Fund C.
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Street)
- --------------------------------------------------------------------------------
(City) (State) (Zip Code)
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX E
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
PROSPECTUS
<PAGE>
AMERICAN GENERAL SERIES
PORTFOLIO COMPANY
2929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
OCTOBER 1, 1998
PROSPECTUS (AS SUPPLEMENTED THROUGH FEBRUARY 22, 1999)
The American General Series Portfolio Company (the "Series Company") is a mutual
fund made up of 13 separate Funds (the "Funds"). Each of the Funds has a
different investment objective. Each Fund is explained in more detail on its
Fact Sheet contained in this prospectus. Here is a summary of the goals of the
13 Funds:
INDEX EQUITY FUNDS:
INTERNATIONAL EQUITIES FUND
Growth through investments tracking the EAFE Index.
MIDCAP INDEX FUND
Growth through investments tracking the S&P MidCap 400 Index.
SMALL CAP INDEX FUND
Growth through investments tracking the Russell 2000 Index.
STOCK INDEX FUND
Growth through investments tracking the S&P 500 Index.
ACTIVELY MANAGED EQUITY FUNDS:
GROWTH FUND
Growth through investments in service sector companies.
GROWTH & INCOME FUND
Growth and income through investments in stocks (or securities
convertible into stocks).
INCOME FUNDS:
CAPITAL CONSERVATION FUND
Income and possible growth through investments in high quality debt
securities.
GOVERNMENT SECURITIES FUND
Income and possible growth through investments in intermediate and
long-term government debt securities.
INTERNATIONAL GOVERNMENT BOND FUND
Income and possible growth through investments in high quality foreign
government debt securities.
SPECIALTY EQUITY FUNDS:
SCIENCE & TECHNOLOGY FUND
Growth through investments in stocks of companies which benefit from
development of science and technology.
SOCIAL AWARENESS FUND
Growth through investments in stocks of companies meeting social
criteria of the Fund.
MONEY MARKET FUND:
MONEY MARKET FUND
Income through investments in short-term money market securities.
ASSET ALLOCATION FUND:
ASSET ALLOCATION FUND
Maximum return through investments in a mix of stocks, bonds and money
market securities.
SHARES OF THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THIS FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
These Funds are available to you only through a variable annuity contract or
variable life insurance policy you or your employer bought from The Variable
Annuity Life Insurance Company ("VALIC") or one of its affiliates, or
employee thrift plans maintained by VALIC or American General Corporation.
VALIC is a member of the American General Corporation group of companies.
This prospectus sets forth concisely the information you should know before
investing in the Funds.
Because different contracts contain different combinations of Funds, all of
the Funds in this prospectus may not be available to you. And, there may be
some Funds that are available to you that don't appear in this prospectus.
See the separate prospectus that describes your, or your employer's, annuity
contract for a complete list of Funds in which you may invest. BE SURE TO
READ BOTH PROSPECTUSES IN FULL BEFORE YOU START PARTICIPATING AND KEEP THEM
FOR FUTURE REFERENCE.
VALIC has filed a Statement of Additional Information, dated October 1, 1998
(as supplemented through February 22, 1999), with the Securities and Exchange
Commission ("SEC"). This Statement contains additional information about
these Funds and is part of this prospectus. For a free copy, write to the
American General Series Portfolio Company at the address above or call
1-800-44-VALIC. The Statement of Additional Information has been filed with
the SEC and is available along with other related materials at the SEC's
internet web site (http://www.sec.gov.).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY, SHARES OF THE FUNDS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
FUNDS. ALSO, IT HAS NOT PASSED ON WHETHER THIS PROSPECTUS IS ADEQUATE OR
ACCURATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
COVER PAGE
WELCOME........................................ 1
EXPENSE SUMMARY................................ 2
FINANCIAL HIGHLIGHTS........................... 3
ABOUT THE SERIES COMPANY'S MANAGEMENT.......... 10
Investment Adviser........................ 10
Investment Sub-advisers................... 10
Portfolio Manager......................... 10
How Advisers Are Paid for Their
Services................................ 11
About the Board of Directors.............. 12
ABOUT THE FUNDS................................ 13
Growth, Income and Stability Categories... 13
About Level of Risk....................... 13
About Portfolio Turnover.................. 13
About Fund Performance.................... 14
ABOUT INDEX EQUITY FUNDS....................... 15
HOW TO READ A FUND FACT SHEET.................. 17
FUND FACT SHEETS............................... 18
Asset Allocation Fund..................... 18
Capital Conservation Fund................. 20
Government Securities Fund................ 22
Growth Fund............................... 24
Growth & Income Fund...................... 26
International Equities Fund............... 28
International Government Bond Fund........ 30
MidCap Index Fund......................... 32
Money Market Fund......................... 34
Science & Technology Fund................. 36
Small Cap Index Fund...................... 38
Social Awareness Fund..................... 40
Stock Index Fund.......................... 42
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TYPES OF INVESTMENTS........................... 44
Stocks.................................... 44
Bonds..................................... 44
Asset-Backed Securities.............. 44
Loan Participations.................. 44
Mortgage-Related Securities............... 45
Illiquid Securities....................... 45
Foreign Securities........................ 45
ADRs...................................... 46
Foreign Currency.......................... 46
When-Issued Securities.................... 46
Money Market Securities................... 46
Variable Rate Demand Notes................ 46
Derivatives............................... 46
Options.............................. 46
Futures Contracts.................... 47
Repurchase Agreements..................... 47
A Word About Risk......................... 47
Investment Practices...................... 48
Limitations.......................... 48
Lending Portfolio Securities......... 48
ABOUT THE SERIES COMPANY....................... 49
Series Company Shares..................... 49
Net Asset Value of the Series Company
Shares.................................. 49
Dividends and Capital Gains............... 50
Diversification........................... 50
Taxes..................................... 51
Voting Rights............................. 51
Year 2000 Risks........................... 51
Reports................................... 51
</TABLE>
(i)
<PAGE>
WELCOME
- --------------------------------------------------------------------------------
Unless otherwise specified in this prospectus, the words we, our, and VALIC mean
The Variable Annuity Life Insurance Company. The words you and your mean the
participant.
American General Series Portfolio Company (the "Series Company") was
incorporated under the laws of Maryland on December 7, 1984.
The Series Company is an open-end management investment company and currently
consists of 13 different Funds, each of which is described in detail in this
prospectus. We serve as each Fund's Investment Adviser and, in this role, report
directly to the Series Company's Board of Directors. As Investment Adviser, we
make investment decisions for the Funds, are responsible for their day to day
operations and perform the cash management function. For more information, see
"About the Series Company's Management" in this prospectus.
Individuals can't invest in these Funds directly. Instead, they participate
through an annuity contract, variable life policy, or employer plan with VALIC
or one of its affiliates, or employee thrift plans maintained by VALIC or
American General Corporation. Most often employers set up these annuity
contracts so they can offer their employees a way to save for retirement or
assist them in estate planning. Retirement plans through employers may be
entitled to tax benefits that individual retirement plans may not be entitled
to. These tax benefits are fully explained in your contract prospectus.
After you invest in a Fund you participate in Fund earnings or losses, in
proportion to the amount of money you invest. Depending on your contract, if you
withdraw your money before retirement, you may incur charges and additional tax
liabilities. However, to save for retirement, you generally should let your
investments and their earnings build. At retirement, you may withdraw all or a
portion of your money, leave it in the account until you need it, or start
receiving annuity payments. At a certain age you may be required to begin
withdrawals.
All inquiries regarding this prospectus and annuity contracts issued by VALIC
should be directed, in writing, to VALIC Customer Service, A3-01, 2929 Allen
Parkway, Houston, Texas 77019, or by calling 1-800-633-8960.
All inquiries regarding annuity contracts or variable life policies issued by
American General Life Insurance Company (AGL) should be directed to AGL's
Annuity Administration Department, 2727-A Allen Parkway, Houston, Texas 77019-
2191 or call 1-800-813-5065. AGL is a member of the American General Corporation
group of companies, as is VALIC.
OPEN-END means shares of the
FUNDS can be bought or sold by
the Series Company at any
time. Also, there is no limit on the
number of investors who may
buy shares.
1
<PAGE>
EXPENSE SUMMARY
- --------------------------------------------------------------------------------
Annual fund operating expenses are the fees paid out of the assets of a Fund.
Each Fund pays a management fee to VALIC. The expenses paid by a Fund are
factored into the calculation of its share price or dividends and are not
charged directly to investors. The expenses reflected in the tables below are
based on the Funds' annual operating expenses for the fiscal year ended May 31,
1998.
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSET CAPITAL GOVERNMENT
ALLOCATION CONSERVATION SECURITIES GROWTH GROWTH & INTERNATIONAL
FUND FUND FUND FUND INCOME FUND EQUITIES FUND
---------- ------------ ---------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Management Fee 0.50% 0.50% 0.50% 0.80% 0.75% 0.35%
Other Expenses 0.04% 0.04% 0.04% 0.04% 0.05% 0.05%
----- ----- ----- ----- ----- ----
Total Fund Operating Expenses 0.54% 0.54% 0.54% 0.84% 0.80% 0.40%
===== ===== ===== ===== ===== ====
<CAPTION>
INTERNATIONAL
GOVERNMENT
BOND FUND
-------------
<S> <C>
Management Fee 0.50%
Other Expenses 0.05%
-----
Total Fund Operating Expenses 0.55%
=====
</TABLE>
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of net assets)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCIENCE & SOCIAL
MID CAP MONEY MARKET TECHNOLOGY SMALL CAP AWARENESS STOCK
INDEX FUND FUND FUND INDEX FUND FUND INDEX FUND
---------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fee 0.32% 0.50% 0.90% 0.35% 0.50% 0.27%
Other Expenses 0.04% 0.04% 0.05% 0.04% 0.04% 0.04%
----- ----- ----- ----- ----- -----
Total Fund Operating Expenses 0.36% 0.54% 0.95% 0.39% 0.54% 0.31%
===== ===== ===== ===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
The purpose of the expense tables above is to assist investors in understanding
the various costs and expenses that a shareholder of a Fund will bear directly
or indirectly. Each Fund's annual operating expenses do not reflect expenses
imposed by separate accounts of VALIC through which an investment in each Fund
is made or their related contracts. A separate account's expenses are fully
explained in your contract prospectus.
2
<PAGE>
FINANCIAL HIGHLIGHTS
A FUND'S FISCAL YEAR ends every May 31st.
Financial highlights are provided below for each of the Funds. The financial
highlights are for the last 10 years of the Funds or if the Fund has been in
operation a shorter period of time, since the date the Fund began operation.
Ernst & Young LLP, Independent Auditors for the Series Company, has audited the
Series Company's financial statements which include the information presented
here. Their unqualified report appears in those audited financial statements,
which are included in the Statement of Additional Information.
Per share data assumes that you held each share from the beginning to the end of
each fiscal year. Total return assumes that you bought additional shares with
dividends paid by the Fund. Total returns for periods of less than one year are
not annualized. The average commission rate paid on investment equity securities
(on a per share basis) is presented for the period beginning June 1, 1996.
ASSET ALLOCATION FUND(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $12.57 $12.55 $11.24 $10.84 $11.18 $10.66 $11.05
-------- -------- -------- -------- -------- -------- --------
+ INCOME (LOSS)
from net investment income 0.41 0.77 0.44 0.44 0.37 0.35 0.30
from net realized & unrealized
gain (loss) on securities 2.24 1.44 1.53 0.82 (0.15) 0.61 (0.19)
-------- -------- -------- -------- -------- -------- --------
total income from investment
operations 2.65 2.21 1.97 1.26 0.22 0.96 0.11
-------- -------- -------- -------- -------- -------- --------
- - DISTRIBUTIONS
from net investment income (0.41) (0.78) (0.44) (0.44) (0.37) (0.35) (0.30)
from net realized gain on
securities (0.79) (1.41) (0.22) (0.42) (0.19) (0.09) (0.20)
-------- -------- -------- -------- -------- -------- --------
total distributions (1.20) (2.19) (0.66) (0.86) (0.56) (0.44) (0.50)
-------- -------- -------- -------- -------- -------- --------
= SHARE VALUE
AT END OF YEAR $14.02 $12.57 $12.55 $11.24 $10.84 $11.18 $10.66
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN 21.94% 15.89% 17.90% 12.43% 1.86% 9.17% 0.87%
======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.54% 0.57% 0.57% 0.58% 0.59% 0.70% 0.90%
Ratio of net investment income to
average net assets 3.02% 3.26% 3.62% 4.03% 3.24% 3.28% 2.72%
Portfolio turnover rate 24% 103% 119% 133% 76% 78% 111%
Number of shares outstanding at
end of year (000's) 14,269 14,107 15,142 16,319 17,956 14,758 13,341
Net assets at end of year (000's) $200,099 $177,347 $190,024 $183,393 $194,576 $165,002 $142,213
Average net assets during the year
(000's) $188,184 $179,615 $187,576 $186,487 $185,036 $151,450 $137,179
Average commission rate paid $0.0205 $0.0401 N/A N/A N/A N/A N/A
<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $10.48 $10.06 $9.40
-------- -------- --------
+ INCOME (LOSS)
from net investment income 0.40 0.55 0.62
from net realized & unrealized
gain (loss) on securities 0.57 0.44 0.65
-------- -------- --------
total income from investment
operations 0.97 0.99 1.27
-------- -------- --------
- - DISTRIBUTIONS
from net investment income (0.40) (0.57) (0.61)
from net realized gain on
securities -- -- --
-------- -------- --------
total distributions (0.40) (0.57) (0.61)
-------- -------- --------
= SHARE VALUE
AT END OF YEAR $11.05 $10.48 $10.06
======== ======== ========
TOTAL RETURN 9.75% 10.06% 14.00%
======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.92% 0.92% 1.00%
Ratio of net investment income to
average net assets 3.94% 5.38% 6.43%
Portfolio turnover rate 55% 51% 93%
Number of shares outstanding at
end of year (000's) 11,891 11,158 9,969
Net assets at end of year (000's) $131,416 $116,966 $100,248
Average net assets during the year
(000's) $116,266 $107,626 $ 92,364
Average commission rate paid N/A N/A N/A
</TABLE>
(1) The Asset Allocation Fund was formerly known as the Timed Opportunity Fund.
3
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CAPITAL CONSERVATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $9.31 $9.23 $9.52 $9.13 $9.87 $9.29 $8.81
------- -------- ------- ------- ------- ------- -------
+ INCOME (LOSS)
from net investment income 0.61 0.62 0.62 0.63 0.61 0.65 0.69
from net realized & unrealized
gain (loss) on securities 0.37 0.08 (0.29) 0.39 (0.69) 0.58 0.48
------- -------- ------- ------- ------- ------- -------
total income (loss) from
investment operations 0.98 0.70 0.33 1.02 (0.08) 1.23 1.17
------- -------- ------- ------- ------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.61) (0.62) (0.62) (0.63) (0.61) (0.65) (0.69)
from net realized gain on
securities -- -- -- -- (0.05) -- --
------- -------- ------- ------- ------- ------- -------
total distributions (0.61) (0.62) (0.62) (0.63) (0.66) (0.65) (0.69)
------- -------- ------- ------- ------- ------- -------
= SHARE VALUE
AT END OF YEAR $9.68 $9.31 $9.23 $9.52 $9.13 $9.87 $9.29
======= ======== ======= ======= ======= ======= =======
TOTAL RETURN 10.76% 7.75% 3.41% 11.80% (1.13)% 13.60% 13.72%
======= ======== ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.54% 0.57% 0.57% 0.58% 0.59% 0.67% 0.77%
Ratio of net investment income to
average net assets 6.32% 6.59% 6.47% 6.88% 6.24% 6.77% 7.80%
Portfolio turnover rate 14% 45% 80% 100% 55% 58% 121%
Number of shares outstanding at
end of period (000's) 6,577 7,168 7,604 6,935 6,712 5,095 3,939
Net assets at end of period
(000's) $63,654 $66,747 $70,212 $66,031 $61,305 $50,290 $36,609
Average net assets during the
period (000's) $66,996 $69,352 $70,271 $61,568 $59,210 $43,316 $29,793
<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $9.08 $9.48 $9.29
------- ------- -------
+ INCOME (LOSS)
from net investment income 0.73 0.80 0.75
from net realized & unrealized
gain (loss) on securities (0.27) (0.36) 0.17
------- ------- -------
total income (loss) from
investment operations 0.46 0.44 0.92
------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.73) (0.84) (0.73)
from net realized gain on
securities -- -- --
------- ------- -------
total distributions (0.73) (0.84) (0.73)
------- ------- -------
= SHARE VALUE
AT END OF YEAR $8.81 $9.08 $9.48
======= ======= =======
TOTAL RETURN 5.40% 4.73% 10.45%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.83% 0.83% 0.88%
Ratio of net investment income to
average net assets 8.25% 8.64% 8.82%
Portfolio turnover rate 142% 125% 55%
Number of shares outstanding at
end of period (000's) 2,333 1,983 1,429
Net assets at end of period
(000's) $20,541 $18,006 $13,544
Average net assets during the
period (000's) $19,105 $16,278 $9,562
</TABLE>
GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $9.67 $9.61 $9.89 $9.55 $10.30 $9.84 $9.34
------- -------- ------- ------- ------- ------- -------
+ INCOME (LOSS)
from investment income 0.58 0.59 0.61 0.60 0.55 0.61 0.65
from net realized & unrealized
gain (loss) on securities 0.42 0.06 (0.28) 0.35 (0.59) 0.59 0.49
------- -------- ------- ------- ------- ------- -------
total income (loss) from
investment operations 1.00 0.65 0.33 0.95 (0.04) 1.20 1.14
------- -------- ------- ------- ------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.58) (0.59) (0.61) (0.61) (0.55) (0.61) (0.64)
from net realized gain on
securities -- -- -- -- (0.16) (0.13) --
------- -------- ------- ------- ------- ------- -------
total distributions (0.58) (0.59) (0.61) (0.61) (0.71) (0.74) (0.64)
------- -------- ------- ------- ------- ------- -------
= SHARE VALUE
AT END OF YEAR $10.09 $9.67 $9.61 $9.89 $9.55 $10.30 $9.84
======= ======== ======= ======= ======= ======= =======
TOTAL RETURN 10.60% 6.94% 3.32% 10.43% (0.66)% 12.56% 12.60%
======= ======== ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.54% 0.56% 0.56% 0.58% 0.59% 0.67% 0.76%
Ratio of net investment income to
average net assets 5.82% 6.11% 6.21% 6.36% 5.44% 6.08% 6.77%
Portfolio turnover rate 24% 38% 36% 229% 85% 105% 78%
Number of shares outstanding at
end of year (000's) 9,129 8,672 8,164 5,478 4,544 3,110 2,090
Net assets at end of year (000's) $92,120 $83,827 $78,423 $54,174 $43,401 $32,023 $20,559
Average net assets during the year
(000's) $87,574 $83,293 $68,017 $45,200 $41,596 $26,145 $17,069
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------
1991 1990 1989
-------- ------ ------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $9.20 $9.42 $9.24
------- ------ ------
+ INCOME (LOSS)
from investment income 0.66 0.70 0.71
from net realized & unrealized
gain (loss) on securities 0.14 (0.17) 0.15
------- ------ ------
total income (loss) from
investment operations 0.80 0.53 0.86
------- ------ ------
- - DISTRIBUTIONS
from net investment income (0.66) (0.75) (0.68)
from net realized gain on
securities -- -- --
------- ------ ------
total distributions (0.66) (0.75) (0.68)
------- ------ ------
= SHARE VALUE
AT END OF YEAR $9.34 $9.20 $9.42
======= ====== ======
TOTAL RETURN 9.28% 5.76% 9.57%
======= ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.87% 0.86% 0.85%
Ratio of net investment income to
average net assets 7.25% 7.77% 7.89%
Portfolio turnover rate 87% 85% 38%
Number of shares outstanding at
end of year (000's) 1,468 978 570
Net assets at end of year (000's) $13,711 $8,997 $5,374
Average net assets during the year
(000's) $11,393 $7,233 $4,565
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, PERIOD FROM
------------------------------------------------------------------- APRIL 29, 1994
1998 1997 1996 1995 TO MAY 31, 1994
---------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $17.62 $16.49 $11.43 $9.87 $10.00(1)
---------- -------- -------- -------- -------
+ INCOME (LOSS)
from net investment income (0.02) 0.02 0.11 0.04 0.01
from net realized & unrealized
gain (loss) on securities 4.82 1.45 5.27 1.56 (0.13)
---------- -------- -------- -------- -------
total income (loss) from
investment operations 4.80 1.47 5.38 1.60 (0.12)
---------- -------- -------- -------- -------
- - DISTRIBUTIONS
from net investment income (0.01) (0.01) (0.09) (0.04) (0.01)
from net realized gain on
securities (0.33) (0.33) (0.23) -- --
---------- -------- -------- -------- -------
total distributions (0.34) (0.34) (0.32) (0.04) (0.01)
---------- -------- -------- -------- -------
= SHARE VALUE
AT END OF PERIOD $22.08 $17.62 $16.49 $11.43 $9.87
========== ======== ======== ======== =======
TOTAL RETURN 27.41% 9.00% 47.46% 16.25% (1.19)%
========== ======== ======== ======== =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.84% 0.86% 0.83% 0.91% 0.08%
Ratio of net investment income to
average net assets (0.11)% 0.09% 0.89% 0.41% 0.11%
Portfolio turnover rate 43% 40% 36% 61% 0%
Number of shares outstanding at
end of year (000's) 49,832 42,422 25,826 8,800 1,001
Net assets at end of year (000's) $1,100,137 $747,654 $425,787 $100,614 $9,885
Average net assets during the
year (000's) $946,335 $588,056 $238,228 $ 42,232 $9,944
Average commission rate paid $0.0474 $0.0499 N/A N/A N/A
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on April 29, 1994.
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED MAY 31, APRIL 29, 1994
----------------------------------------------------------------- TO
1998 1997 1996 1995 MAY 31, 1994
-------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $16.86 $14.78 $11.09 $9.87 $10.00(1)
-------- -------- -------- ------- -------
+ INCOME (LOSS)
from net investment income 0.08 0.10 0.08 0.09 0.02
from net realized & unrealized
gain (loss) on securities 3.26 2.38 3.77 1.22 (0.13)
-------- -------- -------- ------- -------
total income (loss) from
investment operations 3.34 2.48 3.85 1.31 (0.11)
-------- -------- -------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.08) (0.10) (0.07) (0.09) (0.02)
from net realized gain on
securities (0.21) (0.29) (0.09) -- --
-------- -------- -------- ------- -------
total distributions (0.29) (0.39) (0.16) (0.09) (0.02)
-------- -------- -------- ------- -------
= SHARE VALUE
AT END OF PERIOD $19.91 $16.87 $14.78 $11.09 $9.87
======== ======== ======== ======= =======
TOTAL RETURN 19.87% 17.08% 34.85% 13.35% (1.11)%
======== ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.80% 0.81% 0.79% 0.86% 0.07%
Ratio of net investment income to
average net assets 0.43% 0.70% 0.63% 0.93% 0.22%
Portfolio turnover rate 78% 45% 64% 97% 11%
Number of shares outstanding at end
of year (000's) 13,619 12,422 7,685 3,867 1,002
Net assets at end of year (000's) $271,159 $209,545 $113,546 $42,867 $9,890
Average net assets during the year
(000's) $252,647 $161,226 $75,158 $21,910 $9,946
Average commission rate paid $0.0500 $0.0500 N/A N/A N/A
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on April 29, 1994.
5
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
INTERNATIONAL EQUITIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 2,
FISCAL YEAR ENDED MAY 31, 1989
------------------------------------------------------------------------------------- TO MAY 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF
PERIOD $11.44 $11.15 $10.42 $10.14 $8.99 $8.03 $8.58 $9.17 $10.00(1)
-------- -------- -------- -------- -------- ------- ------- ------- --------
+ INCOME (LOSS)
from net investment
income 0.23 0.20 0.17 0.15 0.11 0.18 0.15 0.23 0.10
from net realized &
unrealized gain (loss)
on securities 0.85 0.63 0.97 0.34 1.17 0.93 (0.55) (0.59) (0.83)
-------- -------- -------- -------- -------- ------- ------- ------- --------
total income (loss) from
investment operations 1.08 0.83 1.14 0.49 1.28 1.11 (0.40) (0.36) (0.73)
-------- -------- -------- -------- -------- ------- ------- ------- --------
- - DISTRIBUTIONS
from net investment
income (0.24) (0.19) (0.17) (0.15) (0.11) (0.15) (0.15) (0.23) (0.10)
from net realized gain on
securities (0.33) (0.35) (0.24) (0.06) (0.02) -- -- -- --
-------- -------- -------- -------- -------- ------- ------- ------- --------
total distributions (0.57) (0.54) (0.41) (0.21) (0.13) (0.15) (0.15) (0.23) (0.10)
-------- -------- -------- -------- -------- ------- ------- ------- --------
= SHARE VALUE
AT END OF PERIOD $11.95 $11.44 $11.15 $10.42 $10.14 $8.99 $8.03 $8.58 $9.17
======== ======== ======== ======== ======== ======= ======= ======= ========
TOTAL RETURN 9.92% 7.74% 11.14% 4.92% 14.31% 14.18% (4.69)% (3.71)% (7.42)%
======== ======== ======== ======== ======== ======= ======= ======= ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to
average net assets 0.40% 0.42% 0.42% 0.45% 0.47% 0.53% 0.65% 0.37% 0.19%
Ratio of net investment
income to average net
assets 1.92% 1.75% 1.65% 1.47% 1.43% 2.33% 1.84% 2.67% 1.10%
Portfolio turnover rate 9% 12% 20% 14% 7% 9% 5% 3% 0%
Number of shares
outstanding at end of
year (000's) 13,009 15,857 18,497 20,074 17,273 7,429 4,256 2,451 1,310
Net assets at end of year
(000's) $155,469 $181,437 $206,259 $209,091 $175,183 $66,809 $34,182 $21,036 $12,005
Average net assets during
the year (000's) $165,984 $191,117 $204,792 $199,235 $117,264 $45,509 $26,542 $15,693 $ 7,853
Average commission rate
paid $0.0332 $0.0236 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on October 2, 1989.
INTERNATIONAL GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
FISCAL YEAR ENDED MAY 31, 1991 TO
--------------------------------------------------------------- MAY 31,
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $11.33 $11.79 $12.72 $10.97 $11.16 $10.43 $10.00(1)
-------- -------- -------- ------- ------- ------- -------
+ INCOME (LOSS)
from net investment income 0.56 0.63 0.65 0.65 0.62 0.76 0.48
from net realized & unrealized gain (loss) on
securities and foreign currencies (0.26) (0.49) (0.89) 1.80 (0.20) 0.70 0.42
-------- -------- -------- ------- ------- ------- -------
total income (loss) from investment operations 0.30 0.14 (0.24) 2.45 0.42 1.46 0.90
-------- -------- -------- ------- ------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.20) (0.58) (0.68) (0.70) (0.60) (0.73) (0.47)
from net realized gain on securities (0.01) (0.02) (0.01) -- (0.01) -- --
-------- -------- -------- ------- ------- ------- -------
total distributions (0.21) (0.60) (0.69) (0.70) (0.61) (0.73) (0.47)
-------- -------- -------- ------- ------- ------- -------
= SHARE VALUE
AT END OF PERIOD $11.42 $11.33 $11.79 $12.72 $10.97 $11.16 $10.43
======== ======== ======== ======= ======= ======= =======
TOTAL RETURN 2.65% 1.13% (1.91)% 23.23% 3.87% 14.50% 9.18%
======== ======== ======== ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.55% 0.56% 0.56% 0.59% 0.48% 0.14% 0.08%
Ratio of net investment income to average net
assets 4.70% 5.13% 5.45% 5.83% 5.87% 7.02% 4.62%
Portfolio turnover rate 17% 4% 11% 6% 3% 26% 12%
Number of shares outstanding at end of year
(000's) 13,646 15,680 12,073 6,111 3,741 2,062 1,259
Net assets at end of year (000's) $155,783 $177,709 $142,383 $77,734 $41,028 $23,009 $13,126
Average net assets during the year (000's) $168,439 $166,147 $114,693 $51,451 $33,561 $18,135 $11,938
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on October 1, 1991.
6
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
MIDCAP INDEX FUND(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $20.83 $19.09 $15.68 $14.54 $14.38 $12.86 $12.51
-------- -------- -------- -------- -------- -------- --------
+ INCOME (LOSS)
from net investment income 0.23 0.24 0.24 0.26 0.23 0.24 0.23
from net realized & unrealized
gain (loss) on securities 5.80 2.95 4.06 1.59 0.28 1.93 0.39
-------- -------- -------- -------- -------- -------- --------
total income (loss) from
investment operations 6.03 3.19 4.30 1.85 0.51 2.17 0.62
-------- -------- -------- -------- -------- -------- --------
- - DISTRIBUTIONS
from net investment income (0.23) (0.24) (0.24) (0.26) (0.23) (0.24) (0.23)
from net realized gain on
securities (1.36) (1.21) (0.65) (0.45) (0.12) (0.41) (0.04)
-------- -------- -------- -------- -------- -------- --------
total distributions (1.59) (1.45) (0.89) (0.71) (0.35) (0.65) (0.27)
-------- -------- -------- -------- -------- -------- --------
= SHARE VALUE
AT END OF YEAR $25.27 $20.83 $19.09 $15.68 $14.54 $14.38 $12.86
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN 29.62% 17.48% 28.10% 13.26% 3.52% 17.21% 5.01%
======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.36% 0.40% 0.41% 0.44% 0.46% 0.47% 0.54%
Ratio of net investment income to
average net assets 0.95% 1.24% 1.36% 1.73% 1.62% 1.79% 1.82%
Portfolio turnover rate 26% 19% 21% 23% 17% 5% 112%
Number of shares outstanding at
end of year (000's) 31,830 29,137 28,322 25,988 24,001 14,673 8,862
Net assets at end of year (000's) $804,318 $607,061 $540,688 $407,557 $349,041 $210,931 $113,992
Average net assets during the year
(000's) $722,652 $554,397 $477,372 $376,486 $285,247 $154,979 $88,456
Average commission rate paid $0.0278 $0.0277 N/A N/A N/A N/A N/A
<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $12.92 $12.25 $10.86
------- ------- -------
+ INCOME (LOSS)
from net investment income 0.28 0.28 0.30
from net realized & unrealized
gain (loss) on securities (0.30) 0.71 1.51
------- ------- -------
total income (loss) from
investment operations (0.02) 0.99 1.81
------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.28) (0.32) (0.27)
from net realized gain on
securities (0.11) -- (0.15)
------- ------- -------
total distributions (0.39) (0.32) (0.42)
------- ------- -------
= SHARE VALUE
AT END OF YEAR $12.51 $12.92 $12.25
======= ======= =======
TOTAL RETURN 0.20% 8.22% 17.06%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.67% 0.68% 0.74%
Ratio of net investment income to
average net assets 2.41% 2.29% 2.72%
Portfolio turnover rate 101% 131% 67%
Number of shares outstanding at
end of year (000's) 6,168 5,712 5,354
Net assets at end of year (000's) $77,146 $73,815 $65,586
Average net assets during the year
(000's) $69,696 $67,421 $57,398
Average commission rate paid N/A N/A N/A
</TABLE>
- ------------
(1) Effective October 1, 1991 the Fund's name was changed from the Capital
Accumulation Fund to the MidCap Index Fund. Additionally, on October 1, 1991
the investment objectives and investment program for the Fund were changed.
Bankers Trust has been the Fund's Sub-adviser since May 1, 1992.
MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- ------- -------- -------- ------- -------
+ INCOME
from net investment income 0.05 0.05 0.05 0.05 0.03 0.03 0.05
-------- -------- ------- -------- -------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.05) (0.05) (0.05) (0.05) (0.03) (0.03) (0.05)
-------- -------- ------- -------- -------- ------- -------
= SHARE VALUE
AT END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======= ======== ======== ======= =======
TOTAL RETURN 5.25% 5.02% 5.26% 4.90% 2.83% 2.85% 4.47%
======== ======== ======= ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.54% 0.57% 0.57% 0.57% 0.58% 0.63% 0.67%
Ratio of net investment income to
average net assets 5.14% 4.95% 5.14% 4.75% 2.78% 2.81% 4.42%
Number of shares outstanding at
end of year (000's) 190,975 128,125 83,618 82,256 50,534 45,323 48,355
Total net assets at end of year
(000's) $190,975 $128,125 $83,618 $82,254 $50,533 $45,322 $48,353
Average net assets during the year
(000's) $150,625 $113,882 $84,271 $67,021 $46,222 $45,562 $46,305
<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $1.00 $1.00 $1.00
------- ------- -------
+ INCOME
from net investment income 0.07 0.08 0.08
------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.07) (0.08) (0.08)
------- ------- -------
= SHARE VALUE
AT END OF YEAR $1.00 $1.00 $1.00
======= ======= =======
TOTAL RETURN 7.11% 8.31% 8.63%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.68% 0.74% 0.46%
Ratio of net investment income to
average net assets 6.86% 7.93% 8.39%
Number of shares outstanding at
end of year (000's) 38,572 27,628 21,445
Total net assets at end of year
(000's) $38,570 $27,628 $21,445
Average net assets during the year
(000's) $34,733 $22,563 $13,385
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
SCIENCE & TECHNOLOGY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED MAY 31, APRIL 29, 1994
------------------------------------------------------------------- TO
1998 1997 1996 1995 MAY 31, 1994
---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $19.88 $20.48 $14.43 $9.83 $10.00(1)
---------- -------- -------- -------- -------
+ INCOME (LOSS)
from net investment income (0.09) -- -- 0.03 --
from realized & unrealized gain
(loss) on securities 2.28 0.33 8.08 4.72 (0.17)
---------- -------- -------- -------- -------
total income (loss) from
investment operations 2.19 0.33 8.08 4.75 (0.17)
---------- -------- -------- -------- -------
- - DISTRIBUTIONS
from net investment income -- -- -- (0.02) --
from net realized gain on
securities -- (0.93) (2.03) (0.13) --
---------- -------- -------- -------- -------
total distributions -- (0.93) (2.03) (0.15) --
---------- -------- -------- -------- -------
= SHARE VALUE
AT END OF PERIOD $22.07 $19.88 $20.48 $14.43 $9.83
========== ======== ======== ======== =======
TOTAL RETURN 10.85% 1.81% 58.28% 48.61% (1.66)%
========== ======== ======== ======== =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.95% 0.96% 0.94% 1.00% 0.08%
Ratio of net investment income
(loss) to average net assets (0.46)% (0.29)% (0.07)% 0.36% 0.04%
Portfolio turnover rate 128% 122% 116% 121% 0%
Number of shares outstanding at
end of year (000's) 46,355 40,484 27,696 11,550 1,001
Net assets at end of year (000's) $1,023,141 $804,982 $567,187 $166,683 $ 9,834
Average net assets during the year
(000's) $949,947 $664,608 $363,087 $ 64,974 $ 9,918
Average commission rate paid $0.0455 $0.0393 N/A N/A N/A
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on April 29, 1994.
SMALL CAP INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, PERIOD FROM
--------------------------------------------------------------- MAY 1, 1992
1998 1997 1996 1995 1994 1993 TO MAY 31, 1992
-------- -------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $16.18 $16.25 $12.49 $11.52 $11.28 $ 9.93 $10.00(1)
-------- -------- -------- -------- -------- -------- --------
+ INCOME (LOSS)
from net investment income 0.19 0.19 0.20 0.17 0.13 0.15 0.02
from net realized & unrealized gain
(loss) on securities 3.17 0.93 4.04 0.97 0.58 1.48 (0.07)
-------- -------- -------- -------- -------- -------- --------
total income (loss) from investment
operations 3.36 1.12 4.24 1.14 0.71 1.63 (0.05)
-------- -------- -------- -------- -------- -------- --------
- - DISTRIBUTIONS
from net investment income (0.19) (0.19) (0.20) (0.17) (0.13) (0.15) (0.02)
from net realized gain on
securities (1.41) (1.00) (0.28) -- (0.34) (0.13) --
-------- -------- -------- -------- -------- -------- --------
total distributions (1.60) (1.19) (0.48) (0.17) (0.47) (0.28) (0.02)
-------- -------- -------- -------- -------- -------- --------
= SHARE VALUE
AT END OF PERIOD $17.94 $16.18 $16.25 $12.49 $11.52 $11.28 $ 9.93
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN 21.34% 7.51% 34.50% 9.98% 6.18% 16.64% (0.50)%
======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.39% 0.41% 0.41% 0.44% 0.47% 0.47% 0.04%
Ratio of net investment income to
average net assets 1.05% 1.34% 1.36% 1.44% 1.10% 1.40% 0.21%
Portfolio turnover rate 36% 42% 31% 34% 16% 20% 0%
Number of shares outstanding at end
of year (000's) 13,777 11,893 11,129 10,136 9,381 3,687 1,107
Net assets at end of year (000's) $247,183 $192,459 $180,785 $126,567 $108,050 $ 41,581 $10,989
Average net assets during the year
(000's) $227,757 $178,368 $150,448 $120,298 $70,690 $ 22,142 $10,989
Average commission rate paid $0.0162 $0.0297 N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on May 1, 1992. Bankers Trust has been the Fund's Sub-adviser
since May 1, 1992.
8
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
SOCIAL AWARENESS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
-------- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $17.90 $15.49 $13.02 $11.98 $12.12 $11.43 $11.13 $10.59
-------- --------- ------- ------- ------- ------- ------- -------
+ INCOME (LOSS)
from net investment income 0.23 0.24 0.26 0.27 0.26 0.24 0.26 0.26
from net realized & unrealized
gain (loss) on securities 5.07 4.19 3.37 1.75 (0.02) 1.22 0.30 0.54
-------- --------- ------- ------- ------- ------- ------- -------
total income from investment
operations 5.30 4.43 3.63 2.02 0.24 1.46 0.56 0.80
-------- --------- ------- ------- ------- ------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.23) (0.24) (0.25) (0.27) (0.26) (0.24) (0.26) (0.26)
from net realized gain on
securities (0.81) (1.78) (0.91) (0.71) (0.12) (0.53) -- --
-------- --------- ------- ------- ------- ------- ------- -------
total distributions (1.04) (2.02) (1.16) (0.98) (0.38) (0.77) (0.26) (0.26)
-------- --------- ------- ------- ------- ------- ------- -------
= SHARE VALUE
AT END OF PERIOD $22.16 $17.90 $15.49 $13.02 $11.98 $12.12 $11.43 $11.13
======== ========= ======= ======= ======= ======= ======= =======
TOTAL RETURN 30.34% 30.48% 28.85% 18.19% 1.97% 13.08% 5.08% 7.89%
======== ========= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.54% 0.56% 0.56% 0.58% 0.60% 0.63% 0.16% 0.44%
Ratio of net investment income to
average net assets 1.17% 1.53% 1.80% 2.22% 2.19% 2.14% 2.34% 2.66%
Portfolio turnover rate 120% 109% 117% 148% 83% 106% 203% 100%
Number of shares outstanding at
end of year (000's) 15,080 8,677 5,220 4,143 3,817 2,819 1,799 973
Net assets at end of year (000's) $334,167 $155,349 $80,887 $53,927 $45,729 $34,166 $20,570 $10,835
Average net assets during the year
(000's) $240,782 $106,139 $66,888 $47,942 $41,002 $26,920 $15,365 $ 7,959
Average commission rate paid $0.0431 $0.0400 N/A N/A N/A N/A N/A N/A
<CAPTION>
PERIOD FROM
OCTOBER 2, 1989
TO
MAY 31, 1990
---------------
<S> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $10.00(1)
---------
+ INCOME (LOSS)
from net investment income 0.20
from net realized & unrealized
gain (loss) on securities 0.59
---------
total income from investment
operations 0.79
---------
- - DISTRIBUTIONS
from net investment income (0.20)
from net realized gain on
securities --
---------
total distributions (0.20)
---------
= SHARE VALUE
AT END OF PERIOD $10.59
=========
TOTAL RETURN 8.09%
=========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.23%
Ratio of net investment income to
average net assets 2.04%
Portfolio turnover rate 95%
Number of shares outstanding at
end of year (000's) 612
Net assets at end of year (000's) $ 6,485
Average net assets during the year
(000's) $ 5,358
Average commission rate paid N/A
</TABLE>
- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on October 2, 1989.
STOCK INDEX FUND(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $26.09 $20.69 $16.81 $14.39 $14.36 $13.34 $12.60
---------- ---------- ---------- ---------- ---------- -------- --------
+ INCOME (LOSS)
from net investment income 0.40 0.39 0.39 0.37 0.35 0.34 0.32
from net realized & unrealized
gain (loss) on securities 7.44 5.57 4.26 2.45 0.12 1.20 0.74
---------- ---------- ---------- ---------- ---------- -------- --------
total income (loss) from
investment operations 7.84 5.96 4.65 2.82 0.47 1.54 1.06
---------- ---------- ---------- ---------- ---------- -------- --------
- - DISTRIBUTIONS
from net investment income (0.40) (0.39) (0.38) (0.37) (0.35) (0.34) (0.32)
from net realized gain on
securities (0.15) (0.17) (0.39) (0.03) (0.09) (0.18) --
---------- ---------- ---------- ---------- ---------- -------- --------
total distributions (0.55) (0.56) (0.77) (0.40) (0.44) (0.52) (0.32)
---------- ---------- ---------- ---------- ---------- -------- --------
= SHARE VALUE
AT END OF YEAR $33.38 $26.09 $20.69 $16.81 $14.39 $14.36 $13.34
========== ========== ========== ========== ========== ======== ========
TOTAL RETURN 30.30% 29.24% 28.17% 19.98% 3.29% 11.74% 8.57%
========== ========== ========== ========== ========== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.31% 0.34% 0.35% 0.38% 0.39% 0.43% 0.50%
Ratio of net investment income to
average net assets 1.33% 1.76% 2.05% 2.44% 2.44% 2.52% 3.12%
Portfolio turnover rate 3% 3% 3% 14% 3% 1% 45%
Number of shares outstanding at
end of year (000's) 104,334 93,687 85,117 75,451 75,494 66,224 55,598
Net assets at end of year (000's) 3,482,655 $2,444,200 $1,760,786 $1,267,992 $1,086,459 $951,200 $741,667
Average net assets during the year
(000's) $2,968,059 $2,019,826 $1,498,398 $1,140,085 $1,030,581 $836,510 $167,262
Average commission rate paid $0.0238 $0.0281 N/A N/A N/A N/A N/A
<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $11.86 $10.69 $8.90
------- ------- --------
+ INCOME (LOSS)
from net investment income 0.31 0.33 0.27
from net realized & unrealized
gain (loss) on securities 0.81 1.32 1.86
------- ------- --------
total income (loss) from
investment operations 1.12 1.65 2.13
------- ------- --------
- - DISTRIBUTIONS
from net investment income (0.31) (0.35) (0.25)
from net realized gain on
securities (0.07) (0.13) (0.09)
------- ------- --------
total distributions (0.38) (0.48) (0.34)
------- ------- --------
= SHARE VALUE
AT END OF YEAR $12.60 $11.86 $10.69
======= ======= ========
TOTAL RETURN 9.98% 15.78% 24.40%
======= ======= ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.67% 0.61% 0.78%
Ratio of net investment income to
average net assets 2.82% 3.05% 3.05%
Portfolio turnover rate 6% 8% 14%
Number of shares outstanding at
end of year (000's) 6,662 3,456 1,924
Net assets at end of year (000's) $83,970 $40,969 $20,572
Average net assets during the year
(000's) $55,147 $29,824 $14,060
Average commission rate paid N/A N/A N/A
</TABLE>
- ------------
(1) Bankers Trust has been the Fund's Sub-adviser since May 1, 1992.
9
<PAGE>
ABOUT THE SERIES COMPANY'S MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960. VALIC, as of June 30, 1998, had over $8.5 billion in assets
under management. Since May 30, 1985, VALIC has been the Investment Adviser for
the Funds that comprise the Series Company.
VALIC is a member of the American General Corporation group of companies. The
American General Corporation group of companies is a leading provider of
retirement services, life insurance, and consumer loans. Members of the American
General Corporation group of companies operate in each of the 50 states and
Canada and collectively provide financial services with activities heavily
weighted toward insurance.
As Investment Adviser, VALIC is responsible for each Fund's day to day
operations. Also, VALIC supervises the purchase and sale of Fund Investments and
performs the cash management function. For the MidCap Index Fund, the Stock
Index Fund, the Small Cap Index Fund, the Growth Fund, and the Science &
Technology Fund, VALIC employs Investment Sub-advisers who make investment
decisions for such Fund(s). However, we make investment decisions for, and are
directly responsible for the day to day management of, the Asset Allocation
Fund, the Money Market Fund, the Capital Conservation Fund, the Government
Securities Fund, the Growth & Income Fund the International Equities Fund, the
Social Awareness Fund, and the International Government Bond Fund. VALIC serves
as Investment Adviser through an Investment Advisory Agreement it enters into
with each Fund. These agreements are renewed once each year, by the Series
Company Board of Directors.
One Investment Advisory Agreement covers these Funds:
<TABLE>
<CAPTION>
Effective Date of
Fund Name Agreement
--------- -----------------
<S> <C>
Asset Allocation Fund
Money Market Fund
Capital Conservation Fund
September 7, 1990
Government Securities Fund
International Equities Fund
Social Awareness Fund
International Government Bond October 1, 1991
Fund
</TABLE>
Another Investment Advisory Agreement covers these Funds:
<TABLE>
<CAPTION>
Effective Date of
Fund Name Agreement
--------- -----------------
<S> <C>
MidCap Index Fund
Stock Index Fund May 1, 1992
Small Cap Index Fund
Growth Fund
Growth & Income Fund May 1, 1994
Science & Technology Fund
</TABLE>
For more information on these agreements, see the "Investment Adviser" section
in the Statement of Additional Information.
INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with Investment Sub-advisers, financial
service companies that specialize in certain types of investing. However, VALIC
still retains ultimate responsibility for managing the Funds. The Sub-adviser's
role is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.
The Sub-advisers are:
BANKERS TRUST COMPANY ("BANKERS TRUST")
Since May 1, 1992, Bankers Trust has been the Sub-adviser for the MidCap Index
Fund, the Stock Index Fund, and the Small Cap Index Fund. Bankers Trust first
offered investment management services in 1938 and began managing index funds in
1977. As of March 31, 1998, Bankers Trust managed $337.8 billion in assets.
Bankers Trust is entirely owned by the Bankers Trust New York Corporation, a
bank holding company. Bankers Trust is the seventh largest U.S. financial
services institution as of December 31, 1996.
T. ROWE PRICE ASSOCIATES, INC.
("T. ROWE PRICE")
Since May 1, 1994, T. Rowe Price has been the Sub-adviser for the Growth Fund
and the Science & Technology Fund. T. Rowe Price was incorporated in Maryland in
1947.
The firm, which was founded by Thomas Rowe Price, Jr. in 1937, is one of the
pioneers of the growth stock theory of investing. T. Rowe Price, one of the
nation's leading no-load fund managers, and its affiliates manage over $141
billion of assets as of June 30, 1998. Its approach to managing money is based
on proprietary research and a strict investment discipline developed over six
decades.
These financial service companies act as Investment Sub-advisers through an
agreement each entered into with VALIC. For more information on these agreements
and on these Sub-advisers, see the "Investment Sub-Advisers" section in the
Statement of Additional Information.
PORTFOLIO MANAGER
A portfolio manager is a person or team of persons VALIC, or one of its
Sub-advisers, has assigned to be primarily responsible for the day to day
management of a Fund's investments. A Fund's investments are called its
portfolio.
VALIC'S ADDRESS is
2929 Allen Parkway,
Houston, Texas 77019.
BANKERS TRUST'S PRINCIPAL
OFFICES are located at
One Bankers Trust Plaza,
130 Liberty St., 36th Floor,
New York, New York 10006.
T. ROWE PRICE'S
PRINCIPAL OFFICES
are located at
100 East Pratt Street,
Baltimore, Maryland
21202.
10
<PAGE>
- --------------------------------------------------------------------------------
HOW ADVISERS ARE PAID FOR
THEIR SERVICES
VALIC
Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments.
Here is a list of the percentages each Fund pays VALIC.
<TABLE>
<CAPTION>
Advisory Fee
Fund Name (Annual Rate)
--------- -------------
<S> <C>
Index Equity Funds
International Equities 0.35% on the first
Fund $500 million;
MidCap Index Fund 0.25% on assets
Small Cap Index Fund over
Stock Index Fund $500 million
Growth Fund 0.80%
Growth & Income Fund 0.75%
Capital Conservation Fund 0.50%
Government Securities Fund 0.50%
International Government Bond
Fund 0.50%
Science & Technology Fund 0.90%
Social Awareness Fund 0.50%
Money Market Fund 0.50%
Asset Allocation Fund* 0.50%
</TABLE>
The Investment Advisory Agreements we entered into with each Fund do not limit
how much the Funds pay in monthly expenses each year. However, we voluntarily
limit the Funds' monthly expenses as follows:
If a Fund's average monthly expenses, when annualized, are more than 2% of the
Fund's estimated average daily net assets, we will pay the difference. As a
result the Fund's yield or total return will increase. If VALIC decides to stop
voluntarily reducing a Fund's expenses, it may do so by giving 30 days' notice,
in writing, to the Series Company. To date, VALIC has not had to reduce expenses
of any Fund as a result of this 2% voluntary reduction.
For the fiscal year ended May 31, 1998, the total expenses paid by the Series
Company of each Fund's average net assets were, as a percentage, as follows:
<TABLE>
<CAPTION>
Total
Expenses
Fund Name Ratio
--------- --------
<S> <C>
International Equities Fund 0.40%
MidCap Index Fund 0.36%
Small Cap Index Fund 0.39%
Stock Index Fund 0.31%
Growth Fund 0.84%
Growth & Income Fund 0.80%
Capital Conservation Fund 0.54%
Government Securities Fund 0.54%
International Government Bond Fund 0.55%
Science & Technology Fund 0.95%
Social Awareness Fund 0.54%
Money Market Fund 0.54%
Asset Allocation Fund* 0.54%
</TABLE>
* The Asset Allocation Fund was formerly known as the Timed Opportunity Fund.
11
<PAGE>
The Sub-advisers
According to the agreements we have with the Sub-advisers, we pay them directly
out of the fee we receive from the Funds. The Funds do not pay the Sub-advisers
directly. We pay them a percentage of what is paid to us by the Funds. We and
the Sub-advisers may agree to change the amount of money we pay them. Any such
change increasing the charge would have to be approved by the Series Company
Board of Directors and by the shareholders of the Fund.
Under the Investment Sub-Advisory
Agreement we have with Bankers Trust, we pay to Bankers Trust a monthly fee
based on the respective average daily net asset values of the MidCap Index Fund
at an annual rate of 0.03% on the first $300 million and 0.02% on assets over
$300 million, the Stock Index Fund at an annual rate of 0.02% on the first $2
billion and 0.01% on assets over $2 billion and on the Small Cap Index Fund at
an annual rate of 0.03% on the first $150 million and 0.02% on assets over $150
million.
Under the Investment Sub-Advisory
Agreement we have with T. Rowe Price, we pay T. Rowe Price a monthly fee based
on the average daily net asset values of the Growth Fund at an annual rate of
0.50% on the first $500 million and 0.45% on assets over $500 million and on the
Science & Technology Fund at an annual rate of 0.60% on the first $500 million
and 0.55% on assets over $500 million.
VALIC is required to pay a minimum yearly sub-advisory fee of $50,000 for the
Small Cap Index Fund. There are no minimum yearly sub-advisory fees for the
Stock Index Fund, MidCap Index Fund, Growth Fund, Growth & Income Fund and the
Science & Technology Fund.
According to the agreements we have with the Sub-advisers, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-advisers the authority to manage these Funds and to buy and sell securities
for these Funds. We retain the responsibility for the overall management of
these Funds. The Sub-advisers may buy and sell securities for each Fund with
broker-dealers and other financial intermediaries that they select.
The Sub-advisers may place orders to buy and sell securities of these Funds with
a broker-dealer affiliated with the Sub-adviser as allowed by law. This could
include any affiliated futures commission merchants. Further, in the case of T.
Rowe Price, it may include any indirectly related broker.
The Investment Company Act of 1940 ("1940 Act") permits Sub-advisers under
certain conditions to place an order to buy or sell securities with an
affiliated broker. One of these conditions is that the commission received by
the affiliated broker can not be greater than the usual and customary broker's
commission if the sale was completed on a securities exchange. The Series
Company has adopted procedures, as required by the 1940 Act, which provide that
any commissions received by a Sub-adviser's affiliated broker are reasonable and
fair if compared to the commission received by other brokers for the same type
of securities transaction.
The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the Securities and
Exchange Commission ("SEC"). The Series Company and the Sub-advisers have
entered into a written contract, as required by the 1940 Act, to allow the
Sub-adviser's affiliate to effect these type of transactions for commissions.
The 1940 Act generally prohibits a Sub-adviser or a Sub-adviser's affiliate,
acting as principal, from engaging in securities transactions with a Fund,
without an exemptive order from the SEC.
We and the Sub-advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.
ABOUT THE BOARD OF DIRECTORS
The Series Company Board of Directors currently consists of eight members: five
are independent directors and three are VALIC employees.
The Board of Directors may change each Fund's investment objective, investment
policies and non-fundamental investment restrictions without shareholder
approval. The Board may not change any fundamental restrictions placed on the
types of investments each Fund may buy. The fundamental restrictions appear in
the Statement of Additional Information. Changes to these restrictions may be
made with shareholder approval only.
For more information on
WHAT THE SUB-ADVISERS
ARE PAID, see the
"Investment Sub-Advisers"
section in the Statement of
Additional Information.
12
<PAGE>
ABOUT THE FUNDS
- --------------------------------------------------------------------------------
GROWTH, INCOME AND STABILITY
CATEGORIES
The Funds offered in this prospectus fall into three general investment
categories: growth, income and stability.
Growth Category
The goal of a Fund in the growth category is to increase the value of your
investment over the long term by investing mostly in stocks. Stocks are a type
of investment that can increase in value over a period of years. Companies sell
stock to get the money they need to grow. These companies often keep some of
their profits to reinvest in their business. As they grow, the value of their
stock may increase. This is how the value of your investment may increase.
Series Company Growth Category includes:
Asset Allocation Fund
Growth Fund
Growth & Income Fund
International Equities Fund
MidCap Index Fund
Science & Technology Fund
Small Cap Index Fund
Social Awareness Fund
Stock Index Fund
Income Category
Unlike Funds in the growth category, where the objective is to make the Fund's
investments increase in value, Funds in the income category try to keep the
value of their investments from falling, while providing an increase in the
value of your investment through the income earned on the Fund's investments. To
meet this objective, Funds in the income category buy investments that are
expected to pay interest to the Fund on a regular basis.
Series Company Income Category includes:
Capital Conservation Fund
Government Securities Fund
International Government Bond Fund
Stability Category
Funds in the stability category provide liquidity, protection of capital and
current income through investments in high quality securities.
Series Company Stability Category includes:
Money Market Fund
ABOUT LEVEL OF RISK
The risks involved in each Fund are described in each Fund's Fact Sheet. These
risks include market risk, credit risk, interest rate risk and risk associated
with foreign securities. These risks are described in the "Types of Investments"
section in this prospectus. The money you invest in the Series Company is not
insured. And, we can't guarantee that any of the Funds will meet their
investment objectives. There's a chance you may lose money and end up with less
than you invested.
ABOUT PORTFOLIO TURNOVER
Portfolio turnover occurs when a Fund sells its investments and buys new ones.
In some Funds, high portfolio turnover occurs when these Funds sell and buy
investments as part of their investment strategy. In other Funds, like the Index
Funds discussed below, portfolio turnover is lower because the make up of the
index stays fairly constant.
High portfolio turnover may cause a fund's expenses to increase. For example, a
fund may have to pay brokerage fees and other related expenses.
13
<PAGE>
- --------------------------------------------------------------------------------
For each of the last two fiscal years the portfolio turnover rates for each of
the Funds except the Money Market Fund were as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ending
-----------------------
May 31, May 31,
1997 1998
------- -------
<S> <C> <C>
International Equities Fund 12% 9%
MidCap Index Fund 19% 26%
Small Cap Index Fund 42% 36%
Stock Index Fund 3% 3%
Growth Fund 40% 43%
Growth & Income Fund 45% 78%
Capital Conservation Fund 45% 14%
Government Securities Fund 38% 24%
International Government Bond
Fund 4% 17%
Science & Technology Fund 122% 128%
Social Awareness Fund 109% 120%
Asset Allocation Fund 103% 24%
</TABLE>
A portfolio turnover rate over 100% a year is higher than the rates of many
other mutual fund companies. A high rate increases a Fund's transaction costs
and expenses.
ABOUT FUND PERFORMANCE
From time to time the Series Company may advertise Fund performance information
such as Fund average total return and index total return. Current Fund
performance and information as to how this Fund performance information is
calculated appears in the Statement of Additional Information. Additionally,
information on separate account performance appears in your contract prospectus.
14
<PAGE>
ABOUT INDEX EQUITY FUNDS
- --------------------------------------------------------------------------------
Four of the 13 Funds in the Series Company are Index Equity Funds investing
mostly in stocks. Their investment strategy is to track the performance of a
specific index. This strategy is followed whether markets go up or down. As part
of this investment strategy, each Fund may also invest in futures contracts and
options. Because these Funds do not have a defensive investment strategy, when
the market goes down, you will bear the risk of such market decline.
Index Funds perform best over the long term. This means you should plan to keep
your money in an Index Fund for a period of years.
WHAT IS AN INDEX?
An index reflects the average performance of a particular class of securities.
Examples of indexes include large company stocks (S&P 500 Index), mid-size
company stocks (S&P MidCap 400 Index), the bond market, or stocks of companies
in specific industries. Indexes are not managed funds, and cannot be bought.
Investment advisers compare the results of the funds they manage to indexes that
are close to the investment style of the fund. Information about the Series
Company's use of Standard & Poor's Indexes is in the Statement of Additional
Information.
WHICH INDEXES DO THESE FUNDS TRY
TO TRACK?
While there are more than a hundred different indexes, the Index Funds in this
prospectus try to track four very prominent stock indexes:
The Stock Index Fund tracks the
Standard & Poor's 500 Stock Index(R)*
The Standard & Poor's 500 Stock Index(R) (S&P 500) tracks the common stock
performance of large U.S. companies in the manufacturing, utilities,
transportation, and financial industries. These companies are usually listed on
the New York Stock Exchange. It also tracks performance of common stocks sold by
foreign and smaller U.S. companies in similar industries. The smaller U.S.
companies are usually listed on the American Stock Exchange. In total, this
index tracks 500 common stocks.
This index may periodically change some of the stocks it tracks. And, different
indexes sometimes track some of the same stocks. For example, as of May 31,
1998, this Index was tracking 18 of the same stocks tracked by the Russell 2000
Index.
The MidCap Index Fund tracks the
Standard & Poor's MidCap 400(R) Index*
The Standard & Poor's MidCap 400(R) Index (S&P MidCap 400) tracks the common
stock performance of 400 medium capitalized U.S. and foreign companies that are
in the manufacturing, utilities, transportation, and financial industries. The
average market capitalization of the S&P MidCap 400 Index was $3.4 billion as of
May 31, 1998.
Standard & Poor's created this Index in 1991 to give investors an idea of how
the stocks of medium capitalized companies generally perform.
Standard & Poor's may periodically change some of the stocks in the index. And,
different indexes sometimes include some of the same stocks. For example, as of
May 31, 1998, this Index was tracking 130 of the same stocks tracked by the
Russell 2000 Index. This Index does not track the same stocks as the S&P 500
Index.
The Small Cap Index Fund tracks
The Russell 2000(R) Index**
The Russell 2000 Index is provided by The Frank Russell Company. This Index
tracks the common stock performance of 2,000 small capitalized U.S. companies in
various industries. Small capitalized means these companies have a market value
below $1 billion.
The Frank Russell Company created this Index in 1979 to give investors an idea
of how the stocks of small capitalized companies generally perform. The average
market capitalization of the Russell 2000 Index was $820 million as of May 31,
1998.
The stocks tracked by this Index are updated annually because many small
capitalized companies eventually become medium capitalized companies and some
fail.
- ------------
* "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "S&P MidCap 400(R)" are
trademarks of Standard & Poor's ("S&P"). Neither the MidCap Index Fund nor
the Stock Index Fund is sponsored, endorsed, sold or promoted by S&P, and S&P
makes no representation regarding the advisability of investment in these
Funds.
** The Russell 2000(R) Index is a trademark/service mark of the Frank Russell
Trust Company. The Small Cap Index Fund is not promoted, sponsored or
endorsed by, nor in any way affiliated with Frank Russell Company. Frank
Russell Company is not responsible for and has not reviewed the Fund or any
associated literature or publications and makes no representation or
warranty, express or implied, as to their accuracy, or completeness, or
otherwise.
INDEX FUNDS have
outperformed most mutual
funds over consecutive ten
year periods. However,
because they are managed
to track an index they will
rise and fall with the
market.
15
<PAGE>
- --------------------------------------------------------------------------------
The International Equities Fund tracks
The Morgan Stanley Capital International,
Europe, Australia and the Far East
(EAFE) Index.
The EAFE Index tracks the performance of about 1,000 common stocks of companies
in 20 foreign countries. This index provides a measure of the performance of
companies in the more developed countries in Europe, Australia and the Far East.
Morgan Stanley publishes the EAFE Index daily and, at times, may change some of
the stocks in the index.
HOW CLOSELY CAN INDEX FUNDS TRACK
THE PERFORMANCE OF THEIR INDEX?
The factors that cause a Fund to perform differently from the Index it tries to
track are called tracking differences. There is no assurance that an Index Fund
can track its index.
The coefficient of correlation (r) is an index number which shows how closely
two variables are related. If r=0 there is no tendency for one variable to
change with the other. A value of +1 means that one variable will vary exactly
with the other. Index funds try to keep their coefficient of correlation as
close to 1 as possible. As a practical matter, any coefficient above 0.95, when
measured against the comparison index, shows good tracking.
The index may remove one stock and substitute another requiring the sub-adviser
of the Fund to do the same. When a stock is sold and the new stock purchased,
the Fund incurs transaction costs. The index incurs no transaction costs.
Therefore, the portfolio manager cannot match exactly the performance of an
index.
Also, it may not be possible for a Fund to buy every stock in its index or in
the same proportions. Fund portfolio managers may rely on a statistical
selection technique to figure out, of the stocks tracked by their index, how
many and which ones to buy. Stocks are bought and sold when they are added to or
dropped from the Index. This keeps brokerage fees and other transaction costs
low. For more information, see the "Investment Strategy" sections on each Fund's
Fact Sheet.
16
<PAGE>
HOW TO READ A FUND FACT SHEET
- --------------------------------------------------------------------------------
FACT SHEET DESCRIPTION
17
<PAGE>
ASSET ALLOCATION
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal MAXIMUM RETURN
THROUGH INVESTMENT
IN A MIX OF STOCKS,
BONDS AND MONEY
MARKET SECURITIES
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: Leon A. Olver, C.F.A., who is Vice President and Investment
Officer for the Series Company is the Portfolio Manager of this Fund. Mr. Olver
was an Assistant Vice President for Pulte Financial Companies, Denver, Colorado,
from 1984 to 1991. From 1991 to 1995 Mr. Olver worked for First Heights Bank,
Houston, Texas; he was Vice President, Assistant Treasurer 1991-1994, and Vice
President, Treasurer from 1994-1995. He is also the Portfolio Manager for the
Capital Conservation Fund and Government Securities Fund.
INVESTMENT OBJECTIVE
Seeks maximum aggregate rate of return over the long-term through controlled
investment risk by adjusting its investment mix among stocks, long-term debt
securities and short-term money market securities.
INVESTMENT RISK
The Fund uses the Bankers Trust Tactical Asset Allocation Model (Model) which
allocates the Fund's assets. The Model tries to get the best return from three
types of securities. A part of that program also tries to reduce risk.
The mix of securities the Fund invests in involves market risk, credit risk,
interest rate risk and risk associated with foreign securities. For a discussion
of these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund is an asset allocation fund that attempts to maximize returns with a
mix of stocks, bonds and money market securities. We buy and sell securities for
the Fund by changing its investment mix among stocks, intermediate and long-term
bonds and money market securities. As a result, the Fund's investments may
change often. Also, the Fund can invest 100% in just one of these market
sectors.
Unlike an index fund, which tries to increase the money you invest by matching a
specific index's performance, the Asset Allocation Fund tries to perform better
than a blend of three market sectors measured by:
- - the S&P 500 Index;
- - the Merrill Lynch Corporate and
Government Master Index; and
- - the Certificate of Deposit Primary
Offering by New York City Banks,
30-Day Rate
To help us decide how to allocate the Fund's assets, we rely on the Model. The
Model analyzes many factors that affect the performance of securities that
comprise certain indexes.
Based on the Model, we intend to allocate the Fund's assets around the following
benchmarks:
<TABLE>
<S> <C>
stocks (common stock, preferred 55%
stock and convertible preferred
stock)
intermediate and long-term bonds 35%
high quality money market securities 10%
</TABLE>
The Fund has established separate sub-objectives for investments in each of the
three market sectors. Within the stock sector, the Fund seeks appreciation of
capital by selecting investments that it expects will participate in the growth
of the nation's economy. Within the bond sector, the Fund will generally seek
high current income consistent with reasonable investment risk. Within the money
market sector, the Fund seeks the highest level of current income consistent
with liquidity, stability, and preservation of capital.
As of May 31, 1998, the Fund's assets were invested as follows:
<TABLE>
<S> <C>
stocks 58.36%
intermediate and long-term bonds 32.53%
high quality money market securities 9.11%*
</TABLE>
- ------------
* After taking the contract value of futures positions into consideration. See
"Types of Investments".
Because there is no limit as to how often we may buy and sell securities for
this Fund, this can increase what is called the "portfolio turnover" rate. A
higher rate of portfolio turnover will also increase the brokerage fees and
expenses payable out of the Fund's assets. For more information about portfolio
turnover, see "About the Funds" in this prospectus.
For additional information
about THE FUND'S
INVESTMENTS see "Types
of Investments" in the
prospectus.
18
<PAGE>
ASSET ALLOCATION
FUND
Fact Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- -----------------------------------------------------------------
<S> <C>
Foreign securities up to 20%
- -----------------------------------------------------------------
Futures and options no more than 33%
- -----------------------------------------------------------------
Illiquid securities up to 10%
- -----------------------------------------------------------------
</TABLE>
*At time of purchase.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE ASSET ALLOCATION FUND*
AND THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------
21.94% 13.79% 11.21%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
* The Asset Allocation Fund was formerly known as the Timed Opportunity Fund.
For the fiscal year ended May 31, 1998, the Fund had a return of 22.48% before
subtracting expenses of 0.54%. This represents a positive tracking difference of
1.26% compared to the Fund's benchmark, a blended Index of the S&P 500 Index,
the Merrill Lynch Corporate and Government Master Index and the Certificate of
Deposit Primary Offering to New York City Banks, 30 Day Rate. Bond performance
lagged the relevant index due to one Asian holding, and stock performance
tracked the index. Over-allocation to stocks resulted in overall outperformance.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE ASSET ALLOCATION FUND*
AND THE MODEL BENCHMARK
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C>
- ----------------------------------------------------------------
1 YEAR SINCE 9/1/92**
- ----------------------------------------------------------------
21.94% 13.59%
- ----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
** Beginning September 1, 1992 we began to use the Bankers Trust Tactical Asset
Allocation Model to manage this Fund. The performance of the Fund may be
compared to a benchmark comprised of a weighted average of three market
sectors in which the Fund invests. This benchmark is described above.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
19
<PAGE>
CAPITAL CONSERVATION
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal INCOME AND POSSIBLE
GROWTH THROUGH
INVESTMENTS IN
HIGH QUALITY DEBT
SECURITIES
- -------------------------------------------------
Investment Category INCOME
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: Craig A. Mitchell is this Fund's Portfolio Manager. Mr.
Mitchell has been Vice President and Investment Officer of VALIC since February
1999. Mr. Mitchell joined American General Corporation in May 1995. From July
1992 to April 1995, Mr. Mitchell served as Assistant Portfolio Manager and,
subsequently, Portfolio Manager at Providian Corporation.
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with preservation of capital
through current income and capital gains on investments in intermediate and
long-term debt instruments and other income producing securities.
INVESTMENT RISK
The securities the Fund invests in involve certain risks, such as interest rate
risk, credit risk, market risk and risk associated with foreign securities. This
may cause the debt instruments that the Fund owns to be worth less than what the
Fund paid. For a discussion of these risks see "A Word About Risk" in this
prospectus.
INVESTMENT STRATEGY
The Fund invests in high quality bonds to provide you with the highest possible
total return from current income and capital gains while preserving your
investment. To increase the Fund's earning potential, we may use a small part of
the Fund's assets to make some higher risk investments.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Investment grade at least 75%
intermediate and long-term
corporate bonds rated at
least Baa by Moody's or
another rating organiza-
tion**, securities issued or
guaranteed by the U.S.
Government***, mortgage
backed securities, asset-
backed securities,
collateralized mortgage
obligations and high quality
money market securities
- ----------------------------------------------------
Debt securities up to 25%
rated at least B by
Moody's or another rating
organization****
Preferred or convertible
preferred stock,
Convertible debt securities
- ----------------------------------------------------
Foreign securities, mostly up to 20%
foreign bonds that are of
the same quality as other
bonds purchased by this
Fund
- ----------------------------------------------------
Common stocks***** up to 10%
- ----------------------------------------------------
Futures and options up to 33%
- ----------------------------------------------------
Illiquid securities up to 10%
- ----------------------------------------------------
*At time of purchase.
**For more information concerning ratings see
"Description of Corporate Bond Ratings" and
"Description of Commercial Paper Ratings" in
the Statement of Additional Information.
***U.S. Government securities are securities
issued or guaranteed by the U.S. Government
which are supported by (i) the full faith and
credit of the U.S. Government, (ii) the right
of the issuer to borrow from the U.S. Treasury,
(iii) the credit of the issuing government
agency or (iv) the discretionary authority of
the U.S. Government or GNMA to purchase certain
obligations of the agency. For more information
see "Government Securities Fund" in the
Statement of Additional Information.
****The Fund currently intends to limit these
investments to no more than 5% of its total
assets. For the fiscal year ended May 31, 1998
approximately 3% of the Fund's average monthly
assets were invested in securities rated below
Baa determined on a dollar-weighted basis.
*****Only stocks acquired by conversion of income-
bearing securities or by exercising warrants
attached to income-bearing securities.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
20
<PAGE>
CAPITAL CONSERVATION
FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 11.30% before
subtracting expenses of 0.54%. This represents a negative tracking difference of
1.05% from the Fund's benchmark; the Merrill Lynch Corporate Master Bond Index.
The Fund was impacted by the weak performance of two Asian holdings and the
uncertainty surrounding Columbia Healthcare.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE CAPITAL CONSERVATION FUND AND
THE MERRILL LYNCH CORPORATE MASTER INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------
10.76% 6.41% 7.95%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
21
<PAGE>
GOVERNMENT
SECURITIES FUND
Fact Sheet
- -------------------------------------------------
Investment Goal INCOME AND POSSIBLE
GROWTH THROUGH
INVESTMENTS IN
INTERMEDIATE & LONG-
TERM GOVERNMENT
DEBT SECURITIES
- -------------------------------------------------
Investment Category INCOME
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: Leon A. Olver, C.F.A., Vice President and Investment Officer
for the Series Company, is this Fund's Portfolio Manager. Mr. Olver was an
Assistant Vice President for Pulte Financial Companies, Denver, Colorado from
1984 to 1991. From 1991 to 1995 Mr. Olver worked for First Heights Bank,
Houston, Texas; he was Vice President, Assistant Treasurer 1991-1994; and Vice
President, Treasurer from 1994 to 1995. He is also the Portfolio Manager for the
Capital Conservation Fund and the Asset Allocation Fund.
INVESTMENT OBJECTIVE
Seeks high current income and protection of capital through investments in
intermediate and long-term U.S. Government debt securities.
INVESTMENT RISK
The securities the Fund invests in involve certain risks, including interest
rate risk, credit risk and risk associated with foreign securities. This may
cause the debt instruments that the Fund owns to be worth less than what the
Fund paid. For a discussion of these risks see "A Word About Risk" in this
prospectus.
INVESTMENT STRATEGY
The Fund primarily invests in intermediate and long term U.S. Government and
government sponsored investments. The Fund may also use up to 20% of its assets
to make high quality foreign investments payable in U.S. dollars.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Debt securities issued or at least 80%
guaranteed by the U.S.
Government**, asset-
backed securities, high
quality domestic money
market securities
- ----------------------------------------------------
Mortgage-backed securities up to 25%
- ----------------------------------------------------
High quality foreign up to 20%
government securities and
high quality foreign money
market securities payable in
U.S. dollars
- ----------------------------------------------------
Futures and options up to 33%
Listed and unlisted call
and put options on
securities, stock indices
and currencies
- ----------------------------------------------------
Illiquid securities up to 10%
- ----------------------------------------------------
*At time of purchase.
**U.S. Government securities are securities issued
or guaranteed by the U.S. Government and which are
supported by (i) the full faith and credit of the
U.S. Government, (ii) the right of the issuer to
borrow from the U.S. Treasury, (iii) the credit of
the issuing government agency, or (iv) the
discretionary authority of the U.S. Government or
GNMA to purchase certain obligations of the
agency. For more information see "Government
Securities Fund" in the Statement of Additional
Information.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
22
<PAGE>
GOVERNMENT
SECURITIES FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 11.14% before
subtracting expenses of 0.54%. This represents a negative tracking difference of
0.08% from the Fund's benchmark, the Lehman Brothers U.S. Treasury Composite
Index. Positions in callable agency notes and collateralized mortgage
obligations marginally lowered the Fund's yield.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE GOVERNMENT SECURITIES FUND AND
THE LEHMAN BROTHERS U.S. TREASURY COMPOSITE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------
10.60% 6.04% 7.96%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
23
<PAGE>
GROWTH FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS IN
SERVICE SECTOR
COMPANIES
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
T. Rowe Price
PORTFOLIO MANAGER: This Fund is managed by an Investment Advisory Committee
chaired by John H. Laporte. He has been chairman of this committee since it was
started in 1994. Mr. Laporte joined T. Rowe Price in 1976 and has been managing
investments since 1984.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth of capital through investment primarily in
common stocks of U.S. growth companies engaged in service-related activities.
INVESTMENT RISK
This Fund invests in many companies that are small and/or new. These companies
face special risks because they may not have the financial strength to do well
during difficult times. The securities that the Fund invests in involve certain
risks, such as market risk, and risk associated with foreign securities. For a
discussion of these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests primarily in U.S. companies that are in the services industry.
Examples include: consumer services (retailing, entertainment/leisure, media
communications, restaurants/food
distribution) business services (healthcare, computer services), and financial
services (insurance, investment service). We believe if service companies
outpace overall economic growth, their stocks could generate above-average
returns. Currently, over 50% of the U.S. economy is made up of service
companies.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Common stocks and at least 75%
related securities, bonds,
preferred stock, convertible
stock of service industry
companies
- ----------------------------------------------------
Foreign securities up to 15%
- ----------------------------------------------------
Equity securities sold by up to 25%
non-service related
companies
- ----------------------------------------------------
Illiquid securities up to 15%
- ----------------------------------------------------
Futures and options up to 25%
- ----------------------------------------------------
High quality money market up to 100%
securities**
- ----------------------------------------------------
* At time of purchase.
** If, for temporary defensive reasons, we invest
35% or more of the Fund's assets in money market
securities, it is likely 25% or more of the
Fund's assets will be invested in securities of
the banking industry. This type of concentration
in a single industry may increase the general
level of risk to the Fund.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS
is provided under
"Types of Investments".
24
<PAGE>
GROWTH FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 28.25% before
subtracting expenses of 0.84%. This return represented a negative tracking
difference of 2.43% compared to the Fund's benchmark, the S&P 500 Index. The
Fund's focus on non-cyclical growth companies in service businesses, a strategy
that performs well in a slow growth economy, was not in favor as a surprisingly
strong economy drove favorable earnings reports in most industries.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE GROWTH FUND AND THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C>
- ----------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- ----------------------------------------------------------------
27.41% 23.26%
- ----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the
annuity contract for mortality and expense guarantees, administrative fees or
surrender charges.
25
<PAGE>
GROWTH & INCOME
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH AND INCOME
THROUGH INVESTMENTS
IN STOCKS OR
SECURITIES CONVERTIBLE
INTO STOCKS
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: Paul Green is manager of the Fund. Mr. Green has been Vice
President and Investment Officer of VALIC since February 1999. Previously, Mr.
Green was with BARRA Consulting, Inc. since July 1993.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth of capital and, secondarily, current income
through investment in common stocks and equity-related securities.
INVESTMENT RISK
This Fund invests almost entirely in stocks. Stock values can rise and fall over
both short and long periods of time. However, we believe that our investment
strategy helps us to manage the risks the Fund is subject to such as market
risk, credit risk, interest rate risk and risk associated with foreign
securities. For a discussion of market risk, credit risk, interest rate risk and
risk associated with foreign securities, see "A Word About Risk" in this
prospectus.
INVESTMENT STRATEGY
The Fund invests in stocks that provide long-term growth potential. As a
secondary goal, the Fund invests in securities that will provide current income.
We use a top-down, highly disciplined investment process. A universe of
potential investment candidates is developed and then tested through various
filters to determine the appropriate mix for achieving the desired returns while
limiting variation relative to the market. The portfolio will usually consist of
a diversified selection of large capitalization stocks with a tendency toward
lower price/earnings multiples.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Common stocks and equity generally 90-95%
related securities
bonds, preferred stock,
convertible stock and
warrants
- ----------------------------------------------------
Futures and options up to 25%
- ----------------------------------------------------
Foreign securities up to 20%
- ----------------------------------------------------
Illiquid securities up to 15%
- ----------------------------------------------------
High quality money market up to 100%
securities**
- ----------------------------------------------------
*At time of purchase.
**For temporary defensive reasons, we may invest up
to 100% of the Fund's assets in fixed income
securities such as U.S. Government securities,
bonds, commercial paper, repurchase agreements and
cash equivalents. We may do this when we think
economic and market conditions make it too risky
for us to follow our general guidelines.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
26
<PAGE>
GROWTH & INCOME
FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 20.67% before
subtracting expenses of 0.80%. This return represented a negative tracking
difference of 10.01% compared to the Fund's benchmark, the S&P 500 Index. Large
capitalization stocks have led this market advance, with small and midcap stocks
lagging. This disparate performance impacted the Fund negatively as the small
and midcap stocks are well represented in the Value Line Timeliness Ranking
System. The Fund is managed using that system.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE GROWTH & INCOME FUND AND
THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C>
- ----------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- ----------------------------------------------------------------
19.87% 20.19%
- ----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
27
<PAGE>
INTERNATIONAL EQUITIES
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS TRACKING
THE EAFE INDEX
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: This Fund attempts to track the performance of the EAFE
Index. William Trimbur, Jr. has been this Fund's Portfolio Manager since 1992.
He has been Vice President and Investment Officer for the Series Company since
1987. Mr. Trimbur is also the Portfolio Manager for the International Government
Bond Fund and the Social Awareness Fund.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth of capital through investments primarily in a
diversified portfolio of equity and equity related securities of foreign issuers
that, as a group, are expected to provide investment results closely
corresponding to the performance of the EAFE Index.
INVESTMENT RISK
As described in the Investment Strategy section below, this Fund invests almost
all its assets in foreign securities, which have risks that U.S. investments do
not have. For a further explanation of the risks associated with foreign
securities and market risk, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a sampling of about 100 foreign stocks of companies that are
either in the EAFE Index or are similar to stocks in the EAFE Index. These
stocks, as a group, should reflect EAFE's performance. Since it may not be
possible for this Fund to buy every stock included in this index or in the same
proportions, we buy as many stocks as are needed to closely track the
performance of the EAFE Index.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Stocks in the EAFE Index at least 65%**
- ----------------------------------------------------
Other investments not in no more than 35%
EAFE Index
Foreign equity and
related securities
including common
stocks, convertible
stocks, preferred stocks
and warrants
- ----------------------------------------------------
Futures and options no more than 33%
Covered put and call
options on foreign
currencies
Listed and unlisted put
and call options on
currency futures
Listed and unlisted
foreign currency
contracts
- ----------------------------------------------------
High quality foreign and up to 100%
domestic money market
securities**
- ----------------------------------------------------
Illiquid securities no more than 10%
- ----------------------------------------------------
*At time of purchase.
**It is possible we may invest up to 100% of the
Fund's assets in short term, high quality, foreign
and domestic money market securities when we think
economic, political and market conditions in
foreign countries make it too risky to follow our
general guidelines.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
28
<PAGE>
INTERNATIONAL EQUITIES
FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 10.32% before
subtracting expenses of 0.40%. This return represented a negative tracking
difference of 0.79% compared to the EAFE Index. The underperformance resulted
from low exposure to smaller capitalization stocks which did well in early 1998.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL EQUITIES FUND AND
THE EAFE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION*
- -----------------------------------------------------------------
9.92% 9.56% 5.04%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
29
<PAGE>
INTERNATIONAL
GOVERNMENT BOND
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal INCOME AND POSSIBLE
GROWTH THROUGH
INVESTMENTS IN HIGH
QUALITY FOREIGN
GOVERNMENT DEBT
SECURITIES
- -------------------------------------------------
Investment Category INCOME
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: William Trimbur, Jr. has been this Fund's Portfolio Manager
since the Fund was started in 1991. He has been Vice President and Investment
Officer for the American General Series Portfolio Company since 1987. Mr.
Trimbur is also the Portfolio Manager for the International Equities Fund and
the Social Awareness Fund.
INVESTMENT OBJECTIVE
Seeks high current income through investments primarily in high quality debt
securities issued or guaranteed by foreign governments.
INVESTMENT RISK
This Fund invests mostly in bonds that are issued by foreign governments.
Although these governments promise to pay the principal and interest due on
their bonds, it is still possible you may not get back all the money you invest.
For a discussion of the risks associated with foreign securities, credit risk,
and interest rate risk see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund aims to give you foreign investment opportunities primarily in high
quality government and government sponsored debt securities. Since the Fund
expects to concentrate in certain foreign government securities, it is
classified as a "non-diversified" investment company. Also, the Fund attempts to
have all of its investments payable in foreign currencies. The Fund may also
convert its cash to foreign currency. To help us choose which countries to
invest in we rely, in part, on the Salomon Brothers Non-U.S. Dollar World
Government Bond Index (Salomon Index).
The Salomon Index is a widely used, international government bond index. It
tracks the performance of government bonds sold in Austria, Australia, Belgium,
Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden,
and the United Kingdom. In addition, the Fund may invest in securities in other
countries, provided such securities are payable in the currencies of the
countries in the Salomon Index. We do not try to copy this index's performance.
Rather, we use it as a guide.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
High quality debt securities at least 65%
issued or guaranteed by
foreign governments
- ----------------------------------------------------
Other high quality debt no more than 35%
securities, including
Foreign corporate debt
and foreign money
market securities
sold in the countries
listed above
High quality domestic
money market
securities and debt
obligations issued or
guaranteed by the
U.S. Government
Foreign currency
exchange transactions
- ----------------------------------------------------
Futures and options no more than 33%
Covered put and
call options on
foreign currencies
Listed put and
call options on
currencies
Listed and
unlisted foreign
currency futures
contracts
- ----------------------------------------------------
Illiquid securities up to 10%
- ----------------------------------------------------
*At time of purchase.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
30
<PAGE>
INTERNATIONAL
GOVERNMENT BOND
FUND
Fact Sheet
- --------------------------------------------------------------------------------
For temporary defensive reasons, we may invest up to 100% of the Fund's assets
in short term, high quality US money market securities, and US Government debt
securities. We may do this when we think economic, political or market
conditions in foreign countries make it too risky to follow our general
guidelines.
For the fiscal year ended May 31, 1998, the Fund had a return of 3.20% before
subtracting expenses of 0.55%. This represents a positive tracking difference of
0.82% compared to its benchmark, the Salomon Brothers Non-U.S. Dollar World
Government Bond Index. The yield was reduced by the strong dollar versus all
currencies in which the Fund is invested.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL GOVERNMENT BOND FUND
AND THE SALOMON INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION*
- -----------------------------------------------------------------
2.65% 5.44% 7.61%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the
annuity contract for mortality and expense guarantees, administrative fees or
surrender charges.
31
<PAGE>
MIDCAP INDEX FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS TRACKING
THE S&P 400 MIDCAP
INDEX
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Bankers Trust
INVESTMENT OBJECTIVE
Seeks to provide growth of capital through investments primarily in a
diversified portfolio of common stocks that, as a group, are expected to provide
investment results closely corresponding to the performance of the S&P MidCap
400 Index.
INVESTMENT RISK
The S&P MidCap 400 Index includes the stocks of many medium sized companies.
These companies usually do not have as much financial strength as very large
companies and so may not be able to do as well in difficult times. However,
because they are medium sized, they have more potential to grow, which means the
value of their stock may increase. The S&P MidCap 400 Index also includes stocks
of certain medium sized foreign companies. These stocks can be more risky than
large company stocks. An index fund holding nearly all of the 400 stocks in the
S&P MidCap 400 Index avoids the risk of individual stock selection and seeks to
provide the return of the medium-sized company sector of the market. On average
that return has been positive over many years but can be negative at certain
times. There is no assurance that a positive return will occur in the future.
Because this Fund invests in many of the stocks tracked by this Index, your
investment will experience similar changes in value and share similar risks such
as market risk and risk associated with foreign securities. For more information
about market risk and risk associated with foreign securities, see "A Word About
Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a sampling of stocks in the index that, as a group, should
reflect its performance. The stocks of the S&P 400 MidCap Index to be included
in the Fund will be selected utilizing a statistical sampling technique known as
"optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental character-istics
(e.g. price-to-book, price-to-earnings, debt-to-asset ratios and dividend
yields) closely approximate those of the S&P 400 MidCap Index. The stocks held
by the Fund are weighted to make the Fund's aggregate investment characteristics
similar to those of the Index as a whole. Since it may not be possible for this
Fund to buy every stock included on this index or in the same proportions, we
rely on the aforementioned statistical technique to figure out, of the stocks
tracked by the index, how many and which ones to buy.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Stocks in the S&P MidCap at least 65%
400 Index
- ----------------------------------------------------
Foreign stocks (listed and no more than 20%
over-the-counter) in the
S&P MidCap 400 Index
- ----------------------------------------------------
Futures and options no more than 33%
- ----------------------------------------------------
Investments not in the S&P no more than 35%
MidCap 400 Index
Common stock and
related securities
High quality money
market securities
Illiquid securities
- ----------------------------------------------------
*At time of purchase.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
32
<PAGE>
MIDCAP INDEX FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 29.98%, before
subtracting expenses of 0.36%. This represented a positive tracking difference
of 0.11% compared to the S&P MidCap 400 Index. The close tracking was the result
of low cost trading techniques, and the use of futures to maintain a fully
invested position.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MIDCAP INDEX FUND AND
THE S&P MIDCAP 400 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE 10/1/91*
- -----------------------------------------------------------------
29.62% 17.99% 17.61%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
* Effective October 1, 1991, the Fund's name was changed
from the Capital Accumulation Fund to the MidCap Index
Fund. Additionally, the investment objectives and
investment program for the Fund were changed.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
33
<PAGE>
MONEY MARKET FUND
Fact Sheet
- -------------------------------------------------
Investment Goal INCOME THROUGH
INVESTMENT IN SHORT-
TERM MONEY MARKET
SECURITIES
- -------------------------------------------------
Investment Category STABILITY
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: Teresa Moro has been this Fund's Portfolio Manager and Vice
President and Investment Officer for the Series Company since 1991. From 1986 to
1991, Ms. Moro was an Assistant Vice President and Money Market Trader for the
Fund.
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments.
INVESTMENT RISK
The short-term money market securities that this Fund invests in are high
quality investments, posing low credit and interest rate risk. The current yield
of the Fund will generally go up or down with changes in the level of interest
rates. The Fund uses the amortized cost method to value its portfolio securities
and tries to keep its net asset value at $1.00 per share. There can be no
assurance that the net asset value will be $1.00 per share at all times.
Because the risk to the money you invest is low, the potential for profit is
also low. The Fund may experience risks including interest rate risk, market
risk, credit risk and risk associated with foreign securities. For a discussion
of these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. We use 95% of the
Fund's assets to buy short-term securities that are rated within the highest
rating category for short term debt obligations by at least two nationally
recognized rating services or unrated securities of comparable investment
quality. These eligible securities must mature in 13 months or less and the Fund
must have a dollar-weighted average portfolio maturity of 90 days or less. These
practices are designed to minimize any fluctuation in the value of the Fund's
portfolio.
The investments this Fund may buy include:
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements
- - Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)
- - Asset-backed securities
- - Loan participations
- - Adjustable rate securities
- - Variable rate demand notes
- - Illiquid securities*
- ------------
*limited to 10% of the Fund's net assets
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
34
<PAGE>
MONEY MARKET FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 5.79%, before
subtracting expenses of 0.54%. This return represented a positive tracking
difference of 0.98% compared to the 30-Day Certificate of Deposit Primary
Offering Rate by New York City Banks.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MONEY MARKET FUND
AND THE NYC 30 DAY CD RATE
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------
5.25% 4.65% 5.45%
- -----------------------------------------------------------------
</TABLE>
[CHART]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
35
<PAGE>
SCIENCE &
TECHNOLOGY FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS IN
STOCKS OF COMPANIES
WHICH BENEFIT FROM
DEVELOPMENT OF
SCIENCE AND
TECHNOLOGY
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
T. Rowe Price
PORTFOLIO MANAGER: This Fund is managed by an Investment Advisory Committee
chaired by Charles A. Morris. He has been chairman of this committee since it
was started in 1994. Mr. Morris joined T. Rowe Price in 1987 as an investment
analyst. He has been managing investments since 1991.
INVESTMENT OBJECTIVE
Seeks long-term growth of capital through investment primarily in the common
stocks and equity-related securities of companies that are expected to benefit
from the development, advancement and use of science and technology.
INVESTMENT RISK
The Science & Technology Fund invests in many small and/or new companies that
develop and sell new products or services. These products or services may fail
or become quickly outdated. Also, small and new companies have limited product
lines and do not always have the financial strength to do well in difficult
times. Because these companies are small, their stock prices will go up and down
over the short-term, but may have greater growth potential.
The securities the Fund invests in involve certain risks, including market risk
and risk associated with foreign securities. For a discussion of these risks,
see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in companies that are expected to benefit from scientific
breakthroughs and advancements in technology. We believe that stocks of
companies that develop products using new technology or benefit from this
technology may greatly increase in value. These companies are in the following
industries: computer, pharmaceutical, defense, telecommunications and
electronics.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Common stocks of science at least 65%
and technology companies
- ----------------------------------------------------
Other equity-related up to 25%
securities of science and
technology companies
including convertible debt
securities, convertible
preferred stock
- ----------------------------------------------------
Foreign securities up to 30%
- ----------------------------------------------------
Illiquid securities up to 15%
- ----------------------------------------------------
Futures and options up to 25%
- ----------------------------------------------------
High quality money market up to 100%
securities**
- ----------------------------------------------------
</TABLE>
* At time of purchase.
** For temporary defensive reasons, we may
invest up to 100% of the Fund's assets in cash and cash equivalents. We may
do this when we think economic and market conditions make it too risky for us
to follow our general guidelines.
Additional information
about THE FUND'S
INVESTMENTS
is provided under
"Types of Investments".
36
<PAGE>
SCIENCE &
TECHNOLOGY FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 11.80% before
subtracting expenses of 0.95%. This represents a negative tracking difference of
18.88% compared to the Fund's benchmark, the S&P 500 Index. The market
performance for large capitalization stocks caused much of the negative tracking
as the Fund tends to hold significant amounts of small and midcap stocks. A
number of valuation compressions due to volatile market conditions, also weighed
on results.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SCIENCE & TECHNOLOGY FUND
AND THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C>
- ----------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- ----------------------------------------------------------------
10.85% 26.44%
- ----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
37
<PAGE>
SMALL CAP INDEX
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS TRACKING
THE RUSSELL 2000
INDEX
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Bankers Trust
INVESTMENT OBJECTIVE
Seeks to provide growth of capital through investment primarily in a diversified
portfolio of common stocks that, as a group, are expected to provide investment
results closely corresponding to the performance of the Russell 2000 Index.
INVESTMENT RISK
The Russell 2000 Index includes many small U.S. companies. Some of these
companies often do not have the financial strength needed to do well in
difficult times. Also, they often sell limited numbers of products, which can
make it harder for them to compete with medium and large companies. However,
because they are small, their stock prices may fluctuate more over the short-
term, but they have more potential to grow. This means their stock value may
offer greater potential for appreciation. An index fund holding a large sampling
of the 2,000 stocks in the Russell 2000 Index avoids the risks of individual
stock selection and seeks to provide the return of the smaller-sized company
sector of the market. On average that return has been positive over the years
but has been negative at certain times. There is no assurance that a positive
return will occur in the future.
Because this Fund invests in many of the stocks tracked by this Index, your
investment will experience similar changes in value and share similar risks such
as market risk and risk associated with foreign securities. For more information
about market risk and risk associated with foreign securities, see "A Word About
Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a sampling of stocks in the index that, as a group, should
reflect its performance. The stocks of the Russell 2000 Index to be included in
the Fund will be selected utilizing a statistical sampling technique known as
"optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and
dividend yields) closely approximate those of the Russell 2000 Index. The stocks
held by the Fund are weighted to make the Fund's aggregate investment
characteristics similar to those of the Index as a whole. Since it may not be
possible for this Fund to buy every stock included on this index or in the same
proportions, we rely on the aforementioned statistical technique to figure out,
of the stocks tracked by the index, how many and which ones to buy.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Stocks in the Russell 2000 at least 65%
Index
- ----------------------------------------------------
Foreign stocks (listed and no more than 20%
over-the-counter) in the
Russell 2000 Index
- ----------------------------------------------------
Futures and options no more than 33%
- ----------------------------------------------------
Investments not in the no more than 35%
Russell 2000 Index
Common stock and
related securities
High quality money
market securities
Illiquid securities
- ----------------------------------------------------
*At time of purchase.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
38
<PAGE>
SMALL CAP INDEX
FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 21.73%, before
subtracting expenses of 0.39%. This represented a positive tracking difference
of 0.48% compared to the Russell 2000 Index. The Fund uses futures to maintain a
fully invested position to track its index but incurs fees and charges to
acquire securities which created a variance from the index.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SMALL CAP INDEX FUND AND
THE RUSSELL 2000 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION*
- -----------------------------------------------------------------
21.34% 15.43% 15.31%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the
annuity contract for mortality and expense guarantees, administrative fees or
surrender charges.
39
<PAGE>
SOCIAL AWARENESS
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS IN
STOCKS OF COMPANIES
MEETING SOCIAL
CRITERIA OF THE FUND
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER: Maruti D. More is this Fund's Portfolio Manager. Mr. More has
been Vice President -- Investments of the Series Company since July 1998. Since
April 1998, Mr. More serves as Vice President of The Variable Annuity Life
Insurance Company and American General Investment Management, L.P. From 1993 to
1995, Mr. More was Managing Director, Marketable Securities at Paul Revere
Investment Management Corporation.
INVESTMENT OBJECTIVE
Seeks to obtain growth of capital through investment, primarily in common
stocks, in companies which meet the social criteria established for the Fund.
The Fund invests only in companies which meet its social criteria. The Fund does
not invest in companies that:
- - produce nuclear energy;
- - make military weapons or delivery systems; or
- - engage continuously in practices or produce products that significantly
pollute the environment (such products include tobacco products).
INVESTMENT RISK
Most of the companies this Fund invests in are included in the S&P 500 Index.
This Fund's degree of market risk is slightly greater than the Stock Index
Fund's degree of risk. This is because its investments are more limited by its
investment objective. This Fund may also experience market risk, and risks
associated with foreign securities. For a discussion of these risks see the
Stock Index Fund's Fact Sheet and "A Word About Risk" in this prospectus.
If a company stops meeting the Fund's social criteria after the Fund invested in
it, the Fund will sell these investments even if this means the Fund loses
money. Also, if the Fund changes its social criteria and the companies the Fund
has already invested in no longer qualify, the Fund will sell these investments
even if this means the Fund loses money. Social criteria screening will limit
the availability of investment opportunities for the Fund more than for funds
having no such criteria.
INVESTMENT STRATEGY
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Common stocks of companies at least 80%
meeting Fund's social criteria
- ----------------------------------------------------
Other types of securities of up to 20%
companies meeting social
criteria including
Foreign securities
Preferred stock
Convertible securities
High quality money market
securities and warrants
- ----------------------------------------------------
Futures and options up to 33%
- ----------------------------------------------------
Illiquid securities up to 10%
- ----------------------------------------------------
*At time of purchase.
</TABLE>
To find out which companies meet the Fund's social criteria, we rely on industry
classifications, research services such as the Investor Responsibility Research
Center (IRRC), and special magazines and papers that publish this type of
information.
Since our definition of social criteria is not "fundamental," the Series
Company's Board of Directors may change it without shareholder approval. When
deciding to make changes to the criteria, the Board will consider, among other
things, new or revised state laws that govern or affect the investments of
public funds. At least once a year, we survey state laws on this issue to look
for any new developments. If our survey shows that at least 20 states have
adopted laws that restrict public funds from being invested in a clearly
definable category of investments, this category is automatically added to our
social criteria list.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
40
<PAGE>
SOCIAL AWARENESS
FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 30.88% before
subtracting expenses of 0.54%. This resulted in a positive tracking difference
of 0.20% compared to the Fund's benchmark, the S&P 500 Index. Concentration on
the larger capitalization growth sectors and avoidance of the volatile tobacco
industry aided performance.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SOCIAL AWARENESS FUND
AND THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION*
- -----------------------------------------------------------------
30.34% 21.44% 16.16%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
41
<PAGE>
STOCK INDEX FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS TRACKING
THE S&P 500 INDEX
- -------------------------------------------------
Investment Category GROWTH
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Bankers Trust
INVESTMENT OBJECTIVE
Seeks long-term capital growth through investment in common stocks that, as a
group, are expected to provide investment results closely corresponding to the
performance of the S&P 500 Index.
INVESTMENT RISK
The S&P 500 Index includes the stocks of many large, well-established companies.
These companies usually have the financial strength to weather difficult
financial times. However, the value of any stock can rise and fall over short
and long periods of time. This Fund which holds nearly all of the 500 stocks in
the S&P 500 Index avoids the risk of individual stock selection and seeks to
provide the return of the large company sector of the market. In the past that
return has been positive over many years but can be negative at certain times.
There is no assurance that a positive return will occur in the future.
Because the Fund invests in many of the stocks tracked by this Index, your
investment will experience similar changes in value and share similar risks,
such as market risk and risk associated with foreign securities. For more
information about market risk and risk associated with foreign securities, see
"A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a sampling of stocks in the index that, as a group, should
reflect its performance. The stocks of the S&P 500 Index to be included in the
Fund will be selected utilizing a statistical sampling technique known as
"optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and
dividend yields) closely approximate those of the S&P 500 Index. The stocks held
by the Fund are weighted to make the Fund's aggregate investment characteristics
similar to those of the Index as a whole. Since it may not be possible for this
Fund to buy every stock included on this index or in the same proportions, we
rely on the aforementioned statistical technique to figure out, of the stocks
tracked by the index, how many and which ones to buy.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Stocks in the S&P 500 at least 65%
Index
- ----------------------------------------------------
Foreign stocks (listed and no more than 20%
over-the-counter) in the
S&P 500 Index
- ----------------------------------------------------
Futures and options no more than 33%
- ----------------------------------------------------
Investments not in the S&P no more than 35%
500 Index
Common stock and
related securities
High quality money
market securities
Illiquid securities
- ----------------------------------------------------
*At time of purchase.
</TABLE>
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments".
42
<PAGE>
STOCK INDEX FUND
Fact Sheet
- --------------------------------------------------------------------------------
For the fiscal year ended May 31, 1998, the Fund had a return of 30.61%, before
subtracting expenses of 0.31%. This return represented a negative tracking
difference of 0.07% compared to the S&P 500 Index(C). A combination of careful
purchasing of securities, low cost trading techniques, and the use of futures to
maintain a fully invested position resulted in the close tracking of the Index.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE STOCK INDEX FUND AND THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------
30.30% 21.75% 17.79%
- -----------------------------------------------------------------
</TABLE>
[CHART]
FISCAL YEAR ENDED MAY 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses. The
Fund returns do not reflect charges included in the annuity contract for
mortality and expense guarantees, administrative fees or surrender charges.
43
<PAGE>
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
STOCKS -- also called equity securities
If you own a share of stock, you own a part of the company that issued it.
Companies sell stock to get the money they need to grow.
There are three types of stocks:
Common stock -- Each share of common stock represents a part of the ownership of
the company. The holder of common stock participates in the growth of the
company through increasing stock price and receipt of dividends. If the company
runs into difficulty, the stock price can decline and dividends may not be paid.
Preferred stock -- Each share of preferred stock allows the holder to get a set
dividend before the common stock shareholders receive any dividends on their
shares.
Convertible preferred stock -- A stock with a set dividend which the holder may
exchange for a certain amount of common stock.
All of the Funds except the Money Market Fund in this prospectus may invest in
common, preferred, and convertible preferred stock in accordance with their
investment strategies.
BONDS -- also called debt securities
Bonds are sold by governments on the local, state, and federal levels, and by
companies. There are many different kinds of bonds. For example, each bond issue
has specific terms. U.S. Government bonds are guaranteed to pay interest and
principal by the federal government. Revenue bonds are usually only paid from
the revenue of the issuer. An example of that would be an airport revenue bond.
Debentures are a very common type of corporate bond (a bond sold by a company).
Payment of interest and return of principal is subject to the company's ability
to pay. Convertible bonds are corporate bonds that can be exchanged for stock.
The types of bonds the Funds may invest in are as follows: U.S. Government bonds
and investment grade corporate bonds (the Capital Conservation Fund may also
invest in below investment grade bonds). For a description of investment grade
bonds see "A Word about Risk -- Market Risk" in this prospectus.
Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short term (generally less than 12 months), intermediate (one to
10 years), and long term (10 years or more).
Commercial paper is a specific type of corporate or short term note. In fact,
it's very short term, being paid in less than 270 days. Most commercial paper
matures in 50 days or less.
Bonds rated Ba or B by Moody's Investors Services, Inc. (generally known as
lower-medium and lower-quality bonds) are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and principal
in accordance with the terms of the obligation. While such bonds will likely
have some quality and protective characteristics, these are outweighed by
uncertainties or risk exposures to adverse conditions. Lower-medium and
lower-quality bonds may be more susceptible to real or perceived adverse
economic and individual corporate developments than would investment grade
bonds.
For example, a projected economic downturn or the possibility of an increase in
interest rates could cause a decline in high-yield, high-risk bond prices
because such an event might lessen the ability of highly leveraged high yield
issuers to meet their principal and interest payment obligations, meet projected
business goals, or obtain additional financing. In addition, the secondary
trading market for lower-medium and lower-quality bonds may be less liquid than
the market for investment grade bonds. This potential lack of liquidity may make
it more difficult to accurately value certain of these lower-grade portfolio
securities.
Asset-Backed Securities
Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders.
All of the Funds in this prospectus may invest in asset-backed securities.
Examples of assets supporting asset-backed securities include credit card
receivables, retail installment loans, home equity loans, auto loans, and
manufactured housing loans.
Loan Participations
A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
All the Funds in this prospectus may invest in loan participations.
ISSUED means the
Company (ISSUER) sold it
originally to the public.
For more information about
BONDS AND RATINGS OF
BONDS, see the Statement
of Additional Information.
For more information about
ASSET-BACKED SECURITIES
see the Statement of
Additional Information.
For more information about
LOAN PARTICIPATIONS see
the Statement of Additional
Information.
44
<PAGE>
- --------------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities.
Mortgage Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property.
Payments of interest and principal on these securities are generally made
monthly, in effect "passing through" monthly payments made by the individual
borrowers on the mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities). Mortgage-related securities are
subject to interest rate risk and prepayment risk.
Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (i.e.,
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, private mortgage insurance companies and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity. CMOs that are issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities will be considered U.S. Government securities
by the Funds, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Fund's diversification tests.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities is relatively small compared to
the market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related or asset-backed securities.
Mortgage-Related Securities include mortgage pass-through securities described
above and securities that directly or indirectly represent a participation in,
or are secured by and payable from, mortgage loans on real property, such as
mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities.
These securities may be structured in classes with rights to receive varying
proportions of principal and interest.
ILLIQUID SECURITIES
An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities.
A restricted security is one that has not been registered with the SEC and,
therefore, cannot be sold in the public market. Securities eligible for sale
under Rule 144A and commercial paper offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, are not deemed by VALIC or the Sub-adviser
to be illiquid solely by reason of being restricted. Instead, VALIC or the
sub-adviser will determine whether such securities are liquid based on trading
markets and pursuant to guidelines adopted by the Series Company's Board of
Directors. If VALIC or the Sub-adviser concludes that a security is not liquid,
that investment will be included within the Fund's limitation on illiquid
securities.
All the Funds may buy illiquid securities, but are restricted as to how much
money they may invest in them. See "Limitations" below.
FOREIGN SECURITIES
All of the funds may invest in securities of foreign issuers. Such foreign
securities may be denominated in foreign currencies, except with respect to the
Government Securities Fund and the Money Market Fund which may only invest in
U.S. dollar-denominated securities of foreign issuers.
For more information about
MORTGAGE-RELATED SECURITIES,
see the Statement of
Additional Information.
For more information about
ILLIQUID SECURITIES see the
Statement of Additional
Information.
For more information about
FOREIGN SECURITIES, see the
Statement of Additional
information.
45
<PAGE>
- --------------------------------------------------------------------------------
Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed income securities
issued by foreign governments, corporations and supranational organizations, and
American Depository Receipts, European Depository Receipts and Global Depository
Receipts ("ADRs", "EDRs" and "GDRs"). See "ADRs" below.
ADRS
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. We consider ADRs
foreign securities. ADRs in which a Fund may invest may be sponsored or
unsponsored. There may be less information available about foreign issuers of
unsponsored ADRs.
FOREIGN CURRENCY
All of the Funds, except the Government Securities Fund and the Money Market
Fund, may buy and sell foreign currencies the same way they buy and sell other
investments. Funds buy foreign currencies when they believe the value of the
currency will increase. If it does increase, they sell the currency for a
profit. If it decreases they will experience a loss. Funds may also buy foreign
currencies to pay for foreign securities bought for the Fund.
The Funds, except the Money Market Fund and the Government Securities Fund, may
purchase forward foreign currency exchange contracts to protect against a
decline in the value of the U.S. dollar.
WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will be on the market soon. The Funds negotiate the price with a
broker before it goes on the market. If the security ends up selling on the
market at a lower price than negotiated, the Funds may have a loss. If it sells
at a higher price, the Funds may have a profit.
All of the Funds may buy when-issued securities in accordance with their
investment strategy.
MONEY MARKET SECURITIES
All of the Funds may invest part of their assets in high quality money market
securities payable in U.S. dollars. A listing of the types of money market
securities in which the Money Market Fund may invest is in that Fund's Fact
Sheet. A money market security is high quality when it is rated in one of the
two highest credit categories by Moody's or Standard & Poor's or another
nationally recognized rating service or if unrated, deemed high quality by
VALIC.
These high quality money market securities include:
- - Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- - Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- - Commercial paper sold by corporations and finance companies
- - Corporate debt obligations with remaining maturities of 13 months or less
- - Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan
participations, and adjustable rate securities
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund may invest in participation VRDNs,
which provide the Fund with an undivided interest in underlying VRDNs held by
major investment banking institutions. Any purchase of VRDNs will meet
applicable diversification and concentration requirements, and the conditions
established by the SEC under which such securities may be considered to have
remaining maturities of 397 days or less.
DERIVATIVES
Unlike stocks and bonds that represent actual ownership of that stock or bond,
derivatives are investments which "derive" their value from securities issued by
a company, government, or government agency. In certain cases, derivatives may
be purchased for non-speculative investment purposes or to protect ("hedge")
against a change in the price of the underlying security. There are some
investors who take higher risk ("speculate") and buy derivatives to profit from
a change in price of the underlying security. We may purchase derivatives to
hedge the investment portfolios and to earn additional income in order to help
achieve the Funds' objectives. Generally we do not buy derivatives to speculate.
The Funds, except the Money Market Fund, may buy two types of derivatives:
futures and options.
Options
An option is the right to buy or sell any type of investment for a preset price
over a specific period of time.
For more information about
FOREIGN CURRENCY
EXCHANGE TRANSACTIONS,
see the Statement of
Additional Information.
For more information about
WHEN-ISSUED SECURITIES,
see the Statement of
Additional Information.
For more information on
put and call OPTIONS AND
FINANCIAL FUTURES
CONTRACTS AND OPTIONS,
see the Statement of
Additional information.
For more information about
MONEY MARKET SECURITIES
OF FOREIGN ISSUERS the
Funds may purchase, see
the Statement of Additional
Information.
46
<PAGE>
- --------------------------------------------------------------------------------
Call Option
For example, you can buy an option from Mr. Smith that gives you the right to
buy 10 shares of stock X at $25.00 per share anytime between now and six weeks
from now. You believe stock X will be selling for more than $25.00 per share
between now and then. Mr. Smith believes it won't be. If you exercise this
option before it expires, Mr. Smith must sell you 10 shares of stock X at $25.00
per share.
On the other hand, you can sell an option to Mr. Smith that gives him the right
to buy 10 shares of stock X at $25.00 per share anytime between now and six
weeks from now. You believe stock X will be selling for less than $25.00 per
share between now and then. Mr. Smith believes it won't be. If he exercises this
option before it expires, you must sell to Mr. Smith 10 shares of stock X at
$25.00 per share.
Put Option
Or, you can buy an option from Mr. Smith that gives you the right to sell him 10
shares of X stock at $25.00 per share anytime between now and six weeks from
now. In this example, you believe stock X will be selling for less than $25.00
per share between now and then. Mr. Smith thinks it will be selling for more.
Or, you can sell an option to Mr. Smith that gives him the right to sell to you
10 shares of X stock at $25.00 per share anytime between now and six weeks from
now. In this example, he believes stock X will be selling for less than $25.00
per share between now and then.
Futures Contracts
A futures contract is an agreement between a buyer and a seller to buy or sell
an investment on a future date at a price the buyer and seller set today. The
buyer thinks the price will go up between now and then, and the seller thinks
the price will go down or they may just want to receive today's price because
they do not know which way prices are going to go.
All of the Funds, except the Money Market Fund, may enter into certain types of
futures contracts. The Funds use futures contracts as a tool to earn more money,
and to protect against rising or falling prices in the stock and bond markets.
The Funds use stock and bond futures to invest cash and cash equivalents. When
certain levels are reached the Fund will sell the futures and buy stocks or
bonds.
All of the Funds, except the Money Market Fund can invest in these types of
futures and options:
- - Write exchange traded covered put and call options on securities and stock
indices.
- - Purchase exchange traded put and call options on securities and stock
indices.
- - Purchase and sell exchange traded financial futures contracts.
- - Write covered call options and purchase exchange traded put and call options
on financial futures contracts.
- - Write covered call options and purchase non-exchange traded call and put
options on financial futures contracts.
The Capital Conservation Fund, the Government Securities Fund, the International
Equities Fund, the International Government Bond Fund and the Science &
Technology Fund may write and purchase put and call options on securities and
stock indices that are not traded on an exchange.
REPURCHASE AGREEMENTS
A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short term loan (usually for one day to one week). The Funds may
enter into repurchase agreements only with well-established securities dealers
or banks that are members of the Federal Reserve System. All the Funds in this
prospectus may invest in repurchase agreements.
The risk in a repurchase agreement is the failure of the seller to be able to
buy the security back. If the value of the security declines, the Fund may have
to sell at a loss.
A repurchase agreement of more than 7 days duration is illiquid. A discussion of
repurchase agreements, illiquid securities and Fund limitations is contained in
the Statement of Additional Information.
A WORD ABOUT RISK
There are four basic types of investment risk you may be subject to:
- - Market Risk
- - Credit (Financial) Risk
- - Interest Rate Risk
- - Risk Associated with Foreign Securities
Generally stocks are considered to be subject to market risk, while debt
securities, such as U.S. government bonds and money market securities are
subject to interest rate risk. Other debt securities, such as corporate bonds,
involve both interest rate and credit (financial) risk. Lastly, risks associated
with foreign securities can involve political, currency and limited information
risks. Each of these four basic types of investment risks is discussed below.
Market Risk
Market risk refers to the loss of capital resulting from changes in the prices
of investments. For example, market risk occurs when expectations of lower
corporate profits in general cause the broad market of stocks to fall in price.
When this happens, even though a company is experiencing growth in profits, the
price of its stock could fall.
47
<PAGE>
- --------------------------------------------------------------------------------
Credit (Financial) Risk
Credit risk refers to the risk that the issuer of a bond may default or be
unable to pay interest or principal due on a bond.
To help the Funds' Investment Adviser or
Sub-advisers decide which U.S. corporate and foreign bonds to buy, they rely on
Moody's and Standard & Poor's (two nationally recognized bond rating services),
and on VALIC's own research. This research lowers the risk of buying a bond of a
company that may not pay the interest and principal on the bond.
All of the Funds in this prospectus may buy bonds that are rated as investment
grade. There are four different levels of investment grade, from AAA to BBB; see
Description of Corporate Bond Ratings in the Statement of Additional
Information. All bonds with these ratings are considered to have adequate
ability to pay interest and principal.
All of the Funds in this prospectus may buy bonds issued by the U.S. Government.
The U.S. Government guarantees it will always pay principal and interest.
Interest Rate Risk
Interest rate risk refers to the risk that fluctuations in interest rates may
affect the value of interest paying securities in a Fund. If a fund sells a bond
before it matures, it may lose money, even if the bond is guaranteed by the U.S.
Government. Say, for example, a fund bought an intermediate government bond last
year that was paying interest at a fixed rate of 6%. Now, intermediate
government bonds are paying interest at a rate of 7%. If the fund wants to sell
the bond paying 6%, it will have to sell it at a discount (and realize a loss)
to attract buyers because they can buy new bonds paying 7% interest.
Risk Associated with Foreign Securities
Each of the Funds may, subject to limits stated in each Fund's Fact Sheet,
invest in foreign securities including ADRs. A foreign security is a security
issued by an entity domiciled or incorporated outside of the U.S.
There are three principal risks of owning foreign securities:
Political risk -- the chance of a change in government and the assets of the
company being taken away.
Currency risk -- a change in the value of the foreign currency compared to
the dollar. If the foreign currency declines in value, your investment valued in
U.S. dollars will decline even if the value of the foreign stock or bond is
unchanged.
Limited information -- foreign companies generally are not regulated to the
degree U.S. companies are and may not report all of the information we are used
to getting. To minimize taxes they may not report some income or they may report
higher expenses.
INVESTMENT PRACTICES
Limitations
Each Fund has limitations on the percentage of its assets that it may allocate
to certain investments. These limits are determined by the Fund's investment
objectives and risk level.
For example, the Stock Index Fund's investment goal is growth through
investments tracking the S&P 500 Index, an index that includes stocks of
domestic and foreign companies. As a result, this Fund may invest no more than
35% of its assets in stocks that are not part of the S&P 500 Index.
Some Funds are restricted from buying certain types of investments altogether.
For example, the Money Market Fund may not invest in futures and options.
Each Fund's limitations are shown in the Investment Strategy section of its Fact
Sheet.
Lending Portfolio Securities
Each Fund except the Growth Fund and the Science & Technology Fund may lend up
to 30% of its total assets to broker-dealers and other financial institutions to
earn more money for the Fund. The Growth Fund and the Science & Technology Fund
may lend up to 33 1/3% of their total assets. Assets are placed in a special
account by the borrower to cover the market value of the securities on loan. The
assets serving as collateral for the loan are valued daily.
A risk of lending portfolio investments is that there may be a delay in the Fund
getting its investments back when a loaned security is sold.
The Funds will only make loans to broker-dealers and other financial
institutions approved by its Custodian, as monitored by VALIC and authorized by
the Board of Directors.
For more information about
LENDING PORTFOLIO
SECURITIES, see the
Statement of Additional
Information.
For more information about
INVESTMENT LIMITATIONS,
see the Statement of
Additional Information.
For more information about
FOREIGN SECURITIES, see
the Statement of Additional
Information.
48
<PAGE>
About the Series Company
- --------------------------------------------------------------------------------
SERIES COMPANY SHARES
The Series Company is an open-end mutual fund and may offer shares of the Funds
for sale at any time. However, the Series Company offers shares of the Funds
only to registered and unregistered separate accounts of VALIC and its
affiliates, or employee thrift plans maintained by VALIC or American General
Corporation.
As a participant, you do not directly buy shares of the Funds that make up the
Series Company. Instead, you buy units in either a registered or unregistered
separate account of VALIC or of its affiliates. When you buy these units, you
specify which Funds you want the separate account to invest your money in. The
separate account, in turn, buys the shares of the Funds according to your
instructions. See your contract prospectus for more information on the separate
account associated with your contract.
When the separate accounts buy, sell, or transfer shares of the Funds, they do
not pay any charges related to these transactions.
None of the Funds currently foresees any disadvantages to participants arising
out of the fact that it may offer its shares to separate accounts of various
insurance companies to serve as the investment medium for their variable annuity
and variable life insurance contracts. Nevertheless, the Board of Directors
intends to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. If such a conflict were to occur, one or
more insurance companies' separate accounts might be required to withdraw their
investments in one or more Funds and shares of another Fund may be substituted.
This might force a Fund to sell portfolio securities at disadvantageous prices.
In addition, the Board of Directors may refuse to sell shares of any Fund to any
separate account or may suspend or terminate the offering of shares of any Fund
if such action is required by law or regulatory authority or is on the best
interests of the shareholders of the Fund.
As distributor, VAMCO sells shares of the Funds to the separate accounts. VAMCO
is a wholly owned subsidiary of VALIC and acts as a distributor under an
agreement it has with the Series Company. VAMCO does not charge the Series
Company or the separate accounts for its services. Also, VAMCO is not required
to sell a minimum number of shares to the separate accounts.
VAMCO sends orders to buy, sell or transfer shares to the Series Company's
transfer agent daily. The price of any share affected by the request is the next
net asset value calculated after order is received.
For more information on how to participate, see your contract prospectus.
NET ASSET VALUE OF THE SERIES
COMPANY SHARES
How Net Asset Value is Calculated
Here is how the Series Company calculates the net asset value of each Fund's
shares:
Step 1:
<TABLE>
<S> <C> <C>
Total value of the
Fund's assets*
(including money owed
to the fund but not yet The Fund's
collected) = Total
- -- The Fund's liabilities Net Asset Value
(including money owed
by the Fund but not yet
paid)
Step 2:
The Fund's total net
asset value (from
Step 1) NET ASSET VALUE
/ The total number of the = PER SHARE
Fund's shares that are
outstanding.
</TABLE>
* The Series Company uses the fair market value of Fund's investments to
calculate the Fund's total value. However, it uses the amortized cost method
to determine the values of all the Money Market Fund's investments and of any
other Fund's short-term securities maturing within 60 days. The amortized cost
method approximates fair market value.
If a Fund's portfolio includes investments that are not sold often or are not
sold on any exchanges, the Series Company's Board of Directors or its delegate
will, in good faith, estimate fair market value of these investments.
When Net Asset Value is Calculated
The Series Company calculates the net asset value of each Fund's shares at
approximately 4pm EST each day the New York Stock Exchange is open. (The New
York Stock Exchange is open Monday through Friday but is closed on certain
federal and other holidays.)
THE VARIABLE ANNUITY
MARKETING COMPANY
(VAMCO) acts as the
Series Company's
distributor.
49
<PAGE>
- --------------------------------------------------------------------------------
The separate accounts can buy, sell, and transfer shares in the Funds only on
days that the Series Company calculates the net asset value of each Fund's
shares. Through VAMCO, the separate accounts send orders to the Series Company
to buy, sell, or transfer shares based on requests they receive from
participants.
DIVIDENDS AND CAPITAL GAINS
Dividends from Net Investment Income
Net investment income generally includes stock dividends received and bond
interest earned less expenses paid by the Fund. Each Fund pays dividends from
net investment income occasionally. Dividends from net investment income are
automatically reinvested for you into additional shares of the Fund. The Money
Market Fund pays dividends daily and all other Funds pay dividends once a month.
Distributions from Capital Gains
When a Fund sells a security for more than it paid for that security, a capital
gain results. Once a year, each Fund pays distributions from capital gains, as
long as total capital gains exceed total capital losses. Distributions from
capital gains are automatically reinvested for you into additional shares of the
Fund.
DIVERSIFICATION
Each Fund's diversification policy limits the amount that the Fund may invest in
certain securities. Each Fund's diversification policy is also designed to
comply with the diversification requirements of the Internal Revenue Code (the
"Code") as well as the Investment Company Act of 1940 ("the 1940 Act").
All of the Funds except International Government Bond Fund, Growth Fund and
Science & Technology Fund may invest up to 5% of their total assets in a single
issuer. An issuer, or "company" does not include the U.S. Government or agencies
of the U.S. Government according to the Code and the 1940 Act. For
diversification purposes, repurchase agreements are considered to be issued by
the U.S. Government if backed by U.S. Government securities. Also, these Funds
may not own more than 10% of the voting securities of a company.
The Growth Fund and the Science & Technology Fund may not invest more than 5% of
their total assets in one company and more than 10% of their total assets in the
voting securities of one company as long as the total of these investments does
not exceed 25% of total assets.
The International Government Bond Fund is "non-diversified" under the 1940 Act.
This means it can invest more of its assets in fewer issuers and for this reason
may be riskier than the other Funds. This Fund may invest up to 25% of its total
assets in a single issuer as long as those investments representing over 5% of
total assets in one issuer do not exceed 50% of total assets of the Fund. The
remaining 50% of total assets may not include more than 5% of total assets in
one issuer.
Also, the Money Market Fund may not invest more than 5% of its total assets in
any company rated as "second tier" by a national rating service (as described in
Types of Investments).
50
<PAGE>
- --------------------------------------------------------------------------------
TAXES
By paying out all earnings as described in the Dividends and Capital Gains
section above and by complying with the diversification requirements under the
Code, each Fund expects to qualify as a Registered Investment Company (RIC)
under Subchapter M of the Code. By qualifying as a RIC the Fund will not have to
pay federal income taxes.
VOTING RIGHTS
One Vote Per Share
Each outstanding share has one vote on all matters that shareholders vote on. As
a participant, you vote on these matters indirectly by voting your units. The
way you vote your units as a participant depends on your contract. See your
contract prospectus for specific details.
When a matter comes up for vote, the separate account will vote its shares in
the same proportion as the unit votes it actually receives. If VALIC determines
that it may, under the current interpretation of the 1940 Act, vote shares
directly instead of voting through its units, it may decide to vote that way.
Shareholder Meetings
Maryland law does not require the Series Company to hold regular, annual
shareholder meetings. But, the Series Company must hold shareholder meetings on
the following matters:
- - to approve certain agreements as required by the 1940 Act;
- - to change fundamental investment objectives in the Diversification section
and to change fundamental investment restrictions, above;
- - to fill vacancies on the Series Company's Board of Directors if the
shareholders have elected less than a majority of the Directors.
Shareholders may call a meeting to remove a Director from the Board if at least
10% of the outstanding shares vote to have this meeting. Then, at the meeting,
at least 2/3 of all the outstanding shares of all the Funds must vote in favor
of removing the Director.
Shareholder Communications
The Series Company will assist in shareholder communications.
YEAR 2000 RISKS
VALIC initiated its Year 2000 readiness plan in 1995. Since that time, VALIC
management along with a team of skilled information technology and business
professionals have been dedicated to achieving the objectives of the plan. This
plan calls for the renovation, upgrade and/or replacement of our mission
critical computer systems, whether developed internally or otherwise. It
includes the five steps that we believe are essential to Year 2000 readiness:
inventory and discovery; analysis; construction; testing; and implementation. As
of December 31, 1998, we have substantially completed all steps with respect to
our critical systems.
VALIC's plan also includes an evaluation of the status of our key third party
relationships and their efforts in addressing Year 2000 issues. Throughout 1999
we will continue to work with critical third party dependencies and to develop
contingency plans for any identified risks or shortcomings. If significant third
parties fail to achieve Year 2000 readiness on a timely basis, then the Year
2000 issue could have a material adverse impact on the operations of VALIC and
the Series Company. However, the third party contingency plans we develop are
meant to identify those risks and provide alternative actions should a third
party not achieve readiness. While we believe no one can predict with certainty
outcomes as to all the issues that may arise, VALIC is confident that its
comprehensive plan and resource commitment will allow it to meet its Year 2000
objectives.
Through December, 1998, VALIC has incurred and expensed $26.7 million (pretax)
related to Year 2000 readiness, including $20.2 million incurred during 1998.
VALIC currently anticipates that it will incur future costs of $2.1 million for
additional internal staff, third party vendors, and other expenses to maintain
readiness and complete third party contingency plans.
REPORTS
The Series Company sends Annual Reports containing audited financial statements,
Semi-Annual Reports containing unaudited financial statements, and proxy
materials to Contract owners or participants. Also, the Series Company includes
an Annual Report with each Statement of Additional Information it sends out.
If you have any questions about the Annual
or Semi-Annual Reports, call or write to
the Series Company at the phone number/address found on the cover page of this
prospectus.
See the Statement of
Additional information and
your contract prospectus
for further tax discussions.
You should also CONSULT
YOUR TAX ADVISOR before
investing.
51
<PAGE>
Please tear off, complete and return the form below to Suite A3-01,
Communications Unit, The Variable Annuity Life Insurance Company, 2929 Allen
Parkway, Houston, Texas 77019 to order a Statement of Additional Information for
the Company. A Statement of Additional Information may also be ordered by
calling 1-800-44-VALIC.
Please send me a free copy of the Statement of Additional Information for
American General Series Portfolio Company.
<TABLE>
<S> <C>
Name: ________________________________________ GA. #: ______________________________
Address: ____________________________________ Policy #: ______________________________
Social Security Number: ____________________
</TABLE>
52
<PAGE>
(This page intentionally left blank)
<PAGE>
INVESTMENT ADVISER:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
INVESTMENT SUB-ADVISERS:
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty St., 36th Floor
New York, New York 10006
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
DISTRIBUTOR:
The Variable Annuity Marketing Company
2929 Allen Parkway
Houston, Texas 77019
CUSTODIAN:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INDEPENDENT AUDITORS:
Ernst & Young LLP
1221 McKinney, Suite 2400
Houston, Texas 77010
TRANSFER AND SHAREHOLDER SERVICE AGENT:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
DIRECTORS AND OFFICERS
<TABLE>
<S> <C> <C>
DIRECTORS OFFICERS
Dr. Judith Craven Thomas L. West, Jr. Chairman
Dr. Timothy J. Ebner John A. Graf President
Judge Gustavo E. Gonzales, Jr. Craig R. Rodby Executive Vice President
John A. Graf John E. Arant Executive Vice President
Norman Hackerman Joe C. Osborne Executive Vice President
John Wm. Lancaster Peter V. Tuters Senior Investment Officer
Ben H. Love Maruti D. More Vice President -- Investments
Dr. John E. Maupin, Jr. Teresa S. Moro Vice President and
F. Robert Paulsen Investment Officer
Craig R. Rodby Leon A. Olver Vice President and
R. Miller Upton Investment Officer
Thomas L. West, Jr. William Trimbur, Jr. Vice President and
Investment Officer
Brent C. Nelson Vice President
Cynthia A. Toles Vice President and
Secretary
Nori L. Gabert Vice President and
Assistant Secretary
Cynthia A. Gibbons Assistant Vice President
Gregory R. Seward Treasurer
Jaime M. Sepulveda Assistant Treasurer
Earl E. Allen, Jr. Assistant Treasurer
Kathryn A. Pearce Controller
Donna L. Hathaway Assistant Controller
Heriberto Valdez Assistant Controller
</TABLE>
PRINTED MATTER
PRINTED IN U.S.A.
VA 9017 VER 2/99 [RECYCLED PAPER LOGO] RECYCLED PAPER
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Franklin Life Variable Annuity American General Series Portfolio
Fund A Company
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus of Franklin Life
Variable Annuity Fund A dated the same date as this Statement of Additional
Information.
You may obtain a copy of that Proxy Statement/Prospectus by calling (800)
528-2011, Extension 2591, or by writing The Franklin Life Insurance Company, #1
Franklin Square, Springfield, IL 62713, Attention: Box 1018.
March 1, 1999
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Appendix A - Franklin Life Variable Annuity Fund A - Statement of Additional
Information
Appendix B - Franklin Life Variable Annuity Fund A - Annual Report dated
December 31, 1998
Appendix C - American General Series Portfolio Company - Statement of
Additional Information
Appendix D - American General Series Portfolio Company - Semi-Annual Report
dated November 30, 1998
2
<PAGE>
ADDITIONAL INFORMATION ABOUT FRANKLIN LIFE VARIABLE ANNUITY FUND A
For additional information regarding Franklin Life Variable Annuity Fund A
("Fund A"), please review the Statement of Additional Information to Fund A's
registration statement on Form N-3 filed with the Securities and Exchange
Commission as Post-Effective Amendment No. 45 on April 30, 1998 (File Nos.
2-36394 and 811-1990). Appendix A contains Fund A's Statement of Additional
Information.
ADDITIONAL INFORMATION ABOUT AMERICAN GENERAL SERIES PORTFOLIO COMPANY
Additional information regarding the Stock Index Fund and the Money
Market Fund of the American General Series Portfolio Company (the "Series
Company") is found in the Statement of Additional Information to the
registration statement on Form N-1A filed with the Securities and Exchange
Commission (File Nos. 2-83631 and 011-3738). This Statement of Additional
Information is attached hereto as Appendix C.
FINANCIAL STATEMENTS
Financial statements regarding Fund A are included in the Statement of
Additional Information attached hereto as Appendix A and in the Annual Report
dated December 31, 1998 provided in Appendix B.
Financial statements regarding the Stock Index Fund and the Money Market
Fund of the American General Series Portfolio Company are included in the
Statement of Additional Information provided in Appendix C, and in the
Semi-Annual Report dated November 30, 1998 provided in Appendix D.
Pro Forma financial information is not included because as of December 31,
1998:
(1) the net asset value of Franklin Life Variable Annuity Fund A did not
exceed 10 percent of the net asset value of the Stock Index Fund;
(2) the net asset value of Franklin Life Variable Annuity Fund B did not
exceed 10 percent of the net asset value of the Stock Index Fund; and
(3) the net asset value of Franklin Life Money Market Variable Annuity Fund C
did not exceed 10 percent of the net asset value of the Money Market
Fund.
3
<PAGE>
APPENDIX A
FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
INDIVIDUAL VARIABLE ANNUITY
CONTRACTS FOR USE WITH CERTAIN
QUALIFIED PLANS AND TRUSTS
ACCORDED SPECIAL TAX
TREATMENT AND AS
INDIVIDUALRETIREMENT ANNUITIES
FRANKLIN LIFE VARIABLE ANNUITY
FUND A
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
TELEPHONE (800) 528-2011
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus dated April 30, 1998 relating to the
offering of individual variable annuities for use in connection with certain
qualified plans and trusts accorded special tax treatment or as individual
retirement annuities. A copy of the Prospectus may be obtained by writing to The
Franklin Life Insurance Company at the address set forth above (Attention: Box
1018) or by calling (800) 528-2011, extension 2591.
------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
------------------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . 2
Limitations on Settlement Options . . . . . . . . . . . . . . . . . 2
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services. . . . . . . . . . . . . . . 6
Distribution of The Contracts . . . . . . . . . . . . . . . . . . . 7
Portfolio Turnover and Brokerage. . . . . . . . . . . . . . . . . . 8
Safekeeper of Securities. . . . . . . . . . . . . . . . . . . . . . 9
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Index to Financial Statements . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
1
<PAGE>
GENERAL INFORMATION
The individual variable annuity contracts offered by the Prospectus dated
April 30, 1998 (the "Prospectus") are designed primarily to provide annuity
payments which will vary with the investment performance of Franklin Life
Variable Annuity Fund A (the "Fund"), a separate account which has been
established by The Franklin Life Insurance Company ("The Franklin") under
Illinois insurance law. Reference is made to the Prospectus, which should be
read in conjunction with this Statement of Additional Information. Capitalized
terms not otherwise defined in this Statement of Additional Information shall
have the meanings designated in the Prospectus.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
American General has advised the Fund that there was no person who was
known to it to be the beneficial owner of 10% or more of the voting power of
American General as of March 5, 1998.
INVESTMENT OBJECTIVES
The investment objectives and policies of the Fund are described under
"Investment Policies and Restrictions of the Fund" in the Prospectus.
LIMITATIONS ON SETTLEMENT OPTIONS
A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION
Described below are certain limitations on Settlement Options based on The
Franklin's current understanding of the distribution rules generally applicable
to Contracts purchased for use as Individual Retirement Annuities or issued in
connection with Section 403(b) annuity purchase plans. Various questions exist,
however, about the application of the distribution rules to distributions from
the Contracts and their effect on Settlement Option availability thereunder.
The Internal Revenue Service has proposed regulations relating to required
distributions from qualified plans, individual retirement plans, and annuity
contracts under Section 403(b) of the Code. These proposed regulations may limit
the availability of the Settlement Options in Contracts purchased for use as
Individual Retirement Annuities or issued in connection with Section 403(b)
annuity purchase plans. The proposed regulations are generally effective for
calendar years after 1984; persons contemplating the purchase of a Contract
should consult a qualified tax advisor concerning the effect of the proposed
regulations on the Settlement Option or Options he or she is contemplating.
FIRST OPTION-LIFE ANNUITY. Under Contracts issued for use as Individual
Retirement Annuities or in connection with Section 403(b) annuity purchase
plans, if the Variable Annuitant dies before Annuity Payments have commenced,
this Option is not available to a Beneficiary unless distributions to the
Beneficiary begin not later than one year after the date of the Variable
Annuitant's death (except that distributions to a Beneficiary who is the
surviving spouse of the Variable Annuitant need not commence earlier than the
date on which the Variable Annuitant would have attained age 70-1/2). If the
surviving
2
<PAGE>
spouse of the Variable Annuitant is the Beneficiary and such surviving spouse
dies before Annuity Payments to such spouse have commenced, the surviving spouse
will be treated as the Variable Annuitant for purposes of the preceding rule.
SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN.
Under Contracts issued for use as Individual Retirement Annuities or in
connection with Section 403(b) annuity purchase plans, this Option is not
available unless the selected period does not extend beyond the life expectancy
of the Variable Annuitant (or the life expectancy of the Variable Annuitant and
his or her Beneficiary). Further, if the Variable Annuitant dies before Annuity
Payments have commenced, this Option is not available to a Beneficiary unless
(i) the selected period does not extend beyond the life expectancy of the
Beneficiary and (ii) the distribution to the Beneficiary commences not later
than one year after the date of the Variable Annuitant's death (except that
distributions to a Beneficiary who is the surviving spouse of the Variable
Annuitant need not commence earlier than the date on which the Variable
Annuitant would have attained age 70-1/2). If the surviving spouse of the
Variable Annuitant is the Beneficiary and the surviving spouse dies before
Annuity Payments to such spouse have commenced, the surviving spouse will be
treated as the Variable Annuitant for purposes of the preceding sentence. This
Option is also not available under Individual Retirement Annuities or in
connection with Section 403(b) annuity purchase plans unless certain minimum
distribution incidental benefit requirements of the proposed regulations are
met.
THIRD OPTION-UNIT REFUND LIFE ANNUITY. This Option is not available under
Contracts issued for use as Individual Retirement Annuities. Also, under
Qualified Contracts issued in connection with Section 403(b) annuity purchase
plans, if the Variable Annuitant dies before Annuity Payments have commenced,
this Option is not available to a Beneficiary unless distributions to the
Beneficiary begin not later than one year after the date of the Variable
Annuitant's death (except that distributions to a Beneficiary who is the
surviving spouse of the Variable Annuitant need not commence earlier than the
date on which the Variable Annuitant would have attained age 70-1/2). If the
surviving spouse of the Variable Annuitant is the Beneficiary and such surviving
spouse dies before Annuity Payments to such spouse have commenced, the surviving
spouse will be treated as the Variable Annuitant for purposes of the preceding
rule. This Option is also not available in connection with Section 403(b)
annuity purchase plans unless certain minimum distribution incidental benefit
requirements of the proposed regulations are met.
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Contracts issued
for use as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans, this Option is not available unless the secondary
variable annuitant is the spouse of the Variable Annuitant or unless certain
minimum distribution incidental benefit requirements of the proposed regulations
are met. Further, if the Variable Annuitant dies before Annuity Payments have
commenced, this Option is not available to a Beneficiary under a Contract issued
for use as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans.
FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. Under Contracts issued for
use as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans, this Option is not available unless the limitations
described in the Second Option, above, applicable to such Qualified Contracts,
are satisfied, except that this Option is otherwise available to a Beneficiary
where the Variable Annuitant dies before Annuity Payments have commenced if the
designated period does not exceed a period that terminates five years after the
death of the Variable Annuitant or the substituted surviving spouse, as the case
may be. In addition, this Option is not available if the number of years in the
selected period over which Annuity Payments would otherwise be paid plus the
attained age of the Variable Annuitant at the initial Annuity Payment Date would
exceed 95.
SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is not
available under Contracts issued for use as Individual Retirement Annuities or
in connection with Section 403(b) annuity purchase plans.
3
<PAGE>
SEVENTH OPTION-INVESTMENT OPTION. This Option is not available under
Qualified Contracts issued in connection with any Qualified Plan.
B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS
The Contract Owner may defer the initial Annuity Payment Date and continue
the Contract to a date not later than age 75 unless the provisions of the Code
or any governing Qualified Plan require Annuity Payments to commence at an
earlier date. For example, under Qualified Contracts, other than those issued
for use as Individual Retirement Annuities, the Contract Owner may not defer the
initial Annuity Payment Date beyond April 1 of the calendar year following the
later of the calendar year in which the Variable Annuitant (i) attains age
70-1/2, or (ii) retires, and must be made in a specified form or manner. In
addition, if the plan participant is a "5 percent owner" (as defined in the
Code), or if the Contract is issued for use as an Individual Retirement Annuity,
distributions generally must begin no later than the date described in (i). The
Franklin will require satisfactory proof of age of the Variable Annuitant prior
to the initial Annuity Payment Date.
MANAGEMENT
The following persons hold the positions designated with respect to the
Board of Managers. The table also shows any positions held with The Franklin and
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin which serves as distributor for the Contracts. (See "Distribution of
the Contracts," below.)
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS DURING PAST 5 YEARS POSITIONS HELD WITH THE FUND
<S> <C> <C>
ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member, Board of Managers
#1 Franklin Square currently, Vice President
Springfield, Illinois 62713 of The Franklin; prior to
1996, also Treasurer of The
Franklin and Treasurer and
Assistant Secretary of
Franklin Financial Services
Corporation.
ELIZABETH E. ARTHUR* Officer of The Franklin; Secretary, Board of Managers
#1 Franklin Square currently, Director,
Springfield, Illinois 62713 Assistant Secretary and
Associate General Counsel
of The Franklin. Ms. Arthur
also serves as Assistant
Secretary of Franklin
Financial Services Corporation.
DR. ROBERT C. SPENCER Visiting Professor of Member, Board of Managers
2303 South 3rd Avenue Government, Montana State
Bozeman, Montana 59715 University, since 1992;
Professor of Government and
Public Affairs, Sangamon
State University, prior
thereto.
JAMES W. VOTH Chairman, Resource International Member, Board of Managers
50738 Meadow Green Court Corp., South Bend, Indiana
Granger, Indiana 46530 (marketing, manufacturing and
engineering service to industry);
prior to 1993, also President of
Resource International Corp.
4
<PAGE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS PAST 5 YEARS POSITIONS HELD WITH THE FUND
CLIFFORD L. GREENWALT Director, President and Chief Executive Member, Board of Managers
607 East Adams Street Officer, CIPSCO Incorporated, since
Springfield, Illinois 62739 October, 1990 (utility holding company);
Director, President and Chief Executive
Officer, Central Illinois Public Service
Company, Springfield, Illinois (a subsidiary
of CIPSCO Incorporated); Director, Electric
Energy, Inc., Joppa, Illinois; Director,
First of America Bank, Kalamazoo, Michigan;
Director, First of America Bank - Illinois,
N.A. (a subsidiary of First of America Bank).
</TABLE>
*DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE INVESTMENT
COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN FINANCIAL SERVICES
CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY THEM AS SET FORTH IN THE
ABOVE TABLE.
The following table sets forth a summary of compensation paid for services
to the Fund and certain other entities that are deemed to be part of the same
"Fund Complex" in accordance with the rules of the Securities and Exchange
Commission to all members of the Board of Managers for the year ended December
31, 1997. Pursuant to the terms of its agreement to assume certain of the
Fund's administrative expenses, The Franklin pays all compensation received by
the members of the Board of Managers and the officers of the Fund. Members of
the Board of Managers or officers of the Fund who are also officers, directors
or employees of The Franklin do not receive any remuneration for their services
as members of the Board of Managers or officers of the Fund. Other members of
the Board of Managers received a fee of $1,400 for the year and, thus, the
aggregate direct remuneration of all such members of the Board of Managers was
$4,200 during 1997. It is currently anticipated that the annual aggregate
remuneration of such members of the Board of Managers to be paid during 1998
will not exceed $4,200.
<TABLE>
<CAPTION>
NAME OF PERSON, POSITION AGGREGATE TOTAL COMPENSATION
COMPENSATION RELATING TO FUND AND
RELATING TO FUND FUND COMPLEX PAID TO
EACH MEMBER
<S> <C> <C>
Each member of the Board
of Managers (except $1,400 (1) $4,200 (1)(2)
Robert G. Spencer)
</TABLE>
- --------------------------
(1) Paid by The Franklin pursuant to an agreement to assume certain Fund
administrative expenses.
(2) Includes amounts paid to members of the Board of Managers who are not
officers, directors or employees of The Franklin for service on the Boards
of Managers of Franklin Life Variable Annuity Fund B and Franklin Life
Money Market Variable Annuity Fund C.
Neither any member of the Board of Managers nor the Secretary of the Fund
was, as of April 20, 1998, the owner of any contract participating in the
investment experience of the Fund.
5
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Franklin acts as investment manager of the Fund pursuant to an
Investment Management Agreement executed and dated January 31, 1995, which was
approved by Contract Owners at their annual meeting held on April 17, 1995 and
was renewed to January 31, 1999 by the Board of Managers of the Fund at its
meeting on January 19, 1998. The method of determining the advisory charge is
described in the Prospectus under "Investment Management Service Charge."
The Investment Management Agreement:
(1) May not be terminated by The Franklin without the prior approval of a
new investment management agreement by a "majority" (as that term is defined in
the Investment Company Act of 1940) of the votes available to the Contract
Owners, and may be terminated without the payment of any penalty on 60 days'
written notice by a vote of the Board of Managers of the Fund or by a vote of a
majority of the votes available to the Contract Owners.
(2) Shall continue in effect from the date of its execution until the
second anniversary of such execution date and thereafter shall continue in
effect from year to year but only if such continuance is specifically approved
at least annually by the Board of Managers or by a vote of a majority of the
votes available to Contract Owners, provided that in either case the
continuation is also approved by the vote of a majority of the Board of
Managers who are not "interested persons" (as that term is defined in the
Investment Company Act of 1940) of the Fund or of The Franklin, cast in person
at a meeting called for the purpose of voting on such approval.
(3) Shall not be amended without prior approval by a majority of the
votes available to the Contract Owners.
(4) Shall terminate automatically on "assignment" (as that term is defined
in the Investment Company Act of 1940).
A "majority" of the votes available to the Contract Owners is defined in
the Investment Company Act of 1940 as meaning the lesser of (i) Contract Owners
holding 67% or more of the voting power of the Contract Owners present at a
meeting if Contract Owners holding more than 50% of the total voting power of
all Contract Owners in the Fund are present or represented by proxy, or (ii)
Contract Owners holding more than 50% of the total voting power of all Contract
Owners in the Fund. For the voting rights of Contract Owners, see "Voting
Rights," in the Prospectus.
Under the Investment Management Agreement, The Franklin, subject to the
control of the Board of Managers of the Fund, is authorized and has the duty to
manage the investment of the assets of the Fund, subject to the Fund's
investment policies and the restrictions on investment activities set forth in
the Prospectus, and to order the purchase and sale of securities on behalf of
the Fund. In carrying out its obligations to manage the investment of the assets
of the Fund, The Franklin is committed by the Agreement, so long as it remains
in force, to pay all investment expenses of the Fund other than the following,
which the Fund will bear: (i) taxes, if any, based on the income of, capital
gains of assets in, or existence of, the Fund; (ii) taxes, if any, in connection
with the acquisition, disposition or transfer of assets of the Fund; (iii)
commissions or other capital items payable in connection with the purchase or
sale of the Fund's investments; and (iv) interest on account of any borrowings
by the Fund.
Robert G. Spencer and Elizabeth E. Arthur are "affiliated persons," as
defined in the Investment Company Act of 1940, of both The Franklin and the Fund
by reason of the positions held by them with The Franklin and the Fund as set
forth in the table under "Management," above.
6
<PAGE>
The Administration Agreement discussed under "Deductions and Charges Under
the Contracts-Sales and Administration Deduction" in the Prospectus provides
that The Franklin will provide all services and will assume all expenses
required for the administration of the Contracts, including expenses for legal
and accounting services to the Fund and the cost of such indemnification of
members of the Board of Managers and officers, agents, or employees of the Fund
as is provided by the Fund in its Rules and Regulations. The Franklin is not,
however, obligated under the Administration Agreement to pay the investment
management service charge discussed under "Investment Management Service
Charge," in the Prospectus. The Administration Agreement also provides that The
Franklin will from time to time adjust the assets of the Fund by withdrawing
sums in cash or by transferring cash to the Fund so that the assets of the Fund
will be equal to the actuarial value of the amounts payable under all
outstanding Contracts having an interest in the Fund. The Administration
Agreement may be amended or terminated at any time by mutual consent of the Fund
and The Franklin.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial"), #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin. Franklin Financial
serves as "principal underwriter" (as that term is defined in the Investment
Company Act of 1940) for the Contracts, pursuant to a Sales Agreement with the
Fund. The present Sales Agreement was approved by the Board of Managers of the
Fund, and came into effect, on January 31, 1995. It was last renewed by the
Board of Managers on January 19, 1998. Franklin Financial's employment will
continue thereunder if specifically approved at least annually by the Board of
Managers of the Fund, or by a majority of votes available to Contract Owners,
provided that in either case the continuance of the Sales Agreement is also
approved by a majority of the members of the Board of Managers of the Fund who
are not "interested persons" (as that term is defined in the Investment Company
Act of 1940) of the Fund or Franklin Financial. The employment of Franklin
Financial as principal underwriter automatically terminates upon "assignment"
(as that term is defined in the Investment Company Act of 1940) of the Sales
Agreement and is terminable by either party on not more than 60 days' and not
less than 30 days' notice.
The Fund no longer issues new Contracts. To the extent that Stipulated
Payments continue to be made on Contracts, the Fund may nevertheless be deemed
to be offering interests in Contracts on a continuous basis. Contracts are sold
primarily by persons who are insurance agents or brokers for The Franklin
authorized by applicable law to sell life and other forms of personal insurance
and who are similarly authorized to sell Variable Annuities. Pursuant to an
Agreement, dated June 30, 1971 and amended on May 15, 1975, between The Franklin
and Franklin Financial, Franklin Financial agreed to employ and supervise agents
chosen by The Franklin to sell the Contracts and to use its best efforts to
qualify such persons as registered representatives of Franklin Financial, which
is a broker-dealer registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Franklin Financial also may enter into agreements with
The Franklin and each such agent with respect to the supervision of such agent.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the Contracts
pursuant to a Sales Agreement with the Fund. Sales deductions from Stipulated
Payments are paid to Franklin Financial as a means to recover sales expenses.
Sales deductions are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by sales deductions, Franklin Financial will cover them from other
assets.
Pursuant to an Agreement between The Franklin and Franklin Financial, The
Franklin has agreed to pay commissions earned by registered representatives of
Franklin Financial on the sale of the Contracts and to bear the cost of
preparation of prospectuses and other disclosure materials. Commissions and
other remuneration and the cost of disclosure materials will be paid by The
Franklin from its General Account.
7
<PAGE>
Registration as a broker-dealer does not mean that the Securities and
Exchange Commission has in any way passed upon the financial standing, fitness
or conduct of any broker or dealer, upon the merits of any securities offering
or upon any other matter relating to the business of any broker or dealer.
Salesmen and employees selling Contracts, where required, are also licensed as
securities salesmen under state law.
Elizabeth E. Arthur is an "affiliated person" (as that term is defined in
the Investment Company Act of 1940) of both Franklin Financial and the Fund by
reason of the positions held by her with Franklin Financial and the Fund as set
forth in the table under "Management," above.
PORTFOLIO TURNOVER AND BROKERAGE
A. PORTFOLIO TURNOVER
The Fund will purchase securities, in general, for long-term appreciation
of capital and income and does not place emphasis on obtaining short-term
trading profits. See "Investment Policies and Restrictions of the Fund" in the
Prospectus. Accordingly, the Fund expects to have an annual rate of portfolio
turnover which is at, or below, the industry average. (The "portfolio turnover"
rate means (a) the lesser of the dollar amount of the purchases or of the sales
of portfolio securities (other than short-term securities, that is, those with a
maturity of one year or less at the time of purchase) by the Fund for the period
in question, divided by (b) the monthly average of the value of the Fund's
portfolio securities (excluding short-term securities).) However, the rate of
portfolio turnover is not a limiting factor when changes in the portfolio are
deemed appropriate, and in any given year conditions could result in a higher
rate, which would not in and of itself indicate a variation from stated
investment objectives. The degree of portfolio activity affects the brokerage
costs of the Fund. See "Brokerage," this page, below.
For 1996, the portfolio turnover rate was 4.77%; for 1997 the rate was
.70%.
B. BROKERAGE
Decisions to buy and sell securities for the Fund will be made by The
Franklin, as the Fund's investment manager, subject to the control of the Fund's
Board of Managers. The Franklin, as investment manager, also is responsible for
placing the brokerage business of the Fund and, where applicable, negotiating
the amount of the commission rate paid, subject to the control of the Fund's
Board of Managers. The Fund has no formula for the distribution of brokerage
business in connection with the placing of orders for the purchase and sale of
investments for the Fund. It is The Franklin's intention to place such orders,
consistent with the best execution, to secure the highest possible price on
sales and the lowest possible price on purchases of securities. Portfolio
transactions executed in the over-the-counter market will be placed directly
with the primary market makers unless better executions are available elsewhere.
Subject to the foregoing, The Franklin may give consideration in the allocation
of brokerage business to services performed by a broker or dealer in furnishing
statistical data and research to it. The Franklin may thus be able to supplement
its own information and to consider the views and information of other research
organizations in arriving at its investment decisions. Any such services would
also be available to The Franklin in the management of its own assets and those
of any other separate account. To the extent that such services are used by The
Franklin in performing its investment management functions with respect to the
Fund, they may tend to reduce The Franklin's expenses. However, the dollar value
of any information which might be received is indeterminable and may, in fact,
be negligible. The Franklin does not consider the value of any research services
provided by brokers in negotiating commissions. During 1995, 1996 and 1997, a
total of $4,260, $1,865, and $1,695, respectively, in brokerage commissions was
paid; none of such brokerage business of the Fund was allocated to Franklin
Financial Services Corporation or to brokers who furnished statistical data and
research to The Franklin. No officer or director of The Franklin or Franklin
Financial Services Corporation (the principal underwriter for the Contracts),
and no member of the Board of Managers, is
8
<PAGE>
affiliated with any brokerage firm (except with Franklin Financial Services
Corporation, as described under "Investment Management Service Charge," in the
Prospectus, and "Distribution of the Contracts," above) and no beneficial owner
of 5% or more of the total voting power of The Franklin or any of its parents is
known to be affiliated with any brokerage firm utilized by the Fund (except with
Franklin Financial Services Corporation).
SAFEKEEPER OF SECURITIES
Securities of the Fund are held by State Street Bank and Trust Company
("State Street"), which is located at 1776 Heritage Drive, North Quincy,
Massachusetts, under a Custodian Agreement dated April 17, 1995 to which The
Franklin and State Street are parties. Representatives of the Securities and
Exchange Commission, the Illinois Insurance Department and the NAIC zonal
examination committee have access to such securities in the performance of their
official duties.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1997 and the related statement of operations for
the year then ended and the statements of changes in contract owners' equity for
each of the two years in the period then ended and the table of per-unit income
and changes in accumulation unit value for each of the three years in the period
then ended of the Fund, appearing herein, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. The consolidated financial statements of The Franklin at
December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
table of per-unit income and changes in accumulation unit value for each of the
two years in the period ended December 31, 1994 of the Fund, appearing herein,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. Such financial
statements and tables of per-unit income and changes in accumulation unit value
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
9
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Franklin Life Variable Annuity Fund A:
Reports of Independent Auditors and Accountants F-2 - F-3
Financial Statements:
Statement of Assets and Liabilities, December 31, 1997 F-4
Statement of Operations for the year ended
December 31, 1997 F-4
Statements of Changes in Contract Owners' Equity
for the years ended December 31, 1997 and 1996 F-4
Portfolio of Investments, December 31, 1997 F-5
Notes to Financial Statements F-6
Supplementary Information - Per-Unit Income and Changes
in Accumulation Unit Value for the five years ended
December 31, 1997 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Report of Independent Auditors F-8
Financial Statements:
Consolidated Statement of Income for the years ended
December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January
31, 1995 F-9
Consolidated Balance Sheet, December 31, 1997 and 1996 F-10- F-11
Consolidated Statement of Shareholder's Equity for the
years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month
ended January 31, 1995 F-12
Consolidated Statement of Cash Flows for the years
ended December 31, 1997 and 1996, the eleven months
ended December 31, 1995, and the one month ended,
January 31, 1995 F-13
Notes to Consolidated Financial Statements F-14 - F-38
</TABLE>
*The consolidated financial statements of The Franklin contained herein should
be considered only as bearing upon the ability of The Franklin to meet its
obligations under the Contracts.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A
We have audited the accompanying statement of assets and liabilities of Franklin
Life Variable Annuity Fund A, including the portfolio of investments, as of
December 31, 1997, the related statement of operations for the year then ended
and the statements of changes in contract owners' equity for each of the two
years then ended, and the table of per-unit income and changes in accumulation
unit value for each of the three years then ended. These financial statements
and the table of per-unit income and changes in accumulation unit value are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the table of per-unit income and
changes in accumulation unit value based on our audits. The table of per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994 was audited by other auditors whose report dated
February 1, 1995, expressed an unqualified opinion on that table.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value 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 held by the custodian as of December 31,
1997. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the 1997, 1996, and 1995 table of
per-unit income and changes in accumulation unit value referred to above present
fairly, in all material respects, the financial position of Franklin Life
Variable Annuity Fund A at December 31, 1997, and the results of its operations
for the year then ended, and the changes in its contract owners' equity for each
of the two years then ended, and per-unit income and changes in accumulation
unit value for each of the three years then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 30, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A
Springfield, Illinois
We have audited the accompanying table of per-unit income and changes in
accumulation unit value of Franklin Life Variable Annuity Fund A for each of the
two years in the period ended December 31, 1994. This table of per-unit income
and changes in accumulation unit value is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this table of
per-unit income and changes in accumulation unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the table of per-unit income and changes in
accumulation unit value is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the table of per-unit income and changes in accumulation unit value. An audit
also includes assessing the accounting principles used by management as well as
evaluating the overall presentation of the table of per-unit income and changes
in accumulation unit value. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the table of per-unit income and changes in accumulation unit
value referred to above presents fairly, in all material respects, the per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 1, 1995
F-3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments-at fair value (cost-$6,923,517):
Common stocks $ 10,325,291
Short-term notes 1,896,668
-------------
12,221,959
Cash on deposit 54,548
Dividends and interest receivable 19,871
-------------
Total Assets 12,296,378
Liability -due to The Franklin Life Insurance Company 1,489
-------------
Contract owners' equity
Annuity reserves $ 19,380
Value of 124,714.114 accumulation units outstanding,
equivalent to $98.42918992 per unit 12,275,509 $ 12,294,889
---------- -------------
-------------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income
Dividends $ 167,447
Interest 83,552
----------
Total Income $ 250,999
Expenses
Mortality and expense charges $ 119,981
Investment management services 52,451
----------
Total expenses 172,432
------------
Net investment income 78,567
Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $1,508,962
Cost of investments sold (identified cost method) 1,056,000
----------
Net realized gain 452,962
Net unrealized appreciation of investments
Beginning of year $3,584,070
End of year 5,298,442
----------
Net unrealized appreciation 1,714,372
------------
Net gain on investments 2,167,334
------------
Net increase in contract owners'
equity resulting from operations $2,245,901
------------
------------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
Net investment income $ 78,567 $ 85,278
Net realized gain from investment transactions 452,962 269,793
Net unrealized appreciation of investments 1,714,372 1,406,762
--------------------------
Net increase In contract owners'
equity resulting from operations 2,245,901 1,761,833
Net contract purchase payments 268,272 226,321
Reimbursement for contract guarantees 172 3,178
Annuity payments (4,568) (3,878)
Withdrawals (1,636,104) (995,151)
--------------------------
Net increase in contract owners' equity 873,673 992,303
Contract owners' equity at beginning
of year 11,421,216 10,428,913
--------------------------
Contract owners' equity at end of year $12,294,889 $11,421,216
--------------------------
--------------------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- ------------- -----------
<C> <S> <C>
COMMON STOCKS (83.98%)
BANKING (4.16%)
3,675 SLM Holding Corporation $ 511,284
BEVERAGES (1.30%)
4,400 PepsiCo, Incorporated 159,500
BUSINESS SERVICES (1.61%)
5,600 Equifax Inc. 198,450
CHEMICALS (2.23%)
2,700 Dow Chemical 274,050
COMPUTER SERVICES (3.00%)
8,100 Ceridian Corporation* 371,081
COSMETICS & HOUSEHOLD PRODUCTS
(3.27%)
4,000 Gillette Company 401,750
DRUGS & HEALTH CARE (21.62%)
8,000 Eli Lilly and Company 557,000
4,300 Merck & Company, Inc. 455,800
4,200 Pfizer, Incorporated 313,163
6,450 St. Jude Medical, Inc.* 196,725
6,600 Schering-Plough Corporation 410,025
6,000 Stryker Corporation 223,500
16,000 Walgreen Company 502,000
-----------
2,658,213
ELECTRONICS & INSTRUMENTATIONS
(2.94%)
5,800 Hewlett-Packard Company 361,775
FOOD PROCESSING (2.86%)
10,600 ConAgra, Inc. 351,125
FOOD - RETAIL (2.19%)
5,700 Albertson's, Inc. 269,325
FOOD - WHOLESALE (2.48%)
6,700 Sysco Corporation 305,269
HOUSEHOLD PRODUCTS (1.28%)
3,700 Newell Co. 157,250
MACHINERY - INDUSTRIAL &
CONSTRUCTION (.46%)
1,500 Fluor Corporation 56,062
OFFICE EQUIPMENT & SERVICES (8.00%)
5,000 Compaq Computers Corporation* 282,500
5,350 Digital Equipment Corporation* 198,619
International Business
4,800 Machines Corporation 502,200
-----------
983,319
OIL SERVICES & DRILLING (2.62%)
6,200 Halliburton Company 321,625
OILS & OIL RELATED PRODUCTS (4.9%)
2,700 Amoco Corporation 229,838
2,600 Atlantic Richfield Company 208,325
2,600 Kerr-McGee Corporation 164,612
-----------
602,775
PACKAGING - CONTAINERS (3.06%)
8,400 Avery-Dennison Corporation 375,900
PHOTOGRAPHY (2.02%)
4,100 Eastman Kodak Company 248,306
RESTAURANTS/LODGING (1.92%)
3,400 Marriott International, Inc. 235,450
RETAIL-SPECIALTY (2.29%)
7,200 NIKE, Inc. 281,250
TECHNOLOGY (7.48%)
5,000 AMP, Incorporated 210,000
4,950 Diebold, Incorporated 250,594
4,800 Intel Corporation 337,200
3,600 Millipore Corporation 122,175
-----------
919,969
UTILITIES - TELEPHONE (2.29%)
5,000 BellSouth Corporation 281,562
-----------
TOTAL COMMON STOCKS
(COST-$5,026,849) 10,325,290
PRINCIPAL
AMOUNT
------
SHORT-TERM NOTES (15.43%)
$ 450,000 United States Treasury Bill
4.93%, due 2/5/98 (cost-$446,549) 446,549
$ 1,460,000 United States Treasury Bill
5.05%, due 2/5/98 (cost-$1,450,119) 1,450,119
-----------
TOTAL SHORT-TERM NOTES
1,896,669
-----------
TOTAL INVESTMENTS (99.41%)
(COST-$6,923,517) 12,221,959
CASH AND RECEIVABLES, LESS
LIABILITY (.59%) 72,930
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $12,294,889
-----------
-----------
</TABLE>
*NON-INCOME PRODUCING INVESTMENT IN 1997.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
F-5
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers. Short-term notes
are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be taxed
with those of, The Franklin which is taxed as a "life insurance company" under
the Internal Revenue Code. Under current law, no federal income taxes are
payable with respect to the Fund.
ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are
calculated using the Progressive Annuity Table with an assumed investment rate
of 3-1/2%.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during 1997 aggregated $70,929 and $1,508,962,
respectively.
NOTE C-EXPENSES
Amounts are paid to The Franklin for investment management services at the rate
of .0012% of the current value of the Fund per day (.438% on an annual basis)
and for mortality and expense risk assurances at the rate of .002745% of the
current value of the Fund per day (1.002% on an annual basis).
NOTE D-SALES AND ADMINISTRATIVE CHARGES
Sales and administrative charges aggregating $16,926 and $21,860 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1997 and 1996,
respectively. Franklin Financial Services Corporation is a wholly-owned
subsidiary of The Franklin and principal underwriter for the Fund.
NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ----------
<S> <C> <C> <C> <C>
Balance at
beginning of year 139,945 $11,403,341 150,474 $10,412,808
Purchases 2,945 268,272 3,007 226,321
Net investment
income* - 78,354 - 85,005
Net realized gain
from investment
transactions* - 451,738 - 268,930
Net unrealized
appreciation
of investments* - 1,709,736 - 1,402,260
Withdrawals (18,176) (1,636,104) (13,536) (995,151)
Reimbursement
for contract
guarantees* - 172 - 3,168
-----------------------------------------------------------------------
Balance at end
of year 124,714 $12,275,509 139,945 $11,403,341
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
*Excludes portion allocated to annuity reserves on a pro rata basis.
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also directors, officers or employees of The Franklin
or Franklin Financial Services Corporation. Amounts paid by the Fund to The
Franklin and to Franklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION OF
INVESTMENTS
Net unrealized appreciation of investments at December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------------------------------
<S> <C> <C>
Gross unrealized appreciation $5,387,633 $3,670,260
Gross unrealized depreciation 89,191 86,190
--------------------------------
Net unrealized appreciation
of investments $5,298,442 $3,584,070
--------------------------------
--------------------------------
</TABLE>
F-6
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.910 $1.685 $1.948 $1.408 $1.231
Expenses 1.312 1.090 .875 .773 .773
----------------------------------------------------------------------------
Net investment income .598 .595 1.073 .635 .458
Net realized and unrealized gain (loss) on
investments 16.346 11.690 14.139 (.240) .112
----------------------------------------------------------------------------
Net increase in accumulation unit value 16.944 12.285 15.212 .395 .570
Accumulation unit value:
Beginning of year 81.485 69.200 53.988 53.593 53.023
----------------------------------------------------------------------------
End of year $98.429 $81.485 $69.200 $53.988 $53.593
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average
net assets .66% .79% 1.76% 1.18% .85%
Portfolio turnover rate .70% 4.77% 14.66% 88.99% 68.62%
Number of accumulation units outstanding at
end of year 124,714 139,945 150,474 172,507 198,763
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
-----------------------------
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the accompanying consolidated balance sheet of The Franklin
Life Insurance Company (an indirect wholly-owned subsidiary of American
General Corporation) (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash
flows for the years ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995 and the one month ended January 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Franklin
Life Insurance Company at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995 and the
one month ended January 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998
F-8
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
------------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-----------------------------------------------------------------------------
1997 1996 1995 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $370.2 $ 418.6 $449.6 $34.5
Net investment income 518.6 521.5 468.8 41.3
Realized investment gains (losses) 12.8 2.5 7.2 (7.6)
Other 75.8 68.3 55.9 4.1
-----------------------------------------------------------------------------
Total revenues 977.4 1,010.9 981.5 72.3
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 250.6 240.6 236.3 21.5
Investment-type contracts 169.4 173.3 168.3 14.0
Dividends to policyholders 86.3 81.9 85.6 7.5
Change in policy reserves 54.6 95.9 148.5 11.0
Increase in participating policy-
holders' interests 4.7 12.0 11.0 1.0
Commissions 106.5 110.2 108.0 7.6
Operating costs and expenses 33.5 35.7 17.3 2.8
Amortization of deferred policy
acquisition costs 11.5 10.7 8.3 5.8
Amortization of cost of insurance
purchased, net of deferrals 45.3 51.1 29.0 0.8
-----------------------------------------------------------------------------
Total benefits and expenses 762.4 811.4 812.3 72.0
-----------------------------------------------------------------------------
Income before income tax expense 215.0 199.5 169.2 0.3
Income tax expense
Current 74.8 94.7 39.7 4.9
Deferred (benefit) (0.4) (25.3) 21.1 (4.7)
-----------------------------------------------------------------------------
Total income tax expense 74.4 69.4 60.8 0.2
-----------------------------------------------------------------------------
Net income $140.6 $ 130.1 $108.4 $ 0.1
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Investments
Fixed maturity securities(amortized cost:
$5,157.7; $5,152.3) $5,615.2 $5,476.5
Mortgage loans on real estate 621.6 607.0
Equity securities (cost: $1.1; $2.0) 4.4 5.0
Policy loans 332.7 327.4
Other long-term investments 46.3 47.6
-----------------------
Total investments 6,620.2 6,463.5
Cash and cash equivalents 39.5 24.6
Accrued investment income 100.3 99.7
Note receivable from parent 116.4 116.4
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 26.5 17.7
Receivable from agents, less allowance ($4.3; 14.4 18.3
$0.4)
Amounts recoverable from reinsurers 41.5 84.0
Deferred policy acquisition costs 111.7 82.0
Cost of insurance purchased 303.9 407.8
Property and equipment, at cost, less accumulated
depreciation ($10.2; $7.2) 23.4 20.6
Other assets 27.4 29.6
Assets held in Separate Accounts 239.6 134.9
-----------------------
Total assets $7,673.3 $7,507.6
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In millions, except share data)
DECEMBER 31
-------------------------
LIABILITIES 1997 1996
-------------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health reserves $2,882.8 $2,864.7
Policy and contract claims 34.4 38.1
Investment-type contract deposits
and dividend accumulations 2,907.6 2,992.7
Participating policyholders' interests 211.4 209.7
Other 50.7 49.5
Income taxes
Current 2.2 6.4
Deferred 4.5 (19.0)
Intercompany payables 0.5 0.8
Accrued expenses and other liabilities 109.6 116.6
Liabilities related to Separate Accounts 239.6 134.9
-------------------------
Total liabilities 6,443.3 6,394.4
SHAREHOLDER'S EQUITY
Common stock ($2 par value;
30,000,000 shares authorized,
21,002,000 shares issued and outstanding) 42.0 42.0
Paid-in capital 886.1 886.1
Net unrealized gains on securities 150.8 106.6
Retained earnings 151.1 78.5
-------------------------
Total shareholder's equity 1,230.0 1,113.2
-------------------------
Total liabilities and shareholder's equity $7,673.3 $7,507.6
-------------------------
-------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven
Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------
1997 1996 1995 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
-------------------------------------------------
-------------------------------------------------
Paid-in capital
Balance at beginning of period 886.1 884.3 884.3 803.0
Paid in during the period - 1.8 - -
Adjustment for the acquisition - - - 81.3
-------------------------------------------------
Balance at end of period 886.1 886.1 884.3 884.3
-------------------------------------------------
Net unrealized gains (losses)
on securities
Balance at beginning of period 106.6 187.5 - (8.1)
Change during the period 44.2 (80.9) 187.5 1.4
Adjustment for the acquisition - - - 6.7
-------------------------------------------------
Balance at end of period 150.8 106.6 187.5 -
-------------------------------------------------
Retained earnings
Balance at beginning of period 78.5 48.4 - 522.7
Net income 140.6 130.1 108.4 0.1
Dividends paid to parent (68.0) (100.0) (60.0) (250.0)
Adjustment for the acquisition - - - (272.8)
-------------------------------------------------
Balance at end of period 151.1 78.5 48.4 -
-------------------------------------------------
Total shareholder's equity
at end of period $1,230.0 $1,113.2 $1,162.2 $ 926.3
-------------------------------------------------
-------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------------------
1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income $ 140.6 $ 130.1 $108.4 $ 0.1
Reconciling adjustments
Insurance liabilities 33.4 121.5 155.4 19.9
Deferred policy acquisition costs (40.4) (45.5) (59.4) (2.7)
Investment (gains) losses (6.1) (4.7) (11.4) (0.9)
Investment write-downs and reserves (6.7) 2.2 4.2 8.5
Cost of insurance purchased and intangibles 45.3 51.1 29.0 1.0
Interest credited, net of charges on investment
contract deposits 92.5 103.2 153.7 12.0
Purchase of trading securities - - - (1.5)
Proceeds from sale of trading securities - - - 85.5
Other, net (5.4) (107.9) 14.3 (7.1)
-------------------------------------------------------------------
Net cash provided by operating activities 253.2 250.0 394.2 114.8
-------------------------------------------------------------------
INVESTING ACTIVITIES
Investment purchases
Available-for-sale (891.8) (5,479.1) (1,055.8) -
Held-to-maturity - - - (0.8)
Other investments (125.2) (122.6) (95.7) (27.2)
Affiliated - - (124.5) -
Investment calls, maturities and sales
Available-for-sale 978.0 5,526.3 832.0 0.2
Held-to-maturity - - - 24.9
Other investments 70.7 65.1 127.1 6.3
Additions to property and equipment (6.7) (4.6) (3.5) (0.5)
-------------------------------------------------------------------
Net cash provided by (used for) investing activities 25.0 (14.9) (320.4) 2.9
-------------------------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 194.5 165.3 357.8 29.2
Policyholder account withdrawals (389.8) (297.1) (366.2) (32.6)
Additional capital contribution - 1.8 - -
Proceeds from intercompany borrowings 230.4 62.0 105.2 -
Repayments of intercompany borrowings (230.4) (62.1) (105.1) -
Dividend payments (68.0) (100.0) (60.0) (250.0)
-------------------------------------------------------------------
Net cash used for financing activities (263.3) (230.1) (68.3) (253.4)
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14.9 5.0 5.5 (135.7)
Cash and cash equivalents at beginning of period 24.6 19.6 14.1 149.8
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39.5 $ 24.6 $ 19.6 $ 14.1
-------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The Franklin Life Insurance Company (Franklin) and its subsidiaries,
headquartered in Springfield, Illinois, provide life insurance and
annuity products to middle-income customers throughout the United
States. Franklin serves this customer base through 3,200 agents.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) and include the
accounts of Franklin, and its subsidiaries, The American Franklin Life
Insurance Company (AMFLIC), Franklin Financial Services Corporation
(FFSC) and prior to December 31, 1995, The Franklin United Life
Insurance Company (FULIC). Franklin was formerly a wholly-owned
subsidiary of American Franklin Company (AFC), and is now an indirect,
wholly-owned subsidiary of American General Corporation (AGC) following
the dissolution of AFC in June of 1996. All material intercompany
transactions have been eliminated in consolidation.
On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General
Life Insurance Company, the parent of AGNY, as consideration. No gain
or loss was recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from these estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
AGC, acquired AFC for $1.17 billion. The purchase price consisted of
$920 million in cash and a $250 million extraordinary cash dividend paid
by AFC to its former parent prior to closing. In addition, $6.3 million
of acquisition costs were capitalized as part of the acquisition.
F-14
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The acquisition was accounted for using the purchase method of
accounting in accordance with the provisions of Accounting Principles
Board Opinion 16, "Business Combinations", and other existing accounting
literature pertaining to purchase accounting. Under purchase
accounting, the total purchase cost was allocated to the assets and
liabilities acquired based on a determination of their fair value.
Franklin's consolidated statements of income, shareholder's equity and
cash flows for the years ended December 31, 1997 and 1996, and the
eleven months ended December 31, 1995, are reported under the purchase
method of accounting and, accordingly, are not consistent with the basis
of presentation of the "Predecessor Basis" consolidated statements of
income, shareholder's equity and cash flows for the one month ended
January 31, 1995.
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and
equity securities are classified as available-for-sale and recorded at
fair value. After adjusting related balance sheet accounts as if
unrealized gains (losses) had been realized, the net adjustment is
recorded in net unrealized gains (losses) on securities within
shareholder's equity. If the fair value of a security classified as
available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its
fair value, and the reduction is recorded as a realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of
an allowance for losses. The allowance for losses covers all
non-performing loans and loans for which management has a concern based
on management's assessment of risk factors, such as potential
non-payment or non-monetary default. The allowance is based on a
loan-specific review and a formula that reflects past results and
current trends.
Loans for which Franklin determines that collection of all amounts due
under the contractual terms is not probable are considered to be
impaired. Franklin generally looks to the underlying collateral for
repayment of impaired loans. Therefore, impaired loans are considered
to be collateral dependent and are reported at the lower of amortized
cost or fair value of the underlying collateral, less estimated cost to
sell.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities, policy loans
and performing and restructured mortgage loans is recorded as income
when earned and is adjusted for any amortization of premium or discount.
Interest on delinquent mortgage loans is recorded as income when
received. Dividends are recorded as income on ex-dividend dates.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
OTHER LONG TERM INVESTMENTS. Other long term investments represent
investments in joint ventures and limited partnerships and are reported
on the equity method.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses)
are recognized using the specific identification method.
1.5 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or
less are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is
charged to expense in relation to the estimated gross profits of those
contracts. The interest assumptions used to compute estimated gross
profits with respect to participating life insurance contracts were
7.75% at December 31, 1997 and 1996, and 8.5% at December 31, 1995.
DPAC associated with all other insurance contracts is charged to expense
over the premium-paying period or as the premiums are earned over the
life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the
balance sheet date. The impact of this adjustment is included in net
unrealized gains (losses) on securities within shareholder's equity.
Franklin reviews the carrying amount of DPAC on at least an annual
basis. Management considers estimated future gross profits or future
premiums, expected mortality, interest earned and credited rates,
persistency, and expenses in determining whether the carrying amount is
recoverable.
1.7 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to certain insurance contracts in force at January 31,
1995 is reported as CIP. Interest is accreted on the unamortized
balance of CIP at rates of 7.0% to 8.5%. CIP is charged to expense and
adjusted for the impact of net unrealized gains (losses) on securities
in the same manner as DPAC. Franklin reviews the carrying amount of CIP
on at least an annual basis using the same methods used to evaluate
DPAC.
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.8 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the contract
holder. Therefore, Franklin's liability for these accounts equals the
value of the account assets. Investment income, realized investment
gains (losses), and policyholder account deposits and withdrawals
related to Separate Accounts are excluded from the consolidated
statements of income. Assets held in Separate Accounts are carried at
fair value.
1.9 INSURANCE LIABILITIES
Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a
period of more than one year. The contract provisions normally cannot be
changed or canceled by Franklin during the contract period.
For interest-sensitive life insurance and insurance investment
contracts, reserves equal the sum of the policy account balances and
deferred revenue charges. Reserves for non-participating long-duration
contracts are based on estimates of the cost of future policy benefits
to be paid as a result of present and future claims due to death,
disability, surrender of a policy, or payment of an endowment. Reserves
are determined using the net level premium method. Interest assumptions
used to compute reserves ranged from 2.0% to 8.5% at December 31, 1997.
The liability for future policy benefits on participating life insurance
contracts is a net level reserve using the nonforfeiture interest rate
and mortality table of the plan of insurance.
1.10 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance
contracts are classified as deposits instead of revenues. Revenues for
these contracts consist of mortality, expense, and surrender charges.
Policy charges that are designed to compensate Franklin for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DPAC.
For limited-payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium received and the net premium is
deferred and recognized in income in a constant relationship to
insurance in force. For all other long-duration contracts, premiums are
recognized when due.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 PARTICIPATING LIFE INSURANCE
Participating life insurance contracts contain dividend payment
provisions that entitle the policyholders to participate in the earnings
of the contracts. Participating life insurance accounted for 46% and
47% of life insurance in force at December 31, 1997 and 1996
respectively, and 70%, 62%, 58%, and 69% of premiums and other
considerations for the years ended December 31, 1997 and 1996, the
eleven months ended December 31, 1995, and the one month ended January
31, 1995, respectively.
The portion of earnings allocated to participating policyholders that
cannot be expected to inure to Franklin's shareholder is excluded from
net income and shareholder's equity. Dividends to be paid on
participating life insurance contracts are determined annually based on
estimates of the contracts' earnings.
1.12 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in
effect when the temporary differences reverse. The effect of a tax rate
change is recognized in income in the period of enactment. State income
taxes are included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains
(losses) on securities in shareholder's equity.
1.13 RECLASSIFICATION
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
1.14 NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, Franklin must adopt this statement for
all periods presented. Application of this statement will not change
recognition or measurement of net income and, therefore, will not impact
Franklin's consolidated results of operations or financial position.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
Eleven
Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $435.5 $434.6 $394.3 $33.9
Mortgage loans on real 58.3 58.8 54.3 4.6
estate
Policy loans 19.3 18.9 18.6 1.7
Other investments 9.5 13.5 9.1 1.2
---------------------------------------------------
Gross investment income 522.6 525.8 476.3 41.4
Investment expense 4.0 4.3 7.5 0.1
---------------------------------------------------
Net investment income $518.6 $521.5 $468.8 $41.3
---------------------------------------------------
---------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income
during 1997 totaled $12.4 million, or less than .19% of total invested
assets at December 31, 1997. The ultimate disposition of these assets
is not expected to have a material effect on Franklin's consolidated
results of operations or financial position.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for fixed maturity and equity
securities, net of DPAC and CIP amortization were as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------------------------
In millions 1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 15.4 $ 25.0 $ 13.8 $ -
Gross losses (6.2) (17.6) (1.9) -
------------------------------------------------------------------------
Total fixed maturity securities 9.2 7.4 11.9 -
------------------------------------------------------------------------
Equity securities
Gross gains 1.0 1.8 1.9 4.1
Gross losses - - (0.5) (5.4)
------------------------------------------------------------------------
Total equity securities 1.0 1.8 1.4 (1.3)
------------------------------------------------------------------------
Other 2.6 (6.7) (6.1) (6.3)
------------------------------------------------------------------------
Realized investment gains (losses) $ 12.8 $ 2.5 $ 7.2 $(7.6)
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
Realized
------------------
In millions Category Proceeds Gains Losses
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997 AVAILABLE-FOR-SALE $577.6 $10.5 $ 3.1
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Year Ended
December 31, 1996 Available-for-sale $807.0 $21.8 $15.4
- -------------------------------------------------------------------------------------
Eleven Months Ended
December 31, 1995 Available-for-sale $268.7 $ 8.5 $ 0.4
- -------------------------------------------------------------------------------------
One Month Ended
January 31, 1995 Trading $ 84.7 $ 4.1 $ 5.4
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. Amortized cost and fair value of fixed maturity and equity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,845.2 $228.9 $0.3 $3,073.8
Below investment grade 307.8 13.7 1.1 320.4
Public utilities 972.3 116.1 - 1,088.4
Mortgage-backed 750.7 67.4 0.1 818.0
Foreign governments 90.0 15.4 0.4 105.0
U.S. government 186.7 17.7 - 204.4
States/political subdivisions 4.8 0.2 - 5.0
Redeemable preferred stocks 0.2 - - 0.2
----------------------------------------------------------------------
Total fixed maturity securities $5,157.7 $459.4 $1.9 $5,615.2
----------------------------------------------------------------------
----------------------------------------------------------------------
Equity securities $ 1.1 $ 3.3 $ - $ 4.4
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In millions Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,747.7 $170.2
$6.3 $2,911.6
Below investment grade 239.7 9.0 1.4 247.3
Public utilities 1,064.7 86.9 - 1,151.6
Mortgage-backed 802.1 41.9 1.4 842.6
Foreign governments 96.2 11.0 - 107.2
U.S. government 190.1 13.9 0.1 203.9
States/political subdivisions 11.5 0.5 - 12.0
Redeemable preferred stocks 0.3 - - 0.3
-------------------------------------------------------------------
Total fixed maturity securities $5,152.3 $333.4 $9.2 $5,476.5
-------------------------------------------------------------------
-------------------------------------------------------------------
Equity securities $ 2.0 $ 3.0 $ - $ 5.0
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
In millions COST VALUE
- --------------------------------------------------------------------------------
FIXED MATURITY SECURITIES, EXCLUDING
MORTGAGE-BACKED SECURITIES, DUE
<S> <C> <C>
In one year or less $ 55.0 $ 55.4
In years two through five 785.0 825.8
In years six through ten 1,993.5 2,140.3
After ten years 1,573.5 1,775.7
Mortgage-backed securities 750.7 818.0
----------------------------
Total fixed maturity securities $5,157.7 $5,615.2
----------------------------
----------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
2.4 NET UNREALIZED GAINS ON SECURITIES
Net unrealized gains on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 462.7 $ 336.4
Gross unrealized losses (1.9) (9.2)
DPAC fair value adjustment (10.4) (0.4)
CIP fair value adjustment (215.7) (160.9)
Participating policyholders'
interest (2.5) (1.8)
Deferred federal income taxes (81.4) (57.5)
-----------------------
Net unrealized gains
on securities $ 150.8 $ 106.6
-----------------------
-----------------------
</TABLE>
F-23
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 75% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
In millions 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $119.6 $120.0
East South Central 36.2 37.8
Mid Atlantic 35.5 21.5
Mountain 53.5 58.1
New England 22.5 19.2
Pacific 99.5 104.3
South Atlantic 175.2 167.7
West North Central 34.3 35.4
West South Central 53.5 57.9
Allowance for losses (8.2) (14.9)
-----------------------------------------------------------------------
Total $621.6 $607.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Property type
Retail $333.5 $312.3
Office 131.9 147.5
Industrial 96.7 89.4
Residential and other 67.7 72.7
Allowance for losses (8.2) (14.9)
-----------------------------------------------------------------------
Total $621.6 $607.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows as of and for the year
ended December 31:
<TABLE>
<CAPTION>
In millions 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans
With allowance * $ 8.0 $21.4 5.3
Without allowance 8.1 - 17.8
----------------------------------------------
Total impaired loans $16.1 $21.4 23.1
----------------------------------------------
----------------------------------------------
Average investment $18.8 $22.3 27.4
----------------------------------------------
----------------------------------------------
Interest income earned $ 0.8 $ 1.5 1.3
----------------------------------------------
----------------------------------------------
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of
$3.0 million, $4.9 million, and $1.6 million at December 31, 1997,
1996, and 1995, respectively. There were no impaired loans as of
January 31, 1995.
ALLOWANCE. Activity in the allowance for mortgage loan losses was as
follows:
<TABLE>
<CAPTION>
Eleven One Month
YEAR ENDED Year Ended Months Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of
period $14.9 $12.7 8.5 -
Net change in allowance * (6.7) 2.2 4.2 8.5
---------------------------------------------------
Balance at end of period $ 8.2 $14.9 12.7 8.5
---------------------------------------------------
</TABLE>
* Charged to realized investment gains (losses).
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
At December 31, 1997 and 1996, bonds and other investments carried at $19.3
million and $22.6 million, respectively, were on deposit with regulatory
authorities to comply with state insurance laws.
2.7 INVESTMENT RESTRICTIONS
Franklin is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1997 and
1996, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $62.8 million and
$64.6 million, respectively.
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of Franklin's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of Franklin's assets
and liabilities, and (2) the reporting of investments at fair value without
a corresponding revaluation of related policyholder liabilities can be
misinterpreted.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1997 1996
------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $5,615.2 $5,615.2 $5,476.5 $5,476.5
Mortgage loans on real
estate 621.6 659.4 607.0 637.7
Equity securities 4.4 4.4 5.0 5.0
Liabilities
Insurance investment
contracts $1,881.4 $ 1,813.3 $1,967.9 $1,892.9
Dividend accumulations $ 780.1 $ 780.1 $ 755.9 $ 755.9
</TABLE>
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used to estimate the fair value
of financial instruments.
FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or, in the case of some private
placements, by discounting expected future cash flows using a current
market rate applicable to yield, credit quality, and average life of the
investments.
MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
risk-adjusted discount rates.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
on policy loans was 6% in 1997 and 1996.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts was estimated using cash flows discounted at market interest
rates.
DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividends payable on demand at the reporting date.
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period
balance $ 82.0 $ 47.5 $ - $ 510.6
Capitalization 51.9 56.2 67.7 8.5
Amortization (11.5) (10.7) (8.3) (5.8)
Effect of unrealized
gains on securities (10.0) 11.3 (11.7) -
Effect of realized
investment gains (0.7) (0.4) (0.2) -
Adjustment for the
acquisition(a) - - - (513.3)
Other - (21.9) - -
--------------------------------------------------------
End of period balance $111.7 $ 82.0 $47.5 $ -
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period $ 407.8 $ 353.0 $ 656.6 $174.7
balance
Interest accretion 47.3 51.8 49.0 2.0
Additions 15.1 13.6 41.3 -
Amortization (107.7) (116.5) (118.0) (2.8)
Effect of unrealized
gains on securities (54.8) 109.1 (270.0) -
Effect of realized
investment gains (3.8) (3.2) (5.9) -
Incremental adjustment
for the acquisition(a) - - - 482.7
---------------------------------------------------
End of period balance $ 303.9 $ 407.8 $ 353.0 $656.6
---------------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP
asset attributable to the January 31, 1995 acquisition.
CIP amortization, net of interest accretion and additions, expected to
be recorded in each of the next five years is $41.7 million, $38.4
million, $35.3 million, $32.4 million, and $29.8 million.
6. Separate Accounts
Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers three Separate Accounts in connection
with the issuance of its Variable Universal Life and Variable Annuity
products.
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
Franklin files a life/life consolidated return which includes Franklin and
AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin,
files a separate return.
The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability
of each subsidiary under this agreement shall not exceed the amount such
subsidiary would have paid if it had filed on a separate return basis.
Intercompany tax balances are to be settled no later than thirty (30) days
after the date of filing the consolidated return.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In millions 1997 1996
---------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 122.8 $ 63.1
DPAC and CIP 98.6 124.6
Other 10.2 15.7
-----------------------------
Total deferred tax liabilities 231.6 203.4
-----------------------------
Deferred tax assets, applicable to:
Policy reserves (124.5) (128.3)
Participating policyholders' (74.0) (73.6)
interests
Postretirement benefits (3.4) (4.0)
Basis differential of investments (7.5) (7.7)
Other (17.7) (8.8)
-----------------------------
Total deferred tax assets (227.1) (222.4)
-----------------------------
Net deferred tax liability (asset) $ 4.5 $ (19.0)
-----------------------------
-----------------------------
</TABLE>
Franklin expects adequate future taxable income to realize the deferred tax
assets. Accordingly, no valuation allowance is considered necessary.
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1997. At current corporate income tax
rates, the maximum amount of tax on such income is approximately $70
million. Deferred income taxes on these accumulations are not required
because no distributions are expected.
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------
1997 1996 1995 1995
--------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.9 0.3 0.9 36.3
Tax-exempt investment income (0.5) (0.7) (0.6) (39.3)
Amortization of goodwill - - - 34.3
Other (0.8) 0.2 0.6 0.4
--------------------------------------------------
Effective tax rate 34.6% 34.8% 35.9% 66.7%
--------------------------------------------------
--------------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid for the years ended December 31, 1997 and 1996,
and the eleven months ended December 31, 1995, were $77 million, $74
million, and $53 million, respectively. State income taxes paid for the
years ended December 31, 1997 and 1996, and the eleven months ended
December 31, 1995, were $2 million, $2 million, and $1 million,
respectively. There were no federal or state income taxes paid during
January 1995.
8. Benefit Plans
8.1 PENSION PLANS
On January 1, 1996, Franklin's existing defined benefit pension plan (The
Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan).
The AGC Plan is a non-contributory defined benefit plan covering most
Franklin employees. Under the AGC Plan, pension benefits are based on the
participant's compensation and length of credited service. AGC's funding
policy is to contribute annually no more than the maximum deductible for
federal income tax purposes.
Equity and fixed maturity securities were 63% and 28%, respectively, of the
AGC Plan's assets at the Plan's most recent balance sheet date.
Additionally, 5% of the Plan's assets were invested in general investment
accounts of AGC's subsidiaries through deposit administration insurance
contracts.
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The net pension (income)/expense and the computation of the projected
benefit obligation for years prior to January 1, 1996 were based on the
provisions of the Franklin Plan. The Franklin Plan provided for the
payment of retirement benefits; normally commencing at age 65, and also for
the payment of certain disability benefits. After meeting certain
qualifications, an employee acquired a vested right to future benefits.
Pension benefits were based on the participant's average monthly
compensation and length of credited service. Annual contributions made to
the plan were sufficient to satisfy legal funding requirements.
At December 31, 1995, fixed maturity securities constituted the majority of
The Franklin Plan's assets.
Prior to January 1, 1996, The Franklin Plan purchased annuity contracts
from Franklin to provide benefits for its retirees. For the eleven months
ended December 31, 1995, and the one month ended January 31, 1995, these
contracts provided approximately $3.9 million and $0.3 million annually for
retiree benefits, respectively.
During the fourth quarter of 1995, Franklin sponsored a program of special
incentives to those employees age 55 and over who elected early retirement.
The program concluded December 31, 1995. A withdrawal of $26.5 million was
made from the Franklin Plan in 1995 to provide full retirement benefits for
these employees who elected to retire under the program.
Net pension (income)/expense included the following components:
<TABLE>
<CAPTION>
Eleven One Month
YEAR ENDED Year Ended Months Ended Ended
DECEMBER 31 December 31 December 31 January 31
-----------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits
earned) $ 0.7 $ 0.8 $ 0.9 $ 0.2
Interest cost 1.9 2.0 3.7 0.4
Actual return on plan
assets (8.4) (7.8) (11.5) (0.4)
Net amortization and
deferral 5.0 4.6 6.3 -
-----------------------------------------------------
Pension (income) expense $(0.8) $ (0.4) $ (0.6) $ 0.2
-----------------------------------------------------
</TABLE>
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The funded status and the prepaid pension expense (included in other
assets) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, primarily vested $ 27.7 $ 27.0
Effect of increase in compensation levels 0.5 0.2
---------------------------
Projected benefit obligation 28.2 27.2
Plan assets at fair value 43.8 35.5
---------------------------
Plan assets at fair value in excess of projected
benefit obligation 15.6 8.3
Other unrecognized items, net (3.5) 3.0
---------------------------
Prepaid pension expense $ 12.1 $ 11.3
---------------------------
---------------------------
Weighted-average discount rate on benefit 7.25% 7.50%
obligation
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
</TABLE>
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1996, the assets in Franklin's voluntary employees'
beneficiary association (Franklin VEBA) for the retiree health and welfare
plan were transferred to the AGC VEBA Plan. No changes in assumptions or
plan provisions were made as a result of the transfer.
Under the AGC VEBA Plan, Franklin has life, medical, supplemental major
medical and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to
limit employer contributions to predetermined amounts. Franklin has
reserved the right to change or eliminate these benefits at any time.
The life plans are fully insured for a two-year period. A portion of the
retiree medical and dental plans is funded through the AGC VEBA Plan; the
remainder is unfunded and self-insured. All of the retiree medical and
dental plans' assets held in the AGC VEBA Plan were invested in readily
marketable securities.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The funded status and the accrued postretirement benefit cost (included in
other liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $7.2 $ 7.3
Active plan participants
Fully eligible 0.3 0.2
Other 2.0 1.8
------------------------------------
Accumulated postretirement
benefit obligation (APBO) 9.5 9.3
Plan assets at fair value 0.2 -
------------------------------------
APBO in excess of plan assets
at fair value 9.3 9.3
Unrecognized net gain 0.5 2.2
------------------------------------
Accrued benefit cost $9.8 $11.5
------------------------------------
------------------------------------
Weighted-average discount
rate on benefit obligation 7.25% 7.50%
</TABLE>
Postretirement benefit expense (income) was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In millions 1997 1996 1995 1995
Service cost (benefits $0.1 $0.1 $0.1 $ -
earned)
Interest cost 0.7 0.7 0.9 (0.2)
Postretirement benefit
expense (income) $0.8 $0.8 $1.0 $(0.2)
</TABLE>
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998; the rate was
assumed to decrease gradually to 5% by the year 2005 and remain at that
level. A 1% increase in the assumed rate results in a $0.1 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices.
During 1995, Franklin received approval to loan $116.0 million to AGCL.
Franklin also received approval to pay an extraordinary dividend of $250
million to its former parent as part of the 1995 acquisition, and also
received approval to pay an extraordinary dividend of $60 million to AGCL.
At December 31, 1997 and 1996, Franklin had statutory shareholder's equity
of $521.0 million and $431.0 million, respectively. Statutory net income
was $129.7 million, $123.2 million, and $100.2 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:
<TABLE>
<CAPTION>
STATUTORY
-------------------------------------
In millions 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $17.7 $18.1 $ 9.9
-------------------------------------
-------------------------------------
Net Income $(0.6) $(1.9) $(4.7)
-------------------------------------
-------------------------------------
</TABLE>
Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. Under these restrictions, during 1998, loans or advances in
excess of $130.3 million and dividends in any twelve-month period
aggregating in excess of $129.7 million will require the approval of the
Illinois Insurance Department.
10. Consolidated Statement of Cash Flows
In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and
other financial products $169.4 $173.3 $168.3 $14.0
</TABLE>
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance
Franklin limits its exposure to loss on any single insured to $2.1 million
by ceding additional risks through reinsurance contracts with other
insurers. Franklin diversifies its risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ability ratings. If
the reinsurer could not meet its obligations, Franklin would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by Franklin is considered to be remote.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $41.5 million, $67.3 million, $63.3 million and
$1.4 million for the years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995,
respectively. The amount of reinsurance recoverable (payable) on paid and
unpaid losses was $(0.5) million and $1.8 million at December 31, 1997 and
1996, respectively. The cost of reinsurance is recognized over the life of
the reinsured policies using assumptions consistent with those used to
account for the underlying policies.
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums
and other
considerations $415.3 $491.5 $500.1 $36.8
Reinsurance assumed 8.3 15.9 44.2 (0.8)
Reinsurance ceded (53.4) (88.8) (94.7) (1.5)
- -------------------------------------------------------------------------------
Premiums and other
considerations $370.2 $418.6 $449.6 $34.5
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
12. Related Party Transactions
Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $230.4 million and
$62.0 million, and repaid $230.4 million and $62.1 million in 1997 and
1996, respectively. Interest was paid on the outstanding balances based on
the rate as stipulated in the program.
During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005 (see Note 9).
During 1995, Franklin received $8.5 million of 8% non-voting preferred
stock of American General Life Insurance Company as consideration for the
sale of FULIC.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (continued)
Franklin has entered into indefinite contracts for the performance of all
investment management services as well as cost allocation agreements with
its ultimate parent. Total expenses under these agreements were $2.5
million and $2.3 million for the years ended December 31, 1997 and 1996,
respectively, and $1.1 million for the eleven months ended December 31,
1995.
13. Legal Proceedings
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in
substantial settlements. Franklin is a defendant in such purported class
action lawsuits filed in 1997, asserting claims related to pricing and
sales practices. These claims are being defended vigorously by Franklin.
Given the uncertain nature of litigation and the early stages of this
litigation, the outcome of these actions cannot be predicted at this time.
Franklin management nevertheless believes the ultimate outcome of all such
pending litigation should not have a material adverse effect on Franklin's
financial position. It is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on results of operations for a given
period. No provision for any adverse determinations in this pending
litigation has been made in the consolidated financial statements because
the amount of loss, if any, from these actions cannot be reasonably
estimated at this time.
Franklin is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, Franklin management believes the total
amounts that will ultimately be paid, if any, arising from these lawsuits
and proceedings will not have a material adverse effect on Franklin's
results of operations and financial position. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred
by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guaranty Fund Assessments
Information about state guaranty fund assessments was as follows as of and
for the:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense, included
in operating costs
and expenses $1.2 $ 0.7 $ 0.2 $0.6
Liability for
anticipated
assessments 3.6 7.5 8.5 -
Receivable for
expected recoveries
against future
premium taxes 7.4 11.2 11.2 -
- -------------------------------------------------------------------------------
</TABLE>
Changes in state laws could decrease the amount recoverable against future
premium taxes.
F-38
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN LIFE VARIABLE ANNUITY FUND A
INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND
TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
<PAGE>
APPENDIX B
FRANKLIN LIFE VARIABLE ANNUITY FUND A
ANNUAL REPORT DATED DECEMBER 31, 1998
<PAGE>
[LETTERHEAD]
Dear Contract Owner:
We are pleased to provide this 1998 annual report which shows the status of and
balances in your Franklin Life Variable Annuity Fund A contract.
<TABLE>
<CAPTION>
Investment Position
-------------------
December 31, 1998 June 30, 1998 December 31, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
VARIABLE PORTION:
Accumulation Unit Value $123.03 $108.49 $98.43
------- ------- ------
------- ------- ------
Percentage Change From:
December 31, 1997 +24.99%
-------
-------
June 30, 1998 +13.40%
-------
-------
</TABLE>
The accumulation unit value is based on the market price of the investments held
by the Fund. A listing of the investments held at December 31, 1998 appears on
page 3.
FIXED PORTION:
Additional units in the fixed rate portion of your annuity arising from
contributions credited during the contract year ending in 1998 were based
on a 6.25% interest rate, less a contract expense charge. If your contract
anniversary is in the first half of 1999, the interest rate for the fixed
portion of your annuity applicable to contributions made during the
contract year ending in 1999 is anticipated to be 5.00%, less a contract
expense charge. Amounts selected for investment in the fixed rather than
the variable portion of your annuity do not participate in the investment
experience of the Fund. Contract units resulting from interest added or
contributions made prior to the contract year ending in 1998 continue to be
credited with additional interest based on investment yields which reflect
the years during which such units were purchased. Crediting rates are not
guaranteed for future years.
The United States economy continued its strong growth in 1998, as measured by
the Gross Domestic Product (GDP), increasing at an annual rate of 3.9%. GDP is
expected to slow in 1999, with growth being 2.0% to 2.5%. Employment finished
strong in 1998, with the December unemployment rate at 4.3% and the average
unemployment rate for all of 1998 at 4.5%. New jobs continued to be created
during the year, especially in the service sector. The Federal Reserve Board
lowered the Federal Funds rate by a total of 75 basis points, over three months
in late 1998, to the current level of 4.75%. The stock market had another
excellent year, the fourth year in a row. The Standard & Poor's 500 Index was up
26.69% in 1998. The stock market had a correction in the third quarter, but with
the short term interest rate reduction in the fourth quarter, the stock market
rebounded in the fourth quarter to close at or near record levels. Stocks of
U.S. corporations continue to carry very high price/earnings ratios and
corporate earnings could slow if the economy slows as indicated above.
Inflation, as measured by the Gross Domestic Product deflator, was a very
acceptable 1.7% in 1997, declining to 1.0% by the third quarter of 1998. The
Consumer Price Index increased by 1.7% in 1997 and a slightly lower +1.6% for
1998. The Producers Price Index declined 0.2% in November, but increased 0.4% in
December in light of higher tobacco prices. A decline was recorded in six of the
twelve months of 1998, producing a decline in wholesale prices of 0.1% in 1998,
against a decline in 1997 of 1.2%. The Producers Price Index indicates that
inflation should remain under control for several more months. For stocks to
continue to move higher, corporate earnings will need to improve, interest rates
decline and investors willing to accept higher price/earnings ratios for stocks.
1999 will be a very challenging year for investors in the stock market.
In today's fast-paced world, products, markets, client's needs, and individual
risk tolerance all change. In this environment, you may want to take some extra
time and review how well this product continues to meet your retirement
investment objectives. A Franklin Life representative would be happy to review
your financial situation with you and suggest the most appropriate mix of
products to provide financial security consistent with your risk tolerance.
Cordially yours,
William A. Simpson
Chairman and Chief Executive Officer
1
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments-at fair value (cost-$5,825,740)
Common stocks $ 11,653,302
Short-term notes 1,843,112
-------------
13,496,414
Cash on deposit 49,523
Dividends and interest receivable 19,458
-------------
Total Assets 13,565,395
Liability -due to The Franklin Life Insurance Company 23,895
-------------
Contract owners' equity
Annuity reserves $ 20,793
Value of 109,896.4574 accumulation units outstanding,
equivalent to $123.03132938 per unit 13,520,707 $ 13,541,500
------------ -------------
-------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
Investment income
Dividends $ 130,455
Interest 69,792
------------
Total Income $ 200,247
Expenses
Mortality and expense charges $ 124,538
Investment management services 54,443
Miscellaneous expense 8
------------
Total expenses 178,989
-------------
Net investment income 21,258
Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $1,626,314
Cost of investments sold (identified cost method) 1,197,859
------------
Net realized gain 428,455
Net unrealized appreciation of investments
Beginning of year $ 5,298,442
End of year 7,670,674
------------
Net unrealized appreciation 2,372,232
-------------
Net gain on investments 2,800,687
-------------
Net increase in contract owners'
equity resulting from operations $ 2,821,945
-------------
-------------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
Net investment income $ 21,258 $ 78,567
Net realized gain from investment transactions 428,455 452,962
Net unrealized appreciation of investments 2,372,232 1,714,372
---------------------------------
Net increase In contract owners' equity resulting from
operations 2,821,945 2,245,901
Net contract purchase payments 133,181 268,272
Reimbursement for contract guarantees - 172
Annuity payments (4,788) (4,568)
Withdrawals of funds on terminated contracts (1,725,151) (1,636,104)
Transfers from (to) fixed account 21,424 -
---------------------------------
Net increase in contract owners' equity 1,246,611 873,673
Contract owners' equity at beginning of year 12,294,889 11,421,216
---------------------------------
Contract owners' equity at end of year $13,541,500 $12,294,889
---------------------------------
---------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER NUMBER
OF FAIR OF FAIR
SHARES VALUE SHARES VALUE
- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
COMMON STOCKS (86.06%)
BANKING (4.56%) OIL SERVICES & DRILLING (1.36%)
12,862 SLM Holding Corporation $ 617,376 6,200 Halliburton Company $ 183,675
BEVERAGES (1.33%)
4,400 PepsiCo, Incorporated 180,125 PACKAGING - CONTAINERS (2.80%)
BUSINESS SERVICES (1.41%) 8,400 Avery-Dennison Corporation 378,525
5,600 Equifax Inc. 191,450 PHOTOGRAPHY ( 2.18%)
CHEMICALS (1.81%) 4,100 Eastman Kodak Company 295,200
2,700 Dow Chemical 245,531 RETAIL-SPECIALTY (2.16%)
COMPUTER SERVICES (4.18%) 7,200 NIKE, Inc. 292,050
8,100 Ceridian Corporation* 565,481 TECHNOLOGY (7.18%)
COSMETICS & HOUSEHOLD PRODUCTS 4,361 AMP, Incorporated 227,045
(2.85%) 4,950 Diebold, Incorporated 176,653
8,000 Gillette Company 386,500 4,800 Intel Corporation 569,100
------------
DRUGS & HEALTH CARE (29.89%) 972,798
8,000 Eli Lilly and Company 711,000 UTILITIES - TELEPHONE (3.68%)
4,300 Merck & Company, Inc. 635,056 10,000 BellSouth Corporation 498,750
4,200 Pfizer, Incorporated 526,838 ------------
6,450 St. Jude Medical, Inc.* 178,584
13,200 Schering-Plough Corporation 729,300 TOTAL COMMON STOCKS
6,000 Stryker Corporation 330,375 (COST-$3,982,628) 11,653,302
16,000 Walgreen Company 937,000
------------ PRINCIPAL
4,048,153 AMOUNT
ELECTRONICS & INSTRUMENTATIONS ---------
(2.93%) SHORT-TERM NOTES (13.61%)
5,800 Hewlett-Packard Company 396,213 $1,855,000 United States Treasury Bill
FOOD - RETAIL (2.68%) 4.12%, due 1/7/99 (cost-$1,843,112) 1,843,112
5,700 Albertson's, Inc. 363,019 ------------
FOOD - WHOLESALE ( 2.72%)
13,400 Sysco Corporation 367,662 TOTAL INVESTMENTS (99.67%)
HOUSEHOLD PRODUCTS (1.13%) (COST-$5,825,740) 13,496,414
3,700 Newell Co. 152,625
OFFICE EQUIPMENT & SERVICES CASH AND RECEIVABLES, LESS
(11.21%) LIABILITY (.33 %) 45,086
15,055 Compaq Computers Corporation 631,369 ------------
4,800 International Business
Machines Corporation 886,800 TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $13,541,500
------------ ------------
1,518,169 ------------
*NON-INCOME PRODUCING INVESTMENT IN 1998.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
- -------------------------------------------------------------------------------
3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers.
Short-term notes are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund form a part of, and are taxed with
those of, The Franklin which is taxed as a "life insurance company" under the
Internal Revenue Code. Under current law, no federal income taxes are payable
with respect to the Fund.
ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are
calculated using the Progressive Annuity Table with an assumed investment rate
of 3-1/2%.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during 1998 aggregated $153,637 and $1,626,314,
respectively.
NOTE C-EXPENSES
Amounts are paid to The Franklin for investment management services at the rate
of .0012% of the current value of the Fund per day (.438% on an annual basis)
and for mortality and expense risk assurances at the rate of .002745% of the
current value of the Fund per day (1.002% on an annual basis).
NOTE D-SALES AND ADMINISTRATIVE CHARGES
Sales and administrative charges aggregating $10,036 and $16,926 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1998 and 1997,
respectively. Franklin Financial Services Corporation is a wholly-owned
subsidiary of The Franklin and principal underwriter for the Fund.
Beginning in October 1998, The Franklin began waiving all sales and
administrative charges specified in each Contract in anticipation of the Funds'
proposed reorganization (See Note H-Subsequent Event).
NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 124,714 $12,275,509 139,945 $11,403,341
Purchases and
transfers 1,559 154,605 2,945 268,272
Net investment
income* - 21,210 - 78,354
Net realized gain
from investment
transactions* - 427,513 - 451,738
Net unrealized
appreciation
of investments* - 2,367,021 - 1,709,736
Withdrawals (16,377) (1,725,151) (18,176) (1,636,104)
Reimbursement
for contract
guarantees* - - - 172
----------------------------------------------
Balance at end
of year 109,896 $13,520,707 124,714 $12,275,509
----------------------------------------------
----------------------------------------------
</TABLE>
*Excludes portion allocated to annuity reserves on a pro rata basis.
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also directors, officers or employees of The Franklin
or Franklin Financial Services Corporation. Amounts paid by the Fund to The
Franklin and to Franklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS
Net unrealized appreciation of investments was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
Gross unrealized appreciation $7,670,674 $5,387,633
Gross unrealized depreciation - 89,191
-------------------------------
Net unrealized appreciation
of investments $7,670,674 $5,298,442
-------------------------------
-------------------------------
</TABLE>
4
<PAGE>
NOTE H-SUBSEQUENT EVENT
The Fund's Board of Managers has approved resolutions whereby Contract Owners
will be asked during 1999 to approve a reorganization under which the Fund,
together with Franklin Life Variable Annuity Fund B and Franklin Life Money
Market Variable Annuity Fund C, will be restructured into a unit investment
trust investing exclusively in shares of specified mutual fund portfolios.
Contract Owners will be provided with a proxy statement describing the
reorganization in detail.
NOTE I-YEAR 2000 (UNAUDITED)
INTERNAL SYSTEMS. The Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
decentralized basis. AGC's Year 2000 readiness efforts are therefore being
undertaken by its key business units with centralized oversight. Each business
unit, including The Franklin, has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of The Franklin's information technology
and non-information technology systems; (2) assess which items in the inventory
may expose The Franklin to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, substantially all
of The Franklin's critical systems are Year 2000 ready and have been returned to
operations. However, activities (3) through (5) for certain systems are ongoing,
with vendor upgrades expected to be received during the first half of 1999.
THIRD PARTY RELATIONSHIPS. The Franklin has relationships with various
third parties who must also be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) The Franklin and include
organizations with which The Franklin exchanges information. Third parties
include vendors of hardware, software, and information services; providers of
infrastructure services such as voice and data communications and utilities for
office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that The
Franklin exercises less, or no, control over Year 2000 readiness. The Franklin
has developed a plan to assess and attempt to mitigate the risks associated with
the potential failure of third parties to achieve Year 2000 readiness. The plan
includes the following activities: (1) identify and classify third party
dependencies; (2) research, analyze, and document Year 2000 readiness for
critical third parties; and (3) test critical hardware and software products and
electronic interfaces. As of December 31, 1998, AGC has identified and assessed
approximately 700 critical third party dependencies, including those relating to
The Franklin. A more detailed evaluation will be completed during first quarter
1999 as part of The Franklin's contingency planning efforts. Due to the various
stages of third parties' Year 2000 readiness, The Franklin's testing activities
will extend through 1999.
CONTINGENCY PLANS. The Franklin has commenced contingency planning to
reduce the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action plan to complete contingency plans
for those processes that rank high in consequence and probability of failure;
and (4) complete the applicable action plans. The Franklin is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
RISKS AND UNCERTAINTIES. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, The Franklin believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on The
Franklin's future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and The Franklin is not able to predict a most reasonably
likely worst case scenario. If conversion of The Franklin's internal systems is
not completed on a timely basis (due to non-performance by significant third
party-vendors, lack of qualified personnel to perform the Year 2000 work, or
other unforeseen circumstances in completing The Franklin's plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on The Franklin's
operations following the turn of the century.
COSTS. Through December 31, 1998, The Franklin has incurred, and
anticipates that it will continue to incur, costs for internal staff, third
party vendors, and other expenses to achieve Year 2000 readiness. These costs
are not passed to the Fund. The cost of activities related to Year 2000
readiness has not had a material adverse effect on The Franklin's results of
operations or financial condition. In addition, The Franklin has elected to
accelerate the planned replacement of certain systems as part of the Year 2000
plans. Costs of the replacement systems are being capitalized and amortized over
their useful lives, in accordance with The Franklin's normal accounting
policies.
5
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.720 $1.910 $1.685 $1.948 $1.408
Expenses 1.537 1.312 1.090 .875 .773
-------------------------------------------------------------
Net investment income 0.183 .598 .595 1.073 .635
Net realized and unrealized gain (loss) on
investments 24.419 16.346 11.690 14.139 (.240)
-------------------------------------------------------------
Net increase in accumulation unit value 24.602 16.944 12.285 15.212 .395
Accumulation unit value:
Beginning of year 98.429 81.485 69.200 53.988 53.593
-------------------------------------------------------------
End of year $123.031 $98.429 $81.485 $69.200 $53.988
-------------------------------------------------------------
-------------------------------------------------------------
Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average net assets .17% .66% .79% 1.76% 1.18%
Portfolio turnover rate 1.42% .70% 4.77% 14.66% 88.99%
Number of accumulation units outstanding at end of
year 109,896 124,714 139,945 150,474 172,507
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 20, 1998. At
the meeting, the individuals named below were elected as Members of the Board of
Managers of the Fund, and Ernst & Young LLP was ratified as the Fund's
independent auditors for the ensuing fiscal year. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
if applicable, as to each matter is set forth in the table below.
<TABLE>
<CAPTION>
Matter Votes:
-------------------- -----------------------------------------------------------
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Election of
Robert G. Spencer as
Member, Board of Managers 52,846 683 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 52,751 778 0
Election of
James W. Voth as
Member, Board of Managers 52,846 683 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 52,846 683 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 52,200 573 756
</TABLE>
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A
We have audited the accompanying statement of assets and liabilities of Franklin
Life Variable Annuity Fund A, including the portfolio of investments, as of
December 31, 1998, the related statement of operations for the year then ended
and the statements of changes in contract owners' equity for each of the two
years then ended, and the table of per-unit income and changes in accumulation
unit value for each of the four years then ended. These financial statements and
the table of per-unit income and changes in accumulation unit value are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the table of per-unit income and
changes in accumulation unit value based on our audits. The table of per-unit
income and changes in accumulation unit value for the year ended December 31,
1994 was audited by other auditors whose report dated February 1, 1995,
expressed an unqualified opinion on that table.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value 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 held by the custodian as of December 31, 1998. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the 1998, 1997, 1996, and 1995
table of per-unit income and changes in accumulation unit value referred to
above present fairly, in all material respects, the financial position of
Franklin Life Variable Annuity Fund A at December 31, 1998, and the results of
its operations for the year then ended, and the changes in its contract owners'
equity for each of the two years then ended, and per-unit income and changes in
accumulation unit value for each of the four years then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
January 29, 1999
7
<PAGE>
APPENDIX C
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
ASSET ALLOCATION FUND
CAPITAL CONSERVATION FUND
GOVERNMENT SECURITIES FUND
GROWTH FUND
GROWTH & INCOME FUND
INTERNATIONAL EQUITIES FUND
INTERNATIONAL GOVERNMENT BOND FUND
MIDCAP INDEX FUND
MONEY MARKET FUND
SCIENCE & TECHNOLOGY FUND
SMALL CAP INDEX FUND
SOCIAL AWARENESS FUND
STOCK INDEX FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------
FORM N-1A PART B
OCTOBER 1, 1998
(AS SUPPLEMENTED THROUGH FEBRUARY 22, 1999)
This Statement of Additional Information is not a prospectus and contains
information in addition to that in the Prospectus for American General Series
Portfolio Company (the "Company"). It should be read in conjunction with the
Prospectus. The Statement of Additional Information and the related Prospectus
are both dated October 1, 1998 (as supplemented through February 22, 1999). For
an individual interested in a variable annuity contract issued by The Variable
Annuity Life Insurance Company ("VALIC"), a Prospectus may be obtained by
calling 1-800-44-VALIC or writing the Company or The Variable Annuity Marketing
Company ("VAMCO") at 2929 Allen Parkway, Houston, Texas 77019. All inquiries
regarding variable annuity contracts issued by American General Life Insurance
Company ("AGL"), the successor to California-Western States Life Insurance
Company ("Cal-West"), should be directed in writing to AGL's Annuity
Administration Department, 2727-A Allen Parkway, Houston, Texas 77019-2191 or by
calling 1-800-813-5065. Shares in the Company are available to the public only
through the purchase of certain variable annuity contracts issued and employee
thrift plans maintained by VALIC and its affiliates.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History............................. 4
Additional Information Regarding Certain Funds.............. 5
International Equities Fund............................... 5
Government Securities Fund................................ 5
Asset Allocation Fund..................................... 6
Performance and Yield Information........................... 7
Investment Restrictions..................................... 10
Fundamental Investment Restrictions Applicable to All
Funds.................................................. 10
MMF Investment Restrictions............................... 11
AAF, CCF, GSF, SIF, IEF, MIF and SCIF Investment
Restrictions........................................... 11
GIF Investment Restrictions............................... 11
GF and STF Investment Restrictions........................ 11
SAF Investment Restrictions............................... 12
IGBF Investment Restrictions.............................. 12
Non Fundamental Investment Restrictions................... 12
Investment Practices........................................ 14
Repurchase Agreements..................................... 14
Lending Portfolio Securities.............................. 14
Convertible Securities.................................... 15
Foreign Securities........................................ 15
Foreign Currency Exchange Transactions.................... 16
Bank Obligations.......................................... 16
When Issued Securities.................................... 17
Debt Securities........................................... 17
Emerging Markets.......................................... 18
Asset-Backed Securities................................... 18
Lower Rated Debt Securities............................... 19
Real Estate Securities and Real Estate Investment Trusts
("REITs").............................................. 19
Warrants.................................................. 20
Swap Agreements........................................... 20
Eurodollar Obligations.................................... 21
Mortgage-Related Securities............................... 22
Commercial Mortgage-Backed Securities..................... 24
Other Mortgage-Related Securities......................... 24
Loan Participations....................................... 25
Adjustable Rate Securities................................ 25
Illiquid Securities....................................... 26
Rule 144A Securities...................................... 26
Options on Securities and Securities Indices.............. 26
Writing Covered Call and Put Options and Purchasing Call
and Put Options........................................ 28
Financial Futures Contracts............................... 30
Options on Financial Futures Contracts.................... 31
Certain Additional Risks of Options and Financial Futures
Contracts.............................................. 32
Limitations............................................... 33
Money Market Securities of Foreign Issuers................ 34
Investment Adviser.......................................... 35
Investment Sub-Advisers..................................... 37
Portfolio Transactions and Brokerage........................ 39
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Offering, Purchase, and Redemption of Fund Shares........... 42
Determination of Net Asset Value............................ 43
Calculation of Yield for the Money Market Fund.............. 44
Accounting and Tax Treatment................................ 45
Calls and Puts............................................ 45
Financial Futures Contracts............................... 45
Subchapter M of the Internal Revenue Code of 1986......... 45
Section 817(h) of the Code................................ 46
Other Information........................................... 46
Shareholder Reports....................................... 46
Voting and Other Rights................................... 46
Custody of Assets......................................... 47
Index Funds............................................... 48
Description of Corporate Bond Ratings..................... 49
Description of Commercial Paper Ratings................... 49
Independent Auditors...................................... 49
Directors and Officers...................................... 50
Compensation of Directors and Certain Officers.............. 54
Financial Statements........................................ 55
</TABLE>
3
<PAGE>
GENERAL INFORMATION AND HISTORY
American General Series Portfolio Company (the "Company") was incorporated
in Maryland on December 7, 1984, by VALIC and is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end, management
investment company. Pursuant to Investment Advisory Agreements with the Company
and subject to the authority of the Company's Board of Directors, VALIC serves
as the Company's investment adviser and conducts the business and affairs of the
Company. Additionally, VALIC has engaged an investment sub-adviser to provide
investment sub-advisory services for the Stock Index Fund, the MidCap Index
Fund, the Small Cap Index Fund, the Growth Fund, and the Science & Technology
Fund, subject to VALIC's control, direction and supervision. The Company
consists of thirteen separate investment portfolios (hereinafter collectively
referred to as the "Funds" or individually as a "Fund"), each of which is, in
effect, a separate mutual fund issuing its own separate class of common stock.
The Company issues shares of common stock of each Fund to registered and
unregistered separate accounts of VALIC and its affiliates to fund variable
annuity contracts (the "Contracts"). Currently the Company acts as an investment
vehicle for assets of VALIC's Separate Account A, and AGL Separate Account A and
Separate Account D, each of which is a unit investment trust registered as an
investment company under the 1940 Act, and AGL Separate Account B, a unit
investment trust that is exempt from registration as an investment company under
the 1940 Act. Additionally, retirement plans maintained by VALIC and American
General Corporation may own shares of certain of the Funds.
The Company and VALIC have Codes of Ethics which establish for their
officers, directors and certain employees procedures and restrictions as to
those individual's personal investment trading activities.
<TABLE>
<CAPTION>
DATE OPERATIONS
DATE OF DATE SEED COMMENCED
INCORPORATION OR MONEY WAS (BY ISSUANCE OR
BOARD APPROVAL FIRST PROVIDED AVAILABILITY
NAME OF FUND FOR ORGANIZATION TO THE COMPANY OF SHARES)
------------ ---------------- -------------- ---------------
<S> <C> <C> <C>
Asset Allocation Fund ("AAF")*............. 02-22-83 08-08-83 09-06-83
Capital Conservation Fund ("CCF").......... 12-07-84 12-16-85 01-16-86
Government Securities Fund ("GSF")......... 12-07-84 12-16-85 01-16-86
Growth Fund ("GF")......................... 01-25-94 04-29-94 04-29-94
Growth & Income Fund ("GIF")............... 01-25-94 04-29-94 04-29-94
International Equities Fund ("IEF")........ 07-18-89 09-29-89 10-02-89
International Government Bond Fund
("IGBF")................................. 07-30-91 10-01-91 10-01-91
MidCap Index Fund ("MIF").................. 03-16-82 08-30-82 10-13-82
Money Market Fund ("MMF").................. 12-07-84 12-16-85 01-16-86
Science & Technology Fund ("STF").......... 12-17-93 04-29-94 04-29-94
Small Cap Index Fund ("SCIF").............. 10-28-91 05-01-92 05-01-92
Social Awareness Fund ("SAF").............. 07-18-89 09-29-89 10-02-89
Stock Index Fund ("SIF")................... 02-02-87 04-20-87 04-20-87
</TABLE>
- ---------------
*The Asset Allocation Fund was formerly known as the Timed Opportunity Fund.
The MidCap Index Fund and the Asset Allocation Fund are the successors to
Capital Accumulation Fund, Inc. and Timed Opportunity Fund, Inc., respectively,
which were separately registered open-end diversified management investment
companies under the 1940 Act, pursuant to a reorganization entered into on
September 25, 1985. The MidCap Index Fund effected a change in its name and
investment objective, investment program and one of its restrictions as of
October 1, 1991. The Asset Allocation Fund effected a change in its name from
the Timed Opportunity Fund, effective as of October 1, 1997. In addition, the
Quality Growth Fund was combined into the Stock Index Fund, by means of a
reclassification of its shares, effective May 1, 1992.
4
<PAGE>
ADDITIONAL INFORMATION REGARDING CERTAIN FUNDS
The following disclosures supplement disclosures set forth in the
Prospectus and do not, standing alone, present a complete explanation of the
matters disclosed. Please refer also to the Prospectus for a complete
presentation of these matters.
INTERNATIONAL EQUITIES FUND
The International Equities Fund intends to provide long-term growth of
capital through investments primarily in a diversified portfolio of equity and
equity-related securities of foreign issuers that, as a group, are expected to
provide investment results closely corresponding to the Morgan Stanley's Capital
International, Europe, Australia and Far East Index ("EAFE Index"). The EAFE
Index, which commenced in 1969, is an unmanaged capitalization weighted stock
index consisting of more than 1000 companies operating in 21 countries in
Europe, Australia, and the Far East. The EAFE Index is a well known measure for
international stock performance. The EAFE Index does not reflect charges, fees,
and commissions applicable to the Fund.
The weighted breakdown by country of the EAFE Index (as of May 31, 1998) is
set forth below:
EAFE INDEX BREAKDOWN BY COUNTRY
<TABLE>
<CAPTION>
COUNTRY WEIGHT
------- ------
<C> <S> <C>
1 AUSTRALIA................................................... 2.40
2 AUSTRIA..................................................... 0.44
3 BELGIUM..................................................... 1.65
4 DENMARK..................................................... 1.04
5 FINLAND..................................................... 1.01
6 FRANCE...................................................... 9.32
7 GERMANY..................................................... 11.18
8 HONG KONG................................................... 1.86
9 IRELAND..................................................... 0.51
10 ITALY....................................................... 4.98
11 JAPAN....................................................... 20.91
12 MALAYSIA.................................................... 0.64
13 NETHERLANDS................................................. 6.12
14 NEW ZEALAND................................................. 0.23
15 NORWAY...................................................... 0.59
16 PORTUGAL.................................................... 0.73
17 SINGAPORE................................................... 0.63
18 SPAIN....................................................... 3.41
19 SWEDEN...................................................... 3.33
20 SWITZERLAND................................................. 8.13
21 UNITED KINGDOM.............................................. 20.90
</TABLE>
GOVERNMENT SECURITIES FUND
The Government Securities Fund may invest in intermediate and long-term
debt instruments issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Government securities in which the Fund may invest
include: (1) U.S. Treasury bills, notes, and bonds; (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are supported
by any of the following: (a) the full faith and credit of the U.S. Government
(e.g., Government National Mortgage Association ("GNMA") Certificates); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Treasury (e.g., debt of each of the Federal Home Loan banks); (c)
the discretionary authority of the U.S. Government or GNMA to purchase certain
financial obligations of the agency or instrumentality (e.g., Federal National
Mortgage Association); or (d) the credit of the issuing agency or
instrumentality (e.g., Federal Land Banks, Farmers, Farmers Home Administration
or Student Loan Marketing Association); and (3) collateralized mortgage
obligations ("CMOs") that are issued by governmental or non-governmental
entities and collateralized by U.S. Treasury Obligations or by U.S. Government
agency or instrumentality securities.
5
<PAGE>
No assurance can be given that the U.S. Government will provide support to
such U.S. Government sponsored agencies or instrumentalities in the future,
since it is not required to do so by law.
ASSET ALLOCATION FUND
In addition to its overall investment objective, the Fund has established
separate sub-objectives for investments in each of the three market sectors. The
following is a statement of the sub-objectives of each sector, which are
designed to maximize the unique investment return characteristics inherent in
that market sector:
1. Within the stock sector, the Fund seeks appreciation of capital by
selecting investments that it expects will participate in the growth of
the nation's economy.
2. Within the bond sector, the Fund will generally seek high current income
consistent with reasonable investment risk. The Fund will pursue the
above objective by investing only in (a) investment grade corporate debt
obligations rated e.g. at least Baa by Moody's Investor Services, Inc.
("Moody's") or by any other NRSRO or unrated debt obligations which
VALIC believes are of comparable investment quality, and (b) obligations
of, or debts guaranteed by, the U.S. Government, its agencies, or
instrumentalities. See "Government Securities Portfolio" for an
explanation of U.S. Government obligation and "Debt Securities" in this
Prospectus and the Appendix for an explanation of corporate debt
ratings.
3. Within the money market sector, the Fund seeks the highest level of
current income consistent with liquidity, stability, and preservation of
capital.
The chart below indicates the historic allocations, from June 1983 through
June 1998, based on the investment benchmarks of 55% in equity securities, 35%
in intermediate or long-term debt securities and 10% in money market or short
term debt instruments, as recommended by the Bankers Trust Company Tactical
Asset Allocation Model. The Bankers Trust Company Tactical Asset Allocation
Model is currently used in connection with the management of over $5.12 billion
of assets.
CHART APPEARS HERE
6
<PAGE>
PERFORMANCE AND YIELD INFORMATION
The Series Company may compute the total return of a Fund ("Average Annual
Total Return"), total return of a Fund before expenses ("Portfolio Total
Return"), and compare Portfolio Total Return to the total return of the Fund's
benchmark index ("Index Total Return"). The difference between Portfolio Total
Return and Index Total Return is referred to as "tracking difference." Tracking
difference represents the amount that the return on the investment portfolio
(which results from the Adviser's investment selection) deviates from its
benchmark's Index Total Return. Fund performance does not reflect contract
charges or separate account charges which will reduce Fund values which are
available to Participants. Information about Separate Account performance is
available in the applicable contract prospectus.
AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Return quotations for periods of 1, 3, 5, and 10
years, or, since inception of the Fund, are calculated according to the
following formula:
P (1+T)n = ERV
Where:
<TABLE>
<S> <C>
P = A hypothetical initial Purchase Payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value of a hypothetical $1,000 Purchase
Payment made at the beginning of the first period.
</TABLE>
Average Annual Total Return reflects the deduction of Fund expenses and
assumes that all dividends and distributions are reinvested when paid.
PORTFOLIO TOTAL RETURN
Portfolio Total Return quotations for periods of 1, 3, 5, and 10 years, or,
since inception are calculated by adding to the Average Total Annual Return
(described above) the expenses of the Fund. Expenses of the Fund are calculated
at the end of each Fund's fiscal year and are expressed as a percentage of
average net assets. Expenses as a percentage of average net assets are prorated
equally over the months in the fiscal year in which the ratio was calculated
when determining expenses for periods crossing over fiscal years.
INDEX TOTAL RETURN
Index Total Return quotations for periods 1, 3, 5, and 10 years, or, since
inception, are calculated by determining the percentage change in value of the
benchmark index over the applicable period including reinvestment of dividends
and interest as applicable. Index Total Return is calculated according to the
formula described above for Average Annual Total Return, however it does not
include an expense component; if an expense component were included the return
would be lower.
SEVEN DAY YIELDS
The Money Market Fund may quote a Seven Day Current Yield and a Seven Day
Effective Yield. The Seven Day Current Yield is calculated by determining the
total return for the current seven day period ("based period return") and
annualizing the base period return by dividing by seven days, then multiplying
the result by 365 days. The Seven Day Effective Yield annualizes the base period
return while compounding weekly the base period return according to the
following formula:
Seven Day Effective Yield = [(Base Period Return + 1)365/7 - 1]
7
<PAGE>
30 DAY CURRENT YIELD
The Capital Conservation Fund, Government Securities Fund, and the
International Government Bond Fund may quote a 30 Day Current Yield which is
determined based on the current 30 day period, according to the following
standardized formula:
Yield = 2[(1 + NII )6 - 1]
S x NAV
Where:
<TABLE>
<S> <C>
NII = Net investment income (interest income, plus dividend
income, plus other income, less fund expenses.
S = Average daily shares outstanding.
NAV = Net asset value per share on the last day of the period.
</TABLE>
8
<PAGE>
PERFORMANCE RETURNS
MAY 31, 1998
<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 3 YEAR 5 YEAR INCEPTION (A)
--------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C>
ASSET ALLOCATION FUND:* 09/06/83
Average Annual Total Return 21.94% 18.55% 13.79% 11.21%
Portfolio Total Return 22.48% 19.11% 14.36% 11.94%
Benchmark (B) 21.22% 19.12% 15.02% 14.07%
CAPITAL CONSERVATION FUND: 01/16/86
Average Annual Total Return 10.76% 7.27% 6.41% 7.95%
Portfolio Total Return 11.30% 7.83% 6.98% 8.63%
Merrill Lynch Corporate Master Index 12.35% 8.54% 8.05% 10.19%
GOVERNMENT SECURITIES FUND: 01/16/86
Average Annual Total Return 10.60% 6.91% 6.04% 7.96%
Portfolio Total Return 11.14% 7.46% 6.61% 8.64%
Lehman Brothers U.S. Treasury Index 11.22% 7.49% 6.87% 8.97%
GROWTH FUND: 04/29/94
Average Annual Total Return 27.41% 26.99% N/A 23.26%
Portfolio Total Return 28.25% 27.83% N/A 24.12%
S & P 500 30.68% 29.51% N/A 26.97%
GROWTH & INCOME FUND: 04/29/94
Average Annual Total Return 19.87% 23.69% N/A 20.19%
Portfolio Total Return 20.67% 24.49% N/A 21.00%
S & P 500 30.68% 29.51% N/A 26.97%
INTERNATIONAL EQUITIES FUND: 10/02/89
Average Annual Total Return 9.92% 9.59% 9.56% 5.04%
Portfolio Total Return 10.32% 10.00% 9.99% 5.49%
Morgan Stanley Capital International EAFE 11.11% 9.76% 9.52% 5.24%
INTERNATIONAL GOVERNMENT BOND FUND: 10/01/91
Average Annual Total Return 2.65% 0.61% 5.44% 7.61%
Portfolio Total Return 3.20% 1.17% 5.99% 8.05%
Salomon Brothers Non-U.S. Government Bond Index 2.38% 0.53% 5.79% 8.26%
MIDCAP INDEX FUND: 10/01/91
Average Annual Total Return 29.62% 24.95% 17.99% 17.61%
Portfolio Total Return 29.98% 25.34% 18.40% 18.05%
S & P MidCap 400 29.87% 25.40% 18.42% 18.38%
MONEY MARKET FUND: 01/16/86
Average Annual Total Return 5.25% 5.18% 4.65% 5.45%
Portfolio Total Return 5.79% 5.74% 5.22% 6.05%
30-Day Certificate of Deposit Primary Offering Rate
by New York City Banks 4.81% 4.72% 4.26% 5.22%
SCIENCE & TECHNOLOGY FUND: 04/29/94
Average Annual Total Return 10.85% 21.33% N/A 26.44%
Portfolio Total Return 11.80% 22.28% N/A 27.40%
S & P 500 30.68% 29.51% N/A 26.97%
SMALL CAP INDEX FUND: 05/01/92
Average Annual Total Return 21.34% 20.61% 15.43% 15.31%
Portfolio Total Return 21.73% 21.01% 15.85% 15.74%
Russell 2000 21.25% 20.79% 16.14% 16.68%
SOCIAL AWARENESS FUND: 10/02/89
Average Annual Total Return 30.34% 29.89% 21.44% 16.16%
Portfolio Total Return 30.88% 30.44% 22.01% 16.66%
S & P 500 30.68% 29.51% 22.17% 17.21%
STOCK INDEX FUND: 04/20/87
Average Annual Total Return 30.30% 29.23% 21.75% 17.79%
Portfolio Total Return 30.61% 29.56% 22.10% 18.27%
S & P 500 30.68% 29.51% 22.17% 18.62%
</TABLE>
- ------------
* The Asset Allocation Fund was formerly known as the Timed Opportunity Fund.
(A) Amounts shown are returns for ten years or since inception if the fund has
been in existence for less than ten years.
(B) Benchmark consists of 55% S&P 500 Index, 35% Merrill Lynch Corporate &
Government Master Index, and 10% of NYC 30 Day Primary CD Rate.
9
<PAGE>
INVESTMENT RESTRICTIONS
The Funds have each adopted certain fundamental investment restrictions
which, unlike the other investment objective(s), policies, and investment
program of each Fund, may only be changed for each Fund with the consent of a
majority of the outstanding voting securities of the particular Fund. The 1940
Act defines such a majority as the lesser of (1) 67% or more of the voting
securities present in person or by proxy at a shareholders' meeting, if the
holders of more than 50% of the outstanding voting securities of a Fund are
present or represented by proxy, or (2) more than 50% of a Fund's outstanding
voting securities.
FUNDAMENTAL INVESTMENT RESTRICTIONS
APPLICABLE TO ALL FUNDS
All the Funds, except the International Government Bond Fund, the Growth
Fund and the Science & Technology Fund have adopted each of the following
fundamental investment restrictions. The percentage limitations referenced in
some of the following fundamental investment restrictions are to be determined
at the time of purchase. The International Government Bond Fund has adopted
fundamental investment restrictions 2-10 below. (The Growth Fund and the Science
& Technology Fund have adopted investment restrictions 3, 6 and 7 as
non-fundamental operating policies. Such restrictions provide that no Fund may:
1. Invest more than 5% of the value of its total assets in the
securities of any one issuer or purchase more than 10% of the outstanding
voting securities, or any other class of securities, of any one issuer. For
purposes of this restriction, all outstanding debt securities of an issuer
are considered as one class, and all preferred stock of an issuer is
considered as one class. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. As a matter of operating policy, the Company will not
consider repurchase agreements subject to the 5% limitation if the
collateral underlying the repurchase agreements are U.S. Government
securities.
2. (a) Issue senior securities except in connection with investments
in options and futures contracts; or (b) borrow money except as a temporary
measure for extraordinary or emergency purposes (such as to meet redemption
requests which might otherwise require the disadvantageous sale of
portfolio securities) and then not in excess of 5% of the Fund's total
assets. No Fund may mortgage, pledge or hypothecate more than 5% of the
value of its total assets, and then only to secure borrowings made under
this restriction.
3. Acquire more than 3% of the voting securities of any single other
investment company or invest more than 10% of (the value of) the Fund's
assets in the securities of other investment companies (5% in the case of
each such other company). Additionally, investment company securities will
only be purchased on the open market or from brokers or dealers receiving
customary commissions.
4. Acquire real estate or real estate contracts, although a Fund may
acquire obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
5. Underwrite securities of other issuers except where the sale of
restricted portfolio securities constitutes an underwriting under the
federal securities laws.
6. Acquire securities for the purpose of influencing the management
of, or exercising control over, the issuer.
7. Effect short sales of securities or purchase securities on margin,
except in connection with investment in options and futures contracts. Each
Fund may use short-term credits when necessary to clear transactions.
8. Lend money, except by purchasing debt obligations in which a Fund
may invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
9. Purchase or sell commodities (except in connection with investments
in options and futures contracts) or invest in oil, gas or mineral
exploration programs.
10. Make loans to other persons, except that a Fund may lend its
portfolio securities to broker-dealers and other financial institutions in
an amount up to 30% of the value of the Fund's total assets.
10
<PAGE>
MMF INVESTMENT RESTRICTIONS
MMF may not:
1. Purchase any security which matures more than 13 months from the
date of purchase.
2. Purchase or sell commodity contracts.
3. Invest in warrants, or write, purchase or sell puts, calls,
straddles, spreads or combinations thereof.
4. Invest more than 25% of the value of its total assets in the
securities of issuers primarily engaged in any one industry, except
investments in obligations issued or guaranteed by the U.S. Government, its
agencies, or instrumentalities.
AAF, CCF, GSF, SIF, IEF, MIF, AND SCIF
INVESTMENT RESTRICTIONS
AAF, CCF, GSF, SIF, IEF, MIF, and SCIF may not:
1. Enter into a financial futures contract (by exercise of any option
or otherwise) or acquire any options thereon, if, immediately thereafter,
the total of the initial margin deposits required with respect to all open
futures positions, at the time such positions were established, plus the
sum of the premiums paid for all unexpired options on futures contracts
would exceed 5% of the value of its total assets.
2. Invest more than 25% of the value of its total assets in the
securities of issuers primarily engaged in any one industry.
GIF INVESTMENT RESTRICTIONS
GIF may not:
1. Invest 25% or more of its assets in securities of issuers in any
one industry.
GF AND STF INVESTMENT RESTRICTIONS
GF and STF may not:
1. Borrow money except that the Funds may (i) borrow for
non-leveraging, temporary or emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments or engage in other
transactions, which may involve a borrowing, in a manner consistent with
the Funds' investment objective and program, provided that the combination
of (i) and (ii) shall not exceed 33 1/3% of the value of the Funds' total
assets (including the amount borrowed) less liabilities (other than
borrowings) or such other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance with applicable
law. The Funds may borrow from banks, other T. Rowe Price Funds or other
persons to the extent permitted by law.
2. Purchase the securities of any issuer if, as a result, more than
25% of the value of the Funds' total assets would be invested in the
securities of issuers having their principal business activities in the
same industry; provided, however, the Growth Fund will normally concentrate
25% or more of its assets in the securities of the banking industry when
the Growth Fund's position in issues maturing in one year or less equals
35% or more of the Growth Fund's total assets.
3. Make loans, although the Funds may (i) lend portfolio securities;
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33 1/3% of the value of the Funds' total assets;
(ii) purchase money market securities and enter into repurchase agreements;
and (iii) acquire publicly-distributed or privately-placed debt securities
and purchase debt.
4. Purchase a security if, as a result, with respect to 75% of the
Funds' total assets, more than 5% of the value of its total assets would be
invested in the securities of a single issuer or more than 10% of the
outstanding voting securities of any issuer would be held by the Funds,
except securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities.
5. Purchase or sell physical commodities; except that it may enter
into futures contracts and options thereon.
6. Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the Funds from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business).
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7. Issue senior securities except in compliance with the Investment
Company Act of 1940.
8. Underwrite securities issued by other persons, except to the extent
that the Funds may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
program.
With respect to investment restriction (5), the Fund does not consider
forward foreign currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (2), U.S., state or local
governments, or related agencies or instrumentalities, are not considered
an industry.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, subject to any regulatory requirements, GF
and STF may each invest all of its assets in a single investment company or
a series thereof in connection with a "master-feeder" arrangement. Such an
investment would be made where the Fund (a "Feeder"), and one or more other
funds with the same investment objective and program as the Fund, sought to
accomplish its investment objective and program by investing all of its
assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as
the Fund. The Funds would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
SAF INVESTMENT RESTRICTIONS
SAF may not:
1. Enter into financial futures contracts (by exercise of any option
or otherwise) or acquire any options thereon, if, immediately thereafter,
the total of the initial margin deposits required with respect to all open
futures positions at the time such positions were established plus the sum
of the premiums paid for all unexpired options on futures contracts would
exceed 5% of the value of its total assets.
2. Invest more than 25% of the value of its total assets in the
securities of issuers primarily engaged in any one industry.
IGBF INVESTMENT RESTRICTIONS
IGBF may not:
1. With respect to 50% of its total assets, invest more than 5% of its
total assets in securities of any one issuer or purchase more than 10% of
the outstanding voting securities of any one issuer. With respect to the
remaining 50% of its total assets, invest more than 25% of its total assets
in the securities of any one issuer. This restriction does not apply to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
2. Enter into a financial futures contract (by exercise of any option
or otherwise) or acquire any options thereon, if, immediately thereafter,
the total of the initial margin deposits required with respect to all open
futures positions, at the time such positions were established, plus the
sum of the premiums paid for all unexpired options on futures contracts
would exceed 5% of the value of its total assets.
3. Invest more than 25% of the value of its total assets in the
securities of issuers primarily engaged in any one industry.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following non-fundamental investment restriction is applicable to each
Fund:
The Fund may not invest more than 10% (15% in the case of the Growth Fund,
Growth & Income Fund and Science & Technology Fund) of the Fund's net assets
(taken at the greater of cost or market value) in securities that are illiquid
or not readily marketable including time deposits and repurchase agreements not
maturing within seven days or restricted securities, but excluding (a) Rule 144A
securities that have been determined to be liquid by VALIC or the Sub-adviser,
in accordance with guidelines adopted by the Company's Board of Directors, and
(b) commercial paper that is sold under Section 4(2) of the 1933 Act which: (i)
is not traded flat or in default as to interest or principal; (ii) is rated in
one of the two highest categories by at least two nationally recognized
statistical rating organizations and VALIC or the Sub-adviser, in accordance
with guidelines
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adopted by the Company's Board of Directors, has determined the commercial paper
to be liquid; or (iii) is rated in one of the two highest categories by one
nationally recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Company's Board of Directors, has
determined that the commercial paper is of equivalent quality and is liquid.
In addition, as a non-fundamental operating policy, the Growth Fund and the
Science & Technology Fund will not invest in oil, gas or mineral exploration
programs if, as a result, more than 5% of the value of the total assets would be
invested in such programs.)
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INVESTMENT PRACTICES
REPURCHASE AGREEMENTS
Each Fund may hold commercial paper, certificates of deposits, and
government obligations (including government guaranteed obligations) subject to
repurchase agreements with certain well established domestic banks and certain
broker-dealers, including primary government securities dealers, approved as
creditworthy by the Board of Directors. The underlying security must be a
high-quality domestic money market security (except for the International
Equities Fund and International Government Bond Fund which utilize foreign money
market securities) and the seller must be a well-established securities dealer
or bank that is a member of the Federal Reserve System. For the Money Market
Fund, the underlying security must be a U.S. Government security or a security
rated in the highest rating category by the Requisite NRSROs (Nationally
Recognized Statistical Rating Organization) and must be determined to present
minimal credit risk. Repurchase agreements are generally for short periods,
often less than a week. Repurchase agreements typically obligate a seller, at
the time it sells securities to a Fund, to repurchase the securities at a
specific future time and price. The price for which the Fund resells the
securities is calculated to exceed the price the Fund initially paid for the
same securities, thereby determining the yield during the Fund's holding period.
This results in a fixed market rate of interest, agreed upon by that Fund and
the seller, which is accrued as ordinary income. Most repurchase agreements
mature within seven days although some may have a longer duration. The
underlying securities constitute collateral for these repurchase agreements,
which are considered loans under the 1940 Act.
The Funds do not intend to sell the underlying securities subject to a
repurchase agreement (except to the seller upon maturity of the agreement).
During the term of the repurchase agreement, the Funds (i) retain the securities
subject to the repurchase agreement as collateral securing the seller's
obligation to repurchase the securities, (ii) monitor on a daily basis the
market value of the securities subject to the repurchase agreement, and (iii)
require the seller to deposit with the Company's custodian collateral equal to
any amount by which the market value of the securities subject to the repurchase
agreement falls below the resale amount provided under the repurchase agreement.
In the event that a seller defaults on its obligation to repurchase the
securities, the Funds must hold the securities until they mature or may sell
them on the open market, either of which may result in a loss to a Fund if, and
to the extent that, the values of the securities decline. Additionally, the
Funds may incur disposition expenses when selling the securities. Bankruptcy
proceedings by the seller may also limit or delay realization and liquidation of
the collateral by a Fund and may result in a loss to that Fund. The Board of
Directors of the Company will evaluate the creditworthiness of all banks and
broker-dealers with which the Company proposes to enter into repurchase
agreements. The Funds will not invest in repurchase agreements that do not
mature within seven days if any such investment, together with any illiquid
assets held by a Fund, exceeds 10% of the value of that Fund's total assets (15%
in the case of Growth Fund, Growth & Income Fund and Science & Technology Fund).
LENDING PORTFOLIO SECURITIES
For purposes of realizing additional income, each Fund may make secured
loans of its portfolio securities amounting to no more than 30% of the value of
each Fund's total assets (33 1/3% in the case of Growth Fund and Science &
Technology Fund). This policy is a fundamental policy of each of the Funds.
Securities loans are made to broker-dealers and other financial institutions
approved by State Street Bank and Trust Company ("State Street"), custodian to
the Funds and pursuant to agreements requiring that the loans be continuously
secured by collateral at least equal at all times to the loaned securities
marked to market on a daily basis. The collateral received will consist of cash,
U.S. government securities, letters of credit or such other collateral as
permitted by interpretations or rules of the Securities and Exchange Commission
("SEC"). While the securities are on loan, the Funds will continue to receive
the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower.
Any loan of portfolio securities by any Fund will be callable at any time
by the lending Fund upon notice of five business days. When voting or consent
rights which accompany loaned securities pass to the borrower, the lending Fund
will call the loan, in whole or in part as appropriate, to permit
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the exercise of such rights if the matters involved would have a material effect
on that Fund's investment in the securities being loaned. If the borrower fails
to maintain the requisite amount of collateral, the loan will automatically
terminate, and the lending Fund will be permitted to use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over collateral. As with any extensions of credit, there are
risks of delay in receiving additional collateral or in the recovery of the
securities or, in some cases, even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only when State Street considers the borrowing
broker-dealers or financial institutions to be creditworthy and of good standing
and the interest earned from such loans to justify the attendant risks. On
termination of the loan, the borrower will be required to return the securities
to the lending Fund. Any gain or loss in the market price during the loan would
inure to the lending Fund. The lending Fund may pay reasonable finders',
administrative, and custodial fees in connection with a loan of its securities.
CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities of foreign or domestic
issues. A convertible security is a security (a bond or preferred stock) which
may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's capital
structure but are usually subordinated to similar nonconvertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines.
A Fund may be required to permit the issuer of a convertible security to
redeem the security, convert it into the underlying common stock, or sell it to
a third party. Thus, a Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on a Fund's ability to achieve
its investment objectives.
FOREIGN SECURITIES
All Funds may invest in foreign securities. A foreign security includes
corporate debt securities of foreign issuers (including preferred or preference
stock), certain foreign bank obligations (see "Bank Obligations") and U.S.
dollar or foreign currency-denominated obligations of foreign governments or
their subdivisions, agencies and instrumentalities, international agencies and
supranational entities.
A foreign security is a security issued by an entity domiciled or
incorporated outside of the United States.
Included within the definition of foreign securities are American
Depository Receipts (ADRs).
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. Generally, ADRs are in
registered form. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market
quotations are readily available, and (ii) issuers whose securities are
represented by ADRs are generally subject to auditing, accounting and financial
reporting standards similar to those applied to domestic issuers.
Each Fund may also, in accordance with its specific investment objective(s)
and investment program, policies and restrictions purchase U.S.
dollar-denominated money market securities of foreign issuers. Such money market
securities may be registered domestically and traded on domestic exchanges or in
the over-the-counter market (e.g., Yankee securities) or may be (1) registered
abroad and traded exclusively in foreign markets or (2) registered domestically
and issued in foreign markets (e.g., Eurodollar securities).
In addition, all the Funds, except the Government Securities Fund and the
Money Market Fund, may invest in non-U.S. dollar-denominated foreign securities,
in accordance with their specific investment objective(s), investment programs,
policies, and restrictions. Investing in foreign securities may
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involve advantages and disadvantages not present in domestic investments. There
may be less publicly available information about securities not registered
domestically, or their issuers, than is available about domestic issuers or
their domestically registered securities. Stock markets outside the U.S. may not
be as developed as domestic markets, and there may also be less government
supervision of foreign exchanges and brokers. Foreign securities may be less
liquid or more volatile than U.S. securities. Trade settlements may be slower
and could possibly be subject to failure. In addition, brokerage commissions and
custodial costs with respect to foreign securities may be higher than those for
domestic investments. Accounting, auditing, financial reporting and disclosure
standards for foreign issuers may be different than those applicable to domestic
issuers. Non-U.S. dollar-denominated foreign securities may be affected
favorably or unfavorably by changes in currency exchange rates and exchange
control regulations (including currency blockage) and a Fund may incur costs in
connection with conversions between various currencies. Foreign securities may
also involve risks due to changes in the political or economic conditions of
such foreign countries, the possibility of expropriation of assets or
nationalization, and possible difficulty in obtaining and enforcing judgments
against foreign entities.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Foreign currency transactions used by certain of the Funds may be either:
(i) on the spot (i.e., cash) basis at the spot rate prevailing in the foreign
exchange market, or (ii) conducted through the use of forward foreign currency
exchange contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date. In general,
forward foreign currency exchange contracts are not guaranteed by a third party
and, accordingly, each party to a forward foreign currency exchange contract is
dependent upon the creditworthiness and good faith of the other party.
A Fund will enter into forward foreign currency exchange contracts only
under two circumstances. First, a Fund may enter into a forward foreign currency
exchange contract to purchase an amount of foreign currency to protect itself
against a possible loss that might occur between trade and settlement dates for
a particular security, resulting from a decline in the U.S. dollar against the
foreign currency in which such security is denominated. This practice may limit
the potential gains that might result from a positive change in such currency
relationships. Second, when VALIC or a Sub-adviser believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
the U.S. dollar, a Fund may enter into a forward foreign currency exchange
contract to purchase or sell an amount of foreign currency approximating the
value of some or all of that Fund's portfolio securities denominated in such
foreign currency. The forecasting of short-term currency market movements is
extremely difficult and it is uncertain whether such short-term hedging
strategies will be successful.
EURO CONVERSION
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain are members of the European Economic and
Monetary Union (the "EMU"). The EMU has established a common European currency
for participating countries which will be known as the "euro." Each
participating country has supplemented its existing currency with the euro on
January 1, 1999, and will replace its existing currency with the euro on July 1,
2002. Any other European country which is a member of the EMU may elect to
participate in the EMU and may supplement its existing currency with the euro
after January 1, 1999.
The ongoing introduction of the euro presents unique risks and
uncertainties, including whether the payment and operational systems of banks
and other financial institutions will function properly; how outstanding
financial contracts will be treated after January 1, 1999; the establishment of
exchange rates for existing currencies and the euro; and the creation of
suitable clearing and settlement systems for the euro. These and other factors
could cause market disruptions and could adversely affect the value of
securities held by certain of the Funds.
BANK OBLIGATIONS
Each Fund may invest in bank obligations. Bank obligations in which the
Funds may invest include certificates of deposit, bankers' acceptances, and
fixed time deposits. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange,
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normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. A Fund will not invest in fixed time deposits which (1) are not
subject to prepayment or (2) provide for withdrawal penalties upon prepayment
(other than overnight deposits) if, in the aggregate, more than 10% of its net
assets (15% in the case of Growth Fund, Growth & Income Fund and Science &
Technology Fund) would be invested in such deposits, repurchase agreements
maturing in more than seven days and other illiquid assets.
The Funds limit investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Funds limit investments in foreign bank obligations to United States
dollar-or foreign currency-denominated obligations of foreign banks (including
United States branches of foreign banks) which at the time of investment (i)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (ii) in terms of assets are among the 75 largest foreign banks in the
world; (iii) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (iv) in the opinion of
VALIC or a Sub-adviser, are of an investment quality comparable to obligations
of United States banks in which the Funds may invest. The Government Securities
Fund may invest in the same types of bank obligations as the other Funds, but
they must be U.S. dollar-denominated. Subject to a Fund's limitation on
concentration in the securities of issuers in a particular industry, there is no
limitation on the amount of a Fund's assets which may be invested in obligations
of foreign banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any U.S.
Government agency or instrumentality.
WHEN-ISSUED SECURITIES
Each of the Funds except the Money Market Fund may purchase securities on a
when-issued or delayed delivery basis. When such transactions are negotiated,
the price of such securities is fixed at the time of commitment, but delivery
and payment for the securities may take place a month or more after the date of
the commitment to purchase. The securities so purchased are subject to market
fluctuation, and no interest accrues to the purchaser during this period.
Forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. VALIC does not believe that a
Fund's net asset value or income will be adversely affected by the purchase of
securities on a when-issued basis.
DEBT SECURITIES
Debt securities are considered high-quality if they are rated at least Aa
by Moody's or its equivalent by any other NRSRO or, if unrated, are determined
to be of equivalent investment quality. High-quality debt securities are
considered to have a very strong capacity to pay principal and interest. Debt
securities are considered investment grade if
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they are rated, for example, at least Baa by Moody's
or BBB by S&P or their equivalent by any other NRSRO or, if not rated, are
determined to be of equivalent investment quality. Investment grade debt
securities are regarded as having an adequate capacity to pay principal and
interest. Lowermedium and lower-quality securities rated, for example, Ba and B
by Moody's or its equivalent by any other NRSRO are regarded on balance as high
risk and predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. The Adviser or Sub-Advisers
will not dispose of an investment grade security that has been downgraded to
below investment grade. See the Section regarding "Description of Corporate Bond
Ratings" for a description of each rating category in this Statement of
Additional Information for a more complete description of lower-medium and
lower-quality debt securities and their risks.
The maturity of debt securities may be considered long (ten plus years),
intermediate (one to ten years), or short-term (thirteen months or less). In
general, the principal values of longer-term securities fluctuate more widely in
response to changes in interest rates than those of shorter-term securities,
providing greater opportunity for capital gain or risk of capital loss. A
decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
EMERGING MARKETS
Investments in companies domiciled in emerging market countries may be
subject to additional risks. Specifically, volatile social, political and
economic conditions may expose investments in emerging or developing markets to
economic structures that are generally less diverse and mature. Emerging market
countries may have less stable political systems than those of more developed
countries. As a result, it is possible that recent favorable economic
developments in certain emerging market countries may be suddenly slowed or
reversed by unanticipated political or social events in such countries.
Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the US economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource selfsufficiency and balance of payments position.
Another risk is that the small current size of the markets for such
securities and the currently low or nonexistent volume of trading can result in
a lack of liquidity and in greater price volatility. Until recently, there has
been an absence of a capital market structure or market-oriented economy in
certain emerging market countries. If a Fund's securities will generally be
denominated in foreign currencies, the value of such securities to the Fund will
be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of a Fund's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the U.S. dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the U.S.
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
A further risk is that the existence of national policies may restrict a
Fund's investment opportunities and may include restrictions on investment in
issuers or industries deemed sensitive to national interests. Also, some
emerging markets countries may not have developed structures governing private
or foreign investment and may not allow for judicial redress for injury to
private property.
ASSET-BACKED SECURITIES
Each of the Funds may invest in asset-backed securities (unrelated to first
mortgage loans) that represent fractional interests in pools of retail
installment loans, both secured (such as certificates for automobile
receivables) and unsecured, and leases, or revolving credit receivables both
secured and unsecured (such as credit card receivable securities). These assets
are generally held by a trust and payments of principal and interest, or
interest only are passed through monthly or quarterly to certificate holders and
may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or originator
of the trust.
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Underlying automobile sales contracts, leases or credit card receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, principal repayment rates tend not to vary much with
interest rates and the short-term nature of the underlying loans, leases, or
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying loans, leases or receivables are not realized
by the trust because of unanticipated legal or administrative costs of enforcing
the contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. If consistent with
its investment objective(s) and policies, a Fund may invest in other
asset-backed securities that may be developed in the future.
LOWER RATED DEBT SECURITIES
Issuers of lower rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer 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 securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
Lower rated securities frequently have call or redemption features which
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
A Fund may have difficulty disposing of certain lower rated securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and a Fund's ability to dispose of
particular issues when necessary to meet a Fund's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness of
the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower rated securities are likely to adversely affect a
Fund's net asset value. In addition, a Fund may incur additional expenses to the
extent it is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings as a method
for evaluating lower rated fixed income securities. For example, credit ratings
evaluate the safety of principal and interest payments, not the market risks
involved in lower rated fixed income securities. Since credit rating agencies
may fail to change the credit ratings in a timely manner to reflect subsequent
events, the Sub-adviser will monitor the issuers of lower rated fixed income
securities in a Fund to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
debt securities' liquidity within the parameters of the Fund's investment
policies. The Sub-adviser will not necessarily dispose of a portfolio security
when its ratings have been changed.
REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund may invest in real estate securities. Real estate securities are
equity securities consisting of (i) common stocks, (ii) rights or warrants to
purchase common stocks, (iii) securities convertible into common stocks and (iv)
preferred stocks issued by real estate companies. A real estate company is one
that derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or resi-
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dential real estate or that has at least 50% of its assets invested in real
estate.
Certain Funds also may invest in REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Like regulated investment companies
such as the Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Internal Revenue Code
(the "Code"). A Fund will indirectly bear its proportionate share of any
expenses paid by REITs in which it invests in addition to the expenses paid by a
Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject
to interest rate risks.
WARRANTS
Certain Funds may invest in or acquire warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a Fund to buy
additional bonds at the favorable rate or to sell the warrants at a profit. If
interest rates rise, the warrants would generally expire with no value. Warrants
do not entitle a holder to dividends or voting rights with respect to the
underlying securities and do not represent any rights in the assets of the
issuing company. In addition, the value of warrants does not, necessarily, in
all cases change to the same extent as the value of the underlying securities to
which they relate. Warrants cease to have value if they are not exercised prior
to the expiration date. These factors can make warrants more speculative than
other types of investments.
SWAP AGREEMENTS
Certain Funds may enter into interest rate, index and currency exchange
rate swap agreements. These transactions are entered into in an attempt to
obtain a particular return when it is considered desirable to do so, possibly at
a lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return. Swap agreements are two party contracts
entered into primarily by institutional investors for periods ranging from a few
weeks to more than one year. In a standard "swap" transaction, two parties agree
to exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments, which may be adjusted
for an interest factor. The gross returns to be exchanged or "swapped" between
the parties are generally calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Forms of swap agreements include
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
fall below a specified rate, or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding minimum or maximum levels.
Most swap agreements entered into by the Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by
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each party to the agreement (the "net amount"). A Fund's current obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the segregation of assets determined to be liquid by VALIC or
a Sub-adviser in accordance with procedures established by the Board of
Directors, to avoid any potential leveraging of a Fund's portfolio. Obligations
under swap agreements so covered will not be construed to be "senior securities"
for purposes of the Fund's investment restriction concerning senior securities.
A Fund will not enter into a swap agreement with any single party if the net
amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on VALIC or a Sub-adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. The Funds will
enter into swap agreements only with counterparties that meet certain standards
of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
EURODOLLAR OBLIGATIONS
Certain Funds, in accordance with their investment objective(s), policies,
and investment program, may invest in Eurodollar obligations, including
Eurodollar bonds and Eurodollar certificates of deposit. A Eurodollar obligation
is a security denominated in U.S. dollars and originated principally in Europe,
giving rise to the term Eurodollar.
Such securities are not registered with the SEC and generally may only be
sold to U.S. investors after the initial offering and cooling-off periods. The
market for Eurodollar securities is dominated by foreign-based investors and the
primary trading market for these securities is London.
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Eurodollar obligations, including Eurodollar bonds and Eurodollar
certificates of deposit, are principally obligations of foreign branches of U.S.
banks. These instruments represent the loan of funds actually on deposit in the
U.S. The Series Company believes that the U.S. bank would be liable in the event
that its foreign branch failed to pay on its U.S. dollar denominated
obligations. Nevertheless, the assets supporting the liability could be
expropriated or otherwise restricted if located outside the U.S. Exchange
controls, taxes, or political and economic developments also could affect
liquidity or repayment. Due to possibly conflicting laws or regulations, the
foreign branch of the U.S. bank could maintain and prevail that the liability is
solely its own, thus exposing a Fund to a possible loss. Such U.S. dollar
denominated obligations of foreign branches of Federal Deposit Insurance
Corporation ("FDIC") member U.S. banks are not covered by the usual $100,000 of
FDIC insurance if they are payable only at an office of such a bank located
outside the U.S., Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Moreover, there may be less publicly available information about foreign
issuers whose securities are not registered with the SEC and such foreign
issuers may not be subject to the accounting, auditing, and financial reporting
standards applicable to issuers registered domestically. In addition, foreign
issuers, stock exchanges, and brokers generally are subject to less government
regulation. There are, however, no risks of currency fluctuation since the
obligations are U.S. dollar denominated.
Certain Funds also may purchase and sell Eurodollar futures contracts,
which enable purchasers to obtain a fixed rate for the lending of funds and
sellers to obtain a fixed rate for borrowings. A Fund might use Eurodollar
futures contracts and options thereon to hedge against changes in a foreign
prime lending interest rate to which many interest swaps and fixed income
securities are linked.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." Certain of the Funds may also invest in fixed income securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
Mortgage Pass-Through Securities
Interests in pools of mortgage-related securities differ from other forms
of fixed income securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities are
GNMA, Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned United States Government
corporation within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full faith and credit of the United States
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and
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mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Administration (the "FHA"), or guaranteed by the Department of Veterans
Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation formerly owned by the twelve
Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC
issues Participation Certificates ("PCs") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Series Company's investment quality standards. There can be
no assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Certain Funds may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, VALIC or a Sub-adviser determines that the securities meet the Series
Company's quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. No Fund will purchase mortgage-related securities or any
other assets which in VALIC's or the Sub-adviser's opinion are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the Growth Fund, Growth & Income Fund and Science &
Technology Fund).
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
Veterans' Administration. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeown-
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ers to make payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs)
A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through
security. Similar to a bond, interest and prepaid principal is paid, in most
cases, monthly. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured in multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
As an example of CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES
Other mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, including mortgage
dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS").
Other mortgage-related securities may be equity or fixed income securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals
CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
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depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Fund may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities ("SMBS")
SMBS are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
LOAN PARTICIPATIONS
Loan Participations are debt obligations of corporations and are usually
purchased from major money center banks, selected regional banks, and major
foreign banks with branches in the U.S. which are regulated by the Federal
Reserve System or appropriate state regulatory authorities. VALIC and the
Sub-advisers believe that the credit standards imposed by such banks are
comparable to the standards such banks use in connection with loans originated
by them and in which they intend to maintain a full interest. The financial
institutions offering loan participations do not guarantee principal or interest
on the loan participations which they offer. VALIC and the Sub-advisers will not
purchase such securities for the Funds unless they believe that the collateral
underlying the corporate loans is adequate and the corporation will be able, in
a timely fashion, to pay scheduled interest and principal amounts.
ADJUSTABLE RATE SECURITIES
Each of the Funds may invest in adjustable rate money market securities.
Adjustable rate secu-
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rities (i.e., variable rate and floating rate instruments) are securities that
have interest rates that are adjusted periodically, according to a set formula.
The maturity of some adjustable rate securities may be shortened under certain
special conditions described more fully below.
Variable rate instruments are obligations (usually certificates of deposit)
that provide for the adjustment of their interest rates on predetermined dates
or whenever a specific interest rate changes. A variable rate instrument whose
principal amount is scheduled to be paid in 13 months or less is considered to
have a maturity equal to the period remaining until the next readjustment of the
interest rate. Many variable rate instruments are subject to demand features
which entitle the purchaser to resell such securities to the issuer or another
designated party, either (1) at any time upon notice of usually 30 days or less,
or (2) at specified intervals, not exceeding 13 months, and upon 30 days notice.
A variable rate instrument subject to a demand feature is considered to have a
maturity equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount can be
recovered through demand.
Floating rate instruments (generally corporate notes, bank notes, or
Eurodollar certificates of deposit) have interest rate reset provisions similar
to those for variable rate instruments and may be subject to demand features
like those for variable rate instruments. The maturity of a floating rate
instrument is considered to be the period remaining until the principal amount
can be recovered through demand.
ILLIQUID SECURITIES
The Funds will not invest more than 10% (15% in the case of Growth Fund,
Growth & Income Fund and Science & Technology Fund) of the value of their assets
in securities or other investments that are illiquid or not readily marketable
(including repurchase agreements with maturities exceeding seven days).
Securities received as a result of a corporate reorganization or similar
transaction affecting readily-marketable securities already held in the
portfolio of a Fund will not be considered securities or other investments that
are not readily marketable. However, the Funds will attempt, in an orderly
fashion, to dispose of any securities received under these circumstances, to the
extent that such securities are considered not readily marketable, and together
with other illiquid securities, exceed 10% of the value of a Fund's net assets.
RULE 144A SECURITIES
Each Fund may purchase securities which, while privately placed, are
eligible for purchase and sale pursuant to Rule 144A under the Securities Act of
1933 (the "1933 Act"). This Rule permits certain qualified institutional buyers,
such as the Funds, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Company, under the
supervision of the Board of Directors, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Funds'
restriction on investing more than 10% (15% in the case of the Growth Fund,
Growth & Income Fund and Science & Technology Fund) of its assets in illiquid
securities. Determination of whether a Rule 144A security is liquid or not is a
question of fact. In making this determination the Company will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition the Company could consider (i)
frequency of trades and quotes, (ii) number of dealers and potential purchasers,
(iii) dealer undertakings to make a market, and (iv) nature of the security and
market place trades (for example, the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by the Company and, if, as a result
of changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Funds' holding of illiquid securities will be reviewed to determine
what, if any, action is required to assume that the Funds do not invest more
than 10% of their assets in illiquid securities (15% in the case of the Growth
Fund, Growth & Income Fund and Science & Technology Fund). Investing in Rule
144A securities could have the effect of increasing the amount of the Funds'
investments in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. Each Fund may invest in Rule 144A
securities (in accordance with each Fund's investment restrictions as listed in
the prospectus) that have been determined to be liquid by Board approved
guidelines.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund, other than the Money Market Fund, may write covered call and put
options on
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securities and securities indices. As a matter of operating policy, the Growth &
Income Fund will only write covered call options on securities. The
International Equities Fund and the International Government Bond Fund may also
write covered call and put options on foreign currencies that correlate with the
Fund's portfolio of foreign securities. A call option is a contract that gives
to the holder the right to buy a specified amount of the underlying security or
currency at a fixed or determinable price (called the exercise or "strike"
price) upon exercise of the option. A put option is a contract that gives the
holder the right to sell a specified amount of the underlying security or
currency at a fixed or determinable price upon exercise of the option.
To "cover" a call option written, a Fund may, for example, identify and
have available for sale the specific portfolio security, group of securities, or
foreign currency to which the option relates. To cover a put option written, a
Fund may, for example, establish a segregated asset account with its custodian
containing cash or liquid assets that, when added to amounts deposited with its
broker or futures commission merchant ("FCM") as margin, equals the market value
of the instruments underlying the put option written.
Each of these Funds may write options on securities and securities indices
and the International Equities Fund and the International Government Bond Fund
may write options on currencies for the purpose of increasing the Funds' return
on such securities or its entire portfolio of securities or to protect the value
of the entire portfolio. Such investment strategies will not be used for
speculation. If a Fund writes an option which expires unexercised or is closed
out by the Fund at a profit, it will retain the premium received for the option,
which will increase its gross income. If the price of the underlying security or
currency moves adversely to the Fund's position, the option may be exercised and
the Fund, as the writer of the option, will be required to sell or purchase the
underlying security or currency at a disadvantageous price, which may only be
partially offset by the amount of premium received.
Options on stock indices are similar to options on stock, except that all
settlements are made in cash rather than by delivery of stock, and gains or
losses depend on price movements in the stock market generally (or in a
particular industry or segment of the market represented by the index) rather
than price movements of individual stocks. When a Fund writes an option on a
securities index, and the underlying index moves adversely to the Fund's
position, the option may be exercised. Upon such exercise, the Fund, as the
writer of the option, will be required to pay in cash an amount equal to the
difference between the exercise settlement value of the underlying index and the
exercise price of the option, multiplied by a specified index "multiplier."
Call or put options on a stock index may be written at an exercise or
"strike" price which is either below or above the current value of the index. If
the exercise price at the time of writing the option is below the current value
of the index for a call option or above the current value of the index for a put
option the option is considered to be "in the money." In such a case, the Fund
will cover such options written by segregating with its custodian or pledging to
its commodity broker as collateral cash, U.S. Government or other high-grade,
short-term debt obligations equal in value to the amount by which the option
written is in the money, times the multiplier, times the number of contracts.
Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, Computer
Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver
Index, Institutional Index and NYSE Beta Index. The Funds may also use options
on such other indices as may now or in the future be available.
Each Fund, except the Money Market Fund, may also purchase put or call
options on securities and securities indices in order to (i) hedge against
anticipated changes in interest rates or stock prices that may adversely affect
the prices of securities that the Fund intends to purchase at a later date, (ii)
hedge its investments against an anticipated decline in value, or (iii) attempt
to reduce the risk of missing a market or industry segment advance. As a matter
of operating policy, the Growth & Income Fund will only purchase call options on
securities to close out open positions for covered call options it has written.
The International Equities Fund and the International Government Bond Fund also
may purchase put options on foreign currencies that correlate with the Fund's
portfolio securities in order to minimize or hedge against anticipated declines
in the exchange rate of the currencies in which the Fund's securities are
denominated and
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may purchase call options on foreign currencies that correlate with its
portfolio securities to take advantage of anticipated increases in exchange
rates. In the event that the anticipated changes in interest rates, stock
prices, or exchange rates occur, the Fund may be able to offset the resulting
adverse effect on the Fund, in whole or in part, through the options purchased.
The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying security, securities index,
or currency changes sufficiently, the option may expire without value to the
Fund. To close option positions purchased by the Funds, the Funds may sell put
or call options identical to options previously purchased, which could result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option purchased.
Options used by the Funds may be traded on the national securities
exchanges or in the over-the-counter market. Only the Capital Conservation Fund,
the Government Securities Fund, the International Equities Fund and the
International Government Bond Fund may use over-the-counter options. Options
traded in the over-the-counter market may not be as actively traded as those on
an exchange. Accordingly, it may be more difficult to value such options. In
addition, it may be more difficult to enter into closing transactions with
respect to options traded over-the-counter. In this regard, the Funds may enter
into contracts with the primary dealers with whom they write over-the-counter
options. The contracts will provide that each Fund has the absolute right to
repurchase an option it writes at any time at a repurchase price which
represents the fair market value of such option, as determined in good faith
through negotiations between the parties, but which in no event will exceed a
price determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by each Fund for writing the option, plus the amount, if any,
of the option's intrinsic value (i.e., the amount the option is "in-the-money").
The formula will also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written "out-of-the-money." Although the specific details of the formula may
vary with different primary dealers, each contract will provide a formula to
determine the maximum price at which each Fund can repurchase the option at any
time. The Funds have established standards of creditworthiness for these primary
dealers.
WRITING COVERED CALL AND PUT OPTIONS AND
PURCHASING CALL AND PUT OPTIONS
All of the Funds, except the Money Market Fund, may write exchange-traded
covered call and put options on or relating to specific securities in order to
earn additional income or, in the case of a call written, to minimize or hedge
against anticipated declines in the value of the Fund's securities. As a matter
of operating policy, the Growth Fund and the Science & Technology Fund will not
write a covered option if, as a result, the aggregate market value of all
portfolio securities or currencies covering put or call options exceeds 25% of
the market value of that Fund's net assets. The Growth & Income Fund as a matter
of operating policy, will only write covered call options on securities. The
International Equities Fund and the International Government Bond Fund may also
write covered call and put options on foreign currencies that correlate with its
portfolio securities in order to earn additional income or in the case of call
options written to minimize or hedge against anticipated declines in the
exchange rate of the currencies in which the Fund's securities are denominated.
To "cover" an option means, for example, to identify and make available for sale
the specific portfolio security or foreign currency to which the option relates.
Through the writing of a covered call option a Fund receives premium income but
obligates itself to sell to the purchaser of such an option the particular
security or foreign currency underlying the option at a specified price at any
time prior to the expiration of the option period, regardless of the market
value of the security or the exchange rate for the foreign currency during this
period. Through the writing of a covered put option a Fund receives premium
income but obligates itself to purchase a particular security or foreign
currency underlying the option at a specified price at any time prior to the
expiration of the option period, regardless of market value or exchange rate
during the option period.
Certain Funds, in accordance with their investment objective(s) and
investment programs, may also write exchange-traded covered call and put
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options on stock indices and may purchase call and put options on stock indices
that correlate with the Fund's portfolio securities. These Funds may engage in
such transactions for the same purposes as they may engage in such transactions
with respect to individual portfolio securities or foreign currencies, that is,
to generate additional income or as a hedging technique to minimize anticipated
declines in the value of the Fund's portfolio securities or the exchange rate of
the securities in which the Fund invested. In economic effect, a stock index
call or put option is similar to an option on a particular security, except that
the value of the option depends on the weighted value of the group of securities
comprising the index, rather than a particular security, and settlements are
made in cash rather than by delivery of a particular security.
Each Fund, other than the Money Market Fund, may also purchase
exchange-traded call and put options with respect to securities and stock
indices that correlate with that Fund's particular portfolio securities. As a
matter of operating policy, the Growth & Income Fund will only purchase call
options on securities to close out open positions for covered call options
written by it. The International Equities Fund and the International Government
Bond Fund may also purchase call and put options on foreign currencies that
correlate with the currencies in which the Fund's securities are denominated.
A Fund may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its portfolio securities or
currencies. As the holder of a put option with respect to individual securities
or currencies, the Fund has the right to sell the securities or currencies
underlying the options and to receive a cash payment at the exercise price at
any time during the option period. As the holder of a put option on an index, a
Fund has the right to receive, upon exercise of the option, a cash payment equal
to a multiple of any excess of the strike price specified by the option over the
value of the index.
A Fund may purchase call options on individual securities, currencies or
stock indices in order to take advantage of anticipated increases in the price
of those securities or currencies by purchasing the right to acquire the
securities or currencies underlying the option or, with respect to options on
indices, to receive income equal to the value of such index over the strike
price. As the holder of a call option with respect to individual securities or
currencies, a Fund obtains the right to purchase the underlying securities or
currencies at the exercise price at any time during the option period. As the
holder of a call option on a stock index, a Fund obtains the right to receive,
upon exercise of the option, a cash payment equal to the multiple of any excess
of the value of the index on the exercise date over the strike price specified
in the option.
Unlisted options may be used by the Capital Conservation Fund, the
Government Securities Fund, the International Equities Fund and the
International Government Bond Fund. Such options are not traded on an exchange
and may not be as actively traded as listed securities, making the valuation of
these securities more difficult. In addition, an unlisted option entails a risk
not found in connection with listed options -- that the party on the other side
of the option transaction will default. This may make it impossible to close out
an unlisted option position in some cases, and profits may be lost thereby. Such
unlisted, over-the-counter options, unless otherwise indicated, will be
considered illiquid securities. The Funds will engage in such transactions only
with firms of sufficient credit to minimize these risks. In instances in which a
Fund has entered into agreements with primary dealers with respect to the
unlisted, over-the-counter options it has written, and such agreements would
enable the Fund to have an absolute right to repurchase, at a pre-established
formula price, the over-the-counter options written by it, the Fund will treat
as illiquid only the amount equal to the formula price described above less the
amount by which the option is "in-the-money."
Although these investment practices will be used to generate additional
income and to attempt to reduce the effect of any adverse price movement in the
securities or currencies subject to the option, they do involve certain risks
that are different in some respects from investment risks associated with
similar funds which do not engage in such activities. These risks include the
following: writing covered call options -- the inability to effect closing
transactions at favorable prices and the inability to participate in the
appreciation of the underlying securities or currencies above the exercise
price; writing covered put options -- the inability to effect closing
transactions at favorable prices and the obligation to purchase the specified
securities or currencies or to make a cash settlement on the stock index at
prices which may not reflect current market values or exchange rates; and
purchasing put and call op-
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tions -- possible loss of the entire premium paid. In addition, the
effectiveness of hedging through the purchase or sale (writing) of stock index
options will depend upon the extent to which price movements in the portion of a
Fund's portfolio being hedged correlate with price movements in the selected
stock index. Perfect correlation may not be possible because the securities held
or to be acquired by a Fund may not exactly match the composition of the stock
index on which options are purchased or written. If the forecasts of VALIC
regarding movements in securities prices, currencies or interest rates are
incorrect, a Fund's investment results may have been better without the hedge.
FINANCIAL FUTURES CONTRACTS
Each Fund, except the Money Market Fund, in accordance with its investment
objective(s), investment program, policies, and restrictions may purchase and
sell exchange-traded financial futures contracts as a hedge to protect against
anticipated changes in prevailing interest rates, overall stock prices or
currency rates, or to efficiently and in a less costly manner implement either
increases or decreases in exposure to the equity or bond markets. The Funds may
also write covered call options and purchase put and call options on financial
futures contracts for the same purposes or to earn additional income. The Growth
Fund, the Growth & Income Fund and the Science & Technology Fund may also write
covered put options on stock index futures contracts. Only the International
Equities Fund and the International Government Bond Fund may utilize currency
futures contracts and both listed and unlisted financial futures contracts and
options thereon.
Financial futures contracts consist of interest rate futures contracts,
stock index futures contracts, and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. A stock index futures contract is similar in
economic effect, except that rather than being based on specific securities, it
is based on a specified index of stocks and not the stocks themselves. A
currency futures contract is a contract to buy or sell a specific foreign
currency at a future time for a fixed price.
An interest rate futures contract binds the seller to deliver to the
purchaser on a specified future date a specified quantity of one of several
listed financial instruments, against payment of a settlement price specified in
the contract. A public market currently exists for futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the French franc;
the Swiss franc; the Mexican peso; and certain multinational currencies, such as
the European Currency Unit ("ECU"). It is expected that other futures contracts
will be developed and traded in the future.
Stock index futures contracts bind purchaser and seller to deliver, at a
future date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on the S&P 500 Index, the New York Stock Exchange
Composite Index, the Value Line Stock Index, and the Major Market Index. It is
expected that financial instruments related to broad-based indices, in addition
to those for which futures contracts are currently traded, will in the future be
the subject of publicly-traded futures contracts, and the Funds may use any of
these, which are appropriate, in its hedging strategies.
A financial futures contract is an agreement to buy or sell a security (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery of a specified security)
for a set price in the future. Exchange-traded futures contracts are designated
by boards of trade which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC").
Positions taken in the futures markets are not normally held until delivery
or cash settlement is required, but instead are liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Fund will
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usually be liquidated in this manner, the Fund may instead make or take delivery
of underlying securities whenever it appears economically advantageous to the
Fund to do so. A clearing organization associated with the relevant exchange
assumes responsibility for closing out transactions and guarantees that, as
between the clearing members of an exchange, the sale and purchase obligations
will be performed with regard to all positions that remain open at the
termination of the contract.
Unlisted financial futures contracts, which may be purchased or sold only
by the International Equities Fund and the International Government Bond Fund,
like unlisted options, are not traded on an exchange and, generally, are not as
actively traded as listed futures contracts or listed securities. Such financial
futures contracts generally do not have the following elements: standardized
contract terms, margin requirements relating to price movements, clearing
organizations that guarantee counter-party performance, open and competitive
trading in centralized markets, and public price dissemination. These elements
in listed instruments serve to facilitate their trading and accurate valuation.
As a result, the accurate valuation of unlisted financial futures contracts may
be difficult. In addition, it may be difficult or even impossible, in some
cases, to close out an unlisted financial futures contract, which may, in turn,
result in significant losses to the Fund. Such unlisted financial futures
contracts will be considered by the Fund to be illiquid securities and together
with other illiquid securities will be limited to no more than 10% (15% in the
case of the Growth Fund, the Growth & Income Fund and the Science & Technology
Fund) of the value of such Fund's total assets. In making such determination,
the value of unlisted financial futures contracts will be based upon the "face
amount" of such contracts. The International Equities Fund and the International
Government Bond Fund will engage in such transactions only with securities firms
having sufficient credit or other resources to minimize certain of these risks.
When financial futures contracts are entered into by a Fund, either as the
purchaser or the seller of such contracts, the Fund is required to deposit with
its custodian in a segregated account in the name of the FCM an initial margin
of cash or U.S. Treasury bills equalling as much as 5% to 10% or more of the
contract settlement price. The nature of initial margin requirements in futures
transactions differs from traditional margin payments made in securities
transactions in that initial margins for financial futures contracts do not
involve the borrowing of funds by the customer to finance the transaction.
Instead, a customer's initial margin on a financial futures contract represents
a good faith deposit securing the customer's contractual obligations under the
financial futures contract. The initial margin deposit is returned, assuming
these obligations have been met, when the financial futures contract is
terminated. In addition, subsequent payments to and from the FCM, called
"variation margin," are made on a daily basis as the price of the underlying
security, stock index, or currency fluctuates, reflecting the change in value in
the long (purchase) or short (sale) positions in the financial futures contract,
a process known as "marking to market."
A Fund, as an internal operating policy may not hold financial futures
contracts in an amount greater than 33% of the Fund's net assets. A Fund may not
adhere to this internal operating policy in circumstances where the Fund is
required to invest a large cash infusion. In this circumstance the Fund's total
invested position, including the security value of the financial futures
contracts may not exceed 100% of the Fund's net assets.
Financial futures contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, the Funds will normally close all futures positions by entering
into an offsetting transaction which operates to cancel the position held, and
which usually results in a profit or loss.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
For bona fide hedging purposes, each Fund, except the Money Market Fund,
may also purchase call and put options on financial futures contracts and write
call options on financial futures contracts of the type which the particular
Fund is authorized to enter into. Except for options on currency futures
contracts used by the International Equities Fund and the International
Government Bond Fund, options on financial future contracts used by the Funds
are traded on exchanges that are licensed and regulated by the CFTC. A call
option on a financial futures contract gives the purchaser the right in return
for the premium paid, to purchase a financial futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
put option gives the purchaser the
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right, in return for the premium paid, to sell a financial futures contract
(assume a "short" position), for a specified exercise price, at any time before
the option expires.
Unlike entering into financial futures contracts, purchasing options on
financial futures contracts allows a Fund to decline to exercise the option,
thereby avoiding any loss beyond foregoing the purchase price (or "premium")
paid for the options. Therefore, the purchase of options on financial futures
contracts may be a preferable hedging strategy when a Fund desires maximum
flexibility. Whether, in order to achieve a particular objective, a Fund enters
into a financial futures contract, on the one hand, or an option contract, on
the other, will depend on all the circumstances, including the relative costs,
liquidity, availability and capital requirements of such financial futures and
options contracts. Also, the Funds will consider the relative risks involved,
which may be quite different. These factors, among others, will be considered in
light of market conditions and the particular objective to be achieved.
CERTAIN ADDITIONAL RISKS OF OPTIONS AND
FINANCIAL FUTURES CONTRACTS
In addition to the risks described in the Company's Prospectus, the use of
options and financial futures contracts may entail the following risks. First,
although such instruments when used by the Funds are intended to correlate with
the Funds' portfolio securities or currencies, in many cases the options or
financial futures contracts used may be based on securities, currencies, or
stock indices the components of which are not identical to the portfolio
securities owned or intended to be acquired by the Funds. Second, due to supply
and demand imbalances and other market factors, the price movements of financial
futures contracts, options thereon, currency options, and stock index options
may not necessarily correspond exactly to the price movements of the securities,
currencies, or stock indices on which such instruments are based. Accordingly,
there is a risk that a Fund's transactions in those instruments will not in fact
offset the impact on the Fund of adverse market developments in the manner or to
the extent contemplated or that such transactions will result in losses to the
Fund which are not offset by gains with respect to corresponding portfolio
securities owned or to be purchased by that Fund.
To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures or
option contract are expected to be less volatile than price movements in the
related portfolio securities owned or intended to be acquired by a Fund, it may,
in order to compensate for this difference, use an amount of financial futures
or option contracts which is greater than the amount of such portfolio
securities. Similarly, where the price movement of a financial futures or option
contract is anticipated to be more volatile, a Fund may use an amount of such
contracts which is smaller than the amount of portfolio securities to which such
contracts relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in a Fund's portfolio securities is particularly
relevant to financial futures contracts and options written on stock indices and
currencies. A Fund, in entering into a futures purchase contract, potentially
could lose any or all of the contract's settlement price. In entering into a
futures sale contract, a Fund could potentially lose a sum equal to the excess
of the contract's value (marked to market daily) over the contract's settlement
price. In writing options on stock indices or currencies a Fund could
potentially lose a sum equal to the excess of the value of the index or currency
(marked to market daily) over the exercise price. In addition, because financial
futures contracts require delivery at a future date of either a specified
security or currency, or an amount of cash equal to a multiple of the difference
between the value of a specified stock index on that date and the settlement
price, an algebraic relationship exists between any price movement in the
underlying security or currency or index and the potential cost of settlement to
a Fund. A small increase or decrease in the value of the underlying security or
currency or stock index can, therefore, result in a much greater increase or
decrease in the cost to the Fund.
Stock index call options written also pose another risk as hedging tools.
Because exercises of stock index options are settled in cash, there is an
inherent timing risk that the value of a Fund's portfolio securities "covering"
a stock index call option written by it may decline during the time between
exercise of the option by the option holder and notice to the Fund of such
exercise (usually one day or more) thereby requiring the Fund to use additional
assets to settle the transaction. This risk
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is not present in the case of covered call options on individual securities,
which are settled by delivery of the actual securities.
There are also special risks in using currency options including the
following: (i) settlement of such options must occur in the country issuing the
currency in conformity with foreign regulations for such delivery, including the
possible imposition of additional costs and taxes, (ii) no systematic reporting
of "last sale" information for foreign currencies, and (iii) the need to use
"odd lot" transactions for underlying currencies at prices less favorable than
those for "round lot" transactions.
Although the Funds intend to establish positions in these instruments only
when there appears to be an active market, there is no assurance that a liquid
market for such instruments will exist when a Fund seeks to "close out" (i.e.
terminate) a particular financial futures contract or option position. This is
particularly relevant for over-the-counter options and financial futures
contracts, as previously noted. Trading in such instruments could be
interrupted, for example, because of a lack of either buyers or sellers. In
addition, the futures and options exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. Exercise of options could also be restricted or delayed because
of regulatory restrictions or other factors. A Fund may be able, by adjusting
investment strategy in the cash or other contract markets, to offset to some
extent any adverse effects of being unable to liquidate a hedge position.
Nevertheless, in some cases, a Fund may experience losses as a result of such
inability. Therefore it may have to liquidate other more advantageous
investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to a
Fund's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. See "Other Information Custody of Assets" in this
Statement of Additional Information. The Funds will use only FCMs or brokers in
whose reliability and financial soundness they have full confidence and have
adopted certain other procedures and limitations to reduce the risk of loss with
respect to any assets which brokers hold or to which they may have access.
Nevertheless, in the event of a broker's insolvency or bankruptcy, it is
possible that a Fund could experience a delay or incur costs in recovering such
assets or might recover less than the full amount due. Also the value of such
assets could decline by the time a Fund could effect such recovery.
The success of a Fund in using hedging techniques depends, among other
things, on VALIC's ability to predict the direction and volatility of price
movements in both the futures and options markets as well as the securities
markets and on VALIC's ability to select the proper type, time, and duration of
hedges. There can be no assurance that these techniques will produce their
intended results. In any event, VALIC will use financial future contracts,
options thereon, currency options and stock index options only when it believes
the overall effect is to reduce, rather than increase, the risks to which a Fund
is exposed. Hedging transactions also, of course, may be more, rather than less,
favorable to a Fund than originally anticipated.
LIMITATIONS
No Fund will enter into any financial futures contract or purchase any
option thereon if immediately thereafter the total amount of its assets required
to be on deposit as initial margin to secure its obligations under financial
futures contracts, plus the amount of premiums paid by it for outstanding
options to purchase futures contracts, exceeds 5% of the market value of its
total assets. (Net assets in the case of Growth & Income Fund); provided
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. This is a fundamental policy of each Fund that is permitted to use
options and financial futures contracts.
In addition, each Fund has an operating policy which provides that it will
not enter into financial futures contracts or write put or call options with
respect to financial futures contracts unless such transactions are either
"covered" or subject to segregation requirements considered appropriate by the
SEC staff. Further, each Fund has an operating policy which provides that it
will not enter into custodial arrangements with respect to initial or variation
margin deposits or marked-to-market amounts unless the custody of such initial
and variation margin deposits and marked-to-market amounts are in compliance
with current SEC staff interpretive positions or no-action letters or rules
adopted by the SEC.
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MONEY MARKET SECURITIES OF FOREIGN ISSUERS
Foreign money market instruments utilized by the Funds will be limited to:
(i) obligations of, or guaranteed by, a foreign government, its agencies or
instrumentalities; (ii) certificates of deposit, bankers' acceptances,
short-term notes, negotiable time deposits and other obligations of the ten
largest banks in each foreign country, measured in terms of net assets; and
(iii) other short-term unsecured corporate obligations (usually 1 to 270 day
commercial paper) of foreign companies. For temporary purposes or in light of
adverse foreign political or economic conditions, the Funds may invest in short-
term high quality foreign money market securities without limitation.
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INVESTMENT ADVISER
VALIC serves as the investment adviser to Asset Allocation Fund, Money
Market Fund, Capital Conservation Fund, Government Securities Fund,
International Equities Fund and Social Awareness Fund pursuant to an Investment
Advisory Agreement dated September 30, 1987, approved by shareholders at a
meeting held on September 7, 1990. This Investment Advisory Agreement was also
made applicable to the International Government Bond Fund effective October 1,
1991. The Investment Advisory Agreement was approved by the shareholders of the
International Government Bond Fund on September 15, 1992. VALIC also serves as
investment adviser to the MidCap Index Fund, the Stock Index Fund, the Small Cap
Index Fund pursuant to an Investment Advisory Agreement effective May 1, 1992
that was approved by shareholders of the MidCap Index Fund and Stock Index Fund
on April 28, 1992 and approved by shareholders of the Small Cap Index Fund on
September 15, 1992. This Investment Advisory Agreement was also made applicable
to the Growth Fund, the Growth & Income Fund and the Science & Technology Fund
effective May 1, 1994. Prior to May 1, 1992, VALIC served as investment adviser
to the MidCap Index Fund and Stock Index Fund pursuant to the Investment
Advisory Agreement dated September 30, 1987. VALIC is a stock life insurance
company organized on May 1, 1969 under the Texas Insurance Code as a successor
to The Variable Annuity Life Insurance Company of America, a District of
Columbia insurance company organized in 1955. VALIC's sole business consists of
offering fixed and variable (and combinations thereof) retirement annuity
contracts. VALIC is an indirect wholly-owned subsidiary of American General
Corporation, Houston, Texas. Members of the American General Corporation group
of companies operate in each of the 50 states, the District of Columbia, and
Canada and collectively engage in substantially all forms of financial services,
with activities heavily weighted toward insurance. American General Corporation
was incorporated as a Texas business corporation on February 26, 1980 as the
successor to American General Life Insurance Company (organized in 1926) as the
result of a corporate reorganization completed on July 1, 1980.
Pursuant to the Investment Advisory Agreements, the Company retains VALIC
to manage the investment of the assets of each Fund, maintain a trading desk,
and place orders for the purchase and sale of portfolio securities. As
investment adviser, VALIC obtains and evaluates as appropriate economic,
statistical, and financial information in order to formulate and implement
investment programs in furtherance of each Fund's investment objective(s) and
investment program. Pursuant to the Investment Advisory Agreements, VALIC
provides other services including furnishing the services of the President and
such other executives and clerical personnel as the Company requires to conduct
its day-to-day operations, to prepare the various reports and statements
required by law, and to conduct any other recurring or nonrecurring activity
which the Company may need to continue operations. The Investment Advisory
Agreement provides that the Company pay all expenses not specifically assumed by
VALIC under the Agreements. Examples of the expenses paid by the Company include
transfer agency fees, custodial fees, the fees of outside legal and auditing
firms, the costs of reports to shareholders, expenses of servicing shareholder
accounts (e.g., daily calculation of the net asset value). The Series Company
allocates advisory fees, SEC filing fees, interest expenses and state filing
fees, if any, to the Fund that incurs such charges and allocates all other
expenses among the Funds based on the net assets of each Fund in relation to the
net assets of the Series Company.
The Investment Advisory Agreements require that VALIC's advisory fee be
reduced by any commissions, tender and exchange offer solicitation fees and
other fees, or similar payments (less any direct expenses incurred) received by
VALIC or its affiliates in connection with the purchase and sale of portfolio
investments of the Funds. In this regard, the Investment Advisory Agreements
require VALIC to use its best efforts to recapture tender and exchange
solicitation offer fees for each Fund's benefits, and to advise the Company's
Board of Directors of any other fees, or similar payments that it (or any of its
affiliates) may receive in connection with each Fund's portfolio transactions or
of other arrangements that may benefit any of the Funds or the Company.
The Company, by action of its Board of Directors determined to transfer the
function of providing accounting services from the Company's custodian State
Street Bank and Trust Company to VALIC. This transfer was effective October 31,
1996. Pursu-
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ant to this determination the Company entered into an Accounting Services
Agreement with VALIC ("Agreement"). The Agreement provides that the Company will
pay to VALIC an annual fee payable monthly based on average daily net assets for
providing the accounting services. For the fiscal year ended, May 31, 1998, the
Company paid VALIC $855,162 for accounting services provided by VALIC.
For the fiscal year ended May 31, 1996, the investment advisory fees paid
by the Company for the Stock Index Fund, the MidCap Index Fund, the Small Cap
Index Fund, the International Equities Fund, the Growth Fund, the Growth &
Income Fund, the Science & Technology Fund, the Social Awareness Fund, the Asset
Allocation Fund, the Capital Conservation Fund, the Government Securities Fund,
the International Government Bond Fund, and the Money Market Fund were
$4,242,848, $1,666,107, $523,833, $715,452, $1,871,756, $557,628, $3,228,500,
$333,783, $939,313, $352,058, $340,148, $573,962, and $421,853, respectively.
For the fiscal year ended May 31, 1997, the investment advisory fees paid
by the Company for the Stock Index Fund, the MidCap Index Fund, the Small Cap
Index Fund, the International Equities Fund, the Growth Fund, the Growth &
Income Fund, the Science & Technology Fund, the Social Awareness Fund, the Asset
Allocation Fund, the Capital Conservation Fund, the Government Securities Fund,
the International Government Bond Fund, and the Money Market Fund were
$5,543,535, $1,880,085, $622,719, $668,871, $4,704,380, $1,211,524, $5,973,280,
$525,440, $900,822, $347,154, $417,356, $833,117, and $572,063, respectively.
For the fiscal year ended May 31, 1998, the investment advisory fees paid
by the Company for the Stock Index Fund, the MidCap Index Fund, the Small Cap
Index Fund, the International Equities Fund, the Growth Fund, the Growth &
Income Fund, the Science & Technology Fund, the Social Awareness Fund, the Asset
Allocation Fund, the Capital Conservation Fund, the Government Securities Fund,
the International Government Bond Fund, and the Money Market Fund were
$7,946,046, $2,313,256, $798,980, $582,798, $7,593,303, $1,907,885, $8,602,906,
$1,204,327, $943,269, $335,861, $436,775, $846,176, and $752,732, respectively.
The Investment Advisory Agreements may be continued with respect to any
Fund if specifically approved at least annually by (a)(i) the Company's Board of
Directors or (ii) a majority of that Fund's outstanding voting securities (as
defined by the 1940 Act), and (b) the affirmative vote of a majority of the
directors who are not parties to the agreement or "interested persons" of any
such party (as defined by the 1940 Act) by votes cast in person at a meeting
called for this purpose. The Investment Advisory Agreements also provide that
they shall terminate automatically if assigned. The Investment Advisory
Agreements may be terminated as to any Fund at any time by the Company's Board
of Directors, by vote of a majority of the Fund's outstanding voting securities,
or by VALIC, on not more than 60 days' written notice, nor less than 30 days'
written notice, or upon such shorter notice as may be mutually agreed upon,
without the payment of any penalty. Additionally either Investment Advisory
Agreement that VALIC shall not be liable to the Company, or any shareholder in
the Company, for any act or omission in rendering services under the Agreement,
or for any losses sustained in the purchase, holding, or sale of any portfolio
security, so long as there has been no willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties on the part of VALIC.
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INVESTMENT SUB-ADVISERS
Pursuant to an Investment Sub-Advisory Agreement which was approved by
shareholders of the Stock Index Fund and the MidCap Index Fund on April 28, 1992
and by shareholders of the Small Cap Index Fund on September 15, 1992, VALIC has
engaged Bankers Trust Company ("Bankers Trust") to provide investment
Sub-Advisory services for the Stock Index Fund, the MidCap Index Fund and the
Small Cap Index Fund. T. Rowe Price Associates, Inc. ("T. Rowe Price") provides
Sub-Advisory services for the Growth Fund and the Science & Technology Fund
pursuant to a Sub-Advisory Agreement. Bankers Trust and T. Rowe Price
(collectively the "Sub-Advisers") will be subject to the control, supervision
and direction of VALIC, which will retain responsibility for the overall
management of the Stock Index Fund, the MidCap Index Fund, the Small Cap Index
Fund, the Growth Fund and the Science & Technology Fund, respectively
(collectively the "Sub-Advised Funds").
In addition to acting as Sub-adviser to the MidCap Index Fund, the Stock
Index Fund and Small Cap Index Fund as of September 30, 1995, Bankers Trust and
Bankers Trust Australia collectively are the money managers to the following
registered investment companies: Accessor Funds, Inc. Short Intermediate Fixed
Income Portfolio; Asset Management Portfolio; Asset Management Portfolio II;
Asset Management Portfolio III; The Bank Fiduciary Fund -- Equity Portfolio and
Fixed Income Portfolio; Capital Appreciation Portfolio; Cash Management
Portfolio; Equity 500 Index Portfolio; Small Cap Index Portfolio; EAFE Equity
Index Portfolio; U.S. Bond Index Portfolio; Retirement Plus Portfolio; AARP U.S.
Stock Index Fund; USAA S&P100 Index Fund; AAS&P 100 Index Fund; Liquid Asset
Series and Emerging Market Series; Global High Yield Portfolio; Hercules Latin
American Value Fund; International Equity Portfolio; Intermediate Tax Free
Portfolio; Latin American Equity Portfolio; Liquid Assets Portfolio; NY Tax Free
Money Portfolio; Pacific Basin Equity Portfolio; Pacific Select Fund -- Equity
Index Series; Short Intermediate Government Securities Portfolio; Small Cap
Portfolio; Tax Free Money Portfolio and Treasury Money Portfolio and Utility
Portfolio.
In addition to acting as Sub-adviser to the Growth Fund and the Science &
Technology Fund, T. Rowe Price manages the following funds with which it is
affiliated: T. Rowe Price Growth Stock Fund, Inc.; T. Rowe Price New Horizons
Fund, Inc.; T. Rowe Price New Era Fund, Inc.; T. Rowe Price New Income Fund,
Inc.; T. Rowe Price Growth & Income Fund, Inc.; T. Rowe Price Prime Reserve
Fund, Inc.; T. Rowe Price Tax-Free Income Fund, Inc.; T. Rowe Price Tax-Exempt
Money Fund, Inc.; T. Rowe Price Short-Term Bond Fund, Inc.; T. Rowe Price
Tax-Free Insured Intermediate Bond Fund, Inc.; T. Rowe Price Tax-Free
Short-Intermediate, Inc.; T. Rowe Price High Yield Fund, Inc.; T. Rowe Price
Tax-Free High Yield Fund, Inc.; T. Rowe Price GNMA Fund; T. Rowe Price Equity
Income Fund; T. Rowe Price New America Growth Fund; T. Rowe Price Capital
Appreciation Fund; T. Rowe Price Science & Technology Fund, Inc.; T. Rowe Price
Small-Cap Value Fund, Inc.; T. Rowe Price U.S. Treasury Funds, Inc. (which
includes U.S. Treasury Money Fund, U.S. Treasury Intermediate Fund and U.S.
Treasury Long-Term Fund); T. Rowe Price State Tax-Free Income Trust (which
includes Maryland Tax-Free Bond Fund, New York Tax-Free Bond Fund, New York
Tax-Free Money Fund, Virginia Short-Term Tax-Free Bond Fund, Virginia Tax-Free
Bond Fund, New Jersey Tax-Free Bond Fund, Georgia Tax-Free Bond Fund, Florida
Insured Intermediate Tax-Free Fund, and Maryland Short-Term Tax-Free Bond Fund);
T. Rowe Price California Tax-Free Income Trust (which includes California
Tax-Free Bond Fund and California Tax-Free Money Fund); T. Rowe Price Index
Trust, Inc. (which includes the T. Rowe Price Equity Index 500 Fund, T. Rowe
Price Extended Equity Market Index Fund and T. Rowe Price Total Equity Market
Index Fund); T. Rowe Price Spectrum Fund, Inc. (which includes the Spectrum
Growth Fund, Spectrum Income Fund and Spectrum International Fund); T. Rowe
Price Short Term U.S. Government Fund, Inc. (formerly T. Rowe Price Adjustable
Rate U.S. Government Fund, Inc.); T. Rowe Price Balanced Fund, Inc.; T. Rowe
Price Mid-Cap Value Fund, Inc.; T. Rowe Price Small-Cap Stock Fund, Inc.
(formerly known as T. Rowe Price OTC Fund, Inc.), T. Rowe Price Blue Chip Growth
Fund, Inc., T. Rowe Price Dividend Growth Fund, Inc., T. Rowe Price Capital
Opportunity Fund, Inc., T. Rowe Price Financial Services Fund, Inc., T. Rowe
Price Health Sciences Fund, Inc., T. Rowe Price Mid-Cap Growth Fund, Inc., T.
Rowe Price Value Fund, Inc., T. Rowe Price
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Corporate Income Fund, Inc., T. Rowe Price Summit Funds, Inc. (which includes T.
Rowe Price Summit Cash Reserves Fund, T. Rowe Price Summit Limited-Term Bond
Fund and Summit T. Rowe Price GNMA Fund), T. Rowe Price Summit Municipal Funds,
Inc. (which includes T. Rowe Price Summit Municipal Money Market Fund, T. Rowe
Price Summit Municipal Intermediate Fund, and T. Rowe Price Summit Municipal
Income Fund), Reserve Investment Funds, Inc. (which includes Government Reserve
Investment Fund and Reserve Investment Fund), T. Rowe Price Diversified
Small-Cap Growth Fund, Inc., T. Rowe Price Media & Telecommunications Fund,
Inc., T. Rowe Price Real Estate Fund, Inc., and T. Rowe Price Tax-Efficient
Balanced Fund, Inc., T. Rowe Price Equity Series, Inc. (which includes T. Rowe
Price Equity Income Portfolio, T. Rowe Price New America Growth Portfolio, T.
Rowe Price Mid-Cap Growth Portfolio, and T. Rowe Price Personal Strategy
Balanced Portfolio), T. Rowe Price Fixed Income Series, Inc. (which includes T.
Rowe Price Limited-Term Bond Portfolio and T. Rowe Price Prime Reserve
Portfolio), T. Rowe Price International Series, Inc. (which includes T. Rowe
Price International Stock Portfolio); T. Rowe Price Personal Strategy Funds,
Inc. (which includes T. Rowe Price Personal Strategy Income Fund, T. Rowe Price
Strategy Balanced Fund, and Personal Strategy Growth Fund) and Institutional
Equity Funds, Inc. (which includes Mid-Cap Equity Growth Fund). In addition, an
affiliate of T. Rowe Price, Rowe Price-Fleming International, Inc., acts as
investment adviser to the T. Rowe Price International Funds, Inc. (which
includes the T. Rowe Price International Stock Fund, T. Rowe Price International
Bond Fund, T. Rowe Price International Discovery Fund, T. Rowe Price Emerging
Markets Stock Fund, T. Rowe Price Emerging Markets Bond Fund, T. Rowe Price
European Stock Fund, T. Rowe Price New Asia Fund, T. Rowe Price Global Bond
Fund, formerly T. Rowe Price Global Government Bond Fund, T. Rowe Price Japan
Fund; T. Rowe Price Global Stock Fund, and T. Rowe Price Latin America Fund);
and the Institutional International Funds, Inc. (which includes the Foreign
Equity Fund).
Pursuant to the Investment Sub-Advisory Agreements and subject to VALIC's
control, supervision and direction, the Sub-Advisers will manage the investment
and reinvestment of the assets of the Sub-Advised Funds, including the
evaluation of pertinent economic, statistical, financial and other data, and the
determination of industries and companies to be represented in the Sub-Advised
Funds. Further, the Sub-Advisers will maintain a trading desk and place orders
for the purchase and sale of portfolio investments for the Sub-Advised Funds,
accounts with brokers and dealers selected by the Sub-Advisers, or arrange for
any other entity to provide a trading desk and to place orders with brokers and
dealers selected by the Sub-Advisers and VALIC.
The Investment Sub-Advisory Agreements provide that the Sub-Advisers will
bear the expense of discharging their responsibilities.
VALIC shall, from the compensation VALIC receives from the Company for
acting as investment adviser, pay to BTC, for the services rendered and expenses
paid by BTC, a monthly fee computed at the annual rate of 0.03% on the first
$300 million and 0.02% on assets over $300 million for the MidCap Index Fund,
0.02% on the first $2 billion and 0.01% on assets over $2 billion for the Stock
Index Fund and 0.03% on the first $150 million and 0.02% on assets over $150
million for the Small Cap Index Fund. VALIC shall, from the compensation VALIC
receives from the Company for acting as investment adviser, pay to T. Rowe
Price, for the services rendered and expenses paid by T. Rowe Price, a monthly
fee computed at the annual rate of 0.50% on the first $500 million and 0.45% on
assets over $500 million for the Growth Fund and 0.60% on the first $500 million
and 0.55% on assets over $500 million for the Science & Technology Fund.
Notwithstanding the above provision, VALIC is required to pay a minimum annual
sub-advisory fee of $50,000 to BTC for the Small Cap Index Fund. There are no
minimum sub-advisory fees for the Stock Index Fund, MidCap Index Fund, the
Growth Fund, or the Science & Technology Fund.
The Investment Sub-Advisory Agreements require that each Sub-Adviser
promptly reduce its monthly fee by the amount of any commission, tender and
exchange offer solicitation fees, other fees or similar payments received by the
Sub-Adviser, or any affiliated person of the Sub-Adviser, in connection with
Sub-Advised Fund portfolio transactions. Such "commissions" or "other fees"
exclude those charged by brokers or dealers affiliated with a Sub-Adviser, as
referred to below. Such "tender and exchange offer solicitation fees" ex-
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clude those received by a Sub-Adviser acting in the capacity of manager for any
such offer. In this regard, the Sub-Advisory Agreements require the Sub-Advisers
to use their best efforts to obtain tender and exchange solicitation offer fees
for each Fund's benefit, and to advise VALIC of any other fees or similar
payments that they (or any of their affiliates) may receive in connection with
any Fund's portfolio transactions or of other arrangements that may benefit any
of the Funds.
The Investment Sub-Advisory Agreements may be continued with respect to any
of the Funds if approved at least annually by the vote of the Company's Board of
Directors who are not parties to the Investment Sub-Advisory Agreements or
interested persons of any such parties, cast in person at a meeting called for
the purpose of voting on such approval and by a vote of a majority of the
Company's Board of Directors or a majority of the relevant Fund's outstanding
voting securities.
The Investment Sub-Advisory Agreements will automatically terminate in the
event of assignment or in the event of termination of the Investment Advisory
Agreement between VALIC and the Company as it relates to the relevant
Sub-Advised Fund. The Investment Sub-Advisory Agreements may be terminated at
any time by VALIC, the relevant Sub-Adviser, the Company's Board of Directors,
or by vote of a majority of the outstanding voting securities of the relevant
Sub-Advised Fund, on not more than 60 days' nor less than 30 days' written
notice to the other entities, or upon such shorter notice as may be mutually
agreed upon. Such termination shall be without the payment of any penalty.
The Investment Sub-Advisory Agreements provide that the Sub-Advisers shall
not be liable to VALIC, the Company or to any shareholder of the Company for any
act or omission in rendering services under the Investment Sub-Advisory
Agreements or for any losses sustained in the purchase, holding or sale of any
portfolio security, so long as there has been no willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties on the part of the
Sub-Advisers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As investment adviser to the Company, VALIC has responsibility for placing
(and deciding when to place) orders for the purchase and sale of investments for
the portfolio of each Fund, selecting brokers or dealers to handle these
transactions, and negotiating commissions on these transactions. VALIC utilizes
the assistance of Sub-Advisers in selecting brokers or dealers to handle
transactions for the Stock Index Fund, the MidCap Index Fund, the Small Cap
Index Fund, the Growth Fund, the Growth & Income Fund and the Science &
Technology Fund. The Sub-Advisers may employ affiliated brokers or, in the case
of T. Rowe Price, indirectly related brokers for portfolio transactions under
circumstances described in the Prospectus under the heading "Investment
Management."
Virtually all of the over-the-counter transactions by the Asset Allocation
Fund, the Money Market Fund, the Capital Conservation Fund, the Government
Securities Fund, the International Government Bond Fund and the Growth & Income
Fund are principal transactions with issuers and dealers at net prices which
entail no brokerage commissions. The MidCap Index Fund, the Stock Index Fund,
the International Equities Fund, the Small Cap Index Fund, and the Social
Awareness Fund, each purchase and sell most of their portfolio securities on a
national securities exchange on an agency basis. The Growth Fund and the Science
& Technology Fund engage in over-the-counter transactions with principals and
transactions with national securities exchanges on an agency basis. The Company
normally enters into principal transactions directly with the issuer or the
market-maker.
When the Company purchases or sells securities or financial futures
contracts on an exchange, it pays a commission to any FCM or broker executing
the transaction. When the Company purchases securities from the issuer, an
underwriter usually receives a commission or "concession" paid by the issuer.
When the Company purchases securities from a market-maker, it pays no
commission, but the price includes a "spread" or "mark-up" (between the bid and
asked price) earned by the market-making dealer on the transaction.
In purchasing and selling each Fund's portfolio securities, it is the
policy of VALIC and the Sub-Advisers (collectively, the "Advisers") to seek the
best execution at the most favorable price through responsible broker-dealers
and, in the case of
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<PAGE>
agency transactions, at competitive commission rates. When selecting brokers or
dealers, and in negotiating prices and commissions, the Advisers consider such
factors as: the broker or dealer's reliability; the quality of the broker or
dealer's execution services on a continuing basis; the rate of the commission;
the size and difficulty of the order and the timeliness of execution; the
reliability, integrity, financial condition, general execution, and operational
capabilities of that firm and competing broker-dealers. In over-the-counter
transactions, the Advisers place orders directly with the principal market-maker
unless they believe the Company can obtain a better price (or receive better
execution of orders) from a broker on an agency basis. In transactions executed
on securities or commodities exchanges, the Advisers seek the best overall price
and execution at the most favorable commission rate (except when higher
brokerage commissions are paid to obtain brokerage and research services, as
explained below). When the Advisers believe that more than one firm meets these
criteria the Advisers may prefer brokers who provide the Advisers or the Company
with brokerage and research services, described below.
The Advisers may cause a Fund to pay a broker-dealer a commission (for
executing a securities transaction) that is greater than the commission another
broker-dealer would have received for executing the same transaction, if the
Advisers determine in good faith that the greater commission paid to the first
broker-dealer is reasonable in relation to the value of brokerage and research
services provided to the Advisers viewed in terms of either that particular
transaction or the overall responsibilities of the Advisers.
The Advisers receive a wide range of research services from broker-dealers,
including: information on securities markets, the economy and individual
companies; statistical information; accounting and tax law interpretations;
technical market action; pricing and appraisal services; and credit analyses.
Research services are received by the Advisers primarily in the form of written
reports, telephone contacts, personal meetings with securities analysts,
corporate and industry spokespersons, and access to various computer-generated
data.
The Advisers have no agreements or understandings with broker-dealers by
which specific amounts of transactions or commissions are directed to specific
broker-dealers.
The Advisers evaluate whether such research services provide lawful and
appropriate assistance to them in the performance of their investment
decision-making responsibilities, for the Company. The Advisers will not cause
the Company to pay higher commissions without first determining, in good faith,
that the cost is reasonable considering the brokerage and research services
provided, with respect to either the particular transaction or the Advisers'
overall responsibilities with respect to accounts for which they exercise
investment discretion. The Advisers receive research services at no cost and
cannot assign any specific monetary value to them; nevertheless, the Advisers
believe these supplemental investment research services are essential to the
Advisers' ability to provide high quality portfolio management to the Funds.
Research services furnished by broker-dealers through whom a Fund effects
securities transactions may be used by the Advisers in servicing all of the
Funds, and the Advisers may not use all such services in managing the Funds.
The amount of brokerage commissions paid, the quality of execution, the
nature and quality of research services provided, and the amount of commissions
paid to firms providing research services are reviewed quarterly by the
Company's Board of Directors.
Brokerage commissions paid by the Stock Index Fund on portfolio
transactions for the fiscal years ended May 31, 1998, 1997, and 1996, totalled
$131,621, $122,723 and $84,226, respectively. For the fiscal year ended May 31,
1998 the Stock Index Fund paid no brokerage commissions to brokers for research
services provided to the Advisers.
Brokerage commissions paid by the MidCap Index Fund on portfolio
transactions for the fiscal years ended May 31, 1998, 1997, and 1996, totalled
$125,995, $80,089 and $93,068, respectively. For the fiscal year ended May 31,
1998, the MidCap Index Fund paid no brokerage commissions to brokers for
research services provided to the Advisers.
Brokerage commissions paid by the Small Cap Index Fund on portfolio
transactions for the fiscal year ended May 31, 1998, 1997 and 1996, totalled
$64,613, $90,498 and $37,454, respectively. For the fiscal year ended May 31,
1998, the Small Cap Index Fund paid no brokerage commissions to brokers for
research services provided to the Advisers.
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Brokerage commissions paid by the International Equities Fund on portfolio
transactions for the fiscal years ended May 31, 1998, 1997, and 1996 totalled
$130,204, $153,793 and $250,882, respectively. For the fiscal year ended May 31,
1998, the International Equities Fund paid no brokerage commissions to brokers
for research services provided to VALIC.
Brokerage commissions paid by the Growth Fund on portfolio transactions for
the fiscal years ended May 31, 1998, 1997 and 1996, totalled $889,312, $757,865
and $486,285, respectively. For the fiscal year ended May 31, 1998, the Growth
Fund paid $101,840 in brokerage commissions, on transactions totalling
$40,156,191, to brokers selected on the basis of the quality of the execution
together with research services provided to the Advisers.
Brokerage commissions paid by the Growth & Income Fund on portfolio
transactions for the fiscal year ended May 31, 1998, 1997 and 1996, totalled
$276,322, $159,571 and $112,767, respectively. For the fiscal year ended May 31,
1997, the Growth & Income Fund paid $158,829 in brokerage commissions, on
transactions totalling $147,733,656, to brokers selected on the basis of the
quality of the execution together with research services provided to the
Advisers.
Brokerage commissions paid by the Social Awareness Fund on portfolio
transactions for the fiscal years ended May 31, 1998, 1997, and 1996, totalled
$518,012, $221,028 and $99,297, respectively. For the fiscal year ended May 31,
1998 the Social Awareness Fund paid no brokerage commissions to brokers for
research services provided to VALIC.
Brokerage commissions paid by the Science & Technology Fund on portfolio
transactions for the fiscal year ended May 31, 1998, 1997 and 1996, totalled
$1,031,246, $1,143,004 and $664,932, respectively. For the fiscal year ended
May 31, 1998, the Science & Technology Fund paid $88,345 in brokerage
commissions, on transactions totalling $75,195,279, to brokers selected on the
basis of the quality of the execution together with research services provided
to the Advisers.
Brokerage commissions paid by the Asset Allocation Fund on portfolio
transactions for the fiscal years ended May 31, 1998, 1997 and 1996, totalled
$39,049, $239,365 and $235,223, respectively. For the fiscal year ended May 31,
1998, the Asset Allocation Fund paid no brokerage commissions to brokers for
research services provided to VALIC.
No brokerage commissions were paid by the Capital Conservation Fund,
Government Securities Fund, International Government Bond Fund and Money Market
Fund for fiscal years ended May 31, 1998, 1997 and 1996.
Occasions may arise when one or more of the Funds or other accounts that
may be considered affiliated persons of the Funds under the 1940 Act desire to
purchase or sell the same portfolio security at approximately the same time. On
those occasions when such simultaneous purchase and sale transactions are made
such transaction will be allocated in an equitable manner according to written
procedures approved by the Company's Board of Directors. Specifically, such
written procedures provide that in allocating purchase and sale transactions
made on a combined basis the parties will seek to achieve the same net unit
price of securities for each Fund or other account and to allocate as nearly as
practicable, such transactions on a pro-rata basis substantially in proportion
to the amounts ordered to be purchased and sold by each Fund or other account.
In some cases, this procedure could have an adverse effect on the price or
quantity of securities available to the Funds. However, the Funds may,
alternatively, benefit from lower broker's commissions and/or correspondingly
lower costs for brokerage and research services by engaging in such combined
transactions. In the Advisers' opinion, the results of this procedure will, on
the whole, be in the best interest of each Fund.
OFFERING, PURCHASE, AND REDEMPTION OF FUND SHARES
Pursuant to a distribution agreement, the Variable Annuity Marketing
Company ("VAMCO") acts without remuneration as the Company's agent in the
distribution of Fund shares to the VALIC, AG Life and AGNY separate accounts.
VAMCO's address is the same as that of VALIC.
The distribution agreement between VAMCO and the Company provides that it
shall continue in force from year to year, provided that such continuance is
approved at least annually (a)(i) by the Board of Directors of the Company, or
(ii) by vote of a majority of the Company's outstanding voting
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<PAGE>
securities (as defined in the 1940 Act) and (b) by the affirmative vote of a
majority of the Company's Directors who are not 'interested persons' (as defined
in the 1940 Act) of the Company by votes cast in person at a meeting called for
such purpose. The distribution agreement may be terminated at any time, without
penalty, by a vote of the Board of Directors of the Company or by a vote of a
majority of the outstanding voting securities of the Company, or by VAMCO, on
sixty days' written notice to the other party. The distribution agreement also
provides that it shall automatically terminate in the event of its assignment.
Pursuant to the distribution agreement, VAMCO pays promotional and
advertising expenses and the cost of printing prospectuses used to offer and
sell shares of the Company (after typesetting and printing the copies required
for regulatory filings by the Company). Promotional and advertising expenses
include any expense related to distribution of shares of the Funds or
attributable to any activity primarily intended to result in the sale of shares,
including, for example, the preparation, printing, and distribution of
advertising and sales literature (including reports to shareholders used as
sales literature). VALIC reimburses VAMCO for these expenses. Thus all such
expenses incurred by VAMCO are passed directly on to VALIC, its parent. The
Company pays all expenses related to the registration of Fund shares under
federal and state laws, including registration and filing fees, the cost of
preparing the prospectus for such purpose, and related expenses of outside legal
and auditing firms.
As explained in the prospectus for the Contracts, payments of surrender
values, as well as lump sum payments available under the annuity options of the
Contracts, may be suspended or postponed at any time when redemption of shares
is suspended. Normally, the Company redeems Fund shares within seven days of
receipt of request therefor, but may postpone redemptions beyond seven days
when: (1) the New York Stock Exchange is closed for other than weekends and
customary holidays, or trading on the New York Stock Exchange becomes
restricted; (2) an emergency exists making disposal or valuation of a Fund's
assets not reasonably practicable; or (3) the Securities and Exchange Commission
has so permitted by order for the protection of the Company's shareholders.
The Company normally redeems Fund shares for cash. Although the Company,
with respect to each Fund, may make full or partial payment by assigning to the
separate accounts investing in the Company portfolio securities at their value
used in determining the redemption price (i.e. by redemption-in-kind), the
Company, pursuant to Rule 18f-1 under the 1940 Act, has filed a notification of
election on Form 18f-1. Pursuant to this election, the Company has committed
itself to pay the separate accounts, in cash, all redemptions made during any 90
day period, up to the lesser of $250,000 or 1% of the Company's net asset value.
The securities to be paid in-kind to the separate accounts will be selected in
such manner as the Board of Directors deems fair and equitable. In such cases,
the separate accounts would incur brokerage expenses should they wish to
liquidate these portfolio securities.
All shares are offered for sale and redeemed at net asset value. Net asset
value per share is determined by dividing the net assets of a Fund by the number
of that Fund's outstanding shares at such time.
DETERMINATION OF NET ASSET VALUE
Equity investments (including common stocks, preferred stocks, convertible
securities, and warrants) and call options written on all portfolio investments
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
and call options written on portfolio securities are valued at the last sale
price on the NASDAQ (National Association of Securities Dealers Automated
Quotations) National Market System. In the absence of any National Market System
sales on that day, equity securities are valued at the last reported bid price
and call options written on all portfolio securities for which other
over-the-counter market quotations are readily available are valued at the last
reported asked price.
U.S. Treasury securities and other obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, are valued at representative
quoted prices. Such quotations generally are obtained from government securities
pricing services; however, in circumstances where it is deemed appropriate to do
so, quotations may be obtained from dealers in government securities.
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Publicly-traded corporate bonds are valued at prices obtained from State
Street Bank and Trust Company.
Short-term debt securities for which market quotations are readily
available are valued at the last reported bid price, except for those with a
remaining maturity of 60 days or less which are valued by the amortized cost
method (unless, due to special circumstances, the use of such a method with
respect to any security would result in a valuation which does not approximate
fair market value).
Convertible bonds are valued at prices obtained from one or more of the
major dealers in such bonds. Where there is a discrepancy between dealers or
when no quotes are readily available, values may be adjusted based on a
combination of yields and premium spreads to the underlying common stock.
Portfolio securities that are primarily traded on foreign securities
exchanges are generally valued at the last sale price on the exchange where such
security is primarily traded. All foreign securities traded on the
over-the-counter market are valued at the last sale quote, if market quotations
are available, or the last closing bid price, if there is no active trading in a
particular security for a given day. Where market quotations are not readily
available for such foreign over-the-counter securities, then such securities
will be valued in good faith by a method that the Company's Board of Directors,
or its delegates, believes accurately reflects fair value. Quotations of foreign
securities in foreign currencies are converted, at current exchange rates, to
their U.S. dollar equivalents in order to determine their current value. In
addition, because of the need to value foreign securities (other than ADRs) as
of the close of trading on various exchanges and over-the-counter markets
throughout the world, the calculation of the net asset value of Funds investing
in such foreign securities may not take place contemporaneously with the
valuation of such foreign securities in those Funds' portfolios.
Options purchased by the Funds (including options on financial futures
contracts, stock indices, foreign currencies, and securities) listed on national
securities exchanges are valued on the exchange where such security is primarily
traded.
Over-the-counter options purchased or sold by the Funds are valued based
upon prices provided by market-makers in such securities or dealers in such
currencies.
Exchange-traded financial futures contracts (including interest rate
futures contracts, stock index futures contracts, and currency futures
contracts) are valued at the settlement price for such contracts established
each day by the board of trade or exchange on which such contracts are traded.
Unlisted financial futures contracts are valued based upon prices provided by
market-makers in such financial futures contracts.
All of the assets of the Money Market Fund are valued on the basis of
amortized cost. Under the amortized cost method of valuation, securities are
valued at a price on a given date, and thereafter a constant accretion of any
discount or amortization of any premium to maturity is assumed, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation it may result in periods in
which value as determined by amortized cost is higher or lower than the price a
Fund would receive if it sold the security. During such periods, the yield to
investors may differ somewhat from that obtained by a similar fund or portfolio
which uses available market quotations to value all of its portfolio securities.
The Company's Board of Directors has established procedures reasonably designed,
taking into account current market conditions and Money Market Fund's investment
objective, to stabilize the net asset value per share for purposes of sales and
redemptions at $1.00. These procedures include review by the Board, at such
intervals as it deems appropriate, to determine the extent, if any, to which the
net asset value per share calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation should exceed one
half of one percent, the Board will promptly consider initiating corrective
action. If the Board believes that the extent of any deviation from a $1.00
amortized cost price per share may result in material dilution or other unfair
results to new or existing shareholders, it will take such steps as it considers
appropriate to eliminate or reduce these consequences to the extent reasonably
practicable. Such steps may include: selling portfolio securities prior to
maturity; shortening the average maturity of the portfolio; withholding or
reducing dividends; or utilizing a net asset value per share determined from
available market quotations. Even if these steps were taken, the Money Market
Fund's net asset value might still decline.
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<PAGE>
CALCULATION OF YIELD FOR THE MONEY MARKET FUND
The yield of the Money Market Fund is its net income expressed as a
percentage of assets on an annualized basis for a seven day period. Rule 482
under the Securities Act of 1933 requires that a yield quotation set forth in an
advertisement for a money market fund be computed by a standardized method based
on an historical seven calendar day period. The current yield is computed by
determining the net change (exclusive of realized gains and losses from the sale
of securities and unrealized appreciation and depreciation) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, and then dividing the net change in account value by the value of
the account at the beginning of the base period to obtain the base period
return. The base period return is then multiplied by (365/7) to annualize the
yield figure. The determination of net change in account value reflects the
value of additional shares purchased with dividends from the original share,
dividends declared on both the original share and such additional shares, and
any fees that are charged to all shareholder accounts, in proportion to the
length of the base period and the Money Market Fund's average account size. The
Money Market Fund may also calculate its compound effective yield by compounding
the unannualized base period return (calculated as described above) by adding
one to the base period return, raising the sum to a power equal to 365 divided
by 7, and subtracting one.
The yield quoted by the Money Market Fund at any time represents the amount
being earned on a current basis for the indicated period and is a function of
the types of instruments in the Money Market Fund's portfolio, their quality and
length of maturity, and the Money Market Fund's operating expenses. The length
of maturity for the portfolio is the average dollar weighted maturity of the
portfolio. In other words, the portfolio has an average maturity for all of its
issues, stated in numbers of days and weighted according to the relative value
of each investment.
The yield fluctuates daily as the income earned on the investments of the
Money Market Fund fluctuates. Accordingly, neither the Company nor VALIC can
assure the yield quoted on any given occasion will remain constant for any
period of time. For example, the Money Market Fund's yield will change if it
experiences a net inflow of new assets which it then invests in securities whose
yield is higher or lower than that being currently earned on investments.
Investments in the Money Market Fund are not insured and investors comparing
results of the Money Market Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand this
distinction. In addition, other money market funds as well as banks and savings
and loan associations may calculate their yields on a different basis and the
yield quoted by the Money Market Fund from time-to-time could vary upwards or
downwards if another method of calculation or base period were used.
ACCOUNTING AND TAX TREATMENT
CALLS AND PUTS
When a Fund writes a call or put option, an amount equal to the premium
received by it is included in that Fund's Statement of Assets and Liabilities as
an asset and as an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded. If a call option
which a Fund has written either expires on its stipulated expiration date, or if
a Fund enters into a closing purchase transaction, it realizes a gain (or loss
if the cost of the closing transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a call
option which a Fund has written is exercised, the Fund realizes a capital gain
or loss from the sale of the underlying security and proceeds from such sale are
increased by the premium originally received.
The premium paid by a Fund for the purchase of a put option is included in
the asset section of its Statement of Assets and Liabilities as an investment
and subsequently adjusted daily to the current market value of the option. For
example, if the current market value of the option exceeds the
44
<PAGE>
premium paid, the excess would be unrealized appreciation and, conversely, if
the premium exceeds the current market value, such excess would be unrealized
depreciation. The current market value of a purchased option is the last sale
price on the principal Exchange on which such option is traded. If a put option
which a Fund has purchased expires unexercised it realizes a capital loss equal
to the cost of the option. If a Fund exercises a put option, it realizes a
capital gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid.
FINANCIAL FUTURES CONTRACTS
Accounting for financial futures contracts will be in accordance with
generally accepted accounting principles. Initial margin deposits made upon
entering into financial futures contracts will be recognized as assets due from
the FCM (the Fund's agent in acquiring the futures position). During the period
the financial futures contract is open, changes in the value of the contract
will be recognized as unrealized gains or losses by "marking-to-market" on a
daily basis to reflect the market value of the contract at the end of each day's
trading. Variation (or maintenance) margin payments will be made or received,
depending upon whether gains or losses are incurred. Financial futures contracts
held by a Fund at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes (that is, treated as having been sold at
market value).
SUBCHAPTER M OF THE INTERNAL REVENUE CODE OF 1986
Each Fund of the Company intends to qualify annually as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). A Fund must meet several requirements to obtain and
maintain its status as a regulated investment company. Among these requirements
are that: (i) at least 90% of a Fund's gross income be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
disposition of securities; and (ii) at the close of each quarter of a Fund's
taxable year (a) at least 50% of the value of the Fund's assets consist of cash,
government securities, securities of other regulated investment companies and
other securities (such other securities of any one issuer being not greater than
5% of the value of a Fund and the Fund holding not more than 10% of the
outstanding voting securities of any such issuer) and (b) not more than 25% of
the value of a Fund's assets be invested in the securities of any one issuer
(other than United States government securities or securities of other regulated
investment companies). Each Fund of the Company is treated as a separate entity
for federal income tax purposes.
The Internal Revenue Service ("Service") has ruled publicly that an
exchange-traded call option is a security for purposes of the 50% of assets test
and that its issuer is the issuer of the underlying security, not the writer of
the option, for purposes of the diversification requirements. It has ruled
privately (at the request of a taxpayer other than the Company) that income from
closing financial futures contracts is considered gain from a disposition of
securities for purposes of the 90% of gross income test. However, since
taxpayers other than the taxpayer requesting a particular private ruling are not
entitled to rely on such ruling, the Company intends to keep its Funds' activity
in futures contracts and options at a low enough volume such that gains from
closing futures contracts will not exceed 10% of a Fund's gross income until the
Service rules publicly on the issues or the Company is otherwise satisfied that
those gains are qualifying income.
SECTION 817(h) OF THE CODE
Each of the Funds intends to comply with Section 817(h) of the Code and the
regulations issued thereunder. Section 817(h) of the Code and Treasury
Department regulations thereunder impose certain diversification requirements on
variable annuity contracts based upon segregated asset accounts. These
requirements are in addition to the diversification requirements of Subchapter M
and the 1940 Act and may affect the securities in which a Fund may invest.
Failure to meet the requirements of Section 817(h) could result in immediate
taxation of the Contract Owner to the extent of appreciation on investment under
the Contract.
The Section 817(h) diversification requirements do not apply to pension
plan contracts. "Pension plan contracts" for these purposes generally means
annuity contracts issued with respect to plans qualified under Section 401(a) or
403(a) of the Code, Section 403(b) annuities, Individual Retirement Accounts,
Individual Retirement Annuities and annuities issued with respect to Section 457
plans.
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<PAGE>
The Secretary of the Treasury may, in the future, issue additional
regulations that will prescribe the circumstances in which a Contract Owner's
control of the investments of the separate accounts investing in the Company may
cause the Contract Owner to be taxable with respect to assets allocated to the
separate account, before distributions are actually received under the Contract.
In order to comply with the requirements of Section 817(h) and the
regulations thereunder, the Company may find it necessary to take action to
ensure that a Contract funded by the Company continues to qualify as such under
federal tax laws. The Company, for example, may be required to alter the
investment objectives of a Fund or Funds, or substitute the shares of one Fund
for those of another. No such change of investment objectives or substitution of
securities will take place without notice to the shareholders of the affected
Fund, and the approval of a majority of such shareholders (as defined in the
1940 Act) and without prior approval of the Securities and Exchange Commission,
to the extent legally required.
It is not feasible to comment on all of the federal income tax consequences
concerning the Funds. Each owner of a Contract funded by the Company should
consult a qualified tax adviser for more complete information. The reader should
refer to the appropriate prospectus related to his or her Contracts for a more
complete description of the taxation of the separate account and of the owner of
the particular Contract.
OTHER INFORMATION
SHAREHOLDER REPORTS
Annual Reports containing audited financial statements of the Company and
Semiannual Reports containing unaudited financial statements, as well as proxy
materials, are sent to Contract Owners, annuitants, or beneficiaries as
appropriate.
VOTING AND OTHER RIGHTS
The Company has an authorized capitalization of 13 billion shares of common
stock, $0.01 par value per share, 13 billion of which are authorized to be
issued in thirteen classes comprising 1 billion shares each. Each of the
thirteen classes of stock corresponds to one of the Funds and represents an
ownership interest in that Fund. See "Voting and Other Rights" in the Prospectus
for a full discussion of the manner in which shares of the Fund are voted.
VALIC has made initial organization investments in each of the following
Funds, and, as of May 31, 1998, owned of record the following percentage of the
outstanding shares of these Funds: 0% of the Stock Index Fund, 0% of the MidCap
Index Fund, 0% of the Small Cap Index Fund, 0% of the International Equities
Fund, 0% of the Growth Fund, 0% of the Growth & Income Fund, 0.53% of the
Capital Conservation Fund, 0% of the Government Securities Fund, 0% of the
International Government Bond Fund, 0% of the Social Awareness Fund, 0% of the
Science & Technology Fund, 0% of the Money Market Fund, and 0% of the Asset
Allocation Fund.
VALIC's ownership of more than 25% of the outstanding shares may result in
VALIC's being deemed a controlling entity of each of those Funds as that term is
defined in the 1940 Act. Such control will dilute the effect of the votes of
other shareholders and contract owners.
As of May 31, 1998, VALIC Separate Account A owned of record the following
percentage of the outstanding shares of each Fund: 96.95% of the Stock Index
Fund, 100% of the MidCap Index Fund, 100% of the Small Cap Index Fund, 99.96% of
the International Equities Fund, 97.69% of the Growth Fund, 100% of the Growth &
Income Fund, 99.47% of the Capital Conservation Fund, 100% of the Government
Securities Fund, 100% of the International Government Bond Fund, 99.99% of the
Social Awareness Fund, 100% of the Science & Technology Fund, 100% of the Money
Market Fund, and 99.95% of the Asset Allocation Fund.
As of May 31, 1998, the other shareholders of the Funds included AGL
Separate Account A, AGL Separate Account B, AGL Separate Account D, AGL Select
Reserve, AGL Platinum Investor, American General Corporation Thrift Plan and
VALIC Agents' and Managers' Thrift Plan. None of these other shareholders owned
of record more than 5% of any Fund's outstanding shares.
CUSTODY OF ASSETS
Pursuant to a Custodian Contract with the Company, State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, Mas-
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sachusetts 02110, holds the cash and portfolio securities of the Company as
custodian.
State Street is responsible for holding all securities and cash of each
Fund, receiving and paying for securities purchased, delivering against payment
securities sold, receiving and collecting income from investments, making all
payments covering expenses of the Company, and performing other administrative
duties, all as directed by persons authorized by the Company. State Street does
not exercise any supervisory function in such matters as the purchase and sale
of portfolio securities, payment of dividends, or payment of expenses of the
Funds or the Company. Portfolio securities of the Funds purchased domestically
are maintained in the custody of State Street and may be entered into the book
entry systems of securities depositories approved by the Board of Directors.
Pursuant to the Custodian Contract, portfolio securities purchased outside the
United States will be maintained in the custody of various foreign branches of
State Street and such other custodians, including foreign banks and foreign
securities depositories, as are approved by the Board of Directors, in
accordance with regulations under the 1940 Act.
State Street holds securities of the Funds on which call options have been
written and certain assets of the Funds constituting margin deposits with
respect to financial futures contracts at the disposal of the FCMs through which
such transactions are effected. The Funds may also be required to post margin
deposits with respect to covered call and put options written on stock indices
and for this purpose certain assets of those Funds may be held by the custodian
pursuant to similar arrangements with the brokers involved.
This arrangement regarding margin deposits essentially consists of State
Street creating a separate segregated account into which it transfers (upon the
Company's instructions) assets from a Fund's general (regular) custodial
account. The custody agreement for such arrangement provides that FCMs or
brokers will have access to the funds in the segregated accounts when and if the
FCMs or brokers represent that the Company has defaulted on its obligation to
the FCMs or brokers and that the FCMs or brokers have met all the conditions
precedent to their right to receive such funds under the agreement between the
Company and the FCMs or brokers. The Company has an agreement with each FCM or
broker which provides (1) that the assets of any Fund held by the FCM or broker
will be in the possession of State Street until released or sold or otherwise
disposed of in accordance with or under the terms of such agreement, (2) that
such assets would not otherwise be pledged or encumbered by the FCM or broker,
(3) that when requested by the Company the FCM or broker will cause State Street
to release to its general custodial account any assets to which a Fund is
entitled under the terms of such agreement, and (4) that the assets in the
segregated account shall otherwise be used only to satisfy the Company's
obligations to the FCM or broker under the terms of such agreement.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts or covered options on stock indices held
through a given FCM or broker, it is entitled immediately to receive from the
FCM or broker, and usually will receive by the next business day, the net amount
of such gains. Thereupon, such assets will be deposited in its general or
segregated account with State Street, as appropriate.
INDEX FUNDS
The Small Cap Index Fund is not promoted, sponsored or endorsed by, nor in
any way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Fund nor any associated literature or
publications and Frank Russell Company makes no representation or warranty,
express or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice,
to alter, amend, terminate or in any way change its Index(es). Frank Russell
Company has no obligation to take the needs of any particular fund or its
participants or any product or person into consideration in determining,
comprising or calculating the Index(es).
Frank Russell Company's publication of the Index(es) in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the Index(es)
is (are) based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR
GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE
INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES).
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<PAGE>
FRANK RUSSELL COMPANY MAKES NO REPRESENTATION OR WARRANTY REGARDING THE USE, OR
THE RESULTS OF USE, OF THE INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY
SECURITY (OR COMBINATION THEREOF) COMPRISING THE INDEX(ES). FRANK RUSSELL
COMPANY MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY
WARRANTY, OF ANY KIND, INCLUDING WITHOUT MEANS OR LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE
INDEX(ES) OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN.
The Stock Index Fund and the MidCap Index Fund are not sponsored, endorsed,
sold or promoted by Standard & Poor's Corporation ("S&P"). S&P makes no
representation or warranty, express or implied, to the Company or its
participants regarding the advisability of investing in securities generally or
in the Stock Index Fund or MidCap Index Fund particularly or the ability of the
S&P Index or the S&P MidCap 400 Index Fund to track general stock market
performance. S&P has no obligation to take the need of the Company or the
Company's participants into consideration in determining, composing or
calculating the S&P 500 Index or S&P MidCap 400 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Stock Index Fund or MidCap Index Fund or the timing of the issuance or sale
of such Funds or in the determination or calculation of the equation by which
such Funds are to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the Funds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE COMPANY FROM
THE USE OF THE S&P 500 INDEX OR S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.'s corporate bond ratings are as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstand-
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ing investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Standard & Poor's Corporation classifications are as follows:
AAA -- This is the highest rating assigned by Standard & Poor's to a
financial obligation and indicates an extremely strong capacity to meet its
financial commitment.
AA -- An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is strong.
A -- An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- Obligations rated "BBB" exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB-B-CCC-CC -- Obligations rated "BB", "B", "CCC" and "CC" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "CC" a higher degree of speculation. While such obligations
will likely have some quality and protective characteristics, they may be
outweighed by large uncertainties or major exposures to adverse conditions.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A and Prime Commercial Paper Ratings.
Commercial paper rated A by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better, although, in some cases "BBB" credits may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The rating is described by S&P as the investment
grade category, the highest rating classification. Relative strength or weakness
of the above factors determine whether the issuer's commercial paper is rated
A-1, A-2 or A-3.
Among the factors considered by Moody's in assigning commercial paper
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative differences in
strengths and weaknesses in respect of these criteria establish a rating in one
of three classifications. The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are
designated Higher Quality and High Quality, respectively.
INDEPENDENT AUDITORS
Ernst & Young LLP, One Houston Center, 1221 McKinney, Suite 2400, Houston,
Texas 77010, serve as independent auditors of the Company.
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DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
---------------- --------------- -------------------
<S> <C> <C>
Thomas L. West, Jr.*.............. Chairman of the Board since Chairman and Chief Executive Officer
2929 Allen Parkway 1998, Director since 1994, (1997-Present), Director and
Houston, Texas 77019 President (1997- 1998) and Executive Vice President (1994-1997)
Date of Birth: 06/07/37 Executive Vice President and President (1994-1998), VALIC and
(1994-1997) Chairman of the Board and Chief
Executive Officer (1997-Present),
American General Annuity Insurance
Company ("AGAIC") Formerly Senior
Vice President Annuity Business
Unit -- Aetna Life Insurance &
Annuity Co. (1987-1994).
John A. Graf*..................... Director and President since President and Director, VALIC and
2929 Allen Parkway 1998 AGAIC (1998 to Present). Director,
Houston, Texas 77019 Boy Scouts of America. Formerly,
Date of Birth: 09/14/59 Director (1993-1998), President and
Chief Executive Officer (1997-1998),
Vice Chairman (1996-1997), Chief
Marketing Officer (1993-1997) and
Executive Vice President (1993-1996),
Western National Life Insurance
Corporation and Senior Vice Presi-
dent, Conseco, Inc. (1987-1993).
Craig R. Rodby*................... Director since 1998 and Vice Chairman (1997-Present) and
2929 Allen Parkway Executive Vice President Chief Financial Officer
Houston, Texas 77019 (1997-Present) (1998-Present), VALIC and AGAIC
Date of Birth: 07/05/49 (1998-Present). Formerly, Senior Vice
President-Financial Management,
ReliaStar (1994-1997) and President
and Chief Executive Officer, Northern
Life Insurance Company (1990-1994).
Dr. Judith L. Craven.............. Director since 1998 Physician, Administrator; President,
3212 Ewing Street United Way of Texas Gulf Coast
Houston, Texas 77004 (1992-1998); Director, A.H. Belo
Date of Birth: 10/06/45 Corporation (1993-Present); Director,
Sysco Corporation (1996-Present);
Director, Sisters of Charity of the
Incarnate Word (1996-Present)(3).
Dr. Timothy J. Ebner.............. Director since 1998 Professor, Departments of
17994 NW Union Street Neurosurgery and Physiology,
Elk River, Minnesota 55330 University of Minnesota
Date of Birth: 07/15/49 (1991-Present). Formerly, Consultant
EMPI Inc. (1994-1995) and Medtronic
Inc. (1997-1998)(3).
Judge Gustavo E. Gonzales, Jr..... Director since 1998 Municipal Court Judge, Dallas, Texas;
8320 Coolgreen Drive Director, Downtown Dallas YMCA Board
Dallas, Texas 75228 (1996-Present); Director, Dallas
Date of Birth: 07/27/40 Easter Seals Society
(1997-Present)(3).
Dr. Norman Hackerman.............. Director since 1984 Chairman -- Scientific Advisory Board
5555 San Felipe for The Robert A. Welch Foundation
Suite 1900 (1983- Present); Director,
Houston, Texas 77056-2727 Electrosource, Inc.; President
Date of Birth: 03/02/12 Emeritus, Rice University, Houston,
Texas. Formerly, President, Rice Uni-
versity, Houston, Texas (1970-
1985).(1)(2)(3)
Dr. John Wm. Lancaster............ Director since 1984 Retired. Pastor Emeritus and Director
4642 Braeburn of Planned Giving, First Presbyterian
Bellaire, Texas 77401 Church, Houston, Texas. Formerly,
Date of Birth: 12/15/23 Pastor, First Presbyterian Church,
Houston, Texas (1961-1990).(3)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
---------------- --------------- -------------------
<S> <C> <C>
Ben H. Love....................... Director since 1991 Retired. Formerly, Chief Executive,
4407 Eaton Circle Boy Scouts of America.
Colleyville, Texas 76034 (1985-1993).(3)
Date of Birth: 09/26/30
Dr. John E. Maupin, Jr............ Director since 1998 President, Meharry Medical College,
2 Morningside Court Nashville, Tennessee; Nashville
Nashville, Tennessee 37215 Advisory Board Member, First American
Date of Birth: 10/28/46 National Bank (1996-Present);
Director, Monarch Dental Corporation
(1997-Present). Formerly, Executive
Vice President, Morehouse School of
Medicine, Atlanta, Georgia
(1989-1994).(3)
Dr. F. Robert Paulsen............. Director since 1985 Dean Emeritus and Professor Emeritus,
2801 N. Indian Ruins College of Higher Education,
Tucson, Arizona 85715 University of Arizona, Tucson,
Date of Birth: 07/05/22 Arizona.(1)(2)(3)
Dr. R. Miller Upton............... Director since 1984 Consultant; President Emeritus,
914 Tarrant Dr. Beloit College, Beloit, Wisconsin.
Fontana, Wisconsin 53125 Formerly, Director, Home Life
Date of Birth: 12/27/16 Insurance Company of New York
(1961-1991) and Director, Household
International, Inc.
(1965-1989).(1)(2)(3)
</TABLE>
- ------------
* Interested persons of the Company as defined in the 1940 Act specifically
because of their capacity as officers, directors or consultants of the
Company, VALIC or American General Corporation.
(1) Retired Managing General Partner of Van Kampen American Capital Exchange
Fund.
(2) Retired Trustee of Van Kampen American Capital Bond Fund, Inc., Van Kampen
American Capital Income Trust, Van Kampen American Capital Convertible
Securities Fund, Inc. and the Common Sense Trust.
(3) Directors who are not interested persons of the Company receive an annual
retainer of $18,000. In addition, such Directors are paid per board meeting,
committee meeting, telephone meeting and committee chair, a fee of $1,500,
$250, $250 and $250, respectively, plus expenses incurred, if any.
51
<PAGE>
Listed below are the Company's officers and their principal occupations.
All are affiliates of VALIC and are located at 2929 Allen Parkway, Houston,
Texas 77019. Each officer serves until his or her successor is elected and shall
qualify.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- --------------- -------------------
<S> <C> <C>
John A. Graf...................... President and Director since President and Director, VALIC and
Date of Birth: 09/14/59 1998 AGAIC (1998 to Present). Director,
Boy Scouts of America. Formerly,
Director (1993-1998), President and
Chief Executive Officer (1997-1998),
Vice Chairman (1996-1997), Chief
Marketing Officer (1993-1997) and
Executive Vice President (1993-1996),
Western National Life Insurance
Corporation and Senior Vice Presi-
dent, Conseco, Inc. (1987-1993).
Joe E. Arant...................... Executive Vice President since Executive Vice President-Sales (1998
1998 to Present) and Senior Vice President
(1998), VALIC and AGAIC. Chairman and
President, VAMCO (1998 to Present).
Joe C. Osborne.................... Executive Vice President since Executive Vice President of Marketing
Date of Birth: 09/17/48 1998 and Director (1992-1998) and Director, VALIC and AGAIC.
Peter V. Tuters................... Senior Investment Officer since Executive Vice President, American
Date of Birth: 04/18/52 1998 and Director (1993-1998) General Investment Management, L.P.
(1998 to Present); Vice President and
Investment Officer (1998 to Present),
Vice President and Chief Investment
Officer (1993-1998) VALIC and Vice
President and Investment Officer,
AGAIC (1998 to Present); Former
Director, VALIC. Senior Vice
President and Chief Investment
Officer, American General Corporation
(1993-1998).
Teresa S. Moro.................... Vice President and Investment Trader -- VALIC. Formerly, Money Mar-
Date of Birth: 08/14/60 Officer since 1990 ket Trader, VALIC (1986-1990); AIM
Management Group Inc. (1983-1986).
Leon A. Olver..................... Vice President and Investment Portfolio Manager, VALIC (1995 to
Date of Birth: 06/27/51 Officer since 1995 Present). Formerly Vice President and
Treasurer, First Heights Bank
(1994-1995); Vice President and
Assistant Treasurer, First Heights
Bank (1991-1994); Assistant Vice
President, Pulte Financial Companies
(1984-1991).
William Trimbur, Jr............... Vice President and Investment Portfolio Manager, VALIC. Formerly,
Date of Birth: 06/15/51 Officer since 1987 Second Vice President, VALIC
(1985-1990); Controller, VALIC
(1985-1986); Assistant Controller,
VALIC (1982-1985) and Assistant
Treasurer, VALIC (1982-1986).
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- --------------- -------------------
<S> <C> <C>
Maruti D. More.................... Vice President -- Vice President, American General
Date of Birth: 02/02/44 Investments since 1998 Investment Management, L.P. (1998 to
Present); Vice President,
Investments, VALIC (1998 to Present).
Portfolio Manager, American General
Corporation (1996 to 1998). For-
merly, Managing Director, Marketable
Securities, Paul Revere Investment
Management Corporation (1993 to
1995); Senior Portfolio Manager,
Dewey Square Investors; Investment
Vice President, New York Life
Insurance Company.
Brent C. Nelson................... Vice President since 1987 Senior Vice President, Controller and
Date of Birth: 07/24/51 Director, VALIC and AGAIC. Formerly,
Vice President and Controller, VALIC
(1990-1994); Controller, VALIC (1987-
1990); Second Vice President and
Controller, VALIC (1986-1987); Second
Vice President -- Fund Operations,
VALIC (1985-1986); Assistant Vice
President -- Controller, Lomas
Financial Security Insurance Co.
(1982-1985).
Cynthia A. Toles.................. Vice President since 1998 and Senior Vice President, General
Date of Birth: 03/28/51 Secretary since 1985 Counsel and Secretary, VALIC (1998 to
Present) and AGAIC (1998 to Present).
Director and Secretary, VAMCO.
Formerly, Senior Associate General
Counsel & Secretary, VALIC
(1990-1998); Vice President, Asso-
ciate General Counsel & Secretary,
VALIC (1988-1989); Second Vice
President, Associate General Counsel
and Assistant Secretary, VALIC
(1986-1988); Assistant Vice
President, Assistant General Counsel
and Assistant Secretary, VALIC
(1983-1986).
Gregory R. Seward................. Treasurer since 1991 Vice President -- Variable Product
Date of Birth: 06/27/56 Accounting (1998 to Present) and
Assistant Controller (1991 to 1998),
VALIC and Vice President -- Variable
Product Accounting AGAIC (1998 to
Present). Formerly, Controller,
Avanti Health Systems, Inc.
(1988-1991); Reports Manager, Amer-
ican Capital Asset Management, Inc.
(1986-1988); Senior Auditor, Price
Waterhouse (1982-1986).
Kathryn A. Pearce................. Controller since 1996 Associate Director of Fund
Date of Birth: 02/05/47 Accounting, VALIC (1996 to Present).
Formerly, Supervisor -- Mutual Fund
Accounting, Van Kampen American
Capital, Inc. (1977-1996).
Nori L. Gabert.................... Vice President since 1998 and Associate General Counsel, VALIC
Date of Birth: 08/15/53 Assistant Secretary since (1997 to Present). Formerly, Of
1997 Counsel, Winstead Sechrest & Minick
P.C. (1997); Vice President and
Associate General Counsel of Van
Kampen American Capital, Inc.
(1981-1996).
Cynthia A. Gibbons................ Assistant Vice President since Senior Compliance Analyst, VALIC
Date of Birth: 12/06/67 1998 (1996 to Present).
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- --------------- -------------------
<S> <C> <C>
Jaime M. Sepulveda................ Assistant Treasurer Director -- Variable Product
Date of Birth: 01/09/52 since 1998 Accounting and Financial Reporting,
VALIC (1998 to Present). Formerly,
Accounting Manager, Metro Networks,
Inc. (1997-1998); Controller and
Investment Officer, Port of Houston
Authority (1994-1997); Chief Fi-
nancial Officer, Intile Designs, Inc.
(1993-1994).
Earl E. Allen, Jr................. Assistant Treasurer since 1998 Manager -- Fund Reporting, VALIC.
Date of Birth: 03/16/60 Formerly, Senior Auditor, Texas
Treasury Department; Manager,
American General Corporation;
Assistant Vice President, Texas
Commerce Bank.
Donna L. Hathaway................. Assistant Controller since 1998 Manager -- Variable Product
Date of Birth: 09/17/64 Accounting, VALIC. Formerly, Gas
Revenue Accountant, Texaco Inc.;
Accounting Manager, Hewitt
Associates, LLC; Revenue Accounting
Manager, Trans Texas Gas.
</TABLE>
The officers conduct and supervise the daily business operations of the
Company, while the directors, in addition to their functions set forth under
"Investment Adviser," review such actions and decide on general policy.
The Company has an Audit Committee. The Company's Audit Committee consists
of Messrs. Lancaster, Hackerman, Paulsen, Upton, and Love. The Audit Committee
recommends to the Board the selection of independent auditors for the Company
and reviews with such independent auditors the scope and results of the annual
audit, reviews the performance of the accounts, and considers any comments of
the independent auditors regarding the Company's financial statements or books
of account. The Company does not have a standing nominating or compensation
committee.
The five directors of the Company who are not affiliated with VALIC are
each paid annual directors' fees and are reimbursed for certain out-of-pocket
expenses by the Company.
The directors and officers of the Company and members of their families as
a group, beneficially owned less than 1% of the common stock of each Fund
outstanding as of May 31, 1998.
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS
The following table sets forth information regarding compensation and
benefits earned by the Directors for the fiscal year ending May 31, 1998.
COMPENSATION TABLE
FISCAL YEAR ENDING MAY 31, 1998
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATED COMPENSATION
AGGREGATE ACCRUED AS ANNUAL FROM
COMPENSATION PART OF BENEFITS FUND
FROM SERIES COMPANY UPON COMPLEX(3)
NAME OF PERSON, POSITION* SERIES COMPANY EXPENSES(1) RETIREMENT PAID TO DIRECTORS
------------------------- -------------- -------------- ---------- -----------------
<S> <C> <C> <C> <C>
Thomas L. West, Jr.**..................... $ 0 $ 0 $ 0 $ 0
Joe C. Osborne**.......................... $ 0 $ 0 $ 0 $ 0
Peter V. Tuters**......................... $ 0 $ 0 $ 0 $ 0
Dr. Norman Hackerman...................... $33,000 $24,500 (2) $39,073
Dr. John Wm. Lancaster.................... $27,000 $25,000 (2) $31,073
Ben L. Love............................... $33,000 $24,500 (2) $39,073
Dr. F. Robert Paulsen..................... $27,000 $24,500 (2) $31,073
Dr. R. Miller Upton....................... $25,500 $24,500 (2) $29,073
</TABLE>
54
<PAGE>
- ---------------
* Messrs. Osborne and Tuters were Directors until November 10, 1998. On that
same date Dr. Judith L. Craven, Dr. Timothy J. Ebner, Judge Gustavo E.
Gonzales, Jr., John A. Graf**, Dr. John Maupin and Craig R. Roddy** were
first elected Directors of the Series Company.
** "Interested person," as defined in the 1940 Act, specifically because of
their capacity as officers, trustees or consultants of the Series Company,
VALIC or American General Corporation.
(1) The total present value of accumulated benefits as of May 31, 1998 under
expense assumptions to be used for the fiscal year ending May 31, 1999 for
Messrs. Hackerman, Lancaster, Love, Paulson, and Upton is $749,000.
(2) All current directors would earn ten or more years of service as of their
normal retirement date. Complete years of service earned as of May 31, 1998
are as follows: Messrs. Hackerman, Lancaster, Paulson, and Upton -- 10 or
greater; Mr. Love -- approximately 7 years.
PENSION TABLE -- ESTIMATED BENEFITS AT NORMAL RETIREMENT
<TABLE>
<CAPTION>
SERVICE UNDER 5 10 OR MORE
AT RETIREMENT YEARS 6 YEARS 7 YEARS 8 YEARS 9 YEARS YEARS
- ------------- ------- ------- ------- ------- ------- ----------
COMPENSATION
AT RETIREMENT
<S> <C> <C> <C> <C> <C> <C>
$20,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000
$30,000 $15,000 $18,000 $21,000 $24,000 $27,000 $30,000
$40,000 $20,000 $24,000 $28,000 $32,000 $36,000 $40,000
$50,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
$60,000 $30,000 $36,000 $42,000 $48,000 $54,000 $60,000
</TABLE>
(3) Includes all investment companies managed by VALIC.
FINANCIAL STATEMENTS
The financial statements for the year ended May 31, 1998 and the report of
independent auditors for that period are included in the American General Series
Portfolio Company Annual Report for that period.
The Annual Report to shareholders as of May 31, 1998 is incorporated by
reference in this Statement of Additional Information. The financial statements
included in the Annual Report and incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP, Independent
Auditors, as set forth in their report thereon which appears in the Annual
Report and have been incorporated by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
55
<PAGE>
================================================================================
AMERICAN GENERAL SERIES PORTFOLIO COMPANY - ANNUAL REPORT MAY 31, 1998
================================================================================
TABLE OF CONTENTS
President's Letter ......................... 1
Stock Index Fund ........................... 4
MidCap Index Fund .......................... 11
Small Cap Index Fund ....................... 17
International Equities Fund ................ 33
Growth Fund ................................ 39
Growth & Income Fund ....................... 42
Science & Technology Fund .................. 46
Social Awareness Fund ...................... 49
Asset Allocation Fund ...................... 56
Capital Conservation Fund .................. 64
Government Securities Fund ................. 67
International Government Bond Fund.......... 69
Money Market Fund .......................... 73
Notes to Financial Statements .............. 76
Financial Highlights ....................... 79
Report of Independent Auditors ............. 85
55
<PAGE>
===============================================================================
AGSPC PRESIDENT'S LETTER
1
===============================================================================
Dear Valued Customer,
In today's environment of rapidly changing markets, the commitment to your
financial security remains American General Series Portfolio Company's highest
priority. This dedication is reflected in the performance of our funds, and it
is my pleasure to introduce AGSPC's May 31, 1998 Annual Report for your review.
In this report, you will find financial and performance information for AGSPC's
thirteen funds for the period ended May 31, 1998.
Through your variable annuity contract, you are permitted to invest in one or
more of the funds described in this report. Please refer to the chart on page 3
to determine which funds are available under your contract.
MARKET CONDITIONS
Securities markets provided significantly above average returns for the year
ended May 31, 1998. The Standard & Poor's 500 Index (S&P 500(R)) provided a
total return of 30.68% for the 12 months. The Standard & Poor's MidCap 400 Index
(MidCap 400(R)) returned 29.87% and the Russell 2000(R) had a total return of
21.25%. The emphasis for the year was on large capitalization stocks.
The United States economy continues to expand at an above-trend pace, despite
trade and fiscal drag, a strong dollar, and a relatively high real interest
environment. The primary factor stimulating the economy is the strength of the
U.S. equity market. By raising household net worth the market is fueling
spending. People do not have to save as much of their income if the equity
market is increasing their net worth. Also, the "wealth effect" - the feeling
that he or she is wealthier and should spend more - is bolstering consumer
spending.
Another positive in the economy is the extremely low level of inflation.
Consumer price increases have been held to less than 3% annually and for 1998
less than 2% is expected. Wages and salaries are expanding at the rate of 3.5 to
4.0%. When the inflation rate is subtracted, workers are enjoying real wage
increases.
The combination of above average economic growth and contained inflation is
providing a strong background for the stock and bond markets. In addition, the
financial services industry is sending a very strong message, through the media,
that saving for retirement is essential. That message is being received and
unprecedented amounts of money are being invested in mutual funds.
International markets have experienced widely divergent trends. European
investors have seen equity markets appreciate more than 50% while most Asian
markets have experienced dramatic decreases. The Asian markets declined in local
currencies and the international investor saw a greater decrease as the currency
values fell precipitously.
FUND RETURNS
INDEXED FUNDS
The AGSPC index funds continued to emulate their respective indices with close
correlation dependent upon the liquidity of the sector. The large capitalization
Stock Index Fund tracked the S&P 500 Index(R) with a -0.07% difference for the
year, returning 30.61% before expenses. The MidCap Index Fund tracked the MidCap
400(R) with a positive 0.11% difference, returning 29.98% before expenses. The
Small Cap Index Fund tracked the Russell 2000 Index with a positive 0.48%
variance, returning 21.73% before expenses. The International Equities Fund had
a wider than normal variance to the EAFE Index as smaller capitalization names
outperformed in January and February. The fund has low exposure to the smaller
names and relies on the large benchmark names to track its index. In early 1998,
the larger names did not provide the high correlation to local market returns
that they have provided historically. The fund varied from the EAFE index by
- -0.79%, returning 10.32% before expenses.
MANAGED FUNDS
The Growth Fund earned 28.25% before expenses, a -2.43% variance from the S&P
500 Index. The fund concentrates on stocks with above average growth potential
in the service sector. The Science & Technology Fund invests in the highly
volatile electronic and health care industries. Concerns surrounding computer
pricing and demand have produced substantial variance compared to the basic
market index - S&P 500. For the year the fund returned 11.80%, a -18.88%
variance from the index.
The Social Awareness Fund benefited from the emphasis on large capitalization
growth stocks and it returned 30.88%, a positive 0.20% variance above the S&P
500. The Growth and Income Fund continues to use the Value Line Ranking System
which emphasizes the small and mid-sized growth companies. The return for the
year of 20.67% is closer to the Russell 2000 than the return of the larger
capitalization issues in the S&P 500. The fund under performed the S&P 500 by
10.01%.
The Asset Allocation Fund (previously the Timed Opportunity Fund) returned
22.48%, outperforming its benchmark by 1.26%. Bonds lagged the relevant index,
stocks tracked the index and the over allocation to stocks resulted in the
outperformance.
BOND FUNDS
The Capital Conservation Fund was impacted by two Asian holdings and uncertainty
surrounding Columbia Healthcare. Those factors caused the fund to under-perform
its relevant index by 1.05%, returning 11.30%. The Government Securities Fund
emphasized Agency securities over Treasuries and returned 11.14%,
under-performing its index by 0.08%.
The International Government Bond Fund benefited from rising bond prices but the
Dollar's strength eroded the local market gains. The fund returned 3.20%,
out-performing the index by 0.82%.
FUTURE OUTLOOK
Both the equity and bond markets have provided outstanding returns over the past
four years. Even the currency and credit crises in Southeast Asia have had only
minor impact on the stock market. The bond market has been aided as foreign
investors have sought safety in U.S. Treasury issues.
An added benefit of the Asian crises is the devaluation of those currencies
which have resulted in lower cost goods being exported to the United States. The
other side of the coin is that U.S. exports have become more expensive overseas
and the trade deficit has increased. Nevertheless, the domestic economy
continues to expand at levels in excess of 3% and could well maintain that pace
over the intermediate term. On balance, the less expensive imports have kept
prices low and the flow of funds to U.S. bonds have caused interest rates to
fall to decades lows. That has had a very positive affect on the real estate
market with housing demand at very high levels.
Positive economic growth combined with low interest rates augers well for the
stock market. The current U.S. Treasury long bond yield of 5.6% compared with a
Gross Domestic Product Deflator (a broad measure of inflation) of 1.0% provides
an extraordinary real rate of return - 4.6%. That compares with a century long
standard of 3.0 - 3.5%. In that context, the bond market should improve
modestly.
Thank you for your continued confidence in the VALIC investment management.
Sincerely,
/s/ THOMAS L. WEST, JR.
Thomas L. West, Jr., Chairman and President
June 22, 1998 American General Series Portfolio Company
FUND RETURNS(1) TO INDEX
[GRAPH]
(1) Represents fund performance before subtracting expenses. See page two for
applicable fund expenses and fund level returns after expenses.
56
<PAGE>
================================================================================
AGSPC PRESIDENT'S LETTER CONTINUED
2
================================================================================
FUND RETURNS AND TRACKING DIFFERENCES
For the period ended May 31, 1998
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
FUND TOTAL
PERFORMANCE INDEX
BEFORE RETURN
SUBTRACTING INCLUDING TRACKING
FUND FUND EXPENSES REINVESTED DIFFERENCE
AGSPC FUND/RELEVANT MARKET INDEX RETURN(a) EXPENSES (1) + (2) DIVIDENDS (3) - (4)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDEXED FUNDS:
Stock Index Fund / S&P 500............. 30.30% 0.31% 30.61% 30.68% (0.07)%
MidCap Index Fund /
Standard & Poor's MidCap 400......... 29.62 0.36 29.98 29.87 0.11
Small Cap Index Fund / Russell 2000.... 21.34 0.39 21.73 21.25 0.48
International Equities Fund / EAFE..... 9.92 0.40 10.32 11.11 (0.79)
MANAGED FUNDS:
Growth Fund / S&P 500.................. 27.41 0.84 28.25 30.68 (2.43)
Growth & Income Fund / S&P 500......... 19.87 0.80 20.67 30.68 (10.01)
Science & Technology Fund / S&P 500.... 10.85 0.95 11.80 30.68 (18.88)
Social Awareness Fund / S&P 500........ 30.34 0.54 30.88 30.68 0.20
Asset Allocation Fund / Benchmark(b)... 21.94 0.54 22.48 21.22 1.26
Capital Conservation Fund /
Merrill Lynch Corporate Master Bond.. 10.76 0.54 11.30 12.35 (1.05)
Government Securities Fund /
Lehman Brothers U.S. Treasury........ 10.60 0.54 11.14 11.22 (0.08)
Int'l Gov't Bond Fund /
Salomon Non U.S. Gov't Bond.......... 2.65 0.55 3.20 2.38 0.82
Money Market Fund / 30 Day Certificate
of Deposit
Primary Offering Rate by New York
City Banks (NYC 30 Day CD Rate)...... 5.25 0.54 5.79 4.81 0.98
</TABLE>
(a)Fund level returns are net of investment management fees and other fund
expenses, but do not reflect charges specified in annuity contracts for
mortality and expense guarantees, administrative fees, or surrender charges.
(b)Benchmark consists of 55% S&P 500 Index, 35% Merrill Lynch Corporate and
Government Master Index, and 10% NYC 30 Day CD Rate.
SUMMARY OF NET ASSET VALUES PER SHARE
AND PER SHARE DISTRIBUTIONS
<TABLE>
<CAPTION>
DISTRIBUTIONS FROM NET
INVESTMENT INCOME AND
NET REALIZED GAINS ON
NET ASSET VALUES (PER SHARE) SECURITIES (PER SHARE)
----------------------------------- -------------------------
MAY 31, NOVEMBER 30, MAY 31, 6/1/97 to 12/1/97 to
FUND 1997 1997 1998 11/30/97 5/31/98
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock Index (emulate S&P 500)...........$26.09 $29.38 $33.38 $0.19 $0.36
MidCap Index (emulate MidCap 400)....... 20.83 23.98 25.27 0.12 1.47
Small Cap Index (emulate Russell 2000).. 16.18 18.32 17.94 0.10 1.50
International Equities
(foreign long term growth stocks)..... 11.44 10.83 11.95 0.14 0.43
Growth Fund (long term growth of
capital).............................. 17.62 20.01 22.08 0.00 0.34
Growth & Income Fund (long term growth
of capital and current income)........ 16.87 19.20 19.91 0.04 0.25
Science & Technology Fund (long term
growth of capital).................... 19.88 20.98 22.07 0.00 0.00
Social Awareness (social criteria
growth stocks)........................ 17.90 20.12 22.16 0.11 0.93
Asset Allocation (asset allocation)..... 12.57 13.65 14.02 0.20 1.00
Capital Conservation (quality corporate
bonds)................................ 9.31 9.61 9.68 0.29 0.32
Government Securities (intermediate and
long term government bonds)........... 9.67 9.99 10.09 0.29 0.29
International Government Bond (high
quality foreign government debt
securities)........................... 11.33 11.27 11.42 0.19 0.02
Money Market (money market instruments). 1.00 1.00 1.00 0.03 0.02
</TABLE>
The change in net asset value of the funds will not be the same as the change in
the accumulation unit value of your annuity contract because (1) the change in
net asset value does not reflect the reinvestment of income and capital gain
distributions and (2) the mortality and expense charges described in your
annuity contract are not included.
57
<PAGE>
================================================================================
AGSPC PRESIDENT'S LETTER CONTINUED
3
================================================================================
FUNDS AVAILABLE UNDER VARIABLE ANNUITY CONTRACTS
<TABLE>
<CAPTION>
VALIC SEPARATE ACCOUNT A CONTRACT FORM
--------------------------------------------------------------
PORTFOLIO PORTFOLIO PORTFOLIO INDEPEN- GROUP
DIRECTOR DIRECTOR DIRECTOR DENCE UNIT
FUND 2 1 T PLUS IMPACT PURCHASE
- ----------------------------------- --------- --------- --------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Stock Index
(emulate S&P 500)................ Yes Yes Yes Yes Yes Yes
MidCap Index
(emulate MidCap 400)............. No Yes No Yes Yes No
Small Cap Index
(emulate Russell 2000)........... No Yes Yes Yes No No
International Equities
(foreign long term growth stocks) No Yes Yes Yes No No
Growth Fund
(long term growth of capital).... Yes Yes No No No No
Growth & Income Fund (long term
growth of capital and current
income).......................... No Yes No No No No
Science & Technology Fund
(long term growth of capital).... Yes Yes No No No No
Social Awareness
(social criteria growth stocks).. Yes Yes Yes Yes No No
Timed Opportunity
(asset allocation)............... No Yes Yes Yes Yes No
Capital Conservation
(quality corporate bonds)........ No Yes No Yes Yes No
Government Securities (intermediate
and long term government bonds).. No Yes No Yes No No
Int'l Government Bond (high quality
foreign government debt
securities)...................... Yes Yes No Yes No No
Money Market
(money market instruments)....... Yes Yes Yes Yes Yes No
</TABLE>
<TABLE>
<CAPTION>
AMERICAN GENERAL LIFE INSURANCE COMPANY
---------------------------------------------------------------------
SEPARATE ACCOUNT A
-------------------- SEPARATE SEPARATE
NON ACCOUNT ACCOUNT SELECT PLATINUM
FUND QUALIFIED QUALIFIED B D PRESERVE INVESTOR
- ------------------------------------ --------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock Index
(emulate S&P 500)................ Yes Yes Yes Yes No Yes
MidCap Index
(emulate MidCap 400)............. Yes Yes Yes No No Yes
Small Cap Index
(emulate Russell 2000)........... No No No No No No
International Equities
(foreign long term growth stocks) No No No Yes No Yes
Growth Fund
(long term growth of capital).... No No No No No No
Growth & Income Fund (long term
growth of capital and current
income).......................... No No No No No No
Science & Technology Fund
(long term growth of capital).... No No No No No No
Social Awareness
(social criteria growth stocks).. No No No Yes No No
Timed Opportunity
(asset allocation)............... Yes Yes Yes No No No
Capital Conservation
(quality corporate bonds)........ Yes Yes Yes No No No
Government Securities (intermediate
and long term government bonds).. Yes Yes Yes No No No
Int'l Government Bond (high quality
foreign government debt
securities)...................... No No No No No No
Money Market
(money market instruments)....... Yes Yes Yes No Yes Yes
</TABLE>
58
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS
4 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
COMMON STOCKS - 99.25%
ADVERTISING - 0.17%
43,350 Interpublic Group Cos., Inc.... $ 2,571,197
71,700 Omnicom Group, Inc............. 3,356,456
-----------
5,927,653
-----------
AEROSPACE/DEFENSE - 1.54%
403,008 Boeing Co...................... 19,193,255
29,000 EG & G, Inc.................... 913,500
55,960 General Dynamics Corp.......... 2,486,723
15,400 Goodrich (B.F.) Co............ 789,250
80,076 Lockheed Martin Corp........... 8,988,531
30,800 Northrop Grumman Corp.......... 3,301,375
112,500 Raytheon Co. Class B........... 6,152,344
44,000 TRW Inc........................ 2,356,750
101,300 United Technologies Corp....... 9,522,200
-----------
53,703,928
-----------
AIRLINES - 0.41%
36,300* AMR Corp....................... 5,587,931
31,600 Delta Air Lines, Inc........... 3,634,000
82,800 Southwest Airlines Co.......... 2,209,725
41,400* US Airways Group, Inc.......... 2,898,000
-----------
14,329,656
-----------
APPAREL & PRODUCTS - 0.10%
21,178* Abercrombie & Fitch Co. Class A 894,749
27,000* Fruit of the Loom, Inc. Class A 970,313
32,900 Liz Claiborne, Inc............. 1,667,619
-----------
3,532,681
-----------
APPLIANCES/FURNISHINGS - 0.11%
35,000 Maytag Corp.................... 1,765,313
30,200 Whirlpool Corp................. 2,063,037
-----------
3,828,350
-----------
AUTO - CARS - 1.70%
275,774 Chrysler Corp.................. 15,339,929
450,000 Ford Motor Co.................. 23,343,750
284,900 General Motors Corp............ 20,494,994
-----------
59,178,673
-----------
AUTO - REPLACEMENT PARTS - 0.33%
73,900* AutoZone, Inc.................. 2,457,175
18,700 Cooper Tire & Rubber Co........ 442,956
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
AUTO - REPLACEMENT PARTS - Continued
14,300 Echlin Inc..................... $ 679,250
74,400 Genuine Parts Co............... 2,524,950
71,700 Goodyear Tire & Rubber Co...... 5,153,438
15,800 Pep Boys-Manny, Moe & Jack..... 351,550
------------
11,609,319
------------
BANKS - NEW YORK CITY - 2.01%
161,100 Bank of New York Co., Inc...... 9,847,238
174,882 Chase Manhattan Corp........... 23,773,022
178,700 CitiCorp....................... 26,648,637
79,200 J. P. Morgan & Co. Inc........ 9,835,650
------------
70,104,547
------------
BANKS - OTHER - 3.08%
278,836 BankAmerica Corp............... 23,056,251
61,300 BankBoston Corp................ 6,459,488
122,223 First Chicago Corp............. 10,686,873
419,200 First Union Corp............... 23,187,000
105,393 Fleet Financial Group, Inc..... 8,642,226
116,500 Mellon Bank Corp............... 7,856,469
133,000 National City Corp............. 9,010,750
51,600 Providian Financial Corp....... 3,283,050
14,000 Republic of New York Corp...... 1,798,125
37,033 Wells Fargo & Co............... 13,387,430
------------
107,367,662
------------
BANKS - REGIONAL - 3.55%
261,349 Banc One Corp.................. 14,406,863
67,950 Comerica Inc................... 4,467,713
106,275 Fifth Third Bancorp............ 5,234,044
59,600 Huntington Bancshares, Inc..... 1,951,900
172,340 KeyCorp........................ 6,538,149
51,500 Mercantile Bancorporation Inc.. 2,632,938
389,917 NationsBank Corp............... 29,536,212
53,900 Northern Trust Corp............ 3,801,637
328,200 Norwest Corp................... 12,758,775
135,900 PNC Bank Corp.................. 7,848,225
61,200 State Street Corp.............. 4,218,975
84,200 Summit Bancorporation.......... 4,220,525
72,200 SunTrust Banks, Inc............ 5,703,800
102,150 Synovus Financial Corp......... 2,291,991
309,990 U.S. Bancorp................... 12,128,359
71,513 Wachovia Corp.................. 5,725,510
------------
123,465,616
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
BEVERAGE - BREWERS/
DISTRIBUTORS - 0.47%
11,900 Adolph Coors Class B........... $ 446,250
202,800 Anheuser-Busch Companies, Inc.. 9,316,125
18,915 Brown-Forman Corp Class B...... 1,089,977
128,400 Seagram Co. Ltd................ 5,641,575
------------
16,493,927
------------
BEVERAGE - SOFT DRINKS - 2.97%
995,000 Coca-Cola Co................... 77,983,125
624,500 PepsiCo, Inc................... 25,487,406
------------
103,470,531
------------
BROADCASTING - 1.46%
293,158 CBS Corp....................... 9,307,767
38,600* Clear Channel Communications,
Inc......................... 3,700,775
141,750 Comcast Corp. Class A Special.. 4,859,374
197,178 Tele-Comm Liberty Media Group
Class A..................... 6,765,670
215,200 U S West Communications Group.. 10,921,400
226,800 U S West Media Group........... 8,405,775
122,700* Viacom, Inc Class B............ 6,748,500
------------
50,709,261
------------
BUILDING MATERIALS - 0.38%
8,900 Armstrong World Industries,
Inc......................... 748,713
75,300 Lowe's Companies, Inc.......... 5,962,818
81,400 Masco Corp..................... 4,578,750
60,700 Sherwin-Williams Co............ 2,018,275
------------
13,308,556
------------
CHEMICAL - MAJOR - 2.06%
99,700 Dow Chemical Co................ 9,658,437
446,600 E.I. du Pont de Nemours and Co. 34,388,200
47,500 Hercules, Inc.................. 2,092,969
243,800 Monsanto Co.................... 13,500,425
54,900 Morton International, Inc...... 1,671,019
66,500 PPG Industries, Inc............ 4,846,187
18,300 Rohm and Haas Co............... 2,010,713
68,300 Union Carbide Corp............. 3,410,731
------------
71,578,681
------------
CHEMICAL - MISCELLANEOUS - 0.44%
42,100 Air Products and Chemicals,
Inc......................... 3,662,700
30,637 Eastman Chemical Co............ 2,052,678
17,100 Ecolab Inc..................... 527,963
15,300* FMC Corp....................... 1,169,494
</TABLE>
59
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 5
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
CHEMICAL - MISCELLANEOUS - Continued
26,500 Great Lakes Chemical Corp...... $ 1,060,000
15,428 Millipore Corp................. 514,910
20,300 Nalco Chemical Co.............. 761,250
6,625* Octel Corp..................... 144,508
64,700 Praxair, Inc................... 3,190,518
39,500 Sigma Aldrich Corp............. 1,441,750
41,400 W.R. Grace & Co................ 768,488
-----------
15,294,259
-----------
CONGLOMERATES - 1.01%
232,500 Allied Signal Inc.............. 9,939,375
38,800 ITT Inds, Inc.................. 1,430,750
39,400 Loews Corp..................... 3,575,550
65,200 Tenneco Inc.................... 2,713,950
58,300 Textron Inc.................... 4,325,131
237,000 Tyco International Ltd......... 13,123,875
-----------
35,108,631
-----------
CONSUMER FINANCE - 0.28%
25,000 Beneficial Corp................ 3,350,000
204,275 MBNA Corp...................... 6,472,964
-----------
9,822,964
-----------
CONTAINERS - METAL/GLASS - 0.31%
4,700 Ball Corp...................... 185,356
101,100 Corning Inc.................... 3,987,132
65,600 Crown Cork & Seal Co., Inc..... 3,403,000
12,100 Owens Corning.................. 453,750
61,200* Owens-Illinois, Inc............ 2,750,175
-----------
10,779,413
-----------
CONTAINERS - PAPER - 0.10%
6,500 Bemis Co., Inc................. 274,219
39,214* Sealed Air Corp................ 2,097,949
17,700 Temple-Inland Inc.............. 1,039,875
-----------
3,412,043
-----------
COSMETICS/TOILETRIES - 0.98%
6,800 Alberto-Culver Co. Class B..... 202,300
62,700 Avon Products, Inc............. 5,129,644
220,300 Gillette Co.................... 25,802,637
60,000 International Flavors &
Fragrances, Inc............. 2,880,000
-----------
34,014,581
-----------
DRUGS - 7.86%
22,500 Allergan, Inc.................. 945,000
43,200* ALZA Corp...................... 2,089,800
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
DRUGS - Continued
543,000 American Home Products Corp.... $26,233,687
112,100* Amgen Inc...................... 6,782,050
23,900 Bausch & Lomb Inc.............. 1,190,519
399,400 Bristol Myers Squibb Co........ 42,935,500
444,400 Eli Lilly and Co............... 27,302,825
480,400 Merck & Co., Inc............... 56,236,825
519,800 Pfizer, Inc.................... 54,481,537
219,870* Pharmacia & Upjohn, Inc........ 9,715,506
298,200 Schering-Plough Corp........... 24,955,613
326,700 Warner-Lambert Co.............. 20,847,544
-----------
273,716,406
-----------
ELECTRICAL EQUIPMENT - 3.75%
105,800 AMP Inc........................ 4,020,400
62,000 Cabletron Systems, Inc......... 798,250
181,200 Emerson Electric Co............ 11,007,900
1,314,100 General Electric Co............ 109,563,087
30,500 National Service Industries,
Inc......................... 1,555,500
48,300 Raychem Corp................... 1,817,288
6,800 Thomas & Betts Corp............ 363,375
14,200 W. W. Grainger Inc............. 1,498,988
-----------
130,624,788
-----------
ELECTRONIC INSTRUMENTS - 0.16%
1* Commscope Inc.................. 16
28,100 General Signal Corp............ 1,155,612
27,100* Perkin-Elmer Corp.............. 1,856,350
5,400 Tektronix, Inc................. 206,550
70,400* Thermo Electron Corp........... 2,472,800
-----------
5,691,328
-----------
ENTERTAINMENT - 1.68%
39,400* Harrah's Entertainment, Inc.... 985,000
67,475 Hasbro, Inc.................... 2,580,919
49,400* King World Productions, Inc.... 1,259,700
127,987 Mattel, Inc.................... 4,847,508
216,700 Time Warner Inc................ 16,861,969
283,252 Walt Disney Co................. 32,042,882
-----------
58,577,978
-----------
FINANCE COMPANIES - 0.71%
141,800 Associates First Capital Corp.. 10,608,412
69,600 Green Tree Financial Corp...... 2,797,050
48,800 Household International, Inc... 6,603,250
96,350 SunAmerica, Inc................ 4,685,019
-----------
24,693,731
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
FINANCIAL SERVICES - 0.64%
180,400 American Express Co............ $18,513,550
39,800 Countrywide Credit Industries,
Inc......................... 1,840,750
40,100 H & R Block Inc................ 1,764,400
-----------
22,118,700
-----------
FOODS - 2.16%
215,192 Archer Daniels Midland Co...... 4,061,748
124,000 BestFoods...................... 6,998,250
174,400 Campbell Soup Co............... 9,504,800
178,700 ConAgra, Inc................... 5,226,975
65,900 General Mills, Inc............. 4,497,675
156,350 H J Heinz Co................... 8,296,322
47,000 Hershey Foods Corp............. 3,254,750
162,800 Kellogg Co..................... 6,725,675
79,380 Pioneer Hi-Bred International,
Inc......................... 3,021,401
60,900 Quaker Oats Co................. 3,513,169
47,600 Ralston Purina Co.............. 5,298,475
182,600 Sara Lee Corp.................. 10,750,575
42,500 Wm. Wrigley Jr. Co............. 4,090,625
-----------
75,240,440
-----------
FOOTWEAR - 0.11%
73,700 NIKE, Inc. Class B............ 3,390,200
18,900* Reebok International Ltd....... 543,375
-----------
3,933,575
-----------
FREIGHT - 0.13%
52,560* FDX Corp....................... 3,370,410
37,200 Ryder System, Inc.............. 1,267,125
-----------
4,637,535
-----------
FUNERAL SERVICES - 0.10%
83,800 Service Corp. International.... 3,425,325
-----------
GOLD MINING - 0.15%
151,700 Barrick Gold Corp.............. 2,920,225
52,100 Battle Mountain Gold Co........ 276,781
86,400 Homestake Mining Co............ 939,600
93,800 Placer Dome Inc................ 1,166,638
-----------
5,303,244
-----------
GOVERNMENT SPONSORED - 1.08%
272,600 Federal Home Loan Mortg. Corp.. 12,403,300
418,500 Federal National Mortgage
Association ................... 25,057,688
-----------
37,460,988
-----------
</TABLE>
60
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
6 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
HARDWARE & TOOLS - 0.13%
31,300 Black & Decker Corp............ $ 1,827,138
11,550 Snap-on Inc.................... 506,756
42,600 Stanley Works.................. 2,023,500
-----------
4,357,394
-----------
HEALTHCARE - 0.45%
49,400 Cardinal Health, Inc........... 4,402,775
154,900* HealthSouth Corp............... 4,395,288
54,400* Humana Inc..................... 1,689,800
79,800 United HealthCare Corp......... 5,107,200
-----------
15,595,063
-----------
HEAVY DUTY TRUCKS/PARTS - 0.26%
19,700 Cummins Engine Co., Inc........ 1,024,400
30,700 Dana Corp...................... 1,600,238
37,800 Eaton Corp..................... 3,394,913
39,010* Navistar International Corp.... 1,177,614
35,710 PACCAR Inc..................... 1,971,863
-----------
9,169,028
-----------
HOME BUILDERS - 0.06%
33,200 Centex Corp.................... 1,186,900
14,456 Kaufman & Broad Home Corp...... 371,339
7,900 Pulte Corp..................... 421,168
-----------
1,979,407
-----------
HOSPITAL MANAGEMENT - 0.38%
250,484 Columbia/HCA Healthcare Corp... 8,187,695
13,000 Manor Care, Inc................ 410,313
13,100 Shared Medical Systems Corp.... 953,025
105,200* Tenet Healthcare Corp.......... 3,682,000
-----------
13,233,033
-----------
HOSPITAL SUPPLIES - 2.64%
315,500 Abbott Laboratories............ 23,406,155
8,400 Bard (C. R.), Inc.............. 291,375
112,000 Baxter International Inc....... 6,405,000
55,200 Becton, Dickinson and Co....... 3,905,400
64,100 Biomet, Inc.................... 1,850,888
70,477* Boston Scientific Corp......... 4,492,909
531,900 Johnson & Johnson.............. 36,734,343
37,900 Mallinckrodt, Inc.............. 1,167,794
200,900 Medtronic, Inc................. 11,175,063
37,833* St. Jude Medical, Inc.......... 1,352,530
25,700 United States Surgical Corp.... 1,021,575
-----------
91,803,032
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- ------------
<S> <C> <C>
HOUSEHOLD PRODUCTS - 2.95%
43,200 Clorox Co...................... $ 3,607,200
127,300 Colgate-Palmolive Co........... 11,075,100
173,100 Minnesota Mining &
Manufacturing Co............ 16,033,388
59,000 Newell Co...................... 2,846,750
537,852 Procter & Gamble Co............ 45,145,951
63,100 Rubbermaid, Inc................ 2,058,638
35,300 Tupperware Corp................ 953,100
267,300 Unilever N V - ADR............. 21,099,994
-----------
102,820,121
-----------
INFORMATION PROCESSING - 9.95%
1* A.C. Nielson................... 26
38,200 Adobe Systems Inc.............. 1,525,613
61,400* Apple Computer, Inc............ 1,634,775
27,800 Autodesk, Inc.................. 1,181,500
122,600 Automatic Data Processing, Inc. 7,800,425
78,400* Bay Networks, Inc.............. 2,170,700
319,521* Cendant Corp................... 6,929,612
27,452* Ceridian Corp.................. 1,482,408
409,850* Cisco Systems, Inc............. 30,994,907
68,600 Cognizant Corp................. 3,652,950
622,490 Compaq Computer Corp........... 17,001,758
211,230 Computer Associates
International, Inc.......... 11,089,574
49,400* Computer Sciences Corp......... 2,565,713
265,200* Dell Computer Corp............. 21,854,150
66,200* Digital Equipment Corp......... 3,632,725
213,500* E M C Corp..................... 8,846,906
180,554 First Data Corp................ 6,003,421
60,000* Gateway 2000, Inc.............. 2,703,750
45,300* General Instrument Corp........ 1,078,706
94,900 HBO & Co....................... 5,477,514
408,500 Hewlett Packard Co............. 25,378,062
58,500 Honeywell Inc.................. 4,910,344
382,700 International Business Machine. 44,919,412
988,700* Microsoft Corp................. 83,854,119
164,900* Novell, Inc ................... 1,731,450
412,687* Oracle Corp.................... 9,749,730
120,200* Parametric Technology Corp..... 3,684,887
112,900 Pitney Bowes Inc............... 5,306,300
96,300* Seagate Technology............. 2,226,938
58,100* Silicon Graphics, Inc.......... 697,200
161,400* Sun Microsystems, Inc.......... 6,466,088
137,600* 3Com Corp...................... 3,491,600
96,900* Unisys Corp.................... 2,374,050
138,900 Xerox Corp..................... 14,271,975
-----------
346,689,288
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- ------------
<S> <C> <C>
INSURANCE - CASUALTY - 0.41%
67,800 Chubb Corp..................... $ 5,394,337
27,800 Progressive Corp............... 3,832,925
58,000 SAFECO Corp.................... 2,697,000
56,442 St. Paul Companies, Inc........ 2,504,614
-----------
14,428,876
-----------
INSURANCE - LIFE - 0.67%
63,192 Aetna Inc...................... 4,940,825
101,400 Conseco Inc.................... 4,727,775
66,112 Jefferson-Pilot Corp........... 3,784,911
57,000 Lincoln National Corp.......... 5,122,875
54,900 Torchmark Corp................. 2,353,838
21,209 Transamerica Corp.............. 2,439,035
-----------
23,369,259
-----------
INSURANCE - MISCELLANEOUS - 0.50%
37,600 General Re Corp................ 8,267,300
31,600 MBIA, Inc...................... 2,356,175
51,200 MGIC Investment Corp........... 3,068,800
67,400 UNUM Corp...................... 3,744,913
-----------
17,437,188
-----------
INSURANCE - MULTILINE - 3.05%
183,820 Allstate Corp.................. 17,302,057
281,627 American International Group,
Inc......................... 34,868,942
52,400 Aon Corp....................... 3,356,875
110,400 CIGNA Corp..................... 7,562,400
54,000 Cincinnati Financial Corp...... 2,268,000
57,500 Hartford Financial Services
Group....................... 6,328,594
79,900 March & McLennan Companies,
Inc......................... 6,996,244
453,421 Travelers Group, Inc........... 27,658,681
-----------
106,341,793
-----------
LEISURE TIME - 0.06%
17,900 Brunswick Corp................. 562,731
70,900* Mirage Resorts, Inc............ 1,475,607
-----------
2,038,338
-----------
LODGING - 0.19%
108,800 Hilton Hotels Corp............. 3,420,400
94,000 Marriott International Inc..... 3,266,500
-----------
6,686,900
-----------
MACHINE TOOLS - 0.01%
4,700 Cincinnati Milacron, Inc....... 140,706
-----------
</TABLE>
61
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 7
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
MACHINERY - AGRICULTURE - 0.22%
38,000 Case Corp...................... $ 2,199,250
103,100 Deere & Co..................... 5,348,313
-----------
7,547,563
-----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.31%
158,400 Caterpillar Inc................ 8,702,100
34,200 Fluor Corp..................... 1,630,913
2,600 Foster Wheeler Corp............ 65,975
10,800 Harnischfeger Industries Inc... 340,200
-----------
10,739,188
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.60%
1,600 Aeroquip-Vickers, Inc.......... 98,800
14,600 Briggs & Stratton Corp......... 662,475
42,700 Cooper Industries, Inc......... 2,748,813
95,600 Dover Corp..................... 3,585,000
89,400 Illinois Tool Works Inc........ 5,900,400
64,300 Ingersoll-Rand Co.............. 2,897,518
32,000 Johnson Controls, Inc.......... 1,904,000
59,533 Pall Corp...................... 1,179,498
33,375 Parker Hannifin Corp........... 1,370,461
12,800 Timken Co...................... 481,600
-----------
20,828,565
-----------
MEDICAL TECHNOLOGY - 0.13%
68,900 Guidant Corp................... 4,439,744
-----------
MERCHANDISE - DRUG - 0.46%
75,600 CVS Corp....................... 5,306,175
16,600 Longs Drug Stores Corp......... 503,188
100,600 Rite Aid Corp.................. 3,602,738
191,400 Walgreen Co.................... 6,734,887
-----------
16,146,988
-----------
MERCHANDISE - SPECIALTY - 1.71%
41,000 American Greetings Corp.
Class A..................... 1,947,500
27,100 Circuit City Stores, Inc....... 1,148,363
53,600* Consolidated Stores Corp....... 2,046,849
95,522* CostCo Companies, Inc.......... 5,528,336
74,400 Fortune Brands, Inc........... 2,859,750
164,700 Gap, Inc....................... 8,893,800
304,200 Home Depot, Inc................ 23,898,712
49,600 Ikon Office Solutions Inc...... 1,050,900
973 Jostens, Inc................... 24,568
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
73,873 Limited, Inc................... $ 2,456,277
39,600 Nordstrom, Inc................. 2,853,675
33,600 Tandy Corp..................... 1,486,800
54,000 TJX Companies, Inc............. 2,524,500
109,525* Toys "R" Us, Inc............... 2,902,413
-----------
59,622,443
-----------
MERCHANDISING - DEPARTMENT - 0.64%
186,200 Dayton Hudson Corp............. 8,635,025
30,800 Dillards, Inc. Class A......... 1,295,525
90,800* Federated Department Stores,
Inc......................... 4,704,575
99,800 May Department Stores Co....... 6,418,388
16,000 Mercantile Stores Co., Inc..... 1,258,000
-----------
22,311,513
-----------
MERCHANDISING - FOOD - 0.57%
113,900 Albertsons, Inc................ 5,274,993
119,200 American Stores Co............. 2,972,550
17,400 Giant Food Inc. Class A........ 748,200
15,300 Great Atlantic & Pacific Tea
Co., Inc.................... 489,600
98,300* Kroger Co...................... 4,220,756
16,700 Supervalu Inc.................. 699,313
143,800 SYSCO Corp..................... 3,352,338
52,000 Winn-Dixie Stores, Inc......... 2,115,750
-----------
19,873,500
-----------
MERCHANDISING - MASS - 2.03%
109,900 J.C. Penney Co., Inc........... 7,892,194
190,300* Kmart Corp..................... 3,687,063
148,400 Sears Roebuck and Co........... 9,172,975
891,800 Wal-Mart Stores, Inc........... 49,216,212
35,000 Woolworth Corp................. 691,250
-----------
70,659,694
-----------
METALS - ALUMINUM - 0.25%
76,500 Alcan Aluminium Ltd............ 2,180,250
67,200 Aluminum Co. of America........ 4,662,000
33,100 Reynolds Metals Co............. 1,919,800
-----------
8,762,050
-----------
METALS - COPPER - 0.11%
19,300 ASARCO Inc..................... 437,869
67,631 Newmont Mining Corp............ 1,686,548
27,200 Phelps Dodge Corp.............. 1,659,200
-----------
3,783,617
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
METALS - MISCELLANEOUS - 0.09%
31,350 Cyprus Amax Minerals Co........$ 497,681
57,075 Engelhard Corp................. 1,187,874
48,500 Freeport - McMoRan Copper &
Gold Inc. Class B........... 812,375
52,400 Inco Limited................... 753,250
-----------
3,251,180
-----------
METALS - STEEL - 0.20%
59,525 Allegheny Teldyne Inc.......... 1,383,956
22,300* Armco Inc...................... 121,256
46,100* Bethlehem Steel Corp........... 564,725
20,200 Inland Steel Industries, Inc... 578,225
31,100 Nucor Corp..................... 1,601,650
48,920 USX-US Steel Group, Inc........ 1,755,005
53,625 Worthington Industries, Inc.... 945,141
-----------
6,949,958
-----------
MISCELLANEOUS - 0.16%
51,800 BB&T Corp...................... 3,428,513
57,800 Equifax Inc.................... 2,102,475
-----------
5,530,988
-----------
MOBILE HOMES - 0.02%
14,600 Fleetwood Enterprises, Inc..... 584,000
-----------
NATURAL GAS-DIVERSIFIED - 0.13%
43,900 Coastal Corp................... 3,094,950
37,900 Sonat Inc...................... 1,485,206
-----------
4,580,156
-----------
OIL - INTEGRATED DOMESTIC - 1.57%
35,700 Amerada Hess Corp.............. 1,930,031
405,000 Amoco Corp..................... 16,934,063
26,900 Ashland Oil, Inc............... 1,341,638
125,800 Atlantic Richfield Co.......... 9,922,475
69,067 Burlington Resources, Inc..... 2,909,447
19,400 Kerr-McGee Corp................ 1,227,050
150,600 Occidental Petroleum Corp...... 4,160,325
40,800* Oryx Energy Co................. 951,150
18,500 Pennzoil Co.................... 1,069,531
96,300 Phillips Petroleum Co.......... 4,821,019
40,916 Sun Co., Inc................... 1,738,930
105,400 Unocal Corp.................... 3,754,875
114,100 USX-Marathon Group............. 3,993,500
-----------
54,754,034
-----------
</TABLE>
62
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
8 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- ------------
<S> <C> <C>
OIL - INTEGRATED
INTERNATIONAL - 5.04%
262,000 Chevron Corp................... $ 20,927,250
973,700 Exxon Corp..................... 68,645,850
320,500 Mobil Corp..................... 24,999,000
853,300 Royal Dutch Petroleum Co.
- ADR ....................... 47,838,130
226,900 Texaco Inc..................... 13,103,475
------------
175,513,705
------------
OIL - SERVICES - 0.90%
58,800 Baker Hughes Inc............... 2,116,800
85,500 Dresser Industries, Inc........ 3,981,094
115,000 Halliburton Co................. 5,448,125
34,300 McDermott International, Inc... 1,309,831
35,500* Rowan Companies, Inc........... 907,469
193,400 Schlumberger Ltd............... 15,097,287
26,800* Western Atlas Inc.............. 2,319,875
------------
31,180,481
------------
OIL/GAS PRODUCERS - 0.15%
25,300 Anadarko Petroleum Corp........ 1,669,800
33,700 Apache Corp.................... 1,152,119
6,000 Helmerich & Payne, Inc......... 151,500
113,842 Union Pacific Resources Group
Inc......................... 2,305,300
------------
5,278,719
------------
PAPER/FOREST PRODUCTS - 1.18%
54,200 Avery Dennison Corp............ 2,808,238
10,566 Boise Cascade Corp............. 352,640
45,400 Champion International Corp.... 2,179,200
88,000 Fort James Corp................ 4,207,500
39,200 Georgia-Pacific Corp........... 2,516,150
127,718 International Paper Co......... 5,875,028
240,432 Kimberly-Clark Corp............ 11,916,410
41,600 Louisiana Pacific Corp......... 829,400
39,200 Mead Corp...................... 1,220,100
4,900 Potlatch Corp.................. 214,681
57,364* Stone Container Corp........... 1,018,211
35,450 Union Camp Corp................ 1,938,672
26,850 Westvaco Corp.................. 765,225
79,500 Weyerhaeuser Co................ 4,039,594
35,000 Willamette Industries, Inc..... 1,200,938
------------
41,081,987
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
PHOTOGRAPHY - 0.29%
130,750 Eastman Kodak Co............... $ 9,332,282
18,100 Polaroid Corp.................. 734,181
-----------
10,066,463
-----------
POLLUTION CONTROL - 0.30%
83,300 Browning-Ferris Industries,
Inc......................... 2,962,356
97,400* Laidlaw Inc.................... 1,205,325
198,000 Waste Management, Inc.......... 6,435,000
-----------
10,602,681
-----------
PUBLISHING - NEWS - 0.53%
35,600 Dow Jones & Co., Inc........... 1,713,250
112,000 Gannett Co., Inc............... 7,385,000
42,400 Knight-Ridder, Inc............. 2,419,450
27,500 New York Times Co. Class A... 1,938,750
40,632 Times Mirror Co................ 2,600,448
36,300 Tribune Co..................... 2,427,563
-----------
18,484,461
-----------
PUBLISHING/PRINTING - 0.31%
50,800 Deluxe Corp.................... 1,704,975
64,500 Dun & Bradstreet Corp.......... 2,176,875
19,217 Harcourt General, Inc.......... 1,047,327
30,100 McGraw-Hill, Inc............... 2,353,443
21,600 Moore Corp. Ltd................ 313,200
71,800 R R Donnelley and Son.......... 3,231,000
-----------
10,826,820
-----------
RAILROAD - 0.60%
68,517 Burlington Northern Santa Fe... 6,817,441
76,600 CSX Corp....................... 3,648,075
170,400 Norfolk Southern Corp.......... 5,335,650
103,600 Union Pacific Corp............. 5,011,650
-----------
20,812,816
-----------
RESTAURANTS - 0.65%
55,800 Darden Restaurants, Inc........ 861,413
285,000 McDonald's Corp................ 18,703,124
77,920* Tricon Global Restaurants, Inc. 2,420,390
30,000 Wendy's International, Inc..... 740,625
-----------
22,725,552
-----------
SAVINGS & LOAN - 0.38%
25,100 Golden West Financial Corp..... 2,710,800
31,700 H.F. Ahmanson & Co............. 2,417,125
113,925 Washington Mutual, Inc......... 8,045,953
-----------
13,173,878
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
SECURITIES RELATED - 1.22%
97,650 Charles Schwab Corp............ $ 3,222,450
95,500 Franklin Resources, Inc........ 4,667,562
45,600 Lehman Brothers Hldings, Inc... 3,234,750
134,900 Merrill Lynch & Co., Inc....... 12,073,550
249,201 Morgan St Dean Witter Discover. 19,453,254
-----------
42,651,566
-----------
SEMICONDUCTOR EQUIPMENT - 0.19%
158,000* Applied Materials, Inc......... 5,056,000
42,600* KLA-Tencor Corp................ 1,443,075
-----------
6,499,075
-----------
SEMICONDUCTORS - 2.21%
57,700* Advanced Micro Devices, Inc.... 1,125,150
653,300 Intel Corp..................... 46,670,118
55,500* LSI Logic Corp................. 1,182,844
93,300* Micron Technology, Inc......... 2,198,381
231,600 Motorola, Inc.................. 12,260,325
51,000* National Semiconductor Corp.... 828,750
95,400 Rockwell International Corp.... 5,247,000
146,900 Texas Instruments Inc.......... 7,546,988
-----------
77,059,556
-----------
TELECOMMUNICATIONS - 2.70%
211,200* Airtouch Communications, Inc... 10,058,400
56,300 ALLTEL Corp.................... 2,220,331
32,335* Andrew Corp.................... 710,361
57,000* DSC Communications Corp........ 974,347
54,300 Frontier Corp.................. 1,652,756
43,800 Harris Corp.................... 2,110,613
515,980 Lucent Technologies, Inc....... 36,602,330
89,900* Nextel Communications, Inc.
Class A....................... 2,118,269
203,200 Northern Telecom Ltd........... 13,004,800
29,500 Scientific-Atlanta, Inc........ 650,844
80,100* Tellabs, Inc................... 5,504,376
402,600* WorldCom, Inc.................. 18,318,300
-----------
93,925,727
-----------
TEXTILE - PRODUCTS - 0.09%
26,100 Russell Corp................... 711,225
48,800 V F Corp....................... 2,595,550
-----------
3,306,775
-----------
</TABLE>
63
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 9
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
TOBACCO - 1.13%
981,900 Philip Morris Cos Inc.......... $36,698,512
94,300 UST Inc........................ 2,510,738
-----------
39,209,250
-----------
UTILITIES - COMMUNICATION - 5.50%
654,926 AT & T Corp.................... 39,868,620
451,400 Ameritech Corp................. 19,156,288
327,505 Bell Atlantic Corp............. 30,007,646
384,700 BellSouth Corp................. 24,813,149
403,300 GTE Corp....................... 23,517,431
285,000 MCI Communications Corp........ 15,238,608
733,358 SBC Communications, Inc........ 28,509,291
145,500 Sprint Corp.................... 10,439,625
-----------
191,550,658
-----------
UTILITIES - ELECTRIC - 2.39%
38,300 Ameren Corp.................... 1,498,488
67,000 American Electric Power, Inc... 3,040,125
35,200 Baltimore Gas and Electric Co.. 1,071,400
60,100 Carolina Power & Light Co...... 2,464,100
105,700 Central & South West Corp...... 2,794,444
42,964 Cinergy Corp................... 1,388,274
114,200 Consolidated Edison, Inc....... 4,889,187
57,650 Dominion Resources, Inc........ 2,287,984
42,300 DTE Energy Co.................. 1,673,494
154,451 Duke Energy Corp............... 8,900,238
170,200 Edison International........... 5,020,900
126,300 Entergy Corp................... 3,323,269
74,200 FirstEnergy Corp............... 2,202,813
87,100 FPL Group, Inc................. 5,351,206
32,600 GPU Inc........................ 1,255,100
168,979 Houston Industries, Inc........ 4,837,023
37,500* Niagara Mohawk Power Corp...... 464,063
26,000 Northern States Power Co....... 1,478,750
161,800 P G & E Corp................... 5,096,700
44,500 P P & L Resources Inc.......... 984,563
85,800 PacifiCorp..................... 1,978,763
109,300 Peco Energy Co................. 3,087,725
121,150 Public Serv Enterprise Group... 4,005,522
262,200 Southern Co.................... 6,964,687
109,420 Texas Utilities Co............. 4,322,090
83,800 Unicom Corp.................... 2,880,625
-----------
83,261,533
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
----------- -----------
<S> <C> <C>
UTILITIES - GAS, DISTRIBUTION - 0.03%
23,700 NICOR Inc...................... $ 915,413
-------------
UTILITIES - GAS, PIPELINE - 0.56%
25,200 Columbia Energy Group.......... 2,126,250
44,100 Consolidated Natural Gas Co.... 2,494,406
142,000 Enron Corp..................... 7,117,750
18,300 ONEOK Inc...................... 714,844
16,400 Pacific Enterprises............ 624,225
2,200 Peoples Energy Corp............ 81,125
196,500 Williams Companies, Inc........ 6,373,969
-------------
19,532,569
-------------
TOTAL COMMON STOCKS
(Cost $1,669,898,794)........ 3,456,579,262
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
-----------
<C> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 0.52%
FINANCE COMPANIES - 0.14%
$5,060,000 Ford Motor Credit Co.
5.45% due 6/1/98.............. 5,060,000
-----------
SECURITIES RELATED - 0.38%
Merrill Lynch & Co.:
7,248,000 5.60% due 6/3/98.............. 7,245,745
6,000,000 5.58% due 6/2/98.............. 5,999,070
-----------
13,244,815
-----------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $18,304,815)............. 18,304,815
-----------
UNITED STATES GOVERNMENT -
SHORT TERM - 0.04%
U.S. TREASURY BILLS - 0.04%
United States Treasury Bills:
1,100,000 4.94% due 6/4/98.............. 1,099,547
100,000 4.91% due 6/4/98.............. 99,959
100,000 4.85% due 6/4/98.............. 99,960
-----------
1,299,466
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C>
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $1,299,466)............ $ 1,299,466
--------------
TOTAL INVESTMENTS
(Cost $1,689,503,075) -
99.81%.................... 3,476,183,543
Other assets and liabilities,
net - 0.19%.................. 6,471,280
--------------
NET ASSETS (equivalent
to $33.38 per share on
104,333,547 shares
outstanding) - 100%......... $3,482,654,823
--------------
* Non-income producing
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ------------- -------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 5/31/98)
71(2) S&P 500 Index Futures
(June/$1,090.80)........... $ (390,837)
-------------
</TABLE>
(1)U.S.Treasury Bills with a market value of
approximately $1,300,000 were maintained
in a segregated account with a portion
placed as collateral for futures
contracts.
(2)Per 250
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
104,333,547 shares outstanding........ $ 1,043,335
Additional paid in capital.............. 1,679,728,220
Undistributed net realized gain on
securities......................... 15,215,726
Undistributed net investment income..... 377,911
--------------
Unrealized appreciation (depreciation) of:
Investments........... $1,786,680,468
Futures .............. (390,837) 1,786,289,631
------------- --------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING........................... $3,482,654,823
==============
</TABLE>
64
<PAGE>
================================================================================
STOCK INDEX FUND - FINANCIAL STATEMENTS
10
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ............................................................................... $ 47,362,348
Interest ................................................................................ 1,373,987
------------
Total investment income ............................................................... 48,736,335
------------
EXPENSES:
Advisory fees ........................................................................... 7,946,046
Custodian and accounting services ....................................................... 669,324
Reports to shareholders ................................................................. 249,861
Audit fees and tax services ............................................................. 83,909
Directors' fees and expenses ............................................................ 58,141
Miscellaneous ........................................................................... 161,192
------------
Total expenses ........................................................................ 9,168,473
------------
NET INVESTMENT INCOME ................................................................... 39,567,862
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain on:
Investments ........................................................ $ 10,730,926
Futures contracts .................................................. 6,012,002 16,742,928
------------
Net unrealized appreciation (depreciation) during the year:
Investments ........................................................ 714,529,418
Futures contracts .................................................. (714,337) 713,815,081
------------ ------------
Net realized and unrealized gain on securities during the year ........................ 730,558,009
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................ $770,125,871
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................................... $ 39,567,862 $ 35,492,537
Net realized gain on securities ................................. 16,742,928 14,778,898
Net unrealized appreciation of securities during the year ....... 713,815,081 489,128,221
--------------- ---------------
Increase in net assets resulting from operations .............. 770,125,871 539,399,656
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................... (39,570,522) (35,484,625)
Net realized gain on securities ................................. (14,847,655) (14,806,928)
--------------- ---------------
Decrease in net assets resulting from distributions
to shareholders ............................................... (54,418,177) (50,291,553)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................................ 367,059,600 241,746,270
Proceeds from capital stock issued for distributions
reinvested .................................................... 54,418,177 50,291,553
--------------- ---------------
421,477,777 292,037,823
Cost of capital stock repurchased ............................... (98,730,173) (97,732,690)
--------------- ---------------
Increase in net assets resulting from capital stock
transactions .................................................. 322,747,604 194,305,133
--------------- ---------------
TOTAL INCREASE IN NET ASSETS .................................... 1,038,455,298 683,413,236
NET ASSETS:
Beginning of year ............................................... 2,444,199,525 1,760,786,289
--------------- ---------------
End of year (including undistributed net investment income
of $377,911 and $380,571) ..................................... $ 3,482,654,823 $ 2,444,199,525
=============== ===============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold .................................... 12,118,343 10,718,393
Shares issued for distributions reinvested ...................... 1,806,919 2,200,590
Shares of capital stock repurchased ............................. (3,279,150) (4,348,853)
--------------- ---------------
Increase in shares outstanding ................................ 10,646,112 8,570,130
Shares outstanding:
Beginning of year ............................................. 93,687,435 85,117,305
--------------- ---------------
End of year ................................................... 104,333,547 93,687,435
=============== ===============
</TABLE>
65
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS
May 31, 1998 11
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS - 99.36%
AEROSPACE/DEFENSE - 0.93%
29,180 Gencorp Inc.................... $ 869,929
49,400* SCI Systems, Inc............... 1,685,775
7,500* Sequa Corp. Class A............ 518,438
51,874 Sunstrand Corp................. 3,216,188
29,420 Teleflex Inc................... 1,189,671
-----------
7,480,001
-----------
AIRLINES - 0.22%
13,021* Alaska Air Group, Inc.......... 603,035
28,974 ASA Holdings, Inc.............. 1,139,040
-----------
1,742,075
-----------
APPAREL & PRODUCTS - 0.89%
77,306 Cintas Corp.................... 3,531,918
43,671 Claire's Stores, Inc........... 821,561
27,324* Land's End, Inc................ 882,907
47,000 Warnaco Group Inc. Class A..... 1,938,750
-----------
7,175,136
-----------
APPLIANCES/FURNISHINGS - 0.99%
39,859 Heilig-Meyers Co............... 478,308
79,656 Herman Miller, Inc............. 2,205,476
37,801 Lancaster Colony Corp.......... 1,516,765
75,176 Leggett & Platt, Inc........... 3,777,594
-----------
7,978,143
-----------
AUTO - CARS - 0.75%
130,340 Harley-Davidson, Inc........... 4,659,655
57,000 Meritor Automotive, Inc........ 1,371,563
-----------
6,031,218
-----------
AUTO - ORIGINAL EQUIPMENT - 1.34%
19,725 Arvin Industries, Inc.......... 731,058
22,900 Carlisle Cos Inc............... 1,107,788
46,942 Danaher Corp................... 3,394,493
38,836 Donaldson Co., Inc............. 847,110
34,670 Federal-Mogul Corp............. 2,052,031
50,245 Mark IV Industries, Inc........ 1,105,390
24,928 Modine Manufacturing Co........ 847,552
23,200 Superior Industries
International, Inc........... 675,700
-----------
10,761,122
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
AUTO - REPLACEMENT PARTS - 0.16%
31,642 Kaydon Corp.................... $ 1,247,881
-----------
BANKS - OTHER - 1.48%
109,204 First Tennessee National Corp.. 3,467,227
116,100 Firstar Corp................... 4,259,418
70,900 Union Planters Corp............ 4,147,650
-----------
11,874,295
-----------
BANKS - REGIONAL - 5.81%
40,000 Associated Banc-Corp........... 1,980,000
38,455 City National Corp............. 1,413,221
88,972 Crestar Financial Corp......... 5,110,328
139,211 First Security Corp............ 3,167,050
39,862 First Virginia Banks, Inc...... 2,082,790
106,400 Hibernia Corp. Class A......... 2,234,400
79,448 Marshall & Ilsley Corp......... 4,290,192
57,534 Mercantile Bankshares Corp..... 2,049,649
106,650 North Fork Bancorporation Inc.. 2,566,266
76,400 Old Kent Financial Corp........ 3,046,450
64,468 Pacific Century Finl Corp...... 1,615,729
112,718 Regions Financial Corp......... 4,635,528
132,030 SouthTrust Corp................ 5,355,466
73,000 TCF Financial Corp............. 2,377,063
28,678 Wilmington Trust Corp.......... 1,738,604
59,700 Zions Bancorporation........... 3,044,700
-----------
46,707,436
-----------
BEVERAGE - SOFT DRINKS - 1.47%
314,009 Coca Cola Enterprises, Inc..... 11,794,963
-----------
BROADCASTING - 0.66%
50,228 A.H. Belo Corp................. 2,586,741
26,192* Chris-Craft Industries, Inc.... 1,376,717
22,416 TCA Cable TV, Inc.............. 1,365,975
-----------
5,329,433
-----------
BUILDING MATERIALS - 1.39%
18,366 CalMat Co...................... 461,446
34,000 Fastenal Co.................... 1,683,000
49,050 Hon Industries Inc............. 1,569,600
38,500 Martin Marietta Materials...... 1,771,000
79,456 RPM, Inc....................... 1,350,751
17,900 Southdown, Inc................. 1,174,687
28,200 Vulcan Materials Co............ 3,200,700
-----------
11,211,184
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
CHEMICAL - MAJOR - 0.63%
44,425 Albemarle Corp................. $ 1,080,083
18,700 Borg-Warner Automotive, Inc.... 1,065,900
106,100 Solutia Inc.................... 2,911,119
-----------
5,057,102
-----------
CHEMICAL - MISCELLANEOUS - 2.28%
29,173 A. Schulman, Inc............... 579,813
53,200* Airgas, Inc.................... 807,975
27,080 Betz Laboratories, Inc......... 1,333,690
64,937 Crompton & Knowles Corp........ 1,749,240
36,000* Cytec Industries, Inc.......... 1,764,000
19,368 Dexter Corp.................... 798,930
49,000 Ethyl Corp..................... 346,063
31,570 Ferro Corp..................... 903,691
26,833 Georgia Gulf Corp.............. 672,502
11,264 H.B. Fuller Co................. 705,408
37,193 Lawter International, Inc...... 357,983
52,619 Lubrizol Corp.................. 1,828,510
64,278 Lyondell Petrochemical Co...... 2,004,670
42,336 M.A. Hanna Co.................. 849,366
18,100 Minerals Technologies Inc...... 958,169
5,955 NCH Corp....................... 379,259
40,242 Olin Corp...................... 1,740,467
28,425 Rollins, Inc................... 586,266
-----------
18,366,002
-----------
CONGLOMERATES - 1.36%
39,698 Alexander & Baldwin, Inc....... 1,141,318
80,900 Dial Corp...................... 2,007,331
37,000* Litton Industries, Inc......... 2,143,687
6,200 MAXXAM, Inc.................... 365,413
40,200 Ogden Corp..................... 1,148,213
78,400 Viad Corp...................... 2,116,800
91,500 Whitman Corp................... 1,984,406
-----------
10,907,168
-----------
CONSUMER FINANCE - 0.71%
56,900 Capital One Financial Corp..... 5,679,331
-----------
CONTAINERS - PAPER - 0.46%
18,914 Chesapeake Corp................ 671,447
86,280 Sonoco Products Co............. 3,014,394
-----------
3,685,841
-----------
</TABLE>
66
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
12 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
DRUGS - 4.03%
44,180 Bergen Brunswig Corp. Cl A..... $ 1,833,470
63,552* Biogen, Inc.................... 2,796,288
37,246 Carter-Wallace Inc............. 663,444
59,488* Centocor, Inc.................. 2,320,032
139,180 Chiron Corp.................... 2,513,939
55,625* Covance Inc.................... 1,178,555
66,482* Forest Laboratories, Inc....... 2,193,906
61,442* Genzyme Corp................... 1,681,975
56,700 ICN Pharmaceuticals, Inc....... 2,448,731
109,736* IVAX Corp...................... 1,008,200
73,700 McKesson Corp.................. 5,757,812
105,534 Mylan Laboratories Inc......... 3,166,020
19,100 R.P. Scherer Corp.............. 1,576,944
75,500* Watson Pharmaceuticals, Inc.... 3,303,125
-----------
32,442,441
-----------
ELECTRICAL EQUIPMENT - 1.59%
82,086* American Power Conversion...... 2,462,580
29,031 AMETEK, Inc.................... 838,270
53,970 Hubbell Inc. Class B........... 2,539,963
125,957 Molex Inc...................... 3,511,051
68,846* Teradyne, Inc.................. 2,117,015
41,800* UCAR International, Inc........ 1,337,600
-----------
12,806,479
-----------
ELECTRONIC INSTRUMENTS - 1.24%
80,552* Arrow Electronics, Inc......... 2,028,904
39,450* Imation Corp................... 717,497
72,000* Integrated Device Technology... 675,000
25,521* MagnaTek, Inc.................. 432,262
33,800 Pittston Brink's Group......... 1,307,638
59,579* Sensormatic Electronics Corp... 763,356
47,413 Symbol Technologies, Inc....... 1,668,345
24,316 Varian Associates, Inc......... 1,168,688
54,313* Vishay Intertechnology, Inc... 1,211,867
-----------
9,973,557
-----------
ENTERTAINMENT - 0.14%
34,800* GTECH Holdings Corp............ 1,128,825
-----------
FERTLIIZERS - 0.36%
88,946* IMC Global, Inc................ 2,890,745
-----------
FINANCE COMPANIES - 0.41%
59,800 Finova Group, Inc.............. 3,307,688
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
FOODS - 2.99%
32,282 Dean Foods Co.................. $ 1,589,889
48,109 Dole Food Co., Inc............. 2,222,034
27,036 Dreyer's Grand Ice Cream, Inc.. 684,349
80,204 Flowers Industries, Inc........ 1,654,208
63,000 Hormel Foods Corp.............. 2,118,375
74,000 IBP, Inc....................... 1,433,750
14,612 International Multifoods Corp.. 434,707
59,600 Interstate Bakeries Corp....... 1,922,100
22,871 J.M. Smucker Co. Class A....... 544,616
24,771 Lance, Inc..................... 520,191
67,178 McCormick & Co., Inc........... 2,250,463
34,621 Trinity Industries, Inc........ 1,653,153
182,386 Tyson Foods, Inc. Class A...... 3,852,903
39,200* U. S. Foodservice.............. 1,298,500
44,258 Universal Foods Corp........... 1,053,894
37,200* Vlasic Foods Int'l Inc......... 806,775
-----------
24,039,907
-----------
FOOTWEAR - 0.36%
28,800* Nine West Group, Inc........... 811,800
30,100* Payless ShoeSource, Inc........ 2,108,881
-----------
2,920,681
-----------
FREIGHT - 0.37%
37,246 Airborne Freight Corp.......... 1,387,413
34,700 J.B. Hunt Transport Services,
Inc.......................... 1,038,831
30,271 Overseas Shipholding Group..... 586,501
Inc. -----------
3,012,745
-----------
FUNERAL SERVICES - 0.29%
86,200 Stewart Enterprises Inc........ 2,327,400
-----------
HEALTHCARE - 3.34%
45,000 Allegiance Corp................ 2,250,000
49,000* Apria Healthcare Group, Inc.... 373,625
426* Coram Healthcare Corp.......... 879
26,286* First Health Group Corp........ 1,493,373
104,949* Foundation Health Systems
Class A...................... 3,194,385
131,600 Health Management Assoc........ 3,923,325
49,391* NovaCare, Inc.................. 543,301
63,000 Omnicare, Inc.................. 2,208,938
65,500* Oxford Health Plans, Inc....... 1,129,875
34,574* PacifiCare Health System, Inc.
Class B....................... 2,856,678
59,700* Quintiles Transnational Corp... 2,902,912
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
HEALTHCARE - Continued
66,800* Quorum Health Group Inc........ $ 2,008,175
78,000* Sybron International Corp...... 1,867,125
67,900* Total Renal Care Holdings...... 2,083,681
-----------
26,836,272
-----------
HEAVY DUTY TRUCKS/PARTS - 0.20%
17,000 Bandag, Inc.................... 786,250
37,404 Federal Signal Corp............ 836,915
-----------
1,623,165
-----------
HOME BUILDERS - 0.22%
95,125 Clayton Homes, Inc............. 1,789,539
-----------
HOSPITAL MANAGEMENT - 0.51%
87,000* Beverly Enterprises, Inc....... 1,245,188
43,400* Concentra Managed Care, Inc.... 1,014,475
36,900 Health Care & Retirement Corp.. 1,427,568
60,400* Medaphis Corp.................. 453,000
-----------
4,140,231
-----------
HOSPITAL SUPPLIES - 1.38%
11,410 ATL Ultrasound, Inc............ 517,017
26,335* Acuson Corp.................... 503,658
22,733 Beckman Coulter Inc............ 1,267,366
43,400 DENTSPLY International Inc..... 1,464,751
55,200 Hillenbrand Industries, Inc.... 3,408,601
62,700* PSS World Medical, Inc......... 783,750
77,082 Stryker Corp................... 3,141,093
-----------
11,086,236
-----------
HOUSEHOLD PRODUCTS - 0.89%
59,700* Bed Bath & Beyond, Inc......... 2,996,194
16,014 Church & Dwight Co., Inc....... 485,424
22,300* Culligan Water Technologies.... 1,244,619
32,446 First Brands Corp.............. 807,094
50,200 Premark International Inc...... 1,609,538
-----------
7,142,869
-----------
HUMAN RESOURCES - 1.08%
30,603 Kelly Services Inc. Class A.... 1,124,660
65,800 Manpower Inc................... 2,825,288
63,950 Olsten Corp.................... 795,378
77,700* Robert Half International, Inc. 3,933,562
-----------
8,678,888
-----------
</TABLE>
67
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 13
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
INFORMATION PROCESSING - 10.42%
46,373* A.C. Nielson................... $ 1,197,003
173,300* America Online, Inc............ 14,438,056
171,808* BMC Software, Inc.............. 7,913,906
59,458 Comdisco, Inc.................. 2,162,785
146,000* Compuware Corp................. 6,706,875
35,000 Comverse Technology, Inc....... 1,748,908
58,051 Diebold, Inc................... 1,697,992
48,900* Electronic Arts................ 2,127,150
45,864* Fiserv, Inc.................... 2,704,545
22,768* Information Resources, Inc..... 398,440
125,700* Informix Corp.................. 856,331
54,800* Keane, Inc..................... 2,459,150
56,800* Lexmark Intl Group, Inc........ 3,152,400
52,107* Mentor Graphics Corp........... 576,434
86,373* NCR Corp....................... 2,931,284
60,300* Networks Associates, Inc....... 3,693,375
16,971 OEA, Inc....................... 290,628
140,286 Paychex, Inc................... 5,050,279
14,618* Policy Management Systems
Corp.......................... 1,205,985
112,492* Quantum Corp................... 2,460,763
73,208 Reynolds and Reynolds Co.
Class A...................... 1,532,793
35,225* Sequent Computer Systems, Inc.. 583,414
92,000* Solectron Corp................. 3,806,500
74,152* Sterling Commerce Inc.......... 2,942,908
58,500* Sterling Software, Inc......... 1,590,469
45,990* Storage Technology Corp........ 3,857,411
18,525* Stratus Computer, Inc.......... 668,058
32,595* Structural Dynamic Research
Corp......................... 825,061
88,100* SunGard Data Systems, Inc...... 3,006,413
50,612* Symantec Corp.................. 1,208,362
-----------
83,793,678
-----------
INSURANCE - CASUALTY - 0.52%
47,333 American Financial Group, Inc.. 2,138,860
27,027 Transatlantic Holdings, Inc.... 2,021,958
-----------
4,160,818
-----------
INSURANCE - MISCELLANEOUS - 0.82%
61,500 AMBAC Financial Group Inc...... 3,363,281
24,699 HSB Group Inc.................. 1,086,756
29,000 PMI Group Inc.................. 2,180,438
-----------
6,630,475
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
INSURANCE - MULTILINE - 1.75%
110,025 AFLAC Inc...................... $ 7,034,723
107,100 Old Republic International
Corp......................... 3,052,350
108,172 Provident Companies Inc........ 3,988,843
-----------
14,075,916
-----------
LEISURE TIME - 0.63%
66,400 Callaway Golf Co............... 1,369,500
78,425* Circus Circus Enterprises...... 1,392,044
92,802 International Game Technology.. 2,291,049
-----------
5,052,593
-----------
LODGING - 0.40%
74,257* Promus Hotel Corp.............. 3,211,615
-----------
MACHINERY - AGRICULTURE - 0.16%
50,200 AGCO Corp...................... 1,261,275
-----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.14%
15,171 Granite Construction, Inc...... 428,581
21,268* Jacobs Engineering Group, Inc.. 683,235
-----------
1,111,816
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 1.05%
24,573 Albany International Corp.
Class A...................... 712,617
29,722 Cordant Technologies Inc....... 1,482,385
28,718 Flowserve Corp................. 832,822
27,800 Newport News Shipbuilding...... 778,400
14,414 Nordson Corp................... 655,837
26,633 Stewart & Stevenson Services,
Inc.......................... 552,635
17,600 Tecumseh Products Co. Class A.. 877,800
53,292 Tidewater, Inc................. 2,025,096
21,724 Watts Industries, Inc. Class A. 506,441
-----------
8,424,033
-----------
MERCHANDISE - DRUG - 0.09%
62,900* Perrigo Co..................... 691,900
-----------
MERCHANDISE - SPECIALTY - 4.79%
28,386* BJ's Wholesale Club Inc........ 1,121,247
53,500* Barnes & Noble, Inc............ 1,812,313
72,400* Best Buy Co., Inc.............. 2,362,050
75,400* CompUSA, Inc................... 1,187,550
120,190 Dollar General Corp............ 4,582,243
15,764 Enesco Group Inc............... 481,787
37,100 Fingerhut Companies, Inc....... 1,087,494
70,800* General Nutrition Cos., Inc.... 2,234,625
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
125,800* Kohl's Corp.................... $ 5,983,363
28,500* Micro Warehouse, Inc........... 498,750
130,437* Office Depot, Inc.............. 3,847,892
110,300* OfficeMax, Inc................. 1,813,056
45,311 Sotheby's Holdings, Inc.
Class A...................... 1,042,153
206,225* Staples, Inc................... 5,181,403
29,436 Tiffany & Co................... 1,409,249
114,200* US Office Products, Co......... 1,934,263
68,900 Viking Office Products, Inc.... 1,970,113
-----------
38,549,551
-----------
MERCHANDISING - DEPARTMENT - 0.52%
75,400* Proffit's Inc.................. 2,959,450
52,500* Saks Holding, Inc.............. 1,237,031
-----------
4,196,481
-----------
MERCHANDISING - FOOD - 0.27%
34,700 Hannaford Bros. Co............. 1,533,306
36,200 Ruddick Corp................... 647,075
-----------
2,180,381
-----------
MERCHANDISING - MASS - 0.93%
141,720 Family Dollar Stores, Inc...... 2,347,238
119,900* Fred Meyer, Inc................ 5,155,700
-----------
7,502,938
-----------
METALS - ALUMINUM - 0.26%
44,167* Alumax Inc..................... 2,067,568
-----------
METALS - MISCELLANEOUS - 0.31%
13,600 Brush Wellman Inc.............. 331,500
21,306 Kennametal, Inc................ 1,025,351
19,350 Precision Castparts Corp....... 1,115,044
-----------
2,471,895
-----------
METALS - STEEL - 0.55%
47,800 AK Steel Holding Corp.......... 890,275
15,710 Carpenter Technology Corp...... 832,630
9,157 Cleveland-Cliffs Inc........... 484,749
39,742 Harsco Corp.................... 1,733,745
21,123 Oregon Steel Mills, Inc........ 510,913
-----------
4,452,312
-----------
MISCELLANEOUS - 0.18%
65,400* Corrections Corp. of America... 1,487,850
-----------
</TABLE>
68
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
14 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
MULTIMEDIA - 1.08%
176,956* Cadence Design Systems, Inc.... $ 6,237,699
57,300* Synopsys Inc................... 2,460,319
-----------
8,698,018
-----------
NATURAL GAS - DIVERSIFIED - 0.79%
104,400 El Paso Natural Gas Co......... 4,032,450
33,343 Questar Corp................... 1,352,475
59,632* Seagull Energy Corp............ 987,655
-----------
6,372,580
-----------
OIL - INTEGRATED DOMESTIC - 0.08%
37,114 Quaker State Corp.............. 628,618
-----------
OIL - INTEGRATED
INTERNATIONAL - 0.23%
36,446 Murphy Oil Corp................ 1,833,689
-----------
OIL - SERVICE - PRODUCTS - 1.37%
61,842* BJ Services Co................. 2,021,460
79,168* Evi Weatherford Inc,........... 4,002,928
105,700 Noble Drilling Corp............ 3,118,150
61,125* Parker Drilling Co............. 515,742
51,372* Varco International, Inc....... 1,338,883
-----------
10,997,163
-----------
OIL - SERVICES - 2.45%
32,900 Camco International, Inc....... 2,294,775
115,700 ENSCO International, Inc....... 2,928,656
137,915* Global Marine Inc.............. 3,077,229
87,439* Nabors Industries, Inc......... 2,060,281
33,446* Smith International, Inc....... 1,640,944
85,300 Transocean Offshore, Inc....... 4,206,357
46,046 Witco Corp..................... 1,746,870
34,300 York International Corp........ 1,715,000
-----------
19,670,112
-----------
OIL/GAS PRODUCERS - 1.50%
55,380 Cabot Corp..................... 1,844,846
49,935* Noble Affiliates, Inc.......... 1,950,586
86,670* Ocean Energy, Inc.............. 1,738,817
89,300 Pioneer Natural Resources Corp. 2,098,550
85,366* Ranger Oil Ltd................. 549,544
74,380 Ultramar Diamond Shamrock Corp. 2,375,511
46,991 Valero Energy Corp............. 1,533,081
-----------
12,090,935
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
PAPER/FOREST PRODUCTS - 1.48%
36,339 Bowater Inc.................... $ 1,839,662
72,070 Consolidated Papers, Inc....... 2,085,526
79,200 Georgia-Pacific Corp. Timber
Group........................ 1,866,150
40,939 Longview Fibre Co.............. 675,494
33,300 P. H. Glatfelter Co............ 543,206
30,676 Pentair Inc.................... 1,345,910
23,100 Rayonier Inc................... 1,084,256
23,570 Standard Register Co........... 849,993
57,016 Unisource Worldwide, Inc....... 730,518
40,061 Wausau-Mosinee Paper Corp...... 856,304
-----------
11,877,019
-----------
POLLUTION CONTROL - 1.39%
33,033 Calgon Carbon Corp............. 353,040
81,400* United States Filter Corp...... 2,477,613
176,500* USA Waste Services, Inc........ 8,328,594
-----------
11,159,247
-----------
PUBLISHING - NEWS - 0.83%
34,700 Lee Enterprises, Inc........... 1,054,012
22,168 Media General, Inc. Class A.... 1,019,728
8,561 Washington Post Co. Class B.... 4,625,080
-----------
6,698,820
-----------
PUBLISHING/PRINTING - 0.40%
23,886 Banta Corp..................... 756,888
29,232 Houghton Mifflin Co............ 1,015,812
12,900* Scholastic Corp................ 516,000
34,928 Wallace Computer Svcs, Inc..... 934,324
-----------
3,223,024
-----------
RAILROAD - 0.86%
20,612 GATX Corp...................... 1,692,760
13,359 Illinois Central Corp.......... 495,953
88,796 Kansas City Southern Ind....... 3,762,730
41,500* Wisconsin Central Transport.... 972,656
-----------
6,924,099
-----------
RESTAURANTS - 1.31%
36,633 Bob Evans Farms, Inc........... 780,741
61,155* Brinker International, Inc..... 1,330,121
37,432* Buffets, Inc................... 610,610
48,966 Cracker Barrel, Inc............ 1,579,153
33,100* Lone Star Steakhouse & Saloon.. 558,563
43,500* Outback Steakhouse Inc......... 1,604,062
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
RESTAURANTS - Continued
16,888* Sbarro, Inc.................... $ 493,974
75,000* Starbucks Corp................. 3,600,000
-----------
10,557,224
-----------
SAVINGS & LOAN - 0.83%
109,700 Charter One Financial, Inc..... 3,757,225
99,000 Dime Bancorp, Inc.............. 2,889,563
-----------
6,646,788
-----------
SECURITIES RELATED - 1.82%
96,014 A.G. Edwards, Inc.............. 3,882,567
111,184 Bear Stearns Co. Inc........... 6,031,730
109,200 Paine Webber Group Inc......... 4,688,775
-----------
14,603,072
-----------
SEMICONDUCTORS - 2.56%
73,540* Altera Corp.................... 2,472,783
129,938* Analog Devices, Inc............ 3,207,836
82,200* Atmel Corp..................... 1,217,588
36,188 Avnet, Inc..................... 2,135,091
56,136 Cirrus Logic, Inc.............. 561,360
74,982* Cypress Semiconductor Corp..... 642,033
62,554 Linear Technology Corp......... 4,374,870
110,500 Maxim Integrated Products, Inc. 3,687,937
61,281* Xilinx, Inc.................... 2,330,596
-----------
20,630,094
-----------
TELECOMMUNICATIONS - 1.75%
110,128* ADC Communications, Inc........ 3,097,350
39,742 COMSAT Corp.................... 1,386,002
86,700 LCI International, Inc......... 3,245,831
56,900* QUALCOMM, Inc.................. 2,965,912
97,901* 360 Communications Co.......... 2,796,297
34,640* Vanguard Cellular Systems, Inc.
Class A....................... 621,355
-----------
14,112,747
-----------
TEXTILE - PRODUCTS - 1.00%
47,600* Burlington Industries, Inc..... 835,975
44,500 Jones Apparel Group, Inc....... 2,820,187
101,623 Shaw Industries Inc............ 1,625,968
55,429 Unifi, Inc..................... 2,158,266
24,984 Wellman, Inc................... 601,178
-----------
8,041,574
-----------
</TABLE>
69
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 15
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
TOBACCO - 0.13%
28,435 Universal Corp................. $ 1,068,090
-----------
TRUCKERS - 0.26%
20,214 Arnold Industries, Inc......... 315,844
42,700 CNF Transportation, Inc........ 1,753,368
-----------
2,069,212
-----------
UTILITIES - COMMUNICATION - 1.63%
28,818 Aliant Communications, Inc..... 668,217
72,675 Century Telephone Enterprises,
Inc.......................... 3,220,411
110,000 Cincinnati Bell, Inc........... 3,499,375
56,964 Southern New England Telecom... 3,667,057
47,791 Telephone and Data Systems..... 2,090,855
-----------
13,145,915
-----------
UTILITIES - ELECTRIC - 9.05%
140,472* AES Corp....................... 6,681,200
107,914 Allegheny Energy, Inc.......... 3,028,336
16,279 Black Hills Corp............... 357,121
62,300* Calenergy, Inc................. 1,884,575
27,916 Central Maine Power Co......... 533,894
18,459 Cleco Corp..................... 552,616
75,364 CMS Energy Corp................ 3,283,043
87,538 Conectiv, Inc.................. 1,789,058
55,421 Energy East Corp............... 2,251,478
79,262 Florida Progress Corp.......... 3,269,557
24,166 Hawaiian Electric Industries,
Inc.......................... 924,350
30,123 Idaho Power Co................. 1,029,830
68,300 Illinova Corp.................. 1,984,969
16,859 Indiana Energy, Inc............ 520,522
61,916 Interstate Energy Corp......... 1,861,350
39,564 IPALCO Enterprises, Inc........ 1,666,634
59,019 Kansas City Power & Light Co... 1,696,796
104,342 LG&E Energy Corp............... 2,771,583
75,334 Mid American Energy Holdings
Co........................... 1,567,888
23,218 Minnesota Power Inc............ 915,660
51,457 Montana Power Co............... 1,865,316
37,633 Nevada Power Co................ 898,488
92,322 New Century Energies, Inc...... 4,246,811
60,017 New England Electrical System.. 2,505,710
101,544 NIPSCO Industries, Inc......... 2,728,995
104,133* Northeast Utilities............ 1,659,620
32,946 OGE Energy Corp................ 1,766,729
68,023 Pinnacle West Capital Corp..... 3,056,783
106,964 Potomac Electric Power Co...... 2,613,933
33,537 Public Service Co. of
New Mexico................... 727,334
69,062 Puget Sound Energy Inc......... 1,804,245
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
UTILITIES - ELECTRIC - Continued
84,688 Scana Corp..................... $ 2,440,073
95,820 TECO Energy, Inc............... 2,509,286
45,388 UtiliCorp United Inc........... 1,614,111
34,424 Washington Gas Light Co........ 897,176
96,752 Wisconsin Energy Corp.......... 2,854,184
-----------
72,759,254
-----------
UTILITIES - GAS, DISTRIBUTION - 1.61%
45,536 AGL Resources, Inc............. 910,720
138,305* Keyspan Energy Corp............ 4,659,150
58,268 MCN Energy Group Inc........... 2,097,647
31,178 National Fuel Gas Co........... 1,321,168
125,446 Tosco Corp..................... 3,982,910
-----------
12,971,595
-----------
WATER SERVICES - 0.23%
64,000 American Water Works Co., Inc.. 1,880,000
-----------
TOTAL COMMON STOCKS
(Cost $534,296,502)............ 799,157,983
-----------
PAR
VALUE
- ----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 0.35%
FINANCE COMPANIES - 0.16%
$1,259,000 Ford Motor Credit Co.,
5.45% due 06/01/98.......... 1,259,000
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.19%
1,560,000 Cooper Industries, Inc.,
5.67% due 06/01/98.......... 1,560,000
-----------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $2,819,000).............. 2,819,000
-----------
UNITED STATES GOVERNMENT -
SHORT TERM - 0.07%
U.S. TREASURY BILLS - 0.07%
United States Treasury Bills:
200,000 4.94 % due 6/4/98........... 199,918
250,000 4.74 % due 6/4/98........... 249,901
100,000 4.65 % due 6/4/98........... 99,961
-----------
549,780
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C> <C>
TOTAL UNITED STATES GOVERNMENT
SHORT TERM -
(Cost $549,780)................ $ 549,780
------------
TOTAL INVESTMENTS
(Cost $537,665,282) - 99.78%... 802,526,763
Other assets and liabilities,
net - 0.22%................... 1,790,866
------------
NET ASSETS (equivalent
to $25.27 per share on
31,829,893 shares
outstanding) -100%........... $804,317,629
============
* Non-income producing
UNREALIZED
CONTRACTS DEPRECIATION
- --------- ------------
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 5/31/98)
18 (2) S&P MidCap 400 Index Futures
(June/$357.75)................. $ (40,725)
===========
(1)U.S.Treasury Bills with a market value of
approximately $550,000 were maintained in a
segregated account with a portion placed as
collateral for futures contracts.
(2)Per 500
- --------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
31,829,893 shares outstanding........... $ 318,299
Additional paid in capital................ 471,400,467
Undistributed net realized gain on
securities.............................. 67,735,760
Undistributed net investment income....... 42,347
Unrealized appreciation (depreciation) of:
Investments........... $264,861,481
Futures............... (40,725) 264,820,756
------------ ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................. $804,317,629
============
</TABLE>
70
<PAGE>
===============================================================================
MIDCAP INDEX FUND - FINANCIAL STATEMENTS
16
===============================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends............................................................................. $ 8,911,421
Interest.............................................................................. 609,816
------------
Total investment income............................................................. 9,521,237
------------
EXPENSES:
Advisory fees......................................................................... 2,313,256
Custodian and accounting services..................................................... 165,053
Reports to shareholders............................................................... 58,613
Audit fees and tax services........................................................... 18,922
Directors' fees and expenses.......................................................... 14,303
Miscellaneous......................................................................... 49,866
------------
Total expenses...................................................................... 2,620,013
------------
NET INVESTMENT INCOME................................................................. 6,901,224
------------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on:
Investments....................................................... $ 67,034,658
Futures contracts................................................. 1,444,055 68,478,713
------------
Net unrealized appreciation (depreciation) during the year:
Investments....................................................... 104,256,508
Futures contracts................................................. (160,580) 104,095,928
------------ ------------
Net realized and unrealized gain on securities during the year..................... 172,574,641
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $179,475,865
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income............................................... $ 6,901,224 $ 6,894,820
Net realized gain on securities..................................... 68,478,713 39,709,142
Net unrealized appreciation of securities during the year........... 104,095,928 45,603,667
------------ ------------
Increase in net assets resulting from operations.................. 179,475,865 92,207,629
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (6,915,741) (6,892,259)
Net realized gain on securities..................................... (39,892,715) (33,690,297)
------------ ------------
Decrease in net assets resulting from distributions
to shareholders.................................................. (46,808,456) (40,582,556)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold.................................... 54,227,081 33,601,532
Proceeds from capital stock issued for distributions reinvested..... 46,808,456 40,582,556
------------ ------------
101,035,537 74,184,088
Cost of capital stock repurchased................................... (36,446,663) (59,435,374)
------------ ------------
Increase in net assets resulting from
capital stock transactions....................................... 64,588,874 14,748,714
------------ ------------
TOTAL INCREASE IN NET ASSETS........................................ 197,256,283 66,373,787
NET ASSETS:
Beginning of year................................................... 607,061,346 540,687,559
------------ ------------
End of year (including undistributed net investment income
of $42,347 and $ 56,864) ......................................... $804,317,629 $607,061,346
============ ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold........................................ 2,234,398 1,775,391
Shares issued for distributions reinvested.......................... 1,997,359 2,124,784
Shares of capital stock repurchased ................................ (1,539,198) (3,084,568)
------------ ------------
Increase in shares outstanding.................................... 2,692,559 815,607
Shares outstanding:
Beginning of year................................................. 29,137,334 28,321,727
------------ ------------
End of year....................................................... 31,829,893 29,137,334
============ ============
</TABLE>
71
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS
May 31, 1998 17
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
---------- ----------
<S> <C> <C>
COMMON STOCKS - 97.11%
ADVERTISING - 0.82%
9,025* ADVO, Inc...................... $ 226,189
4,300* American Business Information
Class B....................... 54,288
5,100* Catalina Marketing Corp........ 230,775
400 Grey Advertising, Inc.......... 178,800
4,525* HA-LO Industries, Inc.......... 139,992
6,000* Lamar Advertising Co........... 190,500
6,600* NFO Worldwide Inc.............. 112,200
9,200* National Media Corp............ 12,075
10,200* Outdoor Systems Inc............ 306,000
4,000* Snyder Communications, Inc..... 161,250
7,100 True North Communications Inc.. 225,868
6,900* Westwood One, Inc.............. 184,575
----------
2,022,512
----------
AEROSPACE/DEFENSE - 0.77%
2,300* Alliant Techsystems, Inc....... 148,350
6,700* Aviall, Inc.................... 97,988
1,600* Banner Aerospace, Inc.......... 18,900
6,600* BE Aerospace, Inc.............. 190,782
2,700 Cubic Corp..................... 79,313
9,800 EG & G, Inc.................... 308,700
5,200* Fairchild Corp. Class A........ 103,025
6,800 Gencorp Inc.................... 202,725
14,900* Geotek Communications, Inc..... 5,587
7,800* Orbital Sciences Corp.......... 318,825
3,400* Remec, Inc..................... 48,875
2,000* Sequa Corp. Class A............ 138,250
3,700* Tech-Sym Corp.................. 107,068
7,200* Trimble Navigation Ltd......... 141,750
----------
1,910,138
----------
AIRLINES - 0.56%
9,300* Airtran Holdings Inc........... 67,135
3,800* Alaska Air Group, Inc.......... 175,988
14,100* American West Holdings Corp.
Class B....................... 399,206
5,500 ASA Holdings, Inc.............. 216,219
3,300 Circle International Grp, Inc.. 89,306
6,100 Expeditors International
of WA......................... 244,000
----------
1,050* Mesaba Holdings, Inc........... 22,838
1,950* Midwest Express Holdings, Inc.. 55,940
11,100* Transport World Airls, Inc..... 115,162
----------
1,385,794
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
---------- ----------
<S> <C> <C>
APPAREL & PRODUCTS - 1.42%
1,800* Abercrombie and Fitch Co....... $ 76,050
9,400* Ann Taylor Stores Corp......... 205,038
5,600 Authentic Fitness Corp......... 101,850
1,000* Buckle, Inc.................... 51,000
11,925 Claire's Stores, Inc........... 224,339
6,300* Dress Barn, Inc................ 182,503
1,200 Fab Industries, Inc............ 32,550
8,900* Footstar Inc................... 393,269
2,900* Gadzooks, Inc.................. 80,928
6,200* Gymboree Corp.................. 98,038
6,000* Hartmarx Corp.................. 47,250
5,250 Kellwood Co.................... 173,578
5,300* Land's End, Inc................ 171,256
4,400 Mens Wearhouse, Inc............ 187,550
8,900* Nautica Enterprises, Inc....... 260,325
3,600 OshKosh B'Gosh, Inc. Class A... 138,600
900 Oxford Inds Inc................ 31,388
4,050* Pacific Sunwear of California.. 181,364
8,900 Phillips-Van Heusen Corp....... 115,700
3,600 St. John Knits, Inc............ 138,375
6,200* Stage Stores, Inc.............. 289,075
4,400 Talbots, Inc................... 125,675
2,400 UniFirst Corp.................. 61,800
2,400* Urban Outfitters, Inc.......... 39,300
3,700* Wet Seal, Inc.................. 111,000
----------
3,517,801
----------
APPLIANCES/FURNISHINGS - 1.14%
4,850 Bassett Furniture Industries... 147,925
5,000* CORT Business Services Corp.... 195,625
6,800 Ethan Allen Interiors Inc...... 342,125
15,600* Furniture Brands
International................. 460,200
8,997* Griffon Corp................... 124,833
17,500 Heilig-Meyers Co............... 210,000
5,800* Helen Of Troy, Ltd............. 110,925
4,100 Hunt Corp...................... 95,325
9,200 Kimball International, Inc.
Class B....................... 226,550
2,700 La-Z-Boy Chair Co.............. 138,206
9,085* Metromedia International
Group......................... 122,648
1,500 National Presto Industries..... 60,656
4,650 Oneida Ltd..................... 129,909
5,500* Renters Choice, Inc............ 146,439
2,850* SLI, Inc....................... 81,225
6,800* Windmere Corp.................. 215,475
9,523* Zenith Electronics Corp........ 4,285
----------
2,812,351
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
---------- ----------
<S> <C> <C>
AUTO - CARS - 0.09%
3,900* Budget Group, Inc.............. $ 115,050
5,100* United Auto Group, Inc......... 104,550
----------
219,600
----------
AUTO - ORIGINAL EQUIPMENT - 0.95%
5,900* Allen Telecom, Inc............. 70,800
5,000 Arvin Industries, Inc.......... 185,313
5,100 Breed Technologies, Inc........ 97,219
8,400 Carlisle Cos Inc............... 406,350
10,200 Donaldson Co., Inc............. 222,488
9,600 Federal-Mogul Corp............. 568,200
6,800 Hayes Lemmerz Intl, Inc........ 266,475
7,150* Miller Industries, Inc......... 50,944
5,700 Modine Manufacturing Co........ 193,800
5,100 Superior Industries
International, Inc............ 148,537
3,100* Tower Automotive, Inc.......... 145,505
----------
2,355,631
----------
AUTO - REPLACEMENT PARTS - 0.68%
2,800* Aftermarket Technology Corp.... 47,950
3,400 A.O. Smith Corp................ 171,700
15,100* Collins & Aikman Corp.......... 105,700
3,900 Discount Auto Parts, Inc....... 100,181
5,400 Furon Co....................... 86,063
8,200 Kaydon Corp.................... 323,388
3,457 Myers Industries, Inc.......... 73,029
1,600* O'Reilly Automotive, Inc....... 52,000
3,200* SPX Corp....................... 221,200
5,350 Simpson Industries, Inc........ 74,900
3,200* Standard Motor Products, Inc... 70,400
4,450 Standard Products Co. Class A.. 130,719
6,700* TBC Corp....................... 54,019
3,300* Walbro Corp.................... 34,031
6,468 Wynn's International, Inc...... 135,827
----------
1,681,107
----------
BANKS - OTHER - 0.41%
1 BankBoston Corp................ 105
700 Citizens Bancshares, Inc....... 48,913
1,600 Irwin Financial Corp........... 43,600
38,612 Sovereign Bancorp, Inc......... 682,950
14,200 Westernbank Puerto Rico........ 241,400
----------
1,016,968
----------
</TABLE>
72
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS
18 May 31, 1998
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
BANKS - REGIONAL - 6.45%
7,350 AMCORE Financial, Inc.......... $ 180,994
3,850 Anchor BanCorp Wisconsin, Inc.. 163,144
12,396 Associated Banc-Corp........... 613,602
1,207* BOK Financial Corp............. 59,747
2,600 BancFirst Corp................. 123,500
9,400 BancorpSouth, Inc.............. 200,338
1,785 Bank of Granite Corp........... 73,185
9,200 Bank United Corp............... 460,000
6,400 Banknorth Group, Inc........... 233,600
4,464 CNB Bancshares, Inc............ 206,460
2,100 Capital City Bank Group, Inc... 97,519
4,110 Chemical Financial Corp........ 173,648
6,450 Citizens Banking Corp.......... 223,331
10,400 Colonial BancGroup, Inc........ 336,700
5,249 Commerce Bancorp, Inc.......... 291,648
8,175 Commercial Federal Corp........ 272,330
7,500 Commonwealth Bancorp, Inc...... 177,188
13,000 Community First Bankshares..... 316,875
760 Community Trust Bancorp........ 23,180
3,850 Corus Bankshares, Inc.......... 162,181
5,740 Cullen/Frost Bankers, Inc...... 311,036
3,500 F & M Bancorporation, Inc...... 141,750
4,742 F & M National Corp............ 139,593
6,510 FNB Corp....................... 231,105
5,586 First American
Financial Corp. Class A....... 402,890
2,450 First Citizens
BancShares, Inc. Class A...... 259,700
8,800 First Colorado Bancorp., Inc... 250,800
1,500 First Commerce Bancshares, Inc
Class B....................... 40,500
5,600 First Commonwealth Financial... 158,200
3,872 First Financial Bancorp........ 222,156
900 First Financial Bankshares..... 36,844
531 First Financial Corp........... 27,280
5,875 First Midwest Bancorp, Inc..... 269,883
700 First United Bancshares........ 36,400
5,208 First Western Bancorp, Inc..... 160,635
3,805 Firstbank of Illinois Co....... 162,664
5,800 FirstBank Puerto Rico.......... 324,075
11,346 Fulton Financial Corp.......... 297,839
2,000 GBC Bancorp.................... 57,250
5,124 HUBCO, Inc..................... 180,621
3,346 Harleysville National Corp..... 136,350
2,850 Heritage Financial Services.... 100,106
10,339* Imperial Bancorp............... 302,416
8,700 Magna Group, Inc............... 483,394
NUMBER MARKET
OF SHARES VALUE
--------- ----------
BANKS - REGIONAL - Continued
1,100 MainStreet Financial Corp...... $ 33,413
10,118 Mid-Am, Inc.................... 258,009
2,400 Mississippi Valley Bancshares,. 92,700
7,700 National Bancorp of Alaska..... 245,438
4,336 National City Bancshares, Inc.. 173,711
2,421 National Penn Bancshares, Inc.. 81,709
6,200 Ocean Financial Corp........... 119,059
8,800* Ocwen Financial Corp........... 214,500
6,546 Old National Bancorp Indiana... 314,208
3,900* Omega Financial Corp........... 145,275
9,258 One Valley Bancorp of West Va.. 324,030
8,100* PFF Bancorp, Inc............... 158,456
2,200 Park National Corp............. 209,550
1,031 Peoples First Corp............. 35,344
7,100 Riggs National Corp............ 194,363
9,900 Roslyn Bancorp, Inc............ 232,960
3,690 S&T Bancorp, Inc............... 198,337
12,250 St. Paul Bancorp, Inc.......... 309,312
4,600* Silicon Valley Bancshares...... 150,650
1,400* Southwest Bancorporation of TX. 55,125
2,200 Sumitomo Bank of California.... 82,225
4,912 Susquehanna Bancshares, Inc.... 182,357
5,400 Texas Regional
Bancshares Class A............ 172,800
4,700 Trans Financial, Inc........... 250,862
1,800 Triangle Bancorp, Inc.......... 52,537
6,700 Trust Co. of New Jersey........ 182,575
5,992 TrustCo Bank Corp. NY.......... 170,771
19,100 Trustmark Corp................. 408,262
5,892 UMB Financial Corp............. 324,060
8,700 UST Corp....................... 241,968
7,400 United Bankshares Inc. WV...... 185,925
400 USBANCORP, Inc................. 31,950
1,200 Vermont Financial Services..... 33,975
8,600 Webster Financial Corp......... 290,250
12,561 Westamerica Bankcorporation.... 387,820
2,294 Westcorp....................... 27,815
4,300 Whitney Holding Corp........... 237,037
----------
15,931,995
----------
BEVERAGE - BREWERS/
DISTRIBUTORS - 0.24%
9,300 Adolph Coors Class B........... 348,750
3,200* Boston Beer, Inc. Class A...... 35,200
3,300* Canandaigua Brands, Inc.
Class A....................... 152,213
1,300* Robert Mondavi Corp. Class A... 46,312
----------
582,475
----------
NUMBER MARKET
OF SHARES VALUE
--------- -----------
BEVERAGE - SOFT DRINKS - 0.05%
1,400 Coca-Cola Bottling Co.......... $ 87,238
4,500* National Beverage Corp......... 46,406
----------
133,644
----------
BROADCASTING - 1.57%
3,200 Ackerley Group, Inc............ 64,000
7,900* American Mobile
Satellite Corp................ 90,850
4,870 American Radio
Systems, Corp. Class A........ 322,029
8,900* ANTEC Corp..................... 170,491
9,000* Cablevision
Systems Corp. Class A......... 498,375
12,600* Century Communications Corp.
Class A....................... 200,813
1,300* Cox Radio, Inc. Class A........ 54,763
3,100* Emmis Broadcasting Corp.
Class A....................... 136,981
6,400 Heftel Broadcasting Corp.
Class A....................... 242,400
14,100* Jacor Communications, Inc...... 745,538
2,500* Paxson Communications Corp..... 29,531
2,400 SFX Broadcasting, Inc.
Class A....................... 181,200
2,675* SAGA Communications, Inc.
Class A....................... 55,506
4,200 TCA Cable TV, Inc.............. 255,938
9,800* United International
Holdings Class A.............. 161,700
12,500* United States Satellite
Broadcasting Co., Inc
Class A....................... 119,530
1,700 United Television, Inc......... 185,938
4,100* United Video
Satellite Group Class A....... 159,643
4,200* Young Broadcasting Inc.
Class A....................... 217,875
----------
3,893,101
----------
BUILDING MATERIALS - 1.28%
3,800* ABT Building Products Corp..... 54,150
1,100 Ameron, Inc.................... 66,138
6,900 Apogee Enterprises, Inc........ 96,169
1,850 Butler Manufacturing Co........ 64,750
8,400 CalMat Co...................... 211,050
3,000 Centex Construction Production. 114,750
2,600* Cooper Companies, Inc.......... 102,700
7,300* Dal-Tile International, Inc.... 101,288
3,450 Elcor Corp..................... 91,425
19,100 Fedders USA Inc................ 119,375
3,400 Florida Rock Industries, Inc... 105,825
5,200 Interface, Inc. Class A........ 203,775
3,800 Lone Star Industries, Inc...... 285,713
4,200 Medusa Corp.................... 242,025
1,000* Mestek, Inc.................... 19,125
1,700* NCI Building Systems, Inc...... 90,206
1,100 Puerto Rican Cement Co., Inc... 58,781
</TABLE>
73
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 19
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
BUILDING MATERIALS - Continued
7,000 Southdown, Inc................. $ 459,375
5,700 Texas Industries, Inc.......... 338,437
3,800* Triangle Pacific Corp.......... 167,675
5,700 Watsco, Inc.................... 167,437
----------
3,160,169
----------
CHEMICAL - MAJOR - 0.34%
8,100 Albemarle Corp................. 196,931
4,100 Chemed Corp.................... 150,931
6,409* Hexcel Corp.................... 175,446
6,900 Polymer Group, Inc............. 82,369
4,100* Synetic, Inc................... 242,669
----------
848,346
----------
CHEMICAL - MISCELLANEOUS - 1.81%
4,150 Cambrex Corp................... 232,141
7,900 ChemFirst, Inc................. 202,931
5,800 Dexter Corp.................... 239,250
9,600 Ferro Corp..................... 274,800
8,500* Fisher Scientific Int'l., Inc.. 113,156
3,600 Foamex International, Inc...... 55,800
3,500 H.B. Fuller Co................. 219,188
4,500 General Chemical Group, Inc.... 114,750
5,900 Geon, Co....................... 127,588
7,100 Georgia Gulf Corp.............. 177,944
9,100 M.A. Hanna Co.................. 182,569
12,200 Lawter International, Inc...... 117,425
4,950 LeaRonal, Inc.................. 146,643
6,600 MacDermid, Inc................. 270,600
1,600 McWhorter Technologies, Inc.... 44,200
5,600 Minerals Technologies Inc...... 296,450
5,600* Mycogen Corp................... 132,300
1,200 NCH Corp....................... 76,425
8,200 NL Industries, Inc............. 164,000
7,300 OM Group, Inc.................. 302,950
8,500 Rollins, Inc................... 175,312
9,400 A. Schulman, Inc............... 186,825
2,000 Stepan Co...................... 63,250
4,000* TETRA Technologies, Inc........ 87,250
4,450* VWR Scientific Products Corp... 126,825
6,750 W.H. Brady Co. Class A......... 195,750
5,000 WD-40 Co....................... 137,187
----------
4,463,509
----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
COAL - 0.13%
1,634 NACCO Industries, Inc.
Class A....................... $ 239,381
4,100 Zeigler Coal Holding Co........ 74,569
----------
313,950
----------
CONGLOMERATES - 0.22%
2,700 MAXXAM, Inc.................... 159,131
12,400 Ogden Corp..................... 354,175
1,400* PEC Israel Economic Corp....... 30,975
----------
544,281
----------
CONSUMER FINANCE - 0.67%
7,700* AmeriCredit Corp............... 251,213
12,100* Arcadia Financial Ltd.......... 90,750
6,875 Chittenden Corp................ 256,094
5,800 Eaton Vance Corp............... 260,638
1,050 Fund American Enterprises...... 153,890
9,200* IMC Mortgage Co................ 120,750
44,400* Mercury Finance Co............. 11,100
3,830* National Auto Credit, Inc...... 3,830
5,000 SEI Corp....................... 333,750
6,450 WesBanco, Inc.................. 169,312
----------
1,651,327
----------
CONTAINERS - METAL/GLASS - 0.59%
1,900* Alltrista Corp................. 48,450
4,500 AptarGroup, Inc................ 291,656
9,500 Ball Corp...................... 374,656
1,400* CSS Industries, Inc............ 45,850
9,150* CLARCOR, Inc................... 210,450
5,500 Greif Brothers Corp. Class A... 200,063
1,125 Liqui-Box Corp................. 48,164
4,000* Silgan Holdings, Inc........... 133,000
6,100* U.S. Can Corp.................. 103,319
----------
1,455,608
----------
CONTAINERS - PAPER - 0.22%
5,300 Chesapeake Corp................ 188,150
13,000* Gaylord Container Corp.
Class A....................... 108,875
8,190 Rock-Tenn Co. Class A.......... 120,291
9,000* Shorewood Packaging Corp....... 124,312
----------
541,628
----------
COSMETICS/TOILETRIES - 0.09%
2,100 Alberto-Culver Co. Class B..... 62,475
11,500 Playtex Products, Inc.......... 165,313
----------
227,788
----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
DRUGS - 2.76%
7,500* Agouron Pharmaceuticals, Inc... $ 255,000
2,000* Algos Pharmaceuticals Corp..... 73,125
6,100* Alkermes, Inc.................. 133,438
9,600* Alliance Pharmaceutical Corp... 45,000
3,500 A.L. Pharma Inc. Class A....... 76,125
6,200* AmeriSource Health Corp
Class A....................... 337,125
8,500* Amylin Pharmaceuticals, Inc.... 36,125
1,700* Aphton Corp.................... 21,781
2,700* Barr Laboratories, Inc......... 110,194
2,700 Bindley Western Industries..... 95,850
5,300* CNS, Inc....................... 21,863
7,900 Carter-Wallace Inc............. 140,719
7,900* Cephalon, Inc.................. 83,938
7,000* Columbia Laboratories, Inc..... 59,063
7,300* COR Therapeutics, Inc.......... 125,469
18,000* Covance Inc.................... 381,375
6,400* Cygnus, Inc.................... 59,200
4,500* GelTex Pharmaceuticals, Inc.... 103,781
14,500* Gensia, Inc.................... 61,625
5,000* Guilford Pharmaceuticals, Inc.. 90,313
2,100 Herbalife International, Inc.
Class A....................... 54,075
2,200 Herbalife International, Inc.
Class B....................... 51,425
4,900* Human Genome Sciences, Inc..... 178,850
15,697 ICN Pharmaceuticals, Inc....... 677,914
11,200* ICOS Corp...................... 235,900
4,400* IDEC Pharmaceuticals Corp...... 138,600
5,500* Incyte Pharmaceuticals, Inc.... 201,953
4,400* Inhale Therapeutic Systems..... 145,200
5,900* Interneuron Pharmaceuticals.... 26,919
5,600 Jones Pharma Inc............... 172,200
5,000* KOS Pharmaceuticals, Inc....... 57,188
4,450 Life Technologies, Inc......... 152,134
9,558* Ligand Pharmaceuticals, Inc.
Class B....................... 133,215
4,300* Martek Biosciences Corp........ 53,213
4,100* Medicis Pharmaceutical
Class A....................... 167,331
7,300* Millennium Pharmaceuticals..... 128,663
2,400* Miravant Medical Technologies.. 64,800
4,030 Natures Sunshine
Products, Inc................. 93,193
6,700* Neoprobe Corp.................. 29,312
2,900* Neurogen Corp.................. 49,662
8,300* NeXstar Pharmaceuticals, Inc... 83,518
11,000* P-Com, Inc..................... 165,000
4,800* Parexel International Corp..... 144,000
5,300* Pathogenesis Corp.............. 191,462
6,600* Regeneron Pharmaceuticals Inc.. 61,669
</TABLE>
74
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
20 May 31, 1998
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER MARKET
OF SHARES VALUE
--------- ------
DRUGS - Continued
2,900* Roberts Pharmaceutical Corp.... $ 47,850
5,200* SangStat Medical Corp.......... 136,500
8,400* Sepracor Inc................... 361,200
12,400* SEQUUS Pharmaceuticals, Inc.... 141,050
5,600* Vertex Pharmaceuticals Inc..... 161,000
5,750* Vitalink Pharmacy Services..... 124,703
8,000* Vivus Inc...................... 74,000
----------
6,814,808
----------
ELECTRICAL EQUIPMENT - 1.83%
8,200 AMETEK, Inc.................... 236,775
3,800* Amphenol Corp. Class A......... 206,625
6,200* Applied Magnetics Corp......... 34,875
5,257* BancTec, Inc................... 122,882
6,100 Belden, Inc.................... 242,094
6,900* Cable Design Technologies...... 162,581
4,300* California Microwave, Inc...... 92,181
9,600 Digital Microwave Corp......... 92,700
6,950* Electro Rent Corp.............. 165,714
2,900* Electro Scientific Industries.. 97,150
6,600* Esterline Technologies Corp.... 141,900
5,700 General Cable Corp............. 151,050
7,000* GenRad, Inc.................... 122,500
2,800* Holophane Corp................. 73,500
4,800* Hutchinson Technology, Inc..... 120,000
4,800* Identix Inc.................... 34,200
14,600* Intergraph Corp................ 128,663
7,400 Juno Lighting, Inc............. 157,250
9,400* Kemet Corp..................... 151,282
8,900* Kent Electronics Corp.......... 186,900
5,100 Kuhlman Corp................... 215,475
4,800* Littelfuse, Inc................ 109,800
5,100* Mail-Well, Inc................. 234,600
4,600* Plexus Corp.................... 98,900
2,700* Spectrian Corp................. 44,213
4,900 Standex International Corp..... 147,613
1,200* Thermo Ecotek Corp............. 19,050
6,450 Thomas Industries Inc.......... 165,281
2,000* Triumph Group, Inc............. 98,000
9,400* Uniphase Corp.................. 479,400
7,900* Vicor Corp..................... 123,438
5,100 X-Rite, Inc.................... 68,850
----------
4,525,442
----------
NUMBER MARKET
OF SHARES VALUE
--------- ------
ELECTRONIC INSTRUMENTS - 2.36%
2,300* ADE Corp....................... $ 34,500
13,800* Ampex Corp. Class A............ 31,050
1,950 Analogic Corp.................. 88,725
7,100 BMC Industries................. 104,281
7,600* Berg Electronics Corp.......... 156,750
7,300* C-Cube Microsystems, Inc....... 142,806
6,700 CTS Corp....................... 209,375
11,500 Checkpoint Systems, Inc........ 202,688
8,300* Cognex Corp.................... 157,700
4,300 Daniel Industries, Inc......... 87,344
3,000 Dionex Corp.................... 156,750
1,950* Dynatech Corp. W/I............. 7,800
2,100* Eltron International, Inc...... 46,200
2,800* Evans & Sutherland Computer.... 70,350
7,600* Exabyte Corp................... 74,100
5,400 Fluke Corp..................... 173,475
10,800* Gentex Corp.................... 395,550
6,800 Gerber Scientific, Inc......... 171,275
2,200* HADCO Corp..................... 70,675
4,575 Harman International
Industries.................... 194,723
9,000* Imation Corp................... 163,688
23,000* Integrated Device Technology... 215,625
16,300* InterDigital Communication..... 89,650
9,500* LTX Corp....................... 36,516
7,000* LoJack Corp.................... 87,938
7,700* MagnaTek, Inc.................. 130,419
4,200* Marshall Industries............ 129,938
7,350 Methode Electronics, Inc.
Class A....................... 93,713
10,400 National Computer Systems, Inc. 252,200
3,800* Nimbus CD International, Inc... 40,850
18,900* OIS Optical Imaging Systems.... 23,625
2,600* Optical Cable Corp............. 24,700
4,400 Park Electrochemical Corp...... 104,500
4,700* Performance Food Group Co...... 88,125
93* Perkin-Elmer Corp. (Warrants).. 395
9,537 Pioneer-Standard Electronics... 118,616
4,800 Pittston Bax Group............. 84,300
12,600* Read-Rite Corp................. 111,038
5,100* Robotic Vision Systems, Inc.... 32,193
5,000 Technitrol, Inc................ 201,875
5,700* Telxon Corp.................... 189,525
3,900* Thermedics Detection, Inc...... 37,538
4,300* Thermospectra Corp............. 47,568
7,000* Thermedics, Inc................ 99,750
5,500* Tracor, Inc.................... 217,250
NUMBER MARKET
OF SHARES VALUE
--------- ------
ELECTRONIC INSTRUMENTS - Continued
6,400* Waters Corp.................... $ 372,800
3,400 Watkins-Johnson Co............. 85,637
5,100 ZERO Corp...................... 147,262
1,600* Zygo Corp...................... 28,700
----------
5,832,051
----------
ENTERTAINMENT - 0.57%
3,200* AMC Entertainment, Inc......... 57,600
17,200* Aztar Corp..................... 120,400
1,800* BET Holdings, Inc. Class A..... 112,388
3,900* Carmike Cinemas, Inc. Class A.. 102,131
10,500* Florida Panthers
Holdings, Inc................. 203,438
1,900* GC Companies, Inc.............. 94,763
6,100* Hollywood Entertainment Corp... 64,050
6,946* Midway Games Inc............... 93,771
3,000 NN Ball & Roller, Inc.......... 36,000
1,600* Penn National Gaming, Inc...... 14,200
4,000 Playboy Enterprises, Inc....... 71,500
3,300* Primadonna Resorts, Inc........ 57,337
2,400* SFX Entertainment Inc.
Class A....................... 106,200
6,700* Sodak Gaming, Inc.............. 42,294
9,300* TCI Satellite Entmt Inc.
Class A....................... 52,312
4,900* Ticketmaster Group, Inc........ 134,750
5,900* Toy Biz, Inc. Class A.......... 57,525
----------
1,420,659
----------
FERTILIZERS - 0.24%
9,686 Delta & Pine Land Co........... 414,682
2,000* IMC Global, Inc. Warrant....... 6,625
6,504 Mississippi Chemical Corp...... 108,942
7,100 Terra Industries, Inc.......... 71,887
----------
602,136
----------
FINANCE COMPANIES - 1.05%
6,200 Aames Financial Corp........... 89,513
9,700* Amresco, Inc................... 327,375
2,600* Capital Factors Holdings, Inc.. 47,937
5,000* Cityscape Financial Corp....... 1,563
9,000* Credit Acceptance Corp......... 92,813
2,800* Delta Financial Corp........... 49,350
4,800 Doral Financial Corp........... 80,100
7,700* FIRSTPLUS Financial Group...... 307,037
5,734* Imperial Credit Industries..... 121,131
15,001 Keystone Financial, Inc........ 585,039
925 Oriental Financial Group....... 39,717
</TABLE>
75
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 21
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER MARKET
OF SHARES VALUE
--------- ------
FINANCE COMPANIES - Continued
16,400 Phoenix Investment
Partners, Ltd................. $ 153,750
106* Search Financial Services...... 10
3,700* Southern Pacific Funding....... 56,887
2,000 Student Loan Corp.............. 96,500
2,300* Triad Guaranty, Inc............ 75,900
6,000 U.S. Trust Corp................ 449,250
2,530* WFS Financial, Inc............. 21,821
----------
2,595,693
----------
FINANCIAL SERVICES - 0.01%
1,520 Omega Worldwide, Inc........... 12,920
----------
FOODS - 1.20%
6,400 Dreyer's Grand Ice Cream, Inc.. 162,000
5,000 Earthgrains Co................. 264,063
4,100 International Multifoods Corp.. 121,975
3,600 Interpool, Inc................. 53,325
7,600 Lance, Inc..................... 159,600
3,200 Michael Foods, Inc............. 89,200
17,400* NBTY, Inc...................... 303,413
4,200 Pilgrims Pride Corp............ 71,925
8,200* Ralcorp Holdings, Inc.......... 174,763
10,200 Richfood Holdings, Inc......... 249,263
6,800 J.M. Smucker Co. Class A....... 161,925
6,945* Suiza Foods Corp............... 405,847
10,263* U. S. Foodservice.............. 339,961
800* United Natural Foods, Inc...... 21,000
16,800 Universal Foods Corp........... 400,050
----------
2,978,310
----------
FOOTWEAR - 0.36%
7,000 Brown Group, Inc............... 125,562
2,100* Kenneth Cole Productions, Inc.
Class A....................... 48,169
5,400* Converse, Inc.................. 27,000
8,800* Genesco, Inc................... 113,300
8,250 Just For Feet, Inc............. 180,984
4,300 Justin Industries, Inc......... 68,263
12,000 Stride Rite Corp............... 159,750
2,000* Timberland Co. Class A......... 164,000
----------
887,028
----------
NUMBER MARKET
OF SHARES VALUE
--------- ------
FREIGHT - 0.69%
7,350 Air Express
International Corp............ $ 189,722
11,800 Airborne Freight Corp.......... 439,550
3,200* Eagle USA Airfreight, Inc...... 104,200
10,800* Greyhound Lines, Inc........... 67,500
8,700 J.B. Hunt Transport
Services, Inc................. 260,456
5,512* Kirby Corp..................... 118,508
14,000* OMI Corp....................... 128,625
10,300 Overseas Shipholding
Group Inc..................... 199,563
3,500* SEACOR Holdings, Inc........... 204,750
----------
1,712,874
----------
GOLD MINING - 0.10%
12,800 Amax Gold, Inc................. 40,800
5,600* Coeur d'Alene Mines Corp....... 49,350
8,230* Getchell Gold Corp............. 156,370
----------
246,520
----------
HARDWARE & TOOLS - 0.14%
4,700 Barnes Group Inc............... 139,825
6,200* Barnett, Inc................... 112,375
3,900 Lawson Products, Inc........... 105,788
----------
357,988
----------
HEALTHCARE - 2.19%
5,500* Access Health, Inc............. 140,938
11,000* Advanced Tissue Sciences, Inc.. 100,375
3,100* Alternative Living Services.... 84,088
8,900* American Oncology Resources.... 113,475
11,100* Apria Healthcare Group, Inc.... 84,638
2,612 Block Drug Co., Inc. Class A... 114,275
1,215 Coram Healthcare Corp.......... 2,506
218* Coram Healthcare Corp.
(Warrants)..................... 0
4,000* Curative Technologies, Inc..... 112,500
21,202* CYTOGEN Corp................... 21,201
3,300 Henry Schein, Inc.............. 127,050
4,900 HealthPlan Services Corp....... 108,718
12,544 Integrated Health Services..... 466,480
7,000 Invacare Corp.................. 184,625
11,900* Laboratory Corp. of America.... 25,287
7,800* Mariner Health Group, Inc...... 116,025
5,500* Maxicare Health Plans, Inc..... 51,562
1,800 Medquist, Inc.................. 78,975
6,200 Mentor Corp.................... 164,106
NUMBER MARKET
OF SHARES VALUE
--------- ------
HEALTHCARE - Continued
3,600 NCS HealthCare, Inc. Class A... $ 103,950
4,650* National Surgery Centers, Inc.. 129,618
15,900* NovaCare, Inc.................. 174,900
3,000 PHP Healthcare Corp............ 27,375
21,873* Paragon Health Network, Inc.... 336,298
5,475* Patterson Dental Co............ 177,938
5,199* Pharmaceutical Product Dev..... 110,479
5,250* Renal Care Group, Inc.......... 190,313
9,896* Respironics Inc................ 162,666
4,000* RightCHOICE Managed Care, Inc.
Class A....................... 46,250
4,400* Rural/Metro Corp............... 103,950
3,800* Sierra Health Services, Inc.... 141,075
2,600* SpaceLabs Medical, Inc......... 43,063
10,488* Sun Healthcare Group, Inc...... 176,330
5,500* Sunrise Medical Inc............ 85,250
2,500* Superior Consultant
Holdings C.................... 105,000
20,343* Total Renal Care Holdings...... 624,276
9,700* Trigon Healthcare, Inc......... 329,800
4,000* VISX, Inc...................... 196,500
2,300 Vital Signs, Inc............... 39,963
----------
5,401,818
----------
HEAVY DUTY TRUCKS/PARTS - 0.17%
6,100 Cascade Corp................... 104,463
2,200* Detroit Diesel Corp............ 53,900
8,000 Titan International, Inc....... 155,500
4,450 Wabash National Corp........... 115,421
----------
429,284
----------
HOME BUILDERS - 0.89%
7,905 D R Horton, Inc................ 142,290
6,100 Del Webb Corp.................. 147,925
11,500* Fairfield Communities, Inc..... 235,031
12,300 Kaufman & Broad Home Corp...... 315,956
4,100* NVR, Inc....................... 131,713
5,125* Palm Harbor Homes, Inc......... 213,648
5,500 Pulte Corp..................... 293,219
6,700 Ryland Group, Inc.............. 134,419
11,100 Standard Pacific Corp.......... 192,169
7,700* Toll Brothers, Inc............. 198,275
4,670* U.S. Home Corp................. 188,843
----------
2,193,488
----------
</TABLE>
76
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
22 May 31, 1998
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
HOSPITAL MANAGEMENT - 0.57%
7,400* ABR Information Services, Inc.. $ 189,625
9,929* Concentra Managed Care, Inc.... 232,090
11,000* Coventry Health Care Inc....... 159,500
6,000* FPA Medical Management......... 26,250
7,700* Magellan Health Services, Inc.. 207,900
16,700 Medaphis Corp.................. 125,250
8,000* Orthodontic Centers of America. 169,500
2,700* Pediatrix Medical Group........ 97,706
10,300 Physicians Resource Group...... 52,788
3,800* Prime Medical Services, Inc.... 39,900
4,100* Sunquest Information Systems,.. 35,363
2,800* Sunrise Assisted Living Inc.... 84,350
----------
1,420,222
----------
HOSPITAL SUPPLIES - 1.37%
3,700 ATL Ultrasound, Inc............ 167,656
5,400* Acuson Corp.................... 103,275
4,700 Arrow International, Inc....... 162,444
16,600* Arterial Vascular Engineering.. 513,045
6,900 Ballard Medical Products....... 154,388
11,600* Bio-Technology General Corp.... 98,600
2,600* Closure Medical Corp........... 66,300
5,800* Coherent, Inc.................. 133,763
3,600* CONMED Corp.................... 76,050
5,300* Datascope Corp................. 149,063
4,200 Diagnostic Products Corp....... 130,200
5,500* Immunomedics, Inc.............. 28,187
8,300* Isis Pharmaceuticals, Inc...... 115,162
2,100 Landauer, Inc.................. 59,850
5,500* Marquette Medical Systems,Inc.. 154,000
1,600* MiniMed, Inc................... 80,000
9,350 Owens & Minor, Inc............. 109,862
16,875* PSS World Medical, Inc......... 210,938
4,100* Physio-Control International... 86,100
8,200* Safeskin Corp.................. 287,000
1,233* SonoSight, Inc................. 8,322
9,500* Summit Technology, Inc......... 51,062
4,400 TECHE Corp..................... 77,000
7,200* Theragenics Corp............... 200,700
5,200 West Co., Inc.................. 153,400
----------
3,376,367
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
HOUSEHOLD PRODUCTS - 0.48%
6,500 Church & Dwight Co., Inc....... $ 197,031
6,061* Culligan Water Technologies.... 338,280
8,200 First Brands Corp.............. 203,975
3,900 Libbey, Inc.................... 153,563
8,800* Linens `N Things, Inc.......... 282,700
1,500* USA Detergents, Inc............ 20,906
----------
1,196,455
----------
HUMAN RESOURCES - 0.48%
3,100* Data Processing Resources...... 90,288
6,000* Employee Solutions, Inc........ 24,375
12,200* Interim Services Inc........... 354,563
3,200 Kelly Services Inc. Class A.... 117,600
6,200* Metamor Worldwide, Inc......... 186,194
3,300 Norrell Corp................... 74,455
8,400* Personnel Group of America..... 170,100
4,800* Staffmark, Inc................. 176,400
----------
1,193,975
----------
INFORMATION PROCESSING -9.11 %
16,400* A.C. Nielson................... 423,325
3,200* Activision, Inc................ 32,200
12,100* Acxiom Corp.................... 261,663
4,733* ADAC Laboratories.............. 94,068
2,600* Advent Software, Inc........... 92,950
11,300* Affiliated Computer
Services Class A.............. 376,431
9,300* American Management Systems.... 252,263
7,800 Analysts International Corp.... 228,150
8,800* Anixter Internationall, Inc.... 177,100
2,120* Applied Graphics Technology.... 102,290
3,800* Arbor Software Corp............ 129,913
8,494* Artesyn Technologies, Inc...... 139,355
1,300* Aspect Development, Inc........ 74,344
5,100* Aspen Technology, Inc.......... 227,110
8,900* Auspex Systems, Inc............ 49,506
6,808* Avant! Corp.................... 174,881
2,918* Baan Company NV................ 132,040
2,550* Barra, Inc..................... 51,956
5,200* Bea Systems, Inc............... 104,325
4,100* Bell & Howell Co............... 110,700
5,800* BISYS Group, Inc............... 215,325
4,100* Black Box Corp................. 163,488
9,337* Boole & Babbage, Inc........... 229,924
2,600* BRC Holdings, Inc.............. 48,588
5,200* Broderbund Software, Inc....... 83,200
6,900* CCC Information Services....... 156,544
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
INFORMATION PROCESSING - Continued
2,400* CDW Computer Centers, Inc...... $ 98,850
4,200* Centennial Technologies, Inc... 12,600
6,000* Cerner Corp.................... 153,750
12,600* Checkfree Holdings Corp........ 285,862
9,750* CHS Electronics, Inc........... 193,781
6,200* Ciber, Inc..................... 198,788
10,050* Citrix Systems, Inc............ 524,484
6,500 Clarify, Inc................... 79,625
8,125 Computer Horizons Corp......... 271,426
1,950* Computer Management Sciences... 46,313
4,700 Computer Task Group, Inc....... 148,638
11,660* Comverse Technology, Inc....... 582,636
16,900* CopyTele, Inc.................. 57,038
6,900* CSG Systems
International, Inc............ 294,760
3,000* CyberMedia, Inc................ 18,375
2,900* Data Dimensions, Inc........... 40,963
9,900* Data General Corp.............. 150,975
3,800* Data Transmission Network...... 146,300
2,900* Davox Corp..................... 53,288
3,100* Dialogic Corp.................. 102,300
11,400* Diamond Multimedia Systems..... 86,925
1,160 DocuCorp International, Inc.... 8,845
2,300* Documentum, Inc................ 108,388
4,700* Edify Corp..................... 49,350
4,600* Envoy Corp..................... 201,825
3,200 Fair Issac & Co., Inc.......... 116,200
5,400* FileNet Corp................... 297,169
5,900* Forte Software, Inc............ 29,500
7,500* FTP Software, Inc.............. 19,688
6,800* General DataComm Industries.... 31,025
8,000* GT Interactive Software Corp... 75,000
6,000* Harbinger Corp................. 139,687
2,900 HCIA, Inc...................... 23,925
4,450 Henry Jack & Associates........ 145,181
10,500* HMT Technology Corp............ 122,063
4,500* HNC Software, Inc.............. 155,531
5,800* Hyperion Software Corp......... 187,413
2,000* IDX Systems Corp............... 84,125
5,400* IKOS Systems, Inc.............. 31,725
3,400* Imnet Systems, Inc............. 37,719
7,600* In Focus Systems, Inc.......... 59,850
7,800* Industri-Matematik
Int'l. Corp................... 125,288
5,700* Information Management
Resourc....................... 128,428
9,700* Information Resources, Inc..... 169,750
4,600 Innovex, Inc................... 85,388
11,800 Inprise Corp. Borland
International, Inc............ 98,088
</TABLE>
77
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 23
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
INFORMATION PROCESSING - Continued
3,000* Inso Corp...................... $ 40,875
2,400* Integrated Circuit Systems..... 33,075
3,800* Integrated Systems, Inc........ 71,250
6,700* International Network
Services...................... 210,003
5,800* INTERSOLV, Inc................. 83,375
2,800* Intevac, Inc................... 26,600
2,900 JDA Software Group, Inc........ 130,953
1,900* JPM Co......................... 19,475
2,000* Kronos, Inc.................... 71,500
11,600* Learning Co., Inc.............. 330,600
3,300* Learning Tree International.... 52,800
10,600 Legato Systems, Inc............ 303,425
4,800* LHS Group, Inc................. 277,500
3,600* Lycos, Inc..................... 190,913
10,000* Macromedia, Inc................ 158,438
3,900* Manugistics Group, Inc......... 111,028
11,800* Mentor Graphics Corp........... 130,538
5,800* Mercury Interactive Corp....... 192,850
2,600* Metro Information
Services, Inc................. 84,825
4,000* Micrel, Inc.................... 125,125
1,400* MicroProse, Inc................ 7,525
2,700* MICROS Systems, Inc............ 158,625
8,000 MTS Systems Corp............... 150,000
5,200* Mylex Corp..................... 36,075
5,250* National Instruments Corp...... 174,891
3,900* National TechTeam, Inc......... 35,344
6,800* Network Appliance, Inc......... 236,513
6,800* Network Computing Devices...... 58,225
4,200* NOVA Corp...................... 138,338
11,800* Oak Technology, Inc............ 64,900
6,100* ODS Networks, Inc.............. 41,556
4,100 OEA, Inc....................... 70,213
7,645* Paxar Corp..................... 94,607
2,800* Pegasystems, Inc............... 60,637
2,200* Perceptron, Inc................ 26,950
4,300* Periphonics Corp............... 43,538
4,700 Phoenix Technologies Ltd....... 47,881
7,500 Physician Computer Network..... 1,875
10,600 Picturetel Corp................ 99,375
17,300* PLATINUM technology, inc....... 473,587
7,100 PMC-Sierra, Inc................ 276,456
10,700 PMT Services, Inc.............. 208,650
4,700 Policy Management
Systems Corp.................. 387,750
5,800* Primark Corp................... 193,937
5,100* Progress Software Corp......... 165,112
2,300* Project Software
& Development................. 51,750
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
INFORMATION PROCESSING - Continued
11,000* PsiNet, Inc.................... $ 118,250
2,900 QuickResponse Services, Inc.... 102,860
1,500* Radisys Corp................... 39,843
4,000* Rambus Inc..................... 154,625
20,843* Rationale Software Corp........ 317,856
6,000* Remedy Corp.................... 96,938
2,320* Renaissance Worldwide Inc...... 43,645
12,000* S3, Inc........................ 78,750
5,900* Safeguard Scientifics, Inc..... 254,069
4,000* Sandisk Corp................... 64,500
900* Sapient Corp................... 40,275
9,200* Sequent Computer Systems, Inc.. 152,375
8,800* Shiva Corp..................... 82,500
12,958* Siebel Systems, Inc............ 294,795
2,600* Sipex Corp..................... 56,550
7,200* SMART Modular Technologies..... 98,550
3,500* Splash Technology Holdings..... 59,280
2,700* SPSS, Inc...................... 60,243
8,100* Stratus Computer, Inc.......... 292,105
8,700* Structural Dynamic
Research Corp................. 220,218
3,100* Sykes Enterprises, Inc......... 64,712
15,300* Symantec Corp.................. 365,287
9,650* System Software Associates..... 70,565
10,000* Systems & Computer Technology.. 256,250
4,300* Systemsoft Corp................ 8,062
6,450* Technology Solutions Co........ 194,708
5,800* Transition Systems, Inc........ 114,912
2,900* Trident Microsystems, Inc...... 20,300
6,800* USCS International, Inc........ 127,925
9,400* Vanstar Corp................... 136,888
3,600* Vantive Corp................... 96,750
1,600* Veeco Instruments, Inc......... 47,000
11,475* Veritas Software Corp.......... 462,945
4,400* Viasoft, Inc................... 67,925
4,100* VideoServer, Inc............... 33,825
5,100* Visio Corp..................... 239,063
2,800* Volt Information
Sciences, Inc................. 85,225
3,200* Wall Data, Inc................. 41,400
8,500* Wang Laboratories, Inc......... 204,000
4,850* Wind River Systems Inc......... 160,656
5,500* Xircom, Inc.................... 86,281
6,100* Yahoo!, Inc.................... 667,950
4,900* Zebra Technologies Corp.
Class A....................... 188,038
----------
22,528,819
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
INSURANCE - CASUALTY - 1.02%
5,000* Acceptance Insurance Co., Inc.. $ 115,000
4,700 Baldwin & Lyons, Inc. Class B.. 112,800
2,600 Citizens Corp.................. 83,525
5,100 Commerce Group, Inc............ 182,006
4,500 E.W. Blanch Holdings, Inc...... 169,313
6,370 Frontier Insurance Group, Inc.. 156,065
4,473 Gainsco, Inc................... 32,708
7,500 HCC Insurance Holdings, Inc.... 160,312
5,700* Highlands Insurance Group...... 118,987
3,600 NAC Re Corp.................... 168,075
1,100 Nymagic, Inc................... 32,175
6,362 Orion Capital Corp............. 358,260
1,500 RLI Corp....................... 78,188
6,500* Risk Capital Holdings, Inc..... 161,688
7,200 Selective Insurance Group...... 189,900
4,350 Trenwick Group Inc............. 165,300
1,805 United Fire & Casualty Co...... 69,493
3,100 Vesta Insurance Group, Inc..... 163,331
----------
2,517,126
----------
INSURANCE - LIFE - 0.78%
3,900 American Heritage Life Invest.. 81,900
2,500* Compdent Corp.................. 36,875
6,200 Hartford Life Inc. Class A..... 319,300
300 Kansas City Life Insurance Co.. 25,500
4,300 Life USA Holding, Inc.......... 69,606
500* National Western Life Ins. Co.
Class A...................... 56,531
1,900 Nationwide Financial Svcs Inc
Class A....................... 82,531
9,400 Presidential Life Corp......... 206,800
10,850 Reinsurance Group of America... 541,144
7,570 United Companies Financial..... 139,099
7,650 W.R. Berkley................... 357,638
----------
1,916,924
----------
INSURANCE - MISCELLANEOUS - 1.35%
5,512 ALLIED Group, Inc.............. 232,193
6,200* Amerin Corp.................... 186,388
4,100 Arthur J. Gallaher & Co........ 176,813
6,400 CMAC Investment Corp........... 387,200
2,700 Capital Re Corp................ 201,150
9,000 Crawford & Co. Class B......... 163,125
3,600 Executive Risk, Inc............ 226,575
5,364 Fidelity National Financial.... 179,024
</TABLE>
78
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
24 May 31, 1998
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
INSURANCE - MISCELLANEOUS - Continued
5,700 Foremost Corp. of America...... $ 140,363
5,512 Fremont General Corp........... 315,218
7,650 HSB Group Inc.................. 336,600
3,200 Harleysville Group............. 77,600
3,250 Hilb, Rogal & Hamilton Co...... 56,875
2,747 Liberty Corp................... 138,207
4,400 MMI Companies, Inc............. 97,350
10,300* Mid Atlantic
Med Services, Inc............. 133,255
887 Poe & Brown Inc................ 33,152
4,200 SCPIE Holdings, Inc............ 152,250
4,100 Zenith National
Insurance Corp................ 117,619
----------
3,350,957
----------
INSURANCE - MULTILINE - 0.85%
4,650 Alfa Corp...................... 91,838
5,278 American Annuity Group, Inc.... 127,332
6,253 AmerUs Life Holdings, Inc...... 200,096
4,400 Argonaut Group, Inc............ 141,350
5,600* CNA Surety Corp................ 90,650
3,495* Delphi Financial Group, Inc.
Class A....................... 189,822
7,800 FBL Financial Group, Inc.
Class A....................... 218,888
8,700 John Alden Financal Corp....... 192,488
3,500 Life Re Corp................... 257,687
1,050* Markel Corp.................... 181,452
2,000 Meadowbrook Insurance Group.... 61,625
5,191* Medical Assurance, Inc......... 143,401
6,200 PennCorp Financial Group, Inc.. 137,175
3,000 United Wisconsin Services...... 93,000
----------
2,126,804
----------
LEISURE TIME - 1.14%
8,100* Acclaim Entertainment, Inc..... 52,144
3,800* Action Performance Co., Inc.... 105,688
2,100* Anchor Gaming.................. 191,100
9,000* Boyd Gaming Corp............... 60,188
6,000* Family Golf Centers, Inc....... 157,500
11,000* Grand Casinos Inc.............. 193,188
8,500* Handleman Co................... 104,125
6,100* Hollywood Park, Inc............ 78,918
5,000 Huffy Corp..................... 75,937
6,200 Lewis Galoob Toys, Inc......... 68,588
8,500 Polaris Industries, Inc........ 297,500
3,500 Premier Parks, Inc............. 185,937
4,900* Rio Hotel & Casino Inc......... 106,575
6,900* Sabre Group Holdings, Inc...... 241,930
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
LEISURE TIME - Continued
4,800* Scotts Co. Class A............. $ 167,400
6,100 Showboat Inc................... 186,812
5,150* Signature Resorts, Inc......... 79,825
5,200* Station Casinos, Inc........... 77,350
5,800* Trump Hotels & Casino Resorts.. 49,663
5,700* Vail Resorts Inc............... 165,300
3,300* Vistana, Inc................... 70,125
5,800* WMS Industries Inc............. 25,738
7,600 Winnebago Industries, Inc...... 85,025
----------
2,826,556
----------
LODGING - 0.53%
13,550* Bristol Hotel Co............... 359,075
4,900* CapStar Hotel Co............... 143,325
14,400 Choice Hotels Intl Inc......... 216,900
4,100 Deltic Timber Corp............. 113,519
12,600* Host Marriott Services Corp.... 179,550
4,400* Interstate Hotels Co........... 142,725
7,939 Marcus Corp.................... 140,421
8,200* Prime Hospitality Corp......... 147,087
4,300* Red Roof Inns, Inc............. 75,787
7,000* Sunburst Hospitality Corp...... 48,563
----------
1,566,952
----------
MACHINE TOOLS - 0.46%
2,300 Chase Industries, Inc.......... 71,156
9,100 Cincinnati Milacron, Inc....... 272,431
8,800* Gilead Sciences, Inc........... 284,900
3,200 Gleason Corp................... 94,600
5,000 OmniQuip International, Inc.... 109,688
2,900 PRI Automation Inc............. 58,816
7,600 Roper Industries, Inc.......... 252,225
----------
1,143,816
----------
MACHINERY - AGRICULTURE - 0.14%
2,700 Allied Products Corp........... 58,050
3,600 Lindsay Manufacturing Co....... 167,400
3,100 Toro Co........................ 108,306
----------
333,756
----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.68%
5,400 Blount, Inc. Class A........... 152,213
3,700* CDI Corp....................... 136,206
7,600* Calpine Corp................... 135,375
5,200 Columbus McKinnon Corp......... 151,450
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
MACHINERY - CONSTRUCTION &
CONTRACTS - Continued
3,300 Granite Construction, Inc...... $ 93,225
3,900 J. Ray Mcdermott S.A........... 157,463
5,300* Jacobs Engineering Group, Inc.. 170,262
5,300 Kaman Corp. Class A............ 97,387
10,000 Lennar Corp.................... 265,000
3,522* Morrison Knudsen Corp.......... 41,824
2,900 Stone & Webster, Inc........... 117,450
5,600 TJ International Inc........... 162,050
----------
1,679,905
----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 2.30%
7,350 AAR Corp....................... 194,315
4,700 Albany International Corp.
Class A....................... 136,300
6,075 Applied Industrial Tech., Inc.. 142,762
6,450 Applied Power, Inc. Class A.... 220,912
1,600* Asyst Technologies, Inc........ 26,400
6,373 Baldor Electric Co............. 166,095
7,080 Burlington Coat Factory Whse... 142,043
7,900 DII Group, Inc................. 148,619
5,400 Exide Corp..................... 97,538
12,500 Flowserve Corp................. 362,500
1,175 General Binding Corp........... 40,097
6,750 Graco, Inc..................... 233,719
5,800 Helix Technology Corp.......... 103,313
4,800 Hughes Supply, Inc............. 161,700
9,250 IDEX Corp...................... 342,250
2,550* Insilco Corp................... 111,244
4,700* Integrated Process Equipment... 65,213
5,700* Ionics, Inc.................... 255,075
9,200 JLG Industries, Inc............ 162,150
5,100* Kulicke & Soffa Industries..... 87,338
5,850 Lilly Industries, Inc.
Class A....................... 114,075
5,000 Lincoln Electric Holdings...... 220,938
4,275 Manitowoc CO.,Inc.............. 175,275
6,900 Newport News Shipbuilding...... 193,200
2,800 Nordson Corp................... 127,400
6,040* Oak Industries Inc............. 210,645
900* Osmonics Inc................... 13,331
5,200 Regal-Beloit Corp.............. 169,650
3,100 Robbins & Myers, Inc........... 92,031
3,800* SPS Technologies, Inc.......... 222,775
4,500 Scotsman Industries Inc........ 128,531
</TABLE>
79
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 25
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
MACHINERY - INDUSTRIAL/
SPECIALTY - Continued
4,400* Specialty Equipment Companies.. $ 96,800
7,700 Stewart & Stevenson
Services, Inc................. 159,775
6,000* Stillwater Mining Co........... 145,500
3,800 Tennant Co..................... 162,094
6,700 Watts Industries, Inc.
Class A....................... 156,194
3,300* Zoltek Companies, Inc.......... 100,650
----------
5,688,447
----------
MEDICAL TECHNOLOGY - 1.55%
4,900* Affymetrix, Inc................ 131,688
4,800* Arqule, Inc.................... 68,400
2,200* Bio-Rad Laboratories, Inc.
Class A....................... 69,850
2,700* Biomatrix, Inc................. 91,800
4,100* Cadus Pharmaceutical Corp...... 24,088
7,700* Creative BioMolecules, Inc..... 45,960
3,800* Cytyc Corp..................... 63,650
8,900 Dekalb Genetics Corp. Class B.. 853,287
7,875* Enzo Biochem, Inc.............. 102,375
5,900* Haemonetics Corp............... 89,975
5,200 Heartport Inc.................. 41,600
3,900* Hologic, Inc................... 81,900
4,200* I-STAT Corp.................... 40,687
7,400* Idexx Laboratories, Inc........ 164,650
26,600* Imatron, Inc................... 73,982
1,235 Lab Holdings, Inc.............. 27,787
8,400* Liposome, Inc.................. 51,712
1,800* Lunar Corp..................... 32,737
2,700* Myriad Genetics, Inc........... 54,337
8,400* NABI, Inc...................... 30,450
5,800* Neopath, Inc................... 73,588
6,300* Neurex Corp.................... 176,794
7,400* Neuromedical Systems, Inc...... 11,563
9,218* Organogenesis, Inc............. 233,907
2,700* Perclose, Inc.................. 68,513
13,700 Pharmerica Inc................. 166,969
3,800* Protein Design Labs, Inc....... 95,475
12,200 Psychemedics Corp.............. 68,625
5,700* Quest Diagnostics Inc.......... 123,619
3,400* Sabratek Corp.................. 89,250
11,124* Scios Nova Inc................. 104,288
5,350* Serologicals Corp.............. 157,825
3,700* Thermo Cardiosystems, Inc...... 83,250
3,400* ThermoTrex Corp................ 67,575
3,800* Transkaryotic Therapies, Inc... 114,000
5,400* US Bioscience, Inc............. 50,625
----------
3,826,781
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
MERCHANDISE - DRUG - 0.38%
3,300* Express Scripts, Inc. Class A.. $ 253,893
7,600 Longs Drug Stores Corp......... 230,375
5,700 Medimmune, Inc................. 284,288
16,500* Perrigo Co..................... 181,500
----------
950,056
----------
MERCHANDISE - SPECIALTY - 3.53%
5,100* APAC Teleservices, Inc......... 46,378
2,700* Advanced Energy Industries..... 38,475
1,100* Amazon.com, Inc................ 96,938
4,200* Ames Department Stores, Inc.... 103,688
6,818 Arctic Cat, Inc................ 62,214
5,500* Avid Technology, Inc........... 222,922
11,800* BJ's Wholesale Club Inc........ 466,100
17,200* Best Buy Co., Inc.............. 561,150
1,600* Bush Boake Allen, Inc.......... 47,200
13,000 Caseys General Stores, Inc..... 184,438
6,567 Cash America International..... 110,818
7,500* Central Garden & Pet Co........ 221,719
24,700 Charming Shoppes, Inc.......... 125,044
3,000* Cole National Corp. Class A.... 116,438
5,600* Compucom Systems, Inc.......... 40,950
1,000* Copart, Inc.................... 17,938
2,900 Cross (A.T.) Co. Class A....... 33,531
4,200* Daisytek International Corp.... 107,100
4,500* Department 56, Inc............. 165,094
5,900* Eagle Hardware & Garden, Inc... 107,306
4,500 Enesco Group Inc............... 137,531
12,200 Fingerhut Companies, Inc....... 357,613
3,150* Fossil, Inc.................... 60,933
5,200* Franklin Covey Co.............. 104,000
5,000* Friedman's, Inc. Class A....... 98,750
5,950* Garden Ridge Corp.............. 104,125
6,100* Gibson Greetings, Inc.......... 147,163
7,200* Graham Field Health Products... 42,300
2,600* Guitar Center, Inc............. 68,738
8,800 Hancock Fabrics, Inc........... 116,600
3,105 Hancock Holding Co............. 175,044
8,300* Homebase, Inc.................. 72,106
3,200* Inacom Corp.................... 103,800
7,800 Jostens, Inc................... 196,950
3,578 K2, Inc........................ 71,560
2,000* Knoll, Inc..................... 63,125
3,700 LabOne, Inc.................... 65,675
5,500* Michaels Stores, Inc........... 164,656
5,200* MicroAge, Inc.................. 70,200
7,300* Micro Warehouse, Inc........... 127,750
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- --------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
4,000* Nu Skin Asia Pacific, Inc.
Class A....................... $104,000
7,000* Paragon Trade Brands, Inc...... 33,250
4,000* Petco Animal Supplies, Inc..... 77,500
5,900 Price Enterprises Inc.......... 105,093
9,300* Rexall Sundown, Inc............ 311,550
2,700 Russ Berrie and Co. Inc........ 68,175
7,400* Seitel, Inc.................... 125,800
9,600* Sitel Corp..................... 60,000
9,300 Sotheby's Holdings, Inc.
Class A....................... 213,900
1,614 South Jersey Industries, Inc... 44,081
6,200* Spiegel, Inc. Class A.......... 32,937
8,050* Sports Authority, Inc.......... 121,252
7,300 Sturm, Ruger & Co. Inc......... 135,962
18,700* Sunglass Hut International..... 227,906
3,500* Tractor Supply Co.............. 84,438
6,500* Twinlab Corp................... 241,313
33,150* US Office Products, Co......... 561,478
4,300* United Stationers Inc.......... 256,388
3,300 Unitog Co...................... 75,488
2,100* West Marine, Inc............... 40,294
11,800* Williams-Sonoma, Inc........... 325,975
8,600* Zale Corp...................... 266,063
----------
8,736,903
----------
MERCHANDISING - DEPARTMENT - 0.63%
1,300* Alexander's, Inc............... 114,806
19,272 Pier 1 Imports, Inc............ 463,732
21,667* Proffit's Inc.................. 850,430
7,500* Stein Mart, Inc................ 118,125
----------
1,547,093
----------
MERCHANDISING - FOOD - 0.70%
4,500 Dominick's Supermarkets, Inc... 194,063
75 Farmer Bros. Co................ 15,000
9,400 Fleming Companies, Inc......... 179,188
6,500 Great Atlantic &
Pacific Tea Co., Inc.......... 208,000
3,700* IHOP Corp...................... 149,850
1,500 Ingles Markets, Inc. Class A... 18,750
2,875 NashFinch Co................... 48,515
6,700 Ruddick Corp................... 119,762
1,600 Sanderson Farms, Inc........... 18,600
5,000* ShowBiz Pizza Time, Inc........ 177,500
3,000 Smart & Final Inc.............. 56,250
7,400* Smithfield Foods, Inc.......... 199,800
6,300* Whole Foods Market, Inc........ 346,500
----------
1,731,778
----------
</TABLE>
80
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
26 MAY 31, 1998
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
MERCHANDISING - MASS - 0.13%
4,900* Global Directmail Corp............ $ 101,063
34,000 Service Merchandise Co., Inc...... 72,250
4,500* ShopKo Stores, Inc................ 156,937
----------
330,250
----------
METALS - ALUMINUM - 0.27%
5,300* ACX Technologies, Inc............. 120,243
8,300 Century Aluminum Co............... 124,500
5,700 Commonwealth Industries, Inc...... 83,363
4,400 IMCO Recycling, Inc............... 83,325
5,500* Kaiser Aluminum Corp.............. 57,063
2,300 Tredegar Industries, Inc.......... 198,950
----------
667,444
----------
METALS - COPPER - 0.11%
3,700* Essex International, Inc.......... 90,881
5,000* Wolverine Tube, Inc............... 182,500
----------
273,381
----------
METALS - MISCELLANEOUS - 0.59%
3,337 A.M. Castle & Co.................. 75,082
6,100 Brush Wellman Inc................. 148,687
4,033 Commercial Metals Co.............. 123,763
1,267* Freeport McMoran Sulphur.......... 17,580
19,700 Hecla Mining Co................... 99,731
7,800 Kennametal, Inc................... 375,375
4,050 Material Sciences Corp............ 40,753
4,500* RMI Titanium Co................... 96,469
5,000* Ryerson Tull, Inc. Class A........ 105,000
7,900* Steel Dynamics, Inc............... 153,063
5,900 Titanium Metals Corp.............. 143,444
1,300 Tremont Corp...................... 73,125
----------
1,452,072
----------
METALS - STEEL - 1.18%
14,200 AK Steel Holding Corp............. 264,475
3,000* Acme Metals, Inc.................. 23,625
2,400 Amcast Industrial Corp............ 51,750
25,300* Armco Inc......................... 137,569
8,600 Birmingham Steel Corp............. 120,400
4,500 Carpenter Technology Corp......... 238,500
1,800 Citation Corp..................... 34,425
2,800 Cleveland-Cliffs Inc.............. 148,225
3,650 Commercial Intertech Corp......... 69,350
3,000* Gibraltar Steel Corp.............. 65,250
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
METALS - STEEL - Continued
4,200* Intermedia Communications, Inc.... $ 311,325
7,200 Intermet Corp..................... 140,400
4,500 J & L Specialty Steel, Inc........ 31,500
6,100 Lukens Inc........................ 195,581
9,800* Mueller Industries, Inc........... 303,800
7,400 National Steel Corp. Class B...... 116,550
5,400 Oregon Steel Mills, Inc........... 130,613
3,700 Quanex Corp....................... 114,931
2,100 Reliance Steel & Aluminium Co..... 80,194
6,000 Rohn Industries, Inc.............. 26,250
3,300* Shiloh Industries, Inc............ 70,331
7,700 Valmont Industries, Inc........... 154,000
4,800* Wyman-Gordon Co................... 95,400
----------
2,924,444
----------
MISCELLANEOUS - 2.52%
2,900* Abacus Direct Corp................ 145,363
4,800* Alternative Resources Corp........ 97,800
9,300 AMCOL International Corp.......... 127,875
4,500* AMERCO, Inc....................... 146,250
4,600 Arch Coal, Inc.................... 111,263
5,200* Associated Group, Inc.
Class A.......................... 183,950
2,800* Avondale Industries, Inc.......... 78,750
5,000* Bacou U.S.A., Inc................. 94,375
7,600* Billing Concepts Corp............. 176,700
3,500* Borg-Warner Security Corp......... 77,219
11,750* Brightpoint, Inc.................. 185,797
3,400* Caribiner International, Inc...... 75,225
1,950 Central Parking Corp.............. 87,384
4,500* Century Business Services......... 77,344
3,300* Clin Trials, Inc.................. 17,944
4,500* Coach USA, Inc.................... 193,781
1,800* Coinmach Laundry Corp............. 43,875
3,800 Computer Learning Centers......... 65,075
6,700* DeVry, Inc........................ 266,744
3,600* Encad, Inc........................ 38,025
2,100* Equity Corp. International........ 49,875
6,600* Firearms Training Systems......... 28,257
3,758* Gemstar Group Ltd................. 163,473
4,100* Hvide Marine, Inc. Class A........ 62,013
1,275* ITT Educational Services, Inc..... 36,338
1,800 Matthews International Corp.
Class A.......................... 89,438
3,000* Metzler Group, Inc................ 83,813
2,850 Pinkerton's, Inc.................. 59,494
6,800 Prepaid Legal Services, Inc....... 241,400
2,900 The Profit Recovery Group......... 71,050
4,700 Regis Corp........................ 131,600
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
MISCELLANEOUS - Continued
5,800* Romac International, Inc.......... $ 163,488
3,100* Samsonite Corp.................... 89,125
7,500* Scott Technologies Inc -
Cl A Class A..................... 110,625
5,800* Sola International, Inc........... 229,462
9,225* Sylvan Learning Systems, Inc...... 281,362
4,200* Triangle Pharmaceuticals, Inc..... 65,887
4,200* Turbochef, Inc.................... 37,275
3,600* U.S. Rentals, Inc................. 116,775
7,700 Valhi, Inc........................ 75,555
5,300* Veritas DGC Inc................... 274,605
5,000* Veterinary Centers of America..... 94,375
5,000 Wackenhut Corp.................... 110,312
3,900* Wackenhut Corrections Corp........ 94,575
10,700 Washington Water Power Co......... 230,718
6,600* West Teleservices Corp............ 90,750
4,500* Westell Technologies, Inc.
Class A.......................... 44,437
5,600 Westinghouse Air Brake Co......... 154,700
3,100* Whittman-Hart, Inc................ 126,713
3,500 Woodward Governor Co.............. 101,500
5,100* World Access, Inc................. 160,013
9,800* Xlyan Corp........................ 236,425
4,700* Zitel Corp........................ 37,453
----------
6,233,620
----------
MOBILE HOMES - 0.54%
12,352* Champion Enterprises, Inc......... 332,732
3,800 Coachmen Industries, Inc.......... 90,488
8,800 Fleetwood Enterprises, Inc........ 352,000
2,500 McGrath Rentcorp.................. 51,875
12,400 Oakwood Homes Corp................ 337,125
4,200 Skyline Corp...................... 122,325
1,575 Thor Industries, Inc.............. 43,607
----------
1,330,152
----------
NATURAL GAS - DIVERSIFIED - 0.7 2%
8,450 Atmos Energy Corp................. 259,838
6,100 Bay State Gas Co.................. 232,181
4,800 Eastern Enterprises............... 192,600
4,500 Laclede Gas Co.................... 111,375
4,500 New Jersey Resources Corp......... 161,719
2,200* Southern Union Co................. 58,850
10,300 Southwest Gas Corp................ 225,313
8,300 UGI Corp.......................... 210,094
4,400 WICOR, Inc........................ 201,300
7,300 Western Gas Resources, Inc........ 118,168
----------
1,771,438
----------
</TABLE>
81
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 27
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
OIL - INTEGRATED DOMESTIC - 0.21%
7,875 Cross Timbers Oil Co........... $ 136,336
12,700 Quaker State Corp.............. 215,106
9,100* Tesoro Petroleum Corp.......... 175,744
----------
527,186
----------
OIL - SERVICE - PRODUCTS - 0.73%
7,950* Barrett Resources Corp......... 276,759
3,100 Getty Realty Corp.............. 67,619
5,800* Global Industrial
Technologies.................. 98,238
13,000* Global Industries, Inc......... 277,063
32,300* Kelley Oil & Gas Corp.......... 72,675
6,800* Lone Star Technologies, Inc.... 129,200
1,500* Maverick Tube Corp............. 22,687
20,100* Parker Drilling Co............. 169,594
12,100* Pride International, Inc....... 271,494
6,300* TransMontaigne Oil Co.......... 101,981
4,900* Trico Marine Services, Inc..... 96,775
8,326* Varco International, Inc....... 216,996
----------
1,801,081
----------
OIL - SERVICES - 0.60%
3,800* Cliffs Drilling Company........ 156,750
2,800* Key Energy Group, Inc.......... 46,025
6,400 Lomak Petroleum, Inc........... 77,600
13,900* Marine Drilling
Companies, Inc................ 261,494
7,200 Mascotech, Inc................. 176,400
6,500* Oceaneering
International, Inc............ 139,750
7,100* Offshore Logistics, Inc........ 144,663
5,850 Pennsylvania Enterprises, Inc.. 152,100
4,800 Pool Energy Services Co........ 97,800
10,700* Tuboscope Inc.................. 242,087
----------
1,494,669
----------
OIL/GAS PRODUCERS - 1.40%
3,800* Atwood Oceanics, Inc........... 196,650
160* Aztec Energy Corp.............. 0
683* Bayard Drilling Technologies... 7,556
8,300* Benton Oil and Gas Co.......... 86,631
4,500 Berry Petroleum Co. Class A.... 64,125
7,600 Cabot Oil & Gas Corp. Class A.. 153,900
17,416 Chesapeake Energy Corp......... 75,106
4,200 Comstock Resources, Inc........ 42,000
6,700 Devon Energy Corp.............. 245,806
10,100 Equitable Resources, Inc....... 287,850
3,700* Forcenergy, Inc................ 68,913
8,000* Forest Oil Corp................ 115,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
OIL/GAS PRODUCERS - Continued
23,100* Grey Wolf, Inc................. $ 89,513
2,491* Gulfport Energy Corp........... 3,347
23,000* Harken Energy Corp............. 123,625
1,400 Holly Corp..................... 38,325
11,600* Input/Output, Inc.............. 255,200
5,900 KCS Energy, Inc................ 70,063
2,800* Louis Dreyfus Natural
Gas Corp...................... 49,000
8,500* Newfield Exploration Co........ 190,187
6,100* Nuevo Energy Co................ 198,250
6,000* Patterson Energy, Inc.......... 67,125
3,300* Plains Resources, Inc.......... 63,112
3,400 St. Mary Land & Exploration.... 92,650
10,200 Snyder Oil Corp................ 197,625
4,200* Stone Energy Corp.............. 148,837
5,610* Swift Energy Co................ 101,331
6,800* Titan Exploration, Inc......... 55,250
8,200 Tom Brown, Inc................. 137,350
3,800* Unit Corp...................... 29,688
10,800 Vintage Petroleum, Inc......... 195,750
----------
3,449,765
----------
PAPER/FOREST PRODUCTS - 0.56%
5,800* American Pad & Paper Co........ 38,425
7,200* Buckeye Technologies Inc....... 162,450
6,300 Caraustar Industries, Inc...... 193,331
6,000 P. H. Glatfelter Co............ 97,875
12,600 Longview Fibre Co.............. 207,900
4,700 Pope & Talbot, Inc............. 63,744
4,000 Schweitzer-Mauduit Inc......... 132,250
3,700 Standard Register Co........... 133,431
2,300 Universal Forest Products...... 39,532
14,334 Wausau-Mosinee Paper Corp...... 306,389
----------
1,375,327
----------
PHOTOGRAPHY - 0.21%
2,220 CPI Corp....................... 56,888
6,600* Panavision, Inc................ 174,075
6,100 Photronics Inc................. 160,887
2,000* Seattle Filmworks, Inc......... 17,250
5,900* Ultratech Stepper, Inc......... 119,475
----------
528,575
----------
POLLUTION CONTROL - 0.94%
28,800* Allied Waste Industries, Inc... 763,200
546 Arcadis N.V.................... 6,279
3,450* Cuno, Inc...................... 70,078
8,700 Calgon Carbon Corp............. 92,981
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
POLLUTION CONTROL - Continued
7,700 Dames & Moore, Inc............. $ 99,619
55,240* Laidlaw Environmental Srv Inc.. 214,055
1,625 Mine Safety Appliances Co...... 116,086
737* NCS Corp....................... 1,497
19,000* Newpark Resources, Inc......... 345,563
5,200 OHM Corp....................... 70,850
5,600* Superior Services, Inc......... 171,500
6,500* Tetra Tech, Inc................ 143,000
6,600* Thermo TerraTech, Inc.......... 31,350
4,900 Zurn Industries, Inc........... 203,350
----------
2,329,408
----------
PUBLISHING - NEWS - 0.27%
4,700 Media General, Inc. Class A.... 216,200
7,400* Network Equipment
Technologies.................. 116,088
3,833 Pulitzer Publishing Co......... 339,220
----------
671,508
----------
PUBLISHING/PRINTING - 1.23%
5,500 American Business Products..... 122,375
7,750 Banta Corp..................... 245,578
3,400* Berlitz International, Inc..... 94,350
6,000* Big Flower Holdings, Inc....... 184,125
4,300 Bowne & Co., Inc............... 184,094
2,900* Consolidated Graphics, Inc..... 148,444
8,700* Golden Books Family
Entertainment, Inc 70,144
11,400 John H. Harland Co............. 204,488
7,000 Houghton Mifflin Co............ 243,250
3,300 John Wiley & Sons, Inc.
Class A....................... 178,200
14,200 Journal Register Co............ 284,000
5,975 McClatchy Company Class A...... 177,383
5,600 Merrill Corp................... 126,700
4,700 New England Business Service... 153,043
4,200* Scholastic Corp................ 168,000
2,800* Scientific Games Holdings...... 59,150
14,400* Topps Co. Inc.................. 49,500
6,509 Thomas Nelson, Inc............. 84,210
8,400* World Color Press, Inc......... 252,525
----------
3,029,559
----------
RAILROAD - 0.10%
1,200 Florida East Coast Industries.. 149,700
3,500* Motivepower Industries, Inc.... 96,906
----------
246,606
----------
</TABLE>
82
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
28 May 31, 1998
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
REAL ESTATE - 0.57%
2,300* Avatar Holdings, Inc........... $ 62,388
3,700* CB Richard Ellis Services...... 124,413
3,800* Castle & Cooke, Inc............ 71,725
5,675 Cousins Properties, Inc........ 173,442
2,100 Forest City
Enterprises, Inc. Class A..... 118,387
7,200* Grubb & Ellis Co............... 86,400
7,800* Insignia Financial
Group, Inc. Class A.......... 191,587
7,100 LNR Property Corp.............. 183,712
8,800 Merry Land & Investment Co..... 195,250
7,467 Republic Bancorp Inc........... 140,940
2,100 Tejon Ranch Co................. 56,044
----------
1,404,288
----------
REAL ESTATE INVESTMENT
TRUSTS - 7.20%
7,000 Amli Residential Properties.... 157,063
8,300 American General Hospitality... 197,125
5,300 American Health Properties Com-
Core Group.................... 147,075
8,600 Apartment Investment & Mgt. Co
Class A....................... 335,400
13,100 Arden Realty, Inc.............. 359,431
2,800 Associated Estates Realty...... 53,200
7,600 Avalon Properties, Inc......... 213,750
8,230 BRE Properties, Inc. Class A... 218,095
8,600 Bay Apartment
Communities, Inc.............. 316,050
3,200 Bedford Prpty Investors, Inc... 61,600
9,200 Berkshire Realty Co., Inc...... 110,975
5,373 Bradley Real Estate, Inc....... 112,161
2,300 Burnham Pacific Properties..... 32,344
9,600 CBL & Associates Properties.... 235,800
16,241 Camden Property Trust.......... 496,366
6,500 Capstone Capital Corp.......... 151,531
17,850 Capstead Mortgage Corp......... 325,763
2,800 CenterPoint Properties Corp.... 94,850
5,400 Charles E. Smith, Realty Inc... 174,825
8,900 Chateau Communities, Inc....... 263,663
3,200 Chelsea GCA Properties......... 128,200
8,400 Colonial Properties Trust...... 255,150
9,800 Commercial Net Lease Realty.... 157,413
23,500 Cornerstone Properties, Inc.... 411,250
10,800 Cornerstone Reality Income..... 127,575
7,800 Criimi Mae, Inc................ 118,950
6,100 Crown American Realty Trust.... 61,763
7,200 Developers Diversified Realty.. 282,150
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
REAL ESTATE INVESTMENT
TRUSTS - Continued
10,400 Dynex Capital, Inc............. $ 124,150
800 EastGroup Properties, Inc...... 16,050
12,500 Equity Inns, Inc............... 178,906
4,900 Essex Property Trust, Inc...... 159,250
3,900* Excel Legacy Corp.............. 19,988
3,900 Excel Realty Trust, Inc........ 106,275
13,400 Federal Realty
Investment Trust.............. 331,650
7,600 FelCor Suite Hotels, Inc....... 261,725
11,100 First Industrial Realty Trust.. 344,100
4,000 First Union Real Estate........ 43,750
8,200 Franchise Finance Corp......... 213,200
4,800 Gables Residential Trust....... 133,800
7,000 General Growth Properties...... 259,000
6,400 Glenborough Realty Trust, Inc.. 180,000
5,800 Glimcher Realty Trust.......... 120,713
9,600 Health Care Property
Investors..................... 337,800
3,500 Healthcare Realty Trust, Inc... 99,094
3,500 Health Care REIT, Inc.......... 90,344
15,800 Highwoods Properties, Inc...... 521,400
2,600 Home Properties of NY, Inc..... 69,550
3,892 Horizon Group, Inc............. 43,299
5,300 Hospitality Properties Trust... 165,625
11,300 IRT Property Co................ 128,537
15,300 Indymac Mortgage Holdings...... 362,418
3,700 Innkeepers USA Trust........... 51,568
4,100 Irvine Apartment Communities... 122,487
5,400 JDN Realty Corp................ 175,500
3,300 JP Realty, Inc................. 75,487
4,400 Kilroy Realty Corp............. 115,225
7,200 Koger Equity, Inc.............. 151,200
5,800 LTC Properties, Inc............ 116,362
11,400 Liberty Property Trust......... 301,387
3,200 MGI Properties................. 77,800
3,500 Macerich Co.................... 94,500
15,100 Mack Cali Realty Corp.......... 543,600
8,500 Manufactured Home Communities.. 211,968
11,300 Meridian Indust. Trust, Inc.... 262,725
5,300 Mid-Amer Apartment
Communities................... 142,768
8,800 Mills Corp..................... 217,250
4,300 National Golf Properties, Inc.. 129,268
5,600 National Health
Investors, Inc................ 197,750
10,500 Nationwide Health Properties... 252,000
6,300 Ocwen Asset Investment Corp.... 107,100
4,586 Omega Healthcare Investors..... 157,930
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
REAL ESTATE INVESTMENT
TRUSTS - Continued
8,300 Pacific Gulf Properties, Inc... $ 180,525
4,500 Pennsylvania Real Estate Inv... 106,031
9,482 Post Properties, Inc........... 389,947
7,000 Prentiss Properties Trust...... 178,938
4,700 Price REIT, Inc................ 224,131
1,700 Prime Retail, Inc.............. 22,419
9,000 RFS Hotel Investors, Inc....... 178,875
5,800 Realty Income Corp............. 154,063
7,400 Reckson Associates
Realty Corp................... 184,075
2,500 Redwood Trust, Inc............. 58,594
5,300 Regency Realty Corp............ 129,850
2,900 Saul Centers, Inc.............. 50,388
5,200* Security Capital
Atlantic, Inc................. 116,025
369 Security Capital Group
(Warrants).................... 369
6,800 Shurgard Storage
Centers, Inc. Class A......... 195,075
1,600 Sovran Self Storage, Inc....... 43,700
6,200 Storage USA, Inc............... 230,563
5,800 Storage Trust Realty........... 139,925
5,600 Summit Properties, Inc......... 111,650
7,100 Sun Communities, Inc........... 240,956
5,300 Sunstone Hotel Investors, Inc.. 76,188
7,700 Taubman Centers, Inc........... 105,394
6,200 Thornburg Mortgage Asset Corp.. 87,188
10,000 Town & Country Trust........... 164,375
3,600 TriNet Corporate Realty Trust.. 125,550
3,600 Universal Health Realty Income. 70,425
7,100 Urban Shopping Centers, Inc.... 234,300
6,300 Walden Residential Properties.. 152,775
7,900 Washington Real Estate Inv..... 139,731
7,200 Weeks Corp..................... 229,950
4,300 Western Investment
Real Estate................... 59,125
----------
17,795,117
----------
RESTAURANTS - 1.41%
7,562 Apple South, Inc............... 99,251
7,850 Applebees International, Inc... 191,344
10,400 Bob Evans Farms, Inc........... 221,650
17,100* Brinker International, Inc..... 371,925
14,880* Buffets, Inc................... 242,730
11,145 CKE Restaurants, Inc........... 353,854
4,200 The Cheesecake Factory......... 84,788
2,500* Consolidated Products, Inc..... 49,531
9,900* Foodmaker, Inc................. 167,063
7,100* Landrys Seafood Restaurants.... 160,860
</TABLE>
83
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 29
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
RESTAURANTS - Continued
7,600* Lone Star Steakhouse & Saloon.. $ 128,250
5,900 Luby's Cafeterias, Inc......... 109,150
2,700 Morrison Health Care, Inc...... 46,238
6,800* NPC International, Inc......... 84,150
4,625* Papa Johns International, Inc.. 192,516
7,800* Rainforest Cafe, Inc........... 108,469
11,800 Ruby Tuesday, Inc.............. 189,538
15,600* Ryan's Family Steak Houses..... 158,925
5,000* Sbarro, Inc.................... 146,250
16,200* Shoney's, Inc.................. 71,887
7,125* Sonic Corp..................... 147,398
6,100* Triarc Companies Inc. Class A.. 148,686
----------
3,474,453
----------
SAVINGS & LOAN - 1.63%
5,020 ALBANK Financial Corp.......... 261,040
6,540 Astoria Financial Corp......... 359,905
6,000 Bay View Capital Corp.......... 193,500
6,150 CitFed Bancorp, Inc............ 304,041
5,200* Coast Federal Litigation-CVF... 77,350
5,200 Dime Community Bancorp, Inc.... 150,800
5,155 Downey Financial Corp.......... 170,759
600 First Financial Holdings, Inc.. 13,875
4,700 First Indiana Corp............. 113,975
3,913 First Source Bancorp Inc....... 39,619
4,500 FirstFed Financial Corp........ 220,781
4,000 HFNC Financial Corp............ 50,500
2,900 JSB Financial, Inc............. 168,563
2,600 Klamath First Bancorp.......... 51,513
7,600 Long Island Bancorp, Inc....... 469,538
4,132 MAF Bancorp, Inc............... 155,983
18,184 Peoples Heritage
Financial Grp................. 409,140
7,625 Provident Bankshares Corp...... 238,281
3,748 Queens County Bancorp, Inc..... 164,911
400 Reliance Bancorp, Inc.......... 15,275
2,100 St Francis Capital Corp........ 86,625
7,100 TR Financial Corp.............. 317,725
----------
4,033,699
----------
SECURITIES RELATED - 1.17%
3,300 Dain Rauscher Corp............. 187,275
8,200* E*Trade Group, Inc............. 177,325
3,100 Enhanced Financial Services.... 201,888
8,017 Financial Security Assurance... 475,007
5,600* Hambrecht & Quist Group........ 172,200
3,099 Investors Financial Services... 154,950
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
SECURITIES RELATED - Continued
4,800 Jefferies Group, Inc........... $ 220,800
5,333 Legg Mason, Inc................ 321,647
6,600 McDonald & Co
Investments, Inc.............. 198,000
9,150 Morgan Keegan, Inc............. 209,878
5,400 Pioneer Group, Inc............. 153,562
9,150 Raymond James Financial Inc.... 276,787
1,700* White River Corp............... 151,725
----------
2,901,044
----------
SEMICONDUCTOR EQUIPMENT - 0.02%
3,000* ATMI Inc....................... 54,375
SEMICONDUCTORS - 1.04%
6,300* Actel Corp..................... 80,325
6,200* Alliance Semiconductor Corp.... 29,838
6,500* Altron, Inc.................... 71,906
3,600* Anadigics, Inc................. 51,975
9,300* Burr Brown Corp................ 238,604
13,400 Cirrus Logic, Inc.............. 134,000
3,100 Cohu, Inc...................... 95,325
6,650* Credence Systems Corp.......... 139,650
6,400* Cymer Inc...................... 121,800
12,600* DSP Communications, Inc........ 231,525
5,300* ESS Technology, Inc............ 24,015
5,700* Etec Systems, Inc.............. 208,405
4,300* Electroglas, Inc............... 58,587
8,000* FSI International, Inc......... 92,000
2,900* Fusion Systems Corp............ 272
11,000* International Rectifier Corp... 116,188
9,300* Level One Communications, Inc.. 248,194
4,600* MRV Communications, Inc........ 106,950
11,000* Ramtron International Corp..... 44,344
2,950* SDL, Inc....................... 64,900
7,400* Silicon Valley Group Inc....... 135,513
3,400* Siliconix, Inc................. 91,588
1,600* Speedfam International, Inc.... 31,200
2,700* Triquint Semiconductor, Inc.... 61,088
6,200* Unitrode Corp.................. 80,988
----------
2,559,180
----------
TELECOMMUNICATIONS - 3.00%
7,100 ABM Industries, Inc............ 196,581
6,000* Adtran, Inc.................... 145,875
4,600* Aerial Communications, Inc..... 27,888
14,100* Aspect Telecommunications Co... 363,956
700* CKS Group, Inc................. 14,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
TELECOMMUNICATIONS - Continued
5,250* Cellular Communications Int'l.. $ 247,406
4,200* CellStar Corp.................. 126,394
12,800* CellNet Data Systems, Inc...... 129,600
8,180* Cellular Technical Services.... 8,180
4,800* Centennial Cellular Corp.
Class A....................... 168,000
3,700* Cidco, Inc..................... 30,063
3,500* Coherent Communications........ 165,594
14,900 COMSAT Corp.................... 519,638
3,200* CoreComm Inc................... 68,000
13,400* Glenayre Technologies, Inc..... 205,187
7,100* HighwayMaster Communications... 25,737
5,000* IXC Communications, Inc........ 217,968
5,200 Inter-Tel, Inc................. 97,662
5,400* InterVoice, Inc................ 71,550
4,300* Itron, Inc..................... 66,380
2,750 MasTec, Inc.................... 56,719
9,000 McLeodUSA, Inc. Class A........ 373,500
2,794* Millicom International
Cellula....................... 108,617
6,766* NTL Inc........................ 274,869
3,200* Natural Microsystems Corp...... 68,500
1,600 North Pittsburgh Systems....... 25,200
7,300* Omnipoint Corp................. 150,106
1,900* Pacific Gateway Exchange, Inc.. 80,988
12,500* PageMart Wireless, Inc.
Class A....................... 113,281
29,700* Paging Network, Inc............ 406,519
4,400 Plantronics, Inc............... 201,300
74 Porta Systems Corp............. 315
7,800 Premisys Communications Inc.... 194,269
4,800 Premier Technologies, Inc...... 114,600
6,640* PriCellular Class A............ 90,055
3,500* Proxim, Inc.................... 45,938
1,200* Quintel Entertainment, Inc..... 6,525
7,000* RCN Corp....................... 150,500
4,900* Sanmina Corp................... 381,588
12,400* Skytel Communications Inc...... 280,550
9,100* Symmetricom, Inc............... 57,444
1,900* Tekelec........................ 84,431
7,700* Tel-Save Holdings, Inc......... 152,075
3,455* Teleport Communications
Gro Cl A...................... 193,238
4,100* Transaction Network Services... 83,538
8,200* Vanguard Cellular
Systems, Inc. Class A......... 147,088
17,000* Western Wireless Corp Class A.. 314,500
8,800* WinStar Communications, Inc.... 330,000
8,600* Wireless Telecom Group......... 30,100
----------
7,412,012
----------
</TABLE>
84
<PAGE>
===============================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
30 May 31, 1998
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C> <C>
TEXTILE - PRODUCTS - 0.66%
14,200* Burlington Industries, Inc..... $ 249,388
6,100* Cone Mills Corp................ 58,713
4,100 Culp, Inc...................... 71,750
5,500* Fabri-Centers of
America, Inc. Class A......... 162,250
4,750 G & K Services, Inc. Class A... 185,250
7,650 Guilford Mills, Inc............ 206,550
6,600* Lydall, Inc.................... 115,500
8,100* Mohawk Industries, Inc......... 246,037
3,200 Springs Industries, Inc.
Class A....................... 179,600
6,800 Wellman, Inc................... 163,625
----------
1,638,663
----------
TOBACCO - 0.10%
3,000 Cons Cigar Holdings Inc........ 41,437
12,100 DIMON, Inc..................... 163,350
3,601* General Cigar Holdings, Inc.... 35,785
----------
240,572
----------
TRUCKERS - 0.68%
7,500* American Freightways Corp...... 85,781
4,950 Arnold Industries, Inc......... 77,344
7,800* Consolidated Freightways Corp.. 115,050
5,832 Heartland Express, Inc......... 127,575
750* Knight Transportation, Inc..... 14,297
5,200* Landstar System, Inc........... 175,825
2,300* M.S. Carriers, Inc............. 68,713
3,100 Roadway Express, Inc........... 58,319
18,862 Rollins Truck Leasing Corp..... 226,344
6,900* Swift Transportation Co., Inc.. 153,525
5,600 USFreightways Corp............. 176,400
4,687 Werner Enterprises, Inc........ 89,052
3,700 Xtra Corp...................... 194,250
6,500* Yellow Corp.................... 121,875
----------
1,684,350
----------
UTILITIES - COMMUNICATION - 0.24%
9,200 Aliant Communications, Inc..... 213,325
3,200 CFW Communications Co.......... 80,000
4,666 Commonwealth Telephone Ent..... 138,814
5,178 PXRE Corp...................... 163,107
----------
595,246
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
UTILITIES - ELECTRIC - 2.20%
5,400 Black Hills Corp............... $ 118,463
5,600 Cleco Corp..................... 167,650
13,100 Central Maine Power Co......... 250,538
3,400 CILCORP, Inc................... 149,813
4,600 Commonwealth Energy System Co.. 174,800
31,300 Conectiv, Inc.................. 639,694
1,900 Conectiv, Inc. Class A......... 61,512
9,300 Eastern Utilities Associates... 235,987
15,100* El Paso Electric Co............ 143,450
4,100 Empire District Electric Co.... 83,793
6,100 Hawaiian Electric
Industries, Inc............... 233,325
5,600 Indiana Energy, Inc............ 172,900
17,432 Interstate Energy Corp......... 524,050
7,525 Madison Gas & Electric Co...... 159,905
6,600 Minnesota Power Inc............ 260,287
11,600 Nevada Power Co................ 276,950
8,100 Northwestern Corp.............. 195,413
2,875 Otter Tail Power Co............ 92,000
10,400 Public Service Co.
of New Mexico................. 225,550
13,400 Rochester Gas & Electric Corp.. 412,050
5,950 SIG Corp, Inc.................. 185,566
2,700 TNP Enterprises, Inc........... 87,919
8,020* Unisource Energy Corp. Hldg.... 126,816
3,700 United Illuminating Co......... 175,288
10,500 Washington Gas Light Co........ 273,656
----------
5,427,375
----------
UTILITIES - GAS, DISTRIBUTION - 0.78%
18,600 AGL Resources, Inc............. 372,000
2,700 Connecticut Natural Gas Corp... 62,775
2,200 Colonial Gas Co................ 62,563
2,200 Connecticut Energy Corp........ 63,938
8,600 Energen Corp................... 174,688
1,200 NUI Corp....................... 29,550
12,600* National-Oilwell, Inc.......... 440,212
5,600 Northwest Natural Gas Co....... 154,000
7,400 Piedmont Natural Gas Co., Inc.. 234,487
7,800 Public Service Co. of NC....... 165,750
9,900 Southwestern Energy Co......... 104,568
2,550 Yankee Energy Systems, Inc..... 61,200
----------
1,925,731
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ----------
<S> <C>
UTILITIES - GAS, PIPELINE - 0.12%
2,400 North Carolina Natural Gas..... $ 55,500
5,900 ONEOK Inc...................... 230,469
----------
285,969
----------
UTILITIES - MISCELLANEOUS - 0.52%
4,400 Central Hudson Gas & Electric.. 192,225
7,150 MDU Resources Group, Inc....... 238,184
3,500 Orange and Rockland Utilities.. 187,031
7,700 Sierra Pacific Resources....... 264,206
2,900 Trigen Energy Corp............. 40,238
5,600 WPS Resources Corp............. 175,350
9,000* Walter Industries, Inc......... 172,125
----------
1,269,359
----------
WATER SERVICES - 0.23%
3,000 Aquarion Co.................... 100,125
2,800 California Water
Service Group................. 62,125
1,900 E'Town Corp.................... 65,550
9,700 Philadelphia Suburban Corp..... 190,968
2,150 Southern California Water Co... 46,897
6,200 United Water Resources......... 99,588
----------
565,253
----------
TOTAL COMMON STOCKS
(Cost $186,116,688)............ 240,043,605
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
- ----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 2.36%
FINANCE COMPANIES - 0.93%
$2,291,000 Ford Motor Credit Co.,
5.45% due 06/01/98........... 2,291,000
SECURITIES RELATED - 1.43%
Merrill Lynch & Co.
1,534,000 5.60% due 06/06/98........... 1,533,523
2,000,000 5.58% due 06/02/98........... 1,999,690
----------
3,533,213
----------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $5,824,213).............. 5,824,213
==========
</TABLE>
85
<PAGE>
===============================================================================
May 31, 1998 31
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
===============================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
UNITED STATES GOVERNMENT -
SHORT TERM - 0.08%
U. S. TREASURY BILLS - 0.08%
$ 200,000 United States Treasury Bills,
4.94% due 06/04/98........... $ 199,918
------------
UNITED STATES GOVERNMENT -
SHORT TERM
(Cost $199,918)................ 199,918
------------
TOTAL INVESTMENTS
(Cost $192,140,819) - 99.55%... 246,067,736
Other assets and liabilities,
net - 0.45%................... 1,114,822
------------
NET ASSETS (equivalent
to $17.94 per share on
13,776,917 shares
outstanding) - 100%........... $247,182,558
============
* Non-income producing
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------- -------------
<S> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value
at 5/31/98)
26 (2) Russell 2000 Index Futures
(June/$456.45)................ $ (311,225)
=============
</TABLE>
(1) U.S. Treasury Bills with a market value of approximately
$200,000 were maintained in a segregated account with a
portion placed as collateral for futures contracts.
(2) Per 500
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,776,917 shares outstanding........... $ 137,769
Additional paid in capital................ 174,700,392
Undistributed net realized
gain on securities....................... 18,696,806
Undistributed net investment income....... 31,899
Unrealized appreciation (depreciation) of:
Investments........... $53,926,917
Futures .............. (311,225) 53,615,692
----------- ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................. $247,182,558
============
</TABLE>
86
<PAGE>
================================================================================
SMALL CAP INDEX FUND - FINANCIAL STATEMENTS
32
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ........................................................................... $ 2,784,313
Interest ............................................................................ 493,266
------------
Total investment income ........................................................... 3,277,579
------------
EXPENSES:
Advisory fees ....................................................................... 798,980
Custodian and accounting services ................................................... 48,447
Reports to shareholders ............................................................. 18,071
Audit fees and tax services ......................................................... 5,971
Directors' fees and expenses ........................................................ 4,511
Miscellaneous ....................................................................... 20,829
Total expenses .................................................................... 896,809
------------
NET INVESTMENT INCOME ............................................................... 2,380,770
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain on:
Investments ...................................................... $ 18,026,929
Futures contracts ................................................ 1,045,986 19,072,915
------------
Net unrealized appreciation (depreciation) during the year:
Investments ...................................................... 20,249,083
Futures contracts ................................................ (623,225) 19,625,858
------------ ------------
Net realized and unrealized gain on securities during the year ................... 38,698,773
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... $ 41,079,543
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................................. $ 2,380,770 $ 2,388,474
Net realized gain on securities ........................................ 19,072,915 17,523,137
Net unrealized appreciation (depreciation) of securities
during the year ...................................................... 19,625,858 (6,382,053)
------------- -------------
Increase in net assets resulting from operations ..................... 41,079,543 13,529,558
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .................................................. (2,367,516) (2,385,945)
Net realized gain on securities ........................................ (17,477,319) (11,216,991)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders ..................................................... (19,844,835) (13,602,936)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ....................................... 39,604,509 20,665,121
Proceeds from capital stock issued for distributions reinvested ........ 19,844,835 13,602,936
------------- -------------
59,449,344 34,268,057
Cost of capital stock repurchased ...................................... (25,960,237) (22,521,418)
------------- -------------
Increase in net assets resulting from capital stock transactions ..... 33,489,107 11,746,639
------------- -------------
TOTAL INCREASE IN NET ASSETS ........................................... 54,723,815 11,673,261
NET ASSETS:
Beginning of year ...................................................... 192,458,743 180,785,482
------------- -------------
End of year (including undistributed net investment income
of $31,899 and $18,645) .............................................. $ 247,182,558 $ 192,458,743
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ........................................... 2,173,506 1,339,448
Shares issued for distributions reinvested ............................. 1,157,942 890,371
Shares of capital stock repurchased .................................... (1,447,855) (1,465,127)
------------- -------------
Increase in shares outstanding ....................................... 1,883,593 764,692
Shares outstanding:
Beginning of year .................................................... 11,893,324 11,128,632
------------- -------------
End of year .......................................................... 13,776,917 11,893,324
============= =============
</TABLE>
87
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS
May 31, 1998 33
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
COMMON STOCKS - 98.63%
AIRLINES - 0.89%
4,100 British Airways plc - ADR...... $ 431,013
40,000* Japan Air Lines Co. Ltd........ 102,535
25,000 Lufthansa Ag................... 624,912
60,000 Malay Airline System Bhd....... 35,889
35,000 Singapore Airlines............. 194,386
-----------
1,388,735
-----------
APPAREL & PRODUCTS - 0.16%
20,000 Onward Kashiyama Co., Ltd...... 248,393
-----------
APPLIANCES/FURNISHINGS - 1.72%
4,200 Matsushita Electric Industrial
Co.Ltd. - ADR................. 656,250
10,000 Philips Electronics NV......... 950,250
33,000 Sanyo Electric Co. Ltd......... 94,599
3,400 Sanyo Electric Co. Ltd. - ADR.. 49,725
10,970 Sony Corp - ADR................ 919,423
-----------
2,670,247
-----------
AUTO - CARS - 3.99%
15,000 Daimler-Benz AG - ADR.......... 1,483,125
50,000 Fiat S.p.A..................... 223,834
16,500 Fiat S.p.A. - ADR.............. 368,156
12,500 Honda Motor Co., Ltd. - ADR.... 831,250
35,000 Nissan Motor Co., Ltd.......... 106,145
18,000 Nissan Motor Co., Ltd. - ADR... 112,500
500 Peugeot Citroen SA............. 97,693
78,000 Toyota Motor Corp.............. 1,931,836
500 Volkswagen Ag.................. 405,493
20,000 Volvo AB....................... 639,251
-----------
6,199,283
-----------
AUTO - ORIGINAL EQUIPMENT -
0.06%
25,000 Calsonic Corp.................. 88,996
-----------
AUTO - REPLACEMENT PARTS -
1.03%
26,000 Bridgestone Corp............... 593,256
5,550 Denso Corp..................... 376,501
10,093 Michelin (CGDE) Class B........ 624,508
-----------
1,594,265
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
BANKS - OTHER - 13.32%
60,000 AMMB Holdings BHD.............. $ 53,365
50,000 Asahi Bank Ltd................. 188,100
3,190 Asahi Bank Ltd. - ADR.......... 119,943
126,000 Bank of Tokyo - Mitsubishi..... 1,296,484
68,000 Bank of Yokohama Ltd........... 165,961
2,296 Bank of Yokohama Ltd. - ADR.... 56,006
38,287 Barclays plc................... 1,021,809
11,977 Bco Comm Portugues............. 396,588
25,000 Bco Santander.................. 1,258,660
7,000 Bco Totta E Acores............. 259,075
40,000 Chiba Bank Ltd................. 142,393
108,000 Commerce Asset Holding......... 57,017
11,250 Commerce Asset Holding
(Warrants).................... 1,082
6,300 Den Danske Bank AF 1871 - ADR.. 783,819
27,500 Deutsche Bank AG - ADR......... 2,369,315
13,000 Development Bank of Singapore
Ltd........................... 78,411
14,987 Development Bank of Singapore
Ltd. - ADR.................... 361,692
17,000 Dresdner Bank AG - ADR......... 956,420
10,000 Foreningssparbk................ 300,486
25,000 Hang Seng Bank................. 186,314
2,180 HSBC Holdings plc - ADR........ 528,894
15,000 Industrial Bank of Japan Ltd... 92,064
25,000* Ist Bc S.Paolo To.............. 391,780
13,500 Istituto Mobiliare Italiano
S.p.A. - ADR.................. 690,187
48,000 Joyo Bank...................... 170,525
147,654 Lloyds TSB Group plc........... 2,145,149
60,000* Malayan Bk Bhd................. 84,261
31,435 National Australia Bank Ltd.... 435,931
9,319 National Australia Bank Ltd. -
ADR........................... 642,429
10,591 National Westminster Bank plc.. 193,575
2,500 Paribas Banque................. 254,889
250,000 RHB Capital BHD................ 136,534
50,000 RHB Capital BHD (Warrants)..... 7,672
20,598 Royal Bank Scot Group.......... 347,866
98,000 Sakura Bank Ltd................ 290,837
2,000 Schweiz Bankverein............. 722,241
30,000 Shizuoka Bank.................. 324,500
74,000 Sumitomo Bank.................. 691,963
26,000 Tokai Bank..................... 143,996
2,225 Tokai Bank - ADR............... 246,321
1,000 Union Bank of Switzerland AG... 1,680,729
13,300 Westpac Banking Corp. Ltd. -
ADR........................... 438,900
-----------
20,714,183
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
BEVERAGE - BREWERS/
DISTRIBUTORS - 1.38%
34,642* Bass........................... $ 636,534
60,500 Diageo......................... 684,292
16,000 Kirin Brewery Co., Ltd......... 148,921
12,000 LVMH (Moet Hennessy Louis
Vuitton) - ADR................ 508,500
45,000 Sapporo Breweries.............. 170,590
-----------
2,148,837
-----------
BROADCASTING - 0.48%
50,000 British Sky Broadcasting Group
plc........................... 351,976
764 Canal Plus..................... 138,677
40,000 Mediaset....................... 256,542
-----------
747,195
-----------
BUILDING MATERIALS - 1.90%
20,000 Asahi Glass Co. Ltd............ 108,022
1,223 Cie De St Gobain............... 241,207
31,072 CRH plc........................ 447,547
2,505 Fletcher Challenge Building
Division...................... 41,959
2,700 Glaverbel SA................... 399,973
725 Holderbank Finance Glarus...... 926,865
40,000 Inax Corp...................... 135,750
343* Lafarge........................ 34,971
4,116 Lafarge SA..................... 417,585
15,000 Tostem Corp.................... 192,360
-----------
2,946,239
-----------
CHEMICAL - MAJOR - 1.36%
25,000 BASF AG........................ 1,158,750
10,000 Bayer AG....................... 478,072
10,000 Bayer AG - ADR................. 478,462
-----------
2,115,284
-----------
CHEMICAL - MISCELLANEOUS - 1.84%
13,603 Air Liquide - ADR.............. 536,136
5,100 Akzo Nobel N V- ADR............ 533,587
23,420 BOC Group plc.................. 371,044
7,500 Degussa Ag..................... 478,773
6,000 Imperial Chemical Industries
plc - ADR..................... 447,750
13,100 Shin Etsu Chemical Co.......... 243,574
50,000 Toray Industries Inc........... 249,115
-----------
2,859,979
-----------
</TABLE>
88
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
34 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
CONGLOMERATES - 1.21%
6,890 Broken Hill Proprietary Co.
Ltd. - ADR.................... $ 118,422
34,942* Btr............................ 115,140
15,408* Btr Plc........................ 211,860
30,000 Hutchison Whampoa.............. 156,794
3,300 Itochu Corp. - ADR............. 74,305
71,250 Keppel Corp. Ltd............... 142,117
26,875 Keppel Corp. Ltd. - ADR........ 107,242
8,157 Lagardere Groupe............... 358,564
70,000 Marubeni Corp.................. 141,527
3,200 Marubeni Corp. - ADR........... 64,663
22,000 Mitsubishi Corp................ 132,804
50,000 Mitsui & Co.................... 256,336
----------
1,879,774
----------
CONSUMER FINANCE - 0.03%
37,000 Nippon Shinpan Co.............. 49,960
----------
COSMETICS/TOILETRIES - 1.44%
1,100 Loreal Co...................... 546,231
15,400 Loreal Co. - ADR............... 1,529,505
14,490 Shiseido Ltd. - ADR............ 168,359
----------
2,244,095
----------
DRUGS - 7.80%
26,666 Astra AB....................... 535,885
47,900 Glaxo Wellcome plc - ADR....... 2,583,606
7,700 Kissei Pharmaceutical Co....... 97,577
1,600 Novartis Ag.................... 2,708,606
5,000 Ono Pharmaceutical............. 111,560
200 Roche Holdings AG.............. 2,056,699
10,000 Sankyo Co. Ltd................. 241,173
148,897 Smithkline Beecham............. 1,613,590
35,000 Takeda Chemical Industries Ltd. 904,759
30,900 Zeneca Group plc - ADR......... 1,278,488
----------
12,131,943
----------
ELECTRICAL EQUIPMENT - 1.52%
1,000 Barco.......................... 255,776
15,000 Fanuc.......................... 552,387
30,000 Fujikura....................... 136,905
84,000 General Electric plc........... 688,730
10,400 General Electric plc - ADR..... 85,262
10,000 Murata Manufacturing Co........ 289,552
3,400 Sumitomo Electric Industries
Ltd.- ADR..................... 355,054
----------
2,363,666
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
ELECTRONIC INSTRUMENTS - 2.60%
50,000 Hitachi Ltd.................... $ 329,627
8,550 Hitachi Ltd. - ADR............. 567,506
6,000 Kyocera Corp................... 292,873
25,000 NEC Corp....................... 254,531
5,100 NEC Corp. - ADR................ 260,100
50,000 Racal Electronics plc.......... 307,877
7,110 Schneider SA................... 601,314
8,000 Siemens AG..................... 516,520
12,000 Siemens AG - ADR............... 775,412
25,000 Yokogawa Electric.............. 129,251
----------
4,035,011
----------
FINANCE COMPANIES - 2.94%
20,000 Abbey National................. 357,040
63,000 ABN Amro Holdings N V.......... 1,525,621
126 Dekia France................... 17,121
8,182 Fortis Amev NV................. 490,664
20,180 ING Groep NV................... 1,385,772
3,984 Societe Generale............... 789,076
----------
4,565,294
----------
FOODS - 3.29%
25,000 Ajinomoto Inc.................. 210,304
1,900 Ajinomoto Inc. - ADR........... 159,744
22,084 Cadbury Schweppes plc.......... 337,791
3,929 Cadbury Schweppes plc - ADR.... 240,651
31,794 Coca Cola Amatil Ltd........... 233,954
10,000 Daiei, Inc..................... 28,161
11,500 Daiei, Inc. - ADR.............. 63,250
100,000 Golden Hope Plantations........ 109,227
1,000 Groupe Danone.................. 269,263
30,000 Nestle S A - ADR............... 3,218,862
30,750 Tate & Lyle plc................ 250,116
----------
5,121,323
----------
FOOTWEAR - 0.17%
1,500 Adidas AG...................... 264,817
----------
FREIGHT - 0.67%
98,000 Mitsui Osk Lines Ltd........... 150,018
40,000 Nippon Yusen Kabushiki Kaish... 138,349
8,570 Nippon Yusen Kabushiki Kaish -
ADR.......................... 296,253
33,599 P & O Steam Navigation......... 462,890
----------
1,047,510
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
HOME BUILDERS - 0.27%
15,000 Daiwa House Industry Co. Ltd... $ 116,868
214* Sekisui Homes Ltd. - ADR....... 15,830
20,000 Sekisui House, Ltd............. 148,025
3,000 Skanska Ab..................... 141,630
----------
422,353
----------
HOSPITAL SUPPLIES - 0.65%
2,000 Novo-Nordisk A/S............... 314,803
8,800 Novo-Nordisk A/S - ADR......... 690,800
----------
1,005,603
----------
HOUSEHOLD PRODUCTS - 0.88%
7,000 Katokichi Co................... 77,991
16,400 Unilever N V - ADR.............. 1,294,575
----------
1,372,566
----------
INFORMATION PROCESSING - 1.03%
14,000 Fujitsu Ltd.................... 160,734
7,200 Fujitsu Ltd. - ADR............. 413,091
2,000 SAP AG......................... 1,033,487
----------
1,607,312
----------
INSURANCE - CASUALTY - 0.29%
25,000 Mitsui Marine & Fire........... 122,752
50,000 Nippon Fire & Marine
Insurance..................... 191,350
25,000 Sumitomo Marine & Fire......... 138,999
----------
453,101
----------
INSURANCE - LIFE - 1.19%
66,911 Irish Life plc................. 549,708
15,240 Prudential plc - ADR........... 1,010,849
20,000* Skandia Forsakring............. 292,192
----------
1,852,749
----------
INSURANCE - MULTILINE - 3.79%
3,000 Allianz AG..................... 948,298
88* Allianz AG..................... 27,570
27,313 Assic Generali................. 877,807
10,962 AXA UAP........................ 1,247,722
1,500 Munchener Ruckvers............. 681,379
55,267 Royal Sun Alliance............. 586,288
154,095 Sedgwick Group plc............. 372,492
500 Swiss Reinsurance AG........... 1,151,873
----------
5,893,429
----------
</TABLE>
89
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 35
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
LEISURE TIME - 1.16%
20,000 Canon, Inc. - ADR.............. $ 470,000
15,000 Fuji Photo..................... 507,979
53,882 Ladbroke Group plc............. 304,499
88,050 Rank Group..................... 513,409
-----------
1,795,887
-----------
LODGING - 0.15%
297,916 Hong Kong & Shanghai Hotels.... 159,550
22,916* Hong Kong & Shanghai Hotels
(Warrants).................... 29
180,000 Hotel Properties............... 65,572
-----------
225,151
-----------
MACHINE TOOLS - 0.39%
35,000 Amada Co., Ltd................. 176,908
16,000 Makita Corp. - ADR............. 167,000
25,000 Minebea Co. Ltd................ 256,517
-----------
600,425
-----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.75%
3,501* Algeco......................... 377,427
2,000 Groupe Gtm..................... 186,528
2,000 Jean Lefebvre SA............... 165,134
52,000 Kajima Corp.................... 139,678
2,340 Kajima Corp. - ADR............. 62,821
80,000 Kumagai Gumi Co................ 40,263
16,000* Kumagai Gumi Co. (Warrants).... 21
70,000 Shimizu Corp................... 192,072
-----------
1,163,944
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 2.62%
10,000 Atlas Copco AB Series A........ 289,641
125 Bobst SA....................... 236,247
61,056* British Aerospace.............. 541,495
8,000 Ebara Corp..................... 71,687
2,530 Ebara Corp. - ADR.............. 226,589
100,000 Halma plc...................... 209,063
50,000 Kawasaki Heavy Industries...... 93,509
70,000 Kubota Corp.................... 169,326
1,350 Kubota Corp. - ADR............. 67,162
750 Man AG......................... 298,445
1,000 Mannesmann AG.................. 978,002
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
MACHINERY - INDUSTRIAL/
SPECIALTY - Continued
612 Rauma Oy....................... $ 12,639
49,662 Rolls Royce.................... 236,647
25,367 Siebe plc...................... 635,980
-----------
4,066,432
-----------
MEDICAL TECHNOLOGY - 0.02%
20,000* Instrumentation Laboratory
S. p. A. ..................... 32,500
-----------
MERCHANDISE - SPECIALTY - 1.22%
42,487 BAA plc........................ 507,617
10,000 Esselte AB Series B............ 234,775
35,000 Great Universal Stores plc..... 497,626
10,000 Hennes and Mauritz............. 561,418
1,500 Herlitz AG..................... 94,157
-----------
1,895,593
-----------
MERCHANDISING -
DEPARTMENT - 0.99%
500 Karstadt AG.................... 261,314
15,000 Marks & Spencer plc............ 133,768
15,033 Marks & Spencer plc - ADR...... 804,559
16,000 Marui Co., Ltd................. 245,505
36,000 Mitsukoshi Ltd................. 91,761
200 Mitsukoshi Ltd. - ADR.......... 5,095
-----------
1,542,002
-----------
MERCHANDISING - FOOD - 1.47%
15,607 Ahold Kon Nv................... 492,800
1,550 Carrefour SA................... 947,150
10,000* Delhaize-Le Lion, S.A.......... 686,328
15,000 Melco International Development
Limited....................... 1,452
10,000 Uny Co. Ltd.................... 150,913
-----------
2,278,643
-----------
MERCHANDISING - MASS - 0.65%
4,356 Familymart Co.................. 163,559
10,200 Ito-Yokado Co. Ltd. - ADR...... 504,900
6,500 Jeronimo Martins Sgps.......... 293,416
20,000 Seiyu Ltd...................... 42,747
-----------
1,004,622
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
METALS - MISCELLANEOUS - 0.93%
200* Alusuisse Lonza Holdings....... $ 268,646
37,410 NMC............................ 117,140
109,658 North Ltd...................... 255,465
8,062 Rio Tinto Limited.............. 388,700
6,432 Rio Tinto plc.................. 80,419
6,700 Rio Tinto plc.................. 338,350
----------
1,448,720
----------
METALS - STEEL - 0.98%
500 Bekaert SA..................... 394,469
36,700 British Steel plc.............. 90,812
2,000 British Steel plc - ADR........ 50,875
50,000 Cockerill Sambre............... 297,635
60,000 Kawasaki Steel................. 96,180
5,420 Kawasaki Steel - ADR........... 86,836
78,000 Sumitomo Metal Industries Ltd.. 121,092
50,000 Sumitomo Metal Mining.......... 212,290
2,000* Vallourec Usin................. 169,480
-----------
1,519,669
-----------
MISCELLANEOUS - 0.39%
30,000 Rexam.......................... 152,142
8,000 Secom Co....................... 454,618
-----------
606,760
-----------
OIL - INTEGRATED
INTERNATIONAL - 6.05%
27,405 British Petroleum Co. PLC - ADR 2,428,768
20,946 Elf Aquitaine SA - ADR......... 1,436,110
225,000 Eni S.p.A...................... 1,590,870
10,000 Repsol S A - ADR............... 547,500
40,392 Royal Dutch Pete Co............ 2,264,477
9,207 Total.......................... 1,143,373
-----------
9,411,098
-----------
OIL/GAS PRODUCERS - 0.56%
2,505 Fletcher Challenge Energy
Division...................... 78,125
3,500 Norsk Hydro A/S - ADR.......... 157,281
3,000 OMV AG......................... 434,187
62,500 Santos Ltd..................... 205,488
-----------
875,081
-----------
</TABLE>
90
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
36 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
PAPER/FOREST PRODUCTS - 0.92%
150,801 Fletcher Challenge Forest Ltd.. $ 92,902
4,326 Fletcher Challenge Ltd. - ADR.. 27,578
5,010 Fletcher Challenge Paper
Division...................... 65,756
22,000 New Oji Paper Co., Ltd......... 92,931
300 New Oji Paper Co., Ltd. - ADR.. 12,666
60,000 Nippon Paper Industries........ 259,080
15,000 Stora Kopparbergs.............. 243,068
22,000 UPM - Kymmene Corp............. 637,693
----------
1,431,674
----------
PUBLISHING - NEWS - 0.76%
50,651 Independent Newspapers plc..... 318,596
22,500 News Corp Ltd. - ADR........... 554,062
21,379 United News & Media plc........ 307,456
----------
1,180,114
----------
PUBLISHING/PRINTING - 0.68%
43,333 Reuters Group.................. 497,200
20,000 Trelleborg Ab.................. 283,261
2,020 Wolters Kluwer NV.............. 283,757
----------
1,064,218
----------
RAILROAD - 0.59%
30,000 Fukuyama Transporting Co....... 117,843
9,218 Nagoya Railroad Co. Ltd. - ADR. 274,746
101,970 Odakyu Electric Railway Co.
Ltd. ......................... 332,071
60,000 Tokyu Corp..................... 197,126
----------
921,786
----------
REAL ESTATE - 1.33%
6,000* Asticus Ab..................... 66,605
12,000 Diligentia..................... 110,242
41,427 Hammerson plc.................. 356,583
240,000 Hang Lung Development Co....... 247,774
43,000 Mitsubishi Estate Co. Ltd...... 377,868
35,000 Mitsui Fudosan................. 283,306
26,163 New World Development Co....... 61,786
83,597 Sun Hung Kai Properties Ltd.... 403,475
128,000 Wharf (Holdings) Ltd........... 163,531
----------
2,071,170
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
SECURITIES RELATED - 0.59%
25,000 Daiwa Securities Co. Ltd....... $ 95,133
46,000 Mitsubishi Trust & Banking
Corp. ........................ 408,549
3,800 Nomura Securities Co. Ltd. -
ADR .......................... 414,102
160,000* Peregrine Investment Holdings
Ltd. ......................... 0
6,000* Yamaichi Securities Co. Ltd. -
ADR........................... 0
----------
917,784
----------
TELECOMMUNICATIONS - 10.20%
2,000* Alcatel Alst Cge............... 427,879
35,550 British Telecommunications
plc. ......................... 371,028
13,379 British Telecommunications
plc - ADR ................... 1,396,433
45,924 Cable & Wireless plc........... 520,179
30,000 Deutsche Telekom............... 804,540
30,400 Ericsson LMTEL Co Class B - ADR 847,400
10,000* France Telecom................. 560,087
40,600 Hong Kong Telecommunications
Ltd. - ADR.................... 738,412
15,621 Kon Ptt Nederland.............. 873,076
5,000* Netcom Asa..................... 126,080
300 Nippon Tel+Tel Cp.............. 2,469,493
14,000* Nokia Ab Oy.................... 908,672
2,600 Telecom Corp. of New Zealand
Ltd. - ADR.................... 95,063
250,000 Telecom Italia Mobile.......... 1,478,242
186,111* Telecom Italia Spa............. 1,406,419
14,000 Telefonica de Espana........... 625,404
6,290 Telefonica de Espana - ADR..... 846,005
115,000 Telekom Malaysia Berhad........ 263,185
10,000 Vodafone Group plc - ADR....... 1,098,750
----------
15,856,347
----------
TEXTILE - PRODUCTS - 0.46%
20,000 Courtaulds Textiles plc........ 95,711
30,000* Marzotto & Figli S.p.A......... 460,751
15,000 Wacoal Corp.................... 151,636
----------
708,098
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- ------------
<S> <C> <C>
TOBACCO - 0.76%
77,759 B.A.T. Industries plc......... $ 700,426
20,100 B.A.T. Industries plc - ADR... 371,850
32,000 Swedish Match AB............... 112,692
------------
1,184,968
------------
UTILITIES - COMMUNICATION - 0.17%
1,500 Telecel Comuni Pes............. 262,798
------------
UTILITIES - ELECTRIC - 3.91%
55,000 Clp Holdings................... 237,063
48,000 Endesa S A..................... 1,152,000
6,500 Hidroel Cantabrico............. 304,520
30,000 Iberdrola SA................... 494,886
16,600 Kansai Electric Power Co. Inc.. 264,301
60,000 National Power................. 558,589
4,000 Oesterreichisch
Elektrizitatswirt Schafts -
AG Class A.................... 469,632
10,000 RWE AG - ADR................... 531,189
48,488 Scottish Power plc............. 437,951
95,000 Tenaga Nasional Berhad......... 156,884
25,200 Tokyo Electric Power........... 482,201
15,000 VEBA AG........................ 985,288
------------
6,074,504
------------
UTILITIES - GAS, DISTRIBUTION - 0.32%
44,117 Bg............................. 227,518
127,000 Osaka Gas Co................... 274,193
------------
501,711
------------
WATER SERVICES - 1.71%
21,503 Hyder plc...................... 343,131
26,385 Thames Water plc............... 428,576
43,780 United Utilities plc........... 593,499
6,349* Vivendi........................ 1,275,531
10,196 Vivendi (Warrants)............. 17,723
------------
2,658,460
------------
TOTAL COMMON STOCKS
(Cost $115,663,437)............ 153,332,301
------------
</TABLE>
91
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 37
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- ------------
<S> <C> <C>
UNITED STATES GOVERNMENT -
SHORT TERM - 0.14%
U.S. TREASURY BILLS - 0.14%
$ 225,000 United States Treasury Bills:
4.94% due 6/4/98.............. $ 199,917
4.85% due 6/4/98.............. 24,990
------------
TOTAL UNITED STATES GOVERNMENT -
SHORT TERM
(Cost $224,907)................ 224,907
------------
TOTAL INVESTMENTS
(Cost $115,888,344) - 98.77%... 153,557,208
Other assets and liabilities,
net - 1.23%................... 1,911,959
------------
NET ASSETS (equivalent
to $11.95 per share on
13,009,276 shares
outstanding) - 100%........... $155,469,167
============
</TABLE>
* Non-income producing
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ----------- ------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at
5/31/98)
30 (2) Nikkei 225 Futures
(June/$113.22)................ $ (121,309)
===========
</TABLE>
(1) U.S. Treasury Bills with a market value of approximately
$225,000 were maintained in a segregated account with a portion
placed as collateral for futures contracts.
(2) Per 500
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,009,276 shares outstanding................. $ 130,093
Additional paid in capital..................... 106,757,575
Undistributed net realized gain on
securities.................................... 10,593,190
Undistributed net investment income............ 468,817
Unrealized appreciation (depreciation) of:
Investments................... $ 37,668,864
Futures ...................... (121,309)
Foreign currency translation.. (28,063) 37,519,492
------------ -------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING.................................. $ 155,469,167
=============
</TABLE>
92
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - FINANCIAL STATEMENTS
38
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $465,853)............. $ 3,358,662
Interest............................................................. 489,661
-----------
Total investment income............................................ 3,848,323
-----------
EXPENSES:
Advisory fees........................................................ 582,798
Custodian and accounting services.................................... 32,720
Reports to shareholders.............................................. 10,913
Audit fees and tax services.......................................... 3,182
Directors' fees and expenses......................................... 3,684
Insurance............................................................ 2,555
Miscellaneous........................................................ 32,300
-----------
Total expenses..................................................... 668,152
-----------
NET INVESTMENT INCOME................................................ 3,180,171
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments.......................................... $11,174,773
Foreign currency translations........................ (153,279)
Futures contracts.................................... (93,539) 10,927,955
-----------
Net unrealized appreciation (depreciation)
during the year:
Investments.......................................... 1,952,789
Foreign currency translation......................... (52,149)
Futures contracts.................................... (423,327) 1,477,313
----------- -----------
Net realized and unrealized gain on securities and
foreign currencies during the year.............................. 12,405,268
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $15,585,439
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 3,180,171 $ 3,339,991
Net realized gain on securities and foreign
currency transactions................................ 10,927,955 6,077,411
Net unrealized appreciation of securities and
translation of foreign currencies during
the year............................................. 1,477,313 3,956,886
-------------- --------------
Increase in net assets resulting from operations.... 15,585,439 13,374,288
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................. (3,388,878) (3,206,176)
Net realized gain on securities........................ (4,595,687) (6,030,686)
-------------- --------------
Decrease in net assets resulting from distributions
to shareholders..................................... (7,984,565) (9,236,862)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold....................... 58,848,665 74,488,255
Proceeds from capital stock issued for distributions
reinvested........................................... 7,984,565 9,236,862
-------------- --------------
66,833,230 83,725,117
Cost of capital stock repurchased...................... (100,401,920) (112,684,896)
-------------- --------------
Decrease in net assets resulting from capital
stock transactions................................. (33,568,690) (28,959,779)
-------------- --------------
TOTAL DECREASE IN NET ASSETS........................... (25,967,816) (24,822,353)
NET ASSETS:
Beginning of year...................................... 181,436,983 206,259,336
-------------- --------------
End of year (including undistributed net investment
income of $468,817 and $448,887)..................... $ 155,469,167 $ 181,436,983
-------------- --------------
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold........................... 5,111,681 6,846,567
Shares issued for distributions reinvested............. 728,332 848,956
Shares of capital stock repurchased ................... (8,688,179) (10,334,613)
-------------- --------------
Decrease in shares outstanding....................... (2,848,166) (2,639,090)
Shares outstanding:
Beginning of year.................................... 15,857,442 18,496,532
-------------- --------------
End of year.......................................... 13,009,276 15,857,442
============== ==============
</TABLE>
93
<PAGE>
================================================================================
GROWTH FUND - STATEMENT OF NET ASSETS
May 31, 1998 39
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS - 96.64%
ADVERTISING - 3.86%
415,000* ADVO, Inc...................... $ 10,400,937
330,000* Catalina Marketing Corp........ 14,932,500
570,000* Outdoor Systems Inc............ 17,100,000
------------
42,433,437
------------
AUTO - CARS - 0.73%
330,000* Avis Rent A Car Inc............ 8,002,500
------------
AUTO - REPLACEMENT PARTS - 1.89%
625,000* AutoZone, Inc.................. 20,781,250
------------
BANKS - REGIONAL - 2.59%
200,000 BANC ONE CORP.................. 11,025,000
450,000 Norwest Corp................... 17,493,750
------------
28,518,750
------------
BROADCASTING - 7.56%
195,000 CBS Corp....................... 6,191,250
285,000* Chancellor Media Corp.
Class A...................... 11,916,588
625,000 Comcast Corp. Class A Special.. 21,425,812
225,000* Jacor Communications, Inc...... 11,896,875
520,000* Sinclair Broadcast Group, Inc.. 13,227,500
559,350* Tele-Comm Liberty Media Group
Class A....................... 18,458,550
------------
83,116,575
------------
ENTERTAINMENT - 3.27%
280,000 Carnival Corp. Class A......... 18,970,000
150,000 Walt Disney Co................. 16,968,750
------------
35,938,750
------------
FINANCE COMPANIES - 1.29%
190,000 Associates First Capital Corp.. 14,214,375
------------
FINANCIAL SERVICES - 1.76%
560,000 CIT Group Inc.................. 17,640,000
60,000 Heller Financial Inc........... 1,672,500
------------
19,312,500
------------
GOVERNMENT SPONSORED - 3.59%
460,000 Federal Home Loan Mortgage
Corp. ........................ 20,930,000
220,000 Federal National Mortgage
Association................... 13,172,500
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
GOVERNMENT SPONSORED - Continued
135,000 SLM Holding Corp............... $ 5,391,562
------------
39,494,062
------------
FUNERAL SERVICES - 2.04%
550,000 Service Corp. International.... 22,481,250
------------
HEALTHCARE - 6.24%
275,000 Cardinal Health, Inc........... 24,509,375
550,000 PhyCor, Inc.................... 9,281,250
700,000* Quorum Health Group Inc........ 21,043,750
450,000* Total Renal Care Holdings...... 13,809,375
------------
68,643,750
------------
HOSPITAL MANAGEMENT - 1.27%
600,000* Concentra Managed Care, Inc.... 14,025,000
------------
HOUSEHOLD PRODUCTS - 0.27%
90,000 ServiceMaster Co............... 2,975,625
------------
HUMAN RESOURCES - 4.05%
200,000* Accustaff, Inc................. 6,587,500
685,000* Interim Services Inc........... 19,907,813
600,000* Metamor Worldwide, Inc......... 18,018,780
------------
44,514,093
------------
INFORMATION PROCESSING - 11.80%
660,000* Acxiom Corp.................... 14,272,500
470,000* Affiliated Computer Services
Class A....................... 15,656,875
415,000* BISYS Group, Inc............... 15,406,875
1,000,000* Cendant Corp................... 21,687,500
550,000 First Data Corp................ 18,287,500
410,000* Galileo International Inc...... 16,143,750
337,500 Paychex, Inc................... 12,150,000
475,000* SunGard Data Systems, Inc...... 16,209,375
------------
129,814,375
------------
INSURANCE - MISCELLANEOUS - 1.79%
300,000 Ace Limited.................... 10,687,500
150,000 MGIC Investment Corp........... 8,990,625
------------
19,678,125
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
INSURANCE - MULTILINE - 2.28%
36,300* Fairfax Financial Hldgs Ltd.... $ 14,002,747
182,500 Travelers Group, Inc........... 11,132,500
------------
25,135,247
------------
LEISURE TIME - 1.46%
185,500* Mirage Resorts, Inc............ 3,860,719
230,000* Premier Parks, Inc............. 12,218,750
------------
16,079,469
------------
LODGING - 1.80%
700,000* Extended Stay America, Inc..... 7,700,000
385,000 Hilton Hotels Corp............. 12,103,437
------------
19,803,437
------------
MERCHANDISE - SPECIALTY - 13.04%
410,000 Circuit City Stores, Inc....... 17,373,750
440,000* Cole National Corp. Class A.... 17,077,500
960,300* Corporate Express, Inc......... 11,133,526
320,000* CostCo Companies, Inc.......... 18,520,000
660,000* General Nutrition Cos., Inc.... 20,831,250
235,000 Home Depot, Inc................ 18,462,188
306,300 Ikon Office Solutions Inc...... 6,489,731
250,000* Kohl's Corp.................... 11,890,625
760,000* Viking Office Products, Inc.... 21,731,288
------------
143,509,858
------------
MERCHANDISING - FOOD - 1.46%
440,000* Safeway, Inc................... 16,032,500
------------
MERCHANDISING - MASS - 1.56%
400,000* Fred Meyer, Inc................ 17,200,000
------------
MISCELLANEOUS - 0.44%
215,000* Corrections Corp. of America... 4,891,250
------------
OIL - SERVICES - 3.62%
155,000 Camco International, Inc....... 10,811,250
100,000 Schlumberger Ltd............... 7,806,250
185,000* Smith International, Inc....... 9,076,563
140,000* Western Atlas Inc.............. 12,118,750
------------
39,812,813
------------
</TABLE>
94
<PAGE>
================================================================================
GROWTH FUND - STATEMENT OF NET ASSETS
40 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- --------------
<S> <C> <C>
POLLUTION CONTROL - 3.63%
395,000* Republic Industries, Inc...... $ 9,726,875
640,000* USA Waste Services, Inc....... 30,200,000
--------------
39,926,875
--------------
PUBLISHING - NEWS - 1.09%
180,000 Tribune Co.................... 12,037,500
--------------
RESTAURANTS - 1.63%
485,000* Outback Steakhouse Inc........ 17,884,375
--------------
SECURITIES RELATED - 3.37%
560,000 Franklin Resources, Inc....... 27,370,000
125,000 Morgan Stanley, Dean Witter,
Discover and Co.............. 9,757,813
--------------
37,127,813
--------------
TELECOMMUNICATIONS - 6.26%
550,000* Airtouch Communications, Inc.. 26,193,750
950,000* Paging Network, Inc........... 13,003,125
114,700* 360 Communications Co......... 3,276,119
600,000* Western Wireless Corp
Class A..................... 11,100,000
335,000* WorldCom, Inc................. 15,242,500
--------------
68,815,494
--------------
UTILITIES - COMMUNICATION - 1.00%
205,000 MCI Communications Corp....... 10,961,104
--------------
TOTAL COMMON STOCKS
(Cost $ 782,991,834).......... 1,063,162,152
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
----- --------------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 3.63%
CONSUMER FINANCE - 1.57%
Beneficial Corp.,
$17,239,000 5.55% due 06/02/98....... $ 17,236,342
--------------
FINANCE COMPANIES - 1.59%
Ford Motor Credit Co.
17,536,000 5.50% due 06/01/98...... 17,536,000
--------------
SECURITIES RELATED - 0.47%
Merrill Lynch & Co., Inc.
5,218,000 5.60% due 06/03/98....... 5,216,377
--------------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $39,988,719)........... 39,988,719
--------------
TOTAL INVESTMENTS
(Cost $822,980,553) - 100.27% 1,103,150,871
Other assets and liabilities,
net - (0.27)%............... (3,013,808)
--------------
NET ASSETS (equivalent
to $22.08 per share on
49,832,259 shares
outstanding) - 100%......... $1,100,137,063
==============
</TABLE>
*Non-income producing
<TABLE>
<CAPTION>
MARKET
VALUE
--------------
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
49,832,259 shares outstanding.......... $ 498,323
Additional paid in capital............... 768,928,479
Undistributed net realized gain on
securities............................. 51,655,725
Accumulated net investment loss.......... (1,115,782)
Unrealized appreciation of securities.... 280,170,318
--------------
Net Assets Applicable to Shares
Outstanding............................ $1,100,137,063
==============
</TABLE>
95
<PAGE>
================================================================================
GROWTH FUND - FINANCIAL STATEMENTS
41
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends............................................................ $ 2,806,130
Interest............................................................. 4,126,518
------------
Total investment income............................................ 6,932,648
------------
EXPENSES:
Advisory fees........................................................ 7,593,303
Custodian and accounting services.................................... 213,073
Reports to shareholders.............................................. 81,027
Audit fees and tax services.......................................... 27,624
Directors' fees and expenses......................................... 18,286
Miscellaneous........................................................ 51,367
------------
Total expenses..................................................... 7,984,680
------------
NET INVESTMENT LOSS.................................................. (1,052,032)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain (loss) on:
Investments.......................................... $ 52,237,757
Foreign currency translation......................... (63,750) 52,174,007
------------
Net unrealized appreciation of securities during the year............ 165,960,273
------------
Net realized and unrealized gain on securities during the year..... 218,134,280
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $217,082,248
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income (loss)......................... $ (1,052,032) $ 552,393
Net realized gain on securities...................... 52,174,007 16,994,556
Net unrealized appreciation of securities during
the year........................................... 165,960,273 39,599,901
-------------- ------------
Increase in net assets resulting from operations... 217,082,248 57,146,850
-------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (303,215) (503,196)
Net realized gain on securities...................... (15,121,487) (11,891,551)
-------------- ------------
Decrease in net assets resulting from distributions
to shareholders................................... (15,424,702) (12,394,747)
-------------- ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold..................... 155,432,936 268,628,198
Proceeds from capital stock issued for
distributions reinvested........................... 15,424,702 12,394,747
-------------- ------------
170,857,638 281,022,945
Cost of capital stock repurchased.................... (20,032,134) (3,908,102)
-------------- ------------
Increase in net assets resulting from capital
stock transactions............................... 150,825,504 277,114,843
-------------- ------------
TOTAL INCREASE IN NET ASSETS......................... 352,483,050 321,866,946
NET ASSETS:
Beginning of year.................................... 747,654,013 425,787,067
-------------- ------------
End of year (including undistributed net investment
(loss)/income of ($1,115,782) and $303,215)........ $1,100,137,063 $747,654,013
============== ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold......................... 7,600,994 16,096,764
Shares issued for distributions reinvested........... 769,312 733,851
Shares of capital stock repurchased ................. (959,921) (234,388)
-------------- ------------
Increase in shares outstanding..................... 7,410,385 16,596,227
Shares outstanding:
Beginning of year.................................. 42,421,874 25,825,647
-------------- ------------
End of year........................................ 49,832,259 42,421,874
============== ============
</TABLE>
96
<PAGE>
================================================================================
GROWTH & INCOME FUND - STATEMENT OF NET ASSETS
42 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS - 92.75%
ADVERTISING - 1.31%
76,000 Omnicom Group, Inc............. $ 3,557,750
------------
AIRLINES - 1.11%
65,000* Alaska Air Group, Inc.......... 3,010,313
------------
BANKS - NEW YORK CITY - 1.27%
23,000 CitiCorp....................... 3,429,875
------------
BANKS - OTHER - 2.35%
28,000 BankAmerica Corp............... 2,315,250
60,000 Mellon Bank Corp............... 4,046,250
------------
6,361,500
------------
BANKS - REGIONAL - 3.94%
90,000 Norwest Corp................... 3,498,750
54,000 Star Banc Corp................. 3,294,000
40,000 State Street Corp.............. 2,757,500
22,400 Zions Bancorporation........... 1,142,400
------------
10,692,650
------------
BROADCASTING - 1.94%
55,000* Clear Channel Communications,
Inc.......................... 5,273,125
------------
BUILDING MATERIALS - 1.98%
80,000 HON INDUSTRIES Inc............. 2,560,000
20,000 Lowe's Companies, Inc.......... 1,583,750
40,000* Nortek Inc. Com................ 1,230,000
------------
5,373,750
------------
CHEMICAL - MAJOR - 0.01%
600 Hercules, Inc.................. 26,438
------------
DRUGS - 7.37%
363* Crescendo Phamarceuticals Corp. 4,628
60,000 Eli Lilly and Co............... 3,686,250
105,321 ICN Pharmaceuticals, Inc....... 4,548,550
61,000 Pfizer, Inc.................... 6,393,562
60,000 Warner-Lambert Co.............. 3,828,750
35,000* Watson Pharmaceuticals, Inc.... 1,531,250
------------
19,992,990
------------
ELECTRICAL EQUIPMENT - 1.23%
40,000* General Electric Co............ 3,335,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
FINANCE COMPANIES - 1.28%
15,000* Fleetwood Capital Trust........ $ 802,500
55,000 SunAmerica, Inc................ 2,674,375
------------
3,476,875
------------
FOODS - 2.54%
56,000 Campbell Soup Co............... 3,052,000
25,000 Trinity Industries, Inc........ 1,193,750
80,000* U. S. Foodservice.............. 2,650,000
------------
6,895,750
------------
FREIGHT - 0.48%
35,000 Airborne Freight Corp.......... 1,303,750
------------
HEALTHCARE - 2.86%
45,000 Cardinal Health, Inc........... 4,010,625
131,480* HealthSouth Corp............... 3,730,745
------------
7,741,370
------------
HOME BUILDERS - 0.82%
50,000 Centex Corp.................... 1,787,500
25,000 Standard Pacific Corp.......... 432,813
------------
2,220,313
------------
HOSPITAL SUPPLIES - 1.36%
35,000 Medtronic, Inc................. 1,946,875
50,000* Safeskin Corp.................. 1,750,000
------------
3,696,875
------------
HOUSEHOLD PRODUCTS - 1.02%
55,000* Bed Bath & Beyond, Inc......... 2,760,313
------------
INFORMATION PROCESSING - 16.31%
20,000* America Online, Inc............ 1,666,250
100,000* BMC Software, Inc.............. 4,606,250
52,500 Cisco Systems, Inc............. 3,970,312
80,000 Compaq Computer Corp........... 2,185,000
75,000 Computer Associates
International................ 3,937,500
120,000 Compuware Corp................. 5,512,500
52,083* Data General Corp.............. 794,266
50,000* Dell Computer Corp............. 4,120,315
110,000* E M C Corp..................... 4,558,125
5,000 Microsoft Corp................. 466,875
110,000 Parametric Technology Corp..... 3,372,193
120,000* Peoplesoft Inc................. 5,242,500
14,183* Storage Technology Corp........ 1,189,599
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
INFORMATION PROCESSING - Continued
65,000 Sun Microsystems, Inc.......... $ 2,604,063
------------
44,225,748
------------
INSURANCE - CASUALTY - 1.02%
20,000 Progressive Corp............... 2,757,500
------------
INSURANCE - LIFE - 1.71%
40,000 Conseco Inc.................... 1,865,000
40,404 Equitable Cos., Inc............ 2,782,826
------------
4,647,826
------------
INSURANCE - MISCELLANEOUS - 1.28%
55,000 Executive Risk, Inc............ 3,461,563
------------
INSURANCE - MULTILINE - 4.78%
60,000 Allstate Corp.................. 5,647,500
70,000 Reliastar Financial Corp....... 3,027,500
69,999 Travelers Group, Inc........... 4,269,939
------------
12,944,939
------------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.88%
36,000 Illinois Tool Works Inc........ 2,376,000
------------
MEDICAL TECHNOLOGY - 1.56%
40,000 Guidant Corp................... 2,577,500
20,000* Sofamor Danek Group, Inc....... 1,662,500
------------
4,240,000
------------
MERCHANDISE - DRUG - 1.06%
15,910 CVS Corp....................... 1,116,683
50,000 Walgreen Co.................... 1,759,375
------------
2,876,058
------------
MERCHANDISE - SPECIALTY - 3.85%
55,312* Consolidated Stores Corp....... 2,112,226
20,000 Home Depot, Inc................ 1,571,250
113,062* Staples, Inc................... 2,840,682
84,000 TJX Companies, Inc............. 3,927,000
------------
10,451,158
------------
MERCHANDISING - DEPARTMENT - 1.95%
114,000 Dayton Hudson Corp............. 5,286,750
------------
</TABLE>
97
<PAGE>
================================================================================
GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 43
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
MERCHANDISING - FOOD - 3.49%
90,000 Albertsons, Inc................ $ 4,168,125
70,000* Safeway, Inc................... 2,550,625
50,000* Whole Foods Market, Inc........ 2,750,000
------------
9,468,750
------------
MERCHANDISING - MASS - 0.48%
25,000 Dollar Tree Stores Inc......... 1,293,750
------------
MOBILE HOMES - 1.05%
105,000 Oakwood Homes Corp............. 2,854,688
------------
MISCELLANEOUS - 1.97%
193,400* Brightpoint, Inc............... 3,058,138
100,000* Corrections Corp. of America... 2,275,000
------------
5,333,138
------------
MULTIMEDIA - 0.37%
25,000 Meredith Corp.................. 993,750
------------
OIL - INTEGRATED
INTERNATIONAL - 0.01%
180 British Petroleum Co. plc - ADR 15,953
------------
OIL - SERVICE - PRODUCTS - 1.81%
150,000 B.J. Services Co............... 4,903,125
------------
OIL - SERVICES - 5.29%
60,000 Baker Hughes Inc............... 2,160,000
80,000 Halliburton Co................. 3,790,000
35,000 Schlumberger Ltd............... 2,732,187
25,000* Smith International, Inc....... 1,226,562
90,000 Transocean Offshore, Inc....... 4,438,125
------------
14,346,874
------------
OIL/GAS PRODUCERS - 1.35%
27,285* Noble Affiliates, Inc.......... 1,065,820
90,000* R & B Falcon Corp.............. 2,581,875
------------
3,647,695
------------
POLLUTION CONTROL - 0.44%
45,000* Allied Waste Industries, Inc... 1,192,500
------------
PUBLISHING - NEWS - 0.91%
35,000 New York Times Co. Class A..... 2,467,500
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
SAVINGS & LOAN - 0.84%
30,000 H.F. Ahmanson & Co............. $ 2,287,500
------------
SEMICONDUCTORS - 1.22%
30,000 Intel Corp..................... 2,143,125
35,000 Maxim Integrated Products,
Inc.......................... 1,168,125
------------
3,311,250
------------
TELECOMMUNICATIONS - 3.40%
50,000* Airtouch Communications, Inc... 2,381,250
50,000* Tellabs, Inc................... 3,435,940
75,000* WorldCom, Inc.................. 3,412,500
------------
9,229,690
------------
TOBACCO - 1.10%
80,000 Philip Morris Cos Inc.......... 2,990,000
------------
UTILITIES - ELECTRIC - 1.75%
100,000* AES Corp....................... 4,756,250
------------
TOTAL COMMON STOCKS
(Cost $186,482,335)............ 251,508,592
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
-----
<S> <C> <C>
CONVERTIBLE BONDS - 6.43%
AEROSPACE/DEFENSE - 0.92%
$ 500,000 Rohr, Inc.,
7.75% due 05/15/04............ 1,732,591
500,000 SCI Systems, Inc.,
5.00% due 05/01/06............ 756,560
------------
2,489,151
------------
AIRLINES - 0.40%
500,000 Alaska Air Group, Inc.,
6.50% due 06/15/05............ 1,073,435
------------
BANKS - REGIONAL - 0.87%
2,000,000 Bank Atlantic Bancorp,
5.63% due 12/01/07............ 2,355,000
------------
DRUGS - 0.25%
500,000 ALZA Corp.,
5.00% due 05/01/06............ 681,250
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
----- ------------
<S> <C> <C>
ELECTRONIC INSTRUMENTS - 0.10%
$ 300,000 C - Cube Microsystems, Inc.,
5.88% due 11/01/05............ $ 271,500
------------
HEALTHCARE - 0.32%
1,000,000 PhyCor, Inc.,
4.50% due 02/15/03............ 876,250
------------
INFORMATION PROCESSING - 0.81%
500,000 Adaptec, Inc.,
4.75% due 02/01/04............ 399,375
1,500,000 National Data Corp.,
5.00% due 11/01/03............ 1,515,000
300,000 Data General Corp.,
6.00% due 05/15/04........... 272,625
------------
2,187,000
------------
LODGING - 0.20%
500,000 Hilton Hotels Corp.,
5.00% due 05/15/06........... 552,500
------------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.16%
500,000 Halter Marine Group, Inc.,
4.50% due 09/15/04............ 440,000
------------
MERCHANDISE - SPECIALTY - 0.41%
500,000 Home Depot, Inc.,
3.25% due 10/01/01............ 853,125
250,000 Inacom Corp.,
4.50% due 11/01/04............ 255,000
------------
1,108,125
------------
OIL - INTEGRATED DOMESTIC - 0.51%
1,000,000 Pennzoil Co.,
4.75% due 10/01/03............ 1,371,250
------------
OIL - SERVICE - 0.86%
2,000,000 Key Energy Group, Inc.,
5.00% due 09/15/04............ 1,642,500
500,000 Nabors Industries, Inc.,
5.00% due 05/15/06............ 695,000
------------
2,337,500
------------
</TABLE>
98
<PAGE>
================================================================================
GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED
44 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- ------------
<S> <C> <C>
OIL/GAS PRODUCERS - 0.24%
$ 500,000 Diamond Offshore Drilling, Inc.,
3.75% due 02/15/07............ $ 646,250
------------
PUBLISHING/PRINTING - 0.38%
1,000,000 World Color Press, Inc.,
6.00% due 10/01/07............ 1,035,000
------------
TOTAL CONVERTIBLE BONDS
(Cost $15,210,128)............. 17,424,211
------------
CORPORATE SHORT
TERM COMMERCIAL PAPER - 0.87%
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.87%
2,365,000 Cooper Industries, Inc.,
5.67% due 06/01/98............ 2,365,000
------------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $2,365,000).............. 2,365,000
------------
TOTAL INVESTMENTS
(Cost $204,057,463) - 100.05%.. 271,297,803
Other assets and liabilities,
net - (0.05%)................. (138,805)
------------
NET ASSETS (equivalent
$19.91 per share on
13,618,559 shares
outstanding) - 100%........... $271,158,998
============
</TABLE>
* Non-income producing
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,618,559 shares outstanding........... $ 136,186
Additional paid in capital................ 183,647,905
Undistributed net realized gain on
securities.............................. 19,961,158
Undistributed net investment income....... 173,409
Unrealized appreciation of securities..... 67,240,340
------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................. $271,158,998
============
</TABLE>
99
<PAGE>
================================================================================
GROWTH & INCOME FUND - FINANCIAL STATEMENTS
45
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends............................................................ $ 1,491,393
Interest............................................................. 1,616,330
-----------
Total investment income............................................ 3,107,723
-----------
EXPENSES:
Advisory fees........................................................ 1,907,885
Custodian and accounting fees........................................ 57,561
Reports to shareholders.............................................. 20,611
Audit fees and tax services.......................................... 7,217
Directors' fees and expenses......................................... 5,166
Miscellaneous........................................................ 13,114
-----------
Total expenses..................................................... 2,011,554
-----------
NET INVESTMENT INCOME................................................ 1,096,169
-----------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on securities...................................... 20,112,463
Net unrealized appreciation on securities during the year............ 21,794,919
-----------
Net realized and unrealized gain on securities during the year.... 41,907,382
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $43,003,551
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ................................................ $ 1,096,169 $ 1,134,645
Net realized gain on securities ...................................... 20,112,463 2,722,032
Net unrealized appreciation of securities during the year ............ 21,794,919 24,022,009
------------- -------------
Increase in net assets resulting from operations ................... 43,003,551 27,878,686
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................................ (1,084,032) (1,058,649)
Net realized gain on securities ...................................... (2,863,622) (3,131,642)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders ................................................... (3,947,654) (4,190,291)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ..................................... 31,809,939 70,892,821
Proceeds from capital stock issued for distributions reinvested ...... 3,947,654 4,190,291
------------- -------------
35,757,593 75,083,112
Cost of capital stock repurchased .................................... (13,199,616) (2,772,662)
------------- -------------
Increase in net assets resulting from capital stock transactions ... 22,557,977 72,310,450
------------- -------------
TOTAL INCREASE IN NET ASSETS ......................................... 61,613,874 95,998,845
NET ASSETS:
Beginning of year .................................................... 209,545,124 113,546,279
------------- -------------
End of year (including undistributed net investment income
of $173,409 and $161,272) .......................................... $ 271,158,998 $ 209,545,124
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ......................................... 1,662,136 4,647,143
Shares issued for distributions reinvested ........................... 209,426 268,315
Shares of capital stock repurchased .................................. (675,165) (177,920)
------------- -------------
Increase in shares outstanding ..................................... 1,196,397 4,737,538
Shares outstanding:
Beginning of year .................................................. 12,422,162 7,684,624
------------- -------------
End of year ........................................................ 13,618,559 12,422,162
============= =============
</TABLE>
100
<PAGE>
================================================================================
SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS
46 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
COMMON STOCKS - 97.90%
AEROSPACE/DEFENSE - 0.55%
165,000* SCI Systems, Inc............... $ 5,630,625
-----------
ELECTRICAL EQUIPMENT - 0.09%
70,000* Brooks Automation, Inc......... 901,250
-----------
ELECTRONIC INSTRUMENTS - 0.65%
110,000* Cognex Corp.................... 2,090,000
55,000* Lattice Semiconductor Corp..... 2,124,375
80,000* Marshall Industries............ 2,475,000
-----------
6,689,375
-----------
ENTERTAINMENT - 0.09%
48,500* N2K Inc........................ 956,363
-----------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 10.18%
85,000* AXENT Technologies, Inc........ 2,093,125
440,000* BMC Software, Inc.............. 20,267,500
53,000* Great Plains Software, Inc..... 1,934,500
355,000* Microsoft Corp................. 30,108,438
1,245,000* Oracle Corp.................... 29,413,125
1,700* Peerless Systems Corp.......... 30,812
165,000* Peoplesoft Inc................. 7,208,437
135,000 PLATINUM technology, Inc....... 3,695,625
11,000* Sap............................ 6,087,997
82,500* Veritas Software Corp.......... 3,328,363
-----------
104,167,922
-----------
INFORMATION PROCESSING - COM-
PUTER HARDWARE SYSTEMS - 3.36%
167,500* Dell Computer Corp............. 13,803,055
625,000* Electronics for Imaging, Inc... 12,343,750
205,000* Sun Microsystems, Inc.......... 8,212,813
-----------
34,359,618
-----------
INFORMATION PROCESSING -
COMPUTER SERVICES - 13.93%
245,000* America Online, Inc............ 20,411,562
110,000 Automatic Data Processing, Inc. 6,998,750
101,100 Checkfree Holdings Corp........ 2,293,706
1,110,000 First Data Corp................ 36,907,500
522,200* Gartner Group, Inc............. 17,265,239
165,000 National Data Corp............. 6,187,500
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
INFORMATION PROCESSING -
COMPUTER SERVICES - Continued
410,000* Security Dynamics Technology...$ 8,661,250
750,000* Sterling Commerce Inc.......... 29,765,625
273,000* SunGard Data Systems, Inc...... 9,316,125
170,000* Vantive Corp................... 4,568,750
4,700 VeriSign, Inc.................. 150,106
-----------
142,526,113
-----------
INFORMATION PROCESSING -
CONSUMER SOFTWARE - 6.83%
435,000* Networks Associates, Inc....... 26,643,750
1,410,000 Parametric Technology Corp..... 43,225,383
-----------
69,869,133
-----------
INFORMATION PROCESSING -
DATA SERVICES - 15.13%
580,000 Adobe Systems Inc.............. 23,163,750
140,000 Affiliated Computer Services,
Inc. Class A.................. 4,663,750
555,000* Anixter International, Inc..... 11,169,375
275,000* Avant! Corp.................... 7,064,063
110,000* BISYS Group, Inc............... 4,083,750
95,000* Caere Corp..................... 1,330,000
294,800* CBT Group PLC.................. 14,666,300
660,000* E M C Corp..................... 27,348,750
140,000* Electronic Arts................ 6,090,000
50,000* Envoy Corp..................... 2,193,750
80,000 HCIA, Inc...................... 660,000
210,000 Hewlett Packard Co............. 13,046,250
75,000* Integrated Systems, Inc........ 1,406,250
110,000* Learning Co., Inc.............. 3,135,000
77,100* Legato Systems, Inc............ 2,206,988
85,000* Micrel, Inc.................... 2,658,911
32,300* National Instruments Corp...... 1,075,994
38,200* PsiNet, Inc.................... 410,650
60,000* Renaissance Worldwide Inc...... 1,128,750
320,000* Solectron Corp................. 13,240,000
140,000* Tech Data Corp................. 5,687,500
111,500* Technology Solutions Co........ 3,365,906
69,000* Transaction Systems
Architects Class A.......... 2,794,500
140,000* Viasoft, Inc................... 2,161,250
-----------
154,751,437
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
INFORMATION PROCESSING -
NETWORKING - 6.73%
775,000* Ascend Communications Inc...... $33,470,313
440,000 Cisco Systems, Inc............. 33,275,000
15,800* Concentric Network Corp........ 349,575
33,000* International Network Services. 1,034,345
20,000 PMC-Sierra, Inc................ 778,750
-----------
68,907,983
-----------
INSURANCE - CASUALTY - 0.04%
28,000* Atlantic Data Services, Inc.... 367,500
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.03%
18,500 Ortel Corp..................... 270,562
-----------
MISCELLANEOUS - 0.15%
65,000* Xlyan Corp..................... 1,568,125
-----------
MULTIMEDIA - 3.38%
140,000* Cadence Design Systems, Inc.... 4,935,000
690,000* Synopsys Inc................... 29,626,875
-----------
34,561,875
-----------
SECURITIES RELATED - 1.01%
480,000* E*Trade Group, Inc............. 10,380,000
-----------
SEMICONDUCTOR EQUIPMENT - 5.26%
360,000* Applied Materials, Inc......... 11,520,000
230,000 ASM Lithography Holding NV..... 8,811,875
330,000* KLA-Tencor Corp................ 11,178,750
445,000* LAM Research Corp.............. 10,596,562
430,000* Microchip Technology, Inc...... 10,535,000
30,000* QLogic Corp.................... 1,215,000
-----------
53,857,187
-----------
SEMICONDUCTORS - 14.78%
415,000* Altera Corp.................... 13,954,375
1,040,000* Analog Devices, Inc............ 25,675,000
80,000* Applied Micro Circuits Corp.... 1,800,000
170,000* Burr Brown Corp................ 4,361,568
137,500 Intel Corp..................... 9,822,656
70,000* Level One Communications, Inc.. 1,868,125
180,000 Linear Technology Corp......... 12,588,750
950,000* Maxim Integrated Products, Inc. 31,706,250
55,000* Speedfam International, Inc.... 1,072,500
330,000 Texas Instruments Inc.......... 16,953,750
825,000* Xilinx, Inc.................... 31,375,823
-----------
151,178,797
-----------
</TABLE>
101
<PAGE>
================================================================================
SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 47
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
TELECOMMUNICATIONS - 14.64%
550,000* ADC Communications, Inc......... $ 15,468,750
245,000* Advanced Fibre Communications... 9,080,313
110,000* Airtouch Communications, Inc.... 5,238,750
135,000* CIENA Corp...................... 7,020,000
180,000 Ericsson (LM) Tel Co. -
ADR Series B................. 5,017,500
34,000* Excel Switching Corp............ 671,500
110,000* Glenayre Technologies, Inc...... 1,684,375
75,000 Lucent Technologies, Inc........ 5,320,312
50,000* Natural Microsystems Corp....... 1,070,315
110,000 Nokia Corp - ADR Series A....... 7,143,125
370,000* Paging Network, Inc............. 5,064,375
55,000 Pairgain Technologies Inc....... 859,375
103,400* PanAmSat Corp. New.............. 5,648,225
170,000 Premisys Communications Inc..... 4,234,071
610,000* QUALCOMM, Inc................... 31,796,250
80,000* Sanmina Corp.................... 6,230,000
54,000* Teledata Communications Ltd..... 634,500
95,000* Tellabs, Inc.................... 6,528,286
120,000* Transaction Network Services.... 2,445,000
55,000 Vodafone Group plc - ADR........ 6,043,125
495,000* WorldCom, Inc................... 22,522,500
-------------
149,720,647
-------------
UTILITIES - COMMUNICATION - 1.07%
205,000 MCI Communications Corp......... 10,961,104
-------------
TOTAL COMMON STOCKS
(Cost $891,023,542)............. 1,001,625,616
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 2.27%
CONSUMER FINANCE - 0.73%
7,470,000 Beneficial Corp.,
5.55% due 06/02/98......... $ 7,468,849
--------------
FINANCE COMPANIES - 1.15%
11,761,000 Ford Motor Credit Co.,
5.50% due 06/01/98........ 11,761,000
--------------
SECURITIES RELATED - 0.39%
3,985,000 Merrill Lynch & Co.,
5.60% due 06/03/98........ 3,983,760
--------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $23,213,609).......... 23,213,609
--------------
TOTAL INVESTMENT
(Cost $914,237,151) -
100.17%.................. 1,024,839,225
Other assets and
liabilities, net -
(0.17%).................. (1,698,287)
--------------
NET ASSETS (equivalent
to $22.07 per share on
46,355,160 shares
outstanding) - 100%........ $1,023,140,938
==============
</TABLE>
* Non-income producing
<TABLE>
<CAPTION>
FACE MARKET UNREALIZED
VALUE VALUE DEPRECIATION
----------- ----------- ------------
<S> <C> <C> <C>
Forward currency contracts sold:
Deutsche Mark 6/2/98........... $ 1,629,371 $ 1,627,315 ($ 2,056)
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
46,355,160 shares outstanding.......... $ 463,552
Additional paid in capital............... 817,508,725
Undistributed net realized gain on
securities............................. 94,571,161
--------------
Unrealized appreciation (depreciation) of:
Investments............. $ 110,602,074
Forward contracts....... (2,056)
Foreign currency
translation.......... (2,518) 110,597,500
-------------- --------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................ $1,023,140,938
==============
</TABLE>
102
<PAGE>
================================================================================
SCIENCE & TECHNOLOGY FUND - FINANCIAL STATEMENTS
48
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends......................................................... $ 786,120
Interest.......................................................... 3,796,710
-----------
Total investment income......................................... 4,582,830
-----------
EXPENSES:
Advisory fees...................................................... 8,602,906
Custodian and accounting services.................................. 216,890
Reports to shareholders............................................ 73,409
Audit fees and tax services........................................ 24,471
Directors' fees and expenses....................................... 18,818
Miscellaneous...................................................... 46,100
-----------
Total expenses................................................... 8,982,594
-----------
NET INVESTMENT LOSS................................................ (4,399,764)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
AND FOREIGN CURRENCIES:
Net realized gain on:
Investments......................................... $111,216,186
Foreign currency translation........................ 12,822 111,229,008
------------
Net unrealized appreciation (depreciation) during the
year:
Investments......................................... (16,754,541)
Foreign currency translation........................ 55,815 (16,698,726)
------------ -----------
Net realized and unrealized gain on securities during the year... 94,530,282
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $90,130,518
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ------------
<S> <C> <C>
OPERATIONS:
Net investment loss............................... $ (4,399,764) $ (1,919,791)
Net realized gain (loss) on securities............ 111,229,008 (8,889,903)
Net unrealized appreciation (depreciation) of
securities during the year...................... (16,698,726) 33,692,829
--------------- ------------
Increase in net assets resulting from
operations................................... 90,130,518 22,883,135
--------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. - -
Net realized gain on securities................... - (32,117,202)
--------------- ------------
Decrease in net assets resulting from
distributions to shareholders.................. - (32,117,202)
--------------- ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold.................. 217,275,229 286,682,331
Proceeds from capital stock issued for
distributions reinvested........................ - 32,117,202
--------------- ------------
217,275,229 318,799,533
Cost of capital stock repurchased................. (89,246,756) (71,770,130)
--------------- ------------
Increase in net assets resulting from
capital stock transactions.................... 128,028,473 247,029,403
--------------- ------------
TOTAL INCREASE IN NET ASSETS...................... 218,158,991 237,795,336
NET ASSETS:
Beginning of year................................. 804,981,947 567,186,611
--------------- ------------
End of year (including accumulated net
investment losses of $0 and ($1,935,355)) ...... $1,023,140,938 $804,981,947
=============== ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold...................... 10,004,608 14,868,580
Shares issued for distributions reinvested........ - 1,636,128
Shares of capital stock repurchased .............. (4,133,577) (3,716,452)
--------------- ------------
Increase in shares outstanding.................. 5,871,031 12,788,256
Shares outstanding:
Beginning of year............................... 40,484,129 27,695,873
--------------- ------------
End of year..................................... 46,355,160 40,484,129
=============== ============
</TABLE>
103
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS
May 31, 1998 49
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
COMMON STOCKS - 97.52%
ADVERTISING - 0.18%
<S> <C> <C>
5,352 Interpublic Group Cos., Inc.... $ 317,441
6,030 Omnicom Group, Inc............. 282,279
-----------
599,720
-----------
AEROSPACE/DEFENSE - 0.21%
12,604 Goodrich (B.F.) Co............ 645,955
1,349 Teleflex Inc................... 54,550
-----------
700,505
-----------
AIRLINES - 0.25%
2,418* AMR Corp....................... 372,221
265 Delta Air Lines, Inc........... 30,475
9,344 Southwest Airlines Co.......... 249,368
2,546* US Airways Group, Inc.......... 178,220
-----------
830,284
-----------
APPAREL & PRODUCTS - 0.05%
3,570 Liz Claiborne, Inc............. 180,954
-----------
APPLIANCES/FURNISHINGS - 0.05%
1,457 Herman Miller, Inc............. 40,341
2,612 Maytag Corp.................... 131,742
-----------
172,083
-----------
AUTO - CARS - 0.81%
48,472 Chrysler Corp.................. 2,696,255
-----------
AUTO - ORIGINAL EQUIPMENT - 0.02%
2,160 Arvin Industries, Inc.......... 80,055
-----------
AUTO - REPLACEMENT PARTS - 0.57%
3,174* AutoZone, Inc.................. 105,536
3,429 Echlin Inc..................... 162,878
19,107 Genuine Parts Co............... 648,444
13,617 Goodyear Tire & Rubber Co...... 978,721
-----------
1,895,579
-----------
BANKS - NEW YORK CITY - 2.61%
25,098 Bank of New York Co., Inc...... 1,534,115
22,509 Chase Manhattan Corp........... 3,059,817
20,409 CitiCorp....................... 3,043,493
8,717 J. P. Morgan & Co. Inc........ 1,082,542
-----------
8,719,967
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
BANKS - OTHER - 3.22%
<S> <C> <C>
37,866 BankAmerica Corp............... $ 3,131,045
5,115 BankBoston Corp................ 538,993
10,940 First Chicago Corp............. 956,566
46,963 First Union Corp............... 2,597,641
11,371 Fleet Financial Group, Inc..... 932,422
5,993 Mellon Bank Corp............... 404,153
18,719 National City Corp............. 1,268,212
2,238 Providian Financial Corp....... 142,393
2,222 Wells Fargo & Co............... 803,253
-----------
10,774,678
-----------
BANKS - REGIONAL - 3.63%
43,086 BANC ONE CORP.................. 2,375,116
5,444 Comerica Inc................... 357,943
9,709 Fifth Third Bancorp............ 478,168
1,170 Huntington Bancshares, Inc..... 38,318
12,758 KeyCorp........................ 484,007
45,383 NationsBank Corp............... 3,437,761
2,298 Northern Trust Corp............ 162,081
45,414 Norwest Corp................... 1,765,469
10,848 PNC Bank Corp.................. 626,472
214 Summit Bancorporation.......... 10,727
2,560 SunTrust Banks, Inc............ 202,240
6,650 Synovus Financial Corp......... 149,198
37,479 U.S. Bancorp................... 1,466,366
7,025 Wachovia Corp.................. 562,439
-----------
12,116,305
-----------
BEVERAGE - BREWERS/
DISTRIBUTORS - 0.79%
44,570 Anheuser-Busch Companies, Inc.. 2,047,435
13,258 Seagram Co. Ltd................ 582,523
-----------
2,629,958
-----------
BEVERAGE - SOFT DRINKS - 3.80%
121,862 Coca-Cola Co................... 9,550,934
77,247 PepsiCo, Inc................... 3,152,643
-----------
12,703,577
-----------
BROADCASTING - 1.47%
8,056* Clear Channel Communications,
Inc......................... 772,369
13,957 Comcast Corp. Class A Special.. 478,464
15,578* Tele-Comm Liberty Media Group
Class A..................... 534,520
33,716 U S West Communications Group.. 1,711,087
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
BROADCASTING - Continued
<S> <C> <C>
13,835 U S West Media Group........... $ 512,760
16,159* Viacom, Inc Class B............ 888,745
-----------
4,897,945
-----------
BUILDING MATERIALS - 0.49%
5,833 Lowe's Companies, Inc.......... 461,901
14,473 Masco Corp..................... 814,106
10,859 Sherwin-Williams Co............ 361,062
-----------
1,637,069
-----------
CHEMICAL - MAJOR - 0.70%
1,391 Albemarle Corp................. 33,819
12,352 Morton International, Inc...... 375,964
18,475 PPG Industries, Inc............ 1,346,365
5,402 Rohm and Haas Co............... 593,545
-----------
2,349,693
-----------
CHEMICAL - MISCELLANEOUS - 0.50%
6,287 A. Schulman, Inc............... 124,954
240* Airgas, Inc.................... 3,645
14,644 Ethyl Corp..................... 103,423
241 Ferro Corp..................... 6,899
5,577 Great Lakes Chemical Corp...... 223,080
7,763 Lawter International, Inc...... 74,719
3,750 Lubrizol Corp.................. 130,313
1,029 Lyondell Petrochemical Co...... 32,092
9,012 Nalco Chemical Co.............. 337,950
1,258 NCH Corp....................... 80,119
1,394* Octel Corp..................... 30,412
11,008 Praxair, Inc................... 542,831
-----------
1,690,437
-----------
CONGLOMERATES - 0.57%
12,845 Tenneco Inc.................... 534,673
24,449 Tyco International Ltd......... 1,353,864
-----------
1,888,537
-----------
CONSUMER FINANCE - 0.47%
3,648 Beneficial Corp................ 488,832
34,619 MBNA Corp...................... 1,096,990
-----------
1,585,822
-----------
</TABLE>
104
<PAGE>
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SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS
50 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
CONTAINERS - METAL/GLASS - 0.43%
<S> <C> <C>
6,844 Corning Inc.................... $ 269,910
12,817 Crown Cork & Seal Co., Inc..... 664,882
11,688* Owens-Illinois, Inc............ 525,230
-----------
1,460,022
-----------
CONTAINERS - PAPER - 0.11%
867 Bemis Co., Inc................. 36,577
1,141* Sealed Air Corp................ 61,034
7,349 Sonoco Products Co............. 256,759
-----------
354,370
-----------
COSMETICS/TOILETRIES - 1.30%
3,477 Avon Products, Inc............. 284,462
34,025 Gillette Co.................... 3,985,178
1,242 International Flavors &
Fragrances, Inc............. 59,616
-----------
4,329,256
-----------
DRUGS - 7.52%
65,302 American Home Products Corp.... 3,154,903
6,253* Amgen Inc...................... 378,307
57,755 Bristol Myers Squibb Co........ 6,208,662
46,603 Eli Lilly and Co............... 2,863,172
58,320 Merck & Co., Inc............... 6,827,085
38,793 Schering-Plough Corp........... 3,246,489
38,538 Warner-Lambert Co.............. 2,459,206
-----------
25,137,824
-----------
ELECTRICAL EQUIPMENT - 1.10%
25,796 AMP Inc........................ 980,247
4,214* Cabletron Systems, Inc......... 54,255
35,767 Emerson Electric Co............ 2,172,845
857 Hubbell Inc. Class B........... 40,333
2,617 National Service Industries,
Inc......................... 133,467
2,297 Raychem Corp................... 86,425
2,652* Teradyne, Inc.................. 81,549
2,326 Thomas & Betts Corp............ 124,296
-----------
3,673,417
-----------
ELECTRONIC INSTRUMENTS - 0.05%
10,086* Integrated Device Technology... 94,556
847* Perkin-Elmer Corp.............. 58,020
273 Tektronix, Inc................. 10,442
481* Vishay Intertechnology, Inc... 10,730
-----------
173,748
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
ENTERTAINMENT - 1.94%
<S> <C> <C>
5,200 Hasbro, Inc.................... $ 198,900
1,880* King World Productions, Inc.... 47,940
17,295 Mattel, Inc.................... 655,048
28,933 Time Warner Inc................ 2,251,349
29,522 Walt Disney Co................. 3,339,676
-----------
6,492,913
-----------
FINANCE COMPANIES - 0.50%
833 Finova Group, Inc.............. 46,075
11,413 Household International, Inc... 1,544,321
1,908 SunAmerica, Inc................ 92,777
-----------
1,683,173
-----------
FINANCIAL SERVICES - 1.14%
30,448 American Express Co............ 3,124,726
6,641 Countrywide Credit Industries,
Inc......................... 307,146
8,421 H & R Block Inc................ 370,524
-----------
3,802,396
-----------
FOODS - 2.40%
24,423 BestFoods...................... 1,378,373
23,687 Campbell Soup Co............... 1,290,942
23,005 ConAgra, Inc................... 672,896
12,478 General Mills, Inc............. 851,624
31,300 H J Heinz Co................... 1,660,855
4,969 Hershey Foods Corp............. 344,103
26,133 Kellogg Co..................... 1,079,620
7,720 Quaker Oats Co................. 445,348
225 Ralston Purina Co.............. 25,045
3,109 Wm. Wrigley Jr. Co............. 299,241
-----------
8,048,047
-----------
FOOTWEAR - 0.17%
12,089 NIKE, Inc. Class B............ 556,094
-----------
FREIGHT - 0.06%
2,986* FDX Corp....................... 191,477
-----------
GOLD MINING - 0.16%
16,388 Barrick Gold Corp.............. 315,469
17,951 Placer Dome Inc................ 223,266
-----------
538,735
-----------
GOVERNMENT SPONSORED - 1.71%
39,749 Federal Home Loan Mortgage
Corp........................ 1,808,580
65,100 Federal National Mortgage
Association................. 3,897,862
-----------
5,706,442
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
FUNERAL SERVICES - 0.18%
<S> <C> <C>
14,805 Service Corp. International.... $ 605,154
-----------
HARDWARE & TOOLS - 0.20%
4,637 Black & Decker Corp............ 270,685
352 Snap-on Inc.................... 15,444
7,762 Stanley Works.................. 368,695
-----------
654,824
-----------
HEALTHCARE - 0.25%
6,605 HealthSouth Corp............... 187,417
1,291* PacifiCare Health System,
Inc. Class B................ 106,669
8,422 United HealthCare Corp......... 539,008
-----------
833,094
-----------
HEAVY DUTY TRUCKS/PARTS - 0.49%
16,392 Dana Corp...................... 854,433
6,175* Navistar International Corp.... 186,408
10,887 PACCAR Inc..................... 601,167
-----------
1,642,008
-----------
HOME BUILDERS - 0.03%
2,703 Centex Corp.................... 96,632
-----------
HOSPITAL MANAGEMENT - 0.43%
23,355 Columbia/HCA Healthcare Corp... 763,416
273 Manor Care, Inc................ 8,617
2,175 Medaphis Corp.................. 16,313
1,968 Shared Medical Systems Corp.... 143,172
14,264* Tenet Healthcare Corp.......... 499,240
-----------
1,430,758
-----------
HOSPITAL SUPPLIES - 3.74%
51,175 Abbott Laboratories............ 3,796,545
607 ATL Ultrasound, Inc............ 27,505
21,155 Baxter International Inc....... 1,209,802
3,665 Becton, Dickinson and Co....... 259,299
4,336 Boston Scientific Corp......... 276,420
73,937 Johnson & Johnson.............. 5,106,273
5,863 Mallinckrodt, Inc.............. 180,654
27,161 Medtronic, Inc................. 1,510,831
3,009 United States Surgical Corp.... 119,608
-----------
12,486,937
-----------
</TABLE>
105
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 51
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
HOUSEHOLD PRODUCTS - 3.45%
<S> <C> <C>
8,377 Clorox Co........................ $ 699,480
19,040 Colgate-Palmolive Co............. 1,656,480
1,750 Newell Co........................ 84,438
77,432 Procter & Gamble Co.............. 6,499,449
1,495 Rubbermaid, Inc.................. 48,774
32,171 Unilever N V - ADR............... 2,539,498
-----------
11,528,119
-----------
INFORMATION PROCESSING - 10.17%
2,834* Apple Computer, Inc.............. 75,455
15,833 Automatic Data Processing, Inc... 1,007,375
11,463* Bay Networks, Inc................ 317,382
32,522* Cendant Corp..................... 705,321
43,197* Cisco Systems, Inc............... 3,266,773
7,311 Cognizant Corp................... 389,311
58,595 Compaq Computer Corp............. 1,600,376
19,011 Computer Associates
International................. 998,078
3,654 Computer Sciences Corp........... 189,780
2,366* Data General Corp................ 36,082
23,747* Dell Computer Corp............... 1,956,902
846 Diebold, Inc..................... 24,746
7,099 Digital Equipment Corp........... 389,558
17,257* E M C Corp....................... 715,087
5,828 First Data Corp.................. 193,781
1,072* Gateway 2000, Inc................ 48,307
115* General Instrument Corp.......... 2,738
8,538 HBO & Co......................... 492,803
42,819 Hewlett Packard Co............... 2,660,130
42,490 International Business Machines.. 4,987,263
366* Keane, Inc....................... 16,424
98,648* Microsoft Corp................... 8,366,583
5,057* Novell, Inc ..................... 53,099
37,379* Oracle Corp...................... 883,079
3,691 Parametric Technology Corp....... 113,152
22,489 Pitney Bowes Inc................. 1,056,983
10,590* Seagate Technology............... 244,894
17,327* Silicon Graphics, Inc............ 207,924
229* Storage Technology Corp.......... 19,207
684* Stratus Computer, Inc............ 24,667
18,152* Sun Microsystems, Inc............ 727,215
15,838* 3Com Corp........................ 401,889
17,575 Xerox Corp....................... 1,805,831
-----------
33,978,195
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
INSURANCE - CASUALTY - 0.56%
<S> <C> <C>
8,021 Chubb Corp..................... $ 638,171
12,459 SAFECO Corp.................... 579,344
14,884 St. Paul Companies, Inc........ 660,477
-----------
1,877,992
-----------
INSURANCE - LIFE - 0.48%
5,136 Aetna Inc...................... 401,570
6,115 Conseco Inc.................... 285,112
1,430 Jefferson-Pilot Corp........... 81,868
4,001 Lincoln National Corp.......... 359,590
4,155 Transamerica Corp.............. 477,825
-----------
1,605,965
-----------
INSURANCE - MISCELLANEOUS - 0.25%
3,514 General Re Corp................ 772,641
877 MGIC Investment Corp........... 52,565
-----------
825,206
-----------
INSURANCE - MULTILINE - 4.03%
22,940 Allstate Corp.................. 2,159,228
35,148 American International Group,
Inc......................... 4,351,761
20,635 Aon Corp....................... 1,321,930
10,443 CIGNA Corp..................... 715,346
1,746 Cincinnati Financial Corp...... 73,332
2,107 Hartford Financial Services
Group....................... 231,902
15,767 March & McLennan Companies,
Inc......................... 1,380,598
52,917 Travelers Group, Inc........... 3,227,936
-----------
13,462,033
-----------
LEISURE TIME - 0.07%
5,220 Brunswick Corp................. 164,104
3,755* Mirage Resorts, Inc............ 78,151
-----------
242,255
-----------
LODGING - 0.07%
6,943 Marriott Services Inc.......... 241,269
-----------
MACHINE TOOLS - 0.01%
1,098 Cincinnati Milacron, Inc....... 32,871
-----------
MACHINERY - AGRICULTURE - 0.25%
1,636 Case Corp...................... 94,684
14,380 Deere & Co..................... 745,963
-----------
840,647
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.31%
<S> <C> <C>
18,362 Caterpillar Inc................ $ 1,008,763
667 Foster Wheeler Corp............ 16,925
248 Harnischfeger Industries Inc... 7,812
-----------
1,033,500
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.85%
3,660 Aeroquip-Vickers, Inc.......... 226,005
6,426 Cooper Industries, Inc......... 413,674
6,943 Dover Corp..................... 260,363
11,285 Illinois Tool Works Inc........ 744,810
12,486 Ingersoll-Rand Co.............. 562,650
5,094 Johnson Controls, Inc.......... 303,093
7,985 Pall Corp...................... 158,203
709 Tecumseh Products Co. Class A.. 35,361
3,982 Tidewater, Inc................. 151,316
-----------
2,855,475
-----------
MEDICAL TECHNOLOGY - 0.17%
8,752 Guidant Corp................... 563,957
-----------
MERCHANDISE - DRUG - 0.54%
9,682 CVS Corp....................... 679,555
9,762 Rite Aid Corp.................. 349,602
21,809 Walgreen Co.................... 767,404
-----------
1,796,561
-----------
MERCHANDISE - SPECIALTY - 1.47%
4,516* Best Buy Co., Inc.............. 147,335
804 Circuit City Stores, Inc....... 34,070
158 CompUSA, Inc................... 2,489
2,338* Consolidated Stores Corp....... 89,282
1,059* CostCo Companies, Inc.......... 61,290
30,111 Fortune Brands, Inc........... 1,157,392
11,343 Gap, Inc....................... 612,522
31,623 Home Depot, Inc................ 2,484,382
5,249 Ikon Office Solutions Inc...... 111,213
7,534* Toys "R" Us, Inc............... 199,651
-----------
4,899,626
-----------
</TABLE>
106
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
52 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
MERCHANDISING -
DEPARTMENT - 0.40%
<S> <C> <C>
16,268 Dayton Hudson Corp............. $ 754,429
1,450* Federated Department Stores,
Inc......................... 75,128
8,077 May Department Stores Co....... 519,452
-----------
1,349,009
-----------
MERCHANDISING - FOOD - 0.36%
11,629 Albertsons, Inc................ 538,568
1,069 American Stores Co............. 26,658
2,747* Kroger Co...................... 117,949
7,808 SYSCO Corp..................... 182,024
7,944 Winn-Dixie Stores, Inc......... 323,222
-----------
1,188,421
-----------
MERCHANDISING - MASS - 2.40%
18,255 J.C. Penney Co., Inc........... 1,310,937
7,550* Kmart Corp..................... 146,281
16,794 Sears Roebuck and Co........... 1,038,079
99,819 Wal-Mart Stores, Inc........... 5,508,762
527 Woolworth Corp................. 10,408
-----------
8,014,467
-----------
METALS - ALUMINUM - 0.20%
23,491 Alcan Aluminum Ltd............. 669,494
-----------
METALS - COPPER - 0.04%
5,732 Newmont Mining Corp............ 142,942
-----------
METALS - MISCELLANEOUS - 0.15%
9,537 Freeport - McMoRan Copper &
Gold Inc. Class B............. 159,745
17,391 Inco Limited................... 249,996
1,650 Precision Castparts Corp....... 95,081
-----------
504,822
-----------
METALS - STEEL - 0.06%
1,772 AK Steel Holding Corp.......... 33,004
1,028* Bethlehem Steel Corp........... 12,593
7,993 Worthington Industries, Inc.... 140,876
-----------
186,473
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
NATURAL GAS-DIVERSIFIED - 0.27%
<S> <C> <C>
3,475 Eastern Enterprises............ $ 139,434
5,944 El Paso Natural Gas Co......... 229,587
1,206 Questar Corp................... 48,918
12,348 Sonat Inc...................... 483,888
-----------
901,827
-----------
OIL - INTEGRATED DOMESTIC - 2.16%
11,073 Amerada Hess Corp.............. 598,634
8,737 Ashland Oil, Inc............... 435,758
29,509 Burlington Resources, Inc..... 1,243,067
8,364 Kerr-McGee Corp................ 529,023
900* Oryx Energy Co................. 20,981
8,332 Pennzoil Co.................... 481,694
46,171 Phillips Petroleum Co.......... 2,311,436
6,171 Quaker State Corp.............. 104,521
2,864 Sun Co., Inc................... 121,720
39,072 USX-Marathon Group............. 1,367,520
-----------
7,214,354
-----------
OIL - INTEGRATED
INTERNATIONAL - 1.47%
7,876 Murphy Oil Corp................ 396,261
77,982 Texaco Inc..................... 4,503,461
-----------
4,899,722
-----------
OIL - SERVICE - PRODUCTS - 0.07%
7,713 Noble Drilling Corp............ 227,534
-----------
OIL - SERVICES - 1.44%
22,192 Baker Hughes Inc............... 798,912
8,354 Dresser Industries, Inc........ 388,983
2,104* Global Marine Inc.............. 46,946
17,351 Halliburton Co................. 822,004
34,672 Schlumberger Ltd............... 2,706,582
1,094 Transocean Offshore, Inc....... 53,948
-----------
4,817,375
-----------
OIL/GAS PRODUCERS - 0.59%
4,410 Anadarko Petroleum Corp........ 291,060
10,523 Apache Corp.................... 359,755
6,270 Helmerich & Payne, Inc......... 158,318
9,513 Pioneer Natural Resources
Corp........................ 223,556
7,778 Ultramar Diamond Shamrock
Corp........................ 248,410
33,072 Union Pacific Resources Group
Inc......................... 669,707
1,026 Valero Energy Corp............. 33,473
-----------
1,984,279
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
PAPER/FOREST PRODUCTS - 1.21%
<S> <C> <C>
11,986 Avery Dennison Corp................ $ 621,025
13,069 Fort James Corp.................... 624,862
39,335 Kimberly-Clark Corp................ 1,949,540
15,063 Louisiana Pacific Corp............. 300,319
9,331 Mead Corp.......................... 290,427
11,783 Unisource Worldwide, Inc........... 150,970
2,884 Willamette Industries, Inc......... 98,957
-----------
4,036,100
-----------
POLLUTION CONTROL - 0.29%
8,715 Browning - Ferris Industries,
Inc............................. 309,927
19,929 Waste Management, Inc.............. 647,693
-----------
957,620
-----------
PUBLISHING - NEWS - 0.66%
6,029 Dow Jones & Co., Inc............... 290,146
20,914 Gannett Co., Inc................... 1,379,016
578 New York Times Co. Class A....... 40,749
7,190 Tribune Co......................... 480,831
-----------
2,190,742
-----------
PUBLISHING/PRINTING - 0.28%
8,020 Dun & Bradstreet Corp.............. 270,675
8,690 McGraw-Hill, Inc................... 679,449
-----------
950,124
-----------
RAILROAD - 0.97%
7,629 Burlington Northern Santa Fe....... 759,086
18,025 CSX Corp.......................... 858,441
35,920 Norfolk Southern Corp.............. 1,124,745
10,257 Union Pacific Corp................. 496,182
-----------
3,238,454
-----------
RESTAURANTS - 0.73%
37,338 McDonald's Corp.................... 2,450,305
163* Tricon Global Restaurants, Inc..... 5,063
-----------
2,455,368
-----------
SAVINGS & LOAN - 0.32%
4,017 H.F. Ahmanson & Co................. 306,296
10,796 Washington Mutual, Inc............. 762,468
-----------
1,068,764
-----------
</TABLE>
107
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 53
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
SECURITIES RELATED - 1.47%
10,173 Charles Schwab Corp............ $ 335,709
9,098 Franklin Resources, Inc........ 444,665
5,293 Lehman Brothers Holdings, Inc.. 375,472
16,296 Merrill Lynch & Co., Inc....... 1,458,492
29,310 Morgan St Dean Witter Discover. 2,288,015
-----------
4,902,353
-----------
SEMICONDUCTOR EQUIPMENT - 0.19%
17,737* Applied Materials, Inc......... 567,584
2,176* KLA-Tencor Corp................ 73,712
-----------
641,296
-----------
SEMICONDUCTORS - 1.92%
8,243* Advanced Micro Devices, Inc.... 160,739
69,714 Intel Corp..................... 4,980,193
6,444* LSI Logic Corp................. 137,338
10,409* Micron Technology, Inc......... 245,262
1,557* National Semiconductor Corp.... 25,301
15,718 Rockwell International Corp.... 864,490
-----------
6,413,323
-----------
TELECOMMUNICATIONS - 2.60%
5,172* Airtouch Communications, Inc... 246,317
3,618 ALLTEL Corp.................... 142,685
2,879* DSC Communications Corp........ 49,213
5,582 Frontier Corp.................. 169,902
58,688 Lucent Technologies, Inc....... 4,163,180
10,140* Nextel Communications, Inc.
Class A..................... 238,924
26,975 Northern Telecom Ltd........... 1,726,400
6,549* Tellabs, Inc................... 450,039
33,221* WorldCom, Inc.................. 1,511,556
-----------
8,698,216
-----------
TEXTILE - PRODUCTS - 0.18%
11,114 V F Corp....................... 591,126
-----------
TRUCKERS - 0.02%
4,542 Arnold Industries, Inc......... 70,969
-----------
UTILITIES - COMMUNICATION - 5.81%
55,805 Ameritech Corp................. 2,368,225
76,878 AT & T Corp.................... 4,679,947
39,345 Bell Atlantic Corp............. 3,604,985
49,159 BellSouth Corp................. 3,170,756
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -----------
<S> <C> <C>
UTILITIES - COMMUNICATION - Continued
24,143 MCI Communications Corp........ $ 1,290,897
81,739 SBC Communications, Inc........ 3,177,604
15,727 Sprint Corp.................... 1,128,412
-----------
19,420,826
-----------
UTILITIES - ELECTRIC - 2.36%
3,807 Black Hills Corp............... 83,516
27,665 Cinergy Corp................... 893,925
3,941 Cleco Corp..................... 117,984
5,568 Hawaiian Electric Industries,
Inc......................... 212,976
6,599 Idaho Power Co................. 225,603
4,645 IPALCO Enterprises, Inc........ 195,671
10,023 LG&E Energy Corp............... 266,236
5,860 Minnesota Power Inc............ 231,104
9,591 Montana Power Co............... 347,674
8,790 Nevada Power Co................ 209,861
19,391 New Century Energies, Inc...... 891,986
22,013 NIPSCO Industries, Inc......... 591,599
7,085 OGE Energy Corp................ 379,933
52,031 PacifiCorp..................... 1,199,965
20,791 Potomac Electric Power Co...... 508,080
14,837 Puget Sound Energy Inc......... 387,617
22,966 TECO Energy, Inc............... 601,422
9,433 UtiliCorp United Inc........... 335,461
7,441 Washington Gas Light Co........ 193,931
-----------
7,874,544
-----------
UTILITIES - GAS, DISTRIBUTION - 0.37%
9,966 AGL Resources, Inc............. 199,320
8,976* Marketspan Corp................ 302,379
3,002 MCN Energy Group Inc........... 108,072
6,711 National Fuel Gas Co........... 284,379
8,483 NICOR Inc...................... 327,656
-----------
1,221,806
-----------
UTILITIES - GAS, PIPELINE - 1.53%
3,322 Columbia Energy Group.......... 280,294
16,752 Consolidated Natural Gas Co.... 947,535
33,683 Enron Corp..................... 1,688,360
5,438 ONEOK Inc...................... 212,422
14,631 Pacific Enterprises............ 556,892
6,181 Peoples Energy Corp............ 227,924
37,307 Williams Companies, Inc........ 1,210,145
-----------
5,123,572
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------- -------------
<S> <C> <C>
WATER SERVICES - 0.02%
2,552 American Water Works Co., Inc.. $ 74,965
-------------
TOTAL COMMON STOCKS
(Cost $277,608,938)............ 325,861,302
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
- -----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 2.19%
MACHINERY - INDUSTRIAL/SPECIALTY - 0.95%
$3,183,000 Cooper Industries, Inc.,
5.67% due 06/01/98............ 3,183,000
------------
SECURITIES RELATED - 1.24%
Merrill Lynch & Co.:
2,126,000 5.52% due 06/03/98............ 2,125,348
2,014,000 5.52% due 06/04/98............ 2,013,074
------------
4,138,422
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $7,321,422).............. 7,321,422
------------
UNITED STATES GOVERNMENT
SHORT TERM - 0.12%
U.S. TREASURY BILLS - 0.12%
United States Treasury Bills:
100,000 4.94% due 06/04/98.......... 99,959
100,000 4.91% due 06/04/98.......... 99,959
100,000 4.90% due 06/04/98.......... 99,959
100,000 4.65% due 06/04/98.......... 99,961
------------
399,838
------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $399,838)................ 399,838
------------
TOTAL INVESTMENTS
(Cost $285,330,198) - 99.83%... 333,582,562
Other assets and liabilities,
net - 0.17%................... 584,788
------------
NET ASSETS (equivalent
to $22.16 per share on
15,080,463 shares
outstanding) - 100 %..........$334,167,350
============
</TABLE>
108
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
54 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------- ------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at
5/31/98)
27(2) S&P 500 Index Futures
(June/$1,090.80).............. $ (137,250)
===========
</TABLE>
(1)U.S. Treasury Bills with a market value of
approximately $400,000 were maintained in
a segregated account with a portion
placed as collateral for futures
contracts.
(2)Per 250
* Non-income producing
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
15,080,463 shares outstanding........... $ 150,805
Additional paid in capital................ 250,214,914
Undistributed net realized gain on
securities........................... 35,511,010
Undistributed net investment income....... 175,507
Unrealized appreciation (depreciation) of:
Investments........... $48,252,364
Futures .............. (137,250) 48,115,114
----------- ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................. $334,167,350
============
</TABLE>
109
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - FINANCIAL STATEMENTS
55
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends....................................................... $ 3,754,102
Interest........................................................ 371,484
-----------
Total investment income....................................... 4,125,586
-----------
EXPENSES:
Advisory fees................................................... 1,204,327
Custodian and accounting services............................... 51,735
Reports to shareholders......................................... 23,321
Audit fees and tax services..................................... 7,949
Directors' fees and expenses.................................... 4,216
Miscellaneous................................................... 13,183
-----------
Total expenses................................................ 1,304,731
-----------
NET INVESTMENT INCOME........................................... 2,820,855
-----------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on:
Investments..................................... 34,461,580
Futures contracts............................... 1,849,928 36,311,508
-----------
Net unrealized appreciation (depreciation) during
the year:
Investments..................................... 21,517,279
Futures contracts............................... (227,900) 21,289,379
----------- -----------
Net realized and unrealized gain on securities
during the year:........................................... 57,600,887
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $60,421,742
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income............................. $ 2,820,855 $ 1,619,474
Net realized gain on securities................... 36,311,508 13,356,463
Net unrealized appreciation of securities
during the year................................. 21,289,379 14,695,812
------------ ------------
Increase in net assets resulting from
operations.................................... 60,421,742 29,671,749
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. (2,737,376) (1,578,118)
Net realized gain on securities................... (9,562,689) (10,727,011)
------------ ------------
Decrease in net assets resulting from
distributions to shareholders................. (12,300,065) (12,305,129)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold.................. 120,526,570 52,814,227
Proceeds from capital stock issued for
distributions reinvested........................ 12,300,065 12,305,129
------------ ------------
132,826,635 65,119,356
Cost of capital stock repurchased................. (2,130,016) (8,024,362)
------------ ------------
Increase in net assets resulting from capital
stock transactions............................ 130,696,619 57,094,994
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 178,818,296 74,461,614
NET ASSETS:
Beginning of year................................. 155,349,054 80,887,440
------------ ------------
End of year (including undistributed net
investment income of $175,507 and $92,028)...... $334,167,350 $155,349,054
------------ ------------
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold...................... 5,891,588 3,190,691
Shares issued for distributions reinvested........ 618,253 775,715
Shares of capital stock repurchased .............. (106,789) (509,440)
------------ ------------
Increase in shares outstanding.................. 6,403,052 3,456,966
Shares outstanding:
Beginning of year............................... 8,677,411 5,220,445
------------ ------------
End of year..................................... 15,080,463 8,677,411
============ ============
</TABLE>
110
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS
56 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
COMMON STOCKS - 58.36%
ADVERTISING - 0.11%
1,795 Interpublic Group Cos., Inc.... $ 106,466
2,400 Omnicom Group, Inc............. 112,350
----------
218,816
----------
AEROSPACE/DEFENSE- 0.91%
13,811 Boeing Co...................... 657,749
521 Crane Co....................... 27,450
258 EG & G, Inc.................... 8,127
1,754 General Dynamics Corp.......... 77,943
842 Goodrich (B.F.) Co............ 43,153
2,383 Lockheed Martin Corp........... 267,492
932 Northrop Grumman Corp.......... 99,899
4,718 Raytheon Co. Class B........... 258,016
1,578 TRW Inc........................ 84,522
3,034 United Technologies Corp....... 285,195
----------
1,809,546
----------
AIRLINES - 0.23%
1,126* AMR Corp....................... 173,334
1,007 Delta Air Lines, Inc........... 115,805
2,876 Southwest Airlines Co.......... 76,753
1,413* US Airways Group, Inc.......... 98,910
----------
464,802
----------
APPAREL & PRODUCTS - 0.03%
1,010 Liz Claiborne, Inc............. 51,194
----------
APPLIANCES/FURNISHINGS - 0.08%
1,729 Maytag Corp.................... 87,206
1,029 Whirlpool Corp................. 70,294
----------
157,500
----------
AUTO - CARS - 1.01%
8,655 Chrysler Corp.................. 481,434
16,556 Ford Motor Co.................. 858,843
9,478 General Motors Corp............ 681,824
----------
2,022,101
----------
AUTO - REPLACEMENT PARTS - 0.20%
2,408* AutoZone, Inc.................. 80,066
200 Cooper Tire & Rubber Co........ 4,738
915 Echlin Inc..................... 43,462
2,726 Genuine Parts Co............... 92,513
2,176 Goodyear Tire & Rubber Co...... 156,400
982 Pep Boys-Manny, Moe & Jack..... 21,850
----------
399,029
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BANKS - NEW YORK CITY - 1.17%
5,608 Bank of New York Co., Inc...... $ 342,789
5,879 Chase Manhattan Corp........... 799,177
6,039 CitiCorp....................... 900,566
2,384 J. P. Morgan & Co. Inc........ 296,062
----------
2,338,594
----------
BANKS - OTHER - 1.73%
9,576 BankAmerica Corp............... 791,816
2,033 BankBoston Corp................ 214,227
3,954 First Chicago Corp............. 345,728
12,927 First Union Corp............... 715,025
3,688 Fleet Financial Group, Inc..... 302,416
3,288 Mellon Bank Corp............... 221,735
4,497 National City Corp............. 304,672
1,374 Providian Financial Corp....... 87,420
805 Republic of New York Corp...... 103,392
1,050 Wells Fargo & Co............... 379,575
----------
3,466,006
----------
BANKS - REGIONAL - 2.12%
9,270 Banc One Corp.................. 511,009
2,530 Comerica Inc................... 166,348
3,557 Fifth Third Bancorp............ 175,182
3,200 Huntington Bancshares, Inc..... 104,800
5,880 KeyCorp........................ 223,073
2,000 Mercantile Bancorporation Inc.. 102,250
12,591 NationsBank Corp............... 953,768
2,000 Northern Trust Corp............ 141,063
10,736 Norwest Corp................... 417,362
3,973 PNC Bank Corp.................. 229,441
2,200 State Street Corp.............. 151,663
2,800 Summit Bancorporation.......... 140,350
2,685 SunTrust Banks, Inc............ 212,115
3,900 Synovus Financial Corp......... 87,506
10,221 U.S. Bancorp................... 399,896
2,852 Wachovia Corp.................. 228,337
----------
4,244,163
----------
BEVERAGE - BREWERS/
DISTRIBUTORS - 0.29%
378 Adolph Coors Class B........... 14,175
6,996 Anheuser-Busch Companies, Inc.. 321,379
933 Brown-Forman Corp Class B...... 53,764
4,325 Seagram Co. Ltd................ 190,030
----------
579,348
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BEVERAGE - SOFT DRINKS - 1.74%
33,599 Coca-Cola Co................... $ 2,633,322
20,761 PepsiCo, Inc................... 847,308
-----------
3,480,630
-----------
BROADCASTING - 0.91%
10,102 CBS Corp....................... 320,739
2,100* Clear Channel Communications,
Inc. ........................ 201,338
4,984 Comcast Corp. Class A Special.. 170,858
6,767* Tele-Comm Liberty Media Group
Class A........................ 232,193
6,565 U S West Communications Group.. 333,174
7,763 U S West Media Group........... 287,715
4,950* Viacom, Inc Class B............ 272,250
-----------
1,818,267
-----------
BUILDING MATERIALS - 0.23%
605 Armstrong World Industries,
Inc. ........................ 50,896
2,392 Lowe's Companies, Inc.......... 189,417
2,567 Masco Corp..................... 144,394
2,368 Sherwin-Williams Co............ 78,735
-----------
463,442
-----------
CHEMICAL - MAJOR - 1.20%
3,219 Dow Chemical Co................ 311,841
15,062 E.I. du Pont de Nemours and Co. 1,159,774
1,753 Hercules, Inc.................. 77,242
8,208 Monsanto Co.................... 454,518
1,910 Morton International, Inc...... 58,135
2,135 PPG Industries, Inc............ 155,587
843 Rohm and Haas Co............... 92,625
1,720 Union Carbide Corp............. 85,893
-----------
2,395,615
-----------
CHEMICAL - MISCELLANEOUS - 0.30%
1,461 Air Products and Chemicals,
Inc.......................... 127,107
1,088 Eastman Chemical Co............ 72,896
1,106 Ecolab Inc..................... 34,148
600* FMC Corp....................... 45,863
1,431 Great Lakes Chemical Corp...... 57,240
573 Millipore Corp................. 19,124
1,204 Nalco Chemical Co.............. 45,150
358* Octel Corp..................... 7,803
2,486 Praxair, Inc................... 122,591
1,336 Sigma Aldrich Corp............. 48,764
1,087 W.R. Grace & Co................ 20,177
-----------
600,863
-----------
</TABLE>
111
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 57
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
CONGLOMERATES - 0.60%
7,960 Allied Signal Inc.............. $ 340,290
1,600 ITT Industries, Inc............ 59,000
1,481 Loews Corp..................... 134,401
1,851 Tenneco Inc.................... 77,048
2,156 Textron Inc.................... 159,948
7,758 Tyco International Ltd......... 429,599
-----------
1,200,286
-----------
CONSUMER FINANCE - 0.15%
666 Beneficial Corp................ 89,244
6,941 MBNA Corp...................... 219,943
-----------
309,187
-----------
CONTAINERS - METAL/GLASS - 0.15%
2,892 Corning Inc.................... 114,053
1,693 Crown Cork & Seal Co., Inc..... 87,825
2,400* Owens-Illinois, Inc............ 107,850
-----------
309,728
-----------
CONTAINERS - PAPER - 0.05%
1,000 Bemis Co., Inc................. 42,188
1,082* Sealed Air Corp................ 57,887
-----------
100,075
-----------
COSMETICS/TOILETRIES - 0.55%
799 Alberto-Culver Co. Class B..... 23,770
1,457 Avon Products, Inc............. 119,201
7,746 Gillette Co.................... 907,250
1,071 International Flavors &
Fragrances, Inc................ 51,408
-----------
1,101,629
-----------
DRUGS - 4.59%
475 Allergan, Inc.................. 19,950
814* ALZA Corp...................... 39,377
17,956 American Home Products Corp.... 867,499
3,326* Amgen Inc...................... 201,223
592 Bausch & Lomb Inc.............. 29,489
13,614 Bristol Myers Squibb Co........ 1,463,505
14,760 Eli Lilly and Co............... 906,818
16,537 Merck & Co., Inc............... 1,935,863
6,911* Pharmacia & Upjohn, Inc........ 305,380
17,542 Pfizer, Inc.................... 1,838,620
10,254 Schering-Plough Corp........... 858,132
11,154 Warner-Lambert Co.............. 711,765
-----------
9,177,621
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
ELECTRICAL EQUIPMENT - 2.21%
3,337 AMP Inc........................ $ 126,806
2,284* Cabletron Systems, Inc......... 29,407
5,988 Emerson Electric Co............ 363,771
44,802 General Electric Co............ 3,735,367
710 National Service Industries,
Inc............................ 36,210
1,496 Raychem Corp................... 56,287
850 Thomas & Betts Corp............ 45,421
348 W. W. Grainger Inc............. 36,736
-----------
4,430,005
-----------
ELECTRONIC INSTRUMENTS - 0.08%
591 General Signal Corp............ 24,305
706* Perkin-Elmer Corp.............. 48,360
650 Tektronix, Inc................. 24,863
1,876* Thermo Electron Corp........... 65,895
-----------
163,423
-----------
ENTERTAINMENT - 0.96%
939* Harrah's Entertainment, Inc.... 23,475
1,766 Hasbro, Inc.................... 67,550
1,936* King World Productions, Inc.... 49,368
4,261 Mattel, Inc.................... 161,385
7,863 Time Warner Inc................ 611,840
8,904 Walt Disney Co................. 1,007,265
-----------
1,920,883
-----------
FINANCE COMPANIES - 0.41%
5,139 Associates First Capital Corp.. 384,460
1,256 Green Tree Financial Corp...... 50,476
1,778 Household International, Inc... 240,586
2,700 SunAmerica, Inc................ 131,288
-----------
806,810
-----------
FOODS - 1.29%
8,318 Archer Daniels Midland Co...... 157,002
4,438 BestFoods...................... 250,470
6,150 Campbell Soup Co............... 335,175
6,682 ConAgra, Inc................... 195,449
2,334 General Mills, Inc............. 159,296
5,234 H J Heinz Co................... 277,729
1,744 Hershey Foods Corp............. 120,772
5,832 Kellogg Co..................... 240,935
2,716 Pioneer Hi - Bred International
Inc............................ 103,378
2,119 Quaker Oats Co................. 122,240
1,100 Ralston Purina Co.............. 122,443
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
FOODS - Continued
6,496 Sara Lee Corp.................. $ 382,451
1,176 Wm. Wrigley Jr. Co............. 113,190
-----------
2,580,530
-----------
FINANCIAL SERVICES - 0.39%
6,221 American Express Co............ 638,430
1,600 Countrywide Credit Industries,
Inc............................ 74,000
1,459 H & R Block Inc................ 64,196
-----------
776,626
-----------
FOOTWEAR - 0.10%
3,731 NIKE, Inc. Class B............ 171,626
995* Reebok International Ltd....... 28,606
-----------
200,232
-----------
FREIGHT - 0.08%
1,954* FDX Corp....................... 125,300
1,263 Ryder System, Inc.............. 43,021
-----------
168,321
-----------
GOLD MINING - 0.09%
5,183 Barrick Gold Corp.............. 99,773
1,600 Battle Mountain Gold Co........ 8,500
1,971 Homestake Mining Co............ 21,435
3,779 Placer Dome Inc................ 47,001
-----------
176,709
-----------
GOVERNMENT SPONSORED - 0.66%
9,580 Federal Home Loan Mortgage..... 435,890
14,825 Federal National Mortgage
Association.................... 887,647
-----------
1,323,537
-----------
FUNERAL SERVICES - 0.07%
3,445 Service Corp. International.... 140,814
-----------
HARDWARE & TOOLS - 0.10%
1,684 Black & Decker Corp............ 98,304
984 Snap-on Inc.................... 43,173
1,188 Stanley Works.................. 56,430
-----------
197,907
-----------
HEALTHCARE - 0.23%
1,300 Cardinal Health, Inc........... 115,862
4,668 HealthSouth Corp............... 132,455
2,069* Humana Inc..................... 64,268
2,405 United HealthCare Corp......... 153,920
-----------
466,505
-----------
</TABLE>
112
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
58 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
HEAVY DUTY TRUCKS/PARTS - 0.17%
506 Cummins Engine Co., Inc........ $ 26,312
1,824 Dana Corp...................... 95,076
1,078 Eaton Corp..................... 96,818
1,827* Navistar International Corp.... 55,153
1,388 PACCAR Inc..................... 76,643
-----------
350,002
-----------
HOME BUILDERS - 0.03%
1,032 Centex Corp.................... 36,894
895 Kaufman & Broad Home Corp...... 22,990
-----------
59,884
-----------
HOSPITAL MANAGEMENT - 0.25%
8,136 Columbia/HCA Healthcare Corp... 265,946
1,322 Manor Care, Inc................ 41,725
600 Shared Medical Systems Corp.... 43,650
4,281* Tenet Healthcare Corp.......... 149,835
-----------
501,156
-----------
HOSPITAL SUPPLIES - 1.56%
10,424 Abbott Laboratories............ 773,330
819 Bard (C. R.), Inc.............. 28,408
4,110 Baxter International Inc....... 235,040
1,597 Becton, Dickinson and Co....... 112,988
1,500 Biomet, Inc.................... 43,313
2,473* Boston Scientific Corp......... 157,654
18,448 Johnson & Johnson.............. 1,274,065
1,522 Mallinckrodt, Inc.............. 46,897
6,732 Medtronic, Inc................. 374,468
647* St. Jude Medical, Inc.......... 23,130
1,422 United States Surgical Corp.... 56,525
-----------
3,125,818
-----------
HOUSEHOLD PRODUCTS - 1.69%%
1,548 Clorox Co...................... 129,258
4,116 Colgate-Palmolive Co........... 358,092
5,543 Minnesota Mining &
Manufacturing Co............... 513,420
1,910 Newell Co...................... 92,158
18,438 Procter & Gamble Co............ 1,547,640
2,190 Rubbermaid, Inc................ 71,449
412 Tupperware Corp................ 11,124
8,332 Unilever N V - ADR............. 657,707
-----------
3,380,848
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
INFORMATION PROCESSING - 5.80%
700 Adobe Systems Inc.............. $ 27,956
1,828* Apple Computer, Inc............ 48,671
435 Autodesk, Inc.................. 18,488
3,929 Automatic Data
Processing, Inc............... 249,983
3,482* Bay Networks, Inc.............. 96,408
11,296* Cendant Corp................... 244,982
632* Ceridian Corp.................. 34,128
13,983* Cisco Systems, Inc............. 1,057,464
2,401 Cognizant Corp................. 127,853
20,579 Compaq Computer Corp........... 562,050
7,333 Computer Associates
International, Inc............. 384,983
2,270 Computer Sciences Corp......... 117,898
1,214* Data General Corp.............. 18,514
8,728* Dell Computer Corp............. 719,242
2,310 Digital Equipment Corp......... 126,761
6,622* E M C Corp..................... 274,399
4,898 First Data Corp................ 162,859
1,700* Gateway 2000, Inc.............. 76,606
1,547* General Instrument Corp........ 36,838
3,000 HBO & Co....................... 173,156
13,865 Hewlett Packard Co............. 861,363
1,565 Honeywell Inc.................. 131,362
13,274 International Business
Machines...................... 1,558,036
33,214* Microsoft Corp................. 2,816,962
4,684* Novell, Inc ................... 49,182
13,220* Oracle Corp.................... 312,323
3,256* Parametric Technology Corp..... 99,817
4,306 Pitney Bowes Inc............... 202,382
3,318* Seagate Technology............. 76,729
3,599* Silicon Graphics, Inc.......... 43,188
5,478* Sun Microsystems, Inc.......... 219,462
5,144* 3Com Corp...................... 130,529
2,900* Unisys Corp.................... 71,050
4,583 Xerox Corp..................... 470,902
-----------
11,602,526
-----------
INSURANCE - CASUALTY - 0.29%
2,484 Chubb Corp..................... 197,633
900 Progressive Corp............... 124,088
2,353 SAFECO Corp.................... 109,415
3,568 St. Paul Companies, Inc........ 158,330
-----------
589,466
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
INSURANCE - LIFE - 0.36%
2,197 Aetna Inc...................... $ 171,778
2,798 Conseco Inc.................... 130,457
1,596 Jefferson-Pilot Corp........... 91,370
1,340 Lincoln National Corp.......... 120,433
2,370 Torchmark Corp................. 101,614
887 Transamerica Corp.............. 102,005
-----------
717,657
-----------
INSURANCE - MISCELLANEOUS - 0.28%
1,097 General Re Corp................ 241,203
1,244 MBIA, Inc...................... 92,756
1,806 MGIC Investment Corp........... 108,247
2,214 UNUM Corp...................... 123,015
-----------
565,221
-----------
INSURANCE - MULTILINE - 1.75%
5,746 Allstate Corp.................. 540,842
9,590 American International Group,
Inc............................ 1,187,362
2,552 Aon Corp....................... 163,488
2,829 CIGNA Corp..................... 193,787
2,100 Cincinnati Financial Corp...... 88,200
1,503 Hartford Financial Services
Group.......................... 165,424
2,284 Marsh & McLennan
Companies Inc................. 199,992
15,662 Travelers Group, Inc........... 955,382
-----------
3,494,477
-----------
LEISURE TIME - 0.06%
1,543 Brunswick Corp................. 48,508
3,200* Mirage Resorts, Inc............ 66,600
-----------
115,108
-----------
LODGING - 0.10%
3,010 Hilton Hotels Corp............. 94,627
3,288 Marriott Services Inc.......... 114,258
-----------
208,885
-----------
MACHINERY - AGRICULTURE - 0.13%
1,311 Case Corp...................... 75,874
3,670 Deere & Co..................... 190,381
-----------
266,255
-----------
</TABLE>
113
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
May 31 1998 59
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.18%
4,640 Caterpillar Inc................ $ 254,910
1,303 Fluor Corp..................... 62,137
626 Foster Wheeler Corp............ 15,885
979 Harnischfeger Industries Inc... 30,838
-----------
363,770
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.34%
1,307 Cooper Industries, Inc......... 84,138
2,820 Dover Corp..................... 105,750
2,960 Illinois Tool Works Inc........ 195,360
2,434 Ingersoll-Rand Co.............. 109,682
1,087 Johnson Controls, Inc.......... 64,677
1,795 Pall Corp...................... 35,563
2,104 Parker Hannifin Corp........... 86,396
-----------
681,566
-----------
MACHINE TOOLS - 0.01%
844 Cincinnati Milacron, Inc....... 25,267
-----------
MEDICAL TECHNOLOGY - 0.08%
2,406 Guidant Corp................... 155,037
-----------
MERCHANDISING -
DEPARTMENT - 0.36%
5,952 Dayton Hudson Corp............. 276,024
1,630 Dillards, Inc. Class A......... 68,562
2,816* Federated Department Stores,
Inc ........................... 145,904
3,057 May Department Stores Co....... 196,603
358 Mercantile Stores Co., Inc..... 28,148
-----------
715,241
-----------
MERCHANDISING - FOOD - 0.33%
3,303 Albertsons, Inc................ 152,970
3,442 American Stores Co............. 85,835
570 Giant Food Inc. Class A........ 24,510
300 Great Atlantic & Pacific Tea
Co., Inc....................... 9,600
3,642* Kroger Co...................... 156,378
996 Supervalu Inc.................. 41,708
4,514 SYSCO Corp..................... 105,233
2,279 Winn-Dixie Stores, Inc......... 92,726
-----------
668,960
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
MERCHANDISING - MASS - 1.22%
3,548 J.C. Penney Co., Inc........... $ 254,791
6,176* Kmart Corp..................... 119,660
5,296 Sears Roebuck and Co........... 327,359
30,774 Wal-Mart Stores, Inc........... 1,698,340
2,461 Woolworth Corp................. 48,605
-----------
2,448,755
-----------
MERCHANDISE - DRUG - 0.30%
2,789 CVS Corp....................... 195,753
597 Longs Drug Stores Corp......... 18,097
3,762 Rite Aid Corp.................. 134,726
6,904 Walgreen Co.................... 242,935
-----------
591,511
-----------
MERCHANDISE - SPECIALTY - 1.01%
1,089 American Greetings Corp.
Class A........................ 51,727
1,351 Circuit City Stores, Inc....... 57,248
1,700* Consolidated Stores Corp....... 64,918
2,966* CostCo Companies, Inc.......... 171,657
3,357 Fortune Brands, Inc........... 129,035
5,147 Gap, Inc....................... 277,938
9,956 Home Depot, Inc................ 782,168
1,906 Ikon Office Solutions Inc...... 40,383
491 Jostens, Inc................... 12,398
2,944 Limited, Inc................... 97,888
1,033 Nordstrom, Inc................. 74,441
1,978 TJX Companies, Inc............. 92,472
1,382 Tandy Corp..................... 61,154
3,833* Toys "R" Us, Inc............... 101,575
-----------
2,015,002
-----------
METALS - MISCELLANEOUS - 0.06%
1,666 Cyprus Amax Minerals Co........ 26,448
774 Engelhard Corp................. 16,109
2,553 Freeport-McMoran Copper & Gold
Inc. Class B.................. 42,763
2,507 Inco Limited................... 36,038
-----------
121,358
-----------
METALS - ALUMINUM - 0.15%
2,843 Alcan Aluminum Ltd............. 81,025
2,290 Aluminum Co. of America........ 158,869
942 Reynolds Metals Co............. 54,636
-----------
294,530
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
METALS - COPPER - 0.06%
1,000 ASARCO Inc..................... $ 22,688
2,373 Newmont Mining Corp............ 59,177
559 Phelps Dodge Corp.............. 34,098
-----------
115,963
-----------
METALS - STEEL - 0.11%
2,679 Allegheny Teldyne Inc.......... 62,286
1,895* Bethlehem Steel Corp........... 23,213
300 Inland Steel Industries, Inc... 8,588
967 Nucor Corp..................... 49,801
1,415 USX-US Steel Group, Inc........ 50,763
1,500 Worthington Industries, Inc.... 26,438
-----------
221,089
-----------
MISCELLANEOUS - 0.10%
2,100 BB & T Corp.................... 138,994
1,500 Equifax Inc.................... 54,562
-----------
193,556
-----------
MOBILE HOMES - 0.01%
600 Fleetwood Enterprises, Inc..... 24,000
-----------
MULTIMEDIA - 0.02%
902 Meredith Corp.................. 35,855
-----------
NATURAL GAS-DIVERSIFIED - 0.07%
881 Coastal Corp................... 62,111
200 Eastern Enterprises............ 8,025
1,741 Sonat Inc...................... 68,225
-----------
138,361
-----------
OIL - INTEGRATED DOMESTIC - 0.92%
864 Amerada Hess Corp.............. 46,710
12,888 Amoco Corp..................... 538,880
1,162 Ashland Oil, Inc............... 57,955
4,508 Atlantic Richfield Co.......... 355,569
2,463 Burlington Resources, Inc..... 103,754
767 Kerr-McGee Corp................ 48,513
4,307 Occidental Petroleum Corp...... 118,980
1,373* Oryx Energy Co................. 32,008
832 Pennzoil Co.................... 48,100
3,684 Phillips Petroleum Co.......... 184,430
1,104 Sun Co., Inc................... 46,920
4,011 USX-Marathon Group............. 140,385
3,360 Unocal Corp.................... 119,700
-----------
1,841,904
-----------
</TABLE>
114
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
60 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
OIL - INTEGRATED
INTERNATIONAL - 2.99%
8,859 Chevron Corp................... $ 707,613
33,628 Exxon Corp..................... 2,370,774
10,600 Mobil Corp..................... 826,800
29,492 Royal Dutch Pete Co. - ADR..... 1,653,395
7,474 Texaco Inc..................... 431,623
-----------
5,990,205
-----------
OIL - SERVICES - 0.51%
2,860 Baker Hughes Inc............... 102,960
2,177 Dresser Industries, Inc........ 101,367
3,714 Halliburton Co................. 175,951
881 McDermott International, Inc... 33,643
1,229* Rowan Companies, Inc........... 31,416
6,602 Schlumberger Ltd............... 515,369
658* Western Atlas Inc.............. 56,958
-----------
1,017,664
-----------
OIL/GAS PRODUCERS - 0.09%
700 Anadarko Petroleum Corp........ 46,200
1,400 Apache Corp.................... 47,863
1,400 Helmerich & Payne, Inc......... 35,350
2,711 Union Pacific Resources Group
Inc........................... 54,897
-----------
184,310
-----------
PAPER/FOREST PRODUCTS - 0.69%
1,863 Avery Dennison Corp............ 96,527
766 Boise Cascade Corp............. 25,565
1,507 Champion International Corp.... 72,336
3,338 Fort James Corp................ 159,598
833 Georgia-Pacific Corp........... 53,468
4,262 International Paper Co......... 196,052
7,734 Kimberly-Clark Corp............ 383,316
2,342 Louisiana Pacific Corp......... 46,694
1,568 Mead Corp...................... 48,804
215 Potlatch Corp.................. 9,420
272* Stone Container Corp........... 4,828
944 Union Camp Corp................ 51,625
1,821 Westvaco Corp.................. 51,899
2,544 Weyerhaeuser Co................ 129,267
1,378 Willamette Industries, Inc..... 47,282
-----------
1,376,681
-----------
PHOTOGRAPHY - 0.18%
4,334 Eastman Kodak Co............... 309,339
1,146 Polaroid Corp.................. 46,485
-----------
355,824
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
POLLUTION CONTROL - 0.19%
2,859 Browning - Ferris Industries,
Inc........................... $ 101,672
6,500* Laidlaw Inc.................... 80,438
5,931 Waste Management, Inc.......... 192,758
-----------
374,868
-----------
PUBLISHING - NEWS - 0.35%
1,527 Dow Jones & Co., Inc........... 73,487
4,238 Gannett Co., Inc............... 279,443
996 Knight-Ridder, Inc............. 56,834
1,129 New York Times Co. Class A... 79,595
1,267 Times Mirror Co................ 81,088
1,901 Tribune Co..................... 127,129
-----------
697,576
-----------
PUBLISHING/PRINTING - 0.16%
1,986 Dun & Bradstreet Corp.......... 67,028
971 Harcourt General, Inc.......... 52,920
1,578 McGraw-Hill, Inc............... 123,380
1,496 Moore Corp. Ltd................ 21,691
1,296 R R Donnelley and Son.......... 58,320
-----------
323,339
-----------
RAILROAD - 0.33%
2,033 Burlington Northern Santa Fe... 202,284
2,976 CSX Corp...................... 141,732
4,905 Norfolk Southern Corp.......... 153,588
3,346 Union Pacific Corp............. 161,862
-----------
659,466
-----------
RESTAURANTS - 0.37%
2,057 Darden Restaurants, Inc........ 31,755
9,261 McDonald's Corp................ 607,753
2,276* Tricon Global Restaurants,
Inc.......................... 70,698
1,600 Wendy's International, Inc..... 39,500
-----------
749,706
-----------
SAVINGS & LOAN - 0.21%
325 Golden West Financial Corp..... 35,100
1,785 H.F. Ahmanson & Co............. 136,106
3,664 Washington Mutual, Inc......... 258,770
-----------
429,976
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
SECURITIES RELATED - 0.72%
3,800 Charles Schwab Corp............ $ 125,400
3,300 Franklin Resources, Inc........ 161,288
1,800 Lehman Brothers Holdings, Inc.. 127,688
4,530 Merrill Lynch & Co., Inc....... 405,435
7,912 Morgan Stanley, Dean Witter,
Discover and Co............... 617,630
-----------
1,437,441
-----------
SEMICONDUCTOR EQUIPMENT - 0.11%
5,266* Applied Materials, Inc......... 168,512
1,300* KLA-Tencor Corp................ 44,038
-----------
212,550
-----------
SEMICONDUCTORS - 1.31%
2,157* Advanced Micro Devices, Inc.... 42,062
22,202 Intel Corp..................... 1,586,055
2,010* LSI Logic Corp................. 42,838
3,044* Micron Technology, Inc......... 71,724
8,290 Motorola, Inc.................. 438,852
2,337* National Semiconductor Corp.... 37,976
2,717 Rockwell International Corp.... 149,435
4,928 Texas Instruments Inc.......... 253,176
-----------
2,622,118
-----------
TELECOMMUNICATIONS - 1.63%
7,049* Airtouch Communications, Inc... 335,709
2,784 ALLTEL Corp.................... 109,794
524* Andrew Corp.................... 11,512
2,047* DSC Communications Corp........ 34,991
2,378 Frontier Corp.................. 72,380
1,100 Harris Corp.................... 53,006
17,908 Lucent Technologies, Inc....... 1,270,349
4,200* Nextel Communications, Inc.
Class A....................... 98,963
7,234 Northern Telecom Ltd........... 462,976
381 Scientific-Atlanta, Inc........ 8,406
2,404* Tellabs, Inc................... 165,200
13,868* WorldCom, Inc.................. 630,993
-----------
3,254,279
-----------
TEXTILE - PRODUCTS - 0.06%
683 Russell Corp................... 18,612
300 Springs Industries, Inc.
Class A....................... 16,838
1,700 V F Corp....................... 90,418
-----------
125,868
-----------
</TABLE>
115
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
May 31 1998 61
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- ------------
<S> <C> <C>
TOBACCO - 0.64%
32,729 Philip Morris Cos Inc.......... $ 1,223,246
2,427 UST Inc........................ 64,619
------------
1,287,865
------------
UTILITIES - COMMUNICATION - 3.24%
22,454 AT & T Corp.................... 1,366,887
15,018 Ameritech Corp................. 637,326
10,495 Bell Atlantic Corp............. 961,604
13,427 BellSouth Corp................. 866,042
13,087 GTE Corp....................... 763,136
9,357 MCI Communications Corp........ 500,308
25,014 SBC Communications, Inc........ 972,419
5,720 Sprint Corp.................... 410,410
------------
6,478,132
------------
UTILITIES - ELECTRIC - 1.43%
1,825 Ameren Corp.................... 71,403
2,949 American Electric Power, Inc... 133,811
2,598 Baltimore Gas and Electric Co.. 79,077
1,506 Carolina Power & Light Co...... 61,746
2,692 Central & South West Corp...... 71,170
2,718 Cinergy Corp................... 87,825
3,299 Consolidated Edison Co. of
New York, Inc.................. 141,238
2,193 DTE Energy Co.................. 86,761
2,808 Dominion Resources, Inc........ 111,443
4,904 Duke Energy Corp............... 282,593
5,717 Edison International........... 168,652
3,027 Entergy Corp................... 79,648
2,370 FPL Group, Inc................. 145,607
3,126 FirstEnergy Corp............... 92,803
2,354 GPU Inc........................ 90,629
3,889 Houston Industries, Inc........ 111,323
1,200* Niagara Mohawk Power Corp...... 14,850
1,134 Northern States Power Co....... 64,496
1,677 Peco Energy Co................. 47,375
5,335 P G & E Corp................... 168,053
1,700 P P & L Resources Inc.......... 37,613
4,945 PacifiCorp..................... 114,044
3,081 Public Service Enterprise Group 101,866
10,308 Southern Co.................... 273,805
3,494 Texas Utilities Co............. 138,012
2,300 Unicom Corp.................... 79,060
------------
2,854,903
------------
UTILITIES - GAS, DISTRIBUTION - 0.02%
790 NICOR Inc...................... 30,514
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- ------------
<S> <C> <C>
UTILITIES - GAS, PIPELINE - 0.31%
887 Columbia Energy Group.......... $ 74,841
1,295 Consolidated Natural Gas Co.... 73,248
3,947 Enron Corp..................... 197,843
400 ONEOK Inc...................... 15,625
1,220 Pacific Enterprises............ 46,436
725 Peoples Energy Corp............ 26,735
5,926 Williams Companies, Inc........ 192,225
------------
626,953
------------
TOTAL COMMON STOCKS
(Cost $73,829,020)............. 116,780,010
------------
PAR
VALUE
- -----------
CORPORATE BONDS - 18.40%
AUTO - CARS - 1.07%
$2,000,000 Ford Motor Co.,
7.25% due 10/01/08............ 2,141,080
------------
BANKS - OTHER - 2.50%
1,000,000 BankAmerica Corp.,
6.63% due 05/30/01............ 1,015,680
3,000,000 Malayan Banking Berhad-NY,
7.13% due 09/15/05............ 2,518,410
1,500,000 Santander Finance Issuance,
6.38% due 02/15/15............ 1,463,745
------------
4,997,835
------------
BANKS - REGIONAL - 1.12%
2,000,000 NationsBank Corp.,
7.75% due 08/15/15............ 2,232,740
------------
FINANCE COMPANIES - 4.36%
3,000,000 AT&T Capital Corp.,
6.80% due 02/01/01............ 3,060,540
1,500,000 Finova Capital Corp.,
9.13% due 02/27/02............ 1,641,675
1,000,000 Ford Motor Credit Co.,
6.25% due 11/08/00............ 1,005,960
3,000,000 International Lease Finance
Corp., 6.45% due 09/11/00...... 3,028,410
------------
8,736,585
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- ------------
<S> <C> <C>
HOSPITAL MANAGEMENT - 0.77%
$1,650,000 Columbia/HCA Healthcare Corp.,
7.19% due 11/15/15............ $ 1,539,203
------------
INSURANCE - CASUALTY - 1.10%
2,000,000 Orion Cap Trust,
8.73% due 01/01/37............ 2,197,680
------------
MERCHANDISING - MASS - 0.51%
1,000,000 Sears Roebuck and Co.,
7.35% due 03/23/00............ 1,024,350
------------
MERCHANDISE - SPECIALTY - 2.33%
Goodrich (B.F.),
2,000,000 7.10% due 11/15/27............ 2,089,160
Tandy Corp.,
2,500,000 6.95% due 09/01/07............ 2,566,700
------------
4,655,860
------------
OIL - INTEGRATED DOMESTIC - 1.05%
2,000,000 Union Oil Co. California,
7.20% due 05/15/05............ 2,099,900
------------
SECURITIES RELATED - 1.05%
1,000,000 Bear Stearns Co. Inc.:
9.38% due 06/01/01............ 1,086,960
6.75% due 05/01/01............ 1,016,390
------------
2,103,350
------------
TELECOMMUNICATIONS - 1.81%
1,500,000 Tele-Communications Inc.,
7.25% due 08/01/05............ 1,563,540
2,000,000 360 Communications Co.,
7.13% due 03/01/03............ 2,069,580
------------
3,633,120
------------
UTILITIES - ELECTRIC - 0.73%
Texas Utilities Electric,
1,444,575 6.62% due 07/01/01............ 1,464,888
------------
TOTAL CORPORATE BONDS
(Cost $36,476,391)............. 36,826,591
------------
</TABLE>
116
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
62 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
UNITED STATES GOVERNMENT -
LONG TERM - 14.13%
GOVERNMENT SPONSORED - 3.18%
Federal Home Loan Mortgage Corp
(pools/REMICS):
$ 166,641 7.50% due 09/01/25............ $ 171,275
364,499 7.50% due 09/01/25............ 374,635
309,452 7.50% due 09/01/25............ 318,057
468,190 7.50% due 09/01/25............ 481,211
Federal National Mortgage
Association:
2,000,000 7.00% due 05/10/01............ 2,000,620
3,000,000 6.90% due 10/09/01............ 3,010,770
-----------
6,356,568
-----------
UNITED STATES BONDS &
NOTES - 10.95%
United States Treasury Bonds:
1,500,000 8.13% due 08/15/19............ 1,898,430
2,000,000 7.25% due 05/15/16............ 2,302,500
4,000,000 7.25% due 08/15/22............ 4,684,360
United States Treasury Notes:
1,000,000 8.00% due 08/15/99............ 1,028,120
4,000,000 6.50% due 08/15/05............ 4,198,760
2,200,000 6.38% due 04/30/99............ 2,216,500
2,000,000 6.25% due 02/28/02............ 2,041,880
1,500,000 6.25% due 02/15/03............ 1,539,375
1,000,000 5.75% due 08/15/03............ 1,007,190
1,000,000 5.50% due 04/15/00............ 999,220
-----------
21,916,335
-----------
TOTAL UNITED STATES GOVERNMENT -
LONG TERM
(Cost $27,395,726)............. 28,272,903
-----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 8.38%
CONSUMER FINANCE - 4.27%
2,533,000 Beneficial Corp.,
5.52% due 06/03/98............ 2,532,180
Sears Roebuck Acceptance Corp.:
665,000 5.55% due 06/05/98............ 664,544
5,353,000 5.50% due 06/01/98............ 5,353,000
-----------
8,549,724
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- ------------
<S> <C> <C>
FINANCE COMPANIES - 1.43%
$1,032,000 Ford Motor Credit Co.,
5.50% due 06/05/98............ $ 1,031,320
1,822,000 General Motors Acceptance
Corp.,
5.50% due 06/04/98............ 1,821,099
------------
2,852,419
------------
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.19%
389,000 Cooper Industries, Inc.,
5.67% due 06/01/98............ 389,000
------------
SECURITIES RELATED - 1.24%
Merrill Lynch & Co.:
1,202,000 5.58% due 06/10/98............ 1,200,170
1,290,000 5.52% due 06/02/98............ 1,289,792
------------
2,489,962
------------
UTILITIES - COMMUNICATION - 1.25%
GTE Corp.,
2,500,000 5.61% due 06/08/98............ 2,496,969
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $16,778,074)............. 16,778,074
------------
UNITED STATES GOVERNMENT -
SHORT TERM - 0.18%
UNITED STATES TREASURY BILLS - 0.18%
250,000 4.94% due 06/04/98............. 249,894
100,000 4.75% due 06/04/98............. 99,959
------------
349,853
------------
TOTAL UNITED STATES GOVERNMENT -
SHORT TERM
(Cost $349,853)................ 349,853
------------
TOTAL INVESTMENTS
(Cost $154,829,064) - 99.45%... 199,007,431
Other assets and liabilities,
net - 0.55%................... 1,091,381
------------
NET ASSETS (equivalent
to $14.02 per share on
14,269,480 shares
outstanding) - 100%........... $200,098,812
============
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTACTS DEPRECIATION
-------- ------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 5/31/98)
20(2) S&P 500 Index Futures
(June/$1,090.80).............. $ (68,925)
===========
(1) U.S.Treasury Bills with a market value of
approximately $350,000 were maintained in
a segregated account with a portion placed
as collateral for futures contracts.
(2) Per 250
=======================================================
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
14,269,480 shares outstanding........... $ 142,695
Additional paid in capital................ 143,094,934
Undistributed net realized gain on
securities.............................. 12,699,945
Undistributed net investment income....... 51,796
Unrealized appreciation (depreciation) of:
Investments........... $44,178,367
Futures .............. (68,925) 44,109,442
----------- ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................. $200,098,812
============
</TABLE>
117
<PAGE>
================================================================================
ASSET ALLOCATION FUND - FINANCIAL STATEMENTS 63
================================================================================
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividends....................................................... $ 1,794,610
Interest........................................................ 4,912,556
------------
Total investment income....................................... 6,707,166
------------
EXPENSES:
Advisory fees................................................... 943,269
Custodian and accounting services............................... 44,310
Reports to shareholders......................................... 14,240
Audit fees and tax services..................................... 4,390
Directors' fees and expenses.................................... 3,849
Miscellaneous................................................... 12,429
------------
Total expenses................................................ 1,022,487
------------
NET INVESTMENT INCOME........................................... 5,684,679
------------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on:
Investments..................................... $11,723,542
Futures contracts............................... 1,548,855 13,272,397
------------ ------------
Net unrealized appreciation (depreciation) during
the year:
Investments..................................... 18,457,664
------------
Futures contracts............................... (171,525) 18,286,139
------------ ------------
Net realized and unrealized gain during the year............. 31,558,536
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 37,243,215
------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income............................. $ 5,684,679 $ 5,846,609
Net realized gain on securities................... 13,272,397 10,528,549
Net unrealized appreciation of securities during
the year........................................ 18,286,139 9,840,402
------------ ------------
Increase in net assets resulting from operations 37,243,215 26,215,560
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. (5,673,369) (5,861,358)
Net realized gain on securities................... (10,552,054) (19,664,171)
------------ ------------
Decrease in net assets resulting from
distributions to shareholders................. (16,225,423) (25,525,529)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold.................. 6,643,565 3,274,322
Proceeds from capital stock issued for
distributions reinvested........................ 16,225,423 25,525,529
------------ ------------
22,868,988 28,799,851
Cost of capital stock repurchased................. (21,134,651) (42,167,070)
------------ ------------
Increase (decrease) in net assets resulting from
capital stock transactions.................... 1,734,337 (13,367,219)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS........... 22,752,129 (12,677,188)
NET ASSETS:
Beginning of year................................. 177,346,683 190,023,871
------------ ------------
End of year (including undistributed net
investment income of $51,796 and $ 40,486)...... $200,098,812 $177,346,683
============ ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold...................... 488,059 264,558
Shares issued for distributions reinvested........ 1,231,303 2,146,236
Shares of capital stock repurchased .............. (1,556,774) (3,446,167)
------------ ------------
Increase (decrease) in shares outstanding....... 162,588 (1,035,373)
Shares outstanding:
Beginning of year............................... 14,106,892 15,142,265
------------ ------------
End of year..................................... 14,269,480 14,106,892
============ ============
</TABLE>
118
<PAGE>
================================================================================
CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS
64 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
CORPORATE BONDS - 84.06%
AIRLINES - 6.54%
$1,500,000 Delta Air Lines, Inc.,
9.75% due 05/15/21........... $ 1,935,060
2,000,000 Southwest Airlines Co.,
8.75% due 10/15/03........... 2,226,020
-----------
4,161,080
-----------
AUTO - CARS - 2.32%
1,500,000 Hertz Corp.,
6.00% due 01/15/03........... 1,478,400
-----------
BANKS - OTHER - 5.65%
1,000,000 BankAmerica Corp.,
7.25% due 04/15/06........... 1,054,380
1,500,000 Santander Finance Issuance,
7.25% due 11/01/15........... 1,559,370
1,000,000 Toronto Dominion Bank,
6.13% due 11/01/08........... 982,350
-----------
3,596,100
-----------
BANKS - REGIONAL - 6.81%
1,500,000 Bank Boston Capital Trust I,
8.25% due 12/15/26........... 1,630,395
1,500,000 Barnett Capital Trust I,
8.06% due 12/01/26........... 1,644,330
1,000,000 SouthTrust Corp.,
7.63% due 05/01/04........... 1,063,040
-----------
4,337,765
-----------
BUILDING MATERIALS - 3.22%
2,000,000 CSR America, Inc.,
6.88% due 07/21/05........... 2,046,800
-----------
FINANCE COMPANIES - 9.15%
2,000,000 Capital One Bank,
8.13% due 03/01/00........... 2,063,200
1,000,000 C.I.T. Group Holdings, Inc.,
8.38% due 11/01/01........... 1,070,000
2,000,000 Finova Capital Corp.,
9.13% due 02/27/02........... 2,188,900
500,000 Ford Motor Credit Co.,
6.38% due 11/05/08........... 500,965
-----------
5,823,065
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
HEALTHCARE - 2.22%
$1,500,000 Columbia Healthcare Corp.,
7.50% due 12/15/23........... $ 1,410,315
-----------
MERCHANDISE - DRUG - 0.76%
500,000 Imcera Group Inc.,
6.00% due 10/15/03........... 485,620
-----------
MERCHANDISING -
DEPARTMENT - 3.64%
2,000,000 Associated Dry Goods
Corp. Depentures,
8.85% due 03/01/06........... 2,313,960
-----------
MERCHANDISING - MASS - 3.92%
1,000,000 Sears Roebuck and Co.,
6.25% due 01/15/04........... 998,760
1,500,000 ShopKo Stores, Inc.,
6.50% due 08/15/03........... 1,493,700
-----------
2,492,460
-----------
METALS - STEEL - 2.80%
2,000,000 Pohang Iron & Steel Limited,
7.50% due 08/01/02........... 1,782,200
-----------
PAPER/FOREST PRODUCTS - 3.87%
2,000,000 Georgia-Pacific Corp.,
9.50% due 12/01/11........... 2,464,640
-----------
PUBLISHING - NEWS - 3.49%
2,000,000 News America Holdings,
8.25% due 08/10/18........... 2,222,480
-----------
SECURITIES RELATED - 5.58%
Lehman Brothers, Inc.,
1,500,000 7.13% due 09/15/03........... 1,555,110
2,000,000 6.13% due 02/01/01........... 1,997,180
-----------
3,552,290
-----------
TELECOMMUNICATIONS - 6.59%
2,000,000 Airtouch Communications, Inc.,
7.50% due 07/15/06........... 2,132,380
2,000,000 360 Communications Co.,
7.13% due 03/01/03........... 2,069,580
-----------
4,201,960
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
UTILITIES - COMMUNICATION - 6.46%
$2,500,000 Century Telephone Enterprises, Inc.,
7.20% due 12/01/25..................... $ 2,641,350
1,500,000 GTE South, Inc.,
6.00% due 02/15/08..................... 1,474,095
-----------
4,115,445
-----------
UTILITIES - ELECTRIC - 4.43%
1,000,000 Georgia Power Co.,
6.13% due 09/01/99..................... 1,001,680
2,000,000 Tenaga Nasional Berhad,
7.88% due 06/15/04..................... 1,817,100
-----------
2,818,780
-----------
UTILITIES - GAS, PIPELINE - 6.61%
2,000,000 Columbia Energy Group,
7.62% due 11/28/25...................... 2,083,900
2,000,000 Enron Corp.,
7.63% due 09/10/04..................... 2,122,020
-----------
4,205,920
-----------
TOTAL CORPORATE BONDS
(Cost $52,488,290)....................... 53,509,280
-----------
UNITED STATES GOVERNMENT
LONG TERM - 12.58%
FEDERAL AGENCIES - 0.44%
Government National Mortgage
Association:
68,950 9.50% due 05/15/18..................... 74,784
2,550 9.50% due 06/15/18..................... 2,766
1,240 9.50% due 06/15/18..................... 1,345
151,748 9.50% due 07/15/18..................... 164,587
19,961 9.50% due 08/15/18..................... 21,650
11,896 9.50% due 10/15/18..................... 12,902
-----------
278,034
-----------
GOVERNMENT SPONSORED - 11.29%
Federal Home Loan Mortgage Corp.:
921,110 6.50% due 06/01/12..................... 928,304
1,000,000 5.75% due 12/15/16..................... 997,500
2,000,000 Federal National Mortgage Association,
7.23% due 03/30/06..................... 2,015,940
</TABLE>
119
<PAGE>
================================================================================
CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 65
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
GOVERNMENT SPONSORED - Continued
Federal National Mortgage Association,
(Pools/REMICS):
$ 825,801 7.50% due 07/01/26.............. $ 849,022
792,792 7.00% due 05/01/11.............. 809,140
753,210 7.00% due 05/01/11.............. 768,742
803,910 7.00% due 06/01/11.............. 820,487
-----------
7,189,135
-----------
UNITED STATES NOTES - 0.85%
500,000 United States Treasury Notes,
6.88% due 05/15/06.............. 537,890
-----------
TOTAL UNITED STATES GOVERNMENT -
LONG TERM
(Cost $7,801,256)................. 8,005,059
-----------
FOREIGN GOVERNMENT BONDS - 0.82%
CANADA - 0.82%
500,000 New Brunswick Province,
7.13% due 10/01/02
(Cost $499,176).................. 518,865
-----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 0.83%
MACHINERY - INDUSTRIAL/
SPECIALTY - 0.83%
529,000 Cooper Industries, Inc.,
5.67% due 06/01/98
(Cost $529,000).................. 529,000
-----------
TOTAL INVESTMENTS
(Cost $61,317,722) - 98.29%....... 62,562,204
Other assets and liabilities,
net - 1.71%...................... 1,091,348
-----------
NET ASSETS (equivalent
to $9.68 per share on
6,577,011 shares
outstanding) - 100% ............. $63,653,552
===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ---------- -----------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 5/31/98)
13 (2) U.S. Treasury Bond Futures
(September/$121.50).............. $ (102)
===========
(1) U.S. Treasury Notes with a
market value of approximately
$100,000 were maintained in a
segregated account with a
portion placed as collateral
for futures contracts.
(2) Per 1,000
- --------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
6,577,011 shares outstanding................ $ 65,770
Additional paid in capital.................... 62,825,983
Accumulated net realized loss on securities... (517,185)
Undistributed net investment income........... 34,604
Unrealized appreciation (depreciation) of:
Investments........... $ 1,244,482
Futures .............. (102)........ 1,244,380
----------- -----------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING................................. $63,653,552
===========
</TABLE>
120
<PAGE>
================================================================================
CAPITAL CONSERVATION FUND - FINANCIAL STATEMENTS
66
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest .................................................................. $ 4,595,681
-----------
EXPENSES:
Advisory fees ............................................................. 335,861
Custodian and accounting services ......................................... 15,946
Reports to shareholders ................................................... 4,902
Audit fees and tax services ............................................... 1,534
Directors' fees and expenses .............................................. 1,427
Miscellaneous ............................................................. 5,159
-----------
Total expenses .......................................................... 364,829
-----------
NET INVESTMENT INCOME ..................................................... 4,230,852
-----------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on:
Investments ................................................. $ 149,517
Futures contracts ........................................... 109,743 259,260
-----------
Net unrealized appreciation (depreciation) during the year:
Investments ................................................. 2,347,085
Futures contracts ........................................... (102) 2,346,983
----------- -----------
Net realized and unrealized gain on securities during the year ......... 2,606,243
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $ 6,837,095
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................................................... $ 4,230,852 $ 4,570,257
Net realized gain (loss) on securities .................................... 259,260 (127,757)
Net unrealized appreciation of securities
during the year ......................................................... 2,346,983 760,448
------------ ------------
Increase in net assets resulting from operations ....................... 6,837,095 5,202,948
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................................................... (4,220,237) (4,560,074)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold .......................................... 11,469,948 5,054,950
Proceeds from capital stock issued for distributions reinvested ........... 4,220,237 4,560,074
------------ ------------
15,690,185 9,615,024
Cost of capital stock repurchased ......................................... (21,400,947) (13,722,282)
------------ ------------
Decrease in net assets resulting from
capital stock transactions ............................................. (5,710,762) (4,107,258)
------------ ------------
TOTAL DECREASE IN NET ASSETS .............................................. (3,093,904) (3,464,384)
NET ASSETS:
Beginning of year ......................................................... 66,747,456 70,211,840
------------ ------------
End of year (including undistributed net investment income
of $34,604 and $23,989) ................................................. $ 63,653,552 $ 66,747,456
============ ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold .............................................. 1,185,836 540,826
Shares issued for distributions reinvested ................................ 439,548 488,804
Shares of capital stock repurchased ....................................... (2,216,430) (1,466,062)
------------ ------------
Decrease in shares outstanding .......................................... (591,046) (436,432)
Shares outstanding:
Beginning of year ....................................................... 7,168,057 7,604,489
------------ ------------
End of year ............................................................. 6,577,011 7,168,057
============ ============
</TABLE>
121
<PAGE>
================================================================================
GOVERNMENT SECURITIES FUND - STATEMENT OF NET ASSETS
May 31, 1997 67
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
UNITED STATES GOVERNMENT
LONG TERM - 96.90%
GOVERNMENT SPONSORED - 62.24%
$ 1,500,000 Federal Farm Credit Bank,
6.92% due 05/13/02...................... $ 1,559,535
Federal Home Loan Banks:
1,155,000 7.26% due 09/06/01 ..................... 1,205,173
1,150,000 7.10% due 11/02/02 ..................... 1,208,041
2,000,000 6.38% due 12/20/00 ..................... 2,031,880
3,000,000 5.70% due 12/19/00 ..................... 2,999,520
Federal Home Loan Mortgage Corp.:
3,000,000 7.13% due 07/21/99 ..................... 3,045,480
1,500,000 7.09% due 06/01/05 ..................... 1,528,365
1,500,000 6.90% due 03/26/03 ..................... 1,508,205
3,500,000 6.71% due 11/09/05 ..................... 3,536,085
1,500,000 6.37% due 01/23/06 ..................... 1,499,760
Federal Home Loan Mortgage Corp.
(Pools/REMICS):
104,277 7.50% due 09/01/25 ..................... 107,177
373,170 7.50% due 09/01/25 ..................... 383,548
190,881 7.50% due 09/01/25 ..................... 196,189
2,000,000 7.00% due 09/15/23 ..................... 2,047,500
2,302,775 6.50% due 06/01/12 ..................... 2,320,760
175,000 5.50% due 02/25/19 ..................... 172,265
Federal National Mortgage Association:
1,000,000 9.05% due 04/10/00 ..................... 1,057,190
2,000,000 7.27% due 08/24/05 ..................... 2,051,240
3,000,000 7.00% due 08/27/12 ..................... 3,107,820
2,300,000 6.90% due 10/09/01 ..................... 2,308,257
2,000,000 6.85% due 09/12/05 ..................... 2,021,560
2,000,000 6.62% due 06/25/07 ..................... 2,088,740
2,000,000 6.41% due 03/08/06 ..................... 2,052,500
2,500,000 6.40% due 12/10/01 ..................... 2,501,550
4,000,000 6.25% due 12/13/02 ..................... 4,006,880
3,000,000 6.06% due 05/07/03 ..................... 3,002,820
2,000,000 5.74% due 12/23/99 ..................... 2,002,180
Student Loan Marketing Association,
1,000,000 7.50% due 03/08/00 ..................... 1,030,000
Tennessee Valley Authority:
2,500,000 6.75% due 11/01/25 ..................... 2,702,150
2,000,000 6.38% due 06/15/05 ..................... 2,054,680
-----------
57,337,050
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
UNITED STATES BONDS, NOTES
& STRIPS - 34.66%
United States Treasury Bonds:
$ 1,800,000 9.00% due 11/15/18 ..................... $ 2,457,846
4,000,000 8.75% due 08/15/20 ..................... 5,394,360
3,500,000 8.50% due 02/15/20 ..................... 4,600,855
3,500,000 7.25% due 08/15/22 ..................... 4,098,815
United States Treasury Notes:
2,500,000 6.75% due 04/30/00 ..................... 2,552,725
1,000,000 6.38% due 01/15/00 ..................... 1,012,190
6,000,000 5.88% due 11/15/99 ..................... 6,025,320
3,000,000 5.75% due 08/15/03 ..................... 3,021,570
2,000,000 5.50% due 01/31/03 ..................... 1,991,880
United States Treasury Strips,
1,500,000 0.00% due 11/15/09 ..................... 768,930
-----------
31,924,491
-----------
TOTAL UNITED STATES
GOVERNMENT - LONG TERM
(Cost $86,245,519)....................... 89,261,541
-----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 1.24%
MACHINERY - INDUSTRIAL/
SPECIALTY - 1.24%
1,143,000 Cooper Industries, Inc.,
5.67% due 06/01/98...................... 1,143,000
-----------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $1,143,000)........................ 1,143,000
-----------
TOTAL INVESTMENTS
(Cost $87,388,519) - 98.14%.............. 90,404,541
Other assets and liabilities,
net 1.86%............................... 1,715,676
-----------
NET ASSETS (equivalent
to $10.09 per share on
9,129,497 shares
outstanding) - 100% .................... $92,120,217
===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
--------- ------------
<S> <C> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 5/31/98)
17(2) U.S. Treasury Bond Futures
(September/$121.50)..................... $ (133)
===========
(1) U.S. Treasury Bonds with a market
value of approximately $100,000
were maintained in a segregated
account with a portion placed as
collateral for futures contracts.
(2) Per 1,000.
- --------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
9,129,497 shares outstanding......................... $ 91,295
Additional paid in capital............................. 90,699,767
Accumulated net realized loss on securities............ (1,734,207)
Undistributed net investment income.................... 47,473
Unrealized appreciation (depreciation) of:
Investments..................... $ 3,016,022
Futures ........................ (133) 3,015,889
----------- -----------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING.......................................... $92,120,217
===========
</TABLE>
122
<PAGE>
================================================================================
GOVERNMENT SECURITIES FUND - FINANCIAL STATEMENTS
68
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ....................................................................... $5,571,826
----------
EXPENSES:
Advisory fees .................................................................. 436,775
Custodian and accounting services .............................................. 20,527
Reports to shareholders ........................................................ 6,612
Audit fees and tax services .................................................... 2,067
Directors' fees and expenses ................................................... 1,804
Miscellaneous .................................................................. 6,262
----------
Total expenses ............................................................... 474,047
----------
NET INVESTMENT INCOME .......................................................... 5,097,779
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain on:
Investments ................................................... $ 245,563
Futures contracts ............................................. 112,838 358,401
----------
Net unrealized appreciation (depreciation) during the year:
Investments ................................................... 3,271,194
Futures contracts ............................................. (133 3,271,061
---------- ----------
Net realized and unrealized gain on securities during the year ............... 3,629,462
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $8,727,241
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................................................... $ 5,097,779 $ 5,088,757
Net realized gain on securities ........................................... 358,401 4,132
Net unrealized appreciation of securities
during the year ......................................................... 3,271,061 479,407
------------ ------------
Increase in net assets resulting from operations ....................... 8,727,241 5,572,296
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................................................... (5,081,964) (5,073,340)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold .......................................... 17,280,167 11,299,725
Proceeds from capital stock issued for distributions reinvested ........... 5,081,964 5,073,340
------------ ------------
22,362,131 16,373,065
Cost of capital stock repurchased ......................................... (17,713,793) (11,468,468)
------------ ------------
Increase in net assets resulting from capital stock transactions ........ 4,648,338 4,904,597
------------ ------------
TOTAL INCREASE IN NET ASSETS .............................................. 8,293,615 5,403,553
NET ASSETS:
Beginning of year ......................................................... 83,826,602 78,423,049
------------ ------------
End of year (including undistributed net investment income
of $47,473 and $31,658) ................................................. $ 92,120,217 $ 83,826,602
============ ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold .............................................. 1,716,427 1,165,828
Shares issued for distributions reinvested ................................ 509,952 523,483
Shares of capital stock repurchased ....................................... (1,769,096) (1,180,771)
------------ ------------
Increase in shares outstanding .......................................... 457,283 508,540
Shares outstanding:
Beginning of year ....................................................... 8,672,214 8,163,674
------------ ------------
End of year ............................................................. 9,129,497 8,672,214
============ ============
</TABLE>
123
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - STATEMENT OF NET ASSETS
May 31, 1998 69
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------------- ------------
<S> <C> <C> <C>
GOVERNMENT BONDS - 86.49%
AUSTRALIA - 1.16%
Commonwealth:
A$ 500,000 9.75% due 3/15/02 ............. $ 364,521
A$ 500,000 9.00% due 9/15/04 ............. 376,558
A$ 500,000 8.75% due 1/15/01 ............. 343,151
A$ 500,000 7.50% due 7/15/05 ............. 354,652
A$ 500,000 7.50% due 9/15/09 ............. 369,509
------------
1,808,391
------------
AUSTRIA - 3.01%
Republic of Austria:
DM 1,000,000 7.25% due 5/3/07 .............. 650,974
As 2,000,000 7.125% due 7/12/04 ............ 178,900
As 1,500,000 7.00% due 2/14/00 ............. 124,915
As 2,200,000 7.00% due 1/20/03 ............. 192,497
As 2,000,000 7.00% due 5/16/05 ............. 179,458
As 2,000,000 6.875% due 4/19/02 ............ 172,607
As 2,000,000 6.50% due 11/17/05 ............ 175,475
As 6,000,000 6.25% due 5/31/06 ............. 521,120
As 3,000,000 5.625% due 7/15/07 ............ 250,667
As 2,000,000 5.50% due 1/18/04 ............. 165,816
Ff. 3,000,000 5.50% due 1/18/04 ............. 522,340
Y. 100MM 4.75% due 12/20/04 ............ 880,028
Y. 50MM 4.50% due 9/28/05 ............. 440,916
As 3,000,000 4.375% due 2/28/02 ............ 238,600
------------
4,694,313
------------
BELGIUM - 3.53%
Kingdom of Belgium:
Bf 10,000,000 8.75% due 6/25/02 ............. 313,917
Bf 10,000,000 8.00% due 12/24/12 ............ 348,464
Bf 10,000,000 8.00% due 3/28/15 ............. 353,710
Bf 10,000,000 7.75% due 12/22/00 ............ 294,210
Bf 25,000,000 7.75% due 10/15/04 ............ 788,801
Bf 20,000,000 7.50% due 7/29/08 ............. 649,198
Bf 15,000,000 7.00% due 5/15/06 ............. 463,251
Bf 20,000,000 6.50% due 3/31/05 ............. 596,140
Bf 20,000,000 6.25% due 3/28/07 ............. 592,933
Bf 20,000,000 5.00% due 3/28/01 ............. 553,303
Bf 20,000,000 4.00% due 1/22/00 ............. 542,764
------------
5,496,691
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------------- ------------
<S> <C> <C> <C>
CANADA - 4.76%
Government of Canada:
C$ 550,000 9.50% due 6/1/10............... $ 512,958
C$ 500,000 9.00% due 12/1/04 ............. 412,592
C$ 500,000 9.00% due 6/1/25 .............. 504,726
C$ 1,000,000 8.75% due 12/1/05 ............. 831,457
C$ 1,000,000 8.50% due 4/1/02 .............. 763,622
C$ 1,000,000 8.00% due 6/1/23 .............. 907,406
C$ 500,000 7.50% due 9/1/00 .............. 359,719
C$ 1,000,000 7.50% due 3/1/01 .............. 726,138
C$ 1,000,000 7.25% due 6/1/03 .............. 746,153
C$ 1,000,000 7.00% due 12/1/06 ............. 764,795
C$ 500,000 6.50% due 6/1/04 .............. 364,716
C$ 750,000 5.50% due 2/1/00 .............. 517,453
------------
7,411,735
------------
DENMARK - 2.35%
Kingdom of Denmark:
DK 5,000,000 8.00% due 11/15/01 ............ 813,487
DK 2,500,000 8.00% due 5/15/03 ............. 419,431
DK 3,000,000 8.00% due 3/15/06 ............. 524,942
DK 5,500,000 7.00% due 12/15/04 ............ 902,764
DK 1,250,000 7.00% due 11/10/24 ............ 220,564
DK 5,000,000 6.00% due 11/15/02 ............ 772,371
------------
3,653,559
------------
FINLAND - 1.98%
Republic of Finland:
FIM 2,000,000 10.00% due 9/15/01 ............ 430,336
FIM 1,000,000 9.50% due 3/15/04 ............. 228,271
FIM 3,000,000 7.25% due 4/18/06 ............. 636,603
Ff. 5,000,000 7.00% due 6/15/04 ............. 934,418
Y. 100MM 6.00% due 1/29/02 ............. 858,726
------------
3,088,354
------------
FRANCE - 4.30%
Government of France:
Ff. 4,600,000 9.50% due 1/25/01 ............. 867,027
Ff. 3,500,000 8.50% due 11/25/02 ............ 679,759
Ff. 1,500,000 8.50% due 12/26/12 ............ 336,955
Ff. 3,000,000 7.25% due 4/25/06 ............. 580,645
Ff. 7,000,000 6.75% due 10/25/03 ............ 1,290,373
Ff. 2,000,000 6.50% due 10/25/06 ............ 370,516
Ff. 8,500,000 6.00% due 10/25/25 ............ 1,525,539
Ff. 2,000,000 5.50% due 4/25/04 ............. 349,657
Ff. 4,000,000 5.50% due 4/25/07 ............. 699,315
------------
6,699,786
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------------- ------------
<S> <C> <C> <C>
GERMANY - 11.92%
Federal Republic of Germany:
DM 2,000,000 7.50% due 9/9/04 .............. $ 1,289,505
DM 3,100,000 7.125% due 12/20/02 ........... 1,922,982
DM 2,000,000 7.00% due 1/13/00 ............. 1,172,706
DM 1,000,000 6.75% due 7/15/04 ............. 622,334
DM 3,000,000 6.50% due 3/15/00 ............. 1,752,165
DM 3,000,000 6.50% due 7/15/03 ............. 1,829,172
DM 2,000,000 6.50% due 10/14/05 ............ 1,238,840
DM 1,000,000 6.25% due 4/26/06 ............. 612,526
DM 1,000,000 6.25% due 1/4/24 .............. 624,016
DM 1,000,000 6.00% due 11/12/03 ............ 598,324
DM 1,000,000 6.00% due 1/5/06 .............. 602,606
DM 1,000,000 6.00% due 1/4/07 .............. 604,288
DM 4,000,000 6.00% due 6/20/16 ............. 2,446,518
DM 2,000,000 5.00% due 5/21/01 ............. 1,144,346
DM 3,750,000 4.50% due 8/19/02 ............. 2,108,239
------------
18,568,567
------------
IRELAND - 0.65%
Republic of Ireland:
Ilb 100,000 8.25% due 8/18/15 ............. 185,875
Ilb 100,000 8.00% due 8/18/06 ............. 168,206
Ilb 150,000 6.50% due 10/18/01 ............ 222,838
Ilb 150,000 6.25% due 4/1/99 .............. 213,488
Ilb 150,000 6.25% due 10/18/04 ............ 226,019
------------
1,016,426
------------
ITALY - 9.01%
Republic of Italy:
Lit 1,000MM 12.00% due 6/1/01 ............. 682,480
Lit 1,000MM 12.00% due 1/1/02 ............. 702,844
Lit 1,000MM 10.50% due 7/15/00 ............ 635,836
Lit 500MM 10.50% due 4/1/05 ............. 374,545
Lit 500MM 10.50% due 9/1/05 ............. 379,010
Lit 3,400MM 10.00% due 8/1/03 ............. 2,385,802
Lit 500MM 9.50% due 1/1/05 .............. 356,030
Lit 500MM 9.50% due 2/1/06 .............. 364,903
Lit 2,000MM 9.00% due 11/1/23 ............. 1,670,080
Lit 1,000MM 8.50% due 4/1/04 .............. 672,241
Lit 1,500MM 8.50% due 8/1/04 .............. 1,012,961
Lit 1,000MM 7.75% due 9/15/01 ............. 621,843
Lit 1,500MM 6.75% due 2/1/07 .............. 952,389
Lit 500MM 6.25% due 3/1/02 .............. 299,545
Lit 2,000MM 5.75% due 9/15/02 ............. 1,182,366
Lit 3,000MM 5.50% due 9/15/00 ............. 1,742,031
------------
14,034,906
------------
</TABLE>
124
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - STATEMENT OF NET ASSETS CONTINUED
70 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------------- ------------
<S> <C> <C> <C>
JAPAN - 20.99%
Government of Japan:
Y. 50MM 6.70% due 6/20/00 ............. $ 407,177
Y. 250MM 6.60% due 6/20/01 ............. 2,133,367
Y. 320MM 6.40% due 3/20/00 ............. 2,557,643
Y. 105MM 6.00% due 12/20/01 ............ 899,729
Y. 365MM 5.50% due 3/20/02 ............. 3,107,073
Y. 120MM 5.00% due 12/20/02 ............ 1,026,789
Y. 100MM 5.00% due 9/21/09 ............. 972,850
Y. 100MM 5.00% due 3/20/15 ............. 1,030,616
Y. 130MM 4.80% due 6/21/99 ............. 982,158
Y. 127MM 4.50% due 6/20/03 ............. 1,077,698
Y. 75MM 4.50% due 12/20/04 ............ 655,607
Y. 150MM 4.40% due 9/22/03 ............. 1,273,955
Y. 200MM 4.20% due 9/21/15 ............. 1,900,065
Y. 150MM 4.10% due 6/21/04 ............. 1,273,522
Y. 100MM 3.90% due 6/21/04 ............. 840,494
Y. 100MM 3.80% due 9/20/16 ............. 911,402
Y. 250MM 3.50% due 3/21/16 ............. 2,189,147
Y. 100MM 3.30% due 6/20/06 ............. 829,085
Y. 200MM 3.20% due 3/20/06 ............. 1,644,018
Y. 250MM 3.00% due 9/20/05 ............. 2,021,807
Y. 150MM 2.90% due 12/20/05 ............ 1,207,994
Y. 100MM 2.70% due 3/20/07 ............. 798,383
Y. 150MM 2.00% due 12/20/07 ............ 1,134,450
Y. 250MM 1.10% due 10/22/01 ............ 1,830,475
------------
32,705,504
------------
NETHERLANDS - 4.59%
Government of the Netherlands:
NG 1,050,000 9.00% due 10/16/00 ............ 577,199
NG 1,000,000 8.75% due 9/15/01 ............. 562,641
NG 500,000 8.50% due 3/15/01 ............. 275,602
NG 500,000 8.25% due 2/15/02 ............. 280,575
NG 500,000 8.25% due 6/15/02 ............. 283,061
NG 500,000 8.25% due 2/15/07 ............. 307,427
NG 1,500,000 7.75% due 3/1/05 .............. 875,289
NG 500,000 7.50% due 4/15/10 ............. 303,573
NG 750,000 7.50% due 1/15/23 ............. 479,600
NG 2,000,000 6.50% due 4/15/03 ............. 1,079,038
NG 1,500,000 6.00% due 1/15/06 ............. 803,685
NG 2,000,000 5.75% due 1/15/04 ............. 1,051,192
NG 500,000 5.75% due 2/15/07 ............. 264,414
------------
7,143,296
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------------- ------------
<S> <C> <C> <C>
PORTUGAL - 0.36%
Ff. 3,000,000 Republic of Portugal,
6.625% due 5/13/08.......... $ 560,964
------------
SPAIN - 4.77%
Government of Spain:
Pst 100MM 10.50% due 10/30/03 ........... 838,436
Pst 100MM 10.30% due 6/15/02 ............ 796,899
Pst 100MM 10.15% due 1/31/06 ............ 875,784
Pst 50MM 10.10% due 2/28/01 ............ 377,598
Pst 50MM 10.00% due 2/28/05 ............ 425,701
Pst 50MM 8.40% due 4/30/01 ............. 365,424
Pst 70MM 8.20% due 2/28/09 ............. 577,598
Pst 80MM 8.00% due 5/30/04 ............. 615,163
Pst 50MM 7.90% due 2/28/02 ............. 367,618
Pst 150MM 6.75% due 4/15/00 ............. 1,033,421
Ff. 2,000,000 6.50% due 6/20/01 ............. 354,129
Pst 50MM 6.00% due 1/31/08 ............. 353,233
Pst 67MM 5.25% due 1/31/03 ............. 456,150
------------
7,437,154
------------
SWEDEN - 2.43%
Kingdom of Sweden:
SK 3,000,000 10.25% due 5/5/00 ............. 422,108
SK 6,000,000 10.25% due 5/5/03 ............. 946,084
SK 3,000,000 9.00% due 4/20/09 ............. 504,664
SK 3,000,000 8.00% due 8/15/07 ............. 464,452
C$ 500,000 6.75% due 12/31/01 ............ 357,619
SK 2,000,000 6.50% due 10/25/06 ............ 280,632
SK 6,000,000 6.00% due 2/9/05 .............. 812,805
------------
3,788,364
------------
SWITZERLAND - 0.48%
Government of Switzerland:
Chf 500,000 4.50% due 7/8/02 .............. 367,027
Chf 500,000 4.50% due 4/8/06 .............. 377,995
------------
745,022
------------
UNITED KINGDOM - 8.74%
Government of United Kingdom:
L. 250,000 9.75% due 8/27/02 ............. 463,194
L. 400,000 9.00% due 10/13/08 ............ 818,692
L. 250,000 9.00% due 7/12/11 ............. 529,547
L. 400,000 9.00% due 8/6/12 .............. 856,258
L. 750,000 8.75% due 8/25/17 ............. 1,656,780
L. 500,000 8.50% due 12/7/05 ............. 948,335
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------------- ------------
<S> <C> <C> <C>
UNITED KINGDOM - Continued
L. 500,000 8.00% due 9/25/09 ............. $ 969,517
L. 500,000 8.00% due 12/7/15 ............. 1,025,407
L. 750,000 8.00% due 6/7/21 .............. 1,585,578
L. 1,000,000 7.50% due 12/7/06 ............. 1,817,048
L. 1,500,000 7.00% due 11/6/01 ............. 2,515,028
L. 250,000 6.75% due 11/26/04 ............ 429,890
------------
13,615,274
------------
UNITED STATES - 1.46%
DM 4,000,000 Federal National Mortgage Association,
5.00% due 2/16/01 .......... 2,278,268
------------
TOTAL GOVERNMENT BONDS
(Cost $139,653,971) ................. 134,746,574
------------
SUPRANATIONAL - 6.44%
Eurofima:
Ff. 5,000,000 9.875% due 8/21/00 ............ 932,852
Ff. 1,600,000 9.25% due 12/18/03 ............ 325,255
Ff. 3,000,000 5.625% due 11/25/99 ........... 512,389
European Investment Bank:
Lit 1,100MM 10.50% due 2/7/02 ............. 756,328
L. 250,000 9.00% due 5/14/02 ............. 445,840
Y. 25MM 6.625% due 3/15/00 ............ 200,601
Ff. 2,000,000 6.125% due 10/8/04 ............ 360,187
Y. 100MM 4.625% due 2/26/03 ............ 845,729
Y. 100MM 3.00% due 9/20/06 ............. 811,431
Y. 55MM Inter America Development Bank,
6.75% due 2/20/01 .......... 463,165
International Bank for
Reconstruction & Development:
Lit 150MM 10.80% due 11/13/01 ........... 103,029
Lit 200MM 9.45% due 8/11/03 ............. 138,083
L. 400,000 9.25% due 7/20/07 ............. 795,826
Y. 250MM 5.25% due 3/20/02 ............. 2,108,681
Y. 100MM 4.50% due 3/20/03 ............. 843,924
Y. 50MM 4.50% due 6/20/00 ............. 391,048
------------
TOTAL SUPRANATIONAL
(Cost $11,221,358) .................. 10,034,368
------------
</TABLE>
125
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - STATEMENT OF NET ASSETS CONTINUED
May 31, 1998 71
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- -----------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS - 4.34%
FRANCE - 4.34% Credit Local de France:
Lit 2,000MM 9.00% due 6/14/01 ............. $ 1,272,048
Ff. 5,000,000 8.875% due 6/10/02 ............ 964,190
Ff. 8,000,000 6.25% due 9/27/05 ............. 1,444,927
Ff. 4,000,000 6.00% due 11/15/01 ............ 699,482
Ff. 10,000,000 Elf Aquitaine SA,
7.125% due 8/11/03............. 1,843,766
Ff. 3,000,000 Toyota Motor Credit,
6.25% due 4/11/02.............. 530,252
------------
6,754,665
------------
TOTAL CORPORATE BONDS
(Cost $7,219,766) ................... 6,754,665
------------
UNITED STATES GOVERNMENT -
SHORT TERM - 0.10%
U.S. TREASURY BILLS - 0.10%
USD 150,000 United States Treasury Bills,
4.30% due 6/25/98 ............. 149,570
------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $149,570) ..................... 149,570
------------
TOTAL INVESTMENTS
(Cost $158,244,665) - 97.37% ........ 151,685,177
Other assets and liabilities,
net - 2.63% ........................ 4,097,706
------------
NET ASSETS (equivalent
to $11.42 per share
on 13,645,599 shares
outstanding) - 100% ................ $155,782,883
------------
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- -----------------------------------------------------------------
<S> <C> <C>
FUTURES CONTRACTS SOLD(1)
(Delivery month/Value at 5/31/98)
15 (2) Currency futures - British Pound
(June/$163.02) ...................... $ 14,813
------------
(Delivery month/Value at 5/31/98)
70 (3) Currency futures - Japanese Yen
(June/$72.22) ....................... 199,250
------------
214,063
============
</TABLE>
(1) U.S.Treasury Bills with a market value
of approximately $150,000 were
maintained in a segregated account with
a portion placed as collateral for
futures contracts.
(2) Per 625
(3) Per 1,250
<TABLE>
<CAPTION>
MARKET
VALUE
- -----------------------------------------------------------------
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,645,599 shares outstanding .................. $ 136,456
Additional paid in capital ....................... 160,890,463
Accumulated net realized gain on securities ...... 658,703
Undistributed net investment income .............. 462,129
Unrealized appreciation (depreciation) of:
Investments ..................... $ (6,559,488)
Futures ......................... 214,063
------------
Foreign currency translation..... (19,443) (6,364,868)
------------ ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING .................................... $155,782,883
============
</TABLE>
126
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - FINANCIAL STATEMENTS
72
================================================================================
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $158,558) ....... $ 8,845,092
-----------
EXPENSES:
Advisory fees ................................................. 846,176
Custodian and accounting services ............................. 32,947
Reports to shareholders ....................................... 11,638
Audit fees and tax services ................................... 3,835
Directors' fees and expenses .................................. 3,717
Miscellaneous ................................................. 23,639
-----------
Total expenses .............................................. 921,952
-----------
NET INVESTMENT INCOME ......................................... 7,923,140
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
AND FOREIGN CURRENCIES:
Net realized loss on:
Investments ......................................... $(3,464,702)
Foreign currency translation ........................ (387,612) (3,852,314)
-----------
Net unrealized appreciation (depreciation) during the
year:
Securities .......................................... (74,327)
Foreign currency translation ........................ 101,888
Futures contracts ................................... 214,063 241,624
----------- -----------
Net realized and unrealized loss on securities and
foreign currencies during the year ....................... (3,610,690)
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $ 4,312,450
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .............................. $ 7,923,140 8,522,441
Net realized loss on securities and foreign currency
transactions ..................................... (3,852,314) (145,962)
Net unrealized appreciation (depreciation) of
securities and translation of foreign currencies
during the year .................................. 241,624 (7,210,455)
------------ ------------
Increase in net assets resulting from operations. 4,312,450 1,166,024
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................. (3,034,869) (8,295,746)
Net realized gain on securities .................... (136,607) (295,588)
------------ ------------
Decrease in net assets resulting from
distributions to shareholders .................. (3,171,476) (8,591,334)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................... 30,361,915 72,164,939
Proceeds from capital stock issued for distributions
reinvested........................................ 3,171,476 8,591,334
------------ ------------
33,533,391 80,756,273
Cost of capital stock repurchased .................. (56,600,279) (38,005,431)
------------ ------------
Increase (decrease) in net assets resulting from
capital stock transactions ...................... (23,066,888) 42,750,842
TOTAL INCREASE (DECREASE) IN NET ASSETS ............ (21,925,914) 35,325,532
NET ASSETS:
Beginning of year .................................. 177,708,797 142,383,265
------------ ------------
End of year (including undistributed net investment
income of $462,129 and $84,875) .................. $155,782,883 $177,708,797
------------ ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ....................... 2,685,573 6,113,938
Shares issued for distributions reinvested ......... 279,556 729,242
Shares of capital stock repurchased ................ (4,999,093) (3,236,292)
------------ ------------
Increase (decrease) in shares outstanding ........ (2,033,964) 3,606,888
Shares outstanding:
Beginning of year ................................ 15,679,563 12,072,675
------------ ------------
End of year ...................................... 13,645,599 15,679,563
------------ ============
</TABLE>
127
<PAGE>
================================================================================
MONEY MARKET FUND - STATEMENT OF NET ASSETS
May 31, 1998 73
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 89.58%
BANKS - REGIONAL - 5.18%
$5,000,000 Banc One Corp,
5.48% due 06/08/98............. $ 4,994,672
5,000,000 NationsBank Corp.,
5.48% due 10/21/98............. 4,891,922
-----------
9,886,594
-----------
BEVERAGE - SOFT DRINKS - 1.83%
3,500,000 Coca Cola Co.,
5.48% due 06/19/98............. 3,490,410
-----------
CHEMICAL - MAJOR - 5.65%
E.I. Du Pont de Nemeurs and Co.:
3,500,000 5.49% due 07/07/98.............. 3,480,785
3,000,000 5.44% due 06/25/98.............. 2,989,120
PPG Industries:
2,500,000 5.50% due 06/30/98.............. 2,488,924
1,840,000 5.51% due 06/30/98.............. 1,831,833
-----------
10,790,662
-----------
CONGLOMERATES - 2.70%
Fortune Brands:
2,500,000 5.50% due 07/08/98.............. 2,485,868
2,688,000 5.50% due 07/09/98.............. 2,672,395
-----------
5,158,263
-----------
CONSUMER FINANCE - 16.67%
Associates Corp. of North America:
1,000,000 5.75% due 11/15/98.............. 999,736
2,000,000 5.50% due 08/18/98.............. 1,976,167
1,800,000 5.49% due 06/02/98.............. 1,799,726
2,000,000 5.49% due 07/01/98.............. 1,990,850
825,000 5.48% due 06/16/98.............. 823,116
500,000 5.25% due 09/01/98.............. 499,100
Beneficial Corp:
1,500,000 5.52% due 06/22/98.............. 1,495,170
1,500,000 5.51% due 08/24/98.............. 1,480,715
2,300,000 5.51% due 08/04/98.............. 2,277,470
2,000,000 5.49% due 06/29/98.............. 1,991,460
Commercial Credit Co.:
1,800,000 5.50% due 07/21/98.............. 1,786,250
1,900,000 5.50% due 07/28/98.............. 1,883,454
1,500,000 5.49% due 08/06/98.............. 1,484,903
2,000,000 5.48% due 07/06/98.............. 1,989,344
1,200,000 5.47% due 06/18/98.............. 1,196,900
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
CONSUMER FINANCE - Continued
Sears Roebuck Acceptance Corp.:
$2,400,000 5.54% due 06/16/98.............. $ 2,394,460
644,000 5.52% due 07/29/98.............. 638,273
553,000 5.50% due 07/30/98.............. 548,015
2,100,000 5.50% due 08/03/98.............. 2,079,788
1,400,000 5.50% due 08/05/98.............. 1,386,097
1,100,000 5.48% due 06/29/98.............. 1,095,312
-----------
31,816,306
-----------
ELECTRICAL EQUIPMENT - 1.10%
2,100,000 General Electric Co.,
5.49% due 06/09/98.............. 2,097,438
-----------
ENTERTAINMENT - 2.09%
Walt Disney Co.:
1,500,000 5.57% due 06/04/98.............. 1,499,304
2,500,000 5.44% due 06/26/98.............. 2,490,556
-----------
3,989,860
-----------
FINANCE COMPANIES - 19.65%
Ciesco LP:
3,000,000 5.50% due 06/01/98............... 3,000,000
2,500,000 5.50% due 07/02/98............... 2,488,160
2,000,000 5.45% due 06/10/98............... 1,997,275
CIT Group Holdings, Inc.:
1,707,000 5.52% due 06/11/98............... 1,704,383
2,033,000 5.50% due 06/01/98............... 2,033,000
1,500,000 5.49% due 06/25/98............... 1,494,510
3,300,000 5.46% due 06/23/98............... 3,288,989
Ford Motor Credit Co.:
2,500,000 5.50% due 08/17/98............... 2,470,590
1,404,000 5.48% due 06/12/98............... 1,401,649
General Electric Capital Corp.:
1,000,000 5.51% due 08/10/98............... 989,286
1,800,000 5.50% due 07/15/98............... 1,787,900
1,200,000 5.50% due 06/03/98............... 1,199,633
2,200,000 5.50% due 06/03/98............... 2,199,328
General Motors Acceptance Corp.:
1,000,000 6.30% due 06/11/98............... 1,000,100
2,257,000 5.52% due 06/05/98............... 2,255,616
1,000,000 5.51% due 08/13/98............... 988,827
750,000 5.50% due 06/09/98............... 749,083
1,500,000 5.49% due 06/11/98............... 1,497,713
1,000,000 5.48% due 07/08/98............... 994,368
1,000,000 5.47% due 07/13/98............... 993,618
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
FINANCE COMPANIES - Continued
$1,000,000 IBM Credit Co.,
5.80% due 11/04/98................ $ 999,979
2,000,000 International Lease Finance Corp.,
5.46% due 07/16/98................ 1,986,350
-----------
37,520,357
-----------
FOODS - 3.71%
Archer Daniels Midland Co.:
3,000,000 5.52% due 06/02/98................ 2,999,540
1,100,000 5.50% due 07/22/98................ 1,091,429
1,500,000 5.48% due 06/08/98................ 1,498,402
Kellogg Co.,
1,500,000 5.50% due 06/05/98................ 1,499,083
-----------
7,088,454
-----------
INFORMATION PROCESSING - 1.72%
International Business Machines
Corp.:
2,000,000 5.81% due 10/01/98................ 1,999,820
1,300,000 5.50% due 08/11/98................ 1,285,899
-----------
3,285,719
-----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 7.01%
5,613,000 Cooper Industries, Inc.,
5.67% due 06/01/98................ 5,613,000
Dover Corp.:
3,000,000 5.55% due 06/03/98................ 2,999,075
1,500,000 5.53% due 06/05/98................ 1,499,078
3,270,000 5.50% due 06/10/98................ 3,265,504
-----------
13,376,657
-----------
MERCHANDISE - SPECIALTY - 2.25%
Toys "R" Us, Inc.:
1,300,000 5.50% due 07/02/98................ 1,293,843
3,000,000 5.48% due 06/15/98................ 2,993,607
-----------
4,287,450
-----------
OIL - INTEGRATED DOMESTIC - 3.14%
Atlantic Richfield Co.:
3,000,000 5.52% due 06/12/98................ 2,994,940
3,000,000 5.46% due 06/18/98................ 2,992,265
-----------
5,987,205
-----------
</TABLE>
128
<PAGE>
================================================================================
MONEY MARKET FUND - STATEMENT OF NET ASSETS CONTINUED
74 May 31, 1998
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------------------------------------------------------------
<S> <C> <C>
SECURITIES RELATED - 8.45%
Merrill Lynch & Co., Inc.:
$2,100,000 5.52% due 08/12/98................ $ 2,076,815
1,300,000 5.51% due 06/17/98................ 1,296,816
1,350,000 5.51% due 07/27/98................ 1,338,429
2,700,000 5.51% due 08/19/98................ 2,667,353
1,100,000 5.49% due 06/30/98................ 1,095,135
Morgan Stanley, Dean Witter,
Discover and Co.:
2,500,000 5.50% due 06/15/98................ 2,494,653
2,500,000 5.50% due 06/24/98................ 2,491,215
2,689,000 5.49% due 07/20/98................ 2,668,906
------------
16,129,322
------------
UTILITIES - COMMUNICATION - 8.43%
BellSouth Telecomm:
900,000 5.50% due 08/21/98................ 888,863
3,000,000 5.49% due 07/24/98................ 2,975,752
2,200,000 5.48% due 06/04/98................ 2,198,995
2,000,000 5.46% due 06/22/98................ 1,993,630
GTE Corp.:
2,000,000 5.55% due 06/22/98................ 1,993,525
2,500,000 5.55% due 07/23/98................ 2,479,958
1,500,000 5.53% due 06/09/98................ 1,498,157
2,077,000 5.53% due 06/17/98................ 2,071,895
------------
16,100,775
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $171,005,472)................. 171,005,472
------------
CORPORATE SHORT TERM
OBLIGATIONS - 2.62%
SECURITIES RELATED - 2.62%
Bear Stearns Co. Inc.:
2,000,000 Floating rate note due 07/06/98,
5.61188% at 05/31/98............. 2,000,000
3,000,000 Floating rate note due 07/30/98,
5.65875% at 05/31/98............. 3,000,000
------------
5,000,000
------------
TOTAL CORPORATE SHORT TERM
OBLIGATIONS
(Cost $5,000,000)................... 5,000,000
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------------------------------------------------------------
<S> <C> <C>
UNITED STATES GOVERNMENT
SHORT TERM - 8.38%
Federal Farm Credit Bank:
$1,000,000 5.75% due 09/11/98................ $ 999,827
2,000,000 5.70% due 11/03/98................ 2,000,117
1,000,000 5.50% due 04/01/99................ 998,562
Federal Home Loan Bank:
2,000,000 5.72% due 10/06/98................ 2,000,271
1,000,000 5.70% due 10/23/98................ 999,771
1,000,000 5.60% due 03/10/99................ 1,000,039
1,000,000 5.56% due 03/25/99................ 999,126
1,000,000 5.50% due 03/26/99................ 999,143
Federal National Mortgage
Association:
1,000,000 5.68% due 10/23/98................ 999,507
1,000,000 5.65% due 04/09/99................ 999,769
1,000,000 5.63% due 05/05/99................ 999,176
2,000,000 5.57% due 05/07/99................ 1,996,721
1,000,000 Student Loan Marketing Association,
5.79% due 09/16/98................ 1,000,057
-------------
15,992,086
-------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $15,992,086).................. 15,992,086
-------------
TOTAL INVESTMENTS
(Cost $191,997,558) - 100.58%....... 191,997,558
Other assets and liabilities,
net - (0.58%)...................... (1,022,108)
-------------
NET ASSETS (equivalent
to $1.00 per share on
190,975,450 shares
outstanding) - 100% ............... $ 190,975,450
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------------------------------------------------------------
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
190,975,450 shares outstanding................ $ 1,909,754
Additional paid in capital...................... 189,065,696
------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING..................................... 190,975,450
============
</TABLE>
129
<PAGE>
================================================================================
MONEY MARKET FUND - FINANCIAL STATEMENTS
75
================================================================================
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the fiscal year ended May 31, 1998
INVESTMENT INCOME:
Interest............................................................. $ 8,554,039
-----------
EXPENSES:
Advisory fees........................................................ 752,732
Custodian and accounting services.................................... 32,727
Reports to shareholders.............................................. 11,862
Audit fees and tax services.......................................... 4,093
Directors' fees and expenses......................................... 3,069
Miscellaneous........................................................ 9,824
-----------
Total expenses..................................................... 814,307
-----------
NET INVESTMENT INCOME................................................ 7,739,732
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $ 7,739,732
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended May 31:
<S> <C> <C>
1996 1997
------------ -------------
OPERATIONS:
Net investment income.................................. $ 7,739,732 $ 5,637,643
------------ -------------
Increase in net assets resulting from operations..... 7,739,732 5,637,643
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................. (7,739,732) (5,637,643)
------------ -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold....................... 331,782,891 294,478,892
Proceeds from capital stock
issued for distributions reinvested.................. 7,739,732 5,637,643
------------ -------------
339,522,623 300,116,535
Cost of capital stock repurchased...................... (276,671,818) (255,609,535)
------------ -------------
Increase in net assets resulting from
capital stock transactions......................... 62,850,805 44,507,000
------------ -------------
TOTAL INCREASE IN NET ASSETS........................... 62,850,805 44,507,000
NET ASSETS:
Beginning of year...................................... 128,124,645 83,617,645
------------ ------------
End of year............................................ $190,975,450 $128,124,645
------------ ------------
CHANGE IN SHARES OUTSTANDING
Shares of capital stock sold........................... 331,782,891 294,478,892
Shares issued for distributions reinvested............. 7,739,732 5,637,643
Shares of capital stock repurchased ................... (276,671,818) (255,609,535)
------------ ------------
Increase in shares outstanding....................... 62,850,805 44,507,000
Shares outstanding:
Beginning of year.................................... 128,124,645 83,617,645
------------ ------------
End of year.......................................... 190,975,450 128,124,645
============ ============
</TABLE>
130
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
76
================================================================================
NOTE 1 -- ORGANIZATION
The American General Series Portfolio Company (the "Series") consists of
thirteen separate investment portfolios (the "Funds"):
Stock Index Fund
MidCap Index Fund
Small Cap Index Fund
International Equities Fund
Growth Fund
Growth & Income Fund
Science & Technology Fund
Social Awareness Fund
Asset Allocation Fund (formerly Timed Opportunity Fund)
Capital Conservation Fund
Government Securities Fund
International Government Bond Fund
Money Market Fund
The Series is registered under the Investment Company Act of 1940 (the
"1940 Act"), as amended, as an open-end management investment company. Each Fund
is diversified with the exception of International Government Bond Fund which is
non-diversified as defined by the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). GAAP requires accruals which
occasionally are based upon management estimates. The following is a summary of
significant accounting policies consistently followed by each Fund in the
preparation of its financial statements.
A. INVESTMENT VALUATION
Securities listed or traded on a national exchange are valued daily at their
last reported sale price. In the absence of any exchange sales on that day and
for unlisted issues, securities are valued at the last sale price on the NASDAQ
National Market System. In the absence of any National Market System sales on
that day, securities are valued at the last reported bid price. However, options
written for which other over-the-counter market quotations are readily available
are valued at the last reported asked price, in the absence of any National
Market System sales on that day. Futures contracts, options thereon, and options
on stock indexes are valued at the amount which would be received upon a current
disposition of such investments (i.e., their fair market value), in the absence
of any sales on that day. Short term debt securities for which market quotations
are readily available are valued at the last reported bid price. However, any
short term security with a remaining maturity of 60 days or less and all
investments of the Money Market Fund are valued by the amortized cost method
which approximates fair market value. Investments for which market quotations
are not readily available are valued at fair value as determined in good faith
by, or under authority delegated by, the Series' Board of Directors.
B. OPTIONS AND FUTURES
Call and Put Options. When a Fund writes a call or a put option, an amount
equal to the premium received is recorded as a liability. The liability is
"marked to market" daily to reflect the current market value of the option
written. When a written option expires, the Fund realizes a gain in the amount
of the premium originally received. If the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss in the amount of the original
premium less the cost of the closing transaction. If a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security, and the proceeds from such sale are increased by the premium
originally received. If a written put option is exercised, the amount of the
premium originally received reduces the cost of the security which the Fund
purchases upon exercise of the option.
Purchased options are recorded as investments. If a purchased option
expires, the Fund realizes a loss in the amount of the cost of the option. If
the Fund enters into a closing transaction, it realizes a gain (or loss), to the
extent that the proceeds from the sale are greater (or less) than the cost of
the option. If the Fund exercises a put option, it realizes a gain or loss from
the sale of the underlying security by adjusting the proceeds from such sale by
the amount of the premium originally paid. If the Fund exercises a call option,
the cost of the security purchased upon exercise is increased by the premium
originally paid.
FUTURES CONTRACTS. The initial margin deposit made upon entering into a
futures contract is held by the custodian, in a segregated account, in the name
of the broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in the value of the contract are
recognized as unrealized gains or losses by "marking to market" on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments are received or made daily, as unrealized gains or
losses are incurred. When the contract is closed, the Fund realizes a gain or
loss in the amount of the cost of or proceeds from the closing transaction less
the Fund's basis in the contract.
C. REPURCHASE AGREEMENTS
The seller of a repurchase agreement collateralizes the agreement with
securities delivered to the Fund's custodian bank. The Adviser determines, on a
daily basis, that the seller maintains collateral of at least 100% of the
repurchase proceeds due to the Fund at maturity.
D. FOREIGN CURRENCY TRANSLATION
The accounting records of each Fund are maintained in U.S. dollars.
Transactions denominated in foreign currencies ("local currencies") are
translated into U.S. dollars at prevailing exchange rates on transaction date.
Net realized gains or losses on foreign currency transactions include
exchange rate gains and losses from disposition of foreign currencies, currency
gains and losses realized between trade and settlement dates of security
transactions, and currency gains and losses realized on settlement of other
assets and liabilities settled in local currencies.
In determining realized and unrealized gains or losses on foreign
securities for the period, the Funds do not isolate exchange rate fluctuations
from local security price fluctuations. Foreign currencies and other assets and
liabilities denominated in local currencies are marked-to-market daily to
reflect fluctuations in foreign exchange rates.
E. FEDERAL INCOME TAXES
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code and to distribute all
of its taxable net investment income and taxable net realized capital gains, in
excess of any available capital loss carryovers. Therefore no federal income tax
provision is required.
131
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
77
================================================================================
F. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized gains
and losses are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date, except for dividend income on certain foreign
securities which is recorded when the Fund becomes aware of the dividend.
Interest income on investments is accrued daily.
G. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. The Funds
declare distributions from net investment income monthly, except for the Money
Market Fund, which declares daily. Capital gains distributions are declared
annually.
Investment income and capital gains and losses are recognized in accordance
with generally accepted accounting principles ("book"). Distributions from net
investment income and realized capital gains are based on earnings as determined
in accordance with federal tax regulations ("tax") which may differ from book
basis earnings. At the end of the year, offsetting adjustments to undistributed
net investment income and undistributed net realized gains (losses) are made to
eliminate permanent book/tax differences arising in the current year.
NOTE 3 -- ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
VALIC (the "Adviser") serves as investment adviser to the Series. VALIC is
an indirect wholly-owned subsidiary of American General Corporation, Houston,
Texas. On May 1, 1992, the Adviser entered into a sub-advisory agreement with
Bankers Trust Company ("Bankers Trust"), a wholly-owned subsidiary of Bankers
Trust New York Corporation, to serve as investment sub-adviser to the Stock
Index Fund, the MidCap Index Fund, and the Small Cap Index Fund. On April 29,
1994, the Adviser entered into sub-advisory agreements with T. Rowe Price
Associates, Inc. to serve as investment sub-adviser to the Growth Fund and the
Science & Technology Fund, and with Value Line, Inc., to serve as investment
sub-adviser to the Growth & Income Fund. Sub-advisers are compensated for such
services by the Adviser.
The Adviser receives from the Series a monthly fee based on each Fund's
average daily net asset value at the following annual rates: for Stock Index
Fund, MidCap Index Fund, Small Cap Index Fund and International Equities Fund
.35% on the first $500 million and .25% on the excess over $500 million; for
Social Awareness Fund, Asset Allocation Fund, Capital Conservation Fund,
Government Securities Fund, International Government Bond Fund, and Money Market
Fund, .50%; for Growth & Income Fund, .75%; for Growth Fund, .80%; for Science &
Technology Fund, .90%.
To the extent that any Fund's accrued expenses for a given month exceed, on
an annualized basis, 2% of the Fund's average daily net assets, the Adviser will
voluntarily reduce expenses of any such Fund by the amount of the excess. The
Adviser may withdraw this voluntary undertaking upon 30 days written notice to
the Series.
On October 31, 1996, the Series entered into an accounting services
agreement with VALIC which appointed VALIC as Accounting Services Agent. Under
the agreement VALIC will provide, or cause to be provided, certain accounting
and administrative services to the Series. During the year ended May 31, 1998,
the Series paid VALIC $855,162 for such services provided directly by VALIC.
VALIC provided to the Series, at cost, certain services associated with the
printing of reports to shareholders. During the fiscal year ended May 31, 1998,
the Series paid $10,971 for such services.
During the fiscal year ended May 31, 1998, security transactions were
affected between the following Funds at the then current market price with no
brokerage commissions incurred:
<TABLE>
<CAPTION>
SELLER PURCHASER COST TO PURCHASER NET GAIN TO SELLER
- -------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
MidCap Index Fund Stock Index Fund $20,433,419 $12,850,048
Stock Index Fund MidCap Index Fund 1,016,474 600,277
Small Cap Index Fund MidCap Index Fund 70,400 18,156
</TABLE>
At May 31, 1998, VALIC Separate Account A (a registered separate account of
VALIC) and VALIC owned over five percent of the outstanding shares of the
following Funds:
<TABLE>
<CAPTION>
VALIC SEPARATE
ACCOUNT A
--------------
<S> <C>
Stock Index Fund.............................................. 96.95%
MidCap Index Fund............................................. 100.00
Small Cap Index Fund.......................................... 100.00
International Equities Fund................................... 99.96
Growth Fund................................................... 97.69
Growth & Income Fund.......................................... 100.00
Science & Technology Fund..................................... 100.00
Social Awareness Fund......................................... 99.99
Asset Allocation Fund......................................... 99.95
Capital Conservation Fund..................................... 99.47
Government Securities Fund.................................... 100.00
International Government Bond Fund............................ 100.00
Money Market Fund............................................. 100.00
</TABLE>
Certain officers and directors of the Series are officers and directors of
VALIC or American General Corporation.
NOTE 4 -- INVESTMENT ACTIVITY
The information in the following table is presented on the basis of cost
for federal income tax purposes at May 31,1998.
<TABLE>
<CAPTION>
IDENTIFIED COST GROSS GROSS NET UNREALIZED
OF INVESTMENTS UNREALIZED UNREALIZED APPRECIATION
OWNED APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock Index Fund .................. $ 1,690,305,856 $ 1,813,294,495 $ 27,807,645 $ 1,785,486,850
MidCap Index Fund ................. 539,426,341 292,072,472 29,012,775 263,059,697
Small Cap Index Fund .............. 191,880,517 70,403,693 16,527,699 53,875,994
International Equities Fund ....... 116,325,350 60,941,263 23,709,405 37,231,858
Growth Fund ....................... 823,952,075 305,250,052 26,051,256 279,198,796
Growth & Income Fund .............. 204,371,731 73,811,981 6,885,909 66,926,072
Science & Technology Fund ......... 933,282,452 138,508,705 46,951,932 91,556,773
Social Awareness Fund ............. 286,826,157 51,590,026 4,970,871 46,619,155
Asset Allocation Fund ............. 155,071,503 45,808,444 1,941,441 43,867,003
Capital Conservation Fund ......... 61,317,620 1,963,553 719,071 1,244,482
Government Securities Fund ........ 87,388,386 3,087,643 71,621 3,016,022
International Government
Bond Fund ...................... 158,458,728 5,390,646 11,950,134 (6,559,488)
Money Market Fund ................. 191,997,558 -- -- --
</TABLE>
The following net realized capital loss carryforwards at May 31, 1998, may
be utilized to offset future capital gains.
<TABLE>
<CAPTION>
CAPITAL LOSS CARRYFORWARD EXPIRATION THROUGH
----------------------------------------------
<S> <C> <C>
Capital Conservation Fund........... $ 517,286 May 31, 2003
Government Securities Fund.......... 1,734,344 May 31, 2003
Money Market Fund................... 3,017 May 31, 2004
</TABLE>
132
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
78
================================================================================
During the period, the cost of purchases and proceeds from sales of
securities, excluding short term securities were:
<TABLE>
<CAPTION>
Cost of Proceeds from
Securities Securities Sold
Purchased or Matured
-------------- --------------
<S> <C> <C>
Stock Index Fund........................ $ 405,413,872 $ 87,617,371
MidCap Index Fund....................... 213,029,461 185,622,455
Small Cap Index Fund.................... 100,497,790 84,751,878
International Equities Fund............. 13,855,496 51,338,982
Growth Fund............................. 573,707,759 381,931,725
Growth & Income Fund.................... 206,759,036 183,186,836
Science & Technology Fund............... 1,381,981,685 1,140,937,153
Social Awareness Fund................... 399,387,329 277,756,979
Asset Allocation Fund................... 40,901,054 54,286,294
Capital Conservation Fund............... 8,777,152 14,450,296
Government Securities Fund.............. 24,632,462 20,475,563
International Government Bond Fund...... 27,372,470 43,955,348
</TABLE>
NOTE 5 -- PORTFOLIO SECURITIES LOANED
To realize additional income, a Fund may lend portfolio securities with a
value of up to 30% (33 1/3% in the case of Growth Fund and Science & Technology
Fund) of its total assets. Any such loans will be continuously secured by
collateral consisting of cash or U.S. Government securities, maintained in a
segregated account, at least equal to the market value of the securities loaned.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans by a Fund will only be made to
broker-dealers deemed by the Custodian to be creditworthy and will not be made
unless, in the judgment of the Adviser, the consideration to be earned from such
loans would justify the risk. Each Fund receives income earned on the securities
loaned during the lending period and a portion of the interest or rebate earned
on the collateral received.
Portfolio securities on loan at May 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Market Value Collateral Value
------------ ----------------
<S> <C> <C>
Stock Index Fund....................... $ 11,699,781 $ 12,181,300
MidCap Index Fund...................... 14,927,604 15,530,058
Small Cap Index Fund................... 13,684,195 14,319,771
International Equities Fund............ 4,623,275 4,761,605
Growth & Income Fund................... 5,454,666 5,732,494
Science & Technology Fund.............. 26,557,536 27,784,445
Social Awareness Fund.................. 893,750 920,000
Asset Allocation Fund.................. 439,690 456,252
Capital Conservation Fund.............. 2,102,551 2,148,400
------------ ----------------
Total............................... $ 80,383,048 $ 83,834,325
------------ ----------------
</TABLE>
NOTE 6 -- INVESTMENT CONCENTRATION
A significant portion of Government Securities Fund's investments may be in
U.S. Government sponsored securities. No assurance can be given that the U.S.
Government will provide support to such U.S. Government sponsored agencies or
instrumentalities in the future since it is not required to do so by law. As a
result of the Fund's concentration in such investments, it may be subject to
risks associated with U.S. Government sponsored securities. At May 31, 1998,
Government Securities Fund had 62% of its net assets invested in such
securities.
At May 31, 1998, International Government Bond Fund had 21% of its net
assets invested in securities issued by the Government of Japan and an
additional 5% in issues of companies located in Japan and/or denominated in
Japanese Yen. Future economic and political developments in a foreign country
could adversely affect the liquidity and value of foreign securities or the
currency exchange rates from which foreign currencies are translated.
133
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
79
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
STOCK INDEX FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 26.09 $ 20.69 $ 16.81 $ 14.39 $ 14.36
---------- ---------- ---------- -------------- ----------
Income from investment operations:
Net investment income .................... 0.40 0.39 0.39 0.37 0.35
Net realized and unrealized gain
on securities ........................... 7.44 5.57 4.26 2.45 0.12
---------- ---------- ---------- -------------- ----------
Total income from investment operations .. 7.84 5.96 4.65 2.82 0.47
---------- ---------- ---------- -------------- ----------
Distributions:
Distributions from net investment
income .................................. (0.40) (0.39) (0.38) (0.37) (0.35)
Distributions from net realized gain
on securities ........................... (0.15) (0.17) (0.39) (0.03) (0.09)
---------- ---------- ---------- -------------- ----------
Total distributions ...................... (0.55) (0.56) (0.77) (0.40) (0.44)
---------- ---------- ---------- -------------- ----------
Net asset value at end of period ............. $ 33.38 $ 26.09 $ 20.69 $ 16.81 $ 14.39
---------- ---------- ---------- -------------- ----------
TOTAL RETURN ................................. 30.30% 29.24% 28.17% 19.98% 3.29%
========== ========== ========== ============== ==========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.31% 0.34% 0.35% 0.38% 0.39%
Ratio of net investment income to
average net assets ........................ 1.33% 1.76% 2.05% 2.44% 2.44%
Portfolio turnover rate .................... 3% 3% 3% 14% 3%
Number of shares outstanding at end
of period (000's) ......................... 104,334 93,687 85,117 75,451 75,494
Net assets at end of period (000's) ........ $3,482,655 $2,444,200 $1,760,786 $ 1,267,992 $1,086,459
Average net assets during the
period (000's) ............................ $2,968,059 $2,019,826 $1,498,398 $ 1,140,085 $1,030,581
Average commission rate paid ............... $ 0.0238 $ 0.0281 n/a n/a n/a
</TABLE>
MIDCAP INDEX FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 20.83 $ 19.09 $ 15.68 $ 14.54 $ 14.38
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .................... 0.23 0.24 0.24 0.26 0.23
Net realized and unrealized gain
on securities ........................... 5.80 2.95 4.06 1.59 0.28
-------- -------- -------- -------- --------
Total income from investment operations .. 6.03 3.19 4.30 1.85 0.51
-------- -------- -------- -------- --------
Distributions:
Distributions from net investment
income .................................. (0.23) (0.24) (0.24) (0.26) (0.23)
Distributions from net realized gain
on securities ........................... (1.36) (1.21) (0.65) (0.45) (0.12)
-------- -------- -------- -------- --------
Total distributions ...................... (1.59) (1.45) (0.89) (0.71) (0.35)
-------- -------- -------- -------- --------
Net asset value at end of period ............. $ 25.27 $ 20.83 $ 19.09 $ 15.68 $ 14.54
-------- -------- -------- -------- --------
TOTAL RETURN ................................. 29.62% 17.48% 28.10% 13.26% 3.52%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.36% 0.40% 0.41% 0.44% 0.46%
Ratio of net investment income to
average net assets ........................ 0.95% 1.24% 1.36% 1.73% 1.62%
Portfolio turnover rate .................... 26% 19% 21% 23% 17%
Number of shares outstanding at end
of period (000's) ......................... 31,830 29,137 28,322 25,988 24,001
Net assets at end of period (000's) ........ $804,318 $607,061 $540,688 $407,557 $349,041
Average net assets during the
period (000's) ............................ $722,652 $554,397 $477,372 $376,486 $285,247
Average commission rate paid ............... $ 0.0278 $ 0.0277 n/a n/a n/a
</TABLE>
134
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS CONTINUED
80
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
SMALL CAP INDEX FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ........ $ 16.18 $ 16.25 $ 12.49 $ 11.52 $ 11.28
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income ...................... 0.19 0.19 0.20 0.17 0.13
Net realized and unrealized gain
on securities ............................ 3.17 0.93 4.04 0.97 0.58
-------- -------- -------- -------- --------
Total income from investment
operations ............................... 3.36 1.12 4.24 1.14 0.71
-------- -------- -------- -------- --------
Distributions:
Distributions from net investment income ... (0.19) (0.19) (0.20) (0.17) (0.13)
Distributions from net realized gain
on securities ............................ (1.41) (1.00) (0.28) -- (0.34)
-------- -------- -------- -------- --------
Total distributions ......................... (1.60) (1.19) (0.48) (0.17) (0.47)
-------- -------- -------- -------- --------
Net asset value at end of period .............. $ 17.94 $ 16.18 $ 16.25 $ 12.49 $ 11.52
======== ======== ======== ======== ========
TOTAL RETURN .................................. 21.34% 7.51% 34.50% 9.98% 6.18%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets ....... 0.39% 0.41% 0.41% 0.44% 0.47%
Ratio of net investment income to
average net assets .......................... 1.05% 1.34% 1.36% 1.44% 1.10%
Portfolio turnover rate ....................... 36% 42% 31% 34% 16%
Number of shares outstanding at
end of period (000's) ....................... 13,777 11,893 11,129 10,136 9,381
Net assets at end of period (000's) .......... $247,183 $192,459 $180,785 $126,567 $108,050
Average net assets during the period (000's) .. $227,757 $178,368 $150,448 $120,298 $ 70,690
Average commission rate paid .................. $ 0.0162 $ 0.0297 n/a n/a n/a
</TABLE>
INTERNATIONAL EQUITIES FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period .................. $ 11.44 $ 11.15 $ 10.42 $ 10.14 $ 8.99
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income ................................ 0.23 0.20 0.17 0.15 0.11
Net realized and unrealized gain
on securities and foreign currencies ............... 0.85 0.63 0.97 0.34 1.17
-------- -------- -------- -------- --------
Total income from investment
operations ........................................ 1.08 0.83 1.14 0.49 1.28
-------- -------- -------- -------- --------
Distributions:
Distributions from net investment income ............. (0.24) (0.19) (0.17) (0.15) (0.11)
Distributions from net realized gain
on securities ...................................... (0.33) (0.35) (0.24) (0.06) (0.02)
-------- -------- -------- -------- --------
Total distributions .................................. (0.57) (0.54) (0.41) (0.21) (0.13)
-------- -------- -------- -------- --------
Net asset value at end of period ........................ $ 11.95 $ 11.44 $ 11.15 $ 10.42 $ 10.14
======== ======== ======== ======== ========
TOTAL RETURN ............................................ 9.92% 7.74% 11.14% 4.92% 14.31%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets ................. 0.40% 0.42% 0.42% 0.45% 0.47%
Ratio of net investment income to
average net assets .................................... 1.92% 1.75% 1.65% 1.47% 1.43%
Portfolio turnover rate ................................. 9% 12% 20% 14% 7%
Number of shares outstanding at
end of period (000's) ................................. 13,009 15,857 18,497 20,074 17,273
Net assets at end of period (000's)...................... $155,469 $181,437 $206,259 $209,091 $175,183
Average net assets during the period (000's) ............ $165,984 $191,117 $204,792 $199,235 $117,264
Average commission rate paid ............................ $ 0.0332 $ 0.0236 n/a n/a n/a
</TABLE>
135
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS CONTINUED
81
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
GROWTH FUND
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED MAY 31, APRIL 29, 1994
----------------------------------------------------- TO
1998 1997 1996 1995 MAY 31, 1994
----------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ........... $ 17.62 $ 16.49 $ 11.43 $ 9.87 $ 10.00(1)
----------- -------- --------- --------- -------
Income (loss) from investment operations:
Net investment (loss) income ................. (0.02) 0.02 0.11 0.04 0.01
Net realized and unrealized gain (loss)
on securities ............................... 4.82 1.45 5.27 1.56 (0.13)
----------- -------- --------- --------- -------
Total income (loss) from investment
operations .................................. 4.80 1.47 5.38 1.60 (0.12)
----------- -------- --------- --------- -------
Distributions:
Distributions from net investment income ..... (0.01) (0.01) (0.09) (0.04) (0.01)
Distributions from net realized gain (loss)
on securities ............................... (0.33) (0.33) (0.23) -- --
----------- --------- --------- --------- -------
Total distributions .......................... (0.34) (0.34) (0.32) (0.04) (0.01)
----------- --------- --------- --------- -------
Net asset value at end of period ................. $ 22.08 $ 17.62 $ 16.49 $ 11.43 $ 9.87
=========== ========= ========= ========= =======
TOTAL RETURN ..................................... 27.41% 9.00% 47.46% 16.25% (1.19)%
=========== ========= ========= ========= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets ........ 0.84% 0.86% 0.83% 0.91% 0.08%
Ratio of net investment (loss) income to
average net assets ............................ (0.11%) 0.09% 0.89% 0.41% 0.11%
Portfolio turnover rate ........................ 43% 40% 36% 61% 0%
Number of shares outstanding at end
of period (000's) ............................. 49,832 42,422 25,826 8,800 1,001
Net assets at end of period (000's) ............ $1,100,137 $747,654 $425,787 $100,614 $ 9,885
Average net assets during the period (000's) ... $ 946,335 $588,056 $238,228 $ 42,232 $ 9,944
Average commission rate paid ................... $ 0.0474 $ 0.0499 n/a n/a n/a
</TABLE>
(1) The net asset value at the beginning of the period is as of commencement of
operations on April 29, 1994.
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED MAY 31, APRIL 29, 1994
----------------------------------------------------- TO
1998 1997 1996 1995 MAY 31, 1994
--------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ........... $ 16.86 $ 14.78 $ 11.09 $ 9.87 $10.00(1)
--------- --------- -------- -------- ------
Income (loss) from investment operations:
Net investment income ........................ 0.08 0.10 0.08 0.09 0.02
Net realized and unrealized gain (loss)
on securities ............................... 3.26 2.38 3.77 1.22 (0.13)
--------- --------- -------- -------- ------
Total income (loss) from investment
operations .................................. 3.34 2.48 3.85 1.31 (0.11)
--------- --------- -------- -------- ------
Distributions:
Distributions from net investment income ..... (0.08) (0.10) (0.07) (0.09) (0.02)
Distributions from net realized gain (loss)
on securities ............................... (0.21) (0.29) (0.09) -- --
--------- --------- --------- -------- ------
Total distributions .......................... (0.29) (0.39) (0.16) (0.09) (0.02)
--------- --------- --------- -------- ------
Net asset value at end of period ................. $ 19.91 $ 16.87 $ 14.78 $ 11.09 $ 9.87
========= ========= ========= ======== ======
TOTAL RETURN ..................................... 19.87% 17.08% 34.85% 13.35% (1.11)%
========= ========= ========= ======== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets ........ 0.80% 0.81% 0.79% 0.86% 0.07%
Ratio of net investment income to
average net assets ............................ 0.43% 0.70% 0.63% 0.93% 0.22%
Portfolio turnover rate ........................ 78% 45% 64% 97% 11%
Number of shares outstanding at end
of period (000's) ............................. 13,619 12,422 7,685 3,867 1,002
Net assets at end of period (000's) ............ $271,159 $209,545 $113,546 $42,867 $9,890
Average net assets during the period (000's) ... $252,647 $161,226 $ 75,158 $21,910 $9,946
Average commission rate paid ................... $ 0.0500 $ 0.0500 n/a n/a n/a
</TABLE>
(1) The net asset value at the beginning of the period is as of commencement of
operations on April 29, 1994.
136
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS CONTINUED
82
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
SCIENCE & TECHNOLOGY FUND
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED MAY 31, APRIL 29, 1994
----------------------------------------------------- TO
1998 1997 1996 1995 MAY 31, 1994
----------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period .......... $ 19.88 $ 20.48 $ 14.43 $ 9.83 $ 10.00(1)
----------- --------- --------- --------- --------
Income (loss) from investment operations:
Net investment (loss) income ................ (0.09) -- -- 0.03 --
Net realized and unrealized gain (loss)
on securities and foreign currencies ....... 2.28 0.33 8.08 4.72 (0.17)
----------- --------- --------- --------- --------
Total income (loss) from investment
operations ................................. 2.19 0.33 8.08 4.75 (0.17)
----------- --------- --------- --------- --------
Distributions:
Distributions from net investment income .... -- -- -- (0.02) --
Distributions from net realized gain
on securities .............................. -- (0.93) (2.03) (0.13) --
----------- --------- --------- --------- --------
Total distributions .......................... -- (0.93) (2.03) (0.15) --
----------- --------- --------- --------- --------
Net asset value at end of period ................ $ 22.07 $ 19.88 $ 20.48 $ 14.43 $ 9.83
=========== ========= ========= ========= ========
TOTAL RETURN .................................... 10.85% 1.81% 58.28% 48.61% (1.66)%
=========== ========= ========= ========= ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets ....... 0.95% 0.96% 0.94% 1.00% 0.08%
Ratio of net (loss) investment income to
average net assets ........................... (0.46)% (0.29)% (0.07)% 0.36% 0.04%
Portfolio turnover rate ....................... 128% 122% 116% 121% 0%
Number of shares outstanding at end
of period (000's) ............................ 46,355 40,484 27,696 11,550 1,001
Net assets at end of period (000's) ........... $ 1,023,141 $ 804,982 $ 567,187 $ 166,683 $ 9,834
Average net assets during the period (000's) .. $ 949,947 $ 664,608 $ 363,087 $ 64,974 $ 9,918
Average commission rate paid .................. $ 0.0455 $ 0.0393 n/a n/a n/a
</TABLE>
(1) The net asset value at the beginning of the period is as of commencement of
operations on April 29, 1994.
SOCIAL AWARENESS FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 17.90 $ 15.49 $ 13.02 $ 11.98 $ 12.12
--------- --------- -------- -------- --------
Income from investment operations:
Net investment income .................... 0.23 0.24 0.26 0.27 0.26
Net realized and unrealized gain (loss)
on securities ........................... 5.07 4.19 3.37 1.75 (0.02)
--------- --------- -------- -------- --------
Total income from investment operations .. 5.30 4.43 3.63 2.02 0.24
--------- --------- -------- -------- --------
Distributions:
Distributions from net investment
income .................................. (0.23) (0.24) (0.25) (0.27) (0.26)
Distributions from net realized gain
on securities ........................... (0.81) (1.78) (0.91) (0.71) (0.12)
--------- --------- -------- -------- --------
Total distributions ...................... (1.04) (2.02) (1.16) (0.98) (0.38)
--------- --------- -------- -------- --------
Net asset value at end of period ............. $ 22.16 $ 17.90 $ 15.49 $ 13.02 $ 11.98
========= ========= ======== ======== ========
TOTAL RETURN ................................. 30.34% 30.48% 28.85% 18.19% 1.97%
========= ========= ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.54% 0.56% 0.56% 0.58% 0.60%
Ratio of net investment income to
average net assets ........................ 1.17% 1.53% 1.80% 2.22% 2.19%
Portfolio turnover rate .................... 120% 109% 117% 148% 83%
Number of shares outstanding at end
of period (000's) ......................... 15,080 8,677 5,220 4,143 3,817
Total net assets at end of period (000's) .. $ 334,167 $ 155,349 $ 80,887 $ 53,927 $ 45,729
Average net assets during the
period (000's) ............................ $ 240,782 $ 106,139 $ 66,888 $ 47,942 $ 41,002
Average commission rate paid ............... $ 0.0431 $ 0.0400 n/a n/a n/a
</TABLE>
137
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS CONTINUED
83
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 12.57 $ 12.55 $ 11.24 $ 10.84 $ 11.18
--------- --------- ------------- ------------- -------------
Income from investment operations:
Net investment income .................... 0.41 0.77 0.44 0.44 0.37
Net realized and unrealized gain (loss)
on securities ........................... 2.24 1.44 1.53 0.82 (0.15)
--------- --------- ------------- ------------- -------------
Total income from investment operations .. 2.65 2.21 1.97 1.26 0.22
--------- --------- ------------- ------------- -------------
Distributions:
Distributions from net investment
income .................................. (0.41) (0.78) (0.44) (0.44) (0.37)
Distributions from net realized gain
on securities ........................... (0.79) (1.41) (0.22) (0.42) (0.19)
--------- --------- ------------- ------------- -------------
Total distributions ...................... (1.20) (2.19) (0.66) (0.86) (0.56)
--------- --------- ------------- ------------- -------------
Net asset value at end of period ............. $ 14.02 $ 12.57 $ 12.55 $ 11.24 $ 10.84
========= ========= ============= ============= =============
TOTAL RETURN ................................. 21.94% 15.89% 17.90% 12.43% 1.86%
========= ========= ============= ============= =============
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.54% 0.57% 0.57% 0.58% 0.59%
Ratio of net investment income to
average net assets ........................ 3.02% 3.26% 3.62% 4.03% 3.24%
Portfolio turnover rate .................... 24% 103% 119% 133% 76%
Number of shares outstanding at end
of period (000's) ......................... 14,269 14,107 15,142 16,319 17,956
Total net assets at end of period (000's) .. $ 200,099 $ 177,347 $ 190,024 $ 183,393 $ 194,576
Average net assets during the
period (000's) ............................ $ 188,184 $ 179,615 $ 187,576 $ 186,487 $ 185,036
Average commission rate paid ............... $ 0.0205 $ 0.0401 n/a n/a n/a
</TABLE>
CAPITAL CONSERVATION FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 9.31 $ 9.23 $ 9.52 $ 9.13 $ 9.87
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .................... 0.61 0.62 0.62 0.63 0.61
Net realized and unrealized gain (loss)
on securities ........................... 0.37 0.08 (0.29) 0.39 (0.69)
-------- -------- -------- -------- --------
Total income (loss) from investment
operations .............................. 0.98 0.70 0.33 1.02 (0.08)
-------- -------- -------- -------- --------
Distributions:
Distributions from net investment
income .................................. (0.61) (0.62) (0.62) (0.63) (0.61)
Distributions from net realized gain
on securities ........................... -- -- -- -- (0.05)
-------- -------- -------- -------- --------
Total distributions ...................... (0.61) (0.62) (0.62) (0.63) (0.66)
-------- -------- -------- -------- --------
Net asset value at end of period ............. $ 9.68 $ 9.31 $ 9.23 $ 9.52 $ 9.13
======== ======== ======== ======== ========
TOTAL RETURN ................................. 10.76% 7.75% 3.41% 11.80% (1.13)%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.54% 0.57% 0.57% 0.58% 0.59%
Ratio of net investment income to
average net assets ........................ 6.32% 6.59% 6.47% 6.88% 6.24%
Portfolio turnover rate .................... 14% 45% 80% 100% 55%
Number of shares outstanding at end
of period (000's) ......................... 6,577 7,168 7,604 6,935 6,712
Total net assets at end of period (000's) .. $ 63,654 $ 66,747 $ 70,212 $ 66,031 $ 61,305
Average net assets during the
period (000's) ............................ $ 66,996 $ 69,352 $ 70,271 $ 61,568 $ 59,210
</TABLE>
138
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS CONTINUED
84
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 9.67 $ 9.61 $ 9.89 $ 9.55 $ 10.30
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .................... 0.58 0.59 0.61 0.60 0.55
Net realized and unrealized gain (loss)
on securities ........................... 0.42 0.06 (0.28 0.35 (0.59)
-------- -------- -------- -------- --------
Total income (loss) from investment
operations .............................. 1.00 0.65 0.33 0.95 (0.04)
-------- -------- -------- -------- --------
Distributions:
Distributions from net investment
income .................................. (0.58) (0.59) (0.61) (0.61) (0.55)
Distributions from net realized gain
on securities ........................... -- -- -- -- (0.16)
-------- -------- -------- -------- --------
Total distributions ...................... (0.58) (0.59) (0.61) (0.61) (0.71)
-------- -------- -------- -------- --------
Net asset value at end of period ............. $ 10.09 $ 9.67 $ 9.61 $ 9.89 $ 9.55
======== ======== ======== ======== ========
TOTAL RETURN ................................. 10.60% 6.94% 3.32% 10.43% (0.66)%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.54% 0.56% 0.56% 0.58% 0.59%
Ratio of net investment income to
average net assets ........................ 5.82% 6.11% 6.21% 6.36% 5.44%
Portfolio turnover rate .................... 24% 38% 36% 229% 85%
Number of shares outstanding at end
of period (000's) ......................... 9,129 8,672 8,164 5,478 4,544
Total net assets at end of period (000's) .. $ 92,120 $ 83,827 $ 78,423 $ 54,174 $ 43,401
Average net assets during the
period (000's) ............................ $ 87,574 $ 83,293 $ 68,017 $ 45,200 $ 41,596
</TABLE>
INTERNATIONAL GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ....... $ 11.33 $ 11.79 $ 12.72 $ 10.97 $ 11.16
--------- --------- --------- -------- --------
Income (loss) from investment operations:
Net investment income .................... 0.56 0.63 0.65 0.65 0.62
Net realized and unrealized gain (loss)
on securities and foreign currencies .... (0.26) (0.49) (0.89) 1.80 (0.20)
--------- ---------- --------- -------- --------
Total income (loss) from investment
operations .............................. 0.30 0.14 (0.24) 2.45 0.42
--------- ---------- --------- -------- --------
Distributions:
Distributions from net investment
income .................................. (0.20) (0.58) (0.68) (0.70) (0.60)
Distributions from net realized gain
on securities ........................... (0.01) (0.02) (0.01) -- (0.01)
--------- ---------- --------- -------- --------
Total distributions .................... (0.21) (0.60) (0.69) (0.70) (0.61)
--------- ---------- --------- -------- --------
Net asset value at end of period ............. $ 11.42 $ 11.33 $ 11.79 $ 12.72 $ 10.97
========= ========== ========= ======== ========
TOTAL RETURN ................................. 2.65% 1.13% (1.91)% 23.23% 3.87%
========= ========== ========= ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets .... 0.55% 0.56% 0.56% 0.59% 0.48%
Ratio of net investment income to
average net assets ........................ 4.70% 5.13% 5.45% 5.83% 5.87%
Portfolio turnover rate .................... 17% 4% 11% 6% 3%
Number of shares outstanding at end
of period (000's) ......................... 13,646 15,680 12,073 6,111 3,741
Total net assets at end of period (000's) .. $ 155,783 $ 177,709 $ 142,383 $ 77,734 $ 41,028
Average net assets during the
period (000's) ............................ $ 168,439 $ 166,147 $ 114,693 $ 51,451 $ 33,561
</TABLE>
139
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS CONTINUED
85
================================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date.
MONEY MARKET FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- --------- --------- --------
Income from investment operations:
Net investment income ..................... 0.05 0.05 0.05 0.05 0.03
---------- ---------- --------- --------- --------
Distributions:
Distributions from net investment income .. (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- --------- --------- --------
Net asset value at end of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========= ========= ========
TOTAL RETURN .................................. 5.25% 5.02% 5.26% 4.90% 2.83%
========== ========== ========= ========= ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets ..... 0.54% 0.57% 0.57% 0.57% 0.58%
Ratio of net investment income to
average net assets ......................... 5.14% 4.95% 5.14% 4.75% 2.78%
Number of shares outstanding at end of
period (000's) ............................. 190,975 128,125 83,618 82,256 50,534
Total net assets at end of period (000's) ... $ 190,975 $ 128,125 $ 83,618 $ 82,254 $ 50,533
Average net assets during the
period (000's) ............................. $ 150,625 $ 113,882 $ 84,271 $ 67,021 $ 46,222
</TABLE>
===============================================================================
REPORT OF INDEPENDENT AUDITORS
===============================================================================
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
We have audited the accompanying statements of net assets of Stock Index Fund,
MidCap Index Fund, Small Cap Index Fund, International Equities Fund, Growth
Fund, Growth & Income Fund, Science & Technology Fund, Social Awareness Fund,
Asset Allocation Fund (formerly the Timed Opportunity Fund), Capital
Conservation Fund, Government Securities Fund, International Government Bond
Fund, and Money Market Fund (such "Funds" comprising the American General Series
Portfolio Company) as of May 31, 1998. We have also audited for each of the
Funds the related statement of operations for the year ended May 31, 1998, the
statement of changes in net assets for each of the two years in the period ended
May 31, 1998, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds comprising the American General Series Portfolio Company
at May 31, 1998, the results of their operations and the changes in their net
assets for the periods identified above, and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
July 2, 1998
140
<PAGE>
American General Series Portfolio Company
BOARD OF DIRECTORS
Norman Hackerman
John W. Lancaster
Ben H. Love
Joe C. Osborne
F. Robert Paulsen
Peter V. Tuters
R. Miller Upton
Thomas L. West, Jr.
DISTRIBUTOR
The Variable Annuity Marketing
Company (VAMCO)
2929 Allen Parkway
Houston, Texas 77019
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTMENT ADVISER
The Variable Annuity Life
Insurance Company (VALIC)
2929 Allen Parkway
Houston, Texas 77019
INVESTMENT SUB-ADVISERS
Bankers Trust Company
1 Bankers Trust Plaza
New York, New York 10006
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Value Line, Inc.
220 East 42nd Street
New York, New York 10017-5891
Independent Auditors
Ernst & Young LLP
1221 McKinney
Houston, Texas 77010
SHAREHOLDER SERVICE AGENT
The Variable Annuity Life
Insurance Company (VALIC)
2929 Allen Parkway
Houston, Texas 77019
OFFICERS
Thomas L. West, Jr.,
Chairman and President
Craig R. Rodby,
Executive Vice President
Michael G. Atnip,
Executive Vice President
Norman Jaskol,
Vice President and
Senior Investment Officer
Brent C. Nelson,
Vice President
Maruti D. More,
Vice President and Investment Officer
Teresa S. Moro,
Vice President and Investment Officer
John W. Mossbarger,
Vice President and Investment Officer
Leon A. Olver,
Vice President and Investment Officer
William Trimbur, Jr.,
Vice President and Investment Officer
Cynthia A. Toles,
General Counsel and Secretary
Gregory R. Seward,
Treasurer
Kathryn A. Pearce,
Controller
Nori L. Gabert,
Assistant Secretary
Jaime M. Sepulveda,
Assistant Treasurer
Earl E. Allen, Jr.,
Assistant Treasurer
Donna L. Hathaway,
Assistant Controller
Cynthia A. Gibbons,
Assistant Vice President
This report is for the information of the shareholders and variable
contract owners participating in the American General Series Portfolio Company.
It is authorized for distribution to other persons only when preceded or
accompanied by an effective prospectus which contains information on how to
purchase shares and other pertinent information.
If you would like further information about this material or products
issued by VALIC or American General Life Insurance Company, please contact your
account representative.
"Standard & Poor's(R)", "Standard & Poor's MidCap 400 Index" and "S&P
500(R)" are trademarks of Standard & Poor's Corporation. The Stock Index Fund
and MidCap Index Fund are not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
funds. The Russell 2000(R) Index is a trademark/service mark of the Frank
Russell Company. Russell(TM) is a trademark of the Frank Russell Company.
(C)1998 The Variable Annuity Life Insurance Company, Houston Texas VALIC is a
registered service mark of The Variable Annuity Life Insurance Company.
141
<PAGE>
America's Retirement Plan Specialists(SM)
[VALIC LOGO] (R)
PRINTED MATTER
PRINTED IN U.S.A. VA9017-1 REV 2/99
The Variable Annuity Life Insurance Company, Houston, Texas
<PAGE>
APPENDIX D
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
SEMI-ANNUAL REPORT DATED NOVEMBER 30, 1998
<PAGE>
SEMI-ANNUAL REPORT
NOVEMBER 30, 1998
American
General
Series
Portfolio
Company
[FRONT COVER]
<PAGE>
================================================================================
AMERICAN GENERAL SERIES PORTFOLIO COMPANY - SEMI-ANNUAL REPORT NOVEMBER 30, 1998
================================================================================
TABLE OF CONTENTS
<TABLE>
<S> <C>
CHAIRMAN'S LETTER............................................................... 1
STOCK INDEX FUND................................................................ 4
MIDCAP INDEX FUND............................................................... 12
SMALL CAP INDEX FUND............................................................ 19
INTERNATIONAL EQUITIES FUND..................................................... 36
GROWTH FUND..................................................................... 42
GROWTH & INCOME FUND............................................................ 45
SCIENCE & TECHNOLOGY FUND....................................................... 49
SOCIAL AWARENESS FUND........................................................... 52
ASSET ALLOCATION FUND........................................................... 59
CAPITAL CONSERVATION FUND....................................................... 68
GOVERNMENT SECURITIES FUND...................................................... 71
INTERNATIONAL GOVERNMENT BOND FUND.............................................. 73
MONEY MARKET FUND............................................................... 78
NOTES TO FINANCIAL STATEMENTS................................................... 81
FINANCIAL HIGHLIGHTS............................................................ 84
SUPPLEMENTARY INFORMATION....................................................... 90
</TABLE>
<PAGE>
================================================================================
AGSPC CHAIRMAN'S LETTER 1
================================================================================
Dear Valued Customer,
It is my pleasure to introduce American General Series Portfolio Company's
(AGSPC) November 30, 1998 Semi-Annual Report for your review. In this report,
you will find financial and performance information for AGSPC's 13 funds for the
six-month period ending November 30, 1998. Through your variable annuity
contract, you are permitted to invest in one or more of the funds described in
this report. Please refer to the chart on page three to determine which funds
are available under your contract.
MARKET CONDITIONS
The six-month period ended November 30 was a volatile period for securities
markets. Specifically, the third calendar quarter (contained in the period) was
a wake-up call to many investors who expected the U.S. bull market to rage on ad
infinitum. The Standard & Poor's 500 Index (S&P 500(R)) closed down 10% for the
quarter, making it the first down quarter in over three years and by far the
worst quarter in eight years. The negative impact of the overseas markets on
U.S. shores deepened with the economic crises in Japan, other points in Asia,
and emerging markets acting as the main catalyst. For the quarter, the average
diversified domestic equity portfolio declined a negative 15% and the average
diversified international equity portfolio lost 16%. Fortunately, the
third-quarter performance was a market correction, and very-strong equity market
performance in October and November served to more than offset it. As a result,
equity market returns for the entire six months ended November 30 were
favorable, and the S&P 500 displayed a 7.49% total return for the period.
Although it was a good period for the overall equity market, it was a difficult
environment for active equity managers who seek to maintain broadly diversified
portfolios relative to the S&P 500, because the strong performance of large-cap
stocks far outran that of the mid-cap and small-cap sectors. To illustrate, the
Lipper Mid-Cap Funds Index and Small-Cap Funds Index showed negative returns of
5% and 14%, respectively, for the six-month period.
On the fixed income side, the market shrugged off the disruptive effect of
Long-Term Capital Management's debacle in August, and enjoyed a low-inflation
environment and a Fed easing of interest rates. As a result, the bond market
returns, as reflected in the Lehman Aggregate Bond Index's 5% total return for
the period, was favorable.
FUND RETURNS (1)
Indexed Funds Indexed Funds are designed to emulate the performance of their
respective indices. All four of our equity indexed funds provided slightly
better than index returns.
o The large capitalization Stock Index Fund returned 7.83% before expenses,
with a positive tracking difference of 0.34 over the S&P 500 Index.
o Although S&P 500 Index returns were positive, both MidCap S&P 400 and
SmallCap Russell 2000(R) Indices had negative returns. However, our MidCap
Index Fund tracked the MidCap 400(R) with a positive 0.30 difference,
returning -1.26% before expenses.
o Similarly, the Small Cap Index Fund tracked the Russell 2000 Index with a
positive 0.46~variance, returning -11.89% before expenses.
o The International Equities Fund tracked the EAFE Index with a positive 0.10
difference and returned 0.44% before expenses.
Managed Funds
o The Science & Technology Fund was our best performing managed stock fund,
as it returned 10.21%, 2.72 above the S&P 500 Index before expenses.
o The Social Awareness Fund was the next best performing managed stock fund,
with a return of 7.30%, 0.19 below the S&P 500 Index before expenses. The
absence of tobacco stocks in the Fund detracted from the performance, as
tobacco stocks were the best performing group in the S&P 500 Index with a
return of about 50%.
o AGSPC's Growth Fund which concentrates on companies with above average
growth potential in the service sectors, recorded a negative return of
2.88% before expenses with a difference of 10.37 below the S&P 500. The
fund return was negatively impacted because of the holdings largely in the
mid-cap media service sector, which underperformed large-cap stocks.
o The Growth & Income Fund utilizes the stock selection process of the Value
Line Ranking System which tends to emphasis small and mid-sized companies.
The fund underperformed the larger capitalization issues in the S&P 500 by
10.06 with a return of -2.57% before expenses.
o The Asset Allocation Fund returned 5.26% and underperformed the relevant
blended Index by 1.65 before expenses. Due to the flight to quality, bonds
lagged while stocks tracked their ~relevant indices.
Bond Funds
In general, bond funds underperformed the relevant indices due to flight to
quality concerns brought on by crises in Russia, Southeast Asia, Brazil, and the
Long-Term Capital hedge fund recapitalization.
o The best relative return was produced by the Money Market Fund with a
return of 2.81%, ~0.50 over the NYC CD Index.
o International Government Bond returned 11.33%, and underperformed the
relevant Index by 0.43.
o The Government Securities Fund returned 5.77%, and underperformed the long
term Treasury Index by 1.14 due to spread widening in Agency Securities.
o The Capital Conservation Fund returned 2.93%, and underperformed the
relevant Corporate Bond Index by 1.27 due to spread widening associated
with less liquid corporate bonds.
All bond fund returns are before expenses.
FUTURE OUTLOOK
While international markets outside of North America and Europe remain
unsettled, the U. S. economy is experiencing unprecedented prosperity. The
Western European economy should get an additional boost by the introduction of
the common currency, the Euro, at the start of 1999. Furthermore, with worldwide
inflation rates low, and the Fed wary of weakness in Asia and emerging markets,
it appears that we can expect a continuation of the current stable rate
environment. As a result, the outlook for bond and equity markets is excellent.
In fact, some of our equity portfolios may even get a boost in future
performance from a "snap back" in the valuations of small and mid-cap issues
relative to the very large-cap issues that have led the market in recent
quarters. Additionally, the larger-than-expected U.S. Government budget surplus
is bullish for bond markets. In short, the future looks promising.
With the prospect of another good year ahead, I hope that you will continue to
trust your future with us. I assure you that we continue to strive to provide
you with a variety of quality options to meet your investment needs. In today's
environment of rapidly changing markets, the commitment to your financial
security remains American General Series Portfolio Company's highest priority.
Thank you for your continued confidence in our ability to invest your funds
wisely.
Sincerely,
/s/ THOMAS L. WEST, JR.
Thomas L. West, Jr., Chairman
January 21, 1999 American General Series Portfolio Company
FUND RETURNS(1) TO INDEX
6 Months Ended 11/30/98
[GRAPH]
(1) Represents fund performance before subtracting expenses. See page two for
applicable fund expenses and fund level returns after expenses.
<PAGE>
================================================================================
2 AGSPC CHAIRMAN'S LETTER CONTINUED
================================================================================
FUND RETURNS AND TRACKING DIFFERENCES
For the six months ended November 30, 1998
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
FUND TOTAL
PERFORMANCE INDEX
BEFORE RETURN
SUBTRACTING INCLUDING TRACKING
FUND FUND EXPENSES REINVESTED DIFFERENCE
AGSPC FUND/RELEVANT MARKET INDEX RETURN(a) EXPENSES (1) + (2) DIVIDENDS (3) - (4)
- -------------------------------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INDEXED FUNDS:
Stock Index Fund / S&P 500 .............................. 7.67% 0.16% 7.83% 7.49% 0.34
MidCap Index Fund /
Standard & Poor's MidCap 400 ........................... (1.42) 0.16 (1.26) (1.56) 0.30
Small Cap Index Fund / Russell 2000...................... (12.09) 0.20 (11.89) (12.35) 0.46
International Equities Fund / EAFE ...................... 0.23 0.21 0.44 0.34 0.10
MANAGED FUNDS:
Growth Fund / S&P 500 ................................... (3.31) 0.43 (2.88) 7.49 (10.37)
Growth & Income Fund / S&P 500 .......................... (2.97) 0.40 (2.57) 7.49 (10.06)
Science & Technology Fund / S&P 500 ..................... 9.74 0.47 10.21 7.49 2.72
Social Awareness Fund / S&P 500 ......................... 7.02 0.28 7.30 7.49 (0.19)
Asset Allocation Fund / Benchmark(b) .................... 4.98 0.28 5.26 6.91 (1.65)
Capital Conservation Fund /
Merrill Lynch Corporate Master Bond .................... 2.65 0.28 2.93 4.20 (1.27)
Government Securities Fund /
Lehman Brothers U.S. Treasury .......................... 5.49 0.28 5.77 6.91 (1.14)
International Government Bond Fund /
Salomon Brothers Non U.S. Gov't Bond ................... 11.05 0.28 11.33 11.76 (0.43)
Money Market Fund / 30 Day Certificate of Deposit
Primary Offering Rate by New York City Banks
(NYC 30 Day CD Rate).................................... 2.53 0.28 2.81 2.31 0.50
</TABLE>
(a) Fund level returns are net of investment management fees and other fund
expenses, but ~do not reflect charges specified in annuity contracts for
mortality and expense guarantees, administrative fees, or surrender
charges.
(b) Benchmark consists of 55% S&P 500 Index, 35% Merrill Lynch Corporate and
Government Master Index, and 10% NYC 30 Day CD Rate.
SUMMARY OF NET ASSET VALUES PER SHARE
AND PER SHARE DISTRIBUTIONS
<TABLE>
<CAPTION>
DISTRIBUTIONS FROM NET
INVESTMENT INCOME AND
NET REALIZED GAINS
NET ASSET VALUES ON SECURITIES
--------------------------------- -----------------------
(UNAUDITED) (UNAUDITED)
NOVEMBER 30, MAY 31, NOVEMBER 30, 12/1/97 TO 6/1/98 TO
FUND 1997 1998 1998 5/31/98 11/30/98
- ---- ------------ ------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Stock Index (emulate S&P 500)................................... $29.38 $33.38 $35.73 $ 0.36 $ 0.20
MidCap Index (emulate MidCap 400) .............................. 23.98 25.27 24.79 1.47 0.11
Small Cap Index (emulate Russell 2000).......................... 18.32 17.94 15.67 1.50 0.10
International Equities
(foreign long term growth stocks) ............................. 10.83 11.95 11.84 0.43 0.13
Growth Fund (long term growth of capital) ...................... 20.01 22.08 21.35 0.34 0.00
Growth & Income Fund (long term growth
of capital and current income) ................................ 19.20 19.91 19.28 0.25 0.04
Science & Technology Fund (long term growth
of capital) ................................................... 20.98 22.07 24.22 0.00 0.00
Social Awareness (social criteria growth stocks) ............... 20.12 22.16 23.60 0.93 0.11
Asset Allocation (asset allocation) ............................ 13.65 14.02 14.51 1.00 0.20
Capital Conservation (quality corporate bonds) ................. 9.61 9.68 9.64 0.32 0.30
Government Securities (intermediate and
long term government bonds) ................................... 9.99 10.09 10.36 0.29 (0.28)
International Government Bond (high quality
foreign government debt securities) ........................... 11.27 11.42 12.50 0.02 0.18
Money Market (money market instruments) ........................ 1.00 1.00 1.00 0.02 0.03
</TABLE>
The change in net asset value of the funds will not be the same as the change in
the accumulation unit value of your annuity contract because (1) the change in
net asset value does not reflect the reinvestment of income and capital gain
distributions and (2) the mortality and expense charges described in your
annuity contract are not included.
<PAGE>
================================================================================
AGSPC CHAIRMAN'S LETTER CONTINUED 3
================================================================================
FUNDS AVAILABLE UNDER VARIABLE ANNUITY CONTRACTS
<TABLE>
<CAPTION>
AMERICAN GENERAL
LIFE
VALIC SEPARATE ACCOUNT A CONTRACT FORM INSURANCE COMPANY
------------------------------------------------------------------ -------------------
SEPARATE ACCOUNT A
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO INDEPEN- GROUP -------------------
DIRECTOR DIRECTOR DIRECTOR DIRECTOR DENCE UNIT NON
FUND PLUS 2 1 T PLUS IMPACT PURCHASE QUALIFIED QUALIFIED
- ---- --------- --------- --------- --------- -------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index
(emulate S&P 500)..................... Yes Yes Yes Yes Yes Yes Yes Yes Yes
MidCap Index
(emulate MidCap 400).................. Yes No Yes No Yes Yes No Yes Yes
Small Cap Index
(emulate Russell 2000)................ Yes No Yes Yes Yes No No No No
International Equities
(foreign long term growth stocks...... Yes No Yes No Yes No No No No
Growth
(long term growth of capital)......... Yes Yes Yes Yes No No No No No
Growth & Income (long term
growth of capital and current income.. Yes No Yes No No No No No No
Science & Technology
(long term growth of capital)......... Yes Yes Yes Yes No No No No No
Social Awareness
(social criteria growth stocks)....... Yes Yes Yes Yes Yes No No No No
Asset Allocation
(asset allocation).................... Yes No Yes Yes Yes Yes No Yes Yes
Capital Conversation
(quality corporate bonds)............ Yes No Yes No Yes Yes No Yes Yes
Government Securities (intermediate
and long term government bonds)....... Yes No Yes No Yes No No Yes Yes
Int'l Government Bond (high quality
foreign government debt securities.... Yes Yes Yes No Yes No No No No
Money Market
(money market instruments)............ Yes Yes Yes Yes Yes Yes No Yes Yes
<CAPTION>
AMERICAN GENERAL LIFE INSURANCE COMPANY
-------------------------------------------------------------------------------
PLATINUM AMERICAN
SEPARATE PLATINUM INVESTOR PPVUL AMERICAN GENERAL
ACCOUNT SELECT INVESTOR VARIABLE LEGACY ESTATE GENERAL SIGNATURE
FUND B RESERVE I & II ANNUALLY PLUS MANAGER SIGNATURE II-A
- ---- -------- ------- --------- -------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index
(emulate S&P 500)..................... Yes No Yes Yes No No No Yes
MidCap Index
(emulate MidCap 400).................. Yes No Yes Yes No No No Yes
Small Cap Index
(emulate Russell 2000)................ No No No No No No No No
International Equities
(foreign long term growth stocks...... No No Yes Yes No No No Yes
Growth
(long term growth of capital)......... No No No No No No No No
Growth & Income (long term
growth of capital and current income.. No No No No No No No No
Science & Technology
(long term growth of capital)......... No No No No No No No No
Social Awareness
(social criteria growth stocks)....... No No No No No No No No
Asset Allocation
(asset allocation).................... Yes No No No No No No No
Capital Conversation
(quality corporate bonds)............ Yes No No No No No No No
Government Securities (intermediate
and long term government bonds)....... Yes No No No No No No No
Int'l Government Bond (high quality
foreign government debt securities.... No No No No No No No No
Money Market
(money market instruments)............ Yes Yes Yes Yes Yes Yes Yes Yes
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS
4 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS - 99.14%
ADVERTISING - 0.18%
43,350 Interpublic Group Cos., Inc........................... $ 2,980,312
71,700 Omnicom Group, Inc.................................... 3,831,469
------------
6,811,781
------------
AEROSPACE/DEFENSE - 1.43%
407,008 Boeing Co............................................. 16,534,700
29,000 EG & G, Inc........................................... 810,187
61,260 General Dynamics Corp................................. 3,556,908
15,400 Goodrich (B.F.) Co.................................... 584,238
87,576 Lockheed Martin Corp.................................. 9,086,010
30,800 Northrop Grumman Corp................................. 2,502,500
155,000 Raytheon Co. Class B.................................. 8,583,125
49,800 TRW Inc............................................... 2,742,113
101,300 United Technologies Corp.............................. 10,858,094
------------
55,257,875
------------
AIRLINES - 0.34%
72,600* AMR Corp.............................................. 4,787,063
63,200 Delta Air Lines, Inc.................................. 3,393,050
124,200 Southwest Airlines Co................................. 2,670,300
41,300* US Airways Group, Inc................................. 2,147,600
------------
12,998,013
------------
APPAREL & PRODUCTS - 0.04%
2* Abercrombie and Fitch Co.............................. 112
27,000* Fruit of the Loom, Inc. Class A....................... 398,250
32,900 Liz Claiborne, Inc.................................... 1,114,488
------------
1,512,850
------------
APPLIANCES/FURNISHINGS - 0.09%
35,000 Maytag Corp........................................... 1,894,375
30,200 Whirlpool Corp........................................ 1,691,200
------------
3,585,575
------------
AUTO - CARS - 1.16%
460,300 Ford Motor Co......................................... 25,431,575
279,600 General Motors Corp................................... 19,572,000
------------
45,003,575
------------
AUTO - ORIGINAL EQUIPMENT - 0.06%
54,400 Danaher Corp.......................................... 2,482,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
AUTO - REPLACEMENT PARTS - 0.24%
73,900* AutoZone, Inc......................................... $ 2,226,237
18,700 Cooper Tire & Rubber Co............................... 365,819
74,400 Genuine Parts Co...................................... 2,450,550
73,500 Goodyear Tire & Rubber Co............................. 4,171,125
15,800 Pep Boys-Manny, Moe & Jack............................ 223,175
1* SPX Corp. (fractional share).......................... 26
------------
9,436,932
------------
BANKS - NEW YORK CITY - 1.71%
337,200 Bank of New York Co., Inc............................. 11,549,100
923,271 Citigroup Inc......................................... 46,336,663
76,100 J. P. Morgan & Co. Inc................................ 8,133,188
------------
66,018,951
------------
BANKS - OTHER - 3.55%
727,321 BankAmerica Corp...................................... 47,412,237
136,800 BankBoston Corp....................................... 5,694,300
404,000 First Union Corp...................................... 24,543,000
232,386 Fleet Financial Group, Inc............................ 9,687,591
116,500 Mellon Bank Corp...................................... 7,332,219
133,000 National City Corp.................................... 8,944,250
51,600 Providian Financial Corp.............................. 4,737,525
28,000 Republic of New York Corp............................. 1,309,000
53,500 Union Planters Corp................................... 2,547,938
703,930 Wells Fargo Company................................... 25,341,480
------------
137,549,540
------------
BANKS - REGIONAL - 3.01%
471,550 Bank One Corp......................................... 24,196,409
349,764 Chase Manhattan Corp.................................. 22,188,154
67,950 Comerica Inc.......................................... 4,382,775
106,275 Fifth Third Bancorp................................... 7,054,003
65,560 Huntington Bancshares, Inc............................ 1,942,215
180,040 KeyCorp............................................... 5,524,978
51,500 Mercantile Bancorporation Inc......................... 2,269,219
53,900 Northern Trust Corp................................... 4,352,425
135,900 PNC Bank Corp......................................... 7,007,344
84,400 Regions Financial Corp................................ 3,270,500
61,200 State Street Corp..................................... 4,199,850
84,200 Summit Bancorporation................................. 3,520,613
72,200 SunTrust Banks, Inc................................... 5,040,463
102,150 Synovus Financial Corp................................ 2,253,684
301,390 U.S. Bancorp.......................................... 11,094,919
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
BANKS - REGIONAL - Continued
95,713 Wachovia Corp......................................... $ 8,356,941
------------
116,654,492
------------
BEVERAGE - BREWERS/DISTRIBUTORS - 0.49%
11,900 Adolph Coors Class B.................................. 592,025
202,800 Anheuser-Busch Companies, Inc......................... 12,294,750
18,915 Brown-Forman Corp Class B............................. 1,376,066
135,500 Seagram Co. Ltd....................................... 4,649,344
------------
18,912,185
------------
BEVERAGE - SOFT DRINKS - 2.60%
998,400 Coca-Cola Co.......................................... 69,950,400
160,600 Coca Cola Enterprises, Inc............................ 6,072,687
630,900 PepsiCo, Inc.......................................... 24,407,944
------------
100,431,031
------------
BROADCASTING - 1.57%
311,858* CBS Corp.............................................. 9,297,266
89,900* Clear Channel Communications.......................... 4,202,825
141,750 Comcast Corp. Class A Special......................... 6,892,594
241,000* Media One Group Inc................................... 9,760,500
197,178 Tele-Comm Liberty Media Group
Class A.............................................. 8,330,771
223,193 U S WEST, Inc......................................... 13,893,764
126,400* Viacom, Inc Class B................................... 8,413,500
------------
60,791,220
------------
BUILDING MATERIALS - 0.35%
8,900 Armstrong World Inds. Inc............................. 592,962
150,600 Lowe's Companies, Inc................................. 6,362,850
162,800 Masco Corp............................................ 4,700,850
60,700 Sherwin-Williams Co................................... 1,722,363
------------
13,379,025
------------
CHEMICAL - MAJOR - 1.52%
92,200 Dow Chemical Co....................................... 8,977,975
449,100 E.I. du Pont de Nemours and Co........................ 26,384,625
47,500 Hercules, Inc......................................... 1,561,562
249,000 Monsanto Co........................................... 11,282,812
54,900 Morton International, Inc............................. 1,616,119
66,500 PPG Industries, Inc................................... 4,068,969
54,900 Rohm and Haas Co...................................... 1,918,069
68,300 Union Carbide Corp.................................... 3,056,425
------------
58,866,556
------------
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 5
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
CHEMICAL - MISCELLANEOUS - 0.37%
84,200 Air Products and Chemicals Inc........................ $ 3,210,125
45,837 Eastman Chemical Co................................... 2,655,681
27,600 Ecolab Inc............................................ 853,875
15,300* FMC Corp.............................................. 889,312
41,400 W.R. Grace & Co....................................... 683,100
26,500 Great Lakes Chem Corp................................. 1,058,344
15,428 Millipore Corp........................................ 433,913
20,300 Nalco Chemical Co..................................... 678,781
64,700 Praxair, Inc.......................................... 2,470,731
39,500 Sigma Aldrich Corp.................................... 1,268,938
------------
14,202,800
------------
CONGLOMERATES - 1.11%
232,500 Allied Signal Inc..................................... 10,230,000
38,800 ITT Inds, Inc......................................... 1,396,800
39,400 Loews Corp............................................ 3,940,000
125,000 RJR Nabisco Holdings Corp............................. 3,601,563
65,200 Tenneco Inc........................................... 2,322,750
58,300 Textron Inc........................................... 4,529,181
256,667 Tyco International Ltd................................ 16,891,896
------------
42,912,190
------------
CONSUMER FINANCE - 0.25%
26,300 Capital One Financial Corp............................ 2,893,000
306,412 MBNA Corp............................................. 6,951,722
------------
9,844,722
------------
CONTAINERS - METAL/GLASS - 0.23%
4,700 Ball Corp............................................. 200,925
101,100 Corning Inc........................................... 4,056,638
65,600 Crown Cork & Seal Co., Inc............................ 2,214,000
12,100 Owens Corning......................................... 451,481
61,200* Owens-Illinois, Inc................................... 1,966,050
------------
8,889,094
------------
CONTAINERS - PAPER - 0.08%
6,500 Bemis Co., Inc........................................ 245,781
46,814 Sealed Air Corp....................................... 2,065,668
17,700 Temple-Inland Inc..................................... 950,269
------------
3,261,718
------------
COSMETICS/TOILETRIES - 0.73%
6,800 Alberto-Culver Co. Class B............................ 174,250
123,700 Avon Products, Inc.................................... 5,025,313
444,700 Gillette Co........................................... 20,428,406
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
COSMETICS/TOILETRIES - Continued
60,000 Int'l. Flavors & Fragrances,.......................... $ 2,512,500
------------
28,140,469
------------
DRUGS - 8.68%
36,000 Allergan, Inc......................................... 2,191,500
43,200* ALZA Corp............................................. 2,257,200
555,800 American Home Products Corp........................... 29,596,350
103,400* Amgen Inc............................................. 7,780,850
23,900 Bausch & Lomb Inc..................................... 1,326,450
405,200 Bristol Myers Squibb Co............................... 49,662,325
448,600 Eli Lilly and Co...................................... 40,233,813
482,200 Merck & Co., Inc...................................... 74,680,725
219,870 Pharmacia & Upjohn, Inc............................... 11,446,982
528,000 Pfizer, Inc........................................... 58,938,000
307,000 Schering-Plough Corp.................................. 32,657,125
326,700 Warner-Lambert Co..................................... 24,665,850
------------
335,437,170
------------
ELECTRICAL EQUIPMENT - 3.66%
92,284 AMP Inc............................................... 4,464,238
62,000* Cabletron Systems, Inc................................ 868,000
189,000 Emerson Electric Co................................... 12,285,000
1,322,700 General Electric Co................................... 119,704,350
28,400 W. W. Grainger Inc.................................... 1,199,900
30,500 National Service Indus., Inc.......................... 1,178,063
48,300 Raychem Corp.......................................... 1,645,219
6,800 Thomas & Betts Corp................................... 294,525
------------
141,639,295
------------
ELECTRONIC INSTRUMENTS - 0.10%
1* Commscope Inc......................................... 15
27,100 Perkin-Elmer Corp..................................... 2,527,075
5,400 Tektronix, Inc........................................ 144,788
70,400* Thermo Electron Corp.................................. 1,188,000
------------
3,859,878
------------
ENTERTAINMENT - 1.53%
849,756 Walt Disney Co........................................ 27,351,521
39,400 Harrah's Entertainment, Inc........................... 613,163
67,475 Hasbro, Inc........................................... 2,365,842
49,400* King World Productions, Inc........................... 1,346,150
119,187 Mattel, Inc........................................... 4,119,401
220,200 Time Warner Inc....................................... 23,286,150
------------
59,082,227
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
FINANCE COMPANIES - 0.72%
148,200 Associates First Capital Corp......................... $ 11,541,075
223,065 Household International, Inc.......................... 8,727,418
96,350 SunAmerica, Inc....................................... 7,635,738
------------
27,904,231
------------
FINANCIAL SERVICES - 0.56%
180,400 American Express Co................................... 18,051,275
40,100 H & R Block Inc....................................... 1,801,994
39,800 Countrywide Credit Ind Inc............................ 1,970,100
------------
21,823,369
------------
FOODS - 1.95%
225,951 Archer Daniels Midland Co............................. 4,151,849
117,100 BestFoods............................................. 6,806,437
174,400 Campbell Soup Co...................................... 9,962,600
199,800 ConAgra, Inc.......................................... 6,281,212
62,300 General Mills, Inc.................................... 4,703,650
156,350 H J Heinz Co.......................................... 9,117,159
47,000 Hershey Foods Corp.................................... 3,160,750
162,800 Kellogg Co............................................ 5,962,550
79,380 Pioneer Hi-Bred Int'l, Inc............................ 2,376,439
60,900 Quaker Oats Co........................................ 3,737,738
142,800 Ralston Purina Co..................................... 4,971,225
182,600 Sara Lee Corp......................................... 10,659,275
42,500 Wm. Wrigley Jr. Co.................................... 3,745,313
------------
75,636,197
------------
FOOTWEAR - 0.08%
73,700 NIKE, Inc. Class B.................................... 2,948,000
18,900* Reebok International Ltd.............................. 301,219
------------
3,249,219
------------
FREIGHT - 0.13%
60,560* FDX Corp.............................................. 3,928,830
37,200 Ryder System, Inc..................................... 1,062,525
------------
4,991,355
------------
FUNERAL SERVICES - 0.08%
83,800 Service Corp. International........................... 3,132,025
------------
GOLD MINING - 0.14%
151,700 Barrick Gold Corp..................................... 3,034,000
52,100 Battle Mountain Gold Co............................... 244,218
86,400 Homestake Mining Co................................... 928,800
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
6 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
GOLD MINING - 0.14% - Continued
93,800 Placer Dome Inc....................................... $ 1,365,963
------------
5,572,981
------------
GOVERNMENT SPONSORED - 1.32%
272,600 Federal Home Loan Mortg. Corp......................... 16,492,300
433,700 Federal National Mortgage Asso........................ 31,551,675
67,800 SLM Holding Corp...................................... 2,983,200
------------
51,027,175
------------
HARDWARE & TOOLS - 0.10%
40,100 Black & Decker Corp................................... 2,172,918
11,550 Snap-on Inc........................................... 392,700
42,600 Stanley Works......................................... 1,301,963
------------
3,867,581
------------
HEALTHCARE - 0.52%
89,700 Cardinal Health, Inc.................................. 6,155,662
58,500* HCR Manor Care Inc.................................... 1,857,375
180,800* HealthSouth Corp...................................... 2,429,500
65,300* Humana Inc............................................ 1,293,756
68,600 IMS Helath Inc........................................ 4,553,325
87,500 United HealthCare Corp................................ 3,948,438
------------
20,238,056
------------
HEAVY DUTY TRUCKS/PARTS - 0.19%
17,300 Cummins Engine Co., Inc............................... 642,262
52,988 Dana Corp............................................. 2,066,532
37,800 Eaton Corp............................................ 2,582,213
20,110* Navistar International Corp........................... 520,346
35,710 PACCAR Inc............................................ 1,624,805
------------
7,436,158
------------
HOME BUILDERS - 0.05%
30,300 Centex Corp........................................... 1,081,331
14,456 Kaufman & Broad Home Corp............................. 364,110
15,800 Pulte Corp............................................ 401,913
------------
1,847,354
------------
HOSPITAL MANAGEMENT - 0.26%
250,484 Columbia/HCA Healthcare Corp.......................... 6,168,168
13,100 Shared Med Systems Corp............................... 686,113
105,200* Tenet Healthcare Corp................................. 3,109,975
------------
9,964,256
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
HOSPITAL SUPPLIES - 2.92%
631,000 Abbott Laboratories................................... $ 30,288,000
8,400 Bard (C. R.), Inc..................................... 384,825
117,800 Baxter International Inc.............................. 7,487,662
117,300 Becton, Dickinson and Co.............................. 4,985,250
64,100 Biomet, Inc........................................... 2,451,825
140,954* Boston Scientific Corp................................ 6,977,223
550,400 Johnson & Johnson..................................... 44,720,000
30,000 Mallinckrodt, Inc..................................... 969,375
200,900 Medtronic, Inc........................................ 13,598,419
37,833* St Jude Medical, Inc.................................. 1,099,522
------------
112,962,101
------------
HOUSEHOLD PRODUCTS - 2.65%
43,200 Clorox Co............................................. 4,797,900
127,300 Colgate-Palmolive Co.................................. 10,900,062
173,100 Minnesota Mining & Mfg. Co............................ 13,902,093
59,000 Newell Co............................................. 2,610,750
537,852 Procter & Gamble Co................................... 47,129,282
68,600 Rubbermaid, Inc....................................... 2,268,088
35,300 Tupperware Corp....................................... 615,544
260,800 Unilever N V - ADR.................................... 20,163,100
------------
102,386,819
------------
INFORMATION PROCESSING - 0.18%
189,800 HBO & Co.............................................. 4,733,138
136,200* Parametric Technology Corp............................ 2,315,400
------------
7,048,538
------------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 3.73%
87,300* BMC Software, Inc..................................... 4,457,756
1,015,700* Microsoft Corp........................................ 123,915,400
412,687* Oracle Corp........................................... 14,134,530
92,600* Peoplesoft Inc........................................ 1,904,088
------------
144,411,774
------------
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 1.78%
61,400 Apple Computer, Inc................................... 1,960,962
685,049 Compaq Computer Corp.................................. 22,264,093
530,400* Dell Computer Corp.................................... 32,254,950
58,100* Silicon Graphics, Inc................................. 711,725
155,600 Sun Microsystems, Inc................................. 11,524,125
------------
68,715,855
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
INFORMATION PROCESSING -
COMPUTER SERVICES - 0.72%
132,800 Automatic Data Processing, Inc........................ $ 10,225,600
27,452* Ceridian Corp......................................... 1,786,095
196,400 Electronic Data Systems Corp. New..................... 7,659,600
182,654 First Data Corp....................................... 4,874,579
65,800 Paychex, Inc.......................................... 3,273,550
------------
27,819,424
------------
INFORMATION PROCESSING -
DATA SERVICES - 4.25%
1 A.C. Nielson.......................................... 27
38,200* Adobe Systems Inc..................................... 1,709,450
27,800 Autodesk, Inc......................................... 1,011,225
329,421* Cendant Corp.......................................... 6,258,999
211,230 Computer Associates Int'l............................. 9,346,927
52,800* Computer Sciences Corp................................ 3,016,200
213,500* E M C Corp............................................ 15,478,750
60,000* Gateway 2000, Inc..................................... 3,367,500
420,800 Hewlett Packard Co.................................... 26,405,200
51,400 Honeywell Inc......................................... 4,108,787
380,100 International Business Machine........................ 62,716,500
164,900* Novell, Inc .......................................... 2,731,156
112,900 Pitney Bowes Inc...................................... 6,322,400
116,400* Seagate Technology.................................... 3,433,800
104,100* Unisys Corp........................................... 2,966,850
142,300 Xerox Corp............................................ 15,297,250
------------
164,171,021
------------
INFORMATION PROCESSING -
NETWORKING - 1.54%
82,700* Ascend Communications Inc............................. 4,646,706
635,475* Cisco Systems, Inc.................................... 47,898,928
45,300* General Insturment Corp............................... 1,274,063
145,500* 3Com Corp............................................. 5,629,031
------------
59,448,728
------------
INSURANCE - CASUALTY - 0.37%
73,700 Chubb Corp............................................ 5,163,606
27,800 Progressive Corp...................................... 4,124,825
58,000 SAFECO Corp........................................... 2,490,375
74,842 St. Paul Companies, Inc............................... 2,638,181
------------
14,416,987
------------
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 7
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
INSURANCE - LIFE - 0.61%
71,892 Aetna Inc............................................. $ 5,558,150
165,188 Conseco Inc........................................... 5,471,853
66,112 Jefferson-Pilot Corp.................................. 4,512,144
43,900 Lincoln National Corp................................. 3,673,881
54,900 Torchmark Corp........................................ 2,086,200
21,209 Transamerica Corp..................................... 2,253,456
------------
23,555,684
------------
INSURANCE - MISCELLANEOUS - 0.44%
32,100 General Re Corp....................................... 7,495,350
57,100 MBIA, Inc............................................. 3,697,225
51,200 MGIC Investment Corp.................................. 2,249,600
67,400 UNUM Corp............................................. 3,631,175
------------
17,073,350
------------
INSURANCE - MULTILINE - 2.12%
367,640 Allstate Corp......................................... 14,981,329
422,440 American International Gp. Inc........................ 39,709,360
55,100 Aon Corp.............................................. 3,175,137
86,900 CIGNA Corp............................................ 6,761,906
54,000 Cincinnati Financial Corp............................. 2,109,375
115,000 Hartford Financial Svcs Group......................... 6,346,563
119,850 Marsh & McLennan Companies Inc........................ 6,973,772
54,100 Provident Companies Inc............................... 2,079,469
------------
82,136,911
------------
LEISURE TIME - 0.04%
17,900 Brunswick Corp........................................ 393,800
70,900* Mirage Resorts, Inc................................... 1,054,638
------------
1,448,438
------------
LODGING - 0.13%
108,800 Hilton Hotels Corp.................................... 2,366,400
94,000 Marriott International Inc............................ 2,761,250
------------
5,127,650
------------
MACHINE TOOLS - 0.01%
4,700 Milacron Inc.......................................... 95,175
------------
MACHINERY - AGRICULTURE - 0.12%
41,700 Case Corp............................................. 1,011,225
108,300 Deere & Co............................................ 3,783,731
------------
4,794,956
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.25%
153,000 Caterpillar Inc....................................... $ 7,563,937
31,900 Fluor Corp............................................ 1,365,719
29,000 Foster Wheeler Corp................................... 496,625
10,800 Harnischfeger Industries Inc.......................... 108,000
------------
9,534,281
------------
MACHINERY - INDUSTRIAL/SPECIALTY - 0.51%
1,600 Aeroquip-Vickers, Inc................................. 58,200
14,600 Briggs & Stratton Corp................................ 736,387
42,700 Cooper Industries, Inc................................ 2,097,638
95,600 Dover Corp............................................ 3,405,750
89,400 Illinois Tool Works Inc............................... 5,682,488
67,700 Ingersoll-Rand Co..................................... 3,169,206
32,000 Johnson Controls, Inc................................. 1,852,000
59,533 Pall Corp............................................. 1,384,142
33,375 Parker Hannifin Corp.................................. 1,159,781
12,800 Timken Co............................................. 246,400
------------
19,791,992
------------
MEDICAL TECHNOLOGY - 0.15%
68,900 Guidant Corp.......................................... 5,912,481
------------
MERCHANDISE - DRUG - 0.59%
151,200 CVS Corp.............................................. 7,465,500
16,600 Longs Drug Stores Corp................................ 591,375
100,600 Rite Aid Corp......................................... 4,665,325
191,400 Walgreen Co........................................... 10,275,788
------------
22,997,988
------------
MERCHANDISE - SPECIALTY - 2.00%
41,000 American Greetings Corp. Class A...................... 1,734,812
40,900 Circuit City Stores, Inc.............................. 1,480,068
53,600* Consolidated Stores Corp.............................. 1,152,400
95,522* CostCo Companies, Inc................................. 5,994,005
71,500 Dollar General Corp................................... 1,702,594
74,400 Fortune Brands, Inc................................... 2,534,250
164,700 Gap, Inc.............................................. 12,115,744
608,400 Home Depot, Inc....................................... 30,267,900
89,900 Ikon Office Solutions Inc............................. 876,525
973 Jostens, Inc.......................................... 22,805
63,200* Kohl's Corp........................................... 3,108,650
84,773 Limited, Inc.......................................... 2,453,119
79,200 Nordstrom, Inc........................................ 2,950,200
113,000* Staples, Inc.......................................... 3,947,938
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
108,000 TJX Companies, Inc.................................... $ 2,767,500
33,600 Tandy Corp............................................ 1,514,100
127,625* Toys "R" Us, Inc...................................... 2,520,594
------------
77,143,204
------------
MERCHANDISING - DEPARTMENT - 0.51%
179,800 Dayton Hudson Corp.................................... 8,091,000
48,600 Dillards, Inc. Class A................................ 1,670,625
92,300* Federated Dept Stores, Inc ........................... 3,847,756
99,800 May Department Stores Co.............................. 6,019,188
------------
19,628,569
------------
MERCHANDISING - FOOD - 0.85%
113,900 Albertsons, Inc....................................... 6,499,418
119,200 American Stores Co.................................... 4,000,650
15,300 Great Atlantic & Pacific Tea.......................... 417,881
98,300 Kroger Co............................................. 5,216,044
191,600* Safeway, Inc.......................................... 10,118,875
33,400 Supervalu Inc......................................... 862,138
143,800 SYSCO Corp............................................ 3,873,613
52,000 Winn-Dixie Stores, Inc................................ 2,096,250
------------
33,084,869
------------
MERCHANDISING - MASS - 2.31%
190,300* KMart Corp............................................ 2,902,075
59,600 Fred Meyer, Inc....................................... 3,032,150
119,400 J.C. Penney Co., Inc.................................. 6,567,000
163,300 Sears Roebuck and Co.................................. 7,746,544
35,000* Venator Group, Inc.................................... 275,625
914,100 Wal-Mart Stores, Inc.................................. 68,843,156
------------
89,366,550
------------
METALS - ALUMINUM - 0.25%
115,900 Alcan Aluminium Ltd................................... 3,085,838
67,200 Aluminum Co. of America............................... 4,981,200
33,100 Reynolds Metals Co.................................... 1,816,362
------------
9,883,400
------------
METALS - COPPER - 0.08%
19,300 ASARCO Inc............................................ 373,938
67,631 Newmont Mining Corp................................... 1,344,166
27,200 Phelps Dodge Corp..................................... 1,541,900
------------
3,260,004
------------
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
8 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
METALS - MISCELLANEOUS - 0.07%
31,350 Cyprus Amax Minerals Co............................... $ 356,606
57,075 Engelhard Corp........................................ 1,102,261
48,500* Freeport-McMoRan Copper &
Gold Class ......................................... 633,531
52,400 Inco Limited.......................................... 605,875
------------
2,698,273
------------
METALS - STEEL - 0.12%
59,525 Allegheny Teldyne Inc................................. 1,223,982
46,100* Bethlehem Steel Corp.................................. 380,325
31,100 Nucor Corp............................................ 1,306,200
48,920 USX-US Steel Group, Inc............................... 1,195,483
53,625 Worthington Industries, Inc........................... 653,555
------------
4,759,545
------------
MISCELLANEOUS - 0.16%
103,600 BB & T Corp........................................... 3,826,725
57,800 Equifax Inc........................................... 2,398,700
------------
6,225,425
------------
MOBILE HOMES - 0.01%
14,600 Fleetwood Enterprises, Inc............................ 491,838
------------
NATURAL GAS-DIVERSIFIED - 0.11%
87,800 Coastal Corp.......................................... 3,062,025
37,900 Sonat Inc............................................. 1,125,156
------------
4,187,181
------------
OIL - INTEGRATED DOMESTIC - 1.41%
35,700 Amerada Hess Corp..................................... 1,981,350
406,400 Amoco Corp............................................ 23,952,200
26,900 Ashland Oil, Inc...................................... 1,308,012
131,400 Atlantic Richfield Co................................. 8,738,100
74,967 Burlington Resources, Inc............................. 2,670,699
19,400 Kerr-McGee Corp....................................... 766,300
150,600 Occidental Petroleum Corp............................. 3,049,650
40,800* Oryx Energy Co........................................ 563,550
18,500 Pennzoil Co........................................... 686,812
96,300 Phillips Petroleum Co................................. 4,044,600
114,100 USX-Marathon Group.................................... 3,237,588
98,300 Unocal Corp........................................... 3,329,913
------------
54,328,774
------------
OIL - INTEGRATED INTERNATIONAL - 4.63%
268,200* Chevron Corp.......................................... 22,428,225
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
OIL - INTEGRATED INTERNATIONAL - Continued
991,500 Exxon Corp............................................ $ 74,424,469
320,500 Mobil Corp............................................ 27,623,094
884,900 Royal Dutch Pete Co. - ADR............................ 41,590,300
222,600 Texaco Inc............................................ 12,813,412
------------
178,879,500
------------
OIL - SERVICES - 0.50%
131,160 Baker Hughes Inc...................................... 2,401,868
200,500 Halliburton Co........................................ 5,889,688
34,300 McDermott International, Inc.......................... 919,669
35,500* Rowan Companies, Inc.................................. 348,343
217,400 Schlumberger Ltd...................................... 9,715,062
------------
19,274,630
------------
OIL/GAS PRODUCERS - 0.13%
50,600 Anadarko Petroleum Corp............................... 1,426,288
33,700 Apache Corp........................................... 775,100
6,000 Helmerich & Payne, Inc................................ 103,500
38,716 Sunoco Inc............................................ 1,311,504
113,842 Union Pacific Res. Group Inc.......................... 1,273,607
------------
4,889,999
------------
PAPER/FOREST PRODUCTS - 1.02%
54,200 Avery Dennison Corp................................... 2,598,212
10,566 Boise Cascade Corp.................................... 334,810
45,400 Champion International Corp........................... 1,886,937
96,600 Fort James Corp....................................... 3,779,475
39,200 Georgia-Pacific Corp.................................. 2,224,600
128,918 International Paper Co................................ 5,599,876
240,432 Kimberly-Clark Corp................................... 12,652,734
41,600 Louisiana Pacific Corp................................ 707,200
39,200 Mead Corp............................................. 1,188,250
4,900 Potlatch Corp......................................... 185,281
35,450 Union Camp Corp....................................... 2,293,172
26,850 Westvaco Corp......................................... 755,156
79,500 Weyerhaeuser Co....................................... 3,984,938
35,000 Willamette Industries, Inc............................ 1,222,813
------------
39,413,454
------------
PHOTOGRAPHY - 0.25%
130,750 Eastman Kodak Co...................................... 9,487,547
35,300 Polaroid Corp......................................... 750,125
------------
10,237,672
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----
<S> <C> <C>
POLLUTION CONTROL - 0.34%
83,300 Browning-Ferris Industries Inc........................ $ 2,457,350
97,400 Laidlaw Inc........................................... 967,913
224,150 Waste Management, Inc................................. 9,610,431
------------
13,035,694
------------
PUBLISHING - NEWS - 0.45%
35,600 Dow Jones & Co., Inc.................................. 1,702,125
116,400 Gannett Co., Inc...................................... 7,515,075
42,400 Knight-Ridder, Inc.................................... 2,180,950
77,200 New York Times Co. Class A............................ 2,398,025
24,232 Times Mirror Co....................................... 1,420,601
36,300 Tribune Co............................................ 2,327,738
------------
17,544,514
------------
PUBLISHING/PRINTING - 0.28%
50,800 Deluxe Corp........................................... 1,765,300
74,100 Dun & Bradstreet Corp New............................. 2,236,893
19,217 Harcourt General, Inc................................. 994,480
30,100 McGraw-Hill, Inc...................................... 2,693,950
21,600 Moore Corp. Ltd....................................... 236,250
71,800 R R Donnelley and Son................................. 3,047,013
------------
10,973,886
------------
RAILROAD - 0.57%
205,551 Burlington Northern Santa Fe.......................... 6,988,733
115,900 CSX Corp.............................................. 4,831,581
170,400 Norfolk Southern Corp................................. 5,175,900
103,600 Union Pacific Corp.................................... 5,037,550
------------
22,033,764
------------
RESTAURANTS - 0.64%
55,800 Darden Restaurants, Inc............................... 882,337
285,000 McDonald's Corp....................................... 19,967,813
72,620* Tricon Global Restaurants, Inc........................ 3,308,749
30,000 Wendy's International, Inc............................ 600,000
------------
24,758,899
------------
SAVINGS & LOAN - 0.30%
23,500 Golden West Financial Corp............................ 2,225,156
246,443 Washington Mutual, Inc................................ 9,549,666
------------
11,774,822
------------
SECURITIES RELATED - 1.07%
45,700 Bear Stearns Co. Inc.................................. 1,919,400
97,650 Charles Schwab Corp................................... 5,505,019
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 9
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
SECURITIES RELATED - Continued
95,500 Franklin Resources, Inc............................... $ 4,082,625
45,600 Lehman Brothers Hldings, Inc.......................... 2,277,150
134,900 Merrill Lynch & Co., Inc.............................. 10,117,500
249,201 Morgan Stanley, Dean Witter,
Discover and Co...................................... 17,381,771
------------
41,283,465
------------
SEMICONDUCTOR EQUIPMENT - 0.19%
158,000* Applied Materials, Inc................................ 6,122,500
35,600* KLA-Tencor Corp....................................... 1,212,625
------------
7,335,125
------------
SEMICONDUCTORS - 2.93%
58,600 Advanced Micro Devices, Inc........................... 1,622,487
683,300 Intel Corp............................................ 73,540,163
55,500* LSI Logic Corp........................................ 860,250
93,300* Micron Technology, Inc................................ 3,854,456
244,700 Motorola, Inc......................................... 15,171,400
95,800* National Semiconductor Corp........................... 1,377,125
95,400 Rockwell International Corp........................... 4,668,638
159,600 Texas Instruments Inc................................. 12,189,450
------------
113,283,969
------------
TELECOMMUNICATIONS - 3.37%
217,800* Airtouch Communications, Inc.......................... 12,455,437
96,500 ALLTEL Corp........................................... 5,114,500
32,335* Andrew Corp........................................... 517,360
54,300 Frontier Corp......................................... 1,635,788
32,800 Harris Corp........................................... 1,244,350
546,580 Lucent Technologies, Inc.............................. 47,040,041
734,612* MCI Worldcom Inc...................................... 43,342,079
89,900* Nextel Communications, Inc. Class A................... 1,932,850
257,040 Northern Telecom Ltd.................................. 12,000,555
29,500 Scientific-Atlanta, Inc............................... 571,563
80,100* Tellabs, Inc.......................................... 4,330,406
------------
130,184,929
------------
TEXTILE - PRODUCTS - 0.08%
26,100 Russell Corp.......................................... 621,506
48,800 V F Corp.............................................. 2,394,250
------------
3,015,756
------------
TOBACCO - 1.52%
994,200 Philip Morris Cos Inc................................. 55,613,063
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
TOBACCO - Continued
94,300 UST Inc............................................... $ 3,276,925
------------
58,889,988
------------
UTILITIES - COMMUNICATION - 5.63%
726,026 A T & T Corp.......................................... 45,240,495
461,500 Ameritech Corp........................................ 24,978,688
655,010 Bell Atlantic Corp.................................... 36,434,931
392,000 BellSouth Corp........................................ 34,202,000
413,000 GTE Corp.............................................. 25,606,000
797,758 SBC Communications, Inc............................... 38,242,524
140,800 Sprint Corp. FON Group................................ 10,243,200
176,000 Sprint Corp. PCS Group................................ 2,816,000
------------
217,763,838
------------
UTILITIES - ELECTRIC - 2.50%
71,700* AES Corp.............................................. 3,280,275
43,700 Ameren Corp........................................... 1,799,893
72,900 American Electric Power, Inc.......................... 3,380,738
35,200 Baltimore Gas and Electric Co......................... 1,080,200
60,100 Carolina Power & Light Co............................. 2,787,137
123,800 Central & South West Corp............................. 3,404,500
42,964 Cinergy Corp.......................................... 1,484,943
114,200 Consolidated Edison, Inc.............................. 5,802,787
42,300 DTE Energy Co......................................... 1,845,337
57,650 Dominion Resources, Inc............................... 2,662,709
154,451 Duke Energy Corp...................................... 9,662,841
170,200 Edison International.................................. 4,680,500
138,300 Entergy Corp.......................................... 4,053,919
87,100 FPL Group, Inc........................................ 5,334,875
80,700 FirstEnergy Corp...................................... 2,496,656
32,600 GPU Inc............................................... 1,428,288
116,279 Houston Industries, Inc............................... 3,677,323
44,900 New Century Energies, Inc............................. 2,158,006
37,500* Niagara Mohawk Power Corp............................. 576,563
52,000 Northern States Power Co.............................. 1,413,750
91,300 Peco Energy Co........................................ 3,663,413
161,800 P G & E Corp.......................................... 5,005,688
42,264 P P & L Resources Inc................................. 1,154,336
121,600 PacifiCorp............................................ 2,280,000
94,950 Public Serv Enterprise Group.......................... 3,703,050
279,700 Southern Co........................................... 8,251,150
142,220 Texas Utilities Co.................................... 6,337,679
83,800 Unicom Corp........................................... 3,158,213
------------
96,564,769
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -------------
<S> <C> <C>
UTILITIES - GAS, DISTRIBUTION - 0.03%
23,700 NICOR Inc............................................. $ 996,881
-------------
UTILITIES - GAS, PIPELINE - 0.54%
37,800 Columbia Energy Group................................. 2,145,150
44,100 Consolidated Natural Gas Co........................... 2,395,181
142,000 Enron Corp............................................ 7,463,875
18,300 ONEOK Inc............................................. 637,069
2,200 Peoples Energy Corp................................... 82,913
94,262 Sempra Energy......................................... 2,362,441
196,500 Williams Companies, Inc............................... 5,661,656
-------------
20,748,285
-------------
TOTAL COMMON STOCK
(Cost $1,821,768,439)................................. 3,835,442,745
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
- -----
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 0.67%
AUTO - CARS - 0.21%
$7,950,000 Hertz Corp.,
5.05% due 12/07/1998................................. 7,943,308
------------
FINANCE COMPANIES - 0.46%
11,652,000 Ford Credit Europe PLC,
4.94 12/01/1998...................................... 11,652,000
6,308,000 General Electric Cap Svcs Inc.,
4.95% due 12/03/1998................................. 6,306,264
------------
17,958,264
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $25,901,572).................................... 25,901,572
------------
UNITED STATES GOVERNMENT
SHORT TERM - 0.06%
U. S. TREASURY BILLS - 0.06%
2,475,000 United States Treasury Bills,
3.25% due 12/03/1998.................................. 2,463,794
------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $2,463,794)..................................... 2,463,794
------------
</TABLE>
<PAGE>
================================================================================
STOCK INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
10 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
MARKET
VALUE
--------------
<S> <C>
TOTAL INVESTMENTS
(Cost $1,850,133,805) - 99.87%....................... $3,863,808,111
Other assets less liabilities,
net - 0.13%......................................... 4,870,753
--------------
NET ASSETS (equivalent
to $35.73 per share on
108,284,238 shares
outstanding) - 100%................................. $3,868,678,864
==============
* Non-income producing
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
--------- ------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 11/30/98)
81 (2) S&P 500 Index Futures
(December/$1,166.90)................................ $ 112,450
============
(1)U.S.Treasury Bills with a market value of
approximately $2,175,000 were maintained in a
segregated account with a portion placed as
collateral for futures contracts.
(2)Per 250
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
108,284,238 shares outstanding................................ $ 1,082,842
Additional paid in capital..................................... 1,816,182,773
Accumulated net realized gain on securities.................... 37,099,937
Undistributed net investment income............................ 526,556
Unrealized appreciation of:
Investments........... $2,013,674,306
Futures .............. 112,450 2,013,786,756
-------------- ---------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING.................................................. $ 3,868,678,864
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
STOCK INDEX FUND - FINANCIAL STATEMENTS (Unaudited) 11
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends ........................................................ $ 26,050,437
Interest ......................................................... 686,813
------------
Total investment income ........................................ 26,737,250
------------
EXPENSES:
Advisory fees .................................................... 4,696,528
Custodian and accounting services ................................ 416,470
Reports to shareholders .......................................... 296,034
Audit fees and tax services ...................................... 64,696
Directors' fees and expenses ..................................... 48,092
Miscellaneous .................................................... 92,748
------------
Total expenses ................................................. 5,614,568
------------
NET INVESTMENT INCOME ............................................ 21,122,682
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain (loss) on:
Investments .................................... $ 22,720,875
Futures contracts .............................. (836,664) 21,884,211
------------
Net unrealized appreciation of securities during
the period:
Investments .................................... 226,993,838
Futures contracts .............................. 503,287 227,497,125
------------ ------------
Net realized and unrealized gain on securities
during the period ............................................. 249,381,336
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. $270,504,018
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................................ $ 21,122,682 $ 39,567,862
Net realized gain on securities .............................. 21,884,211 16,742,928
Net unrealized appreciation of securities during the period... 227,497,125 713,815,081
--------------- ---------------
Increase in net assets resulting from operations ........... 270,504,018 770,125,871
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................ (20,974,037) (39,570,522)
Net realized gain on securities .............................. _ (14,847,655)
--------------- ---------------
Decrease in net assets resulting from distributions
to shareholders ........................................... (20,974,037) (54,418,177)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ............................. 179,639,812 367,059,600
Proceeds from capital stock issued for distributions
reinvested ................................................. 20,974,037 54,418,177
--------------- ---------------
.............................................................. 200,613,849 421,477,777
Cost of capital stock repurchased ............................ (64,119,789) (98,730,173)
--------------- ---------------
Increase in net assets resulting from capital stock
transactions .............................................. 136,494,060 322,747,604
--------------- ---------------
TOTAL INCREASE IN NET ASSETS ................................. 386,024,041 1,038,455,298
NET ASSETS:
Beginning of period .......................................... 3,482,654,823 2,444,199,525
--------------- ---------------
End of period (including undistributed net investment income
of $526,556 and $377,911) .................................. $ 3,868,678,864 $ 3,482,654,823
=============== ===============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ................................. 5,303,538 12,118,343
Shares issued for distributions reinvested ................... 622,269 1,806,919
Shares of capital stock repurchased .......................... (1,975,116) (3,279,150)
--------------- ---------------
Increase in shares outstanding ............................. 3,950,691 10,646,112
Shares outstanding:
Beginning of period ........................................ 104,333,547 93,687,435
--------------- ---------------
End of period .............................................. 108,284,238 104,333,547
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS
12 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCKS - 98.00%
ADVERTISING - 0.25%
53,000* Snyder Communications, Inc............................ $ 1,884,813
------------
AEROSPACE/DEFENSE - 1.01%
32,480 Gencorp Inc........................................... 799,820
49,100* SCI Systems, Inc...................................... 2,387,488
8,000* Sequa Corp. Class A................................... 509,000
51,674 Sunstrand Corp........................................ 2,790,396
30,320 Teleflex Inc.......................................... 1,288,600
------------
7,775,304
------------
AIRLINES - 0.22%
22,021* Alaska Air Group, Inc................................. 824,411
24,574 ASA Holdings, Inc..................................... 833,980
------------
1,658,391
------------
APPAREL & PRODUCTS - 1.55%
49,900* Abercrombie and Fitch Co.............................. 2,794,400
87,206 Cintas Corp........................................... 4,796,330
40,971 Claire's Stores, Inc.................................. 696,507
27,224* Land's End, Inc....................................... 614,241
41,500 Ross Stores, Inc...................................... 1,509,563
60,700 Warnaco Group Inc. Class A............................ 1,502,325
------------
11,913,366
------------
APPLIANCES/FURNISHINGS - 0.88%
44,959 Heilig-Meyers Co...................................... 314,713
37,801 Lancaster Colony Corp................................. 1,039,528
161,852 Leggett & Platt, Inc.................................. 3,672,017
80,156 Herman Miller, Inc.................................... 1,703,315
------------
6,729,573
------------
AUTO - CARS - 0.87%
135,040 Harley-Davidson, Inc.................................. 5,646,360
56,700 Meritor Automotive, Inc............................... 1,002,881
------------
6,649,241
------------
AUTO - ORIGINAL EQUIPMENT - 1.28%
20,125 Arvin Industries, Inc................................. 845,250
24,700 Carlisle Cos Inc...................................... 1,094,519
39,036 Donaldson Co., Inc.................................... 780,720
43,270 Federal-Mogul Corp.................................... 2,455,573
60,700* Lear Corp............................................. 2,344,538
50,245 Mark IV Industries, Inc............................... 847,884
24,928 Modine Manufacturing Co............................... 909,872
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
AUTO - ORIGINAL EQUIPMENT - Continued
23,200 Superior Industries International, Inc................ $ 603,200
------------
9,881,556
------------
AUTO - REPLACEMENT PARTS - 0.37%
31,642 Kaydon Corp........................................... 1,117,358
29,500* SPX Corp.............................................. 1,711,000
------------
2,828,358
------------
BANKS - OTHER - 0.70%
115,804 First Tennessee National Corp......................... 3,879,434
116,900 Sovereign Bancorp, Inc................................ 1,497,781
------------
5,377,215
------------
BANKS - REGIONAL - 6.49%
53,600 Associated Banc-Corp.................................. 1,829,100
33,700 CCB Financial Corp.................................... 1,828,225
38,455 City National Corp.................................... 1,437,256
98,572 Crestar Financial Corp................................ 6,542,717
153,511 First Security Corp................................... 3,089,409
41,762 First Virginia Banks, Inc............................. 1,874,070
84,700 GreenPoint Financial Corp............................. 3,223,894
122,700 Hibernia Corp. Class A................................ 2,070,562
86,948 Marshall & Ilsley Corp................................ 4,428,914
58,934 Mercantile Bankshares Corp............................ 2,070,057
132,550 North Fork Bancorporation Inc......................... 2,791,834
85,859 Old Kent Financial Corp............................... 3,691,937
65,968 Pacific Century Financial Corp........................ 1,410,066
35,000 Provident Financial Group............................. 1,417,500
138,930 SouthTrust Corp....................................... 5,105,677
79,800 TCF Financial Corp.................................... 1,930,163
28,178 Wilmington Trust Corp................................. 1,634,324
67,800 Zions Bancorporation.................................. 3,423,900
------------
49,799,605
------------
BROADCASTING - 0.56%
100,456 A.H. Belo Corp........................................ 1,896,107
26,592* Chris-Craft Industries, Inc........................... 1,229,880
40,632 TCA Cable TV, Inc..................................... 1,158,012
------------
4,283,999
------------
BUILDING MATERIALS - 1.64%
18,566 CalMat Co............................................. 570,905
36,800 Fastenal Co........................................... 1,518,000
49,050 Hon Industries Inc.................................... 1,164,938
43,600 Martin Marietta Materials............................. 2,114,600
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
BUILDING MATERIALS - Continued
80,556 RPM, Inc.............................................. $ 1,319,104
34,900 Southdown, Inc........................................ 2,032,925
30,500 Vulcan Materials Co................................... 3,823,938
------------
12,544,410
------------
CHEMICAL - MAJOR - 0.51%
36,345 Albemarle Corp........................................ 676,926
19,400 Borg-Warner Automotive, Inc........................... 967,575
99,500 Solutia Inc........................................... 2,226,312
------------
3,870,813
------------
CHEMICAL - MISCELLANEOUS - 1.71%
53,200 Airgas, Inc........................................... 538,650
63,437 Crompton & Knowles Corp............................... 1,229,092
36,000* Cytec Industries, Inc................................. 812,250
19,368 Dexter Corp........................................... 620,987
66,900 Ethyl Corp............................................ 388,856
36,170 Ferro Corp............................................ 1,010,499
11,264 H.B. Fuller Co........................................ 489,984
26,933 Georgia Gulf Corp..................................... 504,994
50,436 M.A. Hanna Co......................................... 709,256
31,393 Lawter International, Inc............................. 258,992
52,719 Lubrizol Corp......................................... 1,430,003
72,678 Lyondell Chemical Co.................................. 1,353,628
18,500 Minerals Technologies Inc............................. 811,688
5,955 NCH Corp.............................................. 333,480
40,442 Olin Corp............................................. 1,236,009
32,025 Rollins, Inc.......................................... 546,427
38,073 A. Schulman, Inc...................................... 813,810
------------
13,088,605
------------
CONGLOMERATES - 1.48%
39,698 Alexander & Baldwin, Inc.............................. 913,054
94,100 Dial Corp............................................. 2,470,125
40,300* Litton Industries, Inc................................ 2,465,856
7,900* MAXXAM, Inc........................................... 385,619
45,900 Ogden Corp............................................ 1,219,219
81,300 Viad Corp............................................. 1,895,306
87,600 Whitman Corp.......................................... 1,981,950
------------
11,331,129
------------
CONTAINERS - PAPER - 0.43%
17,414 Chesapeake Corp....................................... 604,048
</TABLE>
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 13
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
CONTAINERS - PAPER - Continued
88,979 Sonoco Products Co.................................... $ 2,663,809
------------
3,267,857
------------
DRUGS - 5.04%
25,000* Agouron Pharmaceuticals, Inc.......................... 1,090,625
45,280 Bergen Brunswig Corp. Class A......................... 2,818,680
64,252 Biogen, Inc........................................... 4,875,121
38,046 Carter-Wallace Inc.................................... 675,317
62,688* Centocor, Inc......................................... 2,538,864
147,280 Chiron Corp........................................... 3,332,210
53,425* Covance Inc........................................... 1,335,625
69,982* Forest Laboratories, Inc.............................. 3,262,911
71,042* Genzyme Corp.......................................... 2,988,204
7,680* Genzyme Corp.......................................... 26,879
57,700 ICN Pharmaceuticals, Inc.............................. 1,456,925
109,736* IVAX Corp............................................. 1,042,492
79,700 McKesson Corp......................................... 5,673,644
107,634* Mylan Laboratories Inc................................ 3,572,103
74,200* Watson Pharmaceuticals, Inc........................... 3,997,525
------------
38,687,125
------------
ELECTRIC PRODUCTS -
MISCELLANEOUS - 0.06%
26,716 CMP Group Inc......................................... 479,218
------------
ELECTRICAL EQUIPMENT - 1.99%
84,186* American Power Conversion............................. 3,483,196
29,031 AMETEK, Inc........................................... 602,393
93,600* FORE Systems, Inc..................................... 1,415,700
55,070 Hubbell Inc. Class B.................................. 2,220,009
129,657 Molex Inc............................................. 4,675,756
68,746* Teradyne, Inc......................................... 2,204,169
37,800* UCAR International, Inc............................... 687,487
------------
15,288,710
------------
ELECTRONIC INSTRUMENTS - 1.15%
80,552* Arrow Electronics, Inc................................ 1,752,006
33,250* Imation Corp.......................................... 540,313
66,400 Integrated Device Technology.......................... 390,100
25,621* MagnaTek, Inc......................................... 291,439
33,800 Pittston Brink's Group................................ 1,014,000
60,979* Sensormatic Electronics Corp.......................... 495,454
52,813 Symbol Technologies, Inc.............................. 2,574,634
24,616 Varian Associates, Inc................................ 973,871
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
ELECTRONIC INSTRUMENTS - Continued
55,513* Vishay Intertechnology, Inc........................... $ 787,591
------------
8,819,408
------------
ENTERTAINMENT - 0.11%
34,100* GTECH Holdings Corp................................... 854,631
------------
FERTILIZERS - 0.28%
92,946 IMC Global, Inc....................................... 2,126,140
------------
FINANCE COMPANIES - 0.68%
71,000 Finova Group, Inc..................................... 3,749,688
44,600 Keystone Financial, Inc............................... 1,443,925
------------
5,193,613
------------
FOODS - 3.16%
35,382 Dean Foods Co......................................... 1,609,881
49,209 Dole Food Co., Inc.................................... 1,556,235
27,036 Dreyer's Grand Ice Cream, Inc......................... 368,366
89,404 Flowers Industries, Inc............................... 2,039,529
62,500 Hormel Foods Corp..................................... 1,847,656
84,100 IBP, Inc.............................................. 2,134,037
15,012 International Multifoods Corp......................... 381,868
60,100 Interstate Bakeries Corp.............................. 1,577,625
32,971 Lance, Inc............................................ 649,117
68,778 McCormick & Co., Inc.................................. 2,295,466
22,871 J.M. Smucker Co. Class A.............................. 531,751
35,521 Trinity Industries, Inc............................... 1,374,219
192,486 Tyson Foods, Inc. Class A............................. 3,982,054
42,400* U. S. Foodservices.................................... 1,947,750
44,258 Universal Foods Corp.................................. 1,098,152
37,500* Vlasic Foods Int'l Inc................................ 810,937
------------
24,204,643
------------
FOOTWEAR - 0.27%
28,800* Nine West Group, Inc.................................. 360,000
34,500* Payless ShoeSource, Inc............................... 1,681,875
------------
2,041,875
------------
FREIGHT - 0.30%
47,846 Airborne Freight Corp................................. 1,276,890
29,300 J.B. Hunt Transport Services.......................... 556,700
30,271 Overseas Shipholding Group Inc........................ 478,660
------------
2,312,250
------------
FUNERAL SERVICES - 0.26%
90,400 Stewart Enterprises Inc............................... $ 2,017,050
------------
HEALTHCARE - 3.95%
98,800 Allegiance Corp....................................... 3,982,875
53,900* Apria Healthcare Group, Inc........................... 377,300
426* Coram Healthcare Corp................................. 799
52,372* First Health Group Corp............................... 834,679
99,649* Foundation Health Systems Class A..................... 1,376,402
208,200* Health Management Assoc............................... 4,515,337
53,500* Lincare Holdings Inc.................................. 1,845,750
49,391* NovaCare, Inc......................................... 154,347
79,300* Omnicare, Inc......................................... 2,269,962
66,300* Oxford Health Plans, Inc.............................. 733,444
40,574* PacifiCare Health System, Inc. Class B................ 3,055,730
67,400* Quintiles Transnational Corp.......................... 3,361,575
73,500* Quorum Health Group Inc............................... 1,221,937
55,000* Steris Corp........................................... 1,474,687
80,200* Sybron International Corp............................. 1,994,975
65,000* Total Renal Care Holdings............................. 1,726,563
36,300* Trigon Healthcare, Inc................................ 1,345,369
------------
30,271,731
------------
HEAVY DUTY TRUCKS/PARTS - 0.23%
18,600 Bandag, Inc........................................... 657,975
45,904 Federal Signal Corp................................... 1,121,779
------------
1,779,754
------------
HOME BUILDERS - 0.20%
97,425 Clayton Homes, Inc.................................... 1,510,088
------------
HOSPITAL MANAGEMENT - 0.18%
85,200* Beverly Enterprises, Inc.............................. 489,900
58,400* Concentra Managed Care, Inc........................... 689,850
64,600* Medaphis Corp......................................... 185,725
------------
1,365,475
------------
HOSPITAL SUPPLIES - 1.44%
29,835* Acuson Corp........................................... 417,690
27,533 Beckman Coulter Inc................................... 1,328,467
52,500 DENTSPLY International Inc............................ 1,410,937
56,400 Hillenbrand Industries, Inc........................... 3,204,225
63,800* PSS World Medical, Inc................................ 1,323,850
1* SonoSight, Inc........................................ 10
</TABLE>
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
14 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
HOSPITAL SUPPLIES - Continued
78,982 Stryker Corp.......................................... $ 3,336,990
------------
11,022,169
------------
HOUSEHOLD PRODUCTS - 0.95%
123,300* Bed Bath & Beyond, Inc................................ 3,845,419
16,014 Church & Dwight Co., Inc.............................. 553,484
32,446 First Brands Corp..................................... 1,214,697
50,800 Premark International Inc............................. 1,704,975
------------
7,318,575
------------
HUMAN RESOURCES - 1.02%
31,303 Kelly Services Inc. Class A........................... 909,743
66,400 Manpower Inc.......................................... 1,477,400
90,500* Modis Professional Services........................... 1,080,344
66,650 Olsten Corp........................................... 499,875
82,700* Robert Half International, Inc........................ 3,886,900
------------
7,854,262
------------
INFORMATION PROCESSING - 0.30%
40,400* Comverse Technology, Inc.............................. 2,323,000
------------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 0.69%
37,200* Citrix Systems, Inc................................... 3,087,600
149,700* Informix Corp......................................... 809,316
79,900* Platinum Technology, Inc.............................. 1,413,231
------------
5,310,147
------------
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 1.00%
56,800* Lexmark Intl Group, Inc............................... 4,338,100
16,971 OEA, Inc.............................................. 221,684
140,492* Quantum Corp.......................................... 3,108,385
------------
7,668,169
------------
INFORMATION PROCESSING -
COMPUTER SERVICES - 5.18%
375,600* America Online, Inc................................... 32,888,475
54,000* Cambridge Technology Partner.......................... 1,127,250
82,852* Sterling Commerce Inc................................. 3,003,386
84,400* SunGard Data Systems, Inc............................. 2,700,800
------------
39,719,911
------------
INFORMATION PROCESSING -
CONSUMER SOFTWARE - 1.13%
49,500* Intuit................................................ $ 2,864,813
113,550* Networks Associates, Inc.............................. 5,776,856
------------
8,641,669
------------
INFORMATION PROCESSING -
DATA SERVICES - 6.31%
47,073 A.C. Nielson.......................................... 1,297,450
122,016 Comdisco, Inc......................................... 2,226,792
154,900* Compuware Corp........................................ 9,642,525
56,551 Diebold, Inc.......................................... 1,943,941
54,800* Electronic Arts....................................... 2,308,450
73,096* Fiserv, Inc........................................... 3,229,930
23,768* Information Resources, Inc............................ 199,057
57,600* Keane, Inc............................................ 1,656,000
53,407* Mentor Graphics Corp.................................. 460,635
90,073* NCR Corp.............................................. 3,355,219
62,400* NOVA Corp............................................. 1,985,100
30,036* Policy Management Systems............................. 1,535,590
71,808 Reynolds and Reynolds Co. Class A..................... 1,516,944
35,025* Sequent Computer Systems, Inc......................... 446,569
78,900* Siebel Systems, Inc................................... 1,913,325
100,300* Solectron Corp........................................ 6,638,606
70,800* Sterling Software, Inc................................ 1,823,100
87,780* Storage Technology Corp............................... 3,072,300
27,695 Structural Dynamic Research Corp...................... 482,931
46,212* Symantec Corp......................................... 924,240
43,800* Tech Data Corp........................................ 1,762,950
------------
48,421,654
------------
INSURANCE - CASUALTY - 0.25%
48,333 American Financial Group, Inc......................... 1,900,091
------------
INSURANCE - MISCELLANEOUS - 1.10%
63,700 AMBAC Financial Group Inc............................. 3,885,700
23,799 HSB Group Inc......................................... 984,684
47,700 Protective Life Corp.................................. 1,857,319
30,800 PMI Group Inc......................................... 1,684,375
------------
8,412,078
------------
INSURANCE - MULTILINE - 1.88%
225,250 AFLAC Inc............................................. 8,306,094
108,500 Old Republic International Corp....................... 2,312,406
81,300 Reliastar Financial Corp.............................. 3,821,100
------------
14,439,600
------------
LEISURE TIME - 0.53%
61,300 Callaway Golf Co...................................... $ 819,887
77,925* Circus Circus Enterprises............................. 901,008
100,402 International Game Technology......................... 2,315,521
------------
4,036,416
------------
LODGING - 0.31%
70,457* Promus Hotel Corp..................................... 2,351,503
------------
MACHINERY - AGRICULTURE - 0.05%
49,000 AGCO Corp............................................. 401,188
------------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.20%
22,456 Granite Construction, Inc............................. 725,610
21,268* Jacobs Engineering Group, Inc......................... 801,537
------------
1,527,147
------------
MACHINERY - INDUSTRIAL/SPECIALTY - 1.17%
24,818 Albany International Corp. Class A ................... 471,542
60,000* American Standard Companies........................... 2,055,000
29,822 Cordant Technologies Inc.............................. 1,198,472
38,218 Flowserve Corp........................................ 678,369
33,000 Newport News Shipbuilding............................. 928,125
16,514 Nordson Corp.......................................... 788,543
26,133 Stewart & Stevenson Services.......................... 259,697
17,900 Tecumseh Products Co. Class A......................... 886,050
55,292 Tidewater, Inc........................................ 1,275,172
22,224 Watts Industries, Inc. Class A........................ 420,867
------------
8,961,837
------------
MERCHANDISE - DRUG - 0.07%
63,000* Perrigo Co............................................ 527,625
------------
MERCHANDISE - SPECIALTY - 2.89%
30,686* BJ's Wholesale Club Inc............................... 1,183,329
56,200* Barnes & Noble, Inc................................... 1,861,625
84,500* Best Buy Co., Inc..................................... 4,869,313
74,900* CompUSA, Inc.......................................... 1,109,456
13,764 Enesco Group Inc...................................... 332,056
68,100* General Nutrition Cos., Inc........................... 1,208,775
29,500* Micro Warehouse, Inc.................................. 807,562
204,837* Office Depot, Inc..................................... 6,657,203
121,700* OfficeMax, Inc........................................ 1,293,063
45,311 Sotheby's Holdings, Inc. Class A...................... 1,268,708
34,236 Tiffany & Co.......................................... 1,495,685
</TABLE>
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 15
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
19,515 US Office Products, Co................................ $ 107,333
------------
22,194,108
------------
MERCHANDISING - DEPARTMENT - 0.62%
63,600* Borders Group, Inc.................................... 1,542,300
117,004* Saks Holding, Inc..................................... 3,217,610
------------
4,759,910
------------
MERCHANDISING - FOOD - 0.31%
34,700 Hannaford Bros. Co.................................... 1,622,225
37,300 Ruddick Corp.......................................... 729,681
------------
2,351,906
------------
MERCHANDISING - MASS - 0.69%
54,200* Dollar Tree Stores Inc................................ 2,459,325
140,920 Family Dollar Stores, Inc............................. 2,827,208
------------
5,286,533
------------
METALS - MISCELLANEOUS - 0.19%
24,406 Kennametal, Inc....................................... 520,153
22,050 Precision Castparts Corp.............................. 974,334
------------
1,494,487
------------
METALS - STEEL - 0.52
49,000 AK Steel Holding Corp................................. 940,188
16,910 Carpenter Technology Corp............................. 597,134
9,257 Cleveland-Cliffs Inc.................................. 352,345
41,542 Harsco Corp........................................... 1,344,922
24,885 Inland Steel Industries, Inc.......................... 455,707
21,123 Oregon Steel Mills, Inc............................... 267,998
------------
3,958,294
------------
MISCELLANEOUS - 0.17%
64,100* Corrections Corp. of America.......................... 1,314,052
------------
MULTIMEDIA - 1.00%
177,656* Cadence Design Systems, Inc........................... 4,996,575
56,300* Synopsys Inc.......................................... 2,667,213
------------
7,663,788
------------
NATURAL GAS-DIVERSIFIED - 0.92%
103,600 El Paso Energy Corp................................... 3,535,350
41,500 K N Energy, Inc....................................... 1,815,625
67,486 Questar Corp.......................................... 1,294,888
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
NATURAL GAS-DIVERSIFIED - Continued
52,032* Seagull Energy Corp................................... $ 426,012
------------
7,071,875
------------
OIL - INTEGRATED DOMESTIC - 0.06%
32,214 Quaker State Corp..................................... 461,063
------------
OIL - INTEGRATED INTERNATIONAL - 0.19%
37,246 Murphy Oil Corp....................................... 1,485,184
------------
OIL - SERVICE - PRODUCTS - 0.55%
67,142 BJ Services Co........................................ 927,399
107,700* Noble Drilling Corp................................... 1,245,281
65,525* Parker Drilling Co.................................... 245,719
52,472* Varco International, Inc.............................. 357,465
79,667* Weatherford International Inc......................... 1,453,923
------------
4,229,787
------------
OIL - SERVICES - 1.18%
116,700 ENSCO International, Inc.............................. 1,115,944
140,415* Global Marine Inc..................................... 1,316,391
82,739* Nabors Industries, Inc................................ 1,096,292
40,346* Smith International, Inc.............................. 973,347
90,300 Transocean Offshore, Inc.............................. 2,229,281
47,146 Witco Corp............................................ 898,720
34,000 York International Corp............................... 1,428,000
------------
9,057,975
------------
OIL/GAS PRODUCERS - 1.10%
55,580 Cabot Corp............................................ 1,674,348
52,235 Noble Affiliates, Inc................................. 1,322,198
92,870* Ocean Energy, Inc..................................... 754,569
86,200 Pioneer Natural Resources Corp........................ 1,142,150
92,766* Ranger Oil Ltd........................................ 440,639
82,480 Ultramar Diamond Shamrock............................. 2,123,860
45,391 Valero Energy Corp.................................... 953,210
------------
8,410,974
------------
PAPER/FOREST PRODUCTS - 1.41%
48,939 Bowater Inc........................................... 1,933,091
73,670 Consolidated Papers, Inc.............................. 1,883,189
85,800 Georgia-Pacific Corp. Timber Group.................... 1,973,400
33,300 P. H. Glatfelter Co................................... 428,737
42,639 Longview Fibre Co..................................... 482,354
31,176 Pentair Inc........................................... 1,174,946
23,100 Rayonier Inc.......................................... 981,750
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- ------------
<S> <C> <C>
PAPER/FOREST PRODUCTS - Continued
23,370 Standard Register Co.................................. $ 687,954
57,116 Unisource Worldwide, Inc.............................. 449,789
48,861 Wausau-Mosinee Paper Corp............................. 824,530
------------
10,819,740
------------
POLLUTION CONTROL - 0.85%
149,100* Allied Waste Industries, Inc.......................... 3,037,912
33,033 Calgon Carbon Corp.................................... 239,489
147,212 US Filter Corp........................................ 3,257,066
------------
6,534,467
------------
PUBLISHING - NEWS - 0.86%
36,100 Lee Enterprises, Inc.................................. 1,010,800
22,168 Media General, Inc. Class A........................... 1,051,595
8,561 Washington Post Co. Class B........................... 4,556,057
------------
6,618,452
------------
PUBLISHING/PRINTING - 0.44%
24,486 Banta Corp............................................ 651,940
29,232 Houghton Mifflin Co................................... 1,224,091
13,300* Scholastic Corp....................................... 633,413
37,028 Wallace Computer Services, Inc........................ 830,817
------------
3,340,261
------------
RAILROAD - 0.90%
43,324 GATX Corp............................................. 1,638,189
105,696 Kansas City Southern Ind.............................. 4,511,898
41,800* Wisconsin Central Transport........................... 757,625
------------
6,907,712
------------
RESTAURANTS - 1.30%
36,633 Bob Evans Farms, Inc.................................. 886,061
53,855* Brinker International, Inc............................ 1,369,937
36,732* Buffets, Inc.......................................... 431,601
56,466 Cracker Barrel , Inc.................................. 1,312,835
33,100* Lone Star Steakhouse & Saloon......................... 252,388
46,600* Outback Steakhouse Inc................................ 1,654,300
16,888* Sbarro, Inc........................................... 439,088
78,800* Starbucks Corp........................................ 3,634,650
------------
9,980,860
------------
SAVINGS & LOAN - 0.90%
142,065 Charter One Financial, Inc............................ 4,217,555
</TABLE>
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
16 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
SAVINGS & LOAN - Continued
99,700 Dime Bancorp, Inc. ...................... $ 2,648,281
-----------
6,865,836
-----------
SECURITIES RELATED - 1.27%
115,514 A.G. Edwards, Inc. ...................... 4,259,579
133,300 Paine Webber Group Inc. ................. 5,448,637
-----------
9,708,216
-----------
SEMICONDUCTOR EQUIPMENT - 0.20%
43,400* Microchip Technology, Inc. .............. 1,510,863
-----------
SEMICONDUCTORS - 3.13%
81,040* Altera Corp. ............................ 3,976,025
133,238* Analog Devices, Inc. .................... 2,723,045
81,700* Atmel Corp. ............................. 990,613
36,788 Avnet, Inc. ............................. 2,140,602
56,136* Cirrus Logic, Inc. ...................... 691,175
87,982* Cypress Semiconductor Corp. ............. 896,317
68,054 Linear Technology Corp. ................. 4,768,033
116,500* Maxim Integrated Products ............... 4,572,625
64,681* Xilinx, Inc. ............................ 3,282,561
-----------
24,040,996
-----------
TELECOMMUNICATIONS - 1.19%
111,628* ADC Communications, Inc. ................ 3,334,886
48,242 COMSAT Corp. ............................ 1,718,621
61,500* QUALCOMM, Inc. .......................... 3,374,813
30,540 Vanguard Cellular Systems Class A ....... 702,420
-----------
9,130,740
-----------
TEXTILE - PRODUCTS - 0.98%
47,600 Burlington Industries, Inc. ............. 496,825
88,700* Jones Apparel Group, Inc. ............... 2,056,731
112,423 Shaw Industries Inc. .................... 2,276,566
52,229* Unifi, Inc. ............................. 1,005,408
24,984 Wellman, Inc. ........................... 302,931
47,000 WestPoint Stevens Inc. Class A .......... 1,410,000
-----------
7,548,461
-----------
TOBACCO - 0.13%
28,935 Universal Corp. ......................... 1,018,150
-----------
TRUCKERS - 0.23%
26,114 Arnold Industries, Inc. ................. 372,125
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
TRUCKERS - Continued
39,500 CNF Transportation, Inc. ................ $ 1,409,656
-----------
1,781,781
-----------
UTILITIES - COMMUNICATION - 1.43%
28,818 Aliant Communications, Inc. ............. 821,313
74,875 Century Telephone Enterprises ........... 4,267,875
111,600 Cincinnati Bell, Inc. ................... 3,515,400
12 SBC Communications, Inc. ................ 575
54,391 Telephone and Data Systems .............. 2,325,216
-----------
10,930,379
-----------
UTILITIES - ELECTRIC - 9.26%
111,514 Allegheny Energy, Inc. .................. 3,763,598
16,279 Black Hills Corp. ....................... 401,888
18,459 Cleco Corp. ............................. 631,067
91,164 CMS Energy Corp. ........................ 4,444,245
58,800* Calenergy, Inc. ......................... 1,841,175
87,838 Conectiv, Inc. .......................... 2,020,274
139,000 DPL Inc. ................................ 2,780,000
53,821 Energy East Corp. ....................... 2,855,877
89,062 Florida Progress Corp. .................. 3,807,400
24,166 Hawaiian Electric Industries ............ 940,964
30,823 Idacorp Inc. ............................ 1,074,952
58,800 Illinova Corp. .......................... 1,591,275
22,479 Indiana Energy, Inc. .................... 508,580
62,616 Interstate Energy Corp. ................. 1,901,961
39,464 IPALCO Enterprises, Inc. ................ 1,978,133
59,019 Kansas City Power & Light Co. ........... 1,752,126
117,642 LG&E Energy Corp. ....................... 3,293,976
76,334 MidAmerican Energy Holdings Co. ......... 1,984,684
33,818 Minnesota Power Inc. .................... 1,414,015
51,357 Montana Power Co. ....................... 2,603,158
102,144 NIPSCO Industries, Inc. ................. 2,994,096
37,633 Nevada Power Co. ........................ 891,432
52,617 New England Electrical System ........... 2,196,760
104,133* Northeast Utilities ..................... 1,640,095
66,192 OGE Energy Corp. ........................ 1,849,239
73,823 Pinnacle West Capital Corp. ............. 3,363,560
101,364 Potomac Electric Power Co. .............. 2,641,799
34,237 Public Service Co. of New Mexico ........ 665,482
69,062 Puget Sound Energy Inc. ................. 1,873,307
87,688 Scana Corp. ............................. 2,860,821
104,520 TECO Energy, Inc. ....................... 2,808,975
43,488 UtiliCorp United Inc. ................... 1,530,234
35,724 Washington Gas Light Co. ................ 910,962
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
UTILITIES - ELECTRIC - Continued
103,552 Wisconsin Energy Corp. .................. $ 3,203,640
------------
71,019,750
------------
UTILITIES - GAS, DISTRIBUTION-1.48%
45,536 AGL Resources, Inc. ..................... 981,870
140,805 Keyspan Energy Corp. .................... 4,180,148
72,468 MCN Energy Group Inc. ................... 1,372,364
31,178 National Fuel Gas Co. ................... 1,432,240
128,946 Tosco Corp. ............................. 3,368,713
------------
11,335,335
------------
WATER SERVICES - 0.26%
65,200 American Water Works Co., Inc. .......... 2,017,125
------------
TOTAL COMMON STOCKS
(Cost $582,878,594) ..................... 751,522,047
------------
</TABLE>
<TABLE>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 2.12%
FINANCE COMPANIES - 1.46%
$2,600,000 Ford Motor Credit Co.,
5.05% due 12/02/98 ..................... 2,599,635
1,058,000 General Electric Capital Services, Inc.
4.95% due 12/03/98 ..................... 1,057,709
7,564,000 General Motors Acceptance Corp.,
4.86% due 12/01/98 ..................... 7,564,000
------------
11,221,344
------------
UTILITIES - ELECTRIC - 0.66%
5,076,000 Conagra.,
5.22% due 12/04/98 ..................... 5,073,792
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $16,295,136) ...................... 16,295,136
------------
UNITED STATES GOVERNMENT -
SHORT TERM - 0.11%
U. S. TREASURY BILLS - .011%
875,000 United States Treasury Bills,
4.20% due 12/31/98 ..................... 870,100
------------
</TABLE>
<PAGE>
================================================================================
MIDCAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 17
================================================================================
<TABLE>
PAR MARKET
VALUE VALUE
- ---------- -------------
<S> <C> <C>
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $870,100) ....................... $ 870,100
-------------
TOTAL INVESTMENTS
(Cost $600,043,830) - 100.23% ......... 768,687,283
Other assets less liabilities,
net - (0.23)% ........................ (1,690,783)
-------------
NET ASSETS (equivalent
to $24.79 per share on
30,941,583 shares
outstanding) - 100% .................. $ 766,996,500
=============
* Non-income producing
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------- -------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 11/30/98)
78 (2) S&P MidCap 400 Index Futures
(December/$354.70)..................... $ (139,545)
=============
(1)U.S.Treasury Bills with a market value of
approximately $750,000 were maintained in
a segregated account with a portion placed
as collateral for futures contracts
(2)Per 500
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
30,941,583 shares outstanding ................... $ 309,416
Additional paid in capital ........................ 451,691,775
Accumulated net realized gain on securities ....... 146,455,252
Undistributed net investment income ............... 36,149
Unrealized appreciation (depreciation) of:
Investments .................. $ 168,643,453
Futures ...................... (139,545) 168,503,908
------------- -------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING ....... $ 766,996,500
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
MIDCAP INDEX FUND - FINANCIAL STATEMENTS (Unaudited)
18
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ...................................................................... $ 4,633,094
Interest ....................................................................... 323,201
------------
Total investment income ...................................................... 4,956,295
------------
EXPENSES:
Advisory fees .................................................................. 1,181,632
Custodian and accounting services .............................................. 89,099
Reports to shareholders ........................................................ 59,692
Audit fees and tax services .................................................... 12,968
Directors' fees and expenses ................................................... 10,874
Miscellaneous .................................................................. 30,865
------------
Total expenses ............................................................... 1,385,130
------------
NET INVESTMENT INCOME .......................................................... 3,571,165
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain (loss) on:
Investments ..................................................... $ 80,067,104
Futures contracts ............................................... (1,347,612) 78,719,492
------------
Net unrealized depreciation during the period:
Investments ..................................................... (96,218,028)
Futures contracts ............................................... (98,820) (96,316,848)
------------ ------------
Net realized and unrealized loss on securities during the period ............ (17,597,356)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $(14,026,191)
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30,1998 May 31, 1998
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................. $ 3,571,165 $ 6,901,224
Net realized gain on securities ................................... 78,719,492 68,478,713
Net unrealized appreciation (depreciation) of securities
during the period ............................................ (96,316,848) 104,095,928
------------- -------------
Increase (decrease) in net assets resulting from operations ..... (14,026,191) 179,475,865
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. 3,577,363 (6,915,741)
Net realized gain on securities ................................... -- (39,892,715)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders .............................................. (3,577,363) (46,808,456)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold .................................. 17,273,125 54,227,081
Proceeds from capital stock issued for distributions reinvested ... 3,577,363 46,808,456
------------- -------------
20,850,488 101,035,537
Cost of capital stock repurchased ................................. (40,568,063) (36,446,663)
------------- -------------
Increase (decrease) in net assets resulting from
capital stock transactions ................................... (19,717,575) 64,588,874
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... (37,321,129) 197,256,283
NET ASSETS:
Beginning of period ............................................... 804,317,629 607,061,346
------------- -------------
End of period (including undistributed net investment income
of $36,149 and $42,347) ...................................... $ 766,996,500 $ 804,317,629
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ...................................... 714,310 2,234,398
Shares issued for distributions reinvested ........................ 152,128 1,997,359
Shares of capital stock repurchased ............................... (1,754,748) (1,539,198)
------------- -------------
Increase (decrease) in shares outstanding ....................... (888,310) 2,692,559
Shares outstanding:
Beginning of period ............................................. 31,829,893 29,137,334
------------- -------------
End of period ................................................... 30,941,583 31,829,893
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS
NOVEMBER 30, 1998 (UNAUDITED) 19
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
COMMON STOCK - 97.72%
ADVERTISING - 0.60%
6,625* ADVO, Inc. ................................ $ 171,422
5,100* Catalina Marketing Corp. .................. 297,075
2,600* Doubleclick, Inc. ......................... 105,300
7,500* Getty Images, Inc. ........................ 129,375
300 Grey Advertising, Inc. .................... 108,000
4,525* HA-LO Industries, Inc. .................... 144,517
7,300* NFO Worldwide Inc. ........................ 92,163
1,700* TMP Worldwide Inc. ........................ 54,400
6,800* Westwood One, Inc. ........................ 180,200
----------
1,282,452
----------
AEROSPACE/DEFENSE - 0.55%
3,200* Alliant Techsystems, Inc. ................. 243,800
6,700* Aviall, Inc. .............................. 81,237
1,280* Banner Aerospace, Inc. .................... 11,360
6,600 BE Aerospace, Inc. ........................ 156,750
2,200 Cubic Corp. ............................... 45,100
4,393* Fairchild Corp. Class A ................... 70,562
8,400 Gencorp Inc. .............................. 206,850
2,500 HEICO Corp. ............................... 61,094
3,100* Moog Inc. ................................. 89,900
5,100* Remec, Inc. ............................... 70,763
1,600* Sequa Corp. Class A ....................... 101,800
6,100* Trimble Navigation Ltd. ................... 54,519
----------
1,193,735
----------
AIRLINES - 0.73%
10,600* Airtran Holdings Inc. ..................... 42,400
5,400* Alaska Air Group, Inc. .................... 202,162
11,600 American West Holdings Corp. ..............
Class B .................................. 163,850
2,300* Amtran Inc. ............................... 50,600
5,600 ASA Holdings, Inc. ........................ 190,050
3,400* Atlas Air, Inc. ........................... 157,250
3,300 Circle International Group, Inc. .......... 56,925
6,300 Expeditors International of WA ............ 242,550
10,900* Mesa Airlines, Inc. ....................... 87,200
1,050* Mesaba Holdings, Inc. ..................... 19,687
3,650 Midwest Express Holdings, Inc. ............ 101,288
6,300 SkyWest, Inc. ............................. 170,494
16,600 Transport World Airlines, Inc. ............ 84,038
----------
1,568,494
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
APPAREL & PRODUCTS - 1.35%
4,100* American Eagle Outfitters ................. $ 244,975
6,700* Ann Taylor Stores Corp. ................... 220,681
5,600 Authentic Fitness Corp. ................... 89,600
2,500* Brylane Inc. .............................. 39,688
2,900* Buckle, Inc. .............................. 74,313
11,925 Claire's Stores, Inc. ..................... 202,725
6,100* Dress Barn, Inc. .......................... 89,975
7,700* Footstar Inc. ............................. 187,687
2,900* Gadzooks, Inc. ............................ 21,387
3,200* Goodys Family Clothing Inc. ............... 36,000
10,200* Guess? Inc. ............................... 38,250
6,200* Gymboree Corp. ............................ 41,462
13,500* Hartmarx Corp. ............................ 79,313
5,000* Jo-ann Stores Inc. ........................ 78,750
5,450 Kellwood Co. .............................. 147,150
5,300* Land's End, Inc. .......................... 119,581
6,150* Mens Wearhouse, Inc. ...................... 155,672
8,900 Nautica Enterprises, Inc. ................. 175,219
4,900 Oakley Inc. ............................... 47,775
6,200 OshKosh B'Gosh, Inc. Class A .............. 148,800
900 Oxford Industries Inc. .................... 25,988
5,925* Pacific Sunwear of California ............. 87,764
6,000 Phillips-Van Heusen Corp. ................. 42,000
4,300 St. John Knits, Inc. ...................... 86,000
6,800* Stage Stores, Inc. ........................ 78,200
4,400 Talbots, Inc. ............................. 112,200
2,400 UniFirst Corp. ............................ 52,800
2,400* Urban Outfitters, Inc. .................... 33,900
4,800* Value City Dept. Stores Inc. .............. 49,200
3,700* Wet Seal, Inc. ............................ 102,675
----------
2,909,730
----------
APPLIANCES/FURNISHINGS - 0.87%
6,400 Aaron Rents, Inc. ......................... 100,000
3,850 Bassett Furniture Industries .............. 97,213
5,000* CORT Business Services Corp. .............. 113,438
8,797* Griffon Corp. ............................. 84,671
4,600 Haverty Furniture Cos, Inc. ............... 89,700
15,400 Heilig-Meyers Co. ......................... 107,800
5,800* Helen Of Troy, Ltd. ....................... 97,150
5,200 Hunt Corp. ................................ 71,175
11,500 Hussmann International, Inc. .............. 189,750
9,300 Kimball International, Inc. Class B ....... 179,025
12,000 La-Z-Boy Chair Co. ........................ 201,000
13,185* Metromedia International Group ............ 58,508
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
APPLIANCES/FURNISHINGS - Continued
3,800 National Presto Industries ................ $ 156,988
4,650 Oneida Ltd. ............................... 84,862
4,700* Renters Choice, Inc. ...................... 113,387
3,750* SLI, Inc. ................................. 82,500
6,500* Windmere Corp. ............................ 39,813
----------
1,866,980
----------
AUTO - CARS - 0.15%
8,800* Avis Rent A Car Inc. ...................... 185,350
6,500* Budget Group, Inc. ........................ 81,250
4,000* United Auto Group, Inc. ................... 53,750
----------
320,350
----------
AUTO - ORIGINAL EQUIPMENT - 0.77%
7,100* Allen Telecom, Inc. ....................... 49,256
5,900 Arvin Industries, Inc. .................... 247,800
6,800* Breed Technologies, Inc. .................. 45,900
10,200 Donaldson Co., Inc. ....................... 204,000
6,200* Hayes Lemmerz International, Inc. ......... 195,300
13,300 Mark IV Industries, Inc. .................. 224,438
14,550* Miller Industries, Inc. ................... 70,022
5,700 Modine Manufacturing Co. .................. 208,050
5,300 Superior Industries International, Inc..... 137,800
11,800* Tower Automotive, Inc. .................... 268,450
----------
1,651,016
----------
AUTO - REPLACEMENT PARTS - 0.91%
5,100 A.O. Smith Corp. .......................... 126,863
5,100* Aftermarket Technology Corp. .............. 29,325
15,100* Collins & Aikman Corp. .................... 80,219
3,800* CSK Auto Corp. ............................ 105,925
3,900* Discount Auto Parts, Inc. ................. 97,256
5,400 Furon Co. ................................. 92,813
8,500 Kaydon Corp. .............................. 300,156
3,300 Midas Inc. ................................ 102,919
6,957 Myers Industries, Inc. .................... 156,532
2,200* O'Reilly Automotive, Inc. ................. 99,825
5,350 Simpson Industries, Inc. .................. 56,175
6,400* SPX Corp. ................................. 371,200
4,700 Standard Motor Products, Inc. ............. 107,218
4,450 Standard Products Co. Class A ............. 82,881
6,468 Wynn's International, Inc. ................ 143,509
----------
1,952,816
----------
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
20 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BANKS - OTHER - 0.55%
600 Alabama National Bancorp .................. $ 15,600
10,400 First Bancorp/Puerto Rico ................. 284,700
5,400 First Merchants Corp. ..................... 153,900
3,000 Irwin Financial Corp. ..................... 85,875
11,200 Republic Security Financial Co. ........... 125,300
200 Signal Corp. .............................. 6,850
9,965 Sky Financial Group Inc. .................. 302,683
2,100* Sterling Bancshares, Inc. ................. 33,338
12,000 Westernbank Puerto Rico ................... 159,000
----------
1,167,246
----------
BANKS - REGIONAL - 6.77%
7,350 AMCORE Financial, Inc. .................... 173,184
7,700 Anchor BanCorp Wisconsin, Inc. ............ 154,963
2,400 BancFirst Corp. ........................... 97,800
10,400 BancorpSouth, Inc. ........................ 198,900
3,800 Bancwest Corp. ............................ 164,350
3,700 Bank Atlantic Bancorp Class B ............. 29,600
2,931 Bank of Granite Corp. ..................... 83,534
6,100 Banknorth Group, Inc. ..................... 203,588
1,243* BOK Financial Corp. ....................... 59,052
400 BT Financial Corp. ........................ 11,200
3,150 Capital City Bank Group, Inc. ............. 92,138
1,700 Carolina First Corp. ...................... 42,394
3,200 Cathay Bancorp Inc. ....................... 121,000
4,110 Chemical Financial Corp. .................. 174,675
6,350 Citizens Banking Corp. .................... 205,184
6,587 CNB Bancshares, Inc. ...................... 285,711
7,261 Commerce Bancorp, Inc. .................... 346,713
17,044 Commercial Federal Corp. .................. 390,947
7,900 Commonwealth Bancorp, Inc. ................ 120,475
15,000 Community First Bankshares ................ 319,688
1,960 Community Trust Bancorp ................... 45,080
3,750 Corus Bankshares, Inc. .................... 136,172
5,740 Cullen/Frost Bankers, Inc. ................ 307,808
2,860 F & M Bancorporation, Inc. ................ 90,805
8,142 F & M National Corp. ...................... 245,278
2,800 Farmers Capital Bank Corp. ................ 98,350
1 Fifth Third Bancorp ....................... 50
14,358 First American Financial Corp.
Class A .................................. 439,714
1,850 First Citizens BancShares, Inc.
Class A .................................. 158,175
4,900 First Commerce Bancshares, Inc.
Class B .................................. 142,100
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BANKS - REGIONAL - Continued
5,600 First Commonwealth Financial .............. $ 137,200
7,744 First Financial Bancorp ................... 259,908
2,200 First Financial Bankshares ................ 81,400
2,931 First Financial Corp. ..................... 130,430
8,168 First Midwest Bancorp, Inc. ............... 318,041
4,800 First Source Corp. ........................ 156,000
2,900 First United Bancshares ................... 57,275
5,208 First Western Bancorp, Inc. ............... 164,052
5,410 FNB Corp. ................................. 152,833
8,700* Friedman Billings Ramsey Class A .......... 52,200
1,100* Frontier Financial Corp. .................. 53,350
5,900 GBC Bancorp ............................... 146,763
5,700 Harbor Florida Bancshares ................. 61,988
2,546 Harleysville National Corp. ............... 93,566
4,500 Harris Financial, Inc. .................... 65,812
800 Horizon Bancorp, Inc. ..................... 29,600
5,998 HUBCO, Inc. ............................... 161,946
10,339* Imperial Bancorp .......................... 160,255
21,500 Independence Community Bank ............... 303,687
1,700 International Bancshares Corp. ............ 91,800
2,100 InterWest Bancorp, Inc. ................... 50,663
3,166 JeffBanks, Inc. ........................... 71,630
6,996 KeyCorp ................................... 214,690
3,400 MainStreet Financial Corp. ................ 146,200
2,400 Mississippi Valley Bancshares, Inc. ....... 87,900
6,195 N B T Bancorp, Inc. ....................... 155,649
6,500 National Bancorp of Alaska ................ 201,500
4,553 National City Bancshares, Inc. ............ 173,006
3,276 National Penn Bancshares, Inc. ............ 106,674
6,200 Ocean Financial Corp. ..................... 98,037
6,846 Old National Bancorp Indiana .............. 355,992
2,400 Omega Financial Corp. ..................... 71,850
8,458 One Valley Bancorp of West Va ............. 278,585
2,900 Park National Corp. ....................... 278,400
6,700 Peoples Bancorp, Inc. ..................... 67,000
6,300* PFF Bancorp, Inc. ......................... 96,862
2,400 Premier Bancshares, Inc. .................. 56,100
6,000 Prime Bancorp ............................. 114,000
3,100* Republic Bancshares, Inc. ................. 54,831
6,200 Riggs National Corp. ...................... 130,200
10,800 Roslyn Bancorp, Inc. ...................... 201,150
7,380 S&T Bancorp, Inc. ......................... 196,493
1,800 Santa Barbara Bancorp ..................... 45,000
4,900* Silicon Valley Bancshares ................. 122,500
9,200* Southwest Bancorporation of TX ............ 165,600
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BANKS - REGIONAL - Continued
11,950 St. Paul Bancorp, Inc. .................... $ 252,444
3,100 Sterling Financial Corp. .................. 127,875
8,718 Susquehanna Bancshares, Inc. .............. 193,975
5,400 Texas Regional Bancshares Class A ......... 147,825
4,950 Triangle Bancorp, Inc. .................... 94,978
6,700 Trust Co. of New Jersey ................... 160,800
6,890 TrustCo Bank Corp. NY ..................... 192,920
4,200 U.S.B. Holding Co., Inc. .................. 67,200
3,792 UMB Financial Corp. ....................... 167,796
9,700 United Bankshares Inc. WV ................. 277,056
3,600 USBANCORP, Inc. ........................... 70,875
13,100 UST Corp. ................................. 324,225
6,300 Vermont Financial Services ................ 148,050
8,600 Webster Financial Corp. ................... 238,650
12,361 Westamerica Bankcorporation ............... 446,541
6,794 Westcorp .................................. 58,173
2,900 Western Bancorp ........................... 94,612
7,200 Whitney Holding Corp. ..................... 266,400
-----------
14,487,641
-----------
BEVERAGE - BREWERS/DISTRIBUTORS - 0.44%
9,100 Adolph Coors Class B ...................... 452,725
3,900 Beringer Wine Estates-B ................... 142,838
3,700* Boston Beer, Inc. Class A ................. 31,450
5,000* Canandaigua Brands, Inc. Class A .......... 248,750
2,000 Robert Mondavi Corp. Class A .............. 73,250
-----------
949,013
-----------
BEVERAGE - SOFT DRINKS - 0.03%
1,400 Coca-Cola Bottling Co. .................... 81,288
-----------
BROADCASTING - 0.77%
3,900 Ackerley Group, Inc. ...................... 69,469
4,100 Adelphia Communications Corp. .............
Class A .................................. 143,244
7,900 American Mobile Satellite Corp. ........... 36,538
8,800* ANTEC Corp. ............................... 162,800
2,000* CD Radio Inc. ............................. 76,750
11,100* Century Communications Corp. ..............
Class A .................................. 271,256
1,500* Cox Radio, Inc. Class A ................... 57,281
3,100* Emmis Communications Corp. ................
Class A .................................. 106,756
2,300* Jones Intercable, Inc. .................... 71,444
2,500 Paxson Communications Corp. ............... 18,125
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 21
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BROADCASTING - Continued
13,200* United International Holdings
Class A .................................... $ 222,750
1,800 United Television, Inc. ..................... 198,000
12,100 US Satellite Broadcasting, Inc. .............
Class A .................................... 93,775
3,600* Young Broadcasting Inc. Class A ............. 128,250
----------
1,656,438
----------
BUILDING MATERIALS - 0.93%
1,100 Ameron, Inc. ................................ 40,425
7,200 Apogee Enterprises, Inc. .................... 89,100
1,650 Butler Manufacturing Co. .................... 38,363
5,200 CalMat Co. .................................. 159,900
3,000 Centex Construction Production .............. 106,500
9,500* Comfort Systems USA, Inc. ................... 178,125
3,400* Cooper Companies, Inc. ...................... 72,250
12,800* Dal-Tile International, Inc. ................ 110,400
3,450 Elcor Corp. ................................. 106,519
13,700 Fedders USA Inc. ............................ 76,206
3,400 Florida Rock Industries, Inc. ............... 99,663
2,800* Giant Cement Holding, Inc. .................. 67,200
11,900 Interface, Inc. Class A ..................... 148,750
2,700 Lone Star Industries, Inc. .................. 204,356
6,000* NCI Building Systems, Inc. .................. 147,000
1,100 Puerto Rican Cement Co., Inc. ............... 40,700
5,500 Texas Industries, Inc. ...................... 159,156
8,400 Watsco, Inc. ................................ 150,675
----------
1,995,288
----------
CHEMICAL - MAJOR - 0.38%
5,600 Albemarle Corp. ............................. 104,300
4,400* Borg-Warner Automotive, Inc. ................ 219,450
5,000 Chemed Corp. ................................ 169,375
6,009 Hexcel Corp. ................................ 55,208
6,900* Polymer Group, Inc. ......................... 73,312
4,500* Synetic, Inc. ............................... 190,688
----------
812,333
----------
CHEMICAL - MISCELLANEOUS - 1.82%
9,400 A. Schulman, Inc. ........................... 200,925
8,300* Agribiotech, Inc. ........................... 107,900
12,400* Airgas, Inc. ................................ 125,550
5,450 Brady Corp. ................................. 140,338
8,300 Cambrex Corp. ............................... 232,400
7,900 ChemFirst, Inc. ............................. 149,113
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
CHEMICAL - MISCELLANEOUS - Continued
5,900 Dexter Corp. ................................ $ 189,169
6,400 Ethyl Corp. ................................. 37,200
9,600 Ferro Corp. ................................. 268,200
9,300* Fisher Scientific International, Inc. ....... 172,050
4,500 Foamex International, Inc. .................. 51,469
4,500 General Chemical Group, Inc. ................ 76,500
5,900 Geon, Co. ................................... 131,275
8,100 Georgia Gulf Corp. .......................... 151,875
4,600 H.B. Fuller Co. ............................. 200,100
9,800 Lawter International, Inc. .................. 80,850
4,950 LeaRonal, Inc. .............................. 111,994
11,500 M.A. Hanna Co. .............................. 161,719
2,900 MacDermid, Inc. ............................. 106,937
1,900* McWhorter Technologies, Inc. ................ 44,887
5,200 Minerals Technologies Inc. .................. 228,150
1,200 NCH Corp. ................................... 67,200
5,600 NL Industries, Inc. ......................... 74,550
5,800 OM Group, Inc. .............................. 209,887
8,500 Rollins, Inc. ............................... 145,031
2,000 Stepan Co. .................................. 55,875
3,400* TETRA Technologies, Inc. .................... 42,925
5,550* VWR Scientific Products Corp. ............... 173,437
4,900 WD-40 Co. ................................... 151,900
----------
3,889,406
----------
COAL - 0.07%
1,634 NACCO Industries, Inc. Class A .............. 142,260
----------
CONGLOMERATES - 0.17%
7,400 Alexander & Baldwin, Inc. ................... 170,200
2,100* MAXXAM, Inc. ................................ 102,506
3,600* PEC Israel Economic Corp. ................... 86,625
----------
359,331
----------
CONSUMER FINANCE - 0.77%
15,400* AmeriCredit Corp. ........................... 212,712
14,300* Arcadia Financial Ltd. ...................... 50,943
6,875 Chittenden Corp. ............................ 207,969
10,600 Eaton Vance Corp. ........................... 257,712
1,250 Fund American Enterprises ................... 177,188
11,100* IMC Mortgage Co. ............................ 6,938
5,797 Metris Companies Inc. ....................... 193,475
4,300* SEI Investments Co. ......................... 396,675
5,350 WesBanco, Inc. .............................. 147,125
----------
1,650,737
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
CONTAINERS - METAL/GLASS - 0.47%
8,000 AptarGroup, Inc. ............................ $ 223,500
7,900 Ball Corp. .................................. 337,725
6,450 CLARCOR, Inc. ............................... 121,341
1,800* CSS Industries, Inc. ........................ 53,212
5,000 Greif Brothers Corp. Class A ................ 161,250
4,000* Silgan Holdings, Inc. ....................... 110,000
----------
1,007,028
----------
CONTAINERS - PAPER - 0.26%
4,900 Chesapeake Corp. ............................ 169,969
13,000* Gaylord Container Corp. Class A ............. 68,250
3,000* Ivex Packaging Corp. ........................ 58,500
7,390 Rock-Tenn Co. Class A ....................... 120,549
9,000* Shorewood Packaging Corp. ................... 133,313
----------
550,581
----------
COSMETICS/TOILETRIES - 0.07%
9,400* Playtex Products, Inc. ...................... 145,700
----------
DRUGS - 3.35%
4,500 A.L. Pharma Inc. Class A .................... 162,000
8,800* Agouron Pharmaceuticals, Inc. ............... 383,900
2,600* Algos Pharmaceuticals Corp. ................. 70,525
6,100* Alkermes, Inc. .............................. 112,088
6,200* AmeriSource Health Corp. Class A ............ 396,800
2,300* Barr Laboratories, Inc. ..................... 97,175
4,100 Bindley Western Industries .................. 158,363
6,900 Carter-Wallace Inc. ......................... 122,475
7,900* Cephalon, Inc. .............................. 58,756
10,900* Columbia Laboratories, Inc. ................. 40,875
7,900* COR Therapeutics, Inc. ...................... 92,825
4,000* Coulter Pharmaceutical, Inc. ................ 113,500
17,000* Covance Inc. ................................ 425,000
10,200* Dura Pharmaceuticals, Inc. .................. 131,963
7,200* Fuisz Technologies, Ltd. .................... 87,300
4,500* GelTex Pharmaceuticals, Inc. ................ 107,438
28,800* Gensia, Inc. ................................ 133,200
5,700* Guilford Pharmaceuticals, Inc. .............. 80,513
3,000 Herbalife International, Inc. Class A ....... 35,438
5,600* Human Genome Sciences, Inc. ................. 175,000
10,100* ICOS Corp. .................................. 219,044
4,400* IDEC Pharmaceuticals Corp. .................. 147,950
7,800* Immune Response Corp. ....................... 101,400
6,900* Incyte Pharmaceuticals, Inc. ................ 215,625
4,100* Inhale Therapeutic Systems Inc. ............. 132,738
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
22 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
DRUGS - Continued
21,700* IVAX Corp. .................................. $ 206,150
5,900 Jones Pharma Inc. ........................... 212,400
3,150 Life Technologies, Inc. ..................... 116,944
12,458* Ligand Pharmaceuticals, Inc. Class B ........ 123,801
4,800* Medicis Pharmaceutical Class A .............. 302,400
9,700* Millennium Pharmaceuticals .................. 197,637
2,200* Miravant Medical Technologies ............... 33,550
3,830* Natures Sunshine Products, Inc. ............. 59,843
4,900* Neurogen Corp. .............................. 84,218
7,600* NeXstar Pharmaceuticals, Inc. ............... 76,000
7,100* Parexel International Corp. ................. 185,043
5,300* Pathogenesis Corp. .......................... 254,400
11,100* P-Com, Inc. ................................. 41,278
6,600* Regeneron Pharmaceuticals Inc. .............. 54,450
5,300* Roberts Pharmaceutical Corp. ................ 129,850
5,200* SangStat Medical Corp. ...................... 124,800
2,400* Schein Pharmaceutical, Inc. ................. 32,100
7,900* Sepracor Inc. ............................... 655,700
11,200* SEQUUS Pharmaceuticals, Inc. ................ 221,200
6,500* Vertex Pharmaceuticals Inc. ................. 153,968
8,800* Vivus Inc. .................................. 26,675
4,100* Zonagen, Inc. ............................... 78,925
----------
7,173,223
----------
ELECTRIC PRODUCTS -
MISCELLANEOUS - 0.23%
8,500 CMP Group Inc. .............................. 152,469
5,900* Jabil Circut, Inc. .......................... 342,200
----------
494,669
----------
ELECTRICAL EQUIPMENT- 1.58%
1,900* Advanced Lighting Technologies .............. 16,625
8,500 AMETEK, Inc. ................................ 176,375
14,700* AMKOR Technologies, Inc. .................... 92,794
4,000* Amphenol Corp. Class A ...................... 131,250
5,557* BancTec, Inc. ............................... 73,283
6,700 Belden, Inc. ................................ 113,063
1,500* C & D Technologies, Inc. .................... 43,500
9,300* Cable Design Technologies ................... 171,469
4,300* California Microwave, Inc. .................. 52,138
3,500* Dbt Online, Inc. ............................ 59,719
9,900* Digital Microwave Corp. ..................... 58,163
6,450* Electro Rent Corp. .......................... 77,400
2,900* Electro Scientific Industries ............... 86,819
6,600* Esterline Technologies Corp. ................ 137,775
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
ELECTRICAL EQUIPMENT - Continued
7,500 General Cable Corp. ......................... $ 142,500
1,676 General Electric Co. ........................ 151,714
7,400* GenRad, Inc. ................................ 120,250
2,800* Holophane Corp. ............................. 64,050
5,100* Hutchinson Technology, Inc. ................. 157,781
15,100* Intergraph Corp. ............................ 98,150
7,000 Juno Lighting, Inc. ......................... 163,625
10,000* Kemet Corp. ................................. 141,250
7,100* Kent Electronics Corp. ...................... 100,731
5,700 Kuhlman Corp. ............................... 158,888
5,100* Littelfuse, Inc. ............................ 119,850
10,000* Mail-Well, Inc. ............................. 129,375
4,100* Plexus Corp. ................................ 123,000
4,900 Standex International Corp. ................. 114,537
1,200* Thermo Ecotek Corp. ......................... 12,600
5,850 Thomas Industries Inc. ...................... 100,912
2,300* Triumph Group, Inc. ......................... 77,337
7,900* Vicor Corp. ................................. 70,112
4,600 X-Rite, Inc. ................................ 40,250
----------
3,377,285
----------
ELECTRONIC INSTRUMENTS - 2.29%
1,950 Analogic Corp. .............................. 69,225
7,000 BMC Industries .............................. 43,313
8,800* C-Cube Microsystems, Inc. ................... 230,450
11,500* Checkpoint Systems, Inc. .................... 154,531
8,300* Cognex Corp. ................................ 137,469
12,400* Commscope Inc. .............................. 188,325
5,300 CTS Corp. ................................... 186,825
4,300 Daniel Industries, Inc. ..................... 47,031
8,200* Dionex Corp. ................................ 254,200
2,400* Evans & Sutherland Computer ................. 46,800
18,400* Gentex Corp. ................................ 338,100
6,500 Gerber Scientific, Inc. ..................... 164,531
3,400* HADCO Corp. ................................. 119,000
4,575 Harman International Industries ............. 195,295
10,400* Imation Corp. ............................... 169,000
21,000* Integrated Device Technology ................ 123,375
12,600* InterDigital Communication .................. 59,850
4,700* Lattice Semiconductor Corp. ................. 173,313
7,000* LoJack Corp. ................................ 64,750
7,700* MagnaTek, Inc. .............................. 87,588
4,200* Marshall Industries ......................... 109,200
12,750 Methode Electronics, Inc. Class A ........... 173,719
2,300* Metromedia Fiber Network, Inc. .............. 119,313
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
ELECTRONIC INSTRUMENTS - Continued
8,500* Mettler-Toledo International ................ $ 223,125
9,800 National Computer Systems, Inc. ............. 322,175
2,400* Optical Cable Corp. ......................... 33,300
2,700 Park Electrochemical Corp. .................. 51,806
4,700* Performance Food Group Co. .................. 115,150
6,937 Pioneer-Standard Electronics ................ 75,440
5,200 Pittston Bax Group .......................... 45,175
14,700* Read-Rite Corp. ............................. 197,531
14,000* Sensormatic Electronics Corp. ............... 113,750
4,900 Technitrol, Inc. ............................ 147,918
5,000* Telxon Corp. ................................ 135,000
4,100* Thermedics, Inc. ............................ 42,793
10,800* Vishay Intertechnology, Inc. ............... 153,225
----------
4,911,591
----------
ENTERTAINMENT - 0.92%
3,600* AMC Entertainment, Inc. ..................... 60,300
11,700 Aztar Corp. ................................. 59,231
4,100* Carmike Cinemas, Inc. Class A ............... 82,000
9,100* Florida Panthers Holdings, Inc. ............. 101,806
4,100* Gaylord Entertainment Co. ................... 120,181
1,900* GC Companies, Inc. .......................... 76,475
9,100* GTECH Holdings Corp. ........................ 228,069
9,200* Hollywood Entertainment Corp. ............... 220,800
5,800 International Speedway Corp. ................ 205,900
5,900* Marvel Enterprises Inc. ..................... 36,138
6,946* Midway Games Inc. ........................... 70,762
4,800* N2K Inc. .................................... 78,000
4,000* Playboy Enterprises, Inc. ................... 61,750
3,300* Primadonna Resorts, Inc. .................... 24,750
1,100* Recoton Corp. ............................... 20,556
6,200* SFX Entertainment Inc. Class A .............. 310,775
11,400* Spelling Entertainment Group ................ 83,363
15,900* TCI Satellite Entertainment Inc.
Class A .................................... 17,888
2,800* Trans World Entertainment Corp. ............. 64,750
3,400* Trendwest Resorts, Inc. ..................... 48,875
----------
1,972,369
----------
FERTILIZERS - 0.07%
6,604 Mississippi Chemical Corp. .................. 104,013
8,400 Terra Industries, Inc. ...................... 45,675
----------
149,688
----------
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 23
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
FINANCE COMPANIES - 0.42%
8,800 Aames Financial Corp. ....................... $ 16,500
2,600 Capital Factors Holdings, Inc. .............. 44,850
9,000* Credit Acceptance Corp. ..................... 59,625
3,300* Delta Financial Corp. ....................... 18,150
8,000 Doral Financial Corp. ....................... 143,000
3,900* First Sierra Financial Inc. ................. 35,100
4,100* Franchise Mortgage Acceptance Co. ........... 39,462
9,734* Imperial Credit Industries .................. 98,557
2,166 Oriental Financial Group .................... 66,605
16,000* Phoenix Investment Partners, Ltd ............ 136,000
5,300* Southern Pacific Funding .................... 319
2,400 Student Loan Corp. .......................... 108,900
2,300 Triad Guaranty, Inc. ........................ 51,750
8,800* UniCapital Corp. ............................ 72,600
----------
891,418
----------
FINANCIAL SERVICES - 0.37%
4,100 Advanta Corp. ............................... 42,793
5,000 Conning Corp. ............................... 85,625
5,000 D & N Financial Corp. ....................... 115,313
10,700 EVEREN Capital Corp. ........................ 274,868
1,200 First Liberty Financial Corp. ............... 26,100
2,300* HealthCare Financial Partners ............... 75,613
2,200* International Telecom. Data
Systems Inc. ............................... 54,175
3,600 Resource America, Inc. ...................... 43,425
4,900 Richmond Count Financial Corp. .............. 80,544
----------
798,456
----------
FOODS - 1.32%
3,900* Agribrands International Inc. ............... 118,462
5,600* American Italian Pasta Co. Class A .......... 141,400
6,100 Chiquita Brands International ............... 68,625
7,500 Corn Products International, Inc. ........... 210,468
6,400 Dreyer's Grand Ice Cream, Inc. .............. 87,200
10,000 Earthgrains Co. ............................. 321,250
4,400 International Multifoods Corp. .............. 111,925
3,600 Interpool, Inc. ............................. 52,200
6,800 J.M. Smucker Co. Class A .................... 158,100
6,000 Lance, Inc. ................................. 118,125
3,500 Michael Foods, Inc. ......................... 87,937
15,600* NBTY, Inc. .................................. 95,550
3,800 Pilgrims Pride Corp. ........................ 92,150
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
FOODS - Continued
8,840* Ralcorp Holdings, Inc. ...................... $ 154,700
12,200 Richfood Holdings, Inc. ..................... 226,463
4,300 Riviana Foods ............................... 86,538
1,000* United Natural Foods, Inc. .................. 24,375
16,800 Universal Foods Corp. ....................... 416,850
9,500* Vlasic Foods International Inc. ............. 205,438
1,700* Wild Oats Markets, Inc. ..................... 48,450
----------
2,826,206
----------
FOOTWEAR - 0.38%
7,400 Brown Group, Inc. ........................... 132,738
6,800* Genesco, Inc. ............................... 37,825
7,250* Just For Feet, Inc. ......................... 164,031
4,300 Justin Industries, Inc. ..................... 55,363
3,600 Kenneth Cole Productions, Inc.
Class A .................................... 65,475
4,600* Nine West Group, Inc. ....................... 57,500
12,100 Stride Rite Corp. ........................... 107,388
1,800* Timberland Co. Class A ...................... 73,687
8,500 Wolverine World Wide, Inc. .................. 115,812
----------
809,819
----------
FREIGHT - 0.46%
8,950 Air Express International Corp. ............. 199,138
2,800* Eagle USA Airfreight, Inc. .................. 53,200
15,400* Greyhound Lines, Inc. ....................... 92,400
7,900 J.B. Hunt Transport Services, Inc. .......... 150,100
5,512* Kirby Corp. ................................. 109,551
14,000* OMI Corp. ................................... 43,750
10,200 Overseas Shipholding Group, Inc. ............ 161,287
3,500* SEACOR Holdings, Inc. ....................... 167,125
----------
976,551
----------
GOLD MINING - 0.18%
53,900 Battle Mountain Gold Co. .................... 252,656
8,230* Getchell Gold Corp. ......................... 134,766
----------
387,422
----------
HARDWARE & TOOLS - 0.12%
3,900 Barnes Group Inc. ........................... 120,656
5,900 Barnett, Inc. ............................... 73,750
2,700 Lawson Products, Inc. ....................... 62,100
----------
256,506
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
HEALTHCARE - 2.06%
5,500 Access Health, Inc. ......................... $ 197,313
9,500* Advanced Tissue Sciences, Inc. .............. 27,906
4,000* Alternative Living Services ................. 107,500
7,300* American Oncology Resources ................. 81,669
10,900* Apria Healthcare Group, Inc. ................ 76,300
3,514 Block Drug Co., Inc. Class A ................ 131,789
3,800* CareMatrix Corp. ............................ 106,400
3,500* Curative Technologies, Inc. ................. 100,625
11,000* Genesis Health Ventures, Inc. ............... 105,188
6,100* Hanger Orthopedic Group, Inc. ............... 146,400
4,900 HealthPlan Services Corp. ................... 49,000
6,900 Henry Schein, Inc. .......................... 244,950
1,900 Hooper Holmes, Inc. ......................... 44,413
7,000 Invacare Corp. .............................. 167,563
28,000* Laboratory Corp. of America ................. 36,750
580* LTC Healthcare Inc. ......................... 1,668
29,673* Mariner Post-Acute Network Inc. ............. 127,965
5,600* Medquist, Inc. .............................. 170,100
6,200 Mentor Corp. ................................ 114,700
3,600* NCS HealthCare, Inc. Class A ................ 72,900
15,800* NovaCare, Inc. .............................. 49,375
22,900* Oxford Health Plans, Inc. ................... 253,331
5,575* Patterson Dental Co. ........................ 232,059
6,199* Pharmaceutical Product
Development, Inc. .......................... 177,446
15,700* PhyCor, Inc. ................................ 96,162
2,200* Priority Healthcare Corp. ................... 80,575
3,300* Province Healthcare Co. ..................... 105,600
9,675* Renal Care Group, Inc. ...................... 260,015
9,896* Respironics Inc. ............................ 186,787
4,400* Rural/Metro Corp. ........................... 45,100
6,100* Sierra Health Services, Inc. ................ 139,537
11,088 Sun Healthcare Group, Inc. .................. 58,212
8,300* Sunrise Medical Inc. ........................ 105,825
2,400* Superior Consultant Holdings Corp. .......... 87,600
20,000* Vencor Inc. ................................. 90,000
4,000* VISX, Inc. .................................. 291,500
2,300* Vital Signs, Inc. ........................... 39,100
----------
4,409,323
----------
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
24 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
HEAVY DUTY TRUCKS/PARTS - 0.28%
1,800 Bandag, Inc. ................................ $ 63,675
2,200* Detroit Diesel Corp. ........................ 45,513
9,000 Federal Signal Corp. ........................ 219,938
2,900* Terex Corp. ................................. 81,200
7,900 Titan International, Inc. ................... 78,506
5,850 Wabash National Corp. ....................... 109,687
----------
598,519
----------
HOME BUILDERS - 0.83%
5,100* American Homestar Corp. ..................... 83,513
8,605 D R Horton, Inc. ............................ 162,419
6,000 Del Webb Corp. .............................. 159,000
11,700* Fairfield Communities, Inc. ................. 126,506
10,800 Kaufman & Broad Home Corp. .................. 272,025
3,400* NVR, Inc. ................................... 133,875
6,281* Palm Harbor Homes, Inc. ..................... 162,521
6,600 Pulte Corp. ................................. 167,888
4,000 Ryland Group, Inc. .......................... 106,250
9,500 Standard Pacific Corp. ...................... 92,625
7,400* Toll Brothers, Inc. ......................... 179,913
3,770 U.S. Home Corp. ............................. 120,168
----------
1,766,703
----------
HOSPITAL MANAGEMENT - 0.52%
7,400* ABR Information Services, Inc. .............. 125,800
11,829* Concentra Managed Care, Inc. ................ 139,730
12,200* Coventry Health Care Inc. ................... 90,737
7,900* Magellan Health Services, Inc. .............. 74,062
18,100* Medaphis Corp. .............................. 52,038
9,300* Orthodontic Centers of America .............. 177,863
3,100* Pediatrix Medical Group ..................... 166,431
3,600* Sunrise Assisted Living Inc. ................ 155,250
11,600* Ventas Inc. ................................. 139,200
----------
1,121,111
----------
HOSPITAL SUPPLIES - 0.91%
5,700* Acuson Corp. ................................ 79,800
4,700 Arrow International, Inc. ................... 133,950
7,500 Ballard Medical Products .................... 163,125
12,400* Bio-Technology General Corp. ................ 83,700
2,600* Closure Medical Corp. ....................... 59,800
5,800* Coherent, Inc. .............................. 73,225
3,600* CONMED Corp. ................................ 98,100
4,700* Datascope Corp. ............................. 103,988
3,000 Diagnostic Products Corp. ................... 77,625
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
HOSPITAL SUPPLIES - Continued
9,800* Isis Pharmaceuticals, Inc. .................. $ 111,475
2,100 Landauer, Inc. .............................. 59,850
1,600* MiniMed, Inc. ............................... 114,000
7,850 Owens & Minor, Inc. ......................... 134,431
17,275* PSS World Medical, Inc. ..................... 358,456
4,600* TECHE Corp. ................................. 86,250
7,800* Theragenics Corp. ........................... 107,738
3,574 West Co., Inc. .............................. 108,560
----------
1,954,073
----------
HOUSEHOLD PRODUCTS - 0.51%
6,900 Church & Dwight Co., Inc. ................... 238,481
10,200 First Brands Corp. .......................... 381,863
4,500 Libbey, Inc. ................................ 138,656
10,700* Linens `N Things, Inc. ...................... 327,688
----------
1,086,688
----------
HUMAN RESOURCES - 0.68%
2,900* Data Processing Resources ................... 68,875
10,300* Interim Services Inc. ....................... 213,725
7,100* Labor Ready, Inc. ........................... 154,869
7,300* Metamor Worldwide, Inc. ..................... 172,919
6,200 Norrell Corp. ............................... 98,813
10,900* Novacare Employee Services Inc. ............. 66,762
21,800 Olsten Corp. ................................ 163,500
8,400* Personnel Group of America .................. 138,600
2,100* Probusiness Services Inc. ................... 92,400
3,000* Remedytemp, Inc. ............................ 43,500
6,000* SCB Computer Technology ..................... 48,750
4,600* SOS Staffing Services, Inc. ................. 34,213
3,000* Staff Leasing, Inc. ......................... 27,000
4,200* Staffmark, Inc. ............................. 97,650
3,700* Westaff Inc. ................................ 24,512
----------
1,446,088
----------
INFORMATION PROCESSING - 1.65%
15,980* Acxiom Corp. ................................ 377,528
2,500* Administaff, Inc. ........................... 67,656
2,400* Advent Software, Inc. ....................... 91,800
10,800* American Management Systems ................. 318,600
2,400* CDW Computer Centers, Inc. .................. 194,400
9,750* CHS Electronics, Inc. ....................... 144,421
4,500* ChoicePoint Inc. ............................ 261,562
3,400* Complete Business Solutions ................. 83,725
4,700* Decisionone Holdings Corp. .................. 35,837
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
INFORMATION PROCESSING - Continued
4,800* InfoUSA Inc. Class B ........................ $ 27,600
6,400* International Network Services .............. 349,600
10,500* Lycos, Inc. ................................. 619,500
6,900 M D C Holdings Inc. ......................... 126,788
3,800* Micrel, Inc. ................................ 154,138
5,900* Paymentech, Inc. ............................ 93,663
2,800* Pegasystems, Inc. ........................... 18,375
7,200* Safeguard Scientifics, Inc. ................. 203,850
3,700* Sipex Corp. ................................. 119,325
20,600* Sybase Inc. ................................. 149,350
2,500* Veeco Instruments, Inc. ..................... 91,250
----------
3,528,968
----------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 1.06%
4,400* Alydaar Software Corp. ...................... 40,425
3,400 Aspect Development, Inc. .................... 113,688
5,000* AXENT Technologies, Inc. .................... 130,313
2,918* Baan Co. NV ................................. 34,651
6,000* Cerner Corp. ................................ 157,500
6,200* Clarify, Inc. ............................... 111,600
1,200* Engineering Animation, Inc. ................. 46,950
4,300* First Consulting Group, Inc. ................ 101,050
4,800* H.T.E., Inc. ................................ 43,200
6,500* Harbinger Corp. ............................. 56,062
6,500* HNC Software, Inc. .......................... 214,500
42,500* Informix Corp. .............................. 229,765
2,500* Metro Information Services, Inc. ............ 65,000
1,300* Peregrine Systems, Inc. ..................... 48,018
6,300* Platinum Software Corp. ..................... 66,938
4,400* Quadramed Corp. ............................. 105,600
2,900* Sanchez Computer Associates ................. 88,088
2,400* SCM Microsystems, Inc. ...................... 143,100
8,800 Software AG Systems, Inc. ................... 169,400
3,700* SS&C Technologies Inc. ...................... 43,013
7,800 TAVA Technologies, Inc. ..................... 44,850
6,200* Visio Corp. ................................. 219,325
----------
2,273,036
----------
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 0.73%
11,194* Artesyn Technologies, Inc. .................. 187,500
15,100* Electronics for Imaging, Inc. ............... 404,869
18,600* Komag, Inc. ................................. 134,850
8,000* MEMC Electronic Materials ................... 75,500
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 25
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - Continued
12,000* Micron Electronics Inc. ..................... $ 273,000
6,700 OEA, Inc. ................................... 87,520
4,400* Rambus Inc. ................................. 389,675
----------
1,552,914
----------
INFORMATION PROCESSING -
COMPUTER SERVICES - 1.20%
6,800* BA Merchants Services, Inc. ................. 113,900
12,600 Checkfree Holdings Corp. .................... 204,750
5,000* CMG Information Services .................... 387,500
1,600* C-Net Inc. .................................. 84,900
8,425* Computer Horizons Corp. ..................... 189,563
5,900 Computer Task Group, Inc. ................... 159,300
2,600* Concord Communications, Inc. ................ 115,375
4,200* Cotelligent Inc. ............................ 76,913
3,000* Intelligroup, Inc. .......................... 48,000
3,700* Mastech Corp. ............................... 98,512
7,500 National Data Corp. ......................... 280,312
4,700* Nichols Research Corp. ...................... 100,462
5,100* Presstek Inc. ............................... 39,206
20,843* Rationale Software Corp. .................... 472,876
8,100* Security Dynamics Technologies .............. 123,525
7,900* Vantive Corp. ............................... 67,150
----------
2,562,244
----------
INFORMATION PROCESSING -
CONSUMER SOFTWARE - 0.63%
2,300* Advantage Learning Systems, Inc. ............ 127,075
6,000* BroadVision Inc. ............................ 159,750
3,900* Imrglobal Corp. ............................. 82,875
5,500* Infoseek Corp. .............................. 187,344
10,200* Macromedia, Inc. ............................ 284,962
3,200* Mindspring Enterprises, Inc. ................ 206,600
9,400* MTI Technology .............................. 37,013
6,900* Open Market Inc. ............................ 119,025
5,400* QAD Inc. .................................... 23,962
3,300* Realnetworks, Inc. .......................... 127,050
----------
1,355,656
----------
INFORMATION PROCESSING -
DATA SERVICES - 5.19%
5,033* ADAC Laboratories ........................... 130,858
7,100 Analysts International Corp. ................ 119,813
8,800 Anixter Internationall, Inc. ................ 145,200
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
INFORMATION PROCESSING -
DATA SERVICES - Continued
2,120* Applied Graphics Technology ................. $ 27,163
5,400* Aspen Technology, Inc. ...................... 75,938
8,208* Avant! Corp. ................................ 136,971
2,550 Barra, Inc. ................................. 66,300
14,400* Bea Systems, Inc. ........................... 172,800
4,100* Bell & Howell Co. ........................... 138,375
6,100* BISYS Group, Inc. ........................... 293,563
4,300 Black Box Corp. ............................. 151,038
9,137* Boole & Babbage, Inc. ....................... 288,958
2,268* BRC Holdings, Inc. .......................... 43,232
6,500* CCC Information Services .................... 71,500
1,950* Computer Management Sciences ................ 34,491
6,900* CSG Systems International, Inc. ............. 432,975
15,200* Data General Corp. .......................... 275,500
3,800* Data Transmission Network ................... 103,788
2,900* Davox Corp. ................................. 20,663
2,600* Dialogic Corp. .............................. 58,500
13,400* Diamond Multimedia Systems .................. 87,938
3,700* Documentum, Inc. ............................ 155,631
5,400* Envoy Corp. ................................. 215,325
2,600 Fair Issac & Co., Inc. ...................... 104,650
8,900* FileNet Corp. ............................... 76,206
7,300* GT Interactive Software Corp. ............... 43,800
3,250 Henry Jack & Associates ..................... 163,313
9,700* HMT Technology Corp. ........................ 110,338
9,310* Hyperion Solutions Corp. .................... 301,411
2,100* IDX Systems Corp. ........................... 86,231
6,900* Industri-Matematik International
Corp ....................................... 43,125
10,100* Information Resources, Inc. ................. 84,588
6,600 Innovex, Inc. ............................... 105,600
17,900* Inprise Corp. ............................... 99,569
4,700 Integrated Systems, Inc. .................... 47,294
6,150* JDA Software Group, Inc. .................... 49,200
2,100* Kronos, Inc. ................................ 90,825
3,000* Learning Tree International ................. 24,938
10,500* Legato Systems, Inc. ........................ 502,031
4,500* Manugistics Group, Inc. ..................... 39,375
15,800* Mentor Graphics Corp. ....................... 136,275
5,100* Mercury Interactive Corp. ................... 233,963
4,200* MICROS Systems, Inc. ........................ 119,700
8,000 MTS Systems Corp. ........................... 103,500
4,050 National Instruments Corp. .................. 117,450
7,700* Network Appliance, Inc. ..................... 578,462
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
INFORMATION PROCESSING -
DATA SERVICES - Continued
1,800* Network Solutions, Inc. ..................... $ 118,125
15,850* NOVA Corp. .................................. 504,228
17,100* Oak Technology, Inc. ........................ 67,865
9,045* Paxar Corp. ................................. 94,972
7,500* Physician Computer Network .................. 468
5,285* Primark Corp. ............................... 132,125
6,150* Progress Software Corp. ..................... 156,056
2,300* Project Software & Development .............. 69,287
11,000* PsiNet, Inc. ................................ 206,250
3,000* QRS Corp. ................................... 126,375
3,520* Renaissance Worldwide Inc. .................. 25,080
13,200* S3, Inc. .................................... 70,950
4,800* Sandisk Corp. ............................... 57,000
3,400* Sapient Corp. ............................... 157,250
11,200* Sequent Computer Systems, Inc. .............. 142,800
8,300* SMART Modular Technologies .................. 173,262
3,500* Splash Technology Holdings .................. 30,187
9,300 Structural Dynamic Research ................. 162,168
3,100* Sykes Enterprises, Inc. ..................... 62,775
14,700* Symantec Corp. .............................. 294,000
12,850* System Software Associates .................. 88,343
10,000* Systems & Computer Technology ............... 182,500
10,125* Technology Solutions Co. .................... 94,289
6,000* Transaction Systems Architects
Class A .................................... 228,000
5,300* Transition Systems, Inc. .................... 53,000
7,000* USCS International, Inc. .................... 225,750
11,200* Vanstar Corp. ............................... 133,700
5,000* Viasoft, Inc. ............................... 36,250
2,800* Volt Information Sciences, Inc. ............. 65,275
9,800* Wang Laboratories, Inc. ..................... 249,900
5,450* Wind River Systems Inc. ..................... 254,106
5,900* Xircom, Inc. ................................ 178,106
4,800* Zebra Technologies Corp. Class A ............ 161,100
-----------
11,109,906
-----------
INFORMATION PROCESSING -
NETWORKING - 0.90%
5,100* Concentric Network Corp. .................... 144,713
4,200* Earthlink Network, Inc. ..................... 255,413
7,400* Excite, Inc. ................................ 362,138
2,200* Exodus Communications, Inc. ................. 74,250
13,300* Picturetel Corp. ............................ 94,762
7,700* PMC-Sierra, Inc. ............................ 414,837
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
26 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
INFORMATION PROCESSING -
NETWORKING - Continued
6,000* Remedy Corp. ................................ $ 62,625
7,100* Shiva Corp. ................................. 41,268
9,100* USWeb Corp. ................................. 207,025
4,100* Verio Inc. .................................. 77,900
5,700* Visual Networking, Inc. ..................... 198,075
----------
1,933,006
----------
INSURANCE - CASUALTY - 0.89%
5,000* Acceptance Insurance Co., Inc. .............. 98,438
4,700 Baldwin & Lyons, Inc. Class B ............... 99,875
2,600 Citizens Corp. .............................. 85,962
5,100 Commerce Group, Inc. ........................ 174,675
4,500 E.W. Blanch Holdings, Inc. .................. 180,281
8,217 Frontier Insurance Group, Inc. .............. 116,579
9,700 HCC Insurance Holdings, Inc. ................ 180,056
3,500* Highlands Insurance Group ................... 44,625
2,800 Midland Co. ................................. 69,650
3,900 NAC Re Corp. ................................ 186,225
1,100 Nymagic, Inc. ............................... 23,100
6,300* Risk Capital Holdings, Inc. ................. 135,450
2,000 RLI Corp. ................................... 72,375
7,200 Selective Insurance Group ................... 135,900
900 Stewart Information Services Corp. .......... 44,494
3,350* Trenwick Group Inc. ......................... 106,363
3,505 United Fire & Casualty Co. .................. 129,247
5,300 Vesta Insurance Group, Inc. ................. 30,806
----------
1,914,101
----------
INSURANCE - LIFE - 0.69%
4,100* American Heritage Life Investment
Corp ....................................... 100,706
2,900 American Medical Security Group ............. 41,506
4,400 Arm Financial Group Inc., Class A ........... 94,600
600 Kansas City Life Insurance Co. .............. 49,500
9,400 Life USA Holding, Inc. ...................... 119,850
500* National Western Life Ins. Co.
Class A .................................... 59,250
9,100 Presidential Life Corp. ..................... 163,800
6,550 Reinsurance Group of America ................ 429,025
7,600 UICI ........................................ 151,050
7,570* United Companies Financial .................. 30,753
6,850 W.R. Berkley ................................ 229,475
----------
1,469,515
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
INSURANCE - MISCELLANEOUS - 1.26%
6,000* Amerin Corp. ................................ $ 148,125
4,100 Arthur J. Gallaher & Co. .................... 190,138
5,600 Capital Re Corp. ............................ 110,600
2,900 Chicago Title Corp. ......................... 135,575
6,400 CMAC Investment Corp. ....................... 308,800
9,000 Crawford & Co. Class B ...................... 137,250
3,600 Executive Risk, Inc. ........................ 194,400
5,864 Fidelity National Financial ................. 192,412
4,600 Foremost Corp. of America ................... 94,012
3,200 Harleysville Group .......................... 68,800
7,550 HSB Group Inc. .............................. 312,381
2,747 Liberty Corp. ............................... 133,230
12,000* Mid Atlantic Medical Services, Inc. ......... 106,500
4,200 MMI Companies, Inc. ......................... 68,513
4,387 Poe & Brown Inc. ............................ 153,545
4,200 SCPIE Holdings, Inc. ........................ 128,625
8,300 TIG Holdings, Inc. .......................... 116,719
4,100 Zenith National Insurance Corp. ............. 99,937
----------
2,699,562
----------
INSURANCE - MULTILINE - 0.87%
4,650 Alfa Corp. .................................. 101,719
4,878 American Annuity Group, Inc. ................ 112,194
4,553 AmerUs Life Holdings, Inc. .................. 100,451
4,400 Argonaut Group, Inc. ........................ 110,000
5,600 CNA Surety Corp. ............................ 82,250
3,565* Delphi Financial Group, Inc. Class A ........ 166,436
10,100 FBL Financial Group, Inc. Class A ........... 247,450
4,700 LandAmerica Financial Group ................. 288,169
3,100 Life Re Corp. ............................... 291,981
1,050* Markel Corp. ................................ 175,350
1,500 Meadowbrook Insurance Group ................. 23,719
5,491 Medical Assurance, Inc. ..................... 165,416
6,200* PennCorp Financial Group, Inc. .............. 6,975
----------
1,872,110
----------
LEISURE TIME - 1.09%
16,900* Acclaim Entertainment, Inc. ................. 161,606
3,700* Action Performance Co., Inc. ................ 135,050
2,100* Anchor Gaming ............................... 107,100
7,100* Bally Total Fitness Holding Corp. ........... 168,181
9,300* Boyd Gaming Corp. ........................... 33,713
5,600* Family Golf Centers, Inc. ................... 115,150
10,400* Grand Casinos Inc. .......................... 98,800
8,500* Handleman Co. ............................... 102,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
LEISURE TIME - Continued
5,100* Hollywood Park, Inc. ........................ $ 48,768
7,000 Polaris Industries, Inc. .................... 244,125
15,000* Premier Parks, Inc. ......................... 406,875
7,100* Rio Hotel & Casino Inc. ..................... 110,494
4,800* Scotts Co. Class A .......................... 173,700
5,400* Station Casinos, Inc. ....................... 44,550
6,450* Sunterra Corp. .............................. 75,384
6,800* Vail Resorts Inc. ........................... 171,700
3,300* Vistana, Inc. ............................... 46,613
7,200 Winnebago Industries, Inc. .................. 86,400
----------
2,330,209
----------
LODGING - 0.53%
13,400* Choice Hotels International Inc. ............ 153,263
4,100 Deltic Timber Corp. ......................... 82,000
14,400 Extended Stay America, Inc. ................. 144,000
7,500* Host Marriott Services Corp. ................ 82,031
6,039 Marcus Corp. ................................ 91,340
15,280 Meristar Hospitality Corp. .................. 297,005
8,900* NS Group, Inc. .............................. 48,393
12,800* Prime Hospitality Corp. ..................... 112,000
7,100* Red Roof Inns, Inc. ......................... 120,700
----------
1,130,732
----------
MACHINE - CONTRACT - 0.04%
4,200* Rental Service Corp. ........................ 88,988
----------
MACHINE TOOLS - 0.40%
3,450* Chase Industries, Inc. ...................... 40,322
8,800* Gilead Sciences, Inc. ....................... 273,900
3,200 Gleason Corp. ............................... 61,200
9,700 Milacron Inc. ............................... 196,425
5,000 OmniQuip International, Inc. ................ 67,344
2,900* PRI Automation Inc. ......................... 69,600
8,000 Roper Industries, Inc. ...................... 148,500
----------
857,291
----------
MACHINERY - AGRICULTURE - 0.09%
2,700 Allied Products Corp. ....................... 19,913
5,400 Lindsay Manufacturing Co. ................... 81,000
3,500 Toro Co. .................................... 92,750
----------
193,663
----------
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 27
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.91%
1,100* Astec Industries Inc. ....................... $ 57,063
6,400 Blount, Inc. Class A ........................ 148,000
6,400* Calpine Corp. ............................... 153,600
4,700 CDI Corp. ................................... 126,019
4,700 Columbus McKinnon Corp. ..................... 85,481
8,100 Foster Wheeler Corp. ........................ 138,713
4,950 Granite Construction, Inc. .................. 159,946
8,500 Insituform Technologies, Inc.
Class A .................................... 111,562
3,900 J. Ray Mcdermott S.A ........................ 95,550
7,700 Jacobs Engineering Group, Inc. .............. 290,193
5,900 Kaman Corp. Class A ......................... 95,875
4,822* Morrison Knudsen Corp. ...................... 46,412
3,400 Stone & Webster, Inc. ....................... 115,600
5,200 TJ International Inc. ....................... 122,850
7,542* United Rentals, Inc. ........................ 197,978
----------
1,944,842
----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 2.57%
7,350 AAR Corp. ................................... 185,588
4,646 Albany International Corp. Class A .......... 88,274
6,075 Applied Industrial Tech., Inc. .............. 85,050
10,180 Applied Power, Inc. Class A ................. 362,663
6,873 Baldor Electric Co. ......................... 137,030
5,000 Briggs & Stratton Corp. ..................... 252,188
7,280 Burlington Coat Factory Warehouse
Corp ....................................... 105,560
8,900* DII Group, Inc. ............................. 185,788
4,600 Exide Corp. ................................. 80,213
12,500 Flowserve Corp. ............................. 221,875
2,000 Franklin Electric Co., Inc. ................. 130,500
5,200* Gardner Denver Inc. ......................... 82,550
1,275 General Binding Corp. ....................... 47,813
6,650 Graco, Inc. ................................. 184,537
5,200* Halter Marine Group, Inc. ................... 36,075
4,400 Helix Technology Corp. ...................... 53,900
4,800 Hughes Supply, Inc. ......................... 133,200
9,350 IDEX Corp. .................................. 253,034
4,700 Integrated Process Equipment ................ 49,056
5,600* Ionics, Inc. ................................ 176,050
10,400 JLG Industries, Inc. ........................ 170,950
6,000* Kulicke & Soffa Industries .................. 102,375
5,850 Lilly Industries, Inc. Class A .............. 109,321
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MACHINERY - INDUSTRIAL/
SPECIALTY - Continued
11,200 Lincoln Electric Holdings ................... $ 263,200
4,375 Manitowoc Co., Inc. ......................... 173,906
9,100 Newport News Shipbuilding ................... 255,937
3,600 Nordson Corp. ............................... 171,900
4,840* Oak Industries Inc. ......................... 149,435
5,300 Regal-Beloit Corp. .......................... 132,500
2,400 Robbins & Myers, Inc. ....................... 48,000
3,400 SPS Technologies, Inc. ...................... 194,650
5,200 Scotsman Industries Inc. .................... 106,925
4,400* Specialty Equipment Companies ............... 103,950
8,100* Stewart & Stevenson Services, Inc. .......... 80,494
5,100* Stillwater Mining Co. ....................... 186,469
3,700 Tecumseh Products Co. Class A ............... 183,150
2,700 Tennant Co. ................................. 93,150
5,600 Watts Industries, Inc. Class A .............. 106,050
3,300* Zoltek Companies, Inc. ...................... 35,475
----------
5,518,781
----------
MEDICAL TECHNOLOGY - 1.36%
4,900* Affymetrix, Inc. ............................ 122,500
15,200* Alaris Medical Inc. ......................... 79,800
4,400* Aviron ...................................... 94,600
4,300* Bio-Rad Laboratories, Inc. Class A .......... 91,375
2,700 Biomatrix, Inc. ............................. 131,119
5,600* Cytyc Corp. ................................. 110,950
3,800* Dendrite International, Inc. ................ 73,150
7,875* Enzo Biochem, Inc. .......................... 103,852
5,900* Haemonetics Corp. ........................... 133,119
3,900* Hologic, Inc. ............................... 50,944
9,100* Idexx Laboratories, Inc. .................... 236,600
2,000* IGEN International, Inc. .................... 54,250
3,000* Kendle International Inc. ................... 67,125
14,500* Liposome, Inc. .............................. 131,406
2,200* Maxxim Med Inc. ............................. 59,950
1,500* On Assignment, Inc. ......................... 53,343
9,118* Organogenesis, Inc. ......................... 121,953
1,800* Perclose, Inc. .............................. 47,700
16,500* Pharmerica Inc. ............................. 68,062
6,300* Protein Design Labs, Inc. ................... 138,600
7,800 Quest Diagnostics Inc. ...................... 139,425
2,400* ResMed Inc. ................................. 81,900
2,800* Sabratek Corp. .............................. 47,250
13,124 Scios Nova Inc. ............................. 99,250
7,275* Serologicals Corp. .......................... 213,703
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MEDICAL TECHNOLOGY - Continued
4,200* Thermo Cardiosystems, Inc. .................. $ 48,825
6,900* Thermolase Corp. ............................ 35,363
3,400* ThermoTrex Corp. ............................ 35,700
4,300* Transkaryotic Therapies, Inc. ............... 96,750
6,400 US Bioscience, Inc. ......................... 48,400
2,300* Ventana Medical Systems, Inc. ............... 49,450
1,300* Xomed Surgical Products Inc. ................ 56,875
----------
2,923,289
----------
MERCHANDISE - DRUG - 0.72%
1,800* Andrex Corp. ................................ 71,100
3,700* Duane Reade, Inc. ........................... 148,463
8,600* Express Scripts, Inc. Class A ............... 473,000
8,000 Longs Drug Stores Corp. ..................... 285,000
6,000* Medimmune, Inc. ............................. 401,250
16,900* Perrigo Co. ................................. 141,538
4,600 Weider Nutrition International .............. 30,187
----------
1,550,538
----------
MERCHANDISE - SPECIALTY - 2.75%
1,700* Advanced Energy Industries .................. 30,813
6,900* Ames Department Stores, Inc. ................ 163,875
9,100* APAC Teleservices, Inc. ..................... 59,150
6,818 Arctic Cat, Inc. ............................ 71,589
5,600* Avid Technology, Inc. ....................... 133,700
1,600* Bush Boake Allen, Inc. ...................... 54,600
13,500 Caseys General Stores, Inc. ................. 187,313
8,567 Cash America International .................. 144,568
7,500* Central Garden & Pet Co. .................... 120,703
33,200* Charming Shoppes, Inc. ...................... 136,950
4,800* Cole National Corp. Class A ................. 74,100
5,600* Compucom Systems, Inc. ...................... 21,700
1,000* Copart, Inc. ................................ 23,125
24,400* Corporate Express, Inc. ..................... 143,350
4,200* Daisytek International Corp. ................ 65,100
4,900* Department 56, Inc. ......................... 168,744
8,400* Eagle Hardware & Garden, Inc. ............... 236,775
9,800* Earthshell Corp. ............................ 134,138
4,500 Enesco Group Inc. ........................... 108,563
13,500 Fingerhut Companies, Inc. ................... 150,188
3,150* Fossil, Inc. ................................ 87,216
5,200* Franklin Covey Co. .......................... 97,500
5,000* Friedman's, Inc. Class A .................... 50,000
5,950* Garden Ridge Corp. .......................... 46,856
4,400* Gibson Greetings, Inc. ...................... 48,400
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
28 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
2,700* Guitar Center, Inc. ......................... $ 61,763
6,700 Hancock Fabrics, Inc. ....................... 56,531
4,005 Hancock Holding Co. ......................... 180,225
15,100* Homebase, Inc. .............................. 86,825
3,300* Inacom Corp. ................................ 68,475
2,800* JLK Direct Distribution Inc. ................ 30,625
8,200 Jostens, Inc. ............................... 192,187
3,578 K2, Inc. .................................... 40,700
2,100* Keystone Automotive Industries .............. 40,031
5,400* Knoll, Inc. ................................. 145,800
2,600 LabOne, Inc. ................................ 37,050
6,600* Michaels Stores, Inc. ....................... 118,800
9,000* Micro Warehouse, Inc. ....................... 246,375
5,200 MicroAge, Inc. .............................. 91,000
5,400* Petco Animal Supplies, Inc. ................. 54,000
33,400* Petsmart Inc. ............................... 285,988
4,963 Price Enterprises Inc. ...................... 27,296
3,700* Rent-Way, Inc. .............................. 100,362
2,700* Russ Berrie and Co. Inc. .................... 61,087
8,300 Seitel, Inc. ................................ 111,012
14,100* Sitel Corp. ................................. 35,250
9,500 Sotheby's Holdings, Inc. Class A ............ 266,000
1,914 South Jersey Industries, Inc. ............... 49,405
7,400* Spiegel, Inc. Class A ....................... 29,137
8,050* Sports Authority, Inc. ...................... 52,325
2,300* SportsLine USA, Inc. ........................ 39,675
5,100 Sturm, Ruger & Co. Inc. ..................... 64,706
16,000 Sunglass Hut International .................. 96,000
5,700 The Finish Line ............................. 52,013
5,700* Twinlab Corp. ............................... 94,763
8,600* United Stationers Inc. ...................... 227,900
2,400* West Marine, Inc. ........................... 27,300
9,100* Zale Corp. .................................. 260,487
----------
5,890,109
----------
MERCHANDISING - DEPARTMENT - 0.12%
1,300* Alexander's, Inc. ........................... 103,594
3,300* K&G Men's Center, Inc. ...................... 31,350
2,900* Maxim Group, Inc. ........................... 56,731
7,500* Stein Mart, Inc. ............................ 64,453
----------
256,128
----------
MERCHANDISING - FOOD - 0.50%
4,800* CEC Entertainment, Inc. ..................... 142,200
75 Farmer Bros. Co. ............................ 14,850
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MERCHANDISING - FOOD - Continued
9,800 Fleming Companies, Inc. ..................... $ 98,613
4,600 Great Atlantic & Pacific Tea Co., Inc. ...... 125,638
3,200* IHOP Corp. .................................. 127,200
2,300 Ingles Markets, Inc. Class A ................ 27,600
10,800 Ruddick Corp. ............................... 211,275
3,000 Smart & Final Inc. .......................... 31,875
8,500* Smithfield Foods, Inc. ...................... 224,718
7,200* Zapata Corp. ................................ 56,700
----------
1,060,669
----------
MERCHANDISING - MASS - 0.26%
3,800* Coldwater Creek, Inc. ....................... 45,600
4,500* Global Directmail Corp. ..................... 88,312
3,700* Insight Enterprises, Inc. ................... 155,863
8,400* ShopKo Stores, Inc. ......................... 270,900
----------
560,675
----------
METALS - ALUMINUM - 0.22%
6,100* ACX Technologies, Inc. ...................... 77,775
7,000 Century Aluminum Co. ........................ 59,500
5,000 Commonwealth Industries, Inc. ............... 48,125
4,400 IMCO Recycling, Inc. ........................ 65,725
5,500* Kaiser Aluminum Corp. ....................... 36,094
7,500 Tredegar Industries, Inc. ................... 175,312
----------
462,531
----------
METALS - COPPER - 0.12%
7,600 ASARCO Inc. ................................. 147,250
4,800* Wolverine Tube, Inc. ........................ 107,700
----------
254,950
----------
METALS - MISCELLANEOUS - 0.42%
3,337 A.M. Castle & Co. ........................... 64,237
4,400 Brush Wellman Inc. .......................... 70,950
4,033 Commercial Metals Co. ....................... 102,085
14,500* Hecla Mining Co. ............................ 60,719
5,000 Precision Castparts Corp. ................... 220,938
4,500* RTI International Metals .................... 67,781
4,500* Ryerson Tull, Inc. Class A .................. 49,781
9,700 Steel Dynamics, Inc. ........................ 132,163
5,900 Titanium Metals Corp. ....................... 58,631
1,900 Tremont Corp. ............................... 68,163
----------
895,448
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
METALS - STEEL - 1.17%
13,000 AK Steel Holding Corp. ...................... $ 249,438
24,800* Armco Inc. .................................. 97,650
29,495* Bethlehem Steel Corp. ....................... 243,334
8,200 Birmingham Steel Corp. ...................... 39,975
4,500 Carpenter Technology Corp. .................. 158,906
5,300* Citation Corp. .............................. 73,538
4,200 Cleveland-Cliffs Inc. ....................... 159,863
3,550 Commercial Intertech Corp. .................. 56,134
2,300* Gibraltar Steel Corp. ....................... 45,713
10,649 Inland Steel Industries, Inc. ............... 195,010
7,200 Intermet Corp. .............................. 98,550
3,800 J & L Specialty Steel, Inc. ................. 23,750
20,600 LTV Corp. ................................... 113,300
8,600* Metals USA, Inc. ............................ 80,088
9,800* Mueller Industries, Inc. .................... 223,563
8,500 National Steel Corp. Class B ................ 62,156
5,400 Oregon Steel Mills, Inc. .................... 68,512
5,500 Quanex Corp. ................................ 98,656
2,500 Reliance Steel & Aluminum Co. ............... 76,562
6,000 Rohn Industries, Inc. ....................... 16,875
3,300 Shiloh Industries, Inc. ..................... 48,056
7,700 Valmont Industries, Inc. .................... 124,162
3,400* WHX Corp. ................................... 35,912
7,400* Wyman-Gordon Co. ............................ 115,625
----------
2,505,328
----------
MISCELLANEOUS - 3.58%
2,200* Abacus Direct Corp. ......................... 126,638
6,700* Alternative Resources Corp. ................. 64,488
6,700 AMCOL International Corp. ................... 71,188
4,300 AMERCO, Inc. ................................ 98,900
4,600 Arch Coal, Inc. ............................. 88,263
7,000* Associated Group, Inc. Class A .............. 262,500
3,000* Aviation Sales Co. .......................... 111,000
2,800* Avondale Industries, Inc. ................... 77,350
4,600* Bacou U.S.A., Inc. .......................... 86,250
8,500* Billing Concepts Corp. ...................... 108,375
5,500 Borg-Warner Security Corp. .................. 100,719
1,800* Boron LePore & Associates, Inc. ............. 55,350
13,350* Brightpoint, Inc. ........................... 200,250
6,600* Building One Services Corp. ................. 112,200
9,200 C. H. Robinson Worldwide, Inc. .............. 207,575
3,400 Cabot Industrial Trust ...................... 71,188
5,800 Cadiz Inc. .................................. 52,200
1,400* Capital Senior Living Corp. ................. 17,325
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 29
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MISCELLANEOUS - Continued
4,600* Caribiner International, Inc. ............... $ 42,838
10,700* Catalytica Inc. ............................. 192,433
2,150* Central Parking Corp. ....................... 63,156
10,200* Century Business Services ................... 137,700
4,600* Championship Auto Racing Teams .............. 128,800
4,800* Coach USA, Inc. ............................. 136,200
1,800* Coinmach Laundry Corp. ...................... 29,363
5,600* Computer Learning Centers ................... 36,050
14,000* DeVry, Inc. ................................. 369,250
1,100* Education Management Corp. .................. 50,325
4,100* Equity Corp. International .................. 106,089
5,353 Equity Residential Properties ............... 226,499
3,758* Gemstar Group Ltd. .......................... 228,299
6,000* Hvide Marine, Inc. Class A .................. 36,000
3,175* ITT Educational Services, Inc. .............. 104,378
3,000* Iron Mountain, Inc. ......................... 87,750
2,400* Lason, Inc. ................................. 147,300
4,200 Matthews International Corp. Class A ........ 126,000
2,000* MemberWorks Inc. ............................ 48,750
2,600* Metzler Group, Inc. ......................... 107,900
7,200* Musicland Stores Corp. ...................... 121,950
1,700* ONSALE, Inc. ................................ 104,550
2,550* Pinkerton's, Inc. ........................... 51,000
6,400* Prepaid Legal Services, Inc. ................ 166,400
2,800 The Profit Recovery Group ................... 94,500
7,900 Protection Onc Inc. ......................... 76,038
5,600* Rayovac Corp. ............................... 129,500
4,700 Regis Corp. ................................. 157,450
7,500* Romac International, Inc. ................... 104,532
1,504* Samsonite Corp. ............................. 9,776
7,500* Scott Technologies Inc. - Class A ........... 116,250
2,100* Service Experts, Inc. ....................... 62,213
6,300* Sola International, Inc. .................... 100,013
49,700* Southland Corp. ............................. 100,954
9,225* Sylvan Learning Systems, Inc. ............... 268,101
4,200* Triangle Pharmaceuticals, Inc. .............. 46,200
8,200 Valhi, Inc. ................................. 90,200
5,800* Veritas DGC Inc. ............................ 84,825
5,300* Veterinary Centers of America ............... 97,388
5,000 Wackenhut Corp. ............................. 121,563
3,900* Wackenhut Corrections Corp. ................. 105,300
16,700 Washington Water Power Co. .................. 305,818
4,600* Wesley Jessen VisionCare .................... 108,100
6,000* West Teleservices Corp. ..................... 66,750
3,600* Westell Technologies, Inc. Class A .......... 21,825
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MISCELLANEOUS - Continued
4,900 Westinghouse Air Brake Co. .................. $ 107,800
6,200* Whittman-Hart, Inc. ......................... 136,787
4,100 Woodward Governor Co. ....................... 102,500
5,500* World Access, Inc. .......................... 111,718
9,600* Xylan Corp. ................................. 174,000
----------
7,660,840
----------
MOBILE HOMES - 0.42%
10,552 Champion Enterprises, Inc. .................. 235,441
4,400 Coachmen Industries, Inc. ................... 99,000
2,500 McGrath Rentcorp ............................ 50,625
3,900* National R.V. Holdings, Inc. ................ 103,350
12,400 Oakwood Homes Corp. ......................... 185,225
4,200 Skyline Corp. ............................... 136,500
3,875 Thor Industries, Inc. ....................... 92,516
----------
902,657
----------
NATURAL GAS-DIVERSIFIED - 0.88%
8,050 Atmos Energy Corp. .......................... 246,531
3,600 Bay State Gas Co. ........................... 142,200
5,200 Eastern Enterprises ......................... 210,925
6,100* Hanover Compressor Co. ...................... 138,013
4,500 Laclede Gas Co. ............................. 112,781
4,500 New Jersey Resources Corp. .................. 175,219
13,500* Seagull Energy Corp. ........................ 110,531
4,568* Southern Union Co. .......................... 92,777
7,200 Southwest Gas Corp. ......................... 171,000
8,500* UGI Corp. ................................... 207,188
9,500 WICOR, Inc. ................................. 207,813
6,600 Western Gas Resources, Inc. ................. 61,462
----------
1,876,440
----------
OIL - INTEGRATED DOMESTIC - 0.26%
1,800* Belco Oil and Gas Corp. ..................... 10,125
7,875 Cross Timbers Oil Co. ....................... 89,578
12,300 Quaker State Corp. .......................... 176,043
21,100* Santa Fe Energy Resources, Inc. ............. 162,206
9,100* Tesoro Petroleum Corp. ...................... 121,143
----------
559,095
----------
OIL - SERVICE - PRODUCTS - 0.36%
8,150* Barrett Resources Corp. ..................... 199,166
2,700* Drill Quip .................................. 38,981
3,100 Getty Realty Corp. .......................... 40,493
5,700* Global Industrial Technologies .............. 47,737
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
OIL - SERVICE - PRODUCTS - Continued
3,600* Gulf Island Fabrication, Inc. ............... $ 27,000
32,300* Kelley Oil & Gas Corp. ...................... 30,281
8,000* Lone Star Technologies, Inc. ................ 78,000
2,700* Maverick Tube Corp. ......................... 15,356
22,200* Parker Drilling Co. ......................... 83,250
12,800* Pride International, Inc. ................... 96,800
6,300* TransMontaigne Inc. ......................... 94,500
5,200* Trico Marine Services, Inc. ................. 28,600
----------
780,164
----------
OIL - SERVICES - 0.48%
4,100 Cliffs Drilling Co. ......................... 64,831
4,700* Key Energy Group, Inc. ...................... 29,375
14,000* Marine Drilling Companies, Inc. ............. 121,625
7,900 Mascotech, Inc. ............................. 127,388
6,500* Oceaneering International, Inc. ............. 80,844
6,800* Offshore Logistics, Inc. .................... 84,575
3,000* OMNI Energy Services Corp. .................. 29,813
5,350 Pennsylvania Enterprises, Inc. .............. 132,078
5,400* Pool Energy Services Co. .................... 60,750
6,400 Range Resources Corp. ....................... 26,800
11,500* Tuboscope Inc. .............................. 95,594
5,300* UTI Energy Corp. ............................ 44,387
7,700* Unova Inc. .................................. 130,418
----------
1,028,478
----------
OIL/GAS PRODUCERS - 1.29%
3,200* Atwood Oceanics, Inc. ....................... 60,000
8,300* Benton Oil and Gas Co. ...................... 31,125
4,800 Berry Petroleum Co. Class A ................. 62,400
7,000 Cabot Oil & Gas Corp. Class A ............... 108,063
22,016* Chesapeake Energy Corp. ..................... 30,272
6,400* Comstock Resources, Inc. .................... 23,600
5,800 Devon Energy Corp. .......................... 191,038
27,900* EEX Corp. ................................... 99,394
10,100 Equitable Resources, Inc. ................... 297,319
4,000* Forcenergy, Inc. ............................ 16,250
7,400* Forest Oil Corp. ............................ 62,900
27,800* Grey Wolf, Inc. ............................. 27,800
31,700 Harken Energy Corp. ......................... 89,156
11,300 Helmerich & Payne, Inc. ..................... 194,925
1,400 Holly Corp. ................................. 22,750
12,300* Input/Output, Inc. .......................... 100,706
6,500 KCS Energy, Inc. ............................ 26,000
5,000* Louis Dreyfus Natural Gas Corp. ............. 64,688
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
30 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
OIL/GAS PRODUCERS - Continued
2,300 Mitchell Energy & Development Corp.
Class A .................................... $ 29,900
8,300* Newfield Exploration Co. .................... 161,850
6,700* Nuevo Energy Co. ............................ 99,244
8,100* Patterson Energy, Inc. ...................... 37,969
6,400* Plains Resources, Inc. ...................... 113,600
7,700 Pogo Producing Co. .......................... 89,512
3,800* Rutherford-Moran Oil Corp. .................. 7,837
11,400* Snyder Oil Corp. ............................ 146,775
3,400 St. Mary Land & Exploration ................. 64,600
4,100* Stone Energy Corp. .......................... 123,512
5,610* Swift Energy Co. ............................ 52,243
4,000 The Houston Exploration Co. ................. 70,000
7,300* Titan Exploration, Inc. ..................... 53,837
9,700 Tom Brown, Inc. ............................. 97,000
10,800 Vintage Petroleum, Inc. ..................... 111,375
----------
2,767,640
----------
PAPER/FOREST PRODUCTS - 0.76%
7,200* Buckeye Technologies Inc. ................... 140,400
6,300 Caraustar Industries, Inc. .................. 167,344
13,300 Longview Fibre Co. .......................... 150,456
10,700 P. H. Glatfelter Co. ........................ 137,763
5,700 Potlatch Corp. .............................. 215,531
5,700 Rayonier Inc. ............................... 242,250
4,000 Schweitzer-Mauduit Inc. ..................... 73,000
3,500 Standard Register Co. ....................... 103,031
13,200 Unisource Worldwide, Inc. ................... 103,950
2,300 Universal Forest Products ................... 45,712
14,834 Wausau-Mosinee Paper Corp. .................. 250,324
----------
1,629,761
----------
PHOTOGRAPHY - 0.13%
2,520 CPI Corp. ................................... 53,865
6,100 Photronics Inc. ............................. 122,000
5,400* Ultratech Stepper, Inc. ..................... 100,575
----------
276,440
----------
POLLUTION CONTROL - 0.63%
6,765* Allied Waste Industries, Inc. ............... 137,837
61,800* Aqua Alliance Inc. .......................... 123,600
546 Arcadis N.V ................................. 4,368
9,000 Calgon Carbon Corp. ......................... 65,250
6,150* Cuno, Inc. .................................. 91,866
9,200 Dames & Moore, Inc. ......................... 117,875
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
POLLUTION CONTROL - Continued
6,500* Eastern Environmental Services, Inc. ........ $ 141,375
1,225 Mine Safety Appliances Co. .................. 79,625
737* NCS Corp. ................................... 483
18,900* Newpark Resources, Inc. ..................... 139,388
42,340* Safety Kleen ................................ 145,543
5,800* Superior Services, Inc. ..................... 106,575
9,750* Tetra Tech, Inc. ............................ 204,750
----------
1,358,535
----------
PUBLISHING - NEWS - 0.36%
5,900 Hollinger International, Inc. ............... 76,331
9,100 Lee Enterprises, Inc. ....................... 254,800
6,000 Media General, Inc. Class A ................. 284,625
7,400* Network Equipment Technologies .............. 82,325
3,500* Petersen Companies, Inc. .................... 83,781
----------
781,862
----------
PUBLISHING/PRINTING - 1.50%
7,000 American Business Products .................. 155,750
7,750 Banta Corp. ................................. 206,344
2,200* Berlitz International, Inc. ................. 65,313
6,000* Big Flower Holdings, Inc. ................... 146,625
12,400 Bowne & Co., Inc. ........................... 207,700
2,800* Consolidated Graphics, Inc. ................. 161,175
8,100 Houghton Mifflin Co. ........................ 339,187
9,500 John H. Harland Co. ......................... 144,875
6,600 John Wiley & Sons, Inc. Class A ............. 228,113
5,900* Journal Register Co. ........................ 95,506
5,975 McClatchy Company Class A ................... 196,428
4,700 Merrill Corp. ............................... 79,900
4,700 New England Business Service ................ 150,400
3,400* Scholastic Corp. ............................ 161,925
2,800* Scientific Games Holdings ................... 53,200
8,300* Valassis Communications, Inc. ............... 355,862
8,900 Wallace Computer Services, Inc ............. 199,694
9,100* World Color Press, Inc. ..................... 270,725
----------
3,218,722
----------
RAILROAD - 0.23%
4,300 Florida East Coast Industries ............... 147,275
4,600* Motivepower Industries, Inc. ................ 140,012
11,100* Wisconsin Central Transport ................. 201,188
----------
488,475
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
REAL ESTATE - 0.68%
2,300* Avatar Holdings, Inc. ....................... $ 36,800
5,900 Brandywine Realty Trust ..................... 106,200
7,900 Capital Automotive REIT ..................... 105,663
3,330* Castle & Cooke, Inc. ........................ 52,031
4,400* CB Richard Ellis Services ................... 78,100
4,300 CCA Prison Realty Trust ..................... 104,275
6,475 Cousins Properties, Inc. .................... 199,916
4,000 Forest City Enterprises, Inc. Class A ....... 98,000
7,200* Grubb & Ellis Co. ........................... 60,750
5,200 Insignia Financial Group Inc. ............... 70,525
3,200* LaSalle Partners, Inc. ...................... 91,200
7,100 LNR Property Corp. .......................... 138,450
9,333 Republic Bancorp Inc. ....................... 154,578
2,700 SL Green Realty Corp. ....................... 57,713
2,300 Tejon Ranch Co. ............................. 46,287
3,000* Tower Realty Trust, Inc. .................... 56,437
----------
1,456,925
----------
REAL ESTATE INVESTMENT TRUSTS - 6.64%
500 Alexandria Real Estate Equities, Inc. ....... 15,438
5,700 American Health Properties
Com-Core Group ............................. 129,319
6,600 Amli Residential Properties ................. 143,138
2,044 Apartment Investment &
Management Co. Class A ..................... 69,993
3,400 Associated Estates Realty ................... 42,925
3,200 Bedford Property Investors, Inc. ............ 56,800
9,200* Berkshire Reality Co., Inc. ................. 87,400
5,373 Bradley Real Estate, Inc. ................... 111,154
10,030 BRE Properties, Inc. Class A ................ 241,974
3,500 Burnham Pacific Properties .................. 45,063
14,741 Camden Property Trust ....................... 378,659
17,850* Capstead Mortgage Corp. ..................... 59,128
9,500 CBL & Associates Properties ................. 238,688
4,500 CenterPoint Properties Corp. ................ 153,000
5,400 Charles E. Smith Reality, Inc. .............. 159,638
8,900 Chateau Communities, Inc. ................... 254,763
3,900 Chelsea GCA Properties ...................... 131,869
8,400 Colonial Properties Trust ................... 227,325
7,600 Commercial Net Lease Realty ................. 108,300
9,400 Cornerstone Reality Income .................. 99,288
7,800 Criimi Mae, Inc. ............................ 28,763
6,100 Crown American Realty Trust ................. 48,419
14,600 Developers Diversified Realty ............... 281,963
17,200* Dynex Capital, Inc. ......................... 80,625
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 31
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS - Continued
4,200 EastGroup Properties, Inc. .................. $ 77,963
12,400 Equity Inns, Inc. ........................... 126,325
3,800 Essex Property Trust, Inc. .................. 117,563
10,300 Federal Reality Investment Trust ............ 246,556
16,881 Felcor Lodging Trust, Inc. .................. 401,979
9,800 First Industrial Reality Trust .............. 237,037
4,300 First Union Real Estate ..................... 24,994
9,600 Franchise Finance Corp. ..................... 235,800
8,800 Gables Residential Trust .................... 218,350
9,200 General Growth Properties ................... 348,450
9,400 Glenborough Reality Trust, Inc. ............. 200,925
6,100 Glimcher Reality Trust ...................... 102,938
500 Great Lakes REIT ............................ 7,875
9,600 Health Care Property Investors .............. 303,000
8,400 Health Care REIT, Inc. ...................... 190,050
9,925 Healthcare Realty Trust, Inc. ............... 228,275
6,800 Home Properties of NY, Inc. ................. 167,450
8,900 Hospitality Properties Trust ................ 231,400
5,800 Imperial Credit Commercial
Mortgage Investment Corp. ................. 57,275
4,600 Innkeepers USA Trust ........................ 50,888
9,500 IRT Property Co. ............................ 95,000
4,800 Irvine Apartment Communities ................ 128,700
12,300 JDN Reality Corp. ........................... 254,456
3,300 JP Reality, Inc. ............................ 73,631
4,400 Kilroy Reality Corp. ........................ 98,450
1,692 Kimco Reality Corp. Class D ................. 43,464
6,900 Koger Equity, Inc. .......................... 109,538
5,800* LTC Properties, Inc. ........................ 97,150
4,700 Macerich Co. ................................ 125,137
8,200 Manufactured Home Communities ............... 200,900
7,900 Meridian Industry. Trust, Inc. .............. 190,587
505* Merry Land Properties Inc. .................. 2,083
3,200 MGI Properties .............................. 89,000
4,900 Mid-Amer Apartment Communities .............. 119,437
8,200 Mills Corp. ................................. 175,788
4,300 National Golf Properties, Inc. .............. 124,163
5,600 National Health Investors, Inc. ............. 148,400
10,800 Nationwide Health Properties ................ 241,650
19,600 New Plan Excel Realty Trust ................. 428,750
6,300 Ocwen Asset Investment Corp. ................ 34,650
4,786 Omega Healthcare Investors .................. 145,375
8,100 Pacific Gulf Properties, Inc. ............... 155,925
1,100 Parkway Properties, Inc. .................... 33,206
4,500 Pennsylvania Real Estate Inv ................ 90,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS - Continued
10,300 Prentiss Properties Trust ................... $ 224,025
16,322 Prime Retail, Inc. .......................... 172,401
1,900 PS Business Parks, Inc. ..................... 44,175
6,500 Realty Income Corp. ......................... 164,125
10,200 Reckson Associates Realty Corp. ............. 235,237
5,800* Redwood Trust, Inc. ......................... 83,737
5,300 Regency Realty Corp. ........................ 123,556
9,000 RFS Hotel Investors, Inc. ................... 128,813
8,500* Security Capital Group ...................... 125,375
7,300 Shurgard Storage Centers, Inc.
Class A .................................... 192,081
3,100 Sovran Self Storage, Inc. ................... 79,050
5,800 Storage Trust Realty ........................ 130,137
7,100 Storage USA, Inc. ........................... 225,425
5,600 Summit Properties, Inc. ..................... 98,000
7,000 Sun Communities, Inc. ....................... 227,937
8,100 Sunstone Hotel Investors, Inc. .............. 86,063
7,700 Taubman Centers, Inc. ....................... 106,837
5,600 Thornburg Mortgage Asset Corp. .............. 49,000
9,900 Town & Country Trust ........................ 149,737
6,200* Trammell Crow Co. ........................... 148,800
5,300 TriNet Corporate Realty Trust ............... 142,106
20,600 United Dominion Realty Trust ................ 222,737
6,100 Urban Shopping Centers, Inc. ................ 200,537
5,400 Walden Residential Properties ............... 111,375
8,600 Washington Real Estate Inv .................. 150,500
7,200 Weeks Corp. ................................. 206,100
5,100 Weingarten Realty Investors ................. 231,731
7,200* Wellsford Real Properties, Inc. ............. 65,700
4,400 Western Investment Real Estate .............. 51,425
4,100 Westfield America Inc. ...................... 71,750
-----------
14,222,637
-----------
RESTAURANTS - 1.12%
6,900* Advantica Restaurant Corp. .................. 44,419
7,750 Applebees International, Inc. ............... 159,359
10,662 Avado Brands Inc. ........................... 81,964
10,700 Bob Evans Farms, Inc. ....................... 258,806
11,780* Buffets, Inc. ............................... 138,415
4,200* Consolidated Products, Inc. ................. 86,888
9,900* Foodmaker, Inc. ............................. 191,813
7,100* Landrys Seafood Restaurants ................. 57,688
7,900* Lone Star Steakhouse & Saloon ............... 60,238
10,000 Luby's Cafeterias, Inc. ..................... 158,750
2,900* NPC International, Inc. ..................... 32,988
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
RESTAURANTS - Continued
5,225* Papa Johns International, Inc. .............. $ 219,123
2,500* PJ America, Inc. ............................ 48,906
8,500* Rainforest Cafe, Inc. ....................... 58,968
7,500 Ruby Tuesday, Inc. .......................... 139,687
15,600* Ryan's Family Steak Houses .................. 177,450
3,500* Sbarro, Inc. ................................ 91,000
7,125* Sonic Corp. ................................. 139,828
8,900 TCBY Enterprises Inc. ....................... 68,975
4,200 The Cheesecake Factory ...................... 109,200
5,000* Triarc Companies Inc. Class A ............... 80,625
-----------
2,405,090
-----------
SAVINGS & LOAN - 1.13%
4,820 ALBANK Financial Corp. ...................... 326,555
6,000 Bay View Capital Corp. ...................... 126,750
5,200* Coast Federal Litigation-CVF ................ 47,450
5,200 Dime Community Bancshares ................... 140,400
5,155 Downey Financial Corp. ...................... 134,030
3,500 First Financial Holdings, Inc. .............. 66,500
4,000 First Indiana Corp. ......................... 76,500
8,113 First Source Bancorp Inc. ................... 64,904
9,000 FirstFed Financial Corp. .................... 159,750
2,900 JSB Financial, Inc. ......................... 152,975
8,900* Local Financial Corp. ....................... 75,650
5,898 MAF Bancorp, Inc. ........................... 151,136
7,625 Provident Bankshares Corp. .................. 204,922
5,622* Queens County Bancorp, Inc. ................. 168,660
2,500 Reliance Bancorp, Inc. ...................... 72,813
10,000 Staten Island Bancorp, Inc. ................. 208,125
6,600 TR Financial Corp. .......................... 246,675
2,400* Wilshire Financial Services Group ........... 2,325
-----------
2,426,120
-----------
SECURITIES RELATED - 0.67%
4,100 Dain Rauscher Corp. ......................... 152,725
9,000* E*Trade Group, Inc. ......................... 243,563
6,200 Enhanced Financial Services ................. 182,125
5,500* Hambrecht & Quist Group ..................... 133,375
2,300* Investment Technology Group ................. 120,175
1,699 Investors Financial Services ................ 95,568
4,800 Jefferies Group, Inc. ....................... 222,600
9,150 Morgan Keegan, Inc. ......................... 183,000
5,700* Pioneer Group, Inc. ......................... 104,025
-----------
1,437,156
-----------
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
32 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
SEMICONDUCTOR EQUIPMENT - 0.67%
3,000* ATMI Inc. ................................... $ 57,375
8,100* LAM Research Corp. .......................... 144,788
12,000* Microchip Technology, Inc. .................. 417,750
9,800* Novellus Systems, Inc. ...................... 486,325
3,200* QLogic Corp. ................................ 328,400
----------
1,434,638
----------
SEMICONDUCTORS - 1.39%
5,300* Actel Corp. ................................. 89,769
4,500* Applied Micro Circuits Corp. ................ 150,750
8,500* Burr Brown Corp. ............................ 200,813
14,599* Cirrus Logic, Inc. .......................... 179,750
3,100 Cohu, Inc. .................................. 70,525
7,150* Credence Systems Corp. ...................... 140,318
9,000* Cymer Inc. .................................. 135,000
21,200* Cypress Semiconductor Corp. ................. 215,975
10,800* DSP Communications, Inc. .................... 161,325
6,000 Dallas Semiconductor Corp. .................. 226,500
7,800* Electroglas, Inc. ........................... 113,100
5,700* Etec Systems, Inc. .......................... 187,388
6,200* FSI International, Inc. ..................... 48,437
2,900* Fusion Systems Corp. ........................ 0
17,600* International Rectifier Corp. ............... 165,000
10,000* Level One Communications, Inc. .............. 309,375
5,900* MRV Communications, Inc. .................... 38,719
4,950* SDL, Inc. ................................... 110,447
7,200* Silicon Valley Group Inc. ................... 88,650
2,700* Siliconix, Inc. ............................. 51,975
1,900* Speedfam International, Inc. ................ 28,856
9,500* Unitrode Corp. .............................. 160,906
9,200* VLSI Technology, Inc. ....................... 105,225
----------
2,978,803
----------
TELECOMMUNICATIONS - 3.33%
5,400 ABM Industries, Inc. ........................ 179,888
6,400* Adtran, Inc. ................................ 157,200
4,600* Aerial Communications, Inc. ................. 18,256
22,570* American Tower Corp. - Class A .............. 521,931
14,500* Aspect Telecommunications Co. ............... 274,594
12,800* CellNet Data Systems, Inc. .................. 75,200
8,400* CellStar Corp. .............................. 54,075
3,200* Cellular Communication
of Puerto Rico ............................. 47,600
4,650* Cellular Communications
International .............................. 290,044
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
TELECOMMUNICATIONS - Continued
4,800* Centennial Cellular Corp. Class A ........... $ 192,000
2,400* CKS Group, Inc. ............................. 80,400
8,500* CommNet Cellular, Inc. ...................... 89,250
3,200* CoreComm Inc. ............................... 47,600
2,800* Diamond Tech Partners, Inc. ................. 39,200
2,200* Dycom Industries, Inc. ...................... 86,488
10,400* E. Spire Communication, Inc. ................ 83,850
2,200* EchoStar Communications Corp.
Class A .................................... 85,388
3,100* Excel Switching Corp. ....................... 80,988
17,000* General Communication, Inc. ................. 69,063
8,900* General Magic Inc. .......................... 47,281
7,000* Geotel Communications Corp. ................. 192,500
15,700* Glenayre Technologies, Inc. ................. 97,144
10,500* ICG Communications, Inc. .................... 241,500
7,400 Inter-Tel, Inc. ............................. 177,600
11,700* ITC Deltacom, Inc. .......................... 183,544
3,100* Itron, Inc. ................................. 20,731
5,800* IXC Communications, Inc. .................... 158,775
4,750* MasTec, Inc. ................................ 110,437
4,000* MGC Communications, Inc. .................... 22,750
2,794* Millicom International Cellular S.A ......... 93,250
6,200* MMC Networks, Inc. .......................... 80,988
4,600* Natural Microsystems Corp. .................. 50,887
2,000 North Pittsburgh Systems .................... 28,000
9,766* NTL Inc. .................................... 543,844
9,300* Omnipoint Corp. ............................. 82,537
2,100* Pacific Gateway Exchange, Inc. .............. 93,975
12,800* PageMart Wireless, Inc. Class A ............. 76,800
15,900* Pairgain Technologies Inc. .................. 160,987
4,400* Plantronics, Inc. ........................... 289,300
6,000* Powertel Inc. ............................... 81,000
3,000* Powerwave Technologies Inc. ................. 42,750
5,500* Premier Technologies, Inc. .................. 27,156
6,700* Premisys Communications Inc. ................ 99,662
7,600* RCN Corp. ................................... 129,200
14,200* Skytel Communications Inc. .................. 296,425
1,300 Superior Telecom Inc. ....................... 56,550
8,600* Tekelec ..................................... 133,300
5,500* Telegroup, Inc. ............................. 12,375
8,600* Tel-Save.Com Inc. ........................... 102,662
4,100* Transaction Network Services ................ 98,913
2,000* US LEC Corp. ................................ 22,750
9,900* USN Communications, Inc. .................... 4,331
8,200* Vanguard Cellular Systems Class A ........... 188,600
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
TELECOMMUNICATIONS - Continued
19,500* Western Wireless Corp Class A ............... $ 353,437
9,600* WinStar Communications, Inc. ................ 267,600
----------
7,142,556
----------
TEXTILE - PRODUCTS - 0.55%
14,200 Burlington Industries, Inc. ................. 148,213
6,100* Cone Mills Corp. ............................ 27,831
5,700* Dan River Inc - Class A ..................... 46,313
4,850 G & K Services, Inc. Class A ................ 244,925
7,650 Guilford Mills, Inc. ........................ 110,447
6,600* Lydall, Inc. ................................ 83,737
10,400 Russell Corp. ............................... 247,650
4,700 Springs Industries, Inc. Class A ............ 183,006
7,800 Wellman, Inc. ............................... 94,575
----------
1,186,697
----------
TOBACCO - 0.21%
2,800* Cons Cigar Holdings Inc. .................... 31,850
12,100 DIMON, Inc. ................................. 99,068
6,001 General Cigar Holdings, Inc. ................ 58,885
7,300 Universal Corp. ............................. 256,869
----------
446,672
----------
TRUCKERS - 0.81%
7,500* American Freightways Corp. .................. 67,500
5,150 Arnold Industries, Inc. ..................... 73,388
7,800* Consolidated Freightways Corp. .............. 97,988
4,532* Heartland Express, Inc. ..................... 77,611
750* Knight Transportation, Inc. ................. 14,625
3,200* Landstar System, Inc. ....................... 131,200
2,300* M.S. Carriers, Inc. ......................... 56,350
4,200 Roadway Express, Inc. ....................... 62,475
17,862 Rollins Truck Leasing Corp. ................. 214,344
6,900* Swift Transportation Co., Inc. .............. 151,368
6,700 USFreightways Corp. ......................... 180,063
5,875 Varlen Corp. ................................ 154,953
10,587 Werner Enterprises, Inc. .................... 174,024
3,900 Xtra Corp. .................................. 185,493
6,500* Yellow Corp. ................................ 104,812
----------
1,746,194
----------
UTILITIES - COMMUNICATION - 0.30%
9,200 Aliant Communications, Inc. ................. 262,200
3,300 CFW Communications Co. ...................... 68,888
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 33
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
UTILITIES - COMMUNICATION - Continued
3,966* Commonwealth Telephone
Enterprises, Inc. .......................... $ 107,578
5,178 PXRE Corp. .................................. 114,886
6,200 The Alpine Group, Inc. ...................... 97,650
------------
651,202
------------
UTILITIES - ELECTRIC - 2.13%
5,400 Black Hills Corp. ........................... 133,313
5,700 Cleco Corp. ................................. 194,869
3,400 CILCORP, Inc. ............................... 205,700
4,600 Commonwealth Energy System Co. .............. 177,100
6,000 Eastern Utilities Associates ................ 148,125
15,100* El Paso Electric Co. ........................ 139,675
4,400 Empire District Electric Co. ................ 96,250
10,500 Hawaiian Electric Industries ................ 408,844
7,500 Idacorp Inc. ................................ 261,563
7,467 Indiana Energy, Inc. ........................ 168,933
7,425 Madison Gas & Electric Co. .................. 171,703
11,000 Minnesota Power Inc. ........................ 459,938
11,600 Nevada Power Co. ............................ 274,775
7,800 Northwestern Corp. .......................... 184,275
2,875 Otter Tail Power Co. ........................ 114,281
10,700 Public Service Co. of New Mexico ............ 207,981
10,100 Rochester Gas & Electric Corp. .............. 310,575
5,950 SIG Corp, Inc. .............................. 200,813
2,800 TNP Enterprises, Inc. ....................... 106,400
8,020* Unisource Energy Corp. ...................... 119,798
3,700 United Illuminating Co. ..................... 185,693
11,200 Washington Gas Light Co. .................... 285,600
------------
4,556,204
------------
UTILITIES - GAS, DISTRIBUTION - 0.63%
14,700 AGL Resources, Inc. ......................... 316,969
2,200 Colonial Gas Co. ............................ 76,175
2,400 Connecticut Energy Corp. .................... 67,050
8,600 Energen Corp. ............................... 154,800
6,300 Northwest Natural Gas Co. ................... 178,763
1,200* NUI Corp. ................................... 29,175
7,500 Piedmont Natural Gas Co., Inc. .............. 262,500
5,300 Public Service Co. of NC .................... 128,856
7,500 Southwestern Energy Co. ..................... 56,250
2,650 Yankee Energy Systems, Inc. ................. 77,181
------------
1,347,719
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
UTILITIES - GAS, PIPELINE - 0.33%
2,600 North Carolina Natural Gas .................. $ 83,850
9,900 ONEOK Inc. .................................. 344,644
7,300 Peoples Energy Corp. ........................ 275,119
------------
703,613
------------
UTILITIES - MISCELLANEOUS - 0.68%
4,400 Central Hudson Gas & Electric ............... 177,925
3,800* Group Maintenance America Corp. ............. 50,825
12,075 MDU Resources Group, Inc. ................... 305,648
3,500 Orange and Rockland Utilities ............... 196,875
7,700 Sierra Pacific Resources .................... 277,200
8,300 WPS Resources Corp. ......................... 280,125
11,000* Walter Industries, Inc. ..................... 157,438
------------
1,446,036
------------
WATER SERVICES - 0.27%
3,000 Aquarion Co. ................................ 112,688
2,900 California Water Service Group .............. 75,581
2,000 E'Town Corp. ................................ 84,250
6,300 Philadelphia Suburban Corp. ................. 159,469
6,900 United Water Resources ...................... 143,175
------------
575,163
------------
TOTAL COMMON STOCKS
(Cost $202,714,796) ......................... 209,235,294
------------
PREFERRED STOCKS - 0.04%
5,900 Price Enterprises Inc. ...................... 79,650
778 Prime-Retail, Inc. .......................... 13,858
------------
93,508
------------
TOTAL PREFERRED STOCKS
(Cost $91,185) .............................. 93,508
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- ----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 2.15%
SECURITIES RELATED - 1.34%
$2,872,000 Merrill Lynch & Co., Inc.,
5.00% due 12/01/1998 2,872,000
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- ----------
<S> <C> <C>
UTILITIES - ELECTRIC - 0.81%
$1,729,000 Conagra,
5.52% due 12/02/1998 ..................... $ 1,728,735
-------------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $4,600,735) ......................... 4,600,735
-------------
UNITED STATES GOVERNMENT
SHORT TERM - 0.20%
U. S. TREASURY BILLS - 0.20%
United States Treasury Bills:
275,000 4.00% due 12/24/1998 ..................... 274,080
150,000 3.75% due 12/10/1998 ..................... 149,859
-------------
423,939
-------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $423,939) ........................... 423,939
-------------
TOTAL INVESTMENTS
(Cost $207,830,655) - 100.11% ............ 214,353,476
Other assets less liabilities,
net - (0.11)% ............................ (250,171)
-------------
NET ASSETS (equivalent
to $15.67 per share on
13,660,212 shares
outstanding) - 100% ...................... $ 214,103,305
=============
* Non-income producing
</TABLE>
<PAGE>
================================================================================
SMALL CAP INDEX FUND - STATEMENT OF NET ASSETS
34 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- --------- -------------
<S> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 11/30/98)
22 (2) Russell 2000 Index Futures
(December/$400.80).......................... $ 1,562
=============
(1)U.S.Treasury Bills with a market value of
approximately $275,000 were maintained in
a segregated account with a portion placed
as collateral for futures contracts.
(2)Per 500
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,660,212 shares outstanding.......................... $ 136,602
Additional paid in capital............................... 172,805,715
Accumulated net realized gain on securities.............. 34,597,991
Undistributed net investment income...................... 38,614
Unrealized appreciation of:
Investments........................... $ 6,522,821
Futures .............................. 1,562 6,524,383
----------- ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING............................................. $214,103,305
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
SMALL CAP INDEX FUND - FINANCIAL STATEMENTS (Unaudited)
35
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends ........................................................................... $ 1,611,718
Interest ............................................................................ 210,818
------------
Total investment income ........................................................... 1,822,536
------------
EXPENSES:
Advisory fees ....................................................................... 377,238
Custodian and accounting services ................................................... 25,809
Reports to shareholders ............................................................. 19,085
Audit fees and tax services ......................................................... 3,635
Directors' fees and expenses ........................................................ 3,314
Miscellaneous ....................................................................... 11,044
------------
Total expenses .................................................................... 440,125
------------
NET INVESTMENT INCOME ............................................................... 1,382,411
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain (loss) on:
Investments ...................................................... $ 16,829,951
Futures contracts ................................................ (928,766) 15,901,185
------------
Net unrealized appreciation (depreciation) during the period:
Investments ...................................................... (47,404,096)
Futures contracts ................................................ 312,787 (47,091,309)
------------ ------------
Net realized and unrealized loss on securities during the period ................. (31,190,124)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... $(29,807,713)
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income .............................................. $ 1,382,411 $ 2,380,770
Net realized gain on securities .................................... 15,901,185 19,072,915
Net unrealized appreciation (depreciation) of securities
during the period ................................................ (47,091,309) 19,625,858
--------------- ---------------
Increase (decrease) in net assets resulting from operations ...... (29,807,713) 41,079,543
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................................. (1,375,696) (2,367,516)
Net realized gain on securities .................................... -- (17,477,319)
--------------- ---------------
Decrease in net assets resulting from distributions
to shareholders ................................................. (1,375,696) (19,844,835)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................................... 19,427,789 39,604,509
Proceeds from capital stock issued for distributions reinvested .... 1,375,696 19,844,835
--------------- ---------------
20,803,485 59,449,344
Cost of capital stock repurchased .................................. (22,699,329) (25,960,237)
--------------- ---------------
Increase (decrease) in net assets resulting from capital
stock transactions .............................................. (1,895,844) 33,489,107
--------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ............................ (33,079,253) 54,723,815
NET ASSETS:
Beginning of period ................................................ 247,182,538 192,458,743
--------------- ---------------
End of period (including undistributed net investment income
of $38,614 and $31,899) .......................................... $ 214,103,305 $ 247,182,558
=============== ===============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ....................................... 1,249,840 2,173,506
Shares issued for distributions reinvested ......................... 88,275 1,157,942
Shares of capital stock repurchased ................................ (1,454,820) (1,447,855)
--------------- ---------------
Increase (decrease) in shares outstanding ........................ (116,705) 1,883,593
Shares outstanding:
Beginning of period .............................................. 13,776,917 11,893,324
--------------- ---------------
End of period .................................................... 13,660,212 13,776,917
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS
36 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
COMMON STOCKS - 99.56%
AIRLINES - 0.62%
4,100 British Airways PLC - ADR ................... $ 285,462
40,000* Japan Air Lines Co. Ltd. .................... 101,299
10,000 Lufthansa AG ................................ 218,692
60,000 Malay Airline System BHD .................... 39,158
35,000 Singapore Airlines .......................... 244,013
-----------
888,624
-----------
APPAREL & PRODUCTS - 0.17%
20,000 Onward Kashiyama Co., Ltd. .................. 247,565
-----------
APPLIANCES/FURNISHINGS - 1.42%
4,200 Matsushita Electric Industrial Co.
Ltd. - ADR ................................. 684,338
10,000 Philips Electronics NV ...................... 632,663
33,000 Sanyo Electric Co. Ltd. ..................... 93,214
3,400 Sanyo Electric Co. Ltd. - ADR ............... 49,300
7,970 Sony Corp - ADR ............................. 582,806
-----------
2,042,321
-----------
AUTO - CARS - 3.89%
16,582 Daimler Chrysler AG Stuttgart ............... 1,520,362
50,000 Fiat S.P.A .................................. 153,297
16,500 Fiat S.P.A. - ADR ........................... 252,656
10,000 Honda Motor Co., Ltd. - ADR ................. 725,000
500 Peugeot Citroen SA .......................... 79,097
78,000 Toyota Motor Corp. .......................... 1,975,325
5,000 Volkswagen AG ............................... 406,732
20,000 Volvo AB .................................... 464,487
-----------
5,576,956
-----------
AUTO - ORIGINAL EQUIPMENT - 0.05%
25,000 Calsonic Corp. .............................. 67,979
-----------
AUTO - REPLACEMENT PARTS - 0.97%
26,000 Bridgestone Corp. ........................... 607,792
5,550 Denso Corp. ................................. 429,840
8,191 Michelin (CGDE) Class B ..................... 353,458
-----------
1,391,090
-----------
BANKS - OTHER - 13.27%
60,000 AMMB Holdings BHD ........................... 61,263
50,000 Asahi Bank Ltd. ............................. 190,747
3,190 Asahi Bank Ltd. - ADR ....................... 121,973
106,000 Bank of Tokyo - Mitsubishi .................. 1,152,922
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BANKS - OTHER - Continued
68,000 Bank of Yokohama Ltd. ....................... $ 143,507
2,296 Bank of Yokohama Ltd. - ADR ................. 48,565
38,893 Barclays PLC ................................ 882,083
50,000 Bco Bilbao Vizcaya .......................... 789,747
11,977 Bco Comm Portugues .......................... 364,821
4,000* Bco Espir Santo ............................. 123,979
51,142 Bco Santander SA ............................ 1,045,160
40,000 Chiba Bank Ltd. ............................. 150,649
108,000 Commerce Asset Holding ...................... 77,589
11,250 Commerce Asset Holding
(Warrants) ................................. 1,688
250,000 DCB Holdings BHD ............................ 135,526
50,000 DCB Holdings BHD (Warrants) ................. 8,947
6,300 Den Danske Bank AF 1871 - ADR ............... 813,469
24,500 Deutsche Bank AG - ADR ...................... 1,589,592
13,000 Development Bank of Singapore Ltd. .......... 98,515
14,987 Development Bank of Singapore Ltd.
- ADR ...................................... 454,984
17,000 Dresdner Bank AG - ADR ...................... 787,270
10,000 Foreningssparbk ............................. 280,167
25,000 Hang Seng Bank .............................. 220,360
2,180 HSBC Holdings PLC - ADR ..................... 558,866
15,000 Industrial Bank of Japan Ltd. ............... 80,966
48,000 Joyo Bank ................................... 175,325
134,101 Lloyds TSB Group PLC ........................ 1,863,549
60,000 Malayan Bk BHD .............................. 94,737
35,000* Merita Oyj .................................. 203,548
32,154 National Australia Bank Ltd. ................ 481,258
9,319 National Australia Bank Ltd. - ADR .......... 695,430
10,746 National Westminster Bank PLC ............... 196,036
2,500* Paribas ..................................... 222,791
20,743 Royal Bank Scot Group ....................... 312,379
98,000 Sakura Bank Ltd. ............................ 249,773
25,000* Sao Paolo Imi SPA ........................... 410,031
30,000 Shizuoka Bank ............................... 325,081
74,000 Sumitomo Bank ............................... 822,289
26,000 Tokai Bank .................................. 131,477
2,225 Tokai Bank - ADR ............................ 225,541
6,653 Ubs AG ...................................... 2,001,189
13,300 Westpac Banking Corp. Ltd. - ADR ............ 444,719
-----------
19,038,508
-----------
BANKS - REGIONAL - 0.49%
21,161* Istituto Bancario San Paolo ................. 698,313
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
BEVERAGE - BREWERS/
DISTRIBUTORS - 1.39%
34,642 Bass ........................................ $ 477,692
60,500 Diageo ...................................... 677,585
16,000 Kirin Brewery Co., Ltd. ..................... 165,974
12,000 LVMH ( Moet Hennessy Louis
Vuitton) - ADR ............................. 468,000
45,000 Sapporo Breweries ........................... 199,067
-----------
1,988,318
-----------
BROADCASTING - 0.32%
764 Canal Plus .................................. 175,516
40,000 Mediaset .................................... 282,185
-----------
457,701
-----------
BUILDING MATERIALS - 1.90%
20,000 Asahi Glass Co. Ltd. ........................ 116,234
1,223 Cie De St Gobain ............................ 180,574
31,216 CRH PLC ..................................... 473,253
2,505 Fletcher Challenge Building Division ........ 31,469
2,700 Glaverbel SA ................................ 348,004
525 Holderbank Finance Glarus ................... 607,606
40,000 Inax Corp. .................................. 219,480
4,459 Lafarge SA .................................. 420,098
23,797 Rexam ....................................... 77,719
15,000 Tostem Corp. ................................ 249,594
-----------
2,724,031
-----------
CHEMICAL - MAJOR - 1.24%
25,000 BASF AG ..................................... 946,093
10,000 Bayer AG .................................... 410,269
10,000 Bayer AG - ADR .............................. 428,205
-----------
1,784,567
-----------
CHEMICAL - MISCELLANEOUS - 1.68%
15,303 Air Liquide - ADR ........................... 521,864
10,200 Akzo Nobel N V- ADR ......................... 416,925
23,420 BOC Group PLC ............................... 340,138
7,500 Degussa AG .................................. 373,574
6,000 Imperial Chemical Industries PLC
- ADR ...................................... 227,250
13,100 Shin Etsu Chemical Co. ...................... 292,411
50,000 Toray Industries Inc. ....................... 237,419
-----------
2,409,581
-----------
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 37
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
CONGLOMERATES - 1.17%
6,890 Broken Hill Proprietary Co. Ltd.
- ADR ...................................... $ 108,518
34,942 BTR ......................................... 71,468
15,408 BTR PLC ..................................... 126,145
30,000 Hutchison Whampoa ........................... 214,064
3,300 Itochu Corp. - ADR .......................... 63,090
71,250 Keppel Corp. Ltd. ........................... 187,466
26,875 Keppel Corp. Ltd. - ADR ..................... 141,639
8,157 Lagardere Groupe ............................ 331,918
22,000 Mitsubishi Corp. ............................ 141,071
50,000 Mitsui & Co. ................................ 285,308
6,400* Wharf Hldgs (Warrants) ...................... 752
----------
1,671,439
----------
CONSUMER FINANCE - 0.05%
37,000 Nippon Shinpan Co. .......................... 67,573
----------
COSMETICS/TOILETRIES - 1.28%
1,100 Loreal Co. .................................. 684,648
7,900 Loreal Co. - ADR ............................ 986,523
14,490 Shiseido Ltd. - ADR ......................... 165,153
----------
1,836,324
----------
DRUGS - 8.73%
26,666 Astra AB .................................... 488,232
44,900 Glaxo Wellcome PLC - ADR .................... 2,851,150
7,700 Kissei Pharmaceutical Co. ................... 113,875
1,400 Novartis AG ................................. 2,626,943
5,000 Ono Pharmaceutical .......................... 138,799
3,500 Rhone Poulenc SA ............................ 174,409
200 Roche Holdings AG ........................... 2,349,065
10,000 Sankyo Co. Ltd. ............................. 227,273
149,642 Smithkline Beecham .......................... 1,836,392
25,000 Takeda Chemical Industries Ltd. ............. 842,127
20,900 Zeneca Group PLC - ADR ...................... 879,106
-----------
12,527,371
-----------
ELECTRICAL EQUIPMENT - 1.59%
1,000 Barco ....................................... 267,783
15,000 Fanuc ....................................... 474,838
84,000 General Electric PLC ........................ 686,534
10,400 General Electric PLC - ADR .................. 85,274
10,000 Murata Manufacturing Co. .................... 391,234
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
ELECTRICAL EQUIPMENT - Continued
3,400 Sumitomo Electric Industries Ltd.
- ADR ...................................... $ 370,647
-----------
2,276,310
-----------
ELECTRONIC INSTRUMENTS - 1.92%
50,000 Hitachi Ltd. ................................ 300,730
5,050 Hitachi Ltd. - ADR .......................... 297,950
6,000 Kyocera Corp. ............................... 282,955
50,000 Racal Electronics PLC ....................... 260,613
7,110 Schneider SA ................................ 436,783
8,000 Siemens AG .................................. 556,456
7,000 Siemens AG - ADR ............................ 497,226
25,000 Yokogawa Electric ........................... 124,188
-----------
2,756,901
-----------
FINANCE COMPANIES - 3.35%
30,000 Abbey National .............................. 608,647
44,427 ABN Amro Holdings NV ........................ 915,222
38,879 Allied Zurich ............................... 554,715
9,907 Allied Zurich Plc ........................... 285,842
126 Credit Local de France ...................... 18,892
8,286 Fortis Amev NV .............................. 608,707
20,578 ING Groep NV ................................ 1,178,160
3,984 Societe Generale ............................ 627,446
-----------
4,797,631
-----------
FOODS - 3.19%
25,000 Ajinomoto Inc. .............................. 226,867
22,222 Cadbury Schweppes PLC ....................... 333,552
3,929 Cadbury Schweppes PLC - ADR ................. 237,213
10,000 Daiei, Inc. ................................. 26,705
11,500 Daiei, Inc. - ADR ........................... 58,937
100,000 Golden Hope Plantations ..................... 82,105
1,000 Groupe Danone ............................... 291,781
30,000 Nestle SA - ADR ............................. 3,126,144
30,750 Tate & Lyle PLC ............................. 193,753
----------
4,577,057
----------
FOOTWEAR - 0.11%
1,500 Adidas AG ................................... 163,577
----------
FREIGHT - 0.68%
98,000 Mitsui Osk Lines Ltd. ....................... 158,296
40,000 Nippon Yusen Kabushiki Kaish ................ 121,753
8,570 Nippon Yusen Kabushiki Kaish - ADR .......... 261,450
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
FREIGHT - Continued
35,178 P & O Steam Navigation ...................... $ 426,479
----------
967,978
----------
HOME BUILDERS - 0.32%
214 Sekisui Homes Ltd. - ADR .................... 20,857
20,000 Sekisui House, Ltd. ......................... 194,480
9,000 Skanska AB .................................. 249,939
----------
465,276
----------
HOUSEHOLD PRODUCTS - 0.95%
7,000 Katokichi Co. ............................... 100,682
16,400 Unilever N V- ADR ........................... 1,267,925
----------
1,368,607
----------
INFORMATION PROCESSING - 1.16%
1,200* Cap Gemini .................................. 175,490
14,000 Fujitsu Ltd. ................................ 161,591
7,200 Fujitsu Ltd. - ADR .......................... 416,466
2,000 SAP AG ...................................... 905,420
----------
1,658,967
----------
INSURANCE - CASUALTY - 0.31%
25,000 Mitsui Marine & Fire ........................ 126,015
50,000 Nippon Fire & Marine Insurance .............. 171,266
25,000 Sumitomo Marine & Fire ...................... 149,148
----------
446,429
----------
INSURANCE - LIFE - 1.43%
67,514* Irish Life PLC .............................. 561,560
2,500* Mundial Confianca ........................... 81,769
15,240 Prudential PLC - ADR ........................ 1,119,404
20,000* Skandia Forsakring .......................... 283,854
----------
2,046,587
----------
INSURANCE - MULTILINE - 4.01%
3,088 Allianz AG .................................. 1,111,276
27,313 Assic Generali .............................. 1,019,512
10,962 AXA ......................................... 1,416,204
1,560 Munchener Ruckvers .......................... 717,263
60* Munchener Ruckvers .......................... 2,511
56,462 Royal Sun Alliance .......................... 471,244
400 Swiss Reinsurance AG ........................ 1,010,671
----------
5,748,681
----------
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
38 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
LEISURE TIME - 1.08%
20,000 Canon, Inc. - ADR ........................... $ 443,750
15,000 Fuji Photo .................................. 560,065
54,585 Ladbroke Group PLC .......................... 211,133
90,053 Rank Group .................................. 337,180
----------
1,552,128
----------
LODGING - 0.24%
297,916 Hong Kong & Shanghai Hotels ................. 246,243
22,916* Hong Kong & Shanghai Hotels
(Warrants) ................................. 30
180,000 Hotel Properties ............................ 94,392
----------
340,665
----------
MACHINE TOOLS - 0.43%
35,000 Amada Co., Ltd. ............................. 174,716
16,000 Makita Corp. - ADR .......................... 179,000
25,000 Minebea Co. Ltd. ............................ 268,466
----------
622,182
----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.82%
3,501 Algeco ...................................... 296,611
2,000 Groupe Gtm .................................. 225,691
2,000 Jean Lefebvre SA ............................ 183,154
52,000 Kajima Corp. ................................ 138,442
2,340 Kajima Corp. - ADR .......................... 62,441
16,000* Kumagai Gumi Co (Warrants) .................. 1,467
80,000 Kumagai Gumi Co. ............................ 35,903
70,000 Shimizu Corp. ............................... 230,114
----------
1,173,823
----------
MACHINERY - INDUSTRIAL/
SPECIALTY - 2.38%
10,000 Atlas Copco AB Series A ..................... 227,943
125 Bobst SA .................................... 170,092
61,837 British Aerospace ........................... 531,404
8,000 Ebara Corp. ................................. 67,013
2,530 Ebara Corp. - ADR ........................... 212,411
100,000 Halma PLC ................................... 194,635
50,000 Kawasaki Heavy Industries ................... 123,377
70,000 Kubota Corp. ................................ 161,364
1,350 Kubota Corp. - ADR .......................... 63,112
750 Man AG ...................................... 212,650
10,000 Mannesmann AG ............................... 1,081,671
612 Rauma Oy .................................... 8,601
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
MACHINERY - INDUSTRIAL/
SPECIALTY - Continued
101,468 Siebe PLC ................................... $ 365,277
----------
3,419,550
----------
MEDICAL TECHNOLOGY - 0.02%
20,000* Instrumentation Laboratory S. P. A .......... 22,500
----------
MERCHANDISE - SPECIALTY - 1.38%
43,020 BAA PLC ..................................... 475,427
10,000 Esselte AB Series B ......................... 156,058
35,000 Great Universal Stores PLC .................. 363,992
10,000 Hennes and Mauritz .......................... 738,511
1,500* Herlitz AG .................................. 58,402
3,000 Metro AG .................................... 187,008
----------
1,979,398
----------
MERCHANDISING -
DEPARTMENT - 0.94%
500 Karstadt AG ................................. 234,313
15,311 Marks & Spencer PLC ......................... 104,049
15,033 Marks & Spencer PLC - ADR ................... 621,950
16,000 Marui Co., Ltd. ............................. 285,065
36,000 Mitsukoshi Ltd. ............................. 100,227
200 Mitsukoshi Ltd. - ADR ....................... 5,581
----------
1,351,185
----------
MERCHANDISING - FOOD - 1.84%
16,078 Ahold Kon Nv ................................ 557,356
1,550 Carrefour SA ................................ 1,096,595
10,000 Delhaize-Le Lion, SA ........................ 820,211
15,000 Melco International Development
Limited .................................... 1,395
10,000 Uny Co. Ltd. ................................ 167,208
----------
2,642,765
----------
MERCHANDISING - MASS - 0.86%
4,356 Familymart Co. .............................. 211,082
10,200 Ito-Yokado Co. Ltd. - ADR ................... 633,675
6,500 Jeronimo Martins SGPS ....................... 318,714
20,000 Seiyu Ltd. .................................. 66,396
----------
1,229,867
----------
METALS - MISCELLANEOUS - 1.04%
200* Alusuisse Lonza Holdings .................... 252,095
113,049 North Ltd. .................................. 211,682
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ----------
<S> <C> <C>
METALS - MISCELLANEOUS - Continued
8,062 Rio Tinto Limited ........................... $ 415,690
13,132 Rio Tinto PLC ............................... 396,926
67,410 Western Mining .............................. 212,590
----------
1,488,983
----------
METALS - STEEL - 0.50%
500 Bekaert SA .................................. 268,640
36,700 British Steel PLC ........................... 59,324
2,000 British Steel PLC - ADR ..................... 34,250
78,000 Sumitomo Metal Industries Ltd. .............. 93,068
50,000 Sumitomo Metal Mining ....................... 180,195
2,000 Vallourec Usin .............................. 81,031
----------
716,508
----------
MISCELLANEOUS - 0.69%
8,000 Secom Co. ................................... 591,558
15,718 Tnt Post Groep NV ........................... 395,303
----------
986,861
----------
OIL - INTEGRATED
INTERNATIONAL - 5.35%
27,866 British Petroleum Co. PLC - ADR ............. 2,567,155
16,946 Elf Aquitaine SA - ADR ...................... 1,054,889
225,000 Eni S.P.A ................................... 1,395,074
10,000 Repsol SA - ADR ............................. 561,250
20,392 Royal Dutch Pete Co. ........................ 958,424
9,207 Total ....................................... 1,140,922
----------
7,677,714
----------
OIL/GAS PRODUCERS - 0.45%
2,505 Fletcher Challenge Energy Division .......... 51,196
3,500 Norsk Hydro A/S - ADR ....................... 128,187
3,000 OMV AG ...................................... 282,794
62,500 Santos Ltd. ................................. 181,240
----------
643,417
----------
PAPER/FOREST PRODUCTS - 0.73%
150,801 Fletcher Challenge Forest Ltd. .............. 57,149
4,326 Fletcher Challenge Ltd. - ADR ............... 16,493
5,010 Fletcher Challenge Paper Division ........... 31,939
22,000 New Oji Paper Co., Ltd. ..................... 98,750
300 New Oji Paper Co., Ltd. - ADR ............... 13,496
60,000 Nippon Paper Industries ..................... 256,656
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 39
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
PAPER/FOREST PRODUCTS - Continued
22,000 UPM - Kymmene Corp. ......................... $ 575,749
-----------
1,050,232
-----------
PUBLISHING - NEWS - 0.71%
51,211 Independent Newspapers PLC .................. 183,783
22,500 News Corp Ltd. - ADR ........................ 630,000
21,379 United News & Media PLC ..................... 206,468
-----------
1,020,251
-----------
PUBLISHING/PRINTING - 0.68%
43,333 Reuters Group ............................... 418,489
20,000 Trelleborg AB ............................... 168,346
2,040 Wolters Kluwer NV ........................... 388,790
-----------
975,625
-----------
RAILROAD - 0.65%
30,000 Fukuyama Transporting Co. ................... 135,390
9,218 Nagoya Railroad Co. Ltd. - ADR .............. 307,466
101,970 Odakyu Electric Railway Co. Ltd. ............ 331,072
60,000 Tokyu Corp. ................................. 157,305
-----------
931,233
-----------
REAL ESTATE - 1.54%
6,000* Asticus AB .................................. 50,872
12,000 Diligentia .................................. 80,364
9,000* Drott AB .................................... 71,332
35,000 Great Portland Est .......................... 111,132
42,102 Hammerson PLC ............................... 268,058
240,000 Hang Lung Development Co. ................... 277,412
43,000 Mitsubishi Estate Co. Ltd. .................. 410,454
35,000 Mitsui Fudosan .............................. 268,182
26,634 New World Development Co. ................... 64,667
83,597 Sun Hung Kai Properties Ltd. ................ 599,204
-----------
2,201,677
-----------
SECURITIES RELATED - 0.33%
25,000 Daiwa Securities Co. Ltd. ................... 89,083
2,137 Garban ...................................... 8,354
3,800 Nomura Securities Co. Ltd. - ADR ............ 370,045
160,000* Peregrine Investment Holdings Ltd. .......... 0
6,000* Yamaichi Securities Co. Ltd. - ADR .......... 0
-----------
467,482
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
TELECOMMUNICATIONS - 11.81%
3,000 Alcatel Alst Cge ............................ $ 396,541
36,037 British Telecommunications PLC .............. 493,666
11,379 British Telecommunications PLC
- ADR ...................................... 1,573,147
46,602 Cable & Wireless PLC ........................ 591,881
40,000 Deutsche Telekom ............................ 1,122,344
15,000 France Telecom .............................. 1,041,447
30,600 Hong Kong Telecommunications Ltd.
- ADR ...................................... 575,662
15,621 Kon Kpn NV .................................. 673,829
5,000* Netcom Asa .................................. 130,217
300 Nippon Tel+Tel Cp ........................... 2,240,260
12,000 Nokia Ab Oy ................................. 1,174,760
18* Ntt Mobile Communications ................... 686,688
2,600 Telecom Corp. of New Zealand Ltd.
- ADR ...................................... 87,262
250,000 Telecom Italia Mobile ....................... 1,637,148
106,111 Telecom Italia SPA .......................... 859,438
20,400 Telefonaktiebolage & LM Ericsson
Class B - ADR .............................. 563,550
14,000 Telefonica de Espana ........................ 657,568
6,290 Telefonica de Espana - ADR .................. 876,669
115,000 Telekom Malaysia Berhad ..................... 225,461
9,000 Vodafone Group PLC - ADR .................... 1,329,187
-----------
16,936,725
-----------
TEXTILE - PRODUCTS - 0.26%
20,000 Courtaulds Textiles PLC ..................... 51,133
15,000 Marzotto & Figli S.P.A ...................... 155,380
15,000 Wacoal Corp. ................................ 169,359
------------
375,872
------------
TOBACCO - 0.45%
38,879 British America Tobacco ..................... 356,396
9,908 British American Tobacco PLC ................ 185,775
32,000 Swedish Match AB ............................ 108,135
------------
650,306
------------
UTILITIES - COMMUNICATION - 0.20%
1,500 Telecel Comuni Pes .......................... 293,162
------------
UTILITIES - ELECTRIC - 3.87%
55,000 Clp Holdings ................................ 289,100
48,000 Endesa SA ................................... 1,248,000
6,500 Hidroel Cantabrico .......................... 314,306
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- ------------
<S> <C> <C>
UTILITIES - ELECTRIC - Continued
30,000 Iberdrola SA ................................ $ 496,709
16,600 Kansai Electric Power Co. Inc. .............. 332,808
62,265 National Power .............................. 529,947
2,000 Oesterreichisch Elektrizitatswirt
Schafts - AG Class A ....................... 311,701
10,000 RWE AG - ADR ................................ 533,482
48,488 Scottish Power PLC .......................... 514,262
95,000 Tenaga Nasional Berhad ...................... 126,250
25,200 Tokyo Electric Power ........................ 574,773
5,000 VEBA AG ..................................... 277,049
------------
5,548,387
------------
UTILITIES - GAS, DISTRIBUTION - 0.47%
44,117 Bg .......................................... 302,354
127,000 Osaka Gas Co. ............................... 371,104
------------
673,458
------------
UTILITIES - MISCELLANEOUS - 0.18%
1,500* Tractebel Inv Intl .......................... 257,209
------------
WATER SERVICES - 2.00%
6,349 Eaux (Cie Generale) ......................... 1,435,143
10,196* Eaux (Cie Generale) (Warrants) ............. 20,610
22,242 Hyder PLC ................................... 299,000
24,186 Thames Water ................................ 462,367
45,184 United Utilities PLC ........................ 658,087
------------
2,875,207
------------
TOTAL COMMON STOCKS
(Cost $110,042,347) ........................ 142,796,634
------------
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - STATEMENT OF NET ASSETS CONTINUED
40 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- ------------
<S> <C> <C>
UNITED STATES GOVERNMENT -
SHORT TERM - 0.24%
U.S. TREASURY BILLS - 0.24%
United States Treasury Bills,
$ 25,000 4.20% due 12/31/98 ......................... $ 24,912
200,000 4.17% due 1/14/99 .......................... 198,981
125,000 4.00% due 12/24/98 ......................... 124,680
------------
348,573
------------
TOTAL UNITED STATES GOVERNMENT -
SHORT TERM
(Cost $348,573) ............................. 348,573
------------
TOTAL INVESTMENTS
(Cost $110,390,920) - 99.80% ................ 143,145,207
Other assets less liabilities,
net - 0.20% ................................ 281,881
------------
NET ASSETS (equivalent
to $11.84 per share on
12,109,576 shares
outstanding) - 100% ........................ $143,427,088
============
* Non-income producing
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- --------- ------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 11/30/98)
10 (2) Nikkei 225 Futures
(December/$119.52)............ $ 38,504
============
(1)U.S.Treasury Bills with a market value
of approximately $315,000 were maintained
in a segregated account with a portion
placed as collateral for futures contracts.
(2)Per 500
</TABLE>
<TABLE>
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
12,109,576 shares outstanding ....................... $ 121,096
Additional paid in capital ............................ 96,372,480
Accumulated net realized gain on securities ........... 13,830,664
Undistributed net investment income ................... 304,432
Unrealized appreciation of:
Investments ............................ $ 32,754,287
Futures ................................ 38,504
------------
Foreign currency translation ........... 5,625 32,798,416
------------ ------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING ......................................... $143,427,088
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
INTERNATIONAL EQUITIES FUND - FINANCIAL STATEMENTS (Unaudited)
41
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $130,620) ............................ $ 1,213,679
Interest ............................................................................ 576,660
------------
Total investment income ........................................................... 1,790,339
------------
EXPENSES:
Advisory fees ....................................................................... 251,837
Custodian and accounting services ................................................... 17,433
Reports to shareholders ............................................................. 12,299
Audit fees and tax services ......................................................... 2,076
Directors' fees and expenses ........................................................ 2,101
Miscellaneous ....................................................................... 10,982
------------
Total expenses .................................................................... 296,728
------------
NET INVESTMENT INCOME ............................................................... 1,493,611
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments ........................................................ $ 3,402,683
Foreign currency transactions ...................................... 89,625
Futures contracts .................................................. (254,834) 3,237,474
------------
Net unrealized appreciation (depreciation) during the period:
Investments ........................................................ (4,904,562)
Foreign currency translation ....................................... 23,673
Futures contracts .................................................. 159,813 (4,721,076)
------------ ------------
Net realized and unrealized loss on securities and
foreign currencies during the period ............................................ (1,483,602)
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... $ 10,009
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................................................... $ 1,493,611 $ 3,180,171
Net realized gain on securities and foreign currency transactions ......... 3,237,474 10,927,955
Net unrealized appreciation (depreciation) of securities and
translation of foreign currencies during the period ...................... (4,721,076) 1,477,313
------------- -------------
Increase in net assets resulting from operations ....................... 10,009 15,585,439
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................................................... (1,657,996) (3,388,878)
Net realized gain on securities ........................................... -- (4,595,687)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders ........................................................ (1,657,996) (7,984,565)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold .......................................... 30,621,540 58,848,665
Proceeds from capital stock issued for distributions reinvested ........... 1,657,996 7,984,565
------------- -------------
32,279,536 66,833,230
Cost of capital stock repurchased ......................................... (42,673,628) (100,401,920)
------------- -------------
Decrease in net assets resulting from capital stock transactions ........ (10,394,092) (33,568,690)
------------- -------------
TOTAL DECREASE IN NET ASSETS .............................................. (12,042,079) (25,967,816)
NET ASSETS:
Beginning of period ....................................................... 155,469,167 181,436,983
------------- -------------
End of period (including undistributed net investment income
of $304,432 and $468,817) ............................................... $ 143,427,088 $ 155,469,167
------------- -------------
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold .............................................. 2,661,161 5,111,681
Shares issued for distributions reinvested ................................ 144,082 728,332
Shares of capital stock repurchased ....................................... (3,704,943) (8,688,179)
------------- -------------
Decrease in shares outstanding .......................................... (899,700) (2,848,166)
Shares outstanding:
Beginning of period ..................................................... 13,009,276 15,857,442
------------- -------------
End of period ........................................................... 12,109,576 13,009,276
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
GROWTH FUND - STATEMENT OF NET ASSETS
42 November 30, 1998 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ------------ -------------
<S> <C> <C>
COMMON STOCKS - 94.47%
ADVERTISING - 4.93%
435,000* ADVO, Inc. ................................... $11,255,625
330,000* Catalina Marketing Corp. ..................... 19,222,500
900,000 Outdoor Systems Inc. ......................... 24,300,000
-----------
54,778,125
-----------
APPAREL & PRODUCTS - 0.76%
150,000* Abercrombie and Fitch Co. .................... 8,400,000
-----------
AUTO - CARS - 1.18%
623,500* Avis Rent A Car Inc. ......................... 13,132,478
-----------
AUTO - REPLACEMENT PARTS - 1.73%
637,500* AutoZone, Inc. ............................... 19,204,687
-----------
BANKS - OTHER - 1.46%
450,000 Wells Fargo Co. .............................. 16,200,000
-----------
BROADCASTING - 8.04%
600,000* Chancellor Media Corp. Class A ............... 22,612,500
550,000 Comcast Corp. Class A Special ................ 26,743,750
285,000 Jacor Communications, Inc. ................... 16,583,437
580,000 Tele-Comm Liberty Media Group
Class A .................................... 23,381,250
-----------
89,320,937
-----------
ENTERTAINMENT - 2.98%
480,100 Carnival Corp. Class A ....................... 16,563,450
700,000* Fox Entertainment Group Class A .............. 16,537,500
-----------
33,100,950
-----------
FINANCE COMPANIES - 1.65%
235,000 Associates First Capital Corp. ............... 18,300,625
-----------
FINANCIAL SERVICES - 2.32%
800,000 CIT Group Inc. ............................... 22,450,000
139,700 Waddell & Reed Financial, Inc. ............... 3,265,487
-----------
25,715,487
-----------
FUNERAL SERVICES - 0.93%
275,000 Service Corp. International .................. 10,278,125
-----------
GOVERNMENT SPONSORED - 4.01%
465,000 Federal Home Loan Mortgage Corp .............. 28,132,500
225,000 Federal National Mortgage Association ........ 16,368,750
-----------
44,501,250
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ------------ -------------
<S> <C> <C>
HEALTHCARE - 3.43%
64,200 Cardinal Health, Inc. ........................ $ 4,405,725
490,000 Quorum Health Group Inc. ..................... 8,146,250
750,000* Total Renal Care Holdings .................... 19,921,875
125,000 United HealthCare Corp. ...................... 5,640,625
-----------
38,114,475
-----------
HOSPITAL MANAGEMENT - 0.78%
735,000* Concentra Managed Care, Inc. ................. 8,682,188
-----------
HOUSEHOLD PRODUCTS - 0.21%
108,400 ServiceMaster Co. ............................ 2,330,600
-----------
HUMAN RESOURCES - 3.81%
700,000 Interim Services Inc. ........................ 14,525,000
630,000* Metamor Worldwide, Inc. ...................... 14,923,125
1,075,000* Modis Professional Services .................. 12,832,813
-----------
42,280,938
-----------
INFORMATION PROCESSING - 1.49%
700,000* Acxiom Corp. ................................. 16,537,500
-----------
INFORMATION PROCESSING -
COMPUTER SERVICES - 4.54%
500,000 First Data Corp. ............................. 13,343,750
525,000* Gartner Group, Inc. Class A .................. 11,353,125
200,000 Paychex, Inc. ................................ 9,950,000
492,800* SunGard Data Systems, Inc. ................... 15,769,600
-----------
50,416,475
-----------
INFORMATION PROCESSING -
DATA SERVICES - 8.32%
555,000* Affiliated Computer Services Class A ......... 21,263,438
420,000* BISYS Group, Inc. ............................ 20,212,500
1,625,000* Cendant Corp. ................................ 30,875,000
500,000 Galileo International Inc. ................... 20,000,000
-----------
92,350,938
-----------
INSURANCE - MISCELLANEOUS - 1.76%
305,000 Ace Limited .................................. 9,760,000
222,500 MGIC Investment Corp. ........................ 9,776,094
-----------
19,536,094
-----------
INSURANCE - MULTILINE - 0.70%
24,300* Fairfax Financial Holdings Ltd. .............. 7,772,175
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ------------ -------------
<S> <C> <C>
LEISURE TIME - 1.47%
600,000* Premier Parks, Inc. .......................... $ 16,275,000
-----------
LODGING - 0.86%
950,000* Extended Stay America, Inc. .................. 9,500,000
-----------
MERCHANDISE - SPECIALTY - 11.96%
475,000 Circuit City Stores, Inc. .................... 17,189,063
555,000* Cole National Corp. Class A .................. 8,567,812
450,000* Corporate Express, Inc. ...................... 2,643,750
320,000* CostCo Companies, Inc. ....................... 20,080,000
850,000* General Nutrition Cos., Inc. ................. 15,087,500
420,000 Home Depot, Inc. ............................. 20,895,000
91,500* Kohl's Corp. ................................. 4,500,656
975,000* Office Depot, Inc. ........................... 31,687,500
411,900* Williams-Sonoma, Inc. ........................ 12,176,794
-----------
132,828,075
-----------
MERCHANDISING - DEPARTMENT - 0.62%
250,000* Saks Inc. .................................... 6,875,000
-----------
MERCHANDISING - FOOD - 0.94%
198,500* Safeway, Inc. ................................ 10,483,281
-----------
MERCHANDISING - MASS - 1.83%
400,000 Fred Meyer, Inc. ............................. 20,350,000
-----------
MISCELLANEOUS - 2.36%
85,000* Apollo Group Inc Class A ..................... 2,741,250
313,300* Coach USA, Inc. .............................. 8,889,888
500,000* Sylvan Learning Systems, Inc. ................ 14,531,280
-----------
26,162,418
-----------
OIL - SERVICES - 1.76%
304,700 Schlumberger Ltd. ............................ 13,616,281
245,000* Smith International, Inc. .................... 5,910,625
-----------
19,526,906
-----------
POLLUTION CONTROL - 3.75%
634,000* Allied Waste Industries, Inc. ................ 12,917,750
670,000 Waste Management, Inc. ....................... 28,726,250
-----------
41,644,000
-----------
PUBLISHING - NEWS - 1.18%
205,000 Tribune Co. .................................. 13,145,625
-----------
</TABLE>
<PAGE>
===============================================================================
GROWTH FUND - STATEMENT OF NET ASSETS
November 30, 1998 (Unaudited) 43
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ------------ ---------------
<S> <C> <C>
RESTAURANTS - 1.59%
496,300* Outback Steakhouse Inc. ...................... $ 17,618,650
--------------
SECURITIES RELATED - 3.74%
580,000 Franklin Resources, Inc. ..................... 24,795,000
240,000 Morgan Stanley, Dean Witter,
Discover and Co. ........................... 16,740,000
--------------
41,535,000
--------------
TELECOMMUNICATIONS - 7.38%
540,000* Airtouch Communications, Inc. ................ 30,881,250
608,719* MCI Worldcom Inc. ............................ 35,914,421
540,900 Paging Network, Inc. ......................... 3,346,716
650,000 Western Wireless Corp. Class A ............... 11,781,250
--------------
81,923,637
--------------
TOTAL COMMON STOCKS
(Cost $810,057,645) .......................... 1,048,821,639
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ---------------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 5.11%
CONGLOMERATES - 0.34%
$3,788,000 PHH Corp.,
5.40% due 12/07/1998 ....................... $ 3,784,590
--------------
FINANCE COMPANIES - 1.93%
General Electric Capital Services Inc.:
7,446,000 4.80% due 12/02/1998 ....................... 7,445,006
14,007,000 4.75% due 12/01/1998 ....................... 14,007,000
--------------
21,452,006
--------------
UTILITIES - ELECTRIC - 2.84%
5,000,000 Conagra,
5.52% due 12/02/1998 ....................... 14,997,700
Pacific Gas & Electric Co.:
11,000,000 5.06% due 12/03/1998 ....................... 10,996,907
5,500,000 5.06% due 12/04/1998 ....................... 5,497,635
--------------
31,492,242
--------------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $56,728,838) ........................... 56,728,838
--------------
TOTAL INVESTMENTS
(Cost $866,786,483) - 99.58% ................. 1,105,550,477
Other assets less liabilities,
net - 0.42% ................................ 4,657,422
--------------
NET ASSETS (equivalent
to $21.35 per share on
52,006,265 shares
outstanding) - 100% ........................ $1,110,207,899
==============
* Non-income producing
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
52,006,265 shares outstanding .............. $ 520,063
Additional paid in capital ................... 816,868,419
Accumulated net realized gain on securities .. 56,869,960
Accumulated net investment loss .............. (2,814,537)
Unrealized appreciation of securities ........ 238,763,994
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING ................................ $ 1,110,207,899
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
GROWTH FUND - FINANCIAL STATEMENTS (Unaudited)
44
===============================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ...................................................................... $ 1,517,518
Interest ....................................................................... 1,365,639
------------
Total investment income ...................................................... 2,883,157
------------
EXPENSES:
Advisory fees .................................................................. 4,292,928
Custodian and accounting services .............................................. 128,931
Reports to shareholders ........................................................ 90,343
Audit fees and tax services .................................................... 20,532
Directors' fees and expenses ................................................... 15,363
Miscellaneous .................................................................. 33,815
------------
Total expenses ............................................................... 4,581,912
------------
NET INVESTMENT LOSS ............................................................ (1,698,755)
------------
REALIZED AND UNREALIZED GAIN(LOSS) ON SECURITIES:
Net realized gain (loss) on:
Investments ............................................... $ 5,531,209
Foreign currency translation .............................. (316,974) 5,214,235
Net unrealized depreciation of securities during the period: ------------
Investments ............................................... $(40,733,659)
Foreign currency translation .............................. (672,665) (41,406,324)
------------ ------------
Net realized and unrealized loss on securities and
foreign currencies during the period ........................................ (36,192,089)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $(37,890,844)
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment loss .............................................. $ (1,698,755) $ (1,052,032)
Net realized gain on securities .................................. 5,214,235 52,174,007
Net unrealized appreciation (depreciation) of securities
during the period ............................................. (41,406,324) 165,960,273
--------------- ---------------
Increase (decrease) in net assets resulting from operations .... (37,890,844) 217,082,248
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ -- (303,215)
Net realized gain on securities .................................. -- (15,121,487)
--------------- ---------------
Decrease in net assets resulting from distributions
to shareholders ............................................... -- (15,424,702)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................................. 60,159,807 155,432,936
Proceeds from capital stock issued for distributions reinvested .. -- 15,424,702
--------------- ---------------
60,159,807 170,857,638
Cost of capital stock repurchased ................................ (12,198,127) (20,032,134)
--------------- ---------------
Increase in net assets resulting from capital stock transactions 47,961,680 150,825,504
--------------- ---------------
TOTAL INCREASE IN NET ASSETS ..................................... 10,070,836 352,483,050
NET ASSETS:
Beginning of period .............................................. 1,100,137,063 747,654,013
--------------- ---------------
End of period (including accumulated net investment loss
of $(2,814,537) and $(1,115,782)) .............................. $ 1,110,207,899 $ 1,100,137,063
=============== ===============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ..................................... 2,805,115 7,600,994
Shares issued for distributions reinvested ....................... -- 769,312
Shares of capital stock repurchased .............................. (631,109) (959,921)
--------------- ---------------
Increase in shares outstanding ................................. 2,174,006 7,410,385
Shares outstanding:
Beginning of period ............................................ 49,832,259 42,421,874
--------------- ---------------
End of period .................................................. 52,006,265 49,832,259
--------------- ---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
GROWTH & INCOME FUND - STATEMENT OF NET ASSETS
NOVEMBER 30, 1998 (UNAUDITED) 45
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
COMMON STOCKS - 87.49%
ADVERTISING - 1.58%
76,000 Omnicom Group, Inc........................... $ 4,061,250
-----------
AUTO - CARS - 1.06%
65,000 Harley-Davidson, Inc. ....................... 2,717,813
-----------
BANKS - NEW YORK CITY - 1.27%
65,000 Citigroup Inc. .............................. 3,262,188
-----------
BANKS - OTHER - 2.18%
60,000 Mellon Bank Corp. ........................... 3,776,250
50,000 Wells Fargo Co. ............................. 1,800,000
-----------
5,576,250
-----------
BANKS - REGIONAL - 4.47%
30,000 Fifth Third Bancorp ......................... 1,991,250
54,000 Firstar Corp. ............................... 3,955,500
40,000 State Street Corp. .......................... 2,745,000
55,000 Zions Bancorporation ........................ 2,777,500
-----------
11,469,250
-----------
BROADCASTING - 2.01%
110,000* Clear Channel Communications ................ 5,142,500
-----------
BUILDING MATERIALS - 0.66%
40,000 Lowe's Companies, Inc. ...................... 1,690,000
-----------
CHEMICAL - MAJOR - 0.01%
600 Hercules, Inc. .............................. 19,725
-----------
CONGLOMERATES - 1.36%
45,000 Dial Corp. .................................. 1,181,250
35,000 Tyco International Ltd. ..................... 2,303,438
-----------
3,484,688
-----------
CONTAINERS - METAL/GLASS - 0.82%
65,000* Owens-Illinois, Inc. ........................ 2,088,125
-----------
DRUGS - 11.10%
60,000 Eli Lilly and Co. ........................... 5,381,250
50,000 McKesson Corp. .............................. 3,559,375
20,000 Merck & Co., Inc. ........................... 3,097,500
61,000 Pfizer, Inc. ................................ 6,809,125
30,000 Schering-Plough Corp. ....................... 3,191,250
60,000 Warner-Lambert Co. .......................... 4,530,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
DRUGS - Continued
35,000* Watson Pharmaceuticals, Inc.................. $ 1,885,625
-----------
28,454,125
-----------
ELECTRICAL EQUIPMENT - 1.41%
40,000 General Electric Co. ........................ 3,620,000
-----------
FINANCE COMPANIES - 2.52%
40,000 Finova Group, Inc. .......................... 2,112,500
55,000 SunAmerica, Inc. ............................ 4,358,750
-----------
6,471,250
-----------
FOODS - 0.90%
50,000* U. S. Foodservice ........................... 2,296,875
-----------
GOVERNMENT SPONSORED - 1.49%
39,100 Federal Home Loan Mortgage Corp. ............ 2,365,550
20,000 Federal National Mortgage
Association ............................... 1,455,000
-----------
3,820,550
-----------
HEALTHCARE - 1.81%
67,500 Cardinal Health, Inc. ....................... 4,632,188
-----------
HOME BUILDERS - 1.39%
100,000 Centex Corp. ................................ 3,568,750
-----------
HOSPITAL SUPPLIES - 1.88%
30,000 Johnson & Johnson ........................... 2,437,500
35,000 Medtronic, Inc. ............................. 2,369,062
-----------
4,806,562
-----------
HOUSEHOLD PRODUCTS - 2.95%
85,000* Bed Bath & Beyond, Inc. ..................... 2,650,937
25,000 Clorox Co. .................................. 2,776,562
25,000 Colgate-Palmolive Co. ....................... 2,140,625
-----------
7,568,124
-----------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 4.05%
100,000* BMC Software, Inc. .......................... 5,106,250
25,000* Microsoft Corp. ............................. 3,050,000
65,000* Oracle Corp. ................................ 2,226,250
-----------
10,382,500
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
INFORMATION PROCESSING -
COMPUTER HARDWARE
SYSTEMS - 3.39%
80,000 Compaq Computer Corp......................... $ 2,600,000
100,000* Dell Computer Corp. ......................... 6,081,250
-----------
8,681,250
-----------
INFORMATION PROCESSING -
COMPUTER SERVICES - 1.71%
50,000* America Online, Inc. ........................ 4,378,125
-----------
INFORMATION PROCESSING -
DATA SERVICES - 7.65%
75,000 Computer Associates International 3,318,750
110,000* E M C Corp. ................................. 7,975,000
57,000* Electronic Arts ............................. 2,401,125
20,000 International Business Machine .............. 3,300,000
75,000* Storage Technology Corp. .................... 2,625,000
-----------
19,619,875
-----------
INFORMATION PROCESSING -
NETWORKING - 2.32%
78,750 Cisco Systems, Inc. ......................... 5,935,781
-----------
INSURANCE - LIFE - 0.52%
40,000 Conseco Inc. ................................ 1,325,000
-----------
INSURANCE - MULTILINE -1.10%
30,000 American International Group Inc ............ 2,820,000
-----------
MACHINERY -
INDUSTRIAL/SPECIALTY - 1.62%
36,000 Illinois Tool Works Inc. .................... 2,288,250
40,000 Ingersoll-Rand Co. .......................... 1,872,500
-----------
4,160,750
MEDICAL TECHNOLOGY - 1.34%
40,000 Guidant Corp. ............................... 3,432,500
-----------
MERCHANDISE - SPECIALTY - 5.77%
45,000* CostCo Companies, Inc. ...................... 2,823,750
40,000 Gap, Inc. ................................... 2,942,500
40,000 Home Depot, Inc. ............................ 1,990,000
45,000* Kohl's Corp. ................................ 2,213,438
100,000* Staples, Inc. ............................... 3,493,750
</TABLE>
<PAGE>
===============================================================================
GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED
46 NOVEMBER 30, 1998 (UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -------------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
45,000* Williams-Sonoma, Inc. ....................... $ 1,330,312
-------------
14,793,750
-------------
MERCHANDISING -
DEPARTMENT - 2.00%
114,000 Dayton Hudson Corp. ......................... 5,130,000
-------------
MERCHANDISING - FOOD - 2.44%
45,000 Albertsons, Inc. ............................ 2,567,812
70,000* Safeway, Inc. ............................... 3,696,875
-------------
6,264,687
-------------
MERCHANDISING - MASS - 1.03%
35,000 Wal-Mart Stores, Inc. ....................... 2,635,938
-------------
OIL - SERVICES - 0.72%
75,000 Transocean Offshore, Inc. ................... 1,851,563
-------------
SECURITIES RELATED - 1.21%
55,000 Charles Schwab Corp. ........................ 3,100,625
-------------
SEMICONDUCTORS - 1.26%
30,000 Intel Corp. ................................. 3,228,750
-------------
TELECOMMUNICATIONS - 5.62%
50,000* Airtouch Communications, Inc. ............... 2,859,375
20,000 Lucent Technologies, Inc. ................... 1,721,250
75,000* MCI Worldcom Inc. ........................... 4,425,000
100,000* Tellabs, Inc. ............................... 5,406,250
-------------
14,411,875
-------------
TOBACCO - 1.09%
50,000 Philip Morris Cos Inc. ...................... 2,796,875
-------------
UTILITIES - ELECTRIC - 1.78%
100,000* AES Corp. ................................... 4,575,000
-------------
TOTAL COMMON STOCKS
(Cost $150,626,195) ......................... 224,275,057
-------------
PREFERRED STOCK - 1.34%
20,000 IXC Communications, Inc. .................... 585,000
20,000 NEXTLINK Communications, Inc. ............... 865,000
20,000 QUALCOMM FINANCIAL .......................... 937,500
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -------------
<S> <C> <C>
PREFERRED STOCK - Continued
40,000 Intermedia Communications, Inc
7.00% Series 144A .......................... $ 645,000
20,000 Omnipoint Corp. 7.00% ....................... 412,500
-------------
3,445,000
-------------
TOTAL PREFERRED STOCK
(Cost $4,741,875) ........................... 3,445,000
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- -------------
<S> <C> <C>
CONVERTIBLE BONDS - 4.97%
ADVERTISING - 0.41%
$1,000,000 Outdoor Systems Inc.,
8.88% due 06/15/2007 ....................... 1,055,000
-------------
BANKS - REGIONAL - 0.32%
1,000,000 Bank Atlantic Bancorp.,
5.63% due 12/01/2007 ....................... 820,000
-------------
BROADCASTING - 1.02%
1,000,000 Adelphia Communications Corp.,
9.88% due 03/01/2007 ....................... 1,101,250
1,000,000 Chancellor Media Corp.,
8.13% due 12/15/2007 ....................... 1,000,000
500,000 Clear Channel Communications,
2.63% due 04/01/2003 ....................... 510,000
-------------
2,611,250
-------------
ENTERTAINMENT - 0.40%
1,000,000 Loews Cineplex Entertainment Corp.,
8.88% due 08/01/2008 ....................... 1,035,000
-------------
LODGING - 0.37%
1,000,000 Hilton Hotels Corp.,
5.00% due 05/15/2006 ....................... 940,000
-------------
MACHINERY -
CONSTRUCTION & CONTRACTS - 0.36%
1,000,000 Columbus McKinnon Corp.,
8.50% due 04/01/2008 ....................... 920,000
-------------
MERCHANDISING - MASS - 0.42%
1,000,000 Fred Meyer, Inc.,
7.45% due 03/01/2008 ....................... 1,062,960
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- -------------
<S> <C> <C>
OIL - SERVICES - 0.49%
$2,000,000 Key Energy Group, Inc.,
5.00% due 09/15/2004 ....................... $ 1,265,000
-------------
PUBLISHING/PRINTING - 0.37%
1,000,000 World Color Press, Inc.,
6.00% due 10/01/2007 ....................... 951,250
-------------
TEXTILE - PRODUCTS - 0.40%
1,000,000 WestPoint Stevens Inc.,
7.88% due 06/15/2008 ....................... 1,031,250
-------------
UTILITIES - ELECTRIC - 0.41%
1,000,000 AES Corp.,
8.88% due 08/15/2005 ....................... 1,050,000
-------------
TOTAL CONVERTIBLE BONDS
(Cost $13,633,847) .......................... 12,741,710
-------------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 6.21%
BEVERAGE - SOFT DRINKS - 2.01%
5,151,000 PepsiCo, Inc.,
4.80% due 12/01/1998 ....................... 5,151,000
-------------
FINANCE COMPANIES - 0.72%
1,838,000 General Electric Capital Services,
5.00% due 12/01/1998 ....................... 1,837,816
-------------
UTILITIES - ELECTRIC -3.48%
8,919,000 Conagra,
5.52% due 12/02/1998 ....................... 8,917,632
-------------
TOTAL CORPORATE SHORT
TERM COMMERCIAL PAPER
(Cost $15,906,448) .......................... 15,906,448
-------------
TOTAL INVESTMENTS
(Cost $184,908,365) - 100.01% .............. 256,368,215
Other assets less liabilities,
net - (0.01%) .............................. (14,386)
-------------
NET ASSETS (equivalent
$19.28 per share on
13,298,592 shares
outstanding) - 100% ........................ $ 256,353,829
=============
</TABLE>
<PAGE>
===============================================================================
GROWTH & INCOME FUND - STATEMENT OF NET ASSETS CONTINUED
NOVEMBER 30, 1998 (UNAUDITED) 47
===============================================================================
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,298,592 shares outstanding ............. $ 132,986
Additional paid in capital .................. 178,264,935
Accumulated net realized gain on securities . 6,313,595
Undistributed net investment income ......... 182,463
Unrealized appreciation of securities ....... 71,459,850
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING ................................ $256,353,829
</TABLE>
* Non-income producing
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
GROWTH & INCOME FUND - FINANCIAL STATEMENTS (Unaudited)
48
===============================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends ...................................................................... $ 664,231
Interest ....................................................................... 850,991
-----------
Total investment income ...................................................... 1,515,222
-----------
EXPENSES:
Advisory fees .................................................................. 959,662
Custodian and accounting fees .................................................. 30,131
Reports to shareholders ........................................................ 15,095
Audit fees and tax services .................................................... 4,303
Directors' fees and expenses ................................................... 2,800
Miscellaneous .................................................................. 9,081
-----------
Total expenses ............................................................... 1,021,072
-----------
NET INVESTMENT INCOME .......................................................... 494,150
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized loss on securities ................................................ (13,647,563)
Net unrealized appreciation on securities during the period .................... 4,219,510
-----------
Net realized and unrealized loss on securities during the period ............ (9,428,053)
-----------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $(8,933,903)
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income .......................................................... $ 494,150 $ 1,096,169
Net realized gain (loss) on securities ......................................... (13,647,563) 20,112,463
Net unrealized appreciation of securities during the period .................... 4,219,510 21,794,919
------------- -------------
Increase (decrease) in net assets resulting from operations .................. (8,933,903) 43,003,551
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .......................................................... (485,096) (1,084,032)
Net realized gain on securities ................................................ -- (2,863,622)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders ............................................................. (485,096) (3,947,654)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ............................................... 6,196,491 31,809,939
Proceeds from capital stock issued for distributions reinvested ................ 485,096 3,947,654
------------- -------------
6,681,587 35,757,593
Cost of capital stock repurchased .............................................. (12,067,757) (13,199,616)
------------- -------------
Increase (decrease) in net assets resulting from capital
stock transactions .......................................................... (5,386,170) 22,557,977
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................................ (14,805,169) 61,613,874
NET ASSETS:
Beginning of period ............................................................ 271,158,998 209,545,124
------------- -------------
End of period (including undistributed net investment income
of $182,463 and $173,409) .................................................... $ 256,353,829 $ 271,158,998
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ................................................... 323,625 1,662,136
Shares issued for distributions reinvested ..................................... 26,247 209,426
Shares of capital stock repurchased ............................................ (669,839) (675,465)
------------- -------------
Increase (decrease) in shares outstanding .................................... (319,967) 1,196,397
Shares outstanding:
Beginning of period .......................................................... 13,618,559 12,422,162
------------- -------------
End of period ................................................................ 13,298,592 13,618,559
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS
November 30, 1998 (Unaudited) 49
===============================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS - 92.71%
AEROSPACE/DEFENSE - 1.64%
390,000* SCI Systems, Inc. ........................... $ 18,963,750
------------
AUTO - CARS - 0.48%
145,000 General Motors Corp. Class H ............... 5,510,000
------------
ELECTRONIC INSTRUMENTS - 0.47%
115,000* Cognex Corp. ................................ 1,904,688
43,000 Lattice Semiconductor Corp. ................. 1,585,625
30,000* Marshall Industries ......................... 780,000
55,000* Sawtek Inc. ................................. 1,196,250
------------
5,466,563
------------
INFORMATION PROCESSING - 4.33%
85,000* Micrel, Inc. ................................ 3,447,810
2,740,000* Parametric Technology Corp. ................. 46,580,000
------------
50,027,810
------------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 7.79%
575,000* BMC Software, Inc. .......................... 29,360,937
42,000* Great Plains Software, Inc. ................. 1,648,500
345,000* Microsoft Corp. ............................. 42,090,000
645,000* Platinum technology, inc .................... 11,408,438
152,000* Visio Corp. ................................. 5,377,000
------------
89,884,875
------------
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 4.34%
35,000 Cyberian Outpost, Inc. ...................... 892,500
170,000* Dell Computer Corp. ......................... 10,338,125
345,000* Electronics for Imaging, Inc. ............... 9,250,313
400,000 Sun Microsystems, Inc. ...................... 29,625,000
------------
50,105,938
------------
INFORMATION PROCESSING -
COMPUTER SERVICES - 8.95%
290,000* America Online, Inc. ........................ 25,393,125
145,000 Automatic Data Processing, Inc. ............. 11,165,000
290,000 Checkfree Holdings Corp. .................... 4,712,500
860,000 First Data Corp. ............................ 22,951,250
760,000* Gartner Group, Inc. Class A ................. 16,435,000
215,000 National Data Corp. ......................... 8,035,625
350,700 Security Dynamics Technology ................ 5,348,175
145,000* Sterling Commerce Inc. ...................... 5,256,250
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -----------
<S> <C> <C>
INFORMATION PROCESSING -
COMPUTER SERVICES - Continued
100,000* VeriSign, Inc. .............................. $ 4,012,500
------------
103,309,425
------------
INFORMATION PROCESSING -
CONSUMER SOFTWARE - 4.98%
145,000* Intuit ...................................... 8,391,875
965,000* Networks Associates, Inc. ................... 49,094,375
------------
57,486,250
------------
INFORMATION PROCESSING -
DATA SERVICES - 27.38%
650,000* Adobe Systems Inc. .......................... 29,087,500
114,000* Affiliated Computer Services Class A ........ 4,367,625
571,000 Anixter Internationall, Inc. ................ 9,421,500
720,000* Ascend Communications Inc. .................. 40,455,000
345,000 Avant! Corp. ................................ 5,757,187
57,000* BISYS Group, Inc. ........................... 2,743,125
385,000* CBT Group PLC ADR ........................... 4,042,500
505,000* Cisco Systems, Inc. ......................... 38,064,375
650,000 Computer Associates International ........... 28,762,500
475,000* E M C Corp. ................................. 34,437,500
260,000* Electronic Arts ............................. 10,952,500
70,100* Envoy Corp. ................................. 2,795,237
390,000 Hewlett Packard Co. ......................... 24,472,500
55,000 Integrated Systems, Inc. .................... 553,438
820,000* Learning Co., Inc. .......................... 23,831,250
115,000 National Instruments Corp. .................. 3,335,000
360,000* Netscape Communications Corp. ............... 13,320,000
570,000* PsiNet, Inc. ................................ 10,687,500
140,000* Renaissance Worldwide Inc. .................. 997,500
245,000* Solectron Corp. ............................. 16,215,938
290,000* Tech Data Corp. ............................. 11,672,500
------------
315,972,175
------------
MERCHANDISE - SPECIALTY - 0.06%
40,000* SportsLine USA, Inc. ........................ 690,000
------------
MISCELLANEOUS - 0.49%
200,000* Brightpoint, Inc. ........................... 3,000,000
140,000* Preview Travel Inc. ......................... 2,660,000
------------
5,660,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------- -------------
<S> <C> <C>
MULTIMEDIA - 2.95%
720,000 Synopsys Inc. ............................... $ 34,110,000
--------------
SECURITIES RELATED - 1.08%
460,000 E*Trade Group, Inc. ......................... 12,448,750
--------------
SEMICONDUCTOR EQUIPMENT - 0.50%
171,000* Galileo Technology Ltd. ..................... 2,821,500
85,000* Microchip Technology, Inc. .................. 2,959,063
--------------
5,780,563
--------------
SEMICONDUCTORS - 15.01%
460,000* Altera Corp. ................................ 22,568,750
1,440,000* Analog Devices, Inc. ........................ 29,430,000
130,000* Applied Micro Circuits Corp. ................ 4,355,000
260,000* Burr Brown Corp. ............................ 6,142,500
215,000 Intel Corp. ................................. 23,139,375
950,000* Maxim Integrated Products ................... 37,287,500
230,000 Texas Instruments Inc. ...................... 17,566,250
645,000* Xilinx, Inc. ................................ 32,733,750
--------------
173,223,125
--------------
TELECOMMUNICATIONS - 11.38%
345,000 Airtouch Communications, Inc. ............... 19,729,688
490,000 ICG Communications, Inc. .................... 11,270,000
575,000* Intermedia Communications, Inc. ............. 9,918,750
580,000* MCI Worldcom Inc. ........................... 34,220,000
170,000 Nokia Corp - ADR Series A ................... 16,660,000
285,000* PanAmSat Corp. .............................. 9,583,125
210,000* Premisys Communications Inc. ................ 3,123,750
200,000 QUALCOMM, Inc. .............................. 10,975,000
315,000* Sanmina Corp. ............................... 15,690,938
15,000* Sprint Corp. ................................ 240,000
--------------
131,411,251
--------------
UTILITIES - COMMUNICATION - 0.88%
686,000* Vodafone Group Plc .......................... 10,141,824
--------------
TOTAL COMMON STOCKS
(Cost $862,796,437) ......................... 1,070,192,299
--------------
</TABLE>
<PAGE>
================================================================================
SCIENCE & TECHNOLOGY FUND - STATEMENT OF NET ASSETS CONTINUED
50 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- ---------------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 7.32%
BEVERAGE - SOFT DRINKS - 0.66
PepsiCo, Inc.,
$ 7,555,000 4.80% due 12/01/1998 ....................... $ 7,555,000
---------------
CONGLOMERATES - 2.86%
PHH Corp.,
33,022,000 5.40% due 12/08/1998 ....................... 32,987,322
---------------
CONSUMER FINANCE - 1.30%
Sears Roebuck Acceptance Corp.,
15,000,000 4.87% due 12/02/1998 ....................... 14,997,969
---------------
FINANCE COMPANIES - 2.50%
7,296,000 Ford Credit Europe PLC,
4.95% due 12/04/1998 ....................... 7,292,988
14,161,000 General Electric Capital Services Inc.,
4.95% due 12/07/1998 ....................... 14,149,311
7,465,000 General Motors Acceptance Corp.,
4.86% due 12/03/1998 ....................... 7,462,982
---------------
28,905,281
---------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $84,445,572) .......................... 84,445,572
---------------
TOTAL INVESTMENTS
(Cost $947,242,009) - 100.03% ............... 1,154,637,871
Other assets less liabilities,
net - (0.03%) .............................. (354,811)
---------------
NET ASSETS (equivalent
to $24.22 per share on
47,650,971 shares
outstanding) - 100% ........................ $ 1,154,283,060
===============
</TABLE>
* Non-income producing
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
47,650,971 shares outstanding ............. $ 476,510
Additional paid in capital .................. 845,123,742
Accumulated net realized gain on securities . 104,163,798
Accumulated net investment loss ............. (2,876,852)
Unrealized appreciation of investments ...... 207,395,862
---------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING ............................... $ 1,154,283,060
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
SCIENCE & TECHNOLOGY FUND - FINANCIAL STATEMENTS (Unaudited)
51
===============================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
INVESTMENT INCOME:
<S> <C> <C>
Dividends ...................................................................... $ 346,950
Interest ....................................................................... 1,551,824
------------
Total investment income ...................................................... 1,898,774
------------
EXPENSES:
Advisory fees .................................................................. 4,532,323
Custodian and accounting services .............................................. 115,404
Reports to shareholders ........................................................ 76,185
Audit fees and tax services .................................................... 15,920
Directors' fees and expenses ................................................... 13,779
Miscellaneous .................................................................. 22,015
------------
Total expenses ............................................................... 4,775,626
------------
NET INVESTMENT LOSS ............................................................ (2,876,852)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments .................................................... $ 9,612,939
Foreign currency transactions .................................. (20,302) 9,592,637
-------------
Net unrealized appreciation (depreciation) during the year:
Investments .................................................... 97,127,945
Foreign currency transactions .................................. (329,583) 96,798,362
------------- ------------
Net realized and unrealized gain on securities during the period ............. 106,390,999
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $103,514,147
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment loss .................................................. $ (2,876,852) $ (4,399,764)
Net realized gain on securities and foreign
currency transactions ............................................... 9,592,637 111,229,008
Net unrealized appreciation (depreciation) of securities
during the period ................................................... 96,798,362 (16,698,726)
----------------- -----------------
Increase in net assets resulting from operations .................. 103,514,147 90,130,518
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................................ -- --
Net realized gain on securities ...................................... -- --
Decrease in net assets resulting from distributions
----------------- -----------------
to shareholders .................................................. -- --
----------------- -----------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ..................................... 66,426,237 217,275,229
Proceeds from capital stock issued for
distributions reinvested ............................................ -- --
----------------- -----------------
66,426,237 217,275,229
Cost of capital stock repurchased .................................... (38,798,263) (89,246,756)
----------------- -----------------
Increase in net assets resulting from capital
stock transactions ............................................... 27,627,974 128,028,473
----------------- -----------------
TOTAL INCREASE IN NET ASSETS ......................................... 131,142,121 218,158,991
NET ASSETS:
Beginning of period .................................................. 1,023,140,939 804,981,947
----------------- -----------------
End of period (including accumulated net investment loss
of $(2,876,852) and $0) ............................................. $ 1,154,283,060 $ 1,023,140,938
================= =================
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ......................................... 3,120,246 10,004,608
Shares issued for distributions reinvested ........................... -- --
Shares of capital stock repurchased .................................. (1,824,435) (4,133,577)
----------------- -----------------
Increase in shares outstanding ..................................... 1,295,811 5,871,031
Shares outstanding:
Beginning of period ................................................ 46,355,160 40,484,129
----------------- -----------------
End of period ...................................................... 47,650,971 46,355,160
================= =================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS
52 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
COMMON STOCKS - 98.49%
ADVERTISING - 0.22%
6,982 Interpublic Group Cos., Inc. .......................... $ 480,013
7,561 Omnicom Group, Inc. ................................... 404,041
------------
884,054
------------
AEROSPACE/DEFENSE - 0.12%
967 Crane Co. ............................................. 31,246
11,558 Goodrich (B.F.) Co. ................................... 438,482
------------
469,728
------------
AIRLINES - 0.31%
9,636* AMR Corp. ............................................. 635,374
5,366 Delta Air Lines, Inc. ................................. 288,087
11,932 Southwest Airlines Co. ................................ 256,538
1,737* US Airways Group, Inc. ................................ 90,324
------------
1,270,323
------------
APPLIANCES/FURNISHINGS - 0.10%
3,075 Maytag Corp. .......................................... 166,434
4,021 Whirlpool Corp. ....................................... 225,176
------------
391,610
------------
AUTO - CARS - 0.34%
14,357 Daimlerchrysler AG .................................... 1,316,357
2,839 Meritor Automotive, Inc. .............................. 50,215
------------
1,366,572
------------
AUTO - ORIGINAL EQUIPMENT - 0.03%
155 Arvin Industries, Inc. ................................ 6,510
944 Danaher Corp. ......................................... 43,070
903 Federal-Mogul Corp. ................................... 51,245
1,006 Modine Manufacturing Co. .............................. 36,719
------------
137,544
------------
AUTO - REPLACEMENT PARTS - 0.19%
22,878 Genuine Parts Co. ..................................... 753,544
------------
BANKS - NEW YORK CITY - 1.87%
40,342 Bank of New York Co., Inc. ............................ 1,381,714
105,346 Citigroup Inc. ........................................ 5,287,052
8,534 J. P. Morgan & Co. Inc. ............................... 912,071
-----------
7,580,837
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
BANKS - OTHER - 4.08%
86,158 BankAmerica Corp. ..................................... $ 5,616,425
12,391 BankBoston Corp. ...................................... 515,775
256 Bankers Trust Corp. ................................... 22,272
54,272 First Union Corp. ..................................... 3,297,024
28,311 Fleet Financial Group, Inc. ........................... 1,180,215
11,807 Mellon Bank Corp. ..................................... 743,103
21,346 National City Corp. ................................... 1,435,519
5,429 Providian Financial Corp. ............................. 498,450
89,438 Wells Fargo Co. ....................................... 3,219,767
------------
16,528,550
------------
BANKS - REGIONAL - 3.18%
65,801 Bank One Corp. ........................................ 3,376,414
44,828 Chase Manhattan Corp. ................................. 2,843,776
5,595 Comerica Inc. ......................................... 360,878
13,723 Fifth Third Bancorp ................................... 910,864
23,409 KeyCorp ............................................... 718,364
2,245 Northern Trust Corp. .................................. 181,284
13,874 PNC Bank Corp. ........................................ 715,378
2,486 State Street Corp. .................................... 170,602
3,649 Summit Bancorporation ................................. 152,574
13,197 SunTrust Banks, Inc. .................................. 921,316
38,504 U.S. Bancorp .......................................... 1,417,429
12,963 Wachovia Corp. ........................................ 1,131,832
------------
12,900,711
------------
BEVERAGE - BREWERS/DISTRIBUTORS - 1.02%
918 Adolph Coors Class B .................................. 45,671
44,346 Anheuser-Busch Companies, Inc. ........................ 2,688,476
6,702 Brown-Forman Corp Class B ............................. 487,571
26,459 Seagram Co. Ltd. ...................................... 907,874
------------
4,129,592
------------
BEVERAGE - SOFT DRINKS - 3.19%
131,103 Coca-Cola Co. ......................................... 9,185,404
18,520 Coca Cola Enterprises, Inc. ........................... 700,288
79,083 PepsiCo, Inc. ......................................... 3,059,524
------------
12,945,216
------------
BROADCASTING - 1.59%
9,819* Clear Channel Communications .......................... 459,038
18,756 Comcast Corp. Class A Special ......................... 912,011
25,059* Media One Group Inc. .................................. 1,014,890
25,926 Tele-Comm Liberty Media Group
Class A .............................................. 1,095,374
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ---------- -----------
<S> <C> <C>
BROADCASTING - Continued
29,737 U S WEST, Inc. ........................................ $1,851,128
17,037* Viacom, Inc Class B ................................... 1,134,025
------------
6,466,466
------------
BUILDING MATERIALS - 0.37%
3,313 Armstrong World Inds. Inc. ............................ 220,729
15,466 Lowe's Companies, Inc. ................................ 653,439
9,620 Sherwin-Williams Co. .................................. 272,968
2,834 Vulcan Materials Co. .................................. 355,313
------------
1,502,449
------------
CHEMICAL - MAJOR - 0.62%
6,899 Albemarle Corp. ....................................... 128,494
7,756 Morton International, Inc. ............................ 228,317
22,959 PPG Industries, Inc. .................................. 1,404,804
22,104 Rohm and Haas Co. ..................................... 772,259
------------
2,533,874
------------
CHEMICAL - MISCELLANEOUS - 0.38%
666 Dexter Corp. .......................................... 21,354
9,884 Ecolab Inc. ........................................... 305,786
15,662 Ethyl Corp. ........................................... 91,035
943 Ferro Corp. ........................................... 26,345
3,023 Great Lakes Chemical Corp. ............................ 120,731
6,386 Lawter International, Inc. ............................ 52,685
5,822 Lubrizol Corp. ........................................ 157,922
5,496 Nalco Chemical Co. .................................... 183,773
9,440 Praxair, Inc. ......................................... 360,490
6,820 Sigma Aldrich Corp. ................................... 219,093
------------
1,539,214
------------
CONGLOMERATES - 0.76%
2,893 Alexander & Baldwin, Inc. ............................. 66,539
4,733 Ogden Corp. ........................................... 125,720
19,389 Tenneco Inc. .......................................... 690,733
33,633 Tyco International Ltd. ............................... 2,213,473
------------
3,096,465
------------
CONSUMER FINANCE - 0.32%
3,276 Capital One Financial Corp. ........................... 360,360
41,367 MBNA Corp. ............................................ 938,514
------------
1,298,874
------------
CONTAINERS - METAL/GLASS - 0.22%
15,643 Corning Inc. .......................................... 627,675
</TABLE>
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 53
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
CONTAINERS - METAL/GLASS - Continued
8,280* Owens-Illinois, Inc. .................................. $ 265,995
-----------
893,670
-----------
CONTAINERS - PAPER - 0.13%
4,457 Bemis Co., Inc. ....................................... 168,530
867 Chesapeake Corp. ...................................... 30,074
1,901* Sealed Air Corp. ...................................... 83,874
7,590 Sonoco Products Co. ................................... 227,227
-----------
509,705
-----------
COSMETICS/TOILETRIES - 0.92%
10,847 Avon Products, Inc. ................................... 440,659
64,597 Gillette Co. .......................................... 2,967,425
7,478 International Flavors &
Fragrances, Inc. ..................................... 313,142
-----------
3,721,226
-----------
DRUGS - 7.95%
4,843 Allergan, Inc. ........................................ 294,818
3,659* ALZA Corp. ............................................ 191,183
75,268 American Home Products Corp. .......................... 4,008,021
15,548* Amgen Inc. ............................................ 1,169,987
610 Bausch & Lomb Inc. .................................... 33,855
62,325 Bristol Myers Squibb Co. .............................. 7,638,708
1,041 McKesson Corp. ........................................ 74,106
67,196 Merck & Co., Inc. ..................................... 10,406,981
45,471 Schering-Plough Corp. ................................. 4,836,978
47,217 Warner-Lambert Co. .................................... 3,564,885
-----------
32,219,522
-----------
ELECTRICAL EQUIPMENT - 0.96%
22,443 AMP Inc. .............................................. 1,085,680
39,566 Emerson Electric Co. .................................. 2,571,790
1,647 Thomas & Betts Corp. .................................. 71,337
4,163 W. W. Grainger Inc. ................................... 175,888
-----------
3,904,695
-----------
ELECTRONIC INSTRUMENTS - 0.04%
1,288 Integrated Device Technology .......................... 7,568
1,458 Perkin-Elmer Corp. .................................... 135,959
-----------
143,527
-----------
ENTERTAINMENT - 1.82%
5,228 Hasbro, Inc. .......................................... 183,307
13,552 Mattel, Inc. .......................................... 468,391
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
ENTERTAINMENT - Continued
33,342 Time Warner Inc........................................ $ 3,525,917
99,916 Walt Disney Co......................................... 3,216,047
-----------
7,393,662
-----------
FINANCE COMPANIES - 0.99%
22,600 Associates First Capital Corp. ........................ 1,759,975
38,686 Household International, Inc. ......................... 1,513,590
9,181 SunAmerica, Inc. ...................................... 727,595
-----------
4,001,160
-----------
FINANCIAL SERVICES - 0.95%
33,175 American Express Co. .................................. 3,319,573
4,508 Countrywide Credit Ind Inc. ........................... 223,147
6,816 H & R Block Inc. ...................................... 306,294
-----------
3,849,014
-----------
FOODS - 3.04%
20,839 BestFoods ............................................. 1,211,267
28,610 Campbell Soup Co. ..................................... 1,634,346
28,676 ConAgra, Inc. ......................................... 901,502
13,796 General Mills, Inc. ................................... 1,041,598
27,854 H J Heinz Co. ......................................... 1,624,236
8,089 Hershey Foods Corp. ................................... 543,985
29,038 Kellogg Co. ........................................... 1,063,517
927 Lance, Inc. ........................................... 18,250
14,219 Pioneer Hi-Bred International, Inc. ................... 425,681
7,596 Quaker Oats Co. ....................................... 466,205
21,527 Ralston Purina Co. .................................... 749,409
31,440 Sara Lee Corp. ........................................ 1,835,310
8,996 Wm. Wrigley Jr. Co. ................................... 792,774
-----------
12,308,080
-----------
FOOTWEAR - 0.15%
15,203 NIKE, Inc. Class B .................................... 608,120
-----------
FREIGHT - 0.10%
5,943* FDX Corp. ............................................. 385,552
-----------
GOLD MINING - 0.28%
29,612 Barrick Gold Corp. .................................... 592,240
24,548 Battle Mountain Gold Co. .............................. 115,069
10,410 Homestake Mining Co. .................................. 111,908
22,615 Placer Dome Inc. ...................................... 329,332
-----------
1,148,549
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
GOVERNMENT SPONSORED - 2.07%
44,547 Federal Home Loan Mortgage Corp. ...................... $ 2,695,094
71,684 Federal National Mortgage
Association .......................................... 5,215,012
11,078 SLM Holding Corp. ..................................... 487,432
-----------
8,397,538
-----------
FUNERAL SERVICES - 0.17%
18,716 Service Corp. International ........................... 699,511
-----------
HARDWARE & TOOLS - 0.07%
4,919 Black & Decker Corp. .................................. 266,548
396 Stanley Works ......................................... 12,104
-----------
278,652
-----------
HEALTHCARE - 0.50%
11,570 Cardinal Health, Inc. ................................. 793,992
16,462* HealthSouth Corp. ..................................... 221,208
4,828* Humana Inc. ........................................... 95,655
6,952 IMS Helath Inc. ....................................... 461,439
9,668 United HealthCare Corp. ............................... 436,269
-----------
2,008,563
-----------
HEAVY DUTY TRUCKS/PARTS - 0.25%
18,485 Dana Corp. ............................................ 720,915
6,394 PACCAR Inc. ........................................... 290,927
-----------
1,011,842
-----------
HOSPITAL MANAGEMENT - 0.27%
31,951 Columbia/HCA Healthcare Corp. ......................... 786,794
9,822* Tenet Healthcare Corp. ................................ 290,364
-----------
1,077,158
-----------
HOSPITAL SUPPLIES - 3.95%
102,012 Abbott Laboratories ................................... 4,896,576
20,733 Baxter International Inc. ............................. 1,317,842
14,699 Becton, Dickinson and Co. ............................. 624,708
2,614 Biomet, Inc. .......................................... 99,986
7,927* Boston Scientific Corp. ............................... 392,388
2,290 Hillenbrand Industries, Inc. .......................... 130,101
80,389 Johnson & Johnson ..................................... 6,531,606
29,249 Medtronic, Inc. ....................................... 1,979,793
888 St. Jude Medical, Inc. ................................ 25,808
-----------
15,998,808
-----------
</TABLE>
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
54 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
HOUSEHOLD PRODUCTS - 3.09%
5,356 Clorox Co.............................................. $ 594,851
18,357 Colgate-Palmolive Co. ................................. 1,571,819
4,593 Newell Co. ............................................ 203,240
78,261 Procter & Gamble Co. .................................. 6,857,620
2,717 Rubbermaid, Inc. ...................................... 89,832
41,215 Unilever N V - ADR .................................... 3,186,435
-----------
12,503,797
-----------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 3.78%
6,811* BMC Software, Inc. .................................... 347,787
110,589* Microsoft Corp. ....................................... 13,491,858
41,590* Oracle Corp. .......................................... 1,424,458
2,227* Peoplesoft Inc. ....................................... 45,793
-----------
15,309,896
-----------
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 1.81%
4,855* Apple Computer, Inc. .................................. 155,057
75,429 Compaq Computer Corp. ................................. 2,451,443
55,978* Dell Computer Corp. ................................... 3,404,162
402 OEA, Inc. ............................................. 5,251
17,799 Sun Microsystems, Inc. ................................ 1,318,238
-----------
7,334,151
-----------
INFORMATION PROCESSING -
COMPUTER SERVICES - 0.88%
582* America Online, Inc. .................................. 50,961
21,283 Automatic Data Processing, Inc. ....................... 1,638,791
28,235 Electronic Data Systems Corp. ......................... 1,101,165
18,728 First Data Corp. ...................................... 499,804
5,849 Paychex, Inc. ......................................... 290,988
-----------
3,581,709
-----------
INFORMATION PROCESSING -
COMPUTER SOFTWARE - 0.14%
18,150 HBO & Co. ............................................. 452,616
6,713* Parametric Technology Corp. ........................... 114,121
-----------
566,737
-----------
INFORMATION PROCESSING -
DATA SERVICES - 4.59%
214* Adobe Systems Inc. .................................... 9,577
29,335* Cendant Corp. ......................................... 557,365
3,872 Comdisco, Inc. ........................................ 70,664
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
INFORMATION PROCESSING -
DATA SERVICES - Continued
24,771 Computer Associates International ..................... $ 1,096,117
5,653* Computer Sciences Corp. ............................... 322,928
22,783* E M C Corp. ........................................... 1,651,768
5,970* Gateway 2000, Inc. .................................... 335,066
52,143 Hewlett Packard Co. ................................... 3,271,973
45,095 International Business Machine ........................ 7,440,675
2,183* Novell, Inc ........................................... 36,156
20,235 Pitney Bowes Inc. ..................................... 1,133,160
9,167* Seagate Technology .................................... 270,427
10,621* Unisys Corp. .......................................... 302,699
19,579 Xerox Corp. ........................................... 2,104,743
-----------
18,603,318
-----------
INFORMATION PROCESSING -
NETWORKING - 1.59%
7,938* Ascend Communications Inc. ............................ 446,016
69,912* Cisco Systems, Inc. ................................... 5,269,617
5,053* General Insturment Corp. .............................. 142,116
15,240* 3Com Corp. ............................................ 589,598
-----------
6,447,347
-----------
INSURANCE - CASUALTY - 0.41%
7,669 Chubb Corp. ........................................... 537,309
3,031 Progressive Corp. ..................................... 449,725
3,366 SAFECO Corp. .......................................... 144,528
14,868 St. Paul Companies, Inc. .............................. 524,097
-----------
1,655,659
-----------
INSURANCE - LIFE - 0.65%
8,261 Aetna Inc. ............................................ 638,679
12,315 Conseco Inc. .......................................... 407,934
3,331 Jefferson-Pilot Corp. ................................. 227,341
8,032 Lincoln National Corp. ................................ 672,178
2,856 Torchmark Corp. ....................................... 108,528
5,626 Transamerica Corp. .................................... 597,763
-----------
2,652,423
-----------
INSURANCE - MISCELLANEOUS -0.32%
4,696 General Re Corp. ...................................... 1,096,516
3,865 UNUM Corp. ............................................ 208,227
-----------
1,304,743
-----------
INSURANCE - MULTILINE - 2.85%
521 AFLAC Inc. ............................................ 19,212
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
INSURANCE - MULTILINE - Continued
47,656 Allstate Corp. ........................................ $ 1,941,982
57,545 American International Group, Inc. .................... 5,409,230
18,684 Aon Corp. ............................................. 1,076,666
14,197 CIGNA Corp. ........................................... 1,104,704
4,572 Cincinnati Financial Corp. ............................ 178,594
10,892 Hartford Financial Services Group ..................... 601,102
21,178 Marsh & McLennan Companies Inc. ....................... 1,232,295
-----------
11,563,785
-----------
LEISURE TIME - 0.01%
2,483 Brunswick Corp. ....................................... 54,626
-----------
LODGING - 0.05%
3,716 Hilton Hotels Corp. ................................... 80,823
4,542 Marriott International Inc. ........................... 133,421
-----------
214,244
-----------
MACHINERY - AGRICULTURE - 0.14%
1,089 Case Corp. ............................................ 26,408
15,791 Deere & Co. ........................................... 551,698
-----------
578,106
-----------
MACHINERY -
CONSTRUCTION & CONTRACTS - 0.32%
25,989 Caterpillar Inc. ...................................... 1,284,831
178 Foster Wheeler Corp. .................................. 3,048
-----------
1,287,879
-----------
MACHINERY - INDUSTRIAL/SPECIALTY - 0.95%
1,530 Aeroquip-Vickers, Inc. ................................ 55,654
1,790 Albany International Corp. Class A .................... 34,010
12,247 Cooper Industries, Inc. ............................... 601,634
14,995 Dover Corp. ........................................... 534,197
21,581 Illinois Tool Works Inc. .............................. 1,371,742
9,643 Ingersoll-Rand Co. .................................... 451,413
7,015 Johnson Controls, Inc. ................................ 405,993
6,135 Newport News Shipbuilding ............................. 172,547
4,445 Pall Corp. ............................................ 103,346
1,704 Tidewater, Inc. ....................................... 39,299
4,319 Timken Co. ............................................ 83,141
-----------
3,852,976
-----------
MEDICAL TECHNOLOGY - 0.16%
7,674 Guidant Corp. ......................................... 658,525
-----------
</TABLE>
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 55
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
MERCHANDISE - DRUG - 0.63%
16,609 CVS Corp............................................... $ 820,069
9,062 Rite Aid Corp. ........................................ 420,250
24,751 Walgreen Co. .......................................... 1,328,819
----------
2,569,138
----------
MERCHANDISE - SPECIALTY - 1.66%
2,323 American Greetings Corp. Class A ...................... 98,292
7,442* CostCo Companies, Inc. ................................ 466,986
784 Dollar General Corp. .................................. 18,669
19,841 Fortune Brands, Inc. .................................. 675,834
16,375 Gap, Inc. ............................................. 1,204,586
69,921 Home Depot, Inc. ...................................... 3,478,570
2,378 Ikon Office Solutions Inc. ............................ 23,186
1,256* Kohl's Corp. .......................................... 61,780
4,585 Limited, Inc. ......................................... 132,678
1,741 Nordstrom, Inc. ....................................... 64,852
8,063* Staples, Inc. ......................................... 281,701
852 Tandy Corp. ........................................... 38,393
5,368 TJX Companies, Inc. ................................... 137,555
1,477* Toys "R" Us, Inc. ..................................... 29,171
----------
6,712,253
----------
MERCHANDISING - DEPARTMENT - 0.36%
18,846 Dayton Hudson Corp. ................................... 848,070
1,473* Federated Dept Stores, Inc ............................ 61,406
9,407 May Department Stores Co. ............................. 567,360
----------
1,476,836
----------
MERCHANDISING - FOOD - 0.95%
13,905 Albertsons, Inc. ...................................... 793,454
11,529 American Stores Co. ................................... 386,942
12,063 Kroger Co. ............................................ 640,093
24,303* Safeway, Inc. ......................................... 1,283,502
15,689 SYSCO Corp. ........................................... 422,622
7,888 Winn-Dixie Stores, Inc. ............................... 317,985
----------
3,844,598
----------
MERCHANDISING - MASS - 2.50%
3,008 Fred Meyer, Inc. ...................................... 153,032
18,996* KMart Corp. ........................................... 289,689
14,083 J.C. Penney Co., Inc. ................................. 774,565
20,895 Sears Roebuck and Co. ................................. 991,207
105,190 Wal-Mart Stores, Inc. ................................. 7,922,122
----------
10,130,615
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
METALS - ALUMINUM - 0.19%
28,390 Alcan Aluminium Ltd.................................... 755,884
---------
METALS - COPPER - 0.02%
4,739 Newmont Mining Corp. .................................. 94,188
---------
METALS - MISCELLANEOUS - 0.17%
7,437 Engelhard Corp. ....................................... 143,627
622* Freeport-McMoRan Copper & Gold
Class B .............................................. 8,125
29,208 Inco Limited .......................................... 337,718
4,188 Precision Castparts Corp. ............................. 185,057
---------
674,527
---------
METALS - STEEL- 0.03%
1,127 Cleveland-Cliffs Inc. ................................. 42,896
4,705 Oregon Steel Mills, Inc. .............................. 59,695
1,948 Worthington Industries, Inc. .......................... 23,741
---------
126,332
---------
MOBILE HOMES - 0.02%
1,840 Fleetwood Enterprises, Inc. ........................... 61,985
---------
MISCELLANEOUS - 0.11%
1,815 BB & T Corp. .......................................... 67,042
8,755 Equifax Inc. .......................................... 363,333
---------
430,375
---------
MULTIMEDIA - 0.01%
629 Meredith Corp. ........................................ 24,413
---------
NATURAL GAS-DIVERSIFIED - 0.26%
3,832 Eastern Enterprises ................................... 155,436
6,901 El Paso Energy Corp. .................................. 235,497
5,980* Seagull Energy Corp. .................................. 48,961
20,348 Sonat Inc. ............................................ 604,081
---------
1,043,975
---------
OIL - INTEGRATED DOMESTIC - 1.62%
17,015 Amerada Hess Corp. .................................... 944,332
9,366 Ashland Oil, Inc. ..................................... 455,421
33,552* Burlington Resources, Inc. ............................ 1,195,290
17,387 Oryx Energy Co. ....................................... 240,158
12,661 Pennzoil Co. .......................................... 470,040
50,279 Phillips Petroleum Co. ................................ 2,111,718
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
OIL - INTEGRATED DOMESTIC - Continued
40,022 USX-Marathon Group .................................... $1,135,624
----------
6,552,583
----------
OIL - INTEGRATED INTERNATIONAL - 1.35%
22,340 Murphy Oil Corp. ...................................... 890,807
79,434 Texaco Inc. ........................................... 4,572,420
----------
5,463,227
----------
OIL - SERVICES - 0.89%
31,126 Baker Hughes Inc. ..................................... 569,994
39,382 Halliburton Co. ....................................... 1,156,846
494 McDermott International, Inc. ......................... 13,245
40,349 Schlumberger Ltd. ..................................... 1,803,095
484* Smith International, Inc. ............................. 11,677
2,002 Transocean Offshore, Inc. ............................. 49,424
----------
3,604,281
----------
OIL/GAS PRODUCERS - 0.64%
16,319 Anadarko Petroleum Corp. .............................. 459,991
18,577 Apache Corp. .......................................... 427,271
6,387 Helmerich & Payne, Inc. ............................... 110,176
9,231 Noble Affiliates, Inc. ................................ 233,659
9,623* Ocean Energy, Inc. .................................... 78,186
14,437 Pioneer Natural Resources Corp. ....................... 191,290
3,155* Ranger Oil Ltd. ....................................... 14,986
8,873 Sunoco Inc. ........................................... 300,572
8,908 Ultramar Diamond Shamrock ............................. 229,381
39,531 Union Pacific Resources Group Inc. .................... 442,253
4,686 Valero Energy Corp. ................................... 98,406
----------
2,586,171
----------
PAPER/FOREST PRODUCTS - 0.87%
9,409 Avery Dennison Corp. .................................. 451,043
44,025 Kimberly-Clark Corp. .................................. 2,316,815
9,697 Longview Fibre Co. .................................... 109,697
6,736 Louisiana Pacific Corp. ............................... 114,512
5,086 Rayonier Inc. ......................................... 216,155
8,529 Willamette Industries, Inc. ........................... 297,981
----------
3,506,203
----------
POLLUTION CONTROL - 0.31%
7,181 Browning-Ferris Industries Inc. ....................... 211,839
24,596 Waste Management, Inc. ................................ 1,054,553
----------
1,266,392
----------
</TABLE>
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
56 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
PUBLISHING - NEWS - 0.66%
3,550 Dow Jones & Co., Inc. ................................. $ 169,734
21,631 Gannett Co., Inc. ..................................... 1,396,551
2,042 Knight-Ridder, Inc. ................................... 105,035
12,670 New York Times Co. Class A ............................ 393,562
3,357 Times Mirror Co. ...................................... 196,804
4,887 Tribune Co. ........................................... 313,379
221 Washington Post Co. Class B ........................... 117,613
----------
2,692,678
----------
PUBLISHING/PRINTING - 0.41%
12,865 Deluxe Corp. .......................................... 447,058
11,572 Dun & Bradstreet Corp. ................................ 349,329
9,560 McGraw-Hill, Inc. ..................................... 855,620
----------
1,652,007
----------
RAILROAD - 1.00%
30,788 Burlington Northern Santa Fe .......................... 1,046,792
19,301 CSX Corp. ............................................. 804,610
36,210 Norfolk Southern Corp. ................................ 1,099,878
22,861 Union Pacific Corp. ................................... 1,111,616
----------
4,062,896
----------
RESTAURANTS - 0.76%
41,208 McDonald's Corp. ...................................... 2,887,136
3,962* Tricon Global Restaurants, Inc. ....................... 180,518
----------
3,067,654
----------
SAVINGS & LOAN - 0.27%
1,631 Golden West Financial Corp. ........................... 154,435
24,630 Washington Mutual, Inc. ............................... 954,412
----------
1,108,847
----------
SECURITIES RELATED - 1.15%
11,720 Charles Schwab Corp. .................................. 660,715
13,873 Franklin Resources, Inc. .............................. 593,070
1,764 Lehman Brothers Holdings, Inc. ........................ 88,090
16,058 Merrill Lynch & Co., Inc. ............................. 1,204,350
30,014 Morgan Stanley, Dean Witter,
Discover and Co. ..................................... 2,093,480
----------
4,639,705
----------
SEMICONDUCTOR EQUIPMENT - 0.14%
13,858* Applied Materials, Inc. ............................... 536,997
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
SEMICONDUCTOR EQUIPMENT - Continued
314* KLA-Tencor Corp. ...................................... $ 10,696
-----------
547,693
-----------
SEMICONDUCTORS - 2.56%
2,230* Advanced Micro Devices, Inc. .......................... 61,743
78,086 Intel Corp. ........................................... 8,404,005
2,966* LSI Logic Corp. ....................................... 45,973
8,484* Micron Technology, Inc. ............................... 350,495
3,301* National Semiconductor Corp. .......................... 47,451
19,103 Texas Instruments Inc. ................................ 1,458,992
-----------
10,368,659
-----------
TELECOMMUNICATIONS - 3.35%
20,520* Airtouch Communications, Inc. ......................... 1,173,487
12,745 ALLTEL Corp. .......................................... 675,485
61,855 Lucent Technologies, Inc. ............................. 5,323,396
75,986* MCI Worldcom Inc. ..................................... 4,483,174
1,203* Nextel Communications, Inc. Class A ................... 25,865
30,524 Northern Telecom Ltd. ................................. 1,425,089
832 Scientific-Atlanta, Inc. .............................. 16,120
8,219* Tellabs, Inc. ......................................... 444,340
-----------
13,566,956
-----------
TEXTILE - PRODUCTS - 0.07%
5,513 V F Corp. ............................................. 270,482
-----------
UTILITIES - COMMUNICATION - 6.08%
58,182 Ameritech Corp. ....................................... 3,149,101
89,928 A T & T Corp. ......................................... 5,603,638
84,720 Bell Atlantic Corp. ................................... 4,712,550
55,868 BellSouth Corp. ....................................... 4,874,483
95,035 SBC Communications, Inc. .............................. 4,555,740
21,687 Sprint Corp. FON Group ................................ 1,577,729
10,844 Sprint Corp. PCS Group ................................ 173,496
-----------
24,646,737
-----------
UTILITIES - ELECTRIC - 2.49%
6,280* AES Corp. ............................................. 287,310
22,975 Allegheny Energy, Inc. ................................ 775,406
29,604 Cinergy Corp. ......................................... 1,023,188
3,383 Cleco Corp. ........................................... 115,656
6,006 Hawaiian Electric Industries .......................... 233,859
7,014 Idacorp Inc. .......................................... 244,613
5,481 Indiana Energy, Inc. .................................. 124,015
1,790 IPALCO Enterprises, Inc. .............................. 89,724
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
UTILITIES - ELECTRIC - Continued
4,302 Kansas City Power & Light Co. ......................... $ 127,716
24,336 LG&E Energy Corp. ..................................... 681,408
6,329 Minnesota Power Inc. .................................. 264,631
10,315 Montana Power Co. ..................................... 522,841
9,560 Nevada Power Co. ...................................... 226,453
20,879 New Century Energies, Inc. ............................ 1,003,497
22,287 NIPSCO Industries, Inc. ............................... 653,288
15,157 OGE Energy Corp. ...................................... 423,449
55,779 PacifiCorp ............................................ 1,045,856
22,242 Potomac Electric Power Co. ............................ 579,682
15,868 Puget Sound Energy Inc. ............................... 430,420
24,709 TECO Energy, Inc. ..................................... 664,054
10,086 UtiliCorp United Inc. ................................. 354,901
8,187 Washington Gas Light Co. .............................. 208,768
------------
10,080,735
------------
UTILITIES - GAS, DISTRIBUTION - 0.44%
10,694 AGL Resources, Inc. ................................... 230,589
24,486 Keyspan Energy Corp. .................................. 726,928
1,622 MCN Energy Group Inc. ................................. 30,716
11,619 National Fuel Gas Co. ................................. 533,747
6,130 NICOR Inc. ............................................ 257,843
296 Tosco Corp. ........................................... 7,733
------------
1,787,556
------------
UTILITIES - GAS, PIPELINE - 1.21%
10,633 Columbia Energy Group ................................. 603,423
20,241 Consolidated Natural Gas Co. .......................... 1,099,339
34,124 Enron Corp. ........................................... 1,793,643
8,186 ONEOK Inc. ............................................ 284,975
6,624 Peoples Energy Corp. .................................. 249,642
30,930 Williams Companies, Inc. .............................. 891,171
------------
4,922,193
------------
WATER SERVICES - 0.05%
6,927 American Water Works Co., Inc. ........................ 214,304
------------
TOTAL COMMON STOCKS
(Cost $336,510,956) ................................... 399,077,176
------------
</TABLE>
<PAGE>
================================================================================
SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 57
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- --------- -----------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 1.20%
SECURITIES RELATED - 0.77%
$3,128,000 Merrill Lynch & Co., Inc.,
5.00% due 12/01/1998 .............................. $ 3,128,000
UTILITIES - ELECTRIC - 0.43%
1,725,000 Conagra,
5.52% due 12/02/1998 .............................. 1,724,735
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $4,852,735) .................................. 4,852,735
------------
UNITED STATES GOVERNMENT
SHORT TERM - 0.21%
U.S. TREASURY BILLS - 0.21%
United States Treasury Bills:
50,000 4.17% due 01/14/1999 .............................. 49,745
800,000 3.75% due 12/10/1998 .............................. 799,246
------------
848,991
------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $848,991) .................................... 848,991
------------
TOTAL INVESTMENTS
(Cost $342,212,682) - 99.90% ....................... 404,778,902
Other assets less liabilities,
net - 0.10% ....................................... 412,235
------------
NET ASSETS (equivalent
to $23.60 per share on
17,167,122 shares
outstanding) - 100%................................ $405,191,137
============
* Non-income producing
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
17,167,122 shares outstanding ...................... $ 171,671
Additional paid in capital ........................... 297,453,642
Accumulated net realized gain on securities .......... 44,746,911
Undistributed net investment income .................. 252,693
Unrealized appreciation of investments ............... 62,566,220
------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING ........................................ $405,191,137
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
58 SOCIAL AWARENESS FUND - STATEMENT OF NET ASSETS CONTINUED
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends ................................................................ $ 2,595,157
Interest ................................................................. 254,776
-----------
Total investment income ................................................ 2,849,933
-----------
EXPENSES:
Advisory fees ............................................................ 895,023
Custodian and accounting services ........................................ 41,386
Reports to shareholders .................................................. 30,030
Audit fees and tax services .............................................. 7,090
Directors' fees and expenses ............................................. 4,612
Miscellaneous ............................................................ 10,787
-----------
Total expenses ......................................................... 988,928
-----------
NET INVESTMENT INCOME .................................................... 1,861,005
-----------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on:
Investments ................................................. $ 8,525,578
Futures contracts ........................................... 710,323 9,235,901
-----------
Net unrealized appreciation of securities during the period:
Investments ................................................. 14,314,773
Futures contracts ........................................... 136,333 14,451,106
----------- -----------
Net realized and unrealized gain on securities during the period:...... 23,687,007
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $25,548,012
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- ------------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................ $ 1,861,005 $ 2,820,855
Net realized gain on securities .................................. 9,235,901 36,311,508
Net unrealized appreciation of securities during
the period ..................................................... 14,451,106 21,289,379
------------- -------------
Increase in net assets resulting from operations ............... 25,548,012 60,421,742
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (1,783,819) (2,737,376)
Net realized gain on securities .................................. -- (9,562,689)
------------- -------------
Decrease in net assets resulting from distributions to
shareholders ................................................... (1,783,819) (12,300,065)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................................. 49,005,457 120,526,570
Proceeds from capital stock issued for distributions
reinvested .................................................... 1,783,819 12,300,065
------------- -------------
50,789,276 132,826,635
Cost of capital stock repurchased ................................ (3,529,682) (2,130,016)
------------- -------------
Increase in net assets resulting from capital stock transactions 47,259,594 130,696,619
------------- -------------
TOTAL INCREASE IN NET ASSETS ..................................... 71,023,787 178,818,296
NET ASSETS:
Beginning of period .............................................. 334,167,350 155,349,054
------------- -------------
End of period (including undistributed net investment income of
$252,693 and $175,507) ....................................... $ 405,191,137 $ 334,167,350
------------- -------------
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ..................................... 2,176,823 5,891,588
Shares issued for distributions reinvested ....................... 79,799 618,253
Shares of capital stock repurchased .............................. (169,963) (106,789)
------------- -------------
Increase in shares outstanding ............................... 2,086,659 6,403,052
Shares outstanding:
Beginning of period .......................................... 15,080,463 8,677,411
------------- -------------
End of period ................................................ 17,167,122 15,080,463
============= =============
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS
NOVEMBER 30, 1998 (UNAUDITED) 59
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
COMMON STOCKS - 56.78%
ADVERTISING - 0.11%
1,795 Interpublic Group Cos., Inc. ........................ $ 123,406
2,200 Omnicom Group, Inc. ................................. 117,563
----------
240,969
----------
AEROSPACE/DEFENSE - 0.79%
13,411 Boeing Co. .......................................... 544,822
881 Crane Co. ........................................... 28,468
558 EG & G, Inc. ........................................ 15,589
1,654 General Dynamics Corp. .............................. 96,035
942 Goodrich (B.F.) Co. ................................. 35,737
2,583 Lockheed Martin Corp. ............................... 267,986
932 Northrop Grumman Corp. .............................. 75,725
4,518 Raytheon Co. Class B ................................ 250,184
1,578 TRW Inc. ............................................ 86,889
3,034 United Technologies Corp. ........................... 325,207
----------
1,726,642
----------
AIRLINES - 0.19%
2,352* AMR Corp. ........................................... 155,085
2,014 Delta Air Lines, Inc. ............................... 108,127
4,414 Southwest Airlines Co. .............................. 94,901
1,213* US Airways Group, Inc. .............................. 63,076
----------
421,189
----------
APPAREL & PRODUCTS - 0.02%
1,000* Fruit of the Loom, Inc. Class A ..................... 14,750
910 Liz Claiborne, Inc. ................................. 30,826
----------
45,576
----------
APPLIANCES/FURNISHINGS - 0.06%
1,229 Maytag Corp. ........................................ 66,520
1,029 Whirlpool Corp. ..................................... 57,624
----------
124,144
----------
AUTO - CARS - 0.91%
5,334 Daimlerchrysler AG .................................. 489,065
16,056 Ford Motor Co. ...................................... 887,094
8,678 General Motors Corp. ................................ 607,460
----------
1,983,619
----------
AUTO - REPLACEMENT PARTS - 0.13%
2,008 AutoZone, Inc. ...................................... 60,491
1,000 Cooper Tire & Rubber Co. ............................ 19,563
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
AUTO - REPLACEMENT PARTS - Continued
2,326 Genuine Parts Co. ................................... $ 76,613
2,076 Goodyear Tire & Rubber Co. .......................... 117,813
882 Pep Boys-Manny, Moe & Jack .......................... 12,457
----------
286,937
----------
BANKS - NEW YORK CITY - 0.97%
10,016 Bank of New York Co., Inc. .......................... 343,048
30,309 Citigroup Inc. ...................................... 1,521,133
2,384 J. P. Morgan & Co. Inc. ............................. 254,790
----------
2,118,971
----------
BANKS - OTHER - 1.98%
23,114 BankAmerica Corp. ................................... 1,506,744
3,966 BankBoston Corp. .................................... 165,085
12,927 First Union Corp. ................................... 785,315
7,676 Fleet Financial Group, Inc. ......................... 319,993
3,488 Mellon Bank Corp. ................................... 219,526
4,397 National City Corp. ................................. 295,698
1,274 Providian Financial Corp. ........................... 116,969
1,510 Republic of New York Corp. .......................... 70,593
1,700 Union Planters Corp. ................................ 80,963
21,536 Wells Fargo & Co. ................................... 775,296
----------
4,336,182
----------
BANKS - REGIONAL - 1.75%
15,599 Bank One Corp. ...................................... 800,424
11,358 Chase Manhattan Corp. ............................... 720,523
2,130 Comerica Inc. ....................................... 137,385
3,557 Fifth Third Bancorp ................................. 236,096
2,920 Huntington Bancshares, Inc. ......................... 86,505
5,980 KeyCorp ............................................. 183,511
2,100 Mercantile Bancorporation Inc. ...................... 92,531
1,500 Northern Trust Corp. ................................ 121,125
4,073 PNC Bank Corp. ...................................... 210,014
2,900 Regions Financial Corp. ............................. 112,375
2,200 State Street Corp. .................................. 150,975
2,400 Summit Bancorporation ............................... 100,350
2,785 SunTrust Banks, Inc. ................................ 194,428
3,500 Synovus Financial Corp. ............................. 77,219
9,921 U.S. Bancorp ........................................ 365,217
2,752 Wachovia Corp. ...................................... 240,284
----------
3,828,962
----------
BEVERAGE - BREWERS/DISTRIBUTORS - 0.29%
478 Adolph Coors Class B ................................ 23,781
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
BEVERAGE - BREWERS/DISTRIBUTORS - Continued
6,396 Anheuser-Busch Companies, Inc. ...................... $ 387,757
933 Brown-Forman Corp. Class B .......................... 67,876
4,625 Seagram Co. Ltd. .................................... 158,695
----------
638,109
----------
BEVERAGE - SOFT DRINKS - 1.48%
32,599 Coca-Cola Co. ....................................... 2,283,967
5,400 Coca Cola Enterprises, Inc. ......................... 204,188
19,461 PepsiCo, Inc. ....................................... 752,897
----------
3,241,052
----------
BROADCASTING - 0.92%
9,502* CBS Corp. ........................................... 283,278
3,300* Clear Channel Communications, Inc. .................. 154,275
4,884 Comcast Corp. Class A Special ....................... 237,484
8,063* Media One Group Inc. ................................ 326,552
6,967 Tele-Comm Liberty Media Group
Class A ............................................ 294,356
6,609 U S WEST, Inc. ...................................... 411,410
4,750* Viacom, Inc Class B ................................. 316,172
----------
2,023,527
----------
BUILDING MATERIALS - 0.19%
505 Armstrong World Industries, Inc. .................... 33,646
4,684 Lowe's Companies, Inc. .............................. 197,899
4,534 Masco Corp. ......................................... 130,919
2,268 Sherwin-Williams Co. ................................ 64,354
----------
426,818
----------
CHEMICAL - MAJOR - 0.88%
3,019 Dow Chemical Co. .................................... 293,975
14,962 E.I. du Pont de Nemours and Co. ..................... 879,018
1,253 Hercules, Inc. ...................................... 41,192
7,908 Monsanto Co. ........................................ 358,331
1,710 Morton International, Inc. .......................... 50,339
2,335 PPG Industries, Inc. ................................ 142,873
2,329 Rohm and Haas Co. ................................... 81,369
1,820 Union Carbide Corp. ................................. 81,445
----------
1,928,542
----------
CHEMICAL - MISCELLANEOUS - 0.21%
3,022 Air Products and Chemicals, Inc. .................... 115,214
1,088 Eastman Chemical Co. ................................ 63,036
1,706 Ecolab Inc. ......................................... 52,779
400* FMC Corp. ........................................... 23,250
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS
60 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
CHEMICAL - MISCELLANEOUS - Continued
731 Great Lakes Chemical Corp. .......................... $ 29,194
573 Millipore Corp. ..................................... 16,116
904 Nalco Chemical Co. .................................. 30,228
2,086 Praxair, Inc. ....................................... 79,659
1,336 Sigma Aldrich Corp. ................................. 42,919
1,000 W.R. Grace & Co. .................................... 16,500
----------
468,895
----------
COAL - 0.01%
100 NACCO Industries, Inc. Class A ...................... 8,706
----------
CONGLOMERATES - 0.68%
7,460 Allied Signal Inc. .................................. 328,240
1,600 ITT Industries, Inc. ................................ 57,600
1,581 Loews Corp. ......................................... 158,100
4,400 RJR Nabisco Holdings Corp. .......................... 126,775
2,251 Tenneco Inc. ........................................ 80,192
2,156 Textron Inc. ........................................ 167,494
8,545 Tyco International Ltd. ............................. 562,368
----------
1,480,769
----------
CONSUMER FINANCE - 0.15%
900 Capital One Financial Corp. ......................... 99,000
10,061 MBNA Corp. .......................................... 228,259
----------
327,259
----------
CONTAINERS - METAL/GLASS - 0.13%
400 Ball Corp. .......................................... 17,100
3,092 Corning Inc. ........................................ 124,067
1,693 Crown Cork & Seal Co., Inc. ......................... 57,138
700 Owens Corning ....................................... 26,119
2,000* Owens-Illinois, Inc. ................................ 64,250
----------
288,674
----------
CONTAINERS - PAPER - 0.05%
700 Bemis Co., Inc. ..................................... 26,469
1,082* Sealed Air Corp. .................................... 47,743
800 Temple-Inland Inc. .................................. 42,950
----------
117,162
----------
COSMETICS/TOILETRIES - 0.41%
699 Alberto-Culver Co. Class B .......................... 17,912
3,514 Avon Products, Inc. ................................. 142,756
14,892 Gillette Co. ........................................ 684,102
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
COSMETICS/TOILETRIES - Continued
1,471 International Flavors &
Fragrances, Inc. ................................... $ 61,598
----------
906,368
----------
DRUGS - 4.95%
875 Allergan, Inc. ...................................... 53,266
1,114* ALZA Corp. .......................................... 58,206
17,456 American Home Products Corp. ........................ 929,532
3,326* Amgen Inc. .......................................... 250,281
792 Bausch & Lomb Inc. .................................. 43,956
13,214 Bristol Myers Squibb Co. ............................ 1,619,541
14,560 Eli Lilly and Co. ................................... 1,305,850
15,737 Merck & Co., Inc. ................................... 2,437,268
6,711 Pharmacia & Upjohn, Inc. ............................ 349,391
17,342 Pfizer, Inc. ........................................ 1,935,801
9,754 Schering-Plough Corp. ............................... 1,037,582
10,854 Warner-Lambert Co. .................................. 819,477
----------
10,840,151
----------
ELECTRICAL EQUIPMENT - 2.10%
2,872 AMP Inc. ............................................ 138,933
2,184* Cabletron Systems, Inc. ............................. 30,576
5,788 Emerson Electric Co. ................................ 376,220
43,102 General Electric Co. ................................ 3,900,731
510 National Service Industries, Inc. ................... 19,699
1,096 Raychem Corp. ....................................... 37,333
750 Thomas & Betts Corp. ................................ 32,484
1,296 W. W. Grainger Inc. ................................. 54,756
----------
4,590,732
----------
ELECTRONIC INSTRUMENTS - 0.05%
606 Perkin-Elmer Corp. .................................. 56,510
650 Tektronix, Inc. ..................................... 17,428
2,176* Thermo Electron Corp. ............................... 36,720
----------
110,658
----------
ENTERTAINMENT - 0.89%
1,339* Harrah's Entertainment, Inc. ........................ 20,838
1,766 Hasbro, Inc. ........................................ 61,920
936* King World Productions, Inc. ........................ 25,506
3,861 Mattel, Inc. ........................................ 133,446
7,963 Time Warner Inc. .................................... 842,087
27,112 Walt Disney Co. ..................................... 872,668
----------
1,956,465
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
FINANCE COMPANIES - 0.38%
4,639 Associates First Capital Corp. ...................... $ 361,262
6,576 Household International, Inc. ....................... 257,286
2,800 SunAmerica, Inc. .................................... 221,900
----------
840,448
----------
FINANCIAL SERVICES - 0.35%
6,121 American Express Co. ................................ 612,483
1,359 H & R Block Inc. .................................... 61,070
1,500 Countrywide Credit Industries, Inc. ................. 74,250
117 Waddell & Reed Financial, Inc. ......................
Class A ............................................ 2,793
506* Waddell & Reed Financial, Inc. ......................
Class B ............................................ 11,828
----------
762,424
----------
FOODS - 1.15%
7,923 Archer Daniels Midland Co. .......................... 145,585
3,838 BestFoods ........................................... 223,084
5,950 Campbell Soup Co. ................................... 339,894
6,482 ConAgra, Inc. ....................................... 203,778
2,034 General Mills, Inc. ................................. 153,567
4,834 H J Heinz Co. ....................................... 281,883
1,844 Hershey Foods Corp. ................................. 124,009
5,432 Kellogg Co. ......................................... 198,947
3,216 Pioneer Hi - Bred International Inc. ................ 96,279
1,819 Quaker Oats Co. ..................................... 111,640
4,100 Ralston Purina Co. .................................. 142,731
6,196 Sara Lee Corp. ...................................... 361,692
1,576 Wm. Wrigley Jr. Co. ................................. 138,885
----------
2,521,974
----------
FOOTWEAR - 0.07%
3,831 NIKE, Inc. Class B .................................. 153,240
700* Reebok International Ltd. ........................... 11,156
----------
164,396
----------
FREIGHT - 0.07%
1,954* FDX Corp. ........................................... 126,766
963 Ryder System, Inc. .................................. 27,505
----------
154,271
----------
FUNERAL SERVICES - 0.06%
3,445 Service Corp. International ......................... 128,757
----------
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS
NOVEMBER 30, 1998 (UNAUDITED) 61
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
GOLD MINING - 0.09%
4,983 Barrick Gold Corp. .................................. $ 99,660
3,100 Battle Mountain Gold Co. ............................ 14,532
2,871 Homestake Mining Co. ................................ 30,863
3,279 Placer Dome Inc. .................................... 47,750
----------
192,805
----------
GOVERNMENT SPONSORED - 0.76%
9,080 Federal Home Loan Mortgage Corp. .................... 549,340
13,825 Federal National Mortgage
Association ........................................ 1,005,769
2,300 SLM Holding Corp. ................................... 101,200
----------
1,656,309
----------
HARDWARE & TOOLS - 0.06%
1,184 Black & Decker Corp. ................................ 64,158
784 Snap-on Inc. ........................................ 26,656
1,188 Stanley Works ....................................... 36,308
----------
127,122
----------
HEALTHCARE - 0.28%
2,650 Cardinal Health, Inc. ............................... 181,856
1,400 HCR Manor Care Inc. ................................. 44,450
5,568 HealthSouth Corp. ................................... 74,820
2,169 Humana Inc. ......................................... 42,974
2,201 IMS Health Inc. ..................................... 146,091
2,605 United HealthCare Corp. ............................. 117,551
----------
607,742
----------
HEAVY DUTY TRUCKS/PARTS - 0.11%
500 Cummins Engine Co., Inc. ............................ 18,562
2,153 Dana Corp. .......................................... 83,967
978 Eaton Corp. ......................................... 66,810
927 Navistar International Corp. ........................ 23,986
1,088 PACCAR Inc. ......................................... 49,504
----------
242,829
----------
HOME BUILDERS - 0.03%
832 Centex Corp. ........................................ 29,692
500 Kaufman & Broad Home Corp. .......................... 12,594
600 Pulte Corp. ......................................... 15,262
----------
57,548
----------
HOSPITAL MANAGEMENT - 0.16%
8,536 Columbia/HCA Healthcare Corp. ....................... 210,199
400 Shared Medical Systems Corp. ........................ 20,950
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
HOSPITAL MANAGEMENT - Continued
4,081 Tenet Healthcare Corp. .............................. $ 120,645
----------
351,794
----------
HOSPITAL SUPPLIES - 1.61%
20,348 Abbott Laboratories ................................. 976,704
719 Bard (C. R.), Inc. .................................. 32,939
3,810 Baxter International Inc. ........................... 242,173
3,294 Becton, Dickinson and Co. ........................... 139,995
1,500 Biomet, Inc. ........................................ 57,375
2,573 Boston Scientific Corp. ............................. 127,363
17,848 Johnson & Johnson ................................... 1,450,150
1,022 Mallinckrodt, Inc. .................................. 33,023
6,232 Medtronic, Inc. ..................................... 421,829
1,147 St. Jude Medical, Inc. .............................. 33,335
----------
3,514,886
----------
HOUSEHOLD PRODUCTS - 1.51%
1,348 Clorox Co. .......................................... 149,712
3,916 Colgate-Palmolive Co. ............................... 335,308
5,343 Minnesota Mining & Manufacturing ....................
Co ................................................. 429,110
2,110 Newell Co. .......................................... 93,368
17,738 Procter & Gamble Co. ................................ 1,554,292
1,990 Rubbermaid, Inc. .................................... 65,794
800 Tupperware Corp. .................................... 13,950
8,432 Unilever N V - ADR .................................. 651,899
----------
3,293,433
----------
INFORMATION PROCESSING - 0.09%
5,700 HBO & Co. ........................................... 142,144
3,556 Parametric Technology Corp. ......................... 60,452
----------
202,596
----------
INFORMATION PROCESSING -
BUSINESS SOFTWARE - 2.11%
2,700 BMC Software, Inc. .................................. 137,869
32,614 Microsoft Corp. ..................................... 3,978,908
12,920 Oracle Corp. ........................................ 442,510
3,000 Peoplesoft Inc. ..................................... 61,687
----------
4,620,974
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 1.00%
1,828 Apple Computer, Inc. ................................ $ 58,382
22,072 Compaq Computer Corp. ............................... 717,324
16,756 Dell Computer Corp. ................................. 1,018,974
2,499 Silicon Graphics, Inc. .............................. 30,613
4,978 Sun Microsystems, Inc. .............................. 368,683
----------
2,193,976
----------
INFORMATION PROCESSING -
COMPUTER SERVICES - 0.41%
4,029 Automatic Data Processing, Inc. ..................... 310,233
932 Ceridian Corp. ...................................... 60,638
6,500 Electronic Data Systems Corp. ....................... 253,500
5,898 First Data Corp. .................................... 157,403
2,200 Paychex, Inc. ....................................... 109,450
----------
891,224
----------
INFORMATION PROCESSING -
DATA SERVICES - 2.43%
900 Adobe Systems Inc. .................................. 40,275
635 Autodesk, Inc. ...................................... 23,098
11,396 Cendant Corp. ....................................... 216,524
7,433 Computer Associates International,
Inc ................................................ 328,910
2,070 Computer Sciences Corp. ............................. 118,249
700 Data General Corp. .................................. 12,688
6,622 E M C Corp. ......................................... 480,095
2,100 Gateway 2000, Inc. .................................. 117,862
13,765 Hewlett Packard Co. ................................. 863,754
1,665 Honeywell Inc. ...................................... 133,096
12,374 International Business Machines ..................... 2,041,710
4,684 Novell, Inc. ........................................ 77,579
3,606 Pitney Bowes Inc. ................................... 201,936
3,218 Seagate Technology .................................. 94,931
3,400 Unisys Corp. ........................................ 96,900
4,383 Xerox Corp. ......................................... 471,172
----------
5,318,779
----------
INFORMATION PROCESSING -
NETWORKING - 0.89%
2,900 Ascend Communications Inc. .......................... 162,944
20,574 Cisco Systems, Inc. ................................. 1,550,765
1,947 General Insturment Corp. ............................ 54,759
4,744 3Com Corp. .......................................... 183,534
----------
1,952,002
----------
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS
62 NOVEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
INSURANCE - CASUALTY - 0.23%
2,184 Chubb Corp. ......................................... $ 153,016
1,000 Progressive Corp. ................................... 148,375
1,953 SAFECO Corp. ........................................ 83,857
3,168 St. Paul Companies, Inc. ............................ 111,672
----------
496,920
----------
INSURANCE - LIFE - 0.32%
1,997 Aetna Inc. .......................................... 154,393
4,307 Conseco Inc. ........................................ 142,669
1,596 Jefferson-Pilot Corp. ............................... 108,927
1,440 Lincoln National Corp. .............................. 120,510
2,070 Torchmark Corp. ..................................... 78,660
887 Transamerica Corp. .................................. 94,244
----------
699,403
----------
INSURANCE - MISCELLANEOUS - 0.23%
997 General Re Corp. .................................... 232,799
1,344 MBIA, Inc. .......................................... 87,024
1,506 MGIC Investment Corp. ............................... 66,170
2,014 UNUM Corp. .......................................... 108,504
----------
494,497
----------
INSURANCE - MULTILINE - 1.22%
11,092 Allstate Corp. ...................................... 451,999
13,935 American International Group, Inc. .................. 1,309,890
2,352 Aon Corp. ........................................... 135,534
2,929 CIGNA Corp. ......................................... 227,913
2,200 Cincinnati Financial Corp. .......................... 85,937
3,206 Hartford Financial Servics Group .................... 176,931
3,426 Marsh & McLennan Companies Inc. ..................... 199,350
2,000 Provident Companies Inc. ............................ 76,875
----------
2,664,429
----------
LEISURE TIME - 0.03%
1,343 Brunswick Corp. ..................................... 29,546
2,400* Mirage Resorts, Inc. ................................ 35,700
----------
65,246
----------
LODGING - 0.08%
3,510 Hilton Hotels Corp. ................................. 76,342
3,288 Marriott International Inc. ......................... 96,585
----------
172,927
----------
MACHINERY - AGRICULTURE - 0.06%
1,011 Case Corp. .......................................... 24,517
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
MACHINERY - AGRICULTURE - Continued
3,270 Deere & Co. ......................................... $ 114,245
----------
138,762
----------
MACHINERY - CONSTRUCTION &
CONTRACTS - 0.14%
4,840 Caterpillar Inc. .................................... 239,277
1,003 Fluor Corp. ......................................... 42,941
526 Foster Wheeler Corp. ................................ 9,008
700 Harnischfeger Industries Inc. ....................... 7,000
----------
298,226
----------
MACHINERY - INDUSTRIAL/SPECIALTY - 0.31%
400 Aeroquip-Vickers, Inc. .............................. 14,550
300 Briggs & Stratton Corp. ............................. 15,131
1,507 Cooper Industries, Inc. ............................. 74,031
2,920 Dover Corp. ......................................... 104,025
3,260 Illinois Tool Works Inc. ............................ 207,214
2,134 Ingersoll-Rand Co. .................................. 99,898
1,087 Johnson Controls, Inc. .............................. 62,910
1,595 Pall Corp. .......................................... 37,084
1,504 Parker Hannifin Corp. ............................... 52,264
800 Timken Co. .......................................... 15,400
----------
682,507
----------
MACHINE TOOLS - 0.01%
544 Milacron Inc. ....................................... 11,016
----------
MEDICAL TECHNOLOGY - 0.08%
2,006 Guidant Corp. ....................................... 172,140
----------
MERCHANDISE - DRUG - 0.36%
5,178 CVS Corp. ........................................... 255,664
497 Longs Drug Stores Corp. ............................. 17,706
3,462 Rite Aid Corp. ...................................... 160,550
6,604 Walgreen Co. ........................................ 354,552
----------
788,472
----------
MERCHANDISE - SPECIALTY - 1.11%
889 American Greetings Corp. Class A .................... 37,616
1,351 Circuit City Stores, Inc. ........................... 48,889
1,500* Consolidated Stores Corp. ........................... 32,250
2,866* CostCo Companies, Inc. .............................. 179,841
2,475 Dollar General Corp. ................................ 58,936
2,257 Fortune Brands, Inc. ................................ 76,879
5,147 Gap, Inc. ........................................... 378,626
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
MERCHANDISE - SPECIALTY - Continued
19,412 Home Depot, Inc. .................................... $ 965,747
1,806 Ikon Office Solutions Inc. .......................... 17,608
491 Jostens, Inc. ....................................... 11,508
2,100* Kohl's Corp. ........................................ 103,294
3,044 Limited, Inc. ....................................... 88,086
1,966 Nordstrom, Inc. ..................................... 73,233
3,800* Staples, Inc. ....................................... 132,763
4,156 TJX Companies, Inc. ................................. 106,498
1,282 Tandy Corp. ......................................... 57,770
3,433* Toys "R" Us, Inc. ................................... 67,802
----------
2,437,346
----------
MERCHANDISING - DEPARTMENT - 0.28%
5,852 Dayton Hudson Corp. ................................. 263,340
1,430 Dillards, Inc. Class A .............................. 49,157
2,816* Federated Department Stores, Inc. ................... 117,392
3,057 May Department Stores Co. ........................... 184,375
----------
614,264
----------
MERCHANDISING - FOOD - 0.34%
3,203 Albertsons, Inc. .................................... 182,771
3,642 American Stores Co. ................................. 122,235
500 Great Atlantic & Pacific Tea Co., Inc. .............. 13,656
3,342 Kroger Co. .......................................... 177,335
1,592 Supervalu Inc. ...................................... 41,093
4,414 SYSCO Corp. ......................................... 118,902
1,979 Winn-Dixie Stores, Inc. ............................. 79,778
----------
735,770
----------
MERCHANDISING - MASS - 1.31%
2,000 Fred Meyer, Inc. .................................... 101,750
3,348 J.C. Penney Co., Inc. ............................... 184,140
6,576* KMart Corp. ......................................... 100,284
5,196 Sears Roebuck and Co. ............................... 246,485
1,861* Venator Group, Inc. ................................. 14,656
29,574 Wal-Mart Stores, Inc. ............................... 2,227,292
----------
2,874,607
----------
METALS - ALUMINUM - 0.15%
3,043 Alcan Aluminium Ltd. ................................ 81,020
2,490 Aluminum Co. of America ............................. 184,571
942 Reynolds Metals Co. ................................. 51,692
----------
317,283
----------
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS
NOVEMBER 30, 1998 (UNAUDITED) 63
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
METALS - COPPER - 0.05%
600 ASARCO Inc. ......................................... $ 11,625
2,273 Newmont Mining Corp. ................................ 45,176
759 Phelps Dodge Corp. .................................. 43,026
----------
99,827
----------
METALS - MISCELLANEOUS - 0.05%
1,366 Cyprus Amax Minerals Co. ............................ 15,539
1,874 Engelhard Corp. ..................................... 36,192
2,453* Freeport-McMoRan Copper & Gold
Inc. Class B ....................................... 32,042
2,207 Inco Limited ........................................ 25,518
----------
109,291
----------
METALS - STEEL - 0.08%
2,579 Allegheny Teldyne Inc. .............................. 53,030
1,400* Armco Inc. .......................................... 5,512
1,695* Bethlehem Steel Corp. ............................... 13,984
1,167 Nucor Corp. ......................................... 49,014
1,215 USX-US Steel Group, Inc. ............................ 29,692
1,300 Worthington Industries, Inc. ........................ 15,844
----------
167,076
----------
MOBILE HOMES - 0.01%
500 Fleetwood Enterprises, Inc. ......................... 16,844
----------
MISCELLANEOUS - 0.10%
3,900 BB & T Corp. ........................................ 144,056
2,000 Equifax Inc. ........................................ 83,000
----------
227,056
----------
MULTIMEDIA - 0.01%
702 Meredith Corp. ...................................... 27,246
----------
NATURAL GAS-DIVERSIFIED - 0.07%
2,762 Coastal Corp. ....................................... 96,325
300 Eastern Enterprises ................................. 12,169
1,441 Sonat Inc. .......................................... 42,779
----------
151,273
----------
OIL - INTEGRATED DOMESTIC - 0.80%
1,164 Amerada Hess Corp. .................................. 64,602
12,588 Amoco Corp. ......................................... 741,905
962 Ashland Oil, Inc. ................................... 46,777
4,308 Atlantic Richfield Co. .............................. 286,482
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
OIL - INTEGRATED DOMESTIC - Continued
2,363 Burlington Resources, Inc. .......................... $ 84,182
667 Kerr-McGee Corp. .................................... 26,346
4,707 Occidental Petroleum Corp. .......................... 95,317
1,373* Oryx Energy Co. ..................................... 18,965
632 Pennzoil Co. ........................................ 23,463
3,384 Phillips Petroleum Co. .............................. 142,128
3,811 USX-Marathon Group .................................. 108,137
3,160 Unocal Corp. ........................................ 107,045
----------
1,745,349
----------
OIL - INTEGRATED INTERNATIONAL - 2.64%
8,659* Chevron Corp. ....................................... 724,109
32,228 Exxon Corp. ......................................... 2,419,115
10,300 Mobil Corp. ......................................... 887,731
28,392 Royal Dutch Pete Co. - ADR .......................... 1,334,424
7,074 Texaco Inc. ......................................... 407,197
----------
5,772,576
----------
OIL - SERVICES - 0.27%
4,220 Baker Hughes Inc. ................................... 77,279
5,791 Halliburton Co. ..................................... 170,111
781 McDermott International, Inc. ....................... 20,941
1,129* Rowan Companies, Inc. ............................... 11,078
7,202 Schlumberger Ltd. ................................... 321,839
----------
601,248
----------
OIL/GAS PRODUCERS - 0.08%
1,600 Anadarko Petroleum Corp. ............................ 45,100
1,300 Apache Corp. ........................................ 29,900
700 Helmerich & Payne, Inc. ............................. 12,075
1,204 Sunoco Inc. ......................................... 40,785
3,311 Union Pacific Resources Group Inc. .................. 37,042
----------
164,902
----------
PAPER/FOREST PRODUCTS - 0.58%
1,563 Avery Dennison Corp. ................................ 74,926
766 Boise Cascade Corp. ................................. 24,273
1,307 Champion International Corp. ........................ 54,322
2,938 Fort James Corp. .................................... 114,949
1,233 Georgia-Pacific Corp. ............................... 69,973
4,062 International Paper Co. ............................. 176,443
7,234 Kimberly-Clark Corp. ................................ 380,689
1,443 Louisiana Pacific Corp. ............................. 24,531
1,368 Mead Corp. .......................................... 41,468
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
PAPER/FOREST PRODUCTS - Continued
415 Potlatch Corp. ...................................... $ 15,692
1,358 Smurfit-Stone Container Corp. ....................... 19,101
944 Union Camp Corp. .................................... 61,065
1,321 Westvaco Corp. ...................................... 37,153
2,644 Weyerhaeuser Co. .................................... 132,530
1,478 Willamette Industries, Inc. ......................... 51,638
----------
1,278,753
----------
PHOTOGRAPHY - 0.15%
4,234 Eastman Kodak Co. ................................... 307,230
646 Polaroid Corp. ...................................... 13,727
----------
320,957
----------
POLLUTION CONTROL - 0.20%
2,259 Browning-Ferris Industries, Inc. .................... 66,640
4,400 Laidlaw Inc. ........................................ 43,725
7,562 Waste Management, Inc. .............................. 324,221
----------
434,586
----------
PUBLISHING - NEWS - 0.27%
1,227 Dow Jones & Co., Inc. ............................... 58,666
3,738 Gannett Co., Inc. ................................... 241,334
996 Knight-Ridder, Inc. ................................. 51,232
2,458 New York Times Co. Class A .......................... 76,352
1,167 Times Mirror Co. .................................... 68,415
1,601 Tribune Co. ......................................... 102,664
----------
598,663
----------
PUBLISHING/PRINTING - 0.17%
1,100 Deluxe Corp. ........................................ 38,225
2,286 Dun & Bradstreet Corp ............................... 69,009
971 Harcourt General, Inc. .............................. 50,249
1,278 McGraw-Hill, Inc. ................................... 114,381
1,196 Moore Corp. Ltd. .................................... 13,081
1,796 R R Donnelley and Son ............................... 76,218
----------
361,163
----------
RAILROAD - 0.29%
6,299 Burlington Northern Santa Fe ........................ 214,166
2,876 CSX Corp. ........................................... 119,893
5,005 Norfolk Southern Corp. .............................. 152,027
3,246 Union Pacific Corp. ................................. 157,837
----------
643,923
----------
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
64 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
RESTAURANTS - 0.36%
1,857 Darden Restaurants, Inc. ........................... $ 29,364
9,061 McDonald's Corp. ................................... 634,836
1,976* Tricon Global Restaurants, Inc. .................... 90,032
1,700 Wendy's International, Inc. ........................ 34,000
-----------
788,232
-----------
SAVINGS & LOAN - 0.18%
825 Golden West Financial Corp. ........................ 78,117
7,958 Washington Mutual, Inc. ............................ 308,373
-----------
386,490
-----------
SECURITIES RELATED - 0.63%
1,500 Bear Stearns Co., Inc. ............................. 63,000
3,500 Charles Schwab Corp. ............................... 197,313
3,400 Franklin Resources, Inc. ........................... 145,350
1,600 Lehman Brothers Holdings, Inc. ..................... 79,900
4,630 Merrill Lynch & Co., Inc. .......................... 347,250
7,812 Morgan Stanley, Dean Witter,
Discover and Co. .................................. 544,887
-----------
1,377,700
-----------
SEMICONDUCTOR EQUIPMENT - 0.10%
4,866* Applied Materials, Inc. ............................ 188,557
1,100* KLA-Tencor Corp. ................................... 37,469
-----------
226,026
-----------
SEMICONDUCTORS - 1.66%
1,957* Advanced Micro Devices, Inc. ....................... 54,184
22,202 Intel Corp. ........................................ 2,389,490
1,910* LSI Logic Corp. .................................... 29,605
2,844* Micron Technology, Inc. ............................ 117,493
7,890 Motorola, Inc. ..................................... 489,180
2,237* National Semiconductor Corp. ....................... 32,157
2,517 Rockwell International Corp. ....................... 123,176
5,128 Texas Instruments Inc. ............................. 391,651
-----------
3,626,936
-----------
TELECOMMUNICATIONS - 1.96%
7,549* Airtouch Communications, Inc. ...................... 431,708
3,584 ALLTEL Corp. ....................................... 189,952
1,124* Andrew Corp. ....................................... 17,984
2,278 Frontier Corp. ..................................... 68,625
1,100 Harris Corp. ....................................... 41,731
17,408 Lucent Technologies, Inc. .......................... 1,498,176
23,529* MCI Worldcom Inc. .................................. 1,388,211
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
TELECOMMUNICATIONS - Continued
3,800* Nextel Communications, Inc. ........................
Class A............................................ $ 81,700
8,583 Northern Telecom Ltd. .............................. 400,719
1,081 Scientific-Atlanta, Inc. ........................... 20,944
2,604* Tellabs, Inc. ...................................... 140,779
-----------
4,280,529
-----------
TEXTILE - PRODUCTS - 0.05%
500 Russell Corp. ...................................... 11,907
300 Springs Industries, Inc. Class A ................... 11,681
1,600 V F Corp. .......................................... 78,500
-----------
102,088
-----------
TOBACCO - 0.86%
32,229 Philip Morris Cos Inc. ............................. 1,802,810
2,427 UST Inc. ........................................... 84,338
-----------
1,887,148
-----------
UTILITIES - COMMUNICATION - 3.23%
23,954 AT & T Corp. ....................................... 1,492,634
14,618 Ameritech Corp. .................................... 791,199
20,590 Bell Atlantic Corp. ................................ 1,145,319
13,027 BellSouth Corp. .................................... 1,136,606
12,787 GTE Corp. .......................................... 792,794
25,914 SBC Communications, Inc. ........................... 1,242,252
5,720 Sprint Corp. FON Group ............................. 416,130
2,860 Sprint Corp. PCS Group ............................. 45,760
-----------
7,062,694
-----------
UTILITIES - ELECTRIC - 1.45%
2,300* AES Corp. .......................................... 105,225
1,825 Ameren Corp. ....................................... 75,167
2,549 American Electric Power, Inc. ...................... 118,210
1,998 Baltimore Gas and Electric Co. ..................... 61,314
2,006 Carolina Power & Light Co. ......................... 93,028
2,892 Central & South West Corp. ......................... 79,530
2,118 Cinergy Corp. ...................................... 73,203
3,099 Consolidated Edison, Inc. .......................... 157,468
1,893 DTE Energy Co. ..................................... 82,582
2,608 Dominion Resources, Inc. ........................... 120,457
4,804 Duke Energy Corp. .................................. 300,550
4,717 Edison International ............................... 129,718
3,327 Entergy Corp. ...................................... 97,523
2,370 FPL Group, Inc. .................................... 145,163
3,126 FirstEnergy Corp. .................................. 96,711
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- --------- -----------
<S> <C> <C>
UTILITIES - ELECTRIC - Continued
1,654 GPU Inc. ........................................... $ 72,466
3,989 Houston Industries, Inc. ........................... 126,152
1,500 New Century Energies, Inc. ......................... 72,094
2,400* Niagara Mohawk Power Corp. ......................... 36,900
1,968 Northern States Power Co. .......................... 53,505
5,035 P G & E Corp. ...................................... 155,770
2,046 P P & L Resources Inc. ............................. 55,881
4,045 PacifiCorp ......................................... 75,844
2,977 Peco Energy Co. .................................... 119,452
3,081 Public Services Enterprise Group ................... 120,159
9,208 Southern Co. ....................................... 271,636
3,694 Texas Utilities Co. ................................ 164,614
2,900 Unicom Corp. ....................................... 109,293
-----------
3,169,615
-----------
UTILITIES - GAS, DISTRIBUTION - 0.01%
590 NICOR Inc. ......................................... 24,817
-----------
UTILITIES - GAS, PIPELINE - 0.29%
1,130 Columbia Energy Group .............................. 64,127
1,295 Consolidated Natural Gas Co. ....................... 70,335
4,347 Enron Corp. ........................................ 228,489
400 ONEOK Inc. ......................................... 13,925
500 Peoples Energy Corp. ............................... 18,844
3,234 Sempra Energy ...................................... 81,052
5,626 Williams Companies, Inc. ........................... 162,099
-----------
638,871
-----------
TOTAL COMMON STOCKS
(Cost $76,707,605) ................................. 124,219,061
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ---------- -----------
<S> <C> <C>
CORPORATE BONDS - 10.97%
AIRLINES - 1.42%
$3,001,000 Continental Airlines,
7.08% due 11/01/2004............................... 3,104,234
-----------
BANKS - OTHER - 0.67%
1,500,000 Santander Finance Issuance,
6.38% due 02/15/2011............................... 1,474,065
-----------
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 65
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
BANKS - REGIONAL - 0.39%
$ 850,000 First Union National,
5.80% due 12/01/2008............................... $ 856,970
-----------
BEVERAGE - SOFT DRINKS - 0.23%
475,000 Coca Cola Enterprises, Inc.,
7.88% due 02/01/2002 .............................. 505,329
-----------
CONSUMER FINANCE - 0.47%
1,000,000 Associates Corp. of North America,
6.25% due 11/01/2008 .............................. 1,031,370
-----------
FINANCE COMPANIES - 0.95%
1,500,000 Finova Capital Corp.,
9.13% due 02/27/2002 .............................. 1,627,110
455,000 Markel Cap Trust I,
8.71% due 01/01/2046 .............................. 460,496
-----------
2,087,606
-----------
INFORMATION PROCESSING -
DATA SERVICES - 0.37%
800,000 Cendant Corp.,
7.75% due 12/01/2003 .............................. 799,840
-----------
LODGING - 0.41%
900,000 Marriott International, Inc.,
6.88% due 11/15/2005 .............................. 903,547
-----------
MERCHANDISE - SPECIALTY - 1.69%
2,000,000 Goodrich (B.F.),
7.10% due 11/15/2027 .............................. 2,161,700
1,500,000 Tandy Corp.,
6.95% due 09/01/2007 .............................. 1,540,380
-----------
3,702,080
-----------
OIL - INTEGRATED DOMESTIC - 0.95%
2,000,000 Union Oil Co. California,
7.20% due 05/15/2005 .............................. 2,071,300
-----------
SECURITIES RELATED - 0.42%
925,000 Paine Webber Group Inc.,
6.45% due 12/01/2003 .............................. 915,658
-----------
TELECOMMUNICATIONS - 1.71%
1,500,000 Tele-Communications Inc.,
7.25% due 08/01/2005 .............................. 1,630,515
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
TELECOMMUNICATIONS - Continued
$2,000,000 360 Communications Co.,
7.13% due 03/01/2003................................ $ 2,104,900
-----------
3,735,415
-----------
UTILITIES - ELECTRIC - 0.58%
1,240,646 Texas Utilities Electric,
6.62% due 07/01/2001............................... 1,266,045
-----------
UTILITIES - GAS, PIPELINE - 0.71%
1,500,000 Consolidated Natural Gas Co.,
6.00% due 10/15/2010............................... 1,547,250
-----------
TOTAL CORPORATE BONDS
(Cost $23,240,912).................................. 24,000,709
-----------
UNITED STATES GOVERNMENT -
LONG TERM- 27.47%
GOVERNMENT SPONSORED - 18.17%
Federal Home Loan Mortgage Corp:
5,000,000 5.50% due 12/15/2028............................... 4,929,688
3,000,000 5.50% due 08/13/2001............................... 3,044,070
3,000,000 5.13% due 10/15/2008............................... 2,950,770
Federal Home Loan Mortgage Corp,
(Pools/REMICS)
139,049 7.50% due 09/01/2025............................... 142,829
347,218 7.50% due 09/01/2025............................... 356,655
281,718 7.50% due 09/01/2025............................... 289,375
429,465 7.50% due 09/01/2025............................... 441,138
Federal National Mortgage Association:
10,000,000 8.50% due 12/10/2028............................... 10,437,500
5,000,000 7.50% due 12/10/2028............................... 5,140,625
5,000,000 7.00% due 12/10/2028............................... 5,101,565
2,000,000 7.00% due 05/10/2001............................... 2,015,940
940,000 5.53% due 12/01/2003............................... 942,938
4,000,000 4.63% due 10/15/2001............................... 3,973,760
-----------
39,766,853
-----------
UNITED STATES BONDS & NOTES - 9.30%
United States Treasury Bonds,
1,500,000 8.13% due 08/15/2019............................... 2,017,965
United States Treasury Notes:
4,000,000 6.50% due 08/15/2005............................... 4,405,640
2,000,000 6.25% due 02/28/2002............................... 2,094,680
1,500,000 6.25% due 02/15/2003............................... 1,588,830
1,000,000 5.75% due 08/15/2003............................... 1,045,470
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
UNITED STATES BONDS & NOTES - Continued
United States Treasury Notes:
$1,000,000 5.75% due 11/30/2002............................... $ 1,039,060
2,000,000 5.63% due 05/15/2008............................... 2,127,500
1,000,000 5.50% due 04/15/2000............................... 1,011,560
1,000,000 5.50% due 02/15/2008............................... 1,055,940
4,000,000 4.25% due 11/15/2003............................... 3,957,500
-----------
20,344,145
-----------
TOTAL UNITED STATES GOVERNMENT
LONG TERM
(Cost $58,695,437).................................. 60,110,998
-----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 18.71%
AEROSPACE/DEFENSE - 4.20%
9,200,000 Lockheed Martin Corp.,
5.63% due 12/10/1998............................... 9,187,012
-----------
CONSUMER FINANCE - 3.65%
8,000,000 Commercial Credit Co.,
5.15% due 12/10/1998............................... 7,989,672
-----------
FINANCE COMPANIES - 3.32%
5,000,000 Ford Credit Europe PLC,
4.94% due 12/01/1998............................... 5,000,000
2,265,000 General Electric Capital Services, Inc.,
4.95% due 12/04/1998............................... 2,264,065
-----------
7,264,065
-----------
METALS - MISCELLANEOUS - 1.06%
2,311,000 Engelhard Corp.,
5.50% due 12/01/1998............................... 2,311,000
-----------
SECURITIES RELATED - 4.20%
9,200,000 Merrill Lynch & Co.,
5.15% due 12/10/1998............................... 9,188,123
-----------
UTILITIES - COMMUNICATION - 2.28%
4,988,000 Cincinnati Bell, Inc.,
5.10% due 12/03/1998............................... 4,986,586
-----------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $41,126,107).................................. 40,926,458
-----------
</TABLE>
<PAGE>
================================================================================
ASSET ALLOCATION FUND - STATEMENT OF NET ASSETS CONTINUED
66 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
UNITED STATES GOVERNMENT -
SHORT TERM - 0.09%
UNITED STATES TREASURY BILLS - 0.09%
United States Treasury Bills:
$ 100,000 4.00% due 12/24/1998............................... $ 99,744
100,000 3.75% due 12/10/1998............................... 99,906
-----------
199,650
-----------
TOTAL UNITED STATES GOVERNMENT -
SHORT TERM
(Cost $199,650)..................................... 199,650
-----------
TOTAL INVESTMENTS
(Cost $199,969,711) - 114.02%....................... 249,456,876
Other assets less liabilities,
net - (14.02%)..................................... (30,670,410)
-----------
NET ASSETS (equivalent
to $14.51 per share on
15,078,692 shares
outstanding) - 100%................................ $218,786,466
============
* Non-income producing
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
15,078,692 shares outstanding..................... $ 150,787
Additional paid in capital.......................... 154,572,443
Accumulated net realized gain on securities......... 14,509,047
Undistributed net investment income................. 67,024
Unrealized appreciation of securities............... 49,487,165
------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING....................................... $218,786,466
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
ASSET ALLOCATION FUND - FINANCIAL STATEMENTS (Unaudited) 67
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ................................................................... $ 905,705
Interest .................................................................... 2,632,687
------------
Total investment income ................................................... 3,538,392
------------
EXPENSES:
Advisory fees ............................................................... 513,771
Custodian and accounting services ........................................... 24,172
Reports to shareholders ..................................................... 17,269
Audit fees and tax services ................................................. 3,455
Directors' fees and expenses ................................................ 2,735
Miscellaneous ............................................................... 9,918
------------
Total expenses ............................................................ 571,320
------------
NET INVESTMENT INCOME ....................................................... 2,967,072
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain (loss) on:
Investments ................................................ $ 2,713,977
Futures contracts .......................................... (904,875) 1,809,102
------------
Net unrealized appreciation during the period:
Investments ................................................ 5,308,798
Futures contracts .......................................... 68,925 5,377,723
------------ ------------
Net realized and unrealized gain during the period ....................... 7,186,825
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................ $ 10,153,897
------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................ $ 2,967,072 $ 5,684,679
Net realized gain on securities .................................. 1,809,102 13,272,397
Net unrealized appreciation of securities during the period ...... 5,377,723 18,286,139
------------- -------------
Increase in net assets resulting from operations ............... 10,153,897 37,243,215
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (2,951,844) (5,673,369)
Net realized gain on securities .................................. -- (10,552,054)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders ............................................... (2,951,844) (16,225,423)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................................. 12,127,662 6,643,565
Proceeds from capital stock issued for distributions reinvested... 2,951,844 16,225,423
------------- -------------
15,079,506 22,868,988
Cost of capital stock repurchased ................................ (3,593,905) (21,134,651)
------------- -------------
Increase in net assets resulting from capital
stock transactions ............................................ 11,485,601 1,734,337
------------- -------------
TOTAL INCREASE IN NET ASSETS ..................................... 18,687,654 22,752,129
NET ASSETS:
Beginning of period .............................................. 200,098,812 177,346,683
------------- -------------
End of period (including undistributed net investment income
of $67,024 and $51,796) ........................................ $ 218,786,466 $ 200,098,812
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ..................................... 858,130 488,059
Shares issued for distributions reinvested ....................... 208,946 1,231,303
Shares of capital stock repurchased .............................. (257,864) (1,556,774)
------------- -------------
Increase in shares outstanding ................................. 809,212 162,588
Shares outstanding:
Beginning of period ............................................ 14,269,480 14,106,892
------------- -------------
End of period .................................................. 15,078,692 14,269,480
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS
68 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
CORPORATE BONDS - 87.68%
AIRLINES - 2.75%
$ 1,500,000 Delta Air Lines, Inc.,
9.75% due 5/15/2021................................ $ 1,823,025
-----------
AUTO - CARS - 2.25%
1,500,000 Hertz Corp.,
6.00% due 01/15/2003............................... 1,489,740
-----------
BANKS - OTHER - 5.42%
1,000,000 BankAmerica Corp.,
7.20% due 04/15/2006............................... 1,077,790
1,500,000 Santander Finance Issuance,
7.25% due 11/01/2015............................... 1,512,570
1,000,000 Toronto Dominion Bank,
6.13% due 11/01/2008............................... 999,430
-----------
3,589,790
-----------
BANKS - REGIONAL - 6.63%
1,500,000 Bank Boston Capital Trust I,
8.25% due 12/15/2026............................... 1,620,675
1,500,000 Barnett Capital Trust I,
8.06% due 12/01/2026............................... 1,673,070
1,000,000 SouthTrust Corp.,
7.63% due 05/01/2004............................... 1,090,730
-----------
4,384,475
-----------
BUILDING MATERIALS - 3.02%
2,000,000 CSR America, Inc.,
6.88% due 07/21/2005............................... 1,995,360
-----------
DRUGS - 3.05%
2,000,000 Akzo Nobel Inc.
6.00% due 11/15/2003............................... 2,016,200
-----------
FINANCE COMPANIES - 8.76%
2,000,000 Capital One Bank,
8.13% due 03/01/2000............................... 2,034,960
1,000,000 C.I.T. Group Holdings, Inc.,
8.38% due 11/01/2001............................... 1,074,100
2,000,000 Finova Capital Corp.,
9.13% due 02/27/2002............................... 2,169,480
500,000 Ford Motor Credit Co.,
6.38% due 11/05/2008............................... 520,290
-----------
5,798,830
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
HEALTHCARE - 2.05%
$1,500,000 Columbia Healthcare Corp.,
7.50% due 12/15/2023............................... $ 1,355,460
-----------
HEAVY DUTY TRUCKS/PARTS - 2.26%
1,500,000 Dana Corp.,
7.00% due 03/15/2028............................... 1,494,300
-----------
INFORMATION PROCESSING -
DATA SERVICES - 2.99%
2,000,000 Comdisco, Inc.,
6.13% due 08/01/2001............................... 1,975,660
-----------
MERCHANDISE - DRUG - 0.75%
500,000 Imcera Group, Inc.,
6.00% due 10/15/2003............................... 496,390
-----------
MERCHANDISING - DEPARTMENT - 7.42%
2,000,000 Associated Dry Goods Corp.,
8.85% due 03/01/2006............................... 2,331,780
2,500,000 Federated Department Stores, Inc.,
6.79% due 07/15/2027............................... 2,577,275
-----------
4,909,055
-----------
MERCHANDISING - MASS - 2.27%
1,500,000 ShopKo Stores, Inc.,
6.50% due 08/15/2003............................... 1,504,935
-----------
METALS - STEEL - 2.69%
2,000,000 Pohang Iron & Steel Limited,
7.50% due 08/01/2002............................... 1,782,860
-----------
PAPER/FOREST PRODUCTS - 3.74%
2,000,000 Georgia-Pacific Corp.,
9.50% due 12/01/2011............................... 2,475,300
-----------
POLLUTION CONTROL - 2.24%
1,500,000 US Filter Corp.,
6.38% due 05/15/2001............................... 1,484,100
-----------
PUBLISHING - NEWS - 3.45%
2,000,000 News America Holdings,
8.25% due 08/10/2018............................... 2,280,860
-----------
RAILROAD - 3.06%
2,000,000 Union Pacific Corp.,
6.79% due 11/09/2007............................... 2,027,340
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
TELECOMMUNICATIONS - 6.41%
$2,000,000 Airtouch Communications, Inc.,
7.50% due 07/15/2006............................... $ 2,138,900
2,000,000 360 Communications Co.,
7.13% due 03/01/2003............................... 2,104,900
-----------
4,243,800
-----------
UTILITIES - COMMUNICATION - 6.35%
2,500,000 Century Telephone Enterprises, Inc.,
7.20% due 12/01/2025............................... 2,660,750
1,500,000 GTE South, Inc.,
6.00% due 02/15/2008............................... 1,539,195
-----------
4,199,945
-----------
UTILITIES - ELECTRIC - 2.08%
2,000,000 Tenaga Nasional Berhad,
7.88% due 06/15/2004............................... 1,377,820
-----------
UTILITIES - GAS, DISTRIBUTION - 1.67%
1,000,000 Tosco Corp.,
9.63% due 03/15/2002............................... 1,103,830
-----------
UTILITIES - GAS, PIPELINE - 6.37%
2,000,000 Columbia Energy Group,
7.62% due 11/28/2025............................... 2,087,700
2,000,000 Enron Corp.,
7.63% due 09/10/2004............................... 2,128,300
-----------
4,216,000
-----------
TOTAL CORPORATE BOND
(Cost $57,598,948).................................. 58,025,075
-----------
UNITED STATES GOVERNMENT
LONG TERM - 8.40%
FEDERAL AGENCIES - 0.37%
Government National Mortgage Association
(Pools/REMICS)
41,244 9.50% due 05/15/2018............................... 44,548
2,516 9.50% due 06/15/2018............................... 2,717
1,230 9.50% due 06/15/2018............................... 1,329
150,136 9.50% due 07/15/2018............................... 162,164
18,035 9.50% due 08/15/2018............................... 19,480
10,587 9.50% due 10/15/2018............................... 11,435
-----------
241,673
-----------
</TABLE>
<PAGE>
================================================================================
CAPITAL CONSERVATION FUND - STATEMENT OF NET ASSETS CONTINUED
November 30, 1998 (Unaudited) 69
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
GOVERNMENT SPONSORED - 7.18%
Federal Home Loan Mortgage Corp.,
$ 845,299 6.50% due 06/01/2012............................... $ 857,708
1,000,000 5.75% due 12/15/2016............................... 1,000,000
Federal National Mortgage Association,
(Pool/REMICS)
714,213 7.00% due 60/01/2011............................... 730,504
689,319 7.50% due 07/01/2026............................... 708,268
700,410 7.00% due 05/01/2011............................... 716,387
722,430 7.00% due 05/01/2011............................... 738,909
-----------
4,751,776
-----------
UNITED STATES NOTES - 0.85%
500,000 United States Treasury Notes,
6.88% due 05/15/2006............................... 564,685
-----------
TOTAL UNITED STATES GOVERNMENT -
LONG TERM (Cost $5,352,899)......................... 5,558,134
-----------
FOREIGN GOVERNMENT BONDS - 0.80%
CANADA - 0.80%
500,000 New Brunswick, Province
7.13% due 10/01/2002
(Cost $499,259).................................... 531,920
-----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 0.80%
CONGLOMERATES - 0.80%
530,000 CSW Corp
5.65% due 12/01/1998
(Cost $530,000) 530,000
-----------
TOTAL INVESTMENTS
(Cost $63,981,106) - 97.68%......................... 64,645,129
Other assets less liabilities,
net - 2.32%........................................ 1,533,769
-----------
NET ASSETS (equivalent
to $9.64 per share on
6,868,287 shares
outstanding - 100%................................. $66,178,898
===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- ----------- ------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED(1)
(Delivery month/Value at 11/30/98)
10 (2) U.S. Treasury 30 Year Notes
(March/$130.22).................................... $ 21,100
============
(1)U.S.Treasury Notes with a market value of approximately
$100,000 were maintained in a segregated account with a portion
placed as collateral for futures contracts.
(2)Per 1,000
</TABLE>
<TABLE>
<S> <C> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
6,868,287 shares outstanding................................... $ 68,683
Additional paid in capital....................................... 65,663,586
Accumulated net realized loss on securities...................... (285,441)
Undistributed net investment income.............................. 46,947
Unrealized appreciation of:
Investments........................................ $ 664,023
Futures ........................................... 21,100 685,123
---------- -----------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING..................................................... $66,178,898
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
70 CAPITAL CONSERVATION FUND - FINANCIAL STATEMENTS (Unaudited)
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ............................................................................. $ 2,241,122
-----------
EXPENSES:
Advisory fees ........................................................................ 163,510
Custodian and accounting services .................................................... 7,746
Reports to shareholders .............................................................. 5,522
Audit fees and tax services .......................................................... 975
Directors' fees and expenses ......................................................... 877
Miscellaneous ........................................................................ 2,133
-----------
Total expenses ..................................................................... 180,763
-----------
NET INVESTMENT INCOME ................................................................ 2,060,359
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES:
Net realized gain on:
Investments ......................................................... $ 151,807
Futures contracts ................................................... 79,936 231,743
-----------
Net unrealized appreciation (depreciation) during the period:
Investments ......................................................... (580,459)
Futures contracts ................................................... 21,202 (559,257)
----------- -----------
Net realized and unrealized loss on securities during the period ... (327,514)
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... $ 1,732,845
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................ $ 2,060,359 $ 4,230,852
Net realized gain on securities .................................. 231,743 259,260
Net unrealized appreciation (depreciation) of securities
during the period .............................................. (559,257) 2,346,983
------------ ------------
Increase in net assets resulting from operations .............. 1,732,845 6,837,095
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (2,048,014) (4,220,237)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................................. 7,245,051 11,469,948
Proceeds from capital stock issued for distributions reinvested .. 2,048,014 4,220,237
------------ ------------
9,293,065 15,690,185
Cost of capital stock repurchased ................................ (6,452,550) (21,400,947)
------------ ------------
Increase (decrease) in net assets resulting from capital
stock transactions ............................................ 2,840,515 (5,710,762)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS .......................... 2,525,346 (3,093,904)
NET ASSETS:
Beginning of period .............................................. 63,653,552 66,747,456
------------ ------------
End of period (including undistributed net investment income
of $46,947 and $34,604) ........................................ $ 66,178,898 $ 63,653,552
============ ============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ..................................... 749,791 1,185,836
Shares issued for distributions reinvested ....................... 212,701 439,548
Shares of capital stock repurchased .............................. (671,216) (2,216,430)
------------ ------------
Increase (decrease) in shares outstanding ...................... 291,276 (591,046)
Shares outstanding:
Beginning of period ............................................ 6,577,011 7,168,057
------------ ------------
End of period .................................................. 6,868,287 6,577,011
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
GOVERNMENT SECURITIES FUND - STATEMENT OF NET ASSETS
November 30, 1998 (Unaudited) 71
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
UNITED STATES GOVERNMENT -
LONG TERM - 97.90%
FEDERAL AGENCIES - 10.37%
Tennessee Valley Authority:
$2,000,000 6.75% due 11/01/2025............................... $ 2,134,060
2,500,000 6.38% due 06/15/2005............................... 2,799,675
3,000,000 6.00% due 03/15/2013............................... 3,125,610
3,500,000 5.38% due 11/13/2008............................... 3,501,085
-----------
11,560,430
-----------
GOVERNMENT SPONSORED - 55.45%
1,500,000 Federal Farm Credit Banks,
6.92% due 05/13/2002................................ 1,589,295
Federal Home Loan Banks:
1,155,000 7.26% due 09/06/2001................................ 1,220,685
1,150,000 7.10% due 11/02/2002................................ 1,236,434
2,000,000 6.38% due 12/20/2000................................ 2,052,180
5,000,000 6.12% due 08/26/2008................................ 5,081,250
3,000,000 6.11% due 06/19/2003................................ 3,007,500
3,000,000 5.91% due 03/27/2008................................ 3,099,840
1,145,000 5.81% due 01/21/2005................................ 1,177,381
3,000,000 5.70% due 12/19/2000................................ 3,037,980
Federal Home Loan Mortgage Corp.:
1,500,000 7.09% due 06/01/2005................................ 1,521,795
3,500,000 6.71% due 11/09/2005................................ 3,530,625
1,500,000 6.37% due 01/23/2006................................ 1,520,625
Federal Home Loan Mortgage Corp.
(Pools/REMICS):
88,093 7.50% due 09/01/2025................................ 90,488
339,726 7.50% due 09/01/2025................................ 348,960
175,092 7.50% due 09/01/2025................................ 179,851
2,000,000 7.00% due 06/01/2019................................ 2,064,360
2,113,248 6.50% due 06/01/2012................................ 2,144,270
175,000 5.50% due 02/25/2019................................ 174,069
Federal National Mortgage Association:
1,000,000 9.05% due 04/10/2000................................ 1,051,410
2,000,000 7.27% due 08/24/2005................................ 2,042,180
3,000,000 7.00% due 08/27/2012................................ 3,202,980
2,000,000 6.85% due 09/12/2005................................ 2,022,180
2,000,000 6.62% due 06/25/2007................................ 2,160,620
2,000,000 6.41% due 03/08/2006................................ 2,131,880
4,000,000 6.25% due 12/13/2002................................ 4,026,880
1,475,000 6.15% due 07/02/2008................................ 1,500,576
3,000,000 6.06% due 05/07/2003................................ 3,037,980
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
GOVERNMENT SPONSORED - Continued
$2,000,000 5.74% due 12/23/1999............................... $ 2,013,120
2,500,000 5.50% due 09/29/2003............................... 2,498,000
2,000,000 4.63% due 10/15/2001............................... 1,986,880
1,000,000 Student Loan Marketing Association,
7.50% due 03/08/2000............................... 1,029,370
-----------
61,781,644
-----------
UNITED STATES BONDS, NOTES
& STRIPS - 32.08%
United States Treasury Bonds:
1,800,000 9.00% due 11/15/2018............................... 2,607,462
4,000,000 8.75% due 08/15/2020............................... 5,736,240
3,500,000 8.50% due 02/15/2020............................... 4,890,690
3,500,000 7.25% due 08/15/2022............................... 4,391,940
2,000,000 6.75% due 08/15/2026............................... 2,410,320
United States Treasury Notes:
2,500,000 6.75% due 04/30/2000............................... 2,571,100
1,000,000 6.38% due 01/15/2000............................... 1,017,970
6,000,000 5.88% due 11/15/1999............................... 6,065,640
3,000,000 5.75% due 08/15/2003............................... 3,136,410
2,000,000 5.50% due 01/31/2003............................... 2,061,880
United States Treasury Strips,
1,500,000 due 11/15/2009..................................... 852,465
-----------
35,742,117
-----------
TOTAL UNITED STATES
GOVERNMENT - LONG TERM
(Cost $103,905,695)................................. 109,084,191
-----------
CORPORATE SHORT TERM
COMMERCIAL PAPER - 0.44%
CONGLOMERATES - 0.44%
495,000 CSW Corp.,
5.65 % due 12/01/1998............................... 495,000
-----------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $495,000)..................................... 495,000
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C>
TOTAL INVESTMENTS
(Cost $104,400,695) - 98.34%......................... $109,579,191
Other assets less liabilities,
net - 1.66%......................................... 1,848,639
------------
NET ASSETS (equivalent
to $10.36 per share on
10,757,636 shares
outstanding) - 100% ................................ $111,427,830
============
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
10,757,636 shares outstanding ................................ $ 107,576
Additional paid in capital ..................................... 107,527,062
Accumulated net realized loss on securities .................... (1,451,447)
Undistributed net investment income ............................ 66,143
Unrealized appreciation of investments ......................... 5,178,496
-------------
NET ASSETS APPLICABLE TO
SHARES OUTSTANDING ........................................... $ 111,427,830
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
72 GOVERNMENT SECURITIES FUND - FINANCIAL STATEMENTS (Unaudited)
================================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................................... $3,076,031
----------
EXPENSES:
Advisory fees ...................................................................... 255,786
Custodian and accounting services .................................................. 11,756
Reports to shareholders ............................................................ 8,575
Audit fees and tax services ........................................................ 1,625
Directors' fees and expenses ....................................................... 1,325
Miscellaneous ...................................................................... 2,786
----------
Total expenses ................................................................... 281,853
----------
NET INVESTMENT INCOME .............................................................. 2,794,178
----------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net realized gain on:
Investments ........................................................ $ 52,463
Futures contracts .................................................. 230,297 282,760
----------
Net unrealized appreciation during the period:
Investments ........................................................ 2,162,474
Futures contracts .................................................. 133 2,162,607
---------- ----------
Net realized and unrealized gain on securities during the period ................... 2,445,367
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................................... $5,239,545
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................. $ 2,794,178 $ 5,097,779
Net realized gain on securities ................................... 282,760 358,401
Net unrealized appreciation of securities during the period ....... 2,162,607 3,271,061
------------- -------------
Increase in net assets resulting from operations ............... 5,239,545 8,727,241
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (2,775,508) (5,081,964)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold .................................. 32,249,130 17,280,167
Proceeds from capital stock issued for distributions reinvested ... 2,775,508 5,081,964
------------- -------------
35,024,638 22,362,131
Cost of capital stock repurchased ................................. (18,181,062) (17,713,793)
------------- -------------
Increase in net assets resulting from capital
stock transactions ............................................. 16,843,576 4,648,338
------------- -------------
TOTAL INCREASE IN NET ASSETS ...................................... 19,307,613 8,293,615
NET ASSETS:
Beginning of period ............................................... 92,120,217 83,826,602
------------- -------------
End of period (including undistributed net investment income
of $66,143 and $47,473) ......................................... $ 111,427,830 $ 92,120,217
============= ==============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ...................................... 3,124,242 1,716,427
Shares issued for distributions reinvested ........................ 269,549 509,952
Shares of capital stock repurchased ............................... (1,765,652) (1,769,096)
------------- -------------
Increase in shares outstanding .................................. 1,628,139 457,283
Shares outstanding:
Beginning of period ............................................. 9,129,497 8,672,214
------------- -------------
End of period ................................................... 10,757,636 9,129,497
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - INVESTMENT PORTFOLIO
November 30, 1998 (Unaudited) 73
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
GOVERNMENT BONDS - 83.84%
AUSTRALIA - 1.09%
Commonwealth:
A$ 500,000 9.75% due 3/15/02................................ $ 362,756
A$ 500,000 9.00% due 9/15/04................................ 379,712
A$ 500,000 8.75% due 1/15/01................................ 340,556
A$ 500,000 7.50% due 7/15/05................................ 359,982
A$ 500,000 7.50% due 9/15/09................................ 376,067
----------
1,819,073
----------
AUSTRIA - 2.75%
Republic of Austria:
DM 1,000,000 7.25% due 5/3/07.................................. 712,370
As 2,000,000 7.125% due 7/12/04................................ 193,975
As 1,500,000 7.00% due 2/14/00................................ 130,776
As 2,200,000 7.00% due 1/20/03................................ 207,105
As 2,000,000 7.00% due 5/16/05................................ 195,400
As 2,000,000 6.875% due 4/19/02................................ 184,507
As 2,000,000 6.50% due 11/17/05................................ 191,881
As 6,000,000 6.25% due 5/31/06................................ 571,344
As 3,000,000 5.625% due 7/15/07................................ 276,509
As 2,000,000 5.50% due 1/18/04................................ 180,566
Ff11,000,000 5.50% due 1/18/04................................ 2,082,908
Y. 100MM 4.75% due 12/20/04............................... 1,001,421
Y. 50MM 4.50% due 9/28/05................................ 503,754
As 3,000,000 4.375% due 2/28/02............................... 257,656
----------
6,690,172
----------
BELGIUM - 3.58%
Kingdom of Belgium:
Bf 10,000,000 8.75% due 6/25/02................................. 334,686
Bf 10,000,000 8.00% due 12/24/12................................ 390,529
Bf 10,000,000 8.00% due 3/28/15................................. 396,531
Bf 10,000,000 7.75% due 12/22/00................................ 310,223
Bf 25,000,000 7.75% due 10/15/04................................ 860,078
Bf 20,000,000 7.50% due 7/29/08................................. 716,984
Bf 15,000,000 7.00% due 5/15/06................................. 509,574
Bf 20,000,000 6.50% due 3/31/05................................. 653,940
Bf 20,000,000 6.25% due 3/28/07................................. 655,140
Bf 20,000,000 5.00% due 3/28/01................................. 591,695
Bf 20,000,000 4.00% due 1/22/00................................. 575,588
----------
5,994,968
----------
CANADA - 4.27%
Government of Canada:
C$ 550,000 9.50% due 6/1/10.................................. 497,442
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ----------- -----------
<S> <C> <C>
CANADA - CONTINUED
C $ 500,000 9.00% due 12/1/04................................. $ 395,877
C $ 500,000 9.00% due 6/1/25.................................. 494,378
C $1,000,000 8.75% due 12/1/05................................. 800,236
C $1,000,000 8.50% due 4/1/02.................................. 727,216
C $1,000,000 8.00% due 6/1/23.................................. 891,440
C $ 500,000 7.50% due 9/1/00.................................. 341,709
C $1,000,000 7.50% due 3/1/01.................................. 691,145
C $1,000,000 7.25% due 6/1/03.................................. 716,510
C $1,000,000 7.00% due 12/1/06................................. 741,200
C $ 500,000 6.50% due 6/1/04.................................. 352,260
C $ 750,000 5.50% due 2/1/00.................................. 494,971
----------
7,144,384
----------
DENMARK - 2.35
Kingdom of Denmark:
DK 5,000,000 8.00% due 11/15/01................................ 860,289
DK 2,500,000 8.00% due 5/15/03................................. 449,411
DK 3,000,000 8.00% due 3/15/06................................. 571,763
DK 5,500,000 7.00% due 12/15/04................................ 982,222
DK 1,250,000 7.00% due 11/10/24................................ 243,991
DK 5,000,000 6.00% due 11/15/02................................ 830,361
----------
3,938,037
----------
FINLAND - 2.44%
Republic of Finland:
FIM 2,000,000 10.00% due 9/15/01................................ 453,458
FIM 3,000,000 9.50% due 3/15/04................................. 737,238
FIM 3,000,000 7.25% due 4/18/06................................. 697,127
Ff 5,000,000 7.00% due 6/15/04................................. 1,013,433
Y. 100MM 6.00% due 1/29/02................................. 952,719
FIM 1,000,000 6.00% due 4/25/08................................. 219,870
----------
4,073,845
----------
FRANCE - 4.60%
Government of France:
Ff 4,600,000 9.50% due 1/25/01................................. 910,588
Ff 3,500,000 8.50% due 11/25/02................................ 726,860
Ff 1,500,000 8.50% due 12/26/12................................ 377,162
Ff 7,000,000 6.75% due 10/25/03................................ 1,399,828
Ff 2,000,000 6.50% due 10/25/06................................ 412,888
Ff 8,500,000 6.00% due 10/25/25................................ 1,733,108
Ff 2,000,000 5.50% due 4/25/04................................. 384,413
Ff 4,000,000 5.50% due 4/25/07................................. 779,371
Ff 3,000,000 5.50% due 4/25/29................................. 579,703
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FRANCE - Continued
Ff 2,000,000 5.25% due 4/25/08................................. $ 383,534
----------
7,687,455
----------
GERMANY - 10.64%
Federal Republic of Germany:
DM 2,000,000 7.50% due 9/9/04.................................. 1,404,344
DM 3,100,000 7.125% due 12/20/02............................... 2,074,585
DM 3,000,000 6.50% due 3/15/00................................. 1,837,897
DM 3,000,000 6.50% due 7/15/03................................. 1,985,735
DM 3,000,000 6.50% due 10/14/05................................ 2,043,385
DM 1,000,000 6.25% due 4/26/06................................. 676,413
DM 2,000,000 6.25% due 1/4/24.................................. 1,415,898
DM 1,000,000 6.00% due 1/5/06.................................. 663,916
DM 3,000,000 6.00% due 1/4/07.................................. 2,007,309
DM 2,000,000 6.00% due 6/20/16................................. 1,403,755
DM 3,750,000 4.50% due 8/19/02................................. 2,287,202
----------
17,800,439
----------
IRELAND - 0.66%
Republic of Ireland:
Ilb 100,000 8.25% due 8/18/15................................. 206,537
Ilb 100,000 8.00% due 8/18/06................................. 183,539
Ilb 150,000 6.50% due 10/18/01................................ 237,517
Ilb 150,000 6.25% due 4/1/99.................................. 221,544
Ilb 150,000 6.25% due 10/18/04................................ 247,075
----------
1,096,212
----------
ITALY - 9.77%
Republic of Italy:
Lit 1,000MM 12.00% due 6/1/01................................. 711,951
Lit 1,000MM 12.00% due 1/1/02................................. 737,610
Lit 1,000MM 10.50% due 7/15/00................................ 659,265
Lit 500MM 10.50% due 4/1/05................................. 404,495
Lit 500MM 10.50% due 9/1/05................................. 409,912
Lit 3,400MM 10.00% due 8/1/03................................. 2,554,023
Lit 500MM 9.50% due 1/1/05.................................. 384,878
Lit 500MM 9.50% due 2/1/06.................................. 396,487
Lit 2,000MM 9.00% due 11/1/23................................. 1,845,513
Lit 1,000MM 8.50% due 4/1/04.................................. 726,775
Lit 1,500MM 8.50% due 8/1/04.................................. 1,096,324
Lit 1,000MM 7.75% due 9/15/01................................. 660,872
Lit 1,500MM 6.75% due 2/1/07.................................. 1,047,031
Lit 500MM 6.25% due 3/1/02.................................. 321,566
Lit 2,000MM 5.75% due 9/15/02................................. 1,279,000
Lit 3,000MM 5.50% due 9/15/00................................. 1,848,757
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - INVESTMENT PORTFOLIO CONTINUED
74 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------------ -----------
<S> <C> <C>
ITALY - CONTINUED
Lit 2,000MM 5.00% due 5/1/08............................ $ 1,266,617
------------
16,351,076
------------
JAPAN - 19.49%
Government of Japan:
Y. 250MM 6.60% due 6/20/01............................ 2,345,576
Y. 105MM 6.00% due 12/20/01........................... 993,665
Y. 365MM 5.50% due 3/20/02............................ 3,442,317
Y. 120MM 5.00% due 12/20/02........................... 1,143,994
Y. 100MM 5.00% due 9/21/09............................ 1,116,940
Y. 100MM 5.00% due 3/20/15............................ 1,192,322
Y. 127MM 4.50% due 6/20/03............................ 1,205,985
Y. 75MM 4.50% due 12/20/04........................... 738,738
Y. 150MM 4.40% due 9/22/03............................ 1,428,166
Y. 200MM 4.20% due 9/21/15............................ 2,206,039
Y. 150MM 4.10% due 6/21/04............................ 1,434,375
Y. 100MM 3.90% due 6/21/04............................ 947,321
Y. 100MM 3.80% due 9/20/16............................ 1,059,773
Y. 250MM 3.50% due 3/21/16............................ 2,553,348
Y. 100MM 3.30% due 6/20/06............................ 946,266
Y. 200MM 3.20% due 3/20/06............................ 1,874,351
Y. 250MM 3.00% due 9/20/05............................ 2,301,339
Y. 150MM 2.90% due 12/20/05........................... 1,376,055
Y. 100MM 2.70% due 3/20/07............................ 917,175
Y. 150MM 2.00% due 12/20/07........................... 1,312,232
Y. 250MM 1.10% due 10/22/01........................... 2,064,083
------------
32,600,060
------------
NETHERLANDS - 4.09%
Government of the Netherlands:
NG 1,000,000 8.75% due 9/15/01............................ 595,017
NG 500,000 8.25% due 2/15/02............................ 298,293
NG 500,000 8.25% due 6/15/02............................ 301,430
NG 500,000 8.25% due 2/15/07............................ 336,462
NG 1,500,000 7.75% due 3/1/05............................. 951,740
NG 500,000 7.50% due 4/15/10............................ 338,422
NG 750,000 7.50% due 1/15/23............................ 540,770
NG 2,000,000 6.50% due 4/15/03............................ 1,165,460
NG 1,500,000 6.00% due 1/15/06............................ 883,898
NG 2,000,000 5.75% due 1/15/04............................ 1,145,591
NG 500,000 5.75% due 2/15/07............................ 292,934
------------
6,850,017
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------------ -----------
<S> <C> <C>
PORTUGAL - 0.92%
Republic Of Portugal:
Ff 3,000,000 6.625% due 5/13/08........................... $ 619,396
PTE75,000,000 5.375% due 6/23/08........................... 466,741
PTE75,000,000 4.812% due 4/23/03........................... 448,508
-----------
1,534,645
-----------
SPAIN - 4.62%
Government of Spain:
Pst 50MM 10.50% due 10/30/03........................... 449,827
Pst 100MM 10.30% due 6/15/02............................ 845,307
Pst 50MM 10.00% due 2/28/05............................ 460,218
Pst 70MM 8.20% due 2/28/09............................. 635,456
Pst 80MM 8.00% due 5/30/04............................. 668,292
Ff 2,000,000 6.50% due 6/20/01............................. 376,810
Pst 236MM 6.00% due 1/31/08............................. 1,845,670
Pst 100MM 6.00% due 1/31/29............................. 782,979
Pst 67MM 5.25% due 1/31/03............................. 496,588
Pst 163MM 5.00% due 1/31/01............................. 1,165,247
-----------
7,726,394
-----------
SWEDEN - 2.23%
Kingdom of Sweden:
SK 3,000,000 10.25% due 5/5/00............................ 401,340
SK 6,000,000 10.25% due 5/5/03............................ 923,593
SK 3,000,000 9.00% due 4/20/09............................ 508,688
SK 3,000,000 8.00% due 8/15/07............................ 466,559
C $ 500,000 6.75% due 12/31/01........................... 341,738
SK 2,000,000 6.50% due 10/25/06........................... 281,671
SK 6,000,000 6.00% due 2/9/05............................. 809,587
-----------
3,733,176
-----------
SWITZERLAND - 0.70%
Government of Switzerland:
Chf 500,000 4.50% due 7/8/02............................. 391,463
Chf 500,000 4.50% due 4/8/06............................. 413,056
Chf 500,000 4.00% due 4/8/28............................. 370,973
-----------
1,175,492
-----------
UNITED KINGDOM - 6.95%
Government of United Kingdom:
L 250,000 9.75% due 8/27/02............................ 477,722
L 400,000 9.00% due 10/13/08........................... 881,202
L 250,000 9.00% due 7/12/11............................ 577,720
L 750,000 8.75% due 8/25/17............................ 1,864,290
L 500,000 8.50% due 12/7/05............................ 1,004,514
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------------ -----------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
L 500,000 8.00% due 9/25/09........................... $ 1,030,906
L 500,000 8.00% due 12/7/15........................... 1,149,006
L 750,000 8.00% due 6/7/21............................ 1,829,033
L 1,000,000 7.50% due 12/7/06........................... 1,947,999
L 500,000 7.00% due 11/6/01........................... 868,023
-----------
11,630,415
-----------
UNITED STATES - 1.45%
DM 4,000,000 Federal National Mortgage Association,
5.00% due 2/16/01............................ 2,433,022
-----------
TOTAL GOVERNMENT BONDS
(Cost $133,207,822)........................... 140,278,882
-----------
SUPRANATIONAL - 5.95%
Ff 1,600,000 Eurofima:
9.25% due 12/18/03........................... 349,785
European Investment Bank:
Lit 1,100MM 10.50% due 2/7/02........................... 787,047
L 250,000 9.00% due 5/14/02........................... 455,660
Ff 2,000,000 6.125% due 10/8/04.......................... 391,971
L 1,000,000 6.00% due 11/26/04.......................... 1,705,118
Y. 100MM 4.625% due 2/26/03.......................... 949,675
L 100,000,000 3.00% due 9/20/06........................... 932,427
International Bank for
Reconstruction & Development:
Lit 150MM 10.80% due 11/13/01.......................... 106,902
Lit 200MM 9.45% due 8/11/03............................ 147,046
L 400,000 9.25% due 7/20/07............................ 833,384
Y. 250MM 5.25% due 3/20/02............................ 2,350,092
Y. 100MM 4.50% due 3/20/03............................ 948,154
-----------
TOTAL SUPRANATIONAL
(Cost $10,124,302)............................ 9,957,261
-----------
CORPORATE BONDS - 4.18%
FRANCE - 3.94%
Credit Local de France:
Lit 1,000MM 9.00% due 6/14/01............................ 670,487
Ff 5,000,000 8.875% due 6/10/02........................... 1,025,621
Ff 8,000,000 6.25% due 9/27/05............................ 1,588,976
Ff 4,000,000 6.00% due 11/15/01........................... 747,029
Ff 10,000,000 Elf Aquitaine SA,
7.125% due 8/11/03........................... 1,990,614
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - INVESTMENT PORTFOLIO CONTINUED
November 30, 1998 (Unaudited) 75
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------------ ------------
<S> <C> <C>
FRANCE - CONTINUED
FF3,000,000 Toyota Motor Credit,
6.25% due 4/11/02........................... $ 565,216
------------
6,587,943
------------
UNITED KINGDOM - 0.25%
L 250,000 Sudwestdeutsche Lbank Cap,
0.00% due................................... 412,156
------------
TOTAL CORPORATE BONDS
(Cost $7,391,954)............................ 7,000,099
------------
TOTAL INVESTMENTS
(Cost $150,724,078) - 93.98%................. 157,236,242
Other assets less liabilities,
net - 6.02%.................................. 10,075,800
------------
NET ASSETS (equivalent
to $12.50 per share on
13,382,708 shares
outstanding) - 100%.......................... $167,312,042
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
76 INTERNATIONAL GOVERNMENT BOND FUND - FINANCIAL STATEMENTS (Unaudited)
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1998
<TABLE>
<S> <C>
ASSETS:
Investments (cost $150,724,078) ......................................... $157,236,242
Cash .................................................................... 955,982
Foreign currencies ...................................................... 1,907,707
Receivables:
Investment securities sold ............................................ 457,120
Investment income ..................................................... 3,780,122
Capital stock sold .................................................... 3,159,291
Foreign withholding taxes ............................................. 20,415
Prepaid expenses ........................................................ 1,483
------------
Total assets .......................................................... 167,518,362
------------
LIABILITIES:
Advisory fees ........................................................... 139,491
Foreign tax withholding ................................................. 37,278
Shareholder reports ..................................................... 14,503
Custodian fees .......................................................... 5,526
Other liabilities ....................................................... 9,522
------------
Total liabilities ..................................................... 206,320
------------
NET ASSETS APPLICABLE TO CAPITAL
SHARES OUTSTANDING .................................................... $167,312,042
------------
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
13,382,708 at 11/30/98 and 13,645,599 at 5/31/98 shares outstanding ... $ 133,827
Additional paid in capital .............................................. 158,190,288
Accumulated net realized gain on securities ............................. 783,420
Undistributed net investment income ..................................... 1,628,030
Unrealized appreciation of:
Investments ........................................................... 6,512,164
Foreign currency transactions ......................................... 64,313
------------
TOTAL NET ASSETS APPLICABLE TO CAPITAL
SHARES OUTSTANDING .................................................... $167,312,042
============
</TABLE>
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $45,345) ....................... $ 3,924,225
------------
EXPENSES:
Advisory fees ................................................................ 396,707
Custodian and accounting services ............................................ 18,240
Reports to shareholders ...................................................... 13,014
Audit fees and tax services .................................................. 2,215
Directors' fees and expenses ................................................. 2,243
Miscellaneous ................................................................ 5,908
------------
Total expenses ............................................................. 438,327
------------
NET INVESTMENT INCOME ........................................................ 3,485,898
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments .................................................. $ (263,729)
Foreign currency translation ................................. 61,786
Futures contracts ............................................ 326,660 124,717
------------
Net unrealized appreciation (depreciation) during the year:
Securities ................................................... 13,071,652
Foreign currency transactions ................................ 83,756
Futures contracts ............................................ (214,063) 12,941,345
------------ ------------
Net realized and unrealized gain on securities and
foreign currencies during the period ..................................... 13,066,062
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................. $ 16,551,960
============
</TABLE>
<PAGE>
================================================================================
INTERNATIONAL GOVERNMENT BOND FUND - FINANCIAL STATEMENTS CONTINUED 77
================================================================================
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................. $ 3,485,898 $ 7,923,140
Net realized gain (loss) on securities and
foreign currency transactions ................................... 124,717 (3,852,314)
Net unrealized appreciation of securities and
translation of foreign currencies during the period ............. 12,941,345 241,624
------------- -------------
Increase in net assets resulting from operations ............... 16,551,960 4,312,450
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (2,319,997) (3,034,869)
Net realized gain on securities ................................... -- (136,607)
------------- -------------
Decrease in net assets resulting from distributions
to shareholders ................................................ (2,319,997) (3,171,476)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold .................................. 35,386,864 30,361,915
Proceeds from capital stock issued for distributions reinvested ... 2,319,997 3,171,476
------------- -------------
37,706,861 33,533,391
Cost of capital stock repurchased ................................. (40,409,665) (56,600,279)
------------- -------------
Decrease in net assets resulting from
capital stock transactions ..................................... (2,702,804) (23,066,888)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... 11,529,159 (21,925,914)
NET ASSETS:
Beginning of period ............................................... 155,782,883 177,708,797
------------- -------------
End of period (including undistributed net investment income
of $1,628,030 and $462,129) ..................................... $ 167,312,042 $ 155,782,883
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ...................................... 2,919,958 2,685,573
Shares issued for distributions reinvested ........................ 188,737 279,556
Shares of capital stock repurchased ............................... (3,371,586) (4,999,093)
------------- -------------
Decrease in shares outstanding .................................. (262,891) (2,033,964)
Shares outstanding:
Beginning of period ............................................. 13,645,599 15,679,563
------------- -------------
End of period ................................................... 13,382,708 13,645,599
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
================================================================================
MONEY MARKET FUND - STATEMENT OF NET ASSETS
78 November 30, 1998 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ------------
<S> <C> <C>
CORPORATE SHORT TERM
COMMERCIAL PAPER - 85.96%
AEROSPACE/DEFENSE - 0.95%
$2,200,000 Lockheed Martin Corp.,
5.60% due 02/16/1999........................... $ 2,173,649
------------
BEVERAGE - SOFT DRINKS - 0.69%
1,577,000 Coca Cola Co.,
5.07% due 12/15/1998........................... 1,573,891
------------
CHEMICAL - MAJOR - 3.30%
E.I. du Pont de Nemours and Co.:
2,700,000 5.19% due 12/08/1998........................... 2,697,275
1,300,000 5.10% due 01/13/1999........................... 1,292,081
1,050,000 4.98% due 01/26/1999........................... 1,036,928
2,584,000 4.94% due 03/04/1999........................... 2,550,014
------------
7,576,298
------------
CONSUMER FINANCE - 15.81%
Associates Corp. of North America:
1,500,000 7.82% due 10/21/1999........................... 1,537,630
1,000,000 6.38% due 08/15/1999........................... 1,008,336
1,800,000 5.20% due 12/23/1998........................... 1,794,280
1,500,000 5.14% due 02/19/1999........................... 1,482,867
3,858,000 5.09% due 02/26/1999........................... 3,810,543
Commercial Credit Co.:
2,300,000 5.25% due 02/10/1999........................... 2,276,185
1,072,000 5.17% due 02/02/1999........................... 1,062,301
4,000,000 5.09% due 12/14/1998........................... 3,992,648
2,848,000 5.08% due 12/09/1998........................... 2,844,785
Countrywide Home Loans:
2,200,000 5.20% due 01/27/1999........................... 2,181,887
3,000,000 5.20% due 01/29/1999........................... 2,974,433
1,300,000 5.20% due 02/05/1999........................... 1,287,607
Sears Roebuck Acceptance Corp.:
1,000,000 6.54% due 05/06/1999........................... 1,004,497
3,000,000 5.20% due 01/22/1999........................... 2,977,467
650,000 5.15% due 03/02/1999........................... 641,538
940,000 5.06% due 01/26/1999........................... 932,601
1,300,000 5.07% due 03/22/1999........................... 1,279,678
1,400,000 5.00% due 02/24/1999........................... 1,383,472
1,800,000 5.00% due 03/08/1999........................... 1,775,750
------------
36,248,505
------------
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ------------
<S> <C> <C>
DRUGS - 0.97%
$2,228,000 Schering Corp.,
5.00% due 12/02/1998........................... $ 2,227,691
------------
ELECTRICAL EQUIPMENT - 0.65%
1,500,000 General Electric Co.,
5.15% due 12/01/1998........................... 1,500,000
------------
ENTERTAINMENT - 6.02%
Mattel Inc.:
3,500,000 5.37% due 12/10/1998........................... 3,495,301
3,000,000 5.28% due 12/21/1998........................... 2,991,200
Walt Disney:
1,600,000 5.13% due 01/12/1999........................... 1,590,424
4,000,000 5.08% due 01/05/1999........................... 3,980,244
1,770,000 5.00% due 02/17/1999........................... 1,750,825
------------
13,807,994
------------
FINANCE COMPANIES - 21.13%
1,957,000 Bell Atlantic Financial Services Inc.,
5.35 % due 0.00 12/01/1998.... 1,957,000
2,000,000 Caterpillar Financial Service Corp,
6.80% due 06/15/1999........................... 2,011,155
Ciesco L P:
1,200,000 5.20% due 12/01/1998........................... 1,200,000
2,000,000 5.20% due 12/04/1998........................... 1,999,133
2,000,000 5.15% due 01/06/1999.......................... 1,989,700
2,500,000 5.13% due 01/20/1999.......................... 2,482,205
CIT Group Holdings Inc.:
2,000,000 6.13% due 01/14/1999........................... 2,001,115
1,000,000 5.33% due 12/14/1998........................... 998,075
1,200,000 5.10% due 12/28/1998........................... 1,195,410
1,500,000 5.07% due 12/24/1998........................... 1,495,141
1,825,000 5.03% due 12/16/1998........................... 1,821,175
2,400,000 5.00% due 02/01/1999.......................... 2,379,333
2,500,000 Ford Motor Credit Co.,
5.03% due 01/28/1999.......................... 2,479,740
Ford Motor Credit Europe:
1,700,000 5.05% due 01/19/1999........................... 1,688,315
2,000,000 5.03% due 02/03/1999........................... 1,982,116
1,592,000 5.02% due 01/21/1999........................... 1,580,678
2,068,000 5.02% due 02/04/1999........................... 2,049,256
General Electric Capital Corp.:
2,000,000 5.13% due 02/22/1999.......................... 1,976,345
1,900,000 5.04% due 03/29/1999.......................... 1,868,612
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ------------
<S> <C> <C>
FINANCE COMPANIES - Continued
General Electric Capital Services:
$1,600,000 5.33% due 12/21/1998........................... $ 1,595,262
2,300,000 5.06% due 02/08/1999........................... 2,277,694
900,000 5.03% due 02/10/1999.......................... 891,072
General Motors Acceptance Corp.:
2,250,000 8.40% due 10/15/1999........................... 2,314,312
1,560,000 7.38% due 05/26/1999........................... 1,571,826
750,000 6.50% due 04/16/1999........................... 751,673
1,000,000 6.45% due 05/24/1999........................... 1,004,895
900,000 5.18% due 01/05/1999........................... 895,467
1,500,000 5.18% due 01/27/1999........................... 1,487,698
500,000 International Lease Finance Corp.,
6.63% due 04/01/1999........................... 502,338
------------
48,446,741
------------
FOODS - 4.31%
Archer Daniels Midland Co.:
3,000,000 5.43% due 12/03/1998........................... 2,999,095
2,500,000 5.43% due 12/03/1998........................... 2,499,246
2,000,000 4.93% due 02/25/1999........................... 1,976,446
2,409,000 Kellogg Co.,
5.16% due 12/22/1998........................... 2,401,749
------------
9,876,536
------------
HOSPITAL SUPPLIES - 1.70%
Abbott Labs:
3,000,000 4.88% due 12/30/1998........................... 2,988,207
922,000 4.76% due 12/28/1998........................... 918,708
------------
3,906,915
------------
HOUSEHOLD PRODUCTS - 0.87%
2,000,000 Colgate-Palmolive Co.,
5.15% due 12/11/1998........................... 1,997,139
------------
INFORMATION PROCESSING -
COMPUTER HARDWARE SYSTEMS - 2.17%
IBM Corp.:
2,000,000 5.20% due 12/09/1998........................... 1,997,688
3,000,000 5.05% due 01/07/1999........................... 2,984,429
------------
4,982,117
------------
INFORMATION PROCESSING -
DATA SERVICES- 0.87%
2,000,000 International Business Machine Corp.,
5.12% due 12/29/1998........................... 1,992,036
------------
</TABLE>
<PAGE>
===============================================================================
MONEY MARKET FUND - STATEMENT OF NET ASSETS continued
November 30, 1998 (Unaudited) 79
===============================================================================
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ------------
<S> <C> <C>
INSURANCE - MULTILINE - 3.38%
Marsh & McLennan Companies Inc.:
$2,500,000 5.23% due 12/17/1998........................... $ 2,494,189
3,348,000 5.18% due 03/24/1999........................... 3,293,563
2,000,000 5.06% due 03/26/1999........................... 1,967,672
------------
7,755,424
------------
MACHINERY - INDUSTRIAL/SPECIALTY - 2.17%
Dover Corp.:
2,500,000 5.22% due 01/15/1999........................... 2,483,688
2,500,000 5.18% due 01/04/1999........................... 2,487,769
------------
4,971,457
------------
MERCHANDISE - SPECIALTY - 1.08%
2,500,000 Fortune Brands,
5.30% due 01/11/1999........................... 2,484,910
------------
OIL - INTEGRATED DOMESTIC - 0.86%
2,000,000 Atlantic Richfield Co.,
4.95% due 04/05/1999........................... 1,965,625
------------
OIL - INTEGRATED INTERNATIONAL - 1.18%
2,705,000 Shell Oil Co.,
6.95% due 12/15/1998........................... 2,706,273
------------
SECURITIES RELATED - 12.59%
Bear Stearns Co. Inc.:
1,000,000 6.08% due 10/06/1999........................... 1,006,779
3,000,000 Floating rate note due 06/07/1999,
5.56188% at 11/30/98........................... 3,000,000
2,000,000 Floating rate note due 04/06/1999,
5.2525% at 11/30/98............................ 2,000,000
3,000,000 Floating rate note due 04/30/1999,
5.15969% at 11/30/98........................... 3,000,000
Merrill Lynch & Co. Inc.:
650,000 5.44% due 12/11/1998........................... 649,018
400,000 5.18% due 01/15/1999........................... 397,410
900,000 5.16% due 03/11/1999........................... 887,100
1,300,000 5.16% due 03/15/1999........................... 1,280,621
2,000,000 5.16% due 03/16/1999........................... 1,969,900
350,000 5.13% due 01/04/1999........................... 348,304
225,000 5.13% due 01/29/1999........................... 223,108
305,000 5.13% due 03/19/1999........................... 300,306
1,025,000 5.07% due 01/15/1999........................... 1,018,504
2,500,000 5.06% due 01/25/1999........................... 2,480,674
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ------------
<S> <C> <C>
Morgan Stanley, Dean Witter, Discover:
$3,000,000 5.63% due 03/01/1999........................... $ 2,999,072
2,500,000 5.35% due 01/11/1999........................... 2,484,767
850,000 5.35% due 01/12/1999........................... 844,695
2,000,000 5.29% due 02/26/1999........................... 1,974,432
1,300,000 5.10% due 02/12/1999........................... 1,286,556
725,000 5.08% due 02/05/1999........................... 718,248
------------
28,869,494
------------
UTILITIES - COMMUNICATION - 5.26%
BellSouth Telecomm:
4,119,000 5.07% due 02/23/1999........................... 4,070,272
368,000 5.00% due 01/27/1999........................... 365,087
GTE Corp.:
1,900,000 5.50% due 02/09/1999........................... 1,879,681
1,600,000 5.47% due 02/12/1999........................... 1,582,253
1,700,000 5.40% due 01/26/1999.......................... 1,685,720
2,500,000 5.40% due 02/11/1999........................... 2,473,000
------------
12,056,013
------------
TOTAL CORPORATE SHORT TERM
COMMERCIAL PAPER
(Cost $197,118,708).............................. 189,118,708
------------
FOREIGN GOVERNMENT BONDS - 0.54%
CANADA - 0.54%
1,250,000 British Columbia Province,
5.02% due 12/21/1998........................... 1,246,514
------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $1,246,514)........................... 1,246,514
------------
UNITED STATES GOVERNMENT
SHORT TERM - 13.03%
1,000,000 Federal Farm Credit Bank,
5.50% due 04/01/1999........................... 999,428
Federal Home Loan Bank:
1,000,000 5.60% due 03/10/1999........................... 1,000,014
1,000,000 5.56% due 03/25/1999........................... 999,664
1,000,000 5.50% due 03/26/1999........................... 999,669
1,000,000 5.48% due 12/07/1998........................... 999,980
2,000,000 5.09% due 11/05/1999........................... 2,000,000
3,000,000 5.03% due 10/29/1999........................... 3,000,000
</TABLE>
<TABLE>
<CAPTION>
PAR MARKET
VALUE VALUE
- ------------ ------------
<S> <C> <C>
UNITED STATES GOVERNMENT
SHORT TERM-Continued
Federal Home Loan Mortgage Corp.:
$4,000,000 5.04% due 12/07/1998........................... $ 3,996,640
2,000,000 5.02% due 11/05/1999........................... 2,000,000
Federal National Mortgage Association:
1,000,000 5.65% due 04/09/1999........................... 999,905
1,000,000 5.63% due 05/05/1999........................... 999,622
2,000,000 5.57% due 05/07/1999........................... 1,998,486
2,000,000 5.29% due 12/18/1998........................... 1,995,004
3,000,000 5.00% due 01/08/1999........................... 2,984,167
4,946,000 4.87% due 02/05/1999........................... 4,901,840
------------
29,874,419
------------
TOTAL UNITED STATES GOVERNMENT
SHORT TERM
(Cost $29,874,419)............................... 29,874,419
------------
TOTAL INVESTMENTS
(Cost $228,239,641) - 99.53%.. 228,239,641
Other assets less liabilities,
net - 0.47%..................................... 1,084,524
------------
NET ASSETS (equivalent
to $1.00 per share on
229,324,165 shares
outstanding) - 100%............................. $229,324,165
============
NET ASSETS REPRESENTED BY:
Capital stock, $.01 par value per share,
1,000,000,000 shares authorized,
229,324,165 shares outstanding............................. 2,293,242
Additional paid in capital................................... 227,030,923
------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING.................................................. $229,324,165
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
80 MONEY MARKET FUND - FINANCIAL STATEMENTS (Unaudited)
===============================================================================
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest .................................................. $5,994,442
----------
EXPENSES:
Advisory fees ............................................. 540,476
Custodian and accounting services ......................... 24,429
Reports to shareholders ................................... 15,616
Audit fees and tax services ............................... 3,783
Directors' fees and expenses .............................. 2,631
Miscellaneous ............................................. 5,892
----------
Total expenses .......................................... 592,827
----------
NET INVESTMENT INCOME ..................................... 5,401,615
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,401,615
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
six months ended fiscal year ended
November 30, 1998 May 31, 1998
----------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .............................. $ 5,401,615 $ 7,739,732
------------- -------------
Increase in net assets resulting from operations.. 5,401,615 7,739,732
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................. (5,401,615) (7,739,732)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold ................... 164,453,163 331,782,891
Proceeds from capital stock issued for
distributions reinvested ........................ 5,401,615 7,739,732
------------- -------------
169,854,778 339,522,623
Cost of capital stock repurchased .................. (131,506,063) (276,671,818)
------------- -------------
Increase in net assets resulting from capital
stock transactions ............................. 38,348,715 62,850,805
------------- -------------
TOTAL INCREASE IN NET ASSETS ....................... 38,348,715 62,850,805
NET ASSETS:
Beginning of period ................................ 190,975,450 128,124,645
------------- -------------
End of period ...................................... $ 229,324,165 $ 190,975,450
============= =============
CHANGE IN SHARES OUTSTANDING:
Shares of capital stock sold ....................... 164,453,164 331,782,891
Shares issued for distributions reinvested ......... 5,401,615 7,739,732
Shares of capital stock repurchased ................ (131,506,064) (276,671,818)
------------- -------------
Increase in shares outstanding ................... 38,348,715 62,850,805
Shares outstanding:
Beginning of period .............................. 190,975,450 128,124,645
------------- -------------
End of period .................................... 229,324,165 190,975,450
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS (Unaudited) 81
===============================================================================
NOTE 1 -- ORGANIZATION
The American General Series Portfolio Company (the "Series") consists of
thirteen separate investment portfolios (the "Funds"):
Stock Index Fund
MidCap Index Fund
Small Cap Index Fund
International Equities Fund
Growth Fund
Growth & Income Fund
Science & Technology Fund
Social Awareness Fund
Asset Allocation Fund (formerly Timed Opportunity Fund)
Capital Conservation Fund
Government Securities Fund
International Government Bond Fund
Money Market Fund
The Series is registered under the Investment Company Act of 1940 (the
"1940 Act"), as amended, as an open-end management investment company. Each Fund
is diversified with the exception of International Government Bond Fund which is
non-diversified as defined by the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). GAAP requires accruals which
occasionally are based upon management estimates. The following is a summary of
significant accounting policies consistently followed by each Fund in the
preparation of its financial statements.
A. INVESTMENT VALUATION
Securities listed or traded on a national exchange are valued daily at
their last reported sale price. In the absence of any exchange sales on that day
and for unlisted issues, securities are valued at the last sale price on the
NASDAQ National Market System. In the absence of any National Market System
sales on that day, securities are valued at the last reported bid price.
However, options written for which other over-the-counter market quotations are
readily available are valued at the last reported asked price, in the absence of
any National Market System sales on that day. Futures contracts, options
thereon, and options on stock indexes are valued at the amount which would be
received upon a current disposition of such investments (i.e., their fair market
value), in the absence of any sales on that day. Short term debt securities for
which market quotations are readily available are valued at the last reported
bid price. However, any short term security with a remaining maturity of 60 days
or less and all investments of the Money Market Fund are valued by the amortized
cost method which approximates fair market value. Investments for which market
quotations are not readily available are valued at fair value as determined in
good faith by, or under authority delegated by, the Series' Board of Directors.
B. OPTIONS AND FUTURES
CALL AND PUT OPTIONS. When a Fund writes a call or a put option, an amount
equal to the premium received is recorded as a liability. The liability is
"marked to market" daily to reflect the current market value of the option
written. When a written option expires, the Fund realizes a gain in the amount
of the premium originally received. If the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss in the amount of the original
premium less the cost of the closing transaction. If a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security, and the proceeds from such sale are increased by the premium
originally received. If a written put option is exercised, the amount of the
premium originally received reduces the cost of the security which the Fund
purchases upon exercise of the option.
Purchased options are recorded as investments. If a purchased option
expires, the Fund realizes a loss in the amount of the cost of the option. If
the Fund enters into a closing transaction, it realizes a gain (or loss), to the
extent that the proceeds from the sale are greater (or less) than the cost of
the option. If the Fund exercises a put option, it realizes a gain or loss from
the sale of the underlying security by adjusting the proceeds from such sale by
the amount of the premium originally paid. If the Fund exercises a call option,
the cost of the security purchased upon exercise is increased by the premium
originally paid.
FUTURES CONTRACTS. The initial margin deposit made upon entering into a
futures contract is held by the custodian, in a segregated account, in the name
of the broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in the value of the contract are
recognized as unrealized gains or losses by "marking to market" on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments are received or made daily, as unrealized gains or
losses are incurred. When the contract is closed, the Fund realizes a gain or
loss in the amount of the cost of or proceeds from the closing transaction less
the Fund's basis in the contract.
C. REPURCHASE AGREEMENTS
The seller of a repurchase agreement collateralizes the agreement with
securities delivered to the Fund's custodian bank. The Adviser determines, on a
daily basis, that the seller maintains collateral of at least 100% of the
repurchase proceeds due to the Fund at maturity.
D. FOREIGN CURRENCY TRANSLATION
The accounting records of each Fund are maintained in U.S. dollars.
Transactions denominated in foreign currencies ("local currencies") are
translated into U.S. dollars at prevailing exchange rates on transaction date.
Net realized gains or losses on foreign currency transactions include
exchange rate gains and losses from disposition of foreign currencies, currency
gains and losses realized between trade and settlement dates of security
transactions, and currency gains and losses realized on settlement of other
assets and liabilities settled in local currencies.
In determining realized and unrealized gains or losses on foreign
securities for the period, the Funds do not isolate exchange rate fluctuations
from local security price fluctuations. Foreign currencies and other assets and
liabilities denominated in local currencies are marked-to-market daily to
reflect fluctuations in foreign exchange rates.
E. FEDERAL INCOME TAXES
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and to distribute all of its taxable
net investment income and taxable net realized capital gains, in excess of any
available capital loss carryovers. Therefore no federal income tax provision is
required.
<PAGE>
===============================================================================
82 NOTES TO FINANCIAL STATEMENTS (Unaudited) CONTINUED
===============================================================================
F. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized gains
and losses are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date, except for dividend income on certain foreign
securities which is recorded when the Fund becomes aware of the dividend.
interest income on investments is accrued daily.
G. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. The Funds
declare distributions from net investment income monthly, except for the Money
Market Fund, which declares daily. Capital gains distributions are declared
annually.
Investment income and capital gains and losses are recognized in accordance
with generally accepted accounting principles ("book"). Distributions from net
investment income and realized capital gains are based on earnings as
determined in accordance with federal tax regulations ("tax") which may differ
from book basis earnings. At the end of the year, offsetting adjustments to
undistributed net investment income and undistributed net realized gains
(losses) are made to eliminate permanent book/tax differences arising in the
current year.
NOTE 3 -- ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
VALIC (the "adviser") serves as investment adviser to the Series. VALIC is
an indirect wholly-owned subsidiary of American General Corporation, Houston,
Texas. On May 1, 1992, the Adviser entered into a sub-advisory agreement with
Bankers Trust Company ("Bankers Trust"), a wholly-owned subsidiary of Bankers
Trust New York Corporation, to serve as investment sub-adviser to Stock Index
Fund, Midcap Index Fund, and Small Cap Index Fund. On April 29, 1994, the
Adviser entered into sub-advisory agreements with T. Rowe Price Associates, Inc.
to serve as investment sub-adviser to Growth Fund and Science & Technology Fund,
and with Value Line, Inc., to serve as investment sub-adviser to Growth & Income
Fund. Sub-advisers are compensated for such services by the Adviser.
The Adviser receives from the Series a monthly fee based on each Fund's
average daily net asset value at the following annual rates: for Stock Index
Fund, Midcap Index Fund, Small Cap Index Fund and International Equities Fund
.35% on the first $500 million and .25% on the excess over $500 million; for
Social Awareness Fund, Asset Allocation Fund, Capital Conservation Fund,
Government Securities Fund, International Government Bond Fund, and Money Market
Fund, .50%; for Growth & Income Fund, .75%; for Growth Fund, .80%; for Science &
Technology Fund, .90%.
To the extent that any Fund's accrued expenses for a given month exceed, on
an annualized basis, 2% of the fund's average daily net assets, the Adviser will
voluntarily reduce expenses of any such Fund by the amount of the excess. The
Adviser may withdraw this voluntary undertaking upon 30 days written notice to
the Series.
On October 31, 1996, the Series entered into an accounting services
agreement with VALIC which appointed VALIC as Accounting Services Agent. Under
the agreement VALIC will provide, or cause to be provided, certain accounting
and administrative services to the Series. During the period ended November 30,
1998, the Series paid VALIC $495,993 for such services provided directly by
VALIC.
VALIC provided to the Series, at cost, certain services associated with the
printing of reports to shareholders. During the six months ended November 30,
1998, the Series paid $2,280 for such services.
During the six months ended November 30, 1998, security transactions were
affected between the following Funds at the then current market price with no
brokerage commissions incurred:
<TABLE>
<CAPTION>
SELLER PURCHASER COST TO PURCHASER NET GAIN TO SELLER
- ---------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
MIDCAP INDEX FUND STOCK INDEX FUND $40,645,652 $18,297,519
</TABLE>
At November 30, 1998, VALIC Separate Account A (a registered separate
account of VALIC) owned over five percent of the outstanding shares of the
following Funds:
<TABLE>
<CAPTION>
VALIC SEPARATE
ACCOUNT A
--------------
<S> <C>
Stock Index Fund ............................................... 97.13%
MidCap Index Fund .............................................. 99.97
Small Cap Index Fund ........................................... 100.00
International Equities Fund .................................... 99.92
Growth Fund .................................................... 97.99
Growth & Income Fund ........................................... 100.00
Science & Technology Fund ...................................... 100.00
Social Awareness Fund .......................................... 99.99
Asset Allocation Fund .......................................... 99.95
Capital Conservation Fund ...................................... 100.00
Government Securities Fund ..................................... 100.00
International Government Bond Fund ............................. 100.00
Money Market Fund .............................................. 99.64
</TABLE>
Certain officers and directors of the Series are officers and directors of
VALIC or American General Corporation.
NOTE 4 -- INVESTMENT ACTIVITY
The information in the following table is presented on the basis of cost
for federal income tax purposes at November 30,1998.
<TABLE>
<CAPTION>
IDENTIFIED COST GROSS GROSS
OF INVESTMENTS UNREALIZED UNREALIZED NET UNREALIZED
OWNED APPRECIATION DEPRECIATION APPRECIATION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Stock Index Fund ............. $1,851,439,873 $2,063,434,110 $ 50,953,121 $2,012,480,989
MidCap Index Fund ............ 601,706,069 235,879,807 68,898,592 166,981,215
Small Cap Index Fund ......... 207,883,140 41,540,212 35,059,131 6,481,081
International Equities Fund... 110,429,424 54,935,052 22,219,252 32,715,800
Growth Fund .................. 867,758,005 287,925,726 52,464,502 235,461,224
Growth & Income Fund ......... 185,222,633 74,780,958 3,635,376 71,145,582
Science & Technology Fund .... 966,287,292 252,274,629 64,470,250 187,804,379
Social Awareness Fund ........ 343,844,974 75,195,214 14,261,286 60,933,928
Asset Allocation Fund ........ 200,281,075 51,943,955 2,777,942 49,166,013
Capital Conservation Fund .... 64,002,206 1,956,026 1,292,003 664,023
Government Securities Fund ... 104,400,695 5,266,488 87,992 5,178,496
International Government
Bond Fund ................. 150,724,078 11,363,283 4,840,270 6,523,013
Money Market Fund ............ 228,239,641 0 0 0
</TABLE>
The following net realized capital loss carryforwards at November 30, 1998,
may be utilized to offset future capital gains.
<TABLE>
<CAPTION>
CAPITAL LOSS CARRYFORWARD EXPIRATION THROUGH
-------------------------- -------------------
<S> <C> <C>
Capital Conservation Fund .... 517,286 May 31, 2003
Government Securities Fund ... 1,734,344 May 31, 2003
Money Market Fund ............ 3,017 May 31, 2004
</TABLE>
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONTINUED 83
===============================================================================
During the six months, the cost of purchases and proceeds from sales of
securities, excluding short term securities were:
<TABLE>
<CAPTION>
COST OF PROCEEDS FROM
SECURITIES SECURITIES SOLD
PURCHASED OR MATURED
--------------- ---------------
<S> <C> <C>
Stock Index Fund .................... $ 290,835,805 $ 161,687,086
MidCap Index Fund ................... 135,204,099 167,282,088
Small Cap Index Fund ................ 77,192,326 76,074,185
International Equities Fund ......... 4,691,686 13,707,849
Growth Fund ......................... 334,101,094 295,641,866
Growth & Income Fund ................ 162,069,566 181,071,524
Science & Technology Fund ........... 573,915,502 611,537,625
Social Awareness Fund ............... 204,940,524 154,565,004
Asset Allocation Fund ............... 92,469,552 78,843,111
Capital Conservation Fund ........... 18,812,422 19,891,523
Government Securities Fund .......... 31,857,589 14,165,988
International Government Bond Fund... 13,986,924 20,767,444
</TABLE>
NOTE 5 -- PORTFOLIO SECURITIES LOANED
To realize additional income, a Fund may lend portfolio securities with a
value of up to 30% (33 1/3% in the case of Growth Fund and Science & Technology
Fund) of its total assets. Any such loans will be continuously secured by
collateral consisting of cash or U.S. Government securities, maintained in a
segregated account, at least equal to the market value of the securities loaned.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans by a Fund will only be made to
broker-dealers deemed by the Custodian to be creditworthy and will not be made
unless, in the judgment of the Adviser, the consideration to be earned from such
loans would justify the risk. Each Fund receives income earned on the securities
loaned during the lending period and a portion of the earnings or rebate earned
on the collateral received.
Portfolio securities on loan at November 30, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
MARKET VALUE COLLATERAL VALUE
--------------- ----------------
<S> <C> <C>
Stock Index Fund.............. $ 11,653,552 $ 12,026,772
MidCap Index Fund............. 10,692,871 11,095,596
Small Cap Index Fund.......... 13,532,183 14,183,643
International Equities Fund... 9,627,963 9,920,840
Growth & Income Fund.......... 1,471,088 1,504,900
Science & Technology Fund..... 51,246,976 53,163,005
Social Awareness Fund......... 1,497,850 1,545,600
Asset Allocation Fund......... 2,146,653 2,192,900
Capital Conservation Fund..... 2,076,192 2,119,000
Total ..................... $ 103,945,328 $ 107,752,256
--------------- ----------------
</TABLE>
NOTE 6 -- INVESTMENT CONCENTRATION
A significant portion of Government Securities Fund's investments may be in
U.S. Government sponsored securities. No assurance can be given that the U.S.
Government will provide support to such U.S. Government sponsored agencies or
instrumentalities in the future since it is not required to do so by law. As a
result of the Fund's concentration in such investments, it may be subject to
risks associated with U.S. Government sponsored securities. At November 30,
1998, Government Securities Fund had 55.45% of its net assets invested in such
securities.
At November 30, 1998, International Government Bond Fund had 19.49% of its
net assets invested in securities issued by the Government of Japan and an
additional 4% in issues of companies located in Japan and/or denominated in
Japanese Yen. Future economic and political developments in a foreign country
could adversely affect the liquidity and value of foreign securities or the
currency exchange rates from which foreign currencies are translated.
NOTE 7 -- SUBSEQUENT EVENTS
On December 30, 1998, annual distributions from undistributed net realized
gains on investments were declared payable on December 31, 1998, to shareholders
of record December 30, 1998, as follows:
<TABLE>
<CAPTION>
RATE
PER SHARE
---------
<S> <C>
Stock Index Fund ................................. 0.1472
MidCap Index Fund ................................ 2.2617
Small Cap Index Fund ............................. 1.3602
International Equities Fund ...................... 0.9050
Growth Fund ...................................... 1.0129
Growth & Income Fund ............................. 1.5339
Social Awareness Fund ............................ 2.1153
Asset Allocation Fund ............................ 0.8532
International Government Bond Fund ............... 0.0662
</TABLE>
On January 19, 1999, the Board of Directors of the Series approved the
termination of Value Line, Inc., as sub-adviser of the Growth & Income Fund.
VALIC expects to re-assume direct management of the Fund's investment portfolio
on February 22, 1999.
NOTE 8 -- YEAR 2000
VALIC is in the process of modifying its systems to achieve Year 2000
readiness. This endeavor is directed and managed by VALIC and monitored by the
parent company, American General Corporation. VALIC has developed clearly
defined and documented plans that have been implemented to minimize the risk of
significant negative impact on its operations.
These plans include the following activities: (1) perform an inventory of
VALIC's information technology and non-information technology systems; (2)
assess which items in the inventory may expose VALIC to business interruptions
due to Year 2000 issues; (3) test systems for Year 2000 readiness; (4) reprogram
or replace systems that are not Year 2000 ready; and (5) return the systems to
operation. VALIC expects to complete the forgoing activities for all critical
business systems relevant to the Series by December 1998.
In addition, the Series and VALIC have business relationships with various
third parties, each of which must also be Year 2000 ready. Therefore, VALIC's
plans also include assessing and attempting to mitigate the risks associated
with the potential failure of third parties, as well as contingency plans for
any identified risks or shortcomings, to achieve Year 2000 readiness. Due to the
various stages of the third parties' Year 2000 readiness, VALIC's efforts in
this regard will extend through 1999.
Through October 31, 1998, VALIC has incurred and expensed $18.8 million
(pretax) related to Year 2000 readiness, including $12.3 million incurred during
the first ten months of 1998. VALIC currently anticipates that it will incur
future costs of $7.9 million (pretax) for additional internal staff, third party
vendors, and other expenses for the remainder of 1998 to achieve Year 2000
readiness.
As of this date, VALIC has completed the inventory, assessment, testing,
reprogramming and implementation phases of the plan with respect to its critical
systems. VALIC believes its comprehensive plan and resource commitment will
allow it to meet its Year 2000 objectives. However, the Year 2000 issue remains
complex and the risks, uncertainties, and unforeseen circumstances associated
with the Year 2000 issue could have a material adverse impact on VALIC and the
Series.
<PAGE>
===============================================================================
84 FINANCIAL HIGHLIGHTS (Unaudited)
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
STOCK INDEX FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -----------------------------------------------
1998 1998 1997 1996
----------- ----------- ----------- -----------
PER SHARE DATA
<S> <C> <C> <C> <C>
Net asset value at beginning of
period ................................ $ 33.38 $ 26.09 $ 20.69 $ 16.81
----------- ----------- ----------- -----------
Income from investment operations:
Net investment income ................. 0.20 0.40 0.39 0.39
Net realized and unrealized gain
on securities ....................... 2.35 7.44 5.57 4.26
----------- ----------- ----------- -----------
Total income from investment
operations .......................... 2.55 7.84 5.96 4.65
----------- ----------- ----------- -----------
Distributions:
Distributions from net investment
income .............................. (0.20) (0.40) (0.39) (0.38)
Distributions from net realized gain
on securities ....................... -- (0.15) (0.17) (0.39)
----------- ----------- ----------- -----------
Total distributions ................... (0.20) (0.55) (0.56) (0.77)
----------- ----------- ----------- -----------
Net asset value at end of period ........ $ 35.73 $ 33.38 $ 26.09 $ 20.69
=========== =========== =========== ===========
TOTAL RETURN ............................ 7.67% 30.30% 29.24% 28.17%
=========== =========== =========== ===========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets ............................ 0.16% 0.31% 0.34% 0.35%
Ratio of net investment income to
average net assets .................... 0.60% 1.33% 1.76% 2.05%
Portfolio turnover rate ................. 5% 3% 3% 3%
Number of shares outstanding at
end of period (000's) ................. 108,284 104,334 93,687 85,117
Net assets at end of period (000's) ..... $ 3,868,679 $3,482,655 $ 2,444,200 $ 1,760,786
Average net assets during the
period (000's) ........................ $ 3,531,045 $ 2,968,059 $ 2,019,826 $ 1,498,398
Average commission rate paid ............ $ 0.0257 $ 0.0283 $ 0.0281 n/a
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
-----------------------------
1995 1994
----------- -----------
PER SHARE DATA
<S> <C> <C>
Net asset value at beginning of
period ................................ $ 14.39 $ 14.36
------------- -------------
Income from investment operations:
Net investment income ................. 0.37 0.35
Net realized and unrealized gain
on securities ....................... 2.45 0.12
------------- -------------
Total income from investment
operations .......................... 2.82 0.47
------------- -------------
Distributions:
Distributions from net investment
income .............................. (0.37) (0.35)
Distributions from net realized gain
on securities ....................... (0.03) (0.09)
------------- -------------
Total distributions ................... (0.40) (0.44)
------------- -------------
Net asset value at end of period ........ $ 16.81 $ 14.39
============= =============
TOTAL RETURN ............................ 19.98% 3.29%
============= =============
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets ............................ 0.38% 0.39%
Ratio of net investment income to
average net assets .................... 2.44% 2.44%
Portfolio turnover rate ................. 14% 3%
Number of shares outstanding at
end of period (000's) ................. 75,451 75,494
Net assets at end of period (000's) ..... $ 1,267,992 $ 1,086,459
Average net assets during the
period (000's) ........................ $ 1,140,085 $ 1,030,581
Average commission rate paid ............ n/a n/a
</TABLE>
<TABLE>
<CAPTION>
MIDCAP INDEX FUND
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 25.27 $ 20.83 $ 19.09 $ 15.68 $ 14.54 $ 14.38
--------- --------- --------- --------- --------- ---------
Income from investment operations:
Net investment income ............... 0.11 0.23 0.24 0.24 0.26 0.23
Net realized and unrealized gain
(loss) on securities .............. (0.48) 5.80 2.95 4.06 1.59 0.28
--------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations ............. (0.37) 6.03 3.19 4.30 1.85 0.51
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.11) (0.23) (0.24) (0.24) (0.26) (0.23)
Distributions from net realized
gain on securities ................ -- (1.36) (1.21) (0.65) (0.45) (0.12)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.11) (1.59) (1.45) (0.89) (0.71) (0.35))
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 24.79 $ 25.27 $ 20.83 $ 19.09 $ 15.68 $ 14.54
========= ========= ========= ========= ========= =========
TOTAL RETURN .......................... (1.42)% 29.62% 17.48% 28.10% 13.26% 3.52%
========= ========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.19% 0.36% 0.40% 0.41% 0.44% 0.46%
Ratio of net investment income to
average net assets .................. 0.48% 0.95% 1.24% 1.36% 1.73% 1.62%
Portfolio turnover rate ............... 18% 26% 19% 21% 23% 17%
Number of shares outstanding at
end of period (000's) ............... 30,942 31,830 29,137 28,322 25,988 24,001
Net assets at end of period (000's) ... $ 766,997 $ 804,318 $ 607,061 $ 540,688 $ 407,557 $ 349,041
Average net assets during the
period (000's) ...................... $ 741,052 $ 722,652 $ 554,397 $ 477,372 $ 376,486 $ 285,247
Average commission rate paid .......... $ 0.0239 $ 0.0278 $ 0.0277 n/a n/a n/a
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
FINANCIAL HIGHLIGHTS (Unaudited) continued 85
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
<TABLE>
<CAPTION>
SMALL CAP INDEX FUND
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 17.94 $ 16.18 $ 16.25 $ 12.49 $ 11.52 $ 11.28
--------- --------- --------- --------- --------- ---------
Income from investment operations:
Net investment income ............... 0.10 0.19 0.19 0.20 0.17 0.13
Net realized and unrealized gain
(loss) on securities .............. (2.27) 3.17 0.93 4.04 0.97 0.58
--------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations ............. (2.17) 3.36 1.12 4.24 1.14 0.71
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.10) (0.19) (0.19) (0.20) (0.17) (0.13)
Distributions from net realized
gain on securities ................ -- (1.41) (1.00) (0.28) -- (0.34)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.10) (1.60) (1.19) (0.48) (0.17) (0.47)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 15.67 $ 17.94 $ 16.18 $ 16.25 $ 12.49 $ 11.52
========= ========= ========= ========= ========= =========
TOTAL RETURN .......................... (12.09)% 21.34% 7.51% 34.50% 9.98% 6.18%
========= ========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.20% 0.39% 0.41% 0.41% 0.44% 0.47%
Ratio of net investment income to
average net assets .................. 0.64% 1.05% 1.34% 1.36% 1.44% 1.10%
Portfolio turnover rate ............... 36% 36% 42% 31% 34% 16%
Number of shares outstanding at
end of period (000's) ............... 13,660 13,777 11,893 11,129 10,136 9,381
Net assets at end of period (000's) ... $ 214,103 $ 247,183 $ 192,459 $ 180,785 $ 126,567 $ 108,050
Average net assets during the
period (000's) ...................... $ 216,147 $ 227,757 $ 178,368 $ 150,448 $ 120,298 $ 70,690
Average commission rate paid .......... $ 0.0078 $ 0.0162 $ 0.0297 n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITIES FUND
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 11.95 $ 11.44 $ 11.15 $ 10.42 $ 10.14 $ 8.99
--------- --------- --------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income ............... 0.14 0.23 0.20 0.17 0.15 0.11
Net realized and unrealized
gain (loss) on securities and
foreign currencies ................ (0.12) 0.85 0.63 0.97 0.34 1.17
--------- --------- --------- --------- --------- ---------
Total income from investment
operations ........................ 0.02 1.08 0.83 1.14 0.49 1.28
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.13) (0.24) (0.19) (0.17) (0.15) (0.11)
Distributions from net realized
gain on securities ................ -- (0.33) (0.35) (0.24) (0.06) (0.02)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.13) (0.57) (0.54) (0.41) (0.21) (0.13)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 11.84 $ 11.95 $ 11.44 $ 11.15 $ 10.42 $ 10.14
========= ========= ========= ========= ========= =========
TOTAL RETURN .......................... 0.23% 9.92% 7.74% 11.14% 4.92% 14.31%
========= ========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.21% 0.40% 0.42% 0.42% 0.45% 0.47%
Ratio of net investment income to
average net assets .................. 1.04% 1.92% 1.75% 1.65% 1.47% 1.43%
Portfolio turnover rate ............... 3% 9% 12% 20% 14% 7%
Number of shares outstanding at
end of period (000's) ............... 12,110 13,009 15,857 18,497 20,074 17,273
Net assets at end of period (000's) ... $ 143,427 $ 155,469 $ 181,437 $ 206,259 $ 209,091 $ 175,183
Average net assets during the
period (000's) ...................... $ 143,621 $ 165,984 $ 191,117 $ 204,792 $ 199,235 $ 117,264
Average commission rate paid .......... $ 0.0258 $ 0.0332 $ 0.0236 n/a n/a n/a
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
86 FINANCIAL HIGHLIGHTS (Unaudited) continued
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
GROWTH FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------
1998 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 22.08 $ 17.62 $ 16.49 $ 11.43 $ 9.87
---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income ............. (0.07) (0.02) 0.02 0.11 0.04
Net realized and unrealized gain
(loss) on securities ............ (0.66) 4.82 1.45 5.27 1.56
---------- ---------- ---------- ---------- ----------
Total income (loss) from
investment operations ............ (0.73) 4.80 1.47 5.38 1.60
---------- ---------- ---------- ---------- ----------
Distributions:
Distributions from net investment
income ............................ -- (0.01) (0.01) (0.09) (0.04)
Distributions from net realized
gain on securities ................ -- (0.33) (0.33) (0.23) --
---------- ---------- ---------- ---------- ----------
Total distributions ................. -- (0.34) (0.34) (0.32) (0.04)
---------- ---------- ---------- ---------- ----------
Net asset value at end of period ...... $ 21.35 $ 22.08 $ 17.62 $ 16.49 $ 11.43
========== ========== ========== ========== ==========
TOTAL RETURN .......................... (3.31)% 27.41% 9.00% 47.46% 16.25%
========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.43% 0.84% 0.86% 0.83% 0.91%
Ratio of net investment income to
average net assets .................. (0.16)% (0.11)% 0.09% 0.89% 0.41%
Portfolio turnover rate ............... 29% 43% 40% 36% 61%
Number of shares outstanding at
end of period (000's) ............... 52,006 49,832 42,422 25,826 8,800
Net assets at end of period (000's) ... $1,110,208 $1,100,137 $ 747,654 $ 425,787 $ 100,614
Average net assets during the
period (000's) ...................... $1,072,354 $ 946,335 $ 588,056 $ 238,228 $ 42,232
Average commission rate paid .......... $ 0.0544 $ 0.0474 $ 0.0499 n/a n/a
</TABLE>
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------
1998 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 19.91 $ 16.87 $ 14.78 $ 11.09 $ 9.87
---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income ............... 0.06 0.08 0.10 0.08 0.09
Net realized and unrealized
gain (loss) on securities ......... (0.65) 3.25 2.38 3.77 1.22
---------- ---------- ---------- ---------- ----------
Total income (loss) from
investment operations ............. (0.59) 3.33 2.48 3.85 1.31
---------- ---------- ---------- ---------- ----------
Distributions:
Distributions from net investment
income ............................ (0.04) (0.08) (0.10) (0.07) (0.09)
Distributions from net realized
gain on securities ................ -- (0.21) (0.29) (0.09) --
---------- ---------- ---------- ---------- ----------
Total distributions ................. (0.04) (0.29) (0.39) (0.16) (0.09)
---------- ---------- ---------- ---------- ----------
Net asset value at end of period ...... $ 19.28 $ 19.91 $ 16.87 $ 14.78 $ 11.09
========== ========== ========== ========== ==========
TOTAL RETURN .......................... (2.97)% 19.87% 17.08% 34.85% 13.35%
========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.40% 0.80% 0.81% 0.79% 0.86%
Ratio of net investment income to
average net assets .................. 0.19% 0.43% 0.70% 0.63% 0.93%
Portfolio turnover rate ............... 67% 78% 45% 64% 97%
Number of shares outstanding at end
of period (000's) ................... 13,299 13,619 12,422 7,685 3,867
Net assets at end of period (000's) ... $ 256,354 $ 271,159 $ 209,545 $ 113,546 $ 42,867
Average net assets during the
period (000's) ...................... $ 253,895 $ 252,647 $ 161,226 $ 75,158 $ 21,910
Average commission rate paid .......... $ 0.050 $ 0.0500 $ 0.0500 n/a n/a
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
FINANCIAL HIGHLIGHTS (Unaudited) continued 87
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
SCIENCE & TECHNOLOGY FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30,------------------------------------------------------------------
1998 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 22.07 $ 19.88 $ 20.48 $ 14.43 $ 9.83
---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income ............... (0.16) (0.09) -- -- 0.03
Net realized and unrealized gain
(loss) on securities .............. 2.31 2.28 0.33 8.08 4.72
---------- ---------- ---------- ---------- ----------
Total income (loss) from
investment operations ............... 2.15 2.19 0.33 8.08 4.75
---------- ---------- ---------- ---------- ----------
Distributions:
Distributions from net investment
income ............................ -- -- -- -- (0.02)
Distributions from net realized
gain on securities ................ -- -- (0.93) (2.03) (0.13)
---------- ---------- ---------- ---------- ----------
Total distributions ................. -- -- (0.93) (2.03) (0.15)
---------- ---------- ---------- ---------- ----------
Net asset value at end of period ...... $ 24.22 $ 22.07 $ 19.88 $ 20.48 $ 14.43
========== ========== ========== ========== ==========
TOTAL RETURN .......................... 9.74% 10.85% 1.81% 58.28% 48.61%
========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.47% 0.95% 0.96% 0.94% 1.00%
Ratio of net investment income to
average net assets .................. (0.29)% (0.46)% (0.29)% (0.07)% 0.36%
Portfolio turnover rate ............... 60% 128% 122% 116% 121%
Number of shares outstanding at end
of period (000's) ................... 47,651 46,355 40,484 27,696 11,550
Total net assets at
end of period (000's) ............... $1,154,283 $1,023,141 $ 804,982 $ 567,187 $ 166,683
Average net assets during the
period (000's) ...................... $1,007,553 $ 949,947 $ 664,608 $ 363,087 $ 64,974
Average commission rate paid .......... $ 0.0455 $ 0.0455 $ 0.0393 n/a n/a
</TABLE>
SOCIAL AWARENESS FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30,-----------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 22.16 $ 17.90 $ 15.49 $ 13.02 $ 11.98 $ 12.12
--------- --------- --------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income ............... 0.11 0.23 0.24 0.26 0.27 0.26
Net realized and unrealized gain
(loss) on securities .............. 1.44 5.07 4.19 3.37 1.75 (0.02)
--------- --------- --------- --------- --------- ---------
Total income from investment
operations .......................... 1.55 5.30 4.43 3.63 2.02 0.24
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.11) (0.23) (0.24) (0.25) (0.27) (0.26)
Distributions from net realized
gain on securities ................ -- (0.81) (1.78) (0.91) (0.71) (0.12)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.11) (1.04) (2.02) (1.16) (0.98) (0.38)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 23.60 $ 22.16 $ 17.90 $ 15.49 $ 13.02 $ 11.98
========= ========= ========- ========= ========= =========
TOTAL RETURN .......................... 7.02% 30.34% 30.48% 28.85% 18.19% 1.97%
========= ========= ========- ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.28% 0.54% 0.56% 0.56% 0.58% 0.60%
Ratio of net investment income to
average net assets .................. 0.52% 1.17% 1.53% 1.80% 2.22% 2.19%
Portfolio turnover rate ............... 45% 120% 109% 117% 148% 83%
Number of shares outstanding at end
of period (000's) ................... 17,167 15,080 8,677 5,220 4,143 3,817
Total net assets at
end of period (000's) ............... $405,191 $334,167 $155,349 $ 80,887 $ 53,927 $ 45,729
Average net assets during the
period (000's) ...................... $355,436 $240,782 $106,139 $ 66,888 $ 47,942 $ 41,002
Average commission rate paid .......... $ 0.0353 $ 0.0431 $ 0.0400 n/a n/a n/a
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
88 FINANCIAL HIGHLIGHTS (Unaudited) continued
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 14.02 $ 12.57 $ 12.55 $ 11.24 $ 10.84 $ 11.18
--------- --------- --------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income ............... 0.20 0.41 0.77 0.44 0.44 0.37
Net realized and unrealized gain
(loss) on securities .............. 0.49 2.24 1.44 1.53 0.82 (0.15)
--------- --------- --------- --------- --------- ---------
Total income from investment
operations .......................... 0.69 2.65 2.21 1.97 1.26 0.22
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.20) (0.41) (0.78) (0.44) (0.44) (0.37)
Distributions from net realized
gain on securities ................ -- (0.79) (1.41) (0.22) (0.42) (0.19)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.20) (1.20) (2.19) (0.66) (0.86) (0.56)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 14.51 $ 14.02 $ 12.57 $ 12.55 $ 11.24 $ 10.84
========= ========= ========- ========= ========= =========
TOTAL RETURN .......................... 4.98% 21.94% 15.89% 17.90% 12.43% 1.86%
========= ========= ========- ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.28% 0.54% 0.57% 0.57% 0.58% 0.59%
Ratio of net investment income to
average net assets .................. 1.45% 3.02% 3.26% 3.62% 4.03% 3.24%
Portfolio turnover rate ............... 42% 24% 103% 119% 133% 76%
Number of shares outstanding at end
of period (000's) ................... 15,079 14,269 14,107 15,142 16,319 17,956
Total net assets at
end of period (000's) ............... $218,786 $200,099 $177,347 $190,024 $183,393 $194,576
Average net assets during the
period (000's) ...................... $204,483 $188,184 $179,615 $187,576 $186,487 $185,036
Average commission rate paid .......... $ 0.0359 $ 0.0205 $ 0.0401 n/a n/a n/a
</TABLE>
CAPITAL CONSERVATION FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30, -------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 9.68 $ 9.31 $ 9.23 $ 9.52 $ 9.13 $ 9.87
--------- --------- --------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income ............... 0.31 0.61 0.62 0.62 0.63 0.61
Net realized and unrealized gain
(loss) on securities .............. (0.05) 0.37 0.08 (0.29) 0.39 (0.69)
--------- --------- --------- --------- --------- ---------
Total income (loss) from 0.26 0.98 0.70 0.33 1.02 (0.08)
investment operations ............... --------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.30) (0.61) (0.62) (0.62) (0.63) (0.61)
Distributions from net realized
gain on securities ................ -- -- -- -- -- (0.05)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.30) (0.61) (0.62) (0.62) (0.63) (0.66)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 9.64 $ 9.68 $ 9.31 $ 9.23 $ 9.52 $ 9.13
========= ========= ========- ========= ========= =========
TOTAL RETURN .......................... 2.65% 10.76% 7.75% 3.41% 11.80% (1.13)%
========= ========= ========- ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.28% 0.54% 0.57% 0.57% 0.58% 0.59%
Ratio of net investment income to
average net assets .................. 3.16% 6.32% 6.59% 6.47% 6.88% 6.24%
Portfolio turnover rate ............... 30% 14% 45% 80% 100% 55%
Number of shares outstanding at end
of period (000's) ................... 6,868 6,577 7,168 7,604 6,935 6,712
Total net assets at
end of period (000's) ............... $ 66,179 $ 63,654 $ 66,747 $ 70,212 $ 66,031 $ 61,305
Average net assets during the
period (000's) ...................... $ 65,243 $ 66,996 $ 69,352 $ 70,271 $ 61,568 $ 59,210
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
FINANCIAL HIGHLIGHTS (Unaudited) continued 89
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized. The average commission rate paid on investment equity securities (on
a per share basis) is presented for the periods beginning June 1, 1996.
GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30,-----------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 10.09 $ 9.67 $ 9.61 $ 9.89 $ 9.55 $ 10.30
--------- --------- --------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income ............... 0.28 0.58 0.59 0.61 0.60 0.55
Net realized and unrealized gain
(loss) on securities .............. 0.27 0.42 0.06 (0.28) 0.35 (0.59)
--------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations ............... 0.55 1.00 0.65 0.33 0.95 (0.04)
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.28) (0.58) (0.59) (0.61) (0.61) (0.55)
Distributions from net realized
gain on securities ................ -- -- -- -- -- (0.16)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.28) (0.58) (0.59) (0.61) (0.61) (0.71)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 10.36 $ 10.09 $ 9.67 $ 9.61 $ 9.89 $ 9.55
========= ========= ========- ========= ========= =========
TOTAL RETURN .......................... 5.49% 10.60% 6.94% 3.32% 10.43% (0.66)%
========= ========= ========- ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.28% 0.54% 0.56% 0.56% 0.58% 0.59%
Ratio of net investment income to
average net assets .................. 2.74% 5.82% 6.11% 6.21% 6.36% 5.44%
Portfolio turnover rate ............... 14% 24% 38% 36% 229% 85%
Number of shares outstanding at end
of period (000's) ................... 10,758 9,129 8,672 8,164 5,478 4,544
Total net assets at
end of period (000's) ............... $ 111,428 $ 92,120 $ 83,827 $ 78,423 $ 54,174 $ 43,401
Average net assets during the
period (000's) ...................... $ 102,045 $ 87,574 $ 83,293 $ 68,017 $ 45,200 $ 41,596
</TABLE>
INTERNATIONAL GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30,-----------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 11.42 $ 11.33 $ 11.79 $ 12.72 $ 10.97 $ 11.16
--------- --------- --------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income ............... (0.05) 0.56 0.63 0.65 0.65 0.62
Net realized and unrealized gain
(loss) on securities .............. 1.31 (0.26) (0.49) (0.89) 1.80 (0.20)
--------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations ............... 1.26 0.30 0.14 (0.24) 2.45 0.42
--------- --------- --------- --------- --------- ---------
Distributions:
Distributions from net investment
income ............................ (0.18) (0.20) (0.58) (0.68) (0.70) (0.60)
Distributions from net realized
gain on securities ................ -- (0.01) (0.02) (0.01) -- (0.01)
--------- --------- --------- --------- --------- ---------
Total distributions ................. (0.18) (0.21) (0.60) (0.69) (0.70) (0.61)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period ...... $ 12.50 $ 11.42 $ 11.33 $ 11.79 $ 12.72 $ 10.97
========= ========= ========- ========= ========= =========
TOTAL RETURN .......................... 11.05% 2.65% 1.13% (1.91)% 23.23% 3.87%
========= ========= ========- ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.28% 0.55% 0.56% 0.56% 0.59% 0.48%
Ratio of net investment income to
average net assets .................. 2.20% 4.70% 5.13% 5.45% 5.83% 5.87%
Portfolio turnover rate ............... 9% 17% 4% 11% 6% 3%
Number of shares outstanding at end
of period (000's) ................... 13,383 13,646 15,680 12,073 6,111 3,741
Total net assets at
end of period (000's) ............... $ 167,312 $ 155,783 $ 177,709 $ 142,383 $ 77,734 $ 41,028
Average net assets during the
period (000's) ...................... $ 158,516 $ 168,439 $ 166,147 $ 114,693 $ 51,451 $ 33,561
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
90 FINANCIAL HIGHLIGHTS (Unaudited) continued
===============================================================================
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends on the reinvestment
date. Total returns and ratios for periods of less than one year are not
annualized.
MONEY MARKET FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FISCAL YEAR ENDED MAY 31,
NOVEMBER 30,-----------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period .............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- -------- -------- --------
Income from investment operations:
Net investment income ............... 0.03 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- -------- -------- --------
Distributions:
Distributions from net investment
income ............................ (0.03) (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- -------- -------- --------
Net asset value at end of period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ======== ======== ========
TOTAL RETURN .......................... 2.53% 5.25% 5.02% 5.26% 4.90% 2.83%
========= ========= ========= ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average
net assets .......................... 0.28% 0.54% 0.57% 0.57% 0.57% 0.58%
Ratio of net investment income to
average net assets .................. 2.54% 5.14% 4.95% 5.14% 4.75% 2.78%
Number of shares outstanding at end
of period (000's) ................... 229,324 190,975 128,125 83,618 82,255 50,533
Total net assets at
end of period (000's) ............... $ 229,324 $ 190,975 $ 128,125 $ 83,618 $ 82,255 $ 50,533
Average net assets during the
period (000's) ...................... $ 212,761 $ 150,625 $ 113,882 $ 84,271 $ 67,021 $ 46,222
</TABLE>
===============================================================================
SUPPLEMENTAL INFORMATION (Unaudited)
===============================================================================
ANNUAL MEETING OF SHAREHOLDERS
PROXY VOTING RESULTS
The Annual Meeting of Shareholders of American General Series Portfolio Company
was held on November 10, 1998. Shareholders of the Funds voted on proposals to
elect twelve members of the Board of Directors and to ratify the selection of
Ernst & Young LLP as independent auditors for the Series for the fiscal year
ending on May 31, 1999. The results of the proposals voted on by shareholders of
each Fund were as follows:
ASSET ALLOCATION FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 14,649,479 23,463 14,672,942
Dr. Timothy J. Ebner 14,649,479 23,463 14,672,942
Judge Gustavo E. Gonzales, Jr. 14,648,183 24,759 14,672,942
John A. Graf 14,649,479 23,463 14,672,942
Dr. Norman Hackerman 14,530,149 142,793 14,672,942
Dr. John Wm. Lancaster 14,626,880 46,062 14,672,942
Ben H. Love 14,648,183 24,759 14,672,942
Dr. John E. Maupin, Jr. 14,648,183 24,759 14,672,942
Dr. F. Robert Paulsen 14,626,880 46,062 14,672,942
Craig R. Rodby 14,649,479 23,463 14,672,942
Dr. R. Miller Upton 14,530,149 142,793 14,672,942
Thomas L. West 14,649,479 23,463 14,672,942
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
14,616,084 49,085 7,773 14,672,942
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
===============================================================================
SUPPLEMENTAL INFORMATION (Unaudited) continued 91
===============================================================================
CAPITAL CONSERVATION FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 6,649,981 159,645 6,809,626
Dr. Timothy J. Ebner 6,649,981 159,645 6,809,626
Judge Gustavo E. Gonzales, Jr. 6,649,981 159,645 6,809,626
John A. Graf 6,649,981 159,645 6,809,626
Dr. Norman Hackerman 6,374,777 434,849 6,809,626
Dr. John Wm. Lancaster 6,374,777 434,849 6,809,626
Ben H. Love 6,649,981 159,645 6,809,626
Dr. John E. Maupin, Jr. 6,649,981 159,645 6,809,626
Dr. F. Robert Paulsen 6,374,777 434,849 6,809,626
Craig R. Rodby 6,649,981 159,645 6,809,626
Dr. R. Miller Upton 6,374,777 434,849 6,809,626
Thomas L. West 6,649,981 159,645 6,809,626
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDINg
<S> <C> <C> <C>
6,192,488 503,316 113,822 6,809,626
</TABLE>
GOVERNMENT SECURITIES FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 10,078,999 191,780 10,270,779
Dr. Timothy J. Ebner 10,078,999 191,780 10,270,779
Judge Gustavo E. Gonzales, Jr. 10,078,999 191,780 10,270,779
John A. Graf 10,078,999 191,780 10,270,779
Dr. Norman Hackerman 9,874,674 396,105 10,270,779
Dr. John Wm. Lancaster 10,078,999 191,780 10,270,779
Ben H. Love 10,078,999 191,780 10,270,779
Dr. John E. Maupin, Jr. 10,078,999 191,780 10,270,779
Dr. F. Robert Paulsen 10,078,999 191,780 10,270,779
Craig R. Rodby 10,078,999 191,780 10,270,779
Dr. R. Miller Upton 9,939,504 331,275 10,270,779
Thomas L. West 10,078,999 191,780 10,270,779
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31,
1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
8,353,780 1,767,971 149,028 10,270,779
</TABLE>
GROWTH FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 50,464,412 1,104,476 51,568,888
Dr. Timothy J. Ebner 50,875,139 693,749 51,568,888
Judge Gustavo E. Gonzales, Jr. 50,823,327 745,561 51,568,888
John A. Graf 50,803,151 765,737 51,568,888
Dr. Norman Hackerman 50,510,267 1,058,621 51,568,888
Dr. John Wm. Lancaster 50,495,968 1,072,920 51,568,888
Ben H. Love 50,647,834 921,054 51,568,888
Dr. John E. Maupin, Jr. 50,875,139 693,749 51,568,888
Dr. F. Robert Paulsen 50,527,525 1,041,363 51,568,888
Craig R. Rodby 50,803,151 765,737 51,568,888
Dr. R. Miller Upton 50,503,364 1,065,524 51,568,888
Thomas L. West 50,809,561 759,327 51,568,888
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
49,862,302 502,017 1,204,569 51,568,888
</TABLE>
GROWTH & INCOME FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 13,099,393 333,647 13,433,040
Dr. Timothy J. Ebner 13,376,038 57,002 13,433,040
Judge Gustavo E. Gonzales, Jr. 13,366,494 66,546 13,433,040
John A. Graf 13,362,571 70,469 13,433,040
Dr. Norman Hackerman 13,309,328 123,712 13,433,040
Dr. John Wm. Lancaster 13,315,604 117,436 13,433,040
Ben H. Love 13,378,652 54,388 13,433,040
Dr. John E. Maupin, Jr. 13,376,038 57,002 13,433,040
Dr. F. Robert Paulsen 13,315,604 117,436 13,433,040
Craig R. Rodby 13,362,571 70,469 13,433,040
Dr. R. Miller Upton 13,318,219 114,821 13,433,040
Thomas L. West 13,362,571 70,469 13,433,040
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
13,137,961 63,147 231,932 13,433,040
</TABLE>
<PAGE>
===============================================================================
92 SUPPLEMENTAL INFORMATION (Unaudited) continued
===============================================================================
INTERNATIONAL EQUITIES FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 12,173,665 183,750 12,357,415
Dr. Timothy J. Ebner 12,198,915 158,500 12,357,415
Judge Gustavo E. Gonzales, Jr. 12,198,915 158,500 12,357,415
John A. Graf 12,198,915 158,500 12,357,415
Dr. Norman Hackerman 11,324,474 1,032,941 12,357,415
Dr. John Wm. Lancaster 11,324,474 1,032,941 12,357,415
Ben H. Love 11,988,097 369,318 12,357,415
Dr. John E. Maupin, Jr. 12,198,915 158,500 12,357,415
Dr. F. Robert Paulsen 11,324,474 1,032,941 12,357,415
Craig R. Rodby 12,198,915 158,500 12,357,415
Dr. R. Miller Upton 11,324,474 1,032,941 12,357,415
Thomas L. West 12,198,915 158,500 12,357,415
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
12,103,715 104,986 148,714 12,357,415
</TABLE>
INTERNATIONAL GOVERNMENT BOND FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 12,843,749 120,509 12,964,258
Dr. Timothy J. Ebner 12,840,310 123,948 12,964,258
Judge Gustavo E. Gonzales, Jr. 12,840,310 123,948 12,964,258
John A. Graf 12,776,106 188,152 12,964,258
Dr. Norman Hackerman 12,383,880 580,378 12,964,258
Dr. John Wm. Lancaster 12,425,536 538,722 12,964,258
Ben H. Love 12,755,215 209,043 12,964,258
Dr. John E. Maupin, Jr. 12,840,310 123,948 12,964,258
Dr. F. Robert Paulsen 12,480,949 483,309 12,964,258
Craig R. Rodby 12,776,106 188,152 12,964,258
Dr. R. Miller Upton 12,473,051 491,207 12,964,258
Thomas L. West 12,822,093 142,165 12,964,258
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
12,561,204 240,763 162,291 12,964,258
</TABLE>
MIDCAP INDEX FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 30,469,705 746,102 31,215,807
Dr. Timothy J. Ebner 30,579,048 636,759 31,215,807
Judge Gustavo E. Gonzales, Jr. 30,421,619 794,188 31,215,807
John A. Graf 30,570,166 645,641 31,215,807
Dr. Norman Hackerman 30,148,110 1,067,697 31,215,807
Dr. John Wm. Lancaster 30,146,885 1,068,922 31,215,807
Ben H. Love 30,552,095 663,712 31,215,807
Dr. John E. Maupin, Jr. 30,554,852 660,955 31,215,807
Dr. F. Robert Paulsen 30,304,313 911,494 31,215,807
Craig R. Rodby 30,579,048 636,759 31,215,807
Dr. R. Miller Upton 30,015,490 1,200,317 31,215,807
Thomas L. West 30,579,048 636,759 31,215,807
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
30,405,080 522,822 287,905 31,215,807
</TABLE>
MONEY MARKET FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 218,186,667 10,266,408 228,453,075
Dr. Timothy J. Ebner 218,186,667 10,266,408 228,453,075
Judge Gustavo E. Gonzales, Jr. 218,186,667 10,266,408 228,453,075
John A. Graf 218,186,667 10,266,408 228,453,075
Dr. Norman Hackerman 218,186,667 10,266,408 228,453,075
Dr. John Wm. Lancaster 218,186,667 10,266,408 228,453,075
Ben H. Love 218,186,667 10,266,408 228,453,075
Dr. John E. Maupin, Jr. 218,186,667 10,266,408 228,453,075
Dr. F. Robert Paulsen 218,186,667 10,266,408 228,453,075
Craig R. Rodby 218,186,667 10,266,408 228,453,075
Dr. R. Miller Upton 218,186,667 10,266,408 228,453,075
Thomas L. West 218,186,667 10,266,408 228,453,075
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
223,392,848 98,960 4,961,267 228,453,075
</TABLE>
<PAGE>
===============================================================================
SUPPLEMENTAL INFORMATION (Unaudited) continued 93
===============================================================================
SCIENCE & TECHNOLOGY FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 46,066,407 1,141,485 47,207,892
Dr. Timothy J. Ebner 46,495,443 712,449 47,207,892
Judge Gustavo E. Gonzales, Jr. 46,277,221 930,671 47,207,892
John A. Graf 46,371,479 836,413 47,207,892
Dr. Norman Hackerman 46,059,997 1,147,895 47,207,892
Dr. John Wm. Lancaster 45,993,176 1,214,716 47,207,892
Ben H. Love 46,308,345 899,547 47,207,892
Dr. John E. Maupin, Jr. 46,492,678 715,214 47,207,892
Dr. F. Robert Paulsen 46,188,109 1,019,783 47,207,892
Craig R. Rodby 46,377,009 830,883 47,207,892
Dr. R. Miller Upton 45,898,244 1,309,648 47,207,892
Thomas L. West 46,376,087 831,805 47,207,892
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
45,188,726 936,875 1,082,292 47,207,892
</TABLE>
SMALL CAP INDEX FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 13,256,839 242,035 13,498,874
Dr. Timothy J. Ebner 13,256,839 242,035 13,498,874
Judge Gustavo E. Gonzales, Jr. 13,256,839 242,035 13,498,874
John A. Graf 13,249,461 249,413 13,498,874
Dr. Norman Hackerman 13,040,761 458,113 13,498,874
Dr. John Wm. Lancaster 13,032,328 466,546 13,498,874
Ben H. Love 13,115,993 382,881 13,498,874
Dr. John E. Maupin, Jr. 13,256,839 242,035 13,498,874
Dr. F. Robert Paulsen 13,040,761 458,113 13,498,874
Craig R. Rodby 13,256,839 242,035 13,498,874
Dr. R. Miller Upton 13,040,761 458,113 13,498,874
Thomas L. West 13,256,839 242,035 13,498,874
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
13,339,318 36,496 123,060 13,498,874
</TABLE>
SOCIAL AWARENESS FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 16,227,886 222,643 16,450,529
Dr. Timothy J. Ebner 16,227,886 222,643 16,450,529
Judge Gustavo E. Gonzales, Jr. 16,022,091 428,438 16,450,529
John A. Graf 16,201,085 249,444 16,450,529
Dr. Norman Hackerman 16,189,783 260,746 16,450,529
Dr. John Wm. Lancaster 16,198,502 252,027 16,450,529
Ben H. Love 15,992,707 457,822 16,450,529
Dr. John E. Maupin, Jr. 16,227,886 222,643 16,450,529
Dr. F. Robert Paulsen 16,211,579 238,950 16,450,529
Craig R. Rodby 16,201,085 249,444 16,450,529
Dr. R. Miller Upton 16,189,783 260,746 16,450,529
Thomas L. West 16,201,085 249,444 16,450,529
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
15,969,078 336,629 144,822 16,450,529
</TABLE>
STOCK INDEX FUND
ELECTION OF TWELVE MEMBERS OF THE BOARD OF DIRECTORS:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE WITHHELD TOTAL OUTSTANDING
<S> <C> <C> <C>
Dr. Judith L. Craven 105,248,388 1,493,854 106,742,242
Dr. Timothy J. Ebner 105,651,394 1,090,848 106,742,242
Judge Gustavo E. Gonzales, Jr. 105,392,900 1,349,342 106,742,242
John A. Graf 105,373,564 1,368,678 106,742,242
Dr. Norman Hackerman 104,560,429 2,181,813 106,742,242
Dr. John Wm. Lancaster 105,034,673 1,707,569 106,742,242
Ben H. Love 105,087,593 1,654,649 106,742,242
Dr. John E. Maupin, Jr. 105,693,119 1,049,123 106,742,242
Dr. F. Robert Paulsen 105,134,407 1,607,835 106,742,242
Craig R. Rodby 105,488,563 1,253,679 106,742,242
Dr. R. Miller Upton 104,623,526 2,118,716 106,742,242
Thomas L. West 105,370,511 1,371,731 106,742,242
</TABLE>
Ratify the selection of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending on May 31, 1999:
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN TOTAL OUTSTANDING
<S> <C> <C> <C>
104,182,327 615,322 1,944,593 106,742,242
</TABLE>
<PAGE>
===============================================================================
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
===============================================================================
BOARD OF DIRECTORS
Judith L. Craven
Timothy J. Ebner
Gustavo E. Gonzales, Jr.
John A. Graf
Norman Hackerman
John W. Lancaster
Ben H. Love
John E. Maupin, Jr.
F. Robert Paulsen
Craig R. Rodby
R. Miller Upton
Thomas L. West, Jr.
DISTRIBUTOR
The Variable Annuity Marketing
Company (VAMCO)
2929 Allen Parkway
Houston, Texas 77019
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTMENT ADVISER
The Variable Annuity Life
Insurance Company (VALIC)
2929 Allen Parkway
Houston, Texas 77019
INVESTMENT SUB-ADVISERS
Bankers Trust Company
1 Bankers Trust Plaza
New York, New York 10006
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Value Line, Inc.
220 East 42nd Street
New York, New York 10017-5891
INDEPENDENT AUDITORS
Ernst & Young LLP
1221 McKinney
Houston, Texas 77010
SHAREHOLDER SERVICE AGENT
The Variable Annuity Life
Insurance Company (VALIC)
2929 Allen Parkway
Houston, Texas 77019
OFFICERS
Thomas L. West, Jr.,
Chairman
John A. Graf,
President
Craig R. Rodby,
Executive Vice President
Michael G. Atnip,
Executive Vice President
John E. Arant,
Executive Vice President
Joe C. Osborne,
Executive Vice President
Peter V. Tuters,
Senior Vice President
Brent C. Nelson,
Vice President
Maruti D. More,
Vice President - Investments
Teresa S. Moro,
Vice President and Investment Officer
Leon A. Olver,
Vice President and Investment Officer
William Trimbur, Jr.,
Vice President and Investment Officer
Cynthia A. Toles,
Vice President and Secretary
Gregory R. Seward,
Treasurer
Kathryn A. Pearce,
Controller
Nori L. Gabert,
Vice President and Assistant Secretary
Jaime M. Sepulveda,
Assistant Treasurer
Earl E. Allen, Jr.,
Assistant Treasurer
Donna L. Hathaway,
Assistant Controller
Heriberto Valdez,
Assistant Controller
Cynthia A. Gibbons,
Assistant Vice President
This report is for the information of the shareholders and variable
contract owners participating in the American General Series Portfolio Company.
It is authorized for distribution to other persons only when preceded or
accompanied by an effective prospectus which contains information on how to
purchase shares and other pertinent information.
If you would like further information about this material or products
issued by VALIC or American General Life Insurance Company, please contact your
account representative.
"Standard & Poor's(R)", "Standard & Poor's MidCap 400 Index" and "S&P
500(R)" are trademarks of Standard & Poor's Corporation. The Stock Index Fund
and MidCap Index Fund are not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
funds. The Russell 2000(R) Index is a trademark / service mark of the Frank
Russell Company. Russell(TM) is a trademark of the Frank Russell Company.
[VALIC LOGO]
<PAGE>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY Bulk Rate
U.S. Postage
P.O. Box 3206 PAID
Houston, Texas 77253-3206 Permit No. 6748
Houston, Texas
[BACK COVER]
[VALIC LOGO]
VA 4873 VER 11/98 Recycled Paper
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
ITEM 15. INDEMNIFICATION
FRANKLIN LIFE VARIABLE ANNUITY FUND A ("FUND A")
Fund A's Rules and Regulations provide as follows:
ARTICLE V. INDEMNIFICATION
The Fund shall indemnify each of the members of its Board of Managers and
officers (and his heirs, executors and administrators) against all liabilities
and expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and counsel fees, reasonably
incurred by him in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which he may be or may have been involved
as a party or otherwise or with which he may be or may have been threatened,
while in office or thereafter, by reason of his being or having been such a
member or officer, except with respect to any matter as to which he shall have
been finally adjudicated in any such action, suit or other proceeding not to
have acted in good faith in the reasonable belief that his action was in the
best interests of the Fund; and except that no member of the Board of Managers
or officer shall be indemnified hereunder or by any provision or arrangement
against any liability to the Fund or its Contract Owners to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Expenses, including counsel fees so incurred by any such member or
officer (but excluding amounts paid in satisfaction of judgments, in compromise
or as fines or penalties) may be paid from time to time by the Fund in advance
of the final disposition of any such action, suit or proceeding upon receipt of
an undertaking by or on behalf of such member or officer, secured by an
appropriate deposit or a surety bond approved by independent legal counsel for
the Fund, to repay the amounts so paid to the Fund if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article V.
Any indemnification under this Article V shall be made only upon (1) a
final decision on the merits by a court or other body of competent jurisdiction
before which such proceeding is brought that the member of the Board of Managers
or officer to be indemnified is not liable by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office; or (2) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the member of the Board of
Managers or officer to be indemnified was not liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office by (a) the vote of a majority of a quorum
of directors who are neither 'interested persons' (as defined in Section
2(a)(19) of the Investment Company Act of 1940) of the Fund or the Company nor
parties to the proceeding or (b) independent legal counsel in a written opinion.
Approval of indemnification by the Board of Managers pursuant to clause 2(a) or
clause 2(b) above shall not prevent the recovery from any member of the Board of
Managers or officer of any amount paid to him in accordance with such clause if
such member of the Board of Managers or officer is subsequently adjudicated by a
court of competent jurisdiction (i) not to have acted in good faith in the
reasonable belief that his actions was in the best interests of the Fund or (ii)
to have been liable to the Fund or its Contract Owners by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The right of indemnification hereby provided shall not be exclusive of or
affect any other rights to which any member of the Board of Managers or officer
may be entitled, provided, however, that no such indemnification shall be
inconsistent with the provisions of Section 17(h) of the Investment Company Act
of 1940. Nothing contained in this Article shall affect any rights to
indemnification to which personnel other than members of the Board of Managers
and officers may be entitled by contract or otherwise under law, provided,
however, that no such indemnification shall be effected in violation of the
Investment Company Act of 1940.
Notwithstanding any other provisions of this Article, in the event that a
claim for indemnification with respect to liabilities arising under the
Securities Act of 1933 is asserted by any member of the Board of Managers or
officer of the Fund, the Fund will, unless in the opinion of its counsel the
matter has been settled by controlling precedent and such member or officer is
not liable by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office, submit
to a court of appropriate jurisdiction the question whether such indemnification
by it is against the public policy as expressed in the Securities Act of 1933
and the Investment Company Act of 1940, and whether such member or officer is
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office, and the party
claiming such indemnification and the Fund will be governed by the final
adjudication of such judgment. Any adjudication that such indemnification is
against such public policy, or that such member or officer is so liable, shall
preclude any indemnification by the Fund.
By contract or other agreement with the Fund, the Company may agree to bear
or guarantee the cost of expense of the indemnification provided in this
Article, or any part of it.
The Franklin Life Insurance Company (referred to as "the Company" in the
immediately preceding quoted paragraph) has agreed to bear the expense of such
indemnification pursuant to the Administration Agreement dated June 30, 1971,
between The Franklin Life Insurance Company and Registrant.
* * *
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to members of the Board of Managers of Fund
A pursuant to the foregoing provisions or otherwise, Fund A has been advised
that in the opinion of the SEC 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 payment by Fund A
of expenses incurred or paid by a member of the Board of Managers in the
successful defense of any action, suit or proceeding) is asserted by such member
of the Board of Managers in connection with the securities being registered,
Fund A 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 16 EXHIBITS
(1) (a) Resolution of The Franklin Life Insurance Company's Board of Directors
creating Franklin Life Variable Annuity Fund A.***
(b) Articles of Incorporation for American General Series Portfolio
Company.*
(c) Articles Supplementary to the Articles of Incorporation for American
General Series Portfolio Company, effective April 10, 1990.*
(d) Articles Supplementary to the Articles of Incorporation for American
General Series Portfolio Company, effective September 28, 1990.*
(e) Amendment One to the Articles of Incorporation for American General
Series Portfolio Company, effective October 1, 1991.*
(f) Amendment Two to the Articles of Incorporation for American General
Series Portfolio Company, effective May 1, 1992.*
(g) Articles Supplementary to the Articles of Incorporation for American
General Series Portfolio Company, effective May 1, 1992.*
(h) Articles Supplementary to the Articles of Incorporation for American
General Series Portfolio Company, effective January 20, 1994.*
(i) Articles Supplementary to the Articles of Incorporation for American
General Series Portfolio Company, effective February 4, 1994.*
(j) Articles Supplementary to the Articles of Incorporation for American
General Series Portfolio Company, effective May 1, 1995.*
(k) Articles of Amendment to the Articles of Incorporation for American
General Series Portfolio Company, effective October 1, 1997.**
(2) (a) Rules and Regulations of Franklin Life Variable Annuity Fund A.***
(b) By-Laws of American General Series Portfolio Company.*
(3) Copies of any voting trust agreement affecting more than 5 percent of any
class of equity securities. Not applicable.
(4) Form of Agreement and Plan of Reorganization is incorporated herein by
reference to Appendix A of the Proxy Statement/Prospectus forming Part A
of this Registration Statement.
(5) (a) Specimen copy of Form 1170, deferred periodic payment variable
annuity contract.***
(b) Specimen copy of Form 1171, single payment deferred variable annuity
contract.***
(c) Specimen copy of Form 1172, single payment immediate life variable
annuity contract.***
<PAGE>
(d) Specimen copy of Form 1173, single payment immediate life variable
annuity contract with guaranteed period.***
(e) Specimen copy of Form 1174, single payment immediate joint and last
survivor life variable annuity contract.***
(f) Specimen copy of endorsement to Forms 1170, 1171, 1172, 1173 and
1174 when such contracts are issued to variable annuitants in the
State of Texas.***
(6) (a) Investment Management Agreement between Franklin Life Variable
Annuity Fund A and The Franklin Life Insurance Company dated
January 31, 1995.***
(b) Amended and Restated Investment Advisory Agreement between American
General Series Portfolio Company and The Variable Annuity Life
Insurance Company.*
(c) Investment Advisory Agreement (Form ii) between American General
Series Portfolio Company and The Variable Annuity Life Insurance
Company.*
(d) Investment Sub-Advisory Agreement between The Variable Annuity Life
Insurance Company and Bankers Trust Company.*
(e) Amendment No. 1 to Investment Sub-Advisory Agreement between The
Variable Annuity Life Insurance Company and Bankers Trust Company.*
(7) (a) Sales Agreement between Franklin Life Variable Annuity Fund A and
Franklin Financial Services Corporation dated January 31, 1995.***
(b) Form of Agreement among The Franklin Life Insurance Company,
Franklin Financial Services Corporation and agents.***
(c) Amended and Restated Distribution Agreement between American
General Series Portfolio Company and The Variable Annuity Marketing
Company, effective June 1, 1996.**
(8) Copies of all bonus, profit sharing, pension or other similar contracts
for the benefit of directors or officers. Not applicable.
(9) (a) Custodian Agreement dated April 17, 1995 between The Franklin Life
Insurance Company and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit 3 to Post-Effective
Amendment No. 42 to Franklin Life Variable Annuity Fund A's
Registration Statement on Form N-3, filed April 30, 1996 (File
No. 2-36394).
(b) Custodian Contract between American General Series Portfolio Company
and State Street Bank and Trust Company.*
(c) Custodian Fee Schedule between American General Series Portfolio
Company and State Street Bank and Trust Company.**
<PAGE>
(d) Amendment to Custodian Contract between American General Series
Portfolio Company and State Street Bank and Trust Company.**
(e) Custodian Fee Schedule between American General Series Portfolio
Company and State Street Bank and Trust Company.**
(10) Copies of any plans entered into pursuant to Rule 12b-1 or Rule 18f-3
under the Investment Company Act of 1940. Not Applicable.
(11) (a) Opinion and consent of counsel as to the legality of the Franklin
Life Variable Annuity Fund A securities being registered.***
(b) Opinion and consent of counsel as to the legality of the American
General Series Portfolio Company securities being registered.***
(12) Opinion and consent of Elizabeth E. Arthur, Esq. as to tax matters.***
(13) (a) Administration Agreement between Franklin Life Variable Annuity
Fund A and The Franklin Life Insurance Company dated June 30,
1971.***
(b) Agreement between The Franklin Life Insurance Company and Franklin
Financial Services Corporation dated June 30, 1971.***
(c) Transfer Agency and Service Agreement between American General
Series Portfolio Company and The Variable Annuity Life Insurance
Company.*
(d) Accounting Services Agreement between American General Series
Portfolio Company and The Variable Annuity Life Insurance Company.**
(14) Consents of Independent Auditors.
(15) Financial statements omitted pursuant to Item 14(a)(1). None.
(16) Powers of Attorney for any signatures to the registration statement.***
(17) Any additional exhibits. None.
* Incorporated herein by reference to Post-Effective Amendment Number 26 to
the American General Series Portfolio Company's Form N-1A Registration
Statement filed with the Securities and Exchange Commission on September 22,
1998.
** Incorporated herein by reference to Post-Effective Amendment Number 25 to
the American General Series Portfolio Company's Form N-1A Registration
Statement filed with the Securities and Exchange Commission on July 31, 1997.
*** Incorporated herein by reference to the initial filing of this
registration statement with the Securities and Exchange Commission on January
20, 1999 (File No. 333-70813).
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part
of this registration statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933 [17 CFR 230.145c], the reoffering prospectus will contain the
information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above
<PAGE>
will be filed as a part of an amendment to the registration statement and will
not be used until the amendment is effective, and that, in determining any
liability under the Securities Act of 1933, each post-effective amendment shall
be deemed to be a new registration statement for the securities offered therein,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has been
signed on behalf of Franklin Life Variable Annuity Fund A, in the City of
Springfield, and State of Illinois, on February 19, 1999.
Franklin Life Variable Annuity Fund A
By: /s/ Elizabeth E. Arthur
-------------------------------------
Elizabeth E. Arthur
Secretary, Board of Managers
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Clifford L. Greenwalt*
- -------------------------
Clifford L. Greenwalt Member, Board of Managers
---------------
/s/ Robert C. Spencer*
- -------------------------
Robert C. Spencer Member, Board of Managers
---------------
/s/ Robert G. Spencer*
- -------------------------
Robert G. Spencer Chairman, Board of Managers
---------------
/s/ James W. Voth*
- -------------------------
James W. Voth Member, Board of Managers
---------------
/s/ Elizabeth E. Arthur
- -------------------------
Elizabeth E. Arthur Secretary, Board of Managers
---------------
/s/ Elizabeth E. Arthur Dated February 19, 1999.
- -------------------------
* By Elizabeth E. Arthur,
Attorney-in-Fact
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has been
signed on behalf of American General Series Portfolio Company, in the City of
Houston, and State of Texas, on February 19, 1999.
American General Series Portfolio Company
By: /s/ Thomas L. West, Jr.
--------------------------------
Thomas L. West, Jr.
Chairman of the Board of Directors
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Thomas L. West, Jr. February 19, 1999
- ------------------------- -----------------
Thomas L. West, Jr. Chairman of the Board of Directors
- ------------------------- -----------------
John A. Graf Director and President
- ------------------------- -----------------
Craig R. Rodby Director and Executive Vice President
/s/ Gregory R. Seward February 19, 1999
- ------------------------- -----------------
Gregory R. Seward Treasurer
*
- ------------------------- -----------------
Norman Hackerman Director
*
- ------------------------- -----------------
John Wm. Lancaster Director
*
- ------------------------- -----------------
Ben H. Love Director
*
- ------------------------- -----------------
F. Robert Paulsen Director
*
- ------------------------- -----------------
R. Miller Upton Director
*
- ------------------------- -----------------
Dr. Judith L. Craven Director
*
- ------------------------- -----------------
Dr. Timothy J. Ebner Director
*
- ------------------------- -----------------
Judge Gustavo E. Gonzales, Jr. Director
*
- ------------------------- -----------------
Dr. John E. Maupin, Jr. Director
By: /s/ David M. Leahy February 19, 1999
---------------------- -----------------
*David M. Leahy
Attorney-in-Fact
</TABLE>
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 30, 1998, with respect to the financial
statements and supplementary information of Franklin Life Variable Annuity
Fund A for the year ended December 31, 1997, and our report dated February
23, 1998, with respect to the consolidated financial statements of Franklin
Life Insurance Company for the year ended December 31, 1997, included in the
Statement of Additional Information of Franklin Life Variable Annuity Fund A
dated April 30, 1998. This Statement of Additional Information is included in
the Registration Statement (Form N-14) and related proxy statement/prospectus
of Franklin Life Variable Annuity Fund A for the reorganization of Franklin
Life Variable Annuity Fund A.
We also consent to the use of our report dated January 29, 1999 with respect
to the financial statements and supplementary information of Franklin Life
Variable Annuity Fund A for the year ended December 31, 1998 included in the
Registration Statement (Form N-14) and related proxy statement/prospectus of
Franklin Life Variable Annuity Fund A for the reorganization of Franklin Life
Variable Annuity Fund A.
/s/ Ernst & Young LLP
Chicago, Illinois
March 1, 1999
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial
Highlights", "Independent Auditors", and "Financial Statements" and to
the use of our report dated July 2, 1998, in Post-Effective Amendment No. 26
to the Registration Statement (Form N-1A No. 2-83631) and related Prospectus
of Stock Index Fund, MidCap Index Fund, Small Cap Index Fund, International
Equities Fund, Growth Fund, Growth & Income Fund, Science & Technology Fund,
Social Awareness Fund, Asset Allocation Fund (formerly Timed Opportunity
Fund), Capital Conservation Fund, Government Securities Fund, International
Government Bond Fund, and Money Market Fund of American General Series
Portfolio Company. This Post-Effective Amendment No. 26 to the Registration
Statement (Form N-1A No. 2-83631) and related Prospectus is included in the
Registration Statement (Form N-14) and related proxy statement/prospectus of
Franklin Life Variable Annuity Fund A for the reorganization of Franklin Life
Variable Annuity Fund A.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Houston, Texas
February 24, 1999
