<PAGE>
VARIFLEX(R) AND VARIFLEX ES
================================================================================
1999 ANNUAL REPORT
[LOGO]
SECURITY BENEFIT LIFE
INSURANCE COMPANY
A Member of The Security Benefit
Group of Companies
<PAGE>
A MESSAGE FROM SECURITY BENEFIT
SECURITY BENEFIT GROUP KNOWS WALL STREET AND MAIN STREET
In 1999, Security Benefit Life Insurance Company had another year of outstanding
financial results. The driving forces behind our tremendous financial
performance were consumers' demand for individual retirement products and the
extension of our money management and customer service competencies.
As consumers focus on their future, they look to SBL as a partner for developing
personal retirement strategies. Our core competencies--money management and
customer service--are very solid and the cornerstone of our stronghold in the
market segments.
SECURITY BENEFIT IS A CLEAR CHOICE
There are many qualities that make partnering with Security Benefit a clear
choice:
* variety of retirement products
* cutting edge service
* pool of flexible and responsive employees
* rich heritage of innovation and creativity
* a rock solid financial foundation
* a strong risk management philosophy
However, if we were asked to capture what makes partnering with SBL a clear
choice in one sentence, here's what we'd say--Security Benefit knows Wall Street
and Main Street.
Wall Street and Main Street are among the most famous streets in America, but
they're known better for their characteristics rather than their location.
Everyone knows that Wall Street is in New York, but Wall Street is more of an
adjective today than it is a noun. What are the characteristics of something
that's Wall Street-like? It's fast paced, risky and high stress.
Likewise, Main Street has become an adjective. The characteristics of something
that's Main Street-like are being friendly, courteous, relaxed, and having a
real interest and concern for your neighbor.
Knowledge of both streets is one of our competitive advantages and it's why we
are positioned for strong growth in the future.
SECURITY BENEFIT KNOWS WALL STREET
Even though SBL operates out of America's Heartland in Topeka, Kansas--the exact
opposite of the Wall Street-like atmosphere--we know Wall Street because of our
experience, technology and people.
EXPERIENCE. We've been in the equities business for a long time. SBL was one of
the first in the industry to introduce a variable annuity and we were on the
front end of the mutual fund explosion.* We're as interested in the return of
customers' investments as we are in the return on customers' investments.
TECHNOLOGY. In today's computer age, we receive financial news and information
at the same time as any other Wall Street professional. When that one important
announcement comes across the wire, we receive the information in real time and
our money managers can react appropriately.
PEOPLE. There's an abundance of investment talent and expertise grown in
America's breadbasket and SBL attracts its fair share. Here, our talent is
moderately insulated from the steady stream of Wall Street noise, so they can
focus on what they do best--manage money.
SECURITY BENEFIT KNOWS MAIN STREET
In order to survive in the financial services industry today, you need to be
good at providing three things:
* products with good performance
* competitive product pricing
* good customer service
But, in order to thrive in the industry, you need to be great at one of those
things.
At Security Benefit, we've got good products with good performance and
competitively priced. But, we've made a conscious decision to be great at
customer service. In 1999, Dalbar, Inc. recognized Security Benefit for its
great customer service--again.
Where does our ability to provide outstanding service stem from? It stems from
everyone at Security Benefit having a deep knowledge of Main Street. Main Street
is part of Americana. Our goal is to provide customers the high-touch,
personalized service you receive when you enter an establishment on Main Street,
USA.
In the year 2000 and beyond, we will invest in initiatives that enhance the
value we offer to customers and make partnering with Security Benefit an even
clearer choice. Thanks for choosing Security Benefit in 1999.
*Variable annuities and mutual funds distributed by Security Distributors, Inc.
<PAGE>
BOARD OF DIRECTORS
HOWARD R. FRICKE
CHAIRMAN OF THE BOARD AND CEO
Security Benefit Life Insurance Company
Topeka, Kansas
SISTER LORETTO MARIE COLWELL
PRESIDENT AND CEO
St. Francis Hospital and Medical Center
Topeka, Kansas
JOHN C. DICUS
CHAIRMAN OF THE BOARD
Capitol Federal Savings & Loan Association
Topeka, Kansas
STEVEN J. DOUGLASS
CHAIRMAN AND CEO
Payless ShoeSource
Topeka, Kansas
WILLIAM W. HANNA
VICE CHAIRPERSON
Koch Industries
Wichita, Kansas
JOHN E. HAYES, JR.
CHAIRMAN OF THE BOARD AND CEO (Ret.)
Western Resources, Inc.
Topeka, Kansas
KRIS A. ROBBINS
PRESIDENT AND COO
Security Benefit Life Insurance Company
Topeka, Kansas
FRANK SABATINI
CHAIRMAN OF THE BOARD AND CEO
Capital City Bank
Topeka, Kansas
ROBERT C. WHEELER
CHAIRMAN AND CEO
Hill's Pet Nutrition, Inc.
Topeka, Kansas
NOTICE OF MEETING OF MEMBERS
The annual meeting of members of Security Benefit Mutual Holding Company (the
"Mutual Holding Company") will be held on Tuesday, June 6, 2000, at 700 SW
Harrison St., Topeka, Kansas, at 1:00 p.m. Each owner of an insurance policy
issued by Security Benefit Life Insurance Company is a member of the Mutual
Holding Company and is entitled to vote, either in person or by proxy, on all
matters coming before the meeting. Proxies are available from the corporate
secretary and must be returned no later than May 31, 2000.
This report is submitted only for the general information of Variflex Variable
Annuity contractowners and participants. This report is not authorized for
distribution to prospective purchasers of Variflex unless it is preceded or
accompanied by an effective prospectus.
For More Information Call
1-800-888-2461
www.securitybenefit.com
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE CONTRACT OWNERS OF VARIFLEX
AND THE BOARD OF DIRECTORS OF
SECURITY BENEFIT LIFE INSURANCE COMPANY
We have audited the accompanying individual and combined balance sheets of
Variflex (comprised of the individual series as indicated therein) as of
December 31, 1999, and the related statements of operations and changes in net
assets for the year then ended, except for those individual series operating for
portions of a period as disclosed in the financial statements. These financial
statements are the responsibility of Security Benefit Life Insurance Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 1999,
by correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
individual series of Variflex at December 31, 1999, and the individual and
combined results of their operations and changes in their net assets for the
periods described above in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
February 4, 2000
<PAGE>
VARIFLEX
================================================================================
BALANCE SHEETS DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
Investments:
SBL Fund:
Series A (Growth Series) - 31,820,560 shares at net
asset value of $35.51 per share (cost, $988,561)............. $1,129,956
Series B (Growth-Income Series) - 38,778,697 shares at
net asset value of $24.39 per share (cost, $1,177,906)....... 945,806
Series C (Money Market Series) - 8,861,295 shares at
net asset value of $12.04 per share (cost, $110,222)......... 106,688
Series D (Worldwide Equity Series) - 48,948,631 shares
at net asset value of $9.08 per share (cost, $325,632)....... 444,452
Series E (High Grade Income Series) - 9,578,275 shares
at net asset value of $10.55 per share (cost, $113,333)...... 101,050
Series J (Mid Cap Series) - 11,793,196 shares at net
asset value of $30.15 per share (cost, $249,562)............. 355,560
Series K (Global Strategic Income Series) - 711,052 shares
at net asset value of $9.61 per share (cost, $7,028)......... 6,832
Series M (Global Total Return Series) - 2,253,017 shares
at net asset value of $13.09 per share (cost, $28,124)....... 29,493
Series N (Managed Asset Allocation Series) - 3,171,026 shares
at net asset value of $16.94 per share (cost, $48,973)....... 53,716
Series O (Equity Income Series) - 7,655,204 shares at
net asset value of $17.27 per share (cost, $135,986)......... 132,200
Series S (Social Awareness Series) - 5,933,285 shares at
net asset value of $31.71 per share (cost, $153,288)......... 188,139
Series P (High Yield Series) - 148,179 shares at net
asset value of $15.51 per share (cost, $2,480)............... 2,298
Series V (Value Series) - 808,536 shares at net
asset value of $16.73 per share (cost, $13,141).............. 13,526
Series X (Small Cap Series) - 1,317,327 shares at net
asset value of $19.40 per share (cost, $20,425).............. 25,556
Series H (Enhanced Index Series) - 712,547 shares at
net asset value of $11.15 per share (cost, 7,338)............ 7,944
Series I (International Series) - 122,055 shares at
net asset value of $13.00 per share (cost, $ 1,266).......... 1,587
Series Y (Select 25 Series) - 1,530,122 shares at net
asset value of $12.37 per share (cost, $16,814).............. 18,928
Mortality guarantee receivable..................................... 4
---------
Combined assets.................................................... $3,563,735
=========
See accompanying notes.
<PAGE>
<TABLE>
VARIFLEX
=============================================================================================
BALANCE SHEETS DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------
NET ASSETS (DOLLARS IN THOUSANDS - EXCEPT PER SHARE AND UNIT VALUES)
<CAPTION>
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------- ----- ------
<S> <C> <C> <C> <C>
Net assets are represented by (NOTE 3):
VARIFLEX
Growth Series:
Accumulation units................. 14,612,496 $77.05 $1,125,837
Annuity reserves................... 53,186 77.05 4,098 $1,129,935
---------
Growth-Income Series:
Accumulation units................. 15,143,945 62.23 942,377
Annuity reserves................... 54,145 62.23 3,369 945,746
---------
Money Market Series:
Accumulation units................. 5,169,895 20.41 105,527
Annuity reserves................... 56,292 20.41 1,149 106,676
---------
Worldwide Equity Series:
Accumulation units................. 16,126,805 27.49 443,386
Annuity reserves................... 39,092 27.49 1,075 444,461
---------
High Grade Income Series:
Accumulation units................. 4,189,725 23.92 100,237
Annuity reserves................... 33,944 23.92 812 101,049
---------
Mid Cap Series:
Accumulation units................. 8,901,648 39.82 354,476
Annuity reserves................... 27,348 39.82 1,089 355,565
---------
Global Strategic Income Series:
Accumulation units................. 517,883 13.19 6,832
Annuity reserves................... 5 13.19 --- 6,832
---------
Global Total Return Series:
Accumulation units................. 1,865,142 15.78 29,432
Annuity reserves................... 3,863 15.78 61 29,493
---------
Managed Asset Allocation Series:
Accumulation units................. 3,031,613 17.63 53,439
Annuity reserves................... 14,996 17.63 264 53,703
---------
Equity Income Series:
Accumulation units................. 6,871,867 19.18 131,831
Annuity reserves................... 18,393 19.18 353 132,184
---------
Social Awareness Series:
Accumulation units................. 5,486,456 34.16 187,427
Annuity reserves................... 19,740 34.16 674 188,101
---------
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------
NET ASSETS, CONTINUED
<CAPTION>
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------- ----- ------
<S> <C> <C> <C> <C>
Net assets are represented by (NOTE 3)
(continued):
VARIFLEX (CONTINUED)
High Yield Series:
Accumulation units................. 184,920 $12.43 $ 2,298
Value Series:
Accumulation units................. 766,899 17.62 13,512
Small Cap Series:
Accumulation units................. 1,312,167 19.48 25,556
Enhanced Index Series:
Accumulation units................. 713,124 11.14 7,944
International Series:
Accumulation units................. 123,049 12.89 1,587
Select 25 Series:
Accumulation units................. 1,545,208 12.24 18,921
VARIFLEX ES
Growth Series:
Accumulation units................. 1,322 $23.89 36
Growth-Income Series:
Accumulation units................. 1,599 19.10 32
Worldwide Equity Series:
Accumulation units................. 42 18.75 1
High Grade Income Series:
Accumulation units................. 87 11.34 1
Managed Asset Allocation Series:
Accumulation units................. 761 15.98 13
Equity Income Series:
Accumulation units................. 920 17.54 16
Social Awareness Series:
Accumulation units................. 1,940 24.40 52
Value Series:
Accumulation units................. 812 14.92 14
Select 25 Series:
Accumulation units................. 571 11.74 7
---------
Combined net assets.................... $3,563,735
=========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
VARIFLEX
====================================================================================================================================
STATEMENTS OF OPERATIONS AND
CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<CAPTION>
HIGH
GROWTH- MONEY WORLDWIDE GRADE
GROWTH INCOME MARKET EQUITY INCOME MID CAP
VARIFLEX SERIES SERIES SERIES SERIES SERIES SERIES
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions...................... $ 8,303 $ 22,341 $ 9,795 $ --- $ 13,388 $ ---
Expenses (NOTE 2):
Mortality and expense risk fee............ (13,104) (12,707) (1,401) (3,972) (1,375) (2,973)
Administrative fee........................ (564) (1,146) (111) (46) (231) (32)
--------------------------------------------------------------------------
Net investment income (loss)................ (5,365) 8,488 8,283 (4,018) 11,782 (3,005)
Capital gains distributions................. 35,404 380,799 --- 43,845 --- 39,846
Realized gain (loss) on investments......... 103,927 (64,116) (146) 11,691 (2,603) 15,124
Unrealized appreciation
(depreciation) on investments............. (63,995) (317,071) (4,363) 100,111 (15,263) 77,937
--------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments..................... 75,336 (388) (4,509) 155,647 (17,866) 132,907
--------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations.......... 69,971 8,100 3,774 151,629 (6,084) 129,902
Net assets at beginning of year............. 1,060,662 1,078,658 86,834 300,829 120,032 224,096
Variable annuity deposits (NOTES 2 AND 3)... 335,083 138,151 279,342 77,466 34,749 89,025
Terminations and withdrawals (NOTES 2 AND 3) (333,817) (278,392) (262,639) (85,205) (47,375) (85,914)
Annuity payments (NOTES 2 AND 3)............ (1,954) (740) (626) (268) (266) (1,549)
Net mortality guarantee transfer............ (10) (31) (9) 10 (7) 5
--------------------------------------------------------------------------
Net assets at end of year................... $1,129,935 $ 945,746 $ 106,676 $444,461 $101,049 $355,565
==========================================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
GLOBAL GLOBAL MANAGED
STRATEGIC TOTAL ASSET EQUITY SOCIAL
INCOME RETURN ALLOCATION INCOME AWARENESS HIGH YIELD
SERIES SERIES SERIES SERIES SERIES SERIES
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions...................... $ --- $ 997 $ 1,826 $ 4,300 $ 858 $ 178
Expenses (NOTE 2):
Mortality and expense risk fee............ (88) (353) (625) (1,652) (1,940) (10)
Administrative fee........................ (22) (18) (40) (151) (46) (2)
----------------------------------------------------------------------
Net investment income (loss)................ (110) 626 1,161 2,497 (1,128) 166
Capital gains distributions................. 49 2,206 --- 6,968 5,735 13
Realized gain (loss) on investments......... (461) 498 3,535 6,480 16,550 (8)
Unrealized appreciation
(depreciation) on investments............. 472 99 (652) (14,030) 2,803 (182)
----------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments..................... 60 2,803 2,883 (582) 25,088 (177)
----------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations.......... (50) 3,429 4,044 1,915 23,960 (11)
Net assets at beginning of year............. 7,638 29,917 44,175 128,372 124,218 ---
Variable annuity deposits (NOTES 2 AND 3)... 2,320 4,246 20,797 41,958 76,909 3,092
Terminations and withdrawals (NOTES 2 AND 3) (3,071) (8,095) (15,143) (40,006) (36,955) (783)
Annuity payments (NOTES 2 AND 3)............ (5) (4) (170) (52) (36) ---
Net mortality guarantee transfer............ --- --- --- (3) 5 ---
----------------------------------------------------------------------
Net assets at end of year................... $ 6,832 $29,493 $ 53,703 $132,184 $188,101 $2,298
======================================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
VARIFLEX
====================================================================================================================================
STATEMENTS OF OPERATIONS AND YEAR ENDED DECEMBER 31, 1999
CHANGES IN NET ASSETS (CONTINUED) (EXCEPT AS NOTED)
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<CAPTION>
ENHANCED
VALUE SMALL CAP INDEX INTERNATIONAL SELECT 25 VARIFLEX
SERIES SERIES SERIES* SERIES* SERIES* TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions...................... $ 41 $ 3 $ 27 $ --- $ --- $ 62,057
Expenses (NOTE 2):
Mortality and expense risk fee............ (44) (49) (28) (6) (57) (40,384)
Administrative fee....................... (4) (1) (9) --- (6) (2,429)
--------------------------------------------------------------------------
Net investment income (loss)................ (7) (47) (10) (6) (63) 19,244
Capital gains distributions................. 323 619 25 --- --- 515,832
Realized gain (loss) on investments......... (52) 704 33 13 209 91,378
Unrealized appreciation
(depreciation) on investments............. 385 5,131 606 321 2,114 (225,577)
--------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments..................... 656 6,454 664 334 2,323 381,633
--------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations.......... 649 6,407 654 328 2,260 400,877
Net assets at beginning of year............. --- --- --- --- --- 3,205,431
Variable annuity deposits (NOTES 2 AND 3)... 14,864 21,458 7,971 1,382 17,870 1,166,683
Terminations and withdrawals (NOTES 2 AND 3) (2,001) (2,309) (681) (123) (1,209) (1,203,718)
Annuity payments (NOTES 2 AND 3)............ --- --- --- --- --- (5,670)
Net mortality guarantee guarantee transfer.. --- --- --- --- --- (40)
--------------------------------------------------------------------------
Net assets at end of year................... $13,512 $25,556 $7,944 $1,587 $18,921 $ 3,563,563
==========================================================================
</TABLE>
*For the period May 3, 1999 (inception date) through December 31,1999.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MANAGED ASSET EQUITY
GROWTH GROWTH-INCOME WORLDWIDE HIGH GRADE ALLOCATION INCOME
VARIFLEX ES SERIES SERIES EQUITY SERIES INCOME SERIES SERIES SERIES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions...................... $--- $--- $--- $--- $--- $---
Expenses (NOTE 2):
Mortality and expense risk fee............ --- --- --- --- --- ---
Administrative fee........................ --- --- --- --- --- ---
------------------------------------------------------------------------------------
Net investment income (loss)................ --- --- --- --- --- ---
Capital gains distributions................. --- --- --- --- --- ---
Realized gain (loss) on investments......... --- --- --- --- --- ---
Unrealized appreciation
(depreciation) on investments............. 2 (2) --- --- --- (2)
------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments................ 2 (2) --- --- --- (2)
------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations.......... 2 (2) --- --- --- (2)
Net assets at beginning of year............. --- --- --- --- --- ---
Variable annuity deposits (NOTES 2 AND 3)... 37 35 1 1 15 22
Terminations and withdrawals (NOTES 2 AND 3) (3) (1) --- --- (2) (4)
Annuity payments (NOTES 2 AND 3)............ --- --- --- --- --- ---
Net mortality guarantee transfer............ --- --- --- --- --- ---
------------------------------------------------------------------------------------
Net assets at end of year................... $ 36 $ 32 $ 1 $ 1 $ 13 $ 16
====================================================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
SOCIAL VALUE SELECT 25 VARIFLEX ES
VARIFLEX ES (CONTINUED) AWARENESS SERIES SERIES SERIES* TOTAL COMBINED
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions...................... $--- $--- $--- $--- $ 62,057
Expenses (NOTE 2):
Mortality and expense risk fee............ --- --- --- --- (40,384)
Administrative fee........................ --- --- --- --- (2,429)
------------------------------------------------------------------------------------
Net investment income (loss)................ --- --- --- --- 19,244
Capital gains distributions................. --- --- --- --- 515,832
Realized gain (loss) on investments......... --- --- --- --- 91,378
Unrealized appreciation
(depreciation) on investments............. 3 --- --- 1 (225,576)
------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments................ 3 --- --- 1 381,634
------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations.......... 3 --- --- 1 400,878
Net assets at beginning of year............. --- --- --- --- 3,205,431
Variable annuity deposits (NOTES 2 AND 3)... 49 14 9 183 1,166,866
Terminations and withdrawals (NOTES 2 AND 3) --- --- (2) (12) (1,203,730)
Annuity payments (NOTES 2 AND 3)............ --- --- --- --- (5,670)
Net mortality guarantee transfer............ --- --- --- --- (40)
------------------------------------------------------------------------------------
Net assets at end of year................... $ 52 $ 14 $ 7 $172 $ 3,563,735
====================================================================================
</TABLE>
*Period May 3, 1999 (inception date) through December 31, 1999.
See accompanying notes.
<PAGE>
VARIFLEX
================================================================================
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Variflex (the Account) is a separate account of Security
Benefit Life Insurance Company (SBL). The Account is registered as a unit
investment trust under the Investment Company Act of 1940, as amended.
Deposits received by the Account are invested in the SBL Fund, a mutual fund
not otherwise available to the public. As directed by the owners, amounts
deposited may be invested in shares of Series A (Growth Series - emphasis on
capital appreciation), Series B (Growth-Income Series - emphasis on capital
appreciation with secondary emphasis on income), Series C (Money Market
Series - emphasis on capital preservation while generating interest income),
Series D (Worldwide Equity Series - emphasis on long-term capital growth
through investment in foreign and domestic common stocks and equivalents),
Series E (High Grade Income Series - emphasis on current income with security
of principal), Series J (Mid Cap Series - emphasis on capital appreciation),
Series K (Global Strategic Income Series - emphasis on high current income
with secondary emphasis on capital appreciation), Series M (Global Total
Return Series - emphasis on high total return consisting of capital
appreciation and current income), Series N (Managed Asset Allocation Series -
emphasis on high level of total return), Series O (Equity Income Series -
emphasis on substantial dividend income and capital appreciation), Series S
(Social Awareness Series - emphasis on capital appreciation), Series P (High
Yield Series - emphasis on high current income with secondary emphasis on
capital appreciation through investment in higher yielding, higher risk debt
securities), Series V (Value Series - emphasis on long-term growth of
capital), Series X (Small Cap Series - emphasis on long-term growth of
capital), Series H (Enhanced Index Series - emphasis on capital appreciation
consistent with performance of the Standard & Poor's 500 Composite Index),
Series I (International Series - emphasis on long-term capital appreciation
from investment in foreign equity securities) and Series Y (Select 25 Series
- emphasis on long-term capital appreciation from a concentration of 20 to 30
common stocks). During 1999 the former Emerging Growth Series, Global
Aggressive Bond Series, and Specialized Asset Allocation Series were renamed
Mid Cap Series, Global Strategic Income Series, and Global Total Return
Series, respectively.
The Account receives deposits from two types of investment contracts,
Variflex and Variflex ES.
Under the terms of the investment advisory contracts, portfolio investments
of the underlying mutual fund are made by Security Management Company, LLC
(SMC), a limited liability company controlled by its members, SBL and
Security Benefit Group, Inc., a wholly-owned subsidiary of SBL.
SMC has engaged T. Rowe Price Associates, Inc. to provide subadvisory
services for the Managed Asset Allocation Series and the Equity Income
Series; Strong Capital Management, Inc. to provide subadvisory services for
the Small Cap Series; Oppenheimer Funds, Inc. to provide subadvisory services
for the Worldwide Equity Series and Banker's Trust Company to provide
subadvisory services for the Enhanced Index Series and the International
Series. Meridian Investment Management Corporation (Meridian) served as
subadvisor for the Global Strategic Income Series and the Global Total Return
Series until May 15, 1999 when Meridian was replaced by Wellington Management
Company, LLP.
INVESTMENT VALUATION - Investments in mutual fund shares are carried in the
balance sheet at market value (net asset value of the underlying mutual
fund). The first-in, first-out cost method is used to determine realized
gains and losses. Security transactions are accounted for on the trade date.
The cost of investments purchased and proceeds from investments sold for the
year ended December 31 was as follows:
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
(IN THOUSANDS)
Growth Series.................... $401,454 $372,081
Growth-Income Series............. 556,246 307,908
Money Market Series.............. 199,746 75,383
Worldwide Equity Series.......... 125,940 94,119
High Grade Income Series......... 52,141 53,253
Mid Cap Series................... 135,516 97,113
Global Strategic Income Series... 2,530 3,347
Global Total Return Series....... 7,979 9,000
Managed Asset Allocation Series.. 24,193 17,535
Equity Income Series............. 55,397 44,015
Social Awareness Series.......... 85,811 41,242
High Yield Series................ 3,410 922
Value Series..................... 15,442 2,249
Small Cap Series................. 22,509 2,788
Enhanced Index Series............ 8,181 876
International Series............. 1,455 202
Select 25 Series................. 18,547 1,942
ANNUITY RESERVES - Annuity reserves relate to contracts that have matured and
are in the payout stage. Such reserves are computed on the basis of published
mortality tables using assumed interest rates that will provide reserves as
prescribed by law. In cases where the payout option selected is life
contingent, SBL periodically recalculates the required annuity reserves and
any resulting adjustment is either charged or credited to SBL and not to the
Account.
REINVESTMENT OF DIVIDENDS - Dividend and capital gains distributions paid by
the mutual fund to the Account are reinvested in additional shares of each
respective series. Dividend income and capital gains distributions are
recorded as income on the ex-dividend date.
FEDERAL INCOME TAXES - The operations of the Account are a part of the
operations of SBL. Under current law, no federal income taxes are allocated
by SBL to the operations of the Account.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee of $30 per year for each Variflex contract
and $15 per year for each Variflex ES contract, except for certain contracts
based on a minimum account value and the period of time the contract has been
in force. Mortality and expense risks assumed by SBL are compensated for by a
fee equivalent to an annual rate of 1.2% of the net asset value of each
Variflex contract and 1.0% of the net asset value of each Variflex ES
contract, of which 0.7% is for assuming mortality risks and the remainder is
for assuming expense risks.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
3. SUMMARY OF UNIT TRANSACTIONS (IN THOUSANDS)
UNITS
-----
VARIFLEX
Growth Series:
Variable annuity deposits....................................... 3,598
Terminations, withdrawals, annuity payments and expense charges. 3,643
Growth-Income Series:
Variable annuity deposits....................................... 1,111
Terminations, withdrawals, annuity payments and expense charges. 3,351
Money Market Series:
Variable annuity deposits....................................... 10,211
Terminations, withdrawals, annuity payments and expense charges. 9,389
Worldwide Equity Series:
Variable annuity deposits....................................... 2,823
Terminations, withdrawals, annuity payments and expense charges. 3,270
High Grade Income Series:
Variable annuity deposits....................................... 950
Terminations, withdrawals, annuity payments and expense charges. 1,498
Mid Cap Series:
Variable annuity deposits....................................... 2,285
Terminations, withdrawals, annuity payments and expense charges. 2,355
Global Strategic Income Series:
Variable annuity deposits....................................... 134
Terminations, withdrawals, annuity payments and expense charges. 195
Global Total Return Series:
Variable annuity deposits....................................... 188
Terminations, withdrawals, annuity payments and expense charges. 454
Managed Asset Allocation Series:
Variable annuity deposits....................................... 1,114
Terminations, withdrawals, annuity payments and expense charges. 785
Equity Income Series:
Variable annuity deposits....................................... 1,643
Terminations, withdrawals, annuity payments and expense charges. 1,569
Social Awareness Series:
Variable annuity deposits....................................... 2,233
Terminations, withdrawals, annuity payments and expense charges. 937
High Yield Series:
Variable annuity deposits....................................... 248
Terminations, withdrawals, annuity payments and expense charges. 63
Value Series:
Variable annuity deposits....................................... 886
Terminations, withdrawals, annuity payments and expense charges. 120
Small Cap Series:
Variable annuity deposits....................................... 1,474
Terminations, withdrawals, annuity payments and expense charges. 162
Enhanced Index Series:
Variable annuity deposits....................................... 781
Terminations, withdrawals, annuity payments and expense charges. 68
International Series:
Variable annuity deposits....................................... 135
Terminations, withdrawals, annuity payments and expense charges. 12
Select 25 Series:
Variable annuity deposits....................................... 1,652
Terminations, withdrawals, annuity payments and expense charges. 107
VARIFLEX ES
Growth Series:
Variable annuity deposits....................................... 1
Terminations, withdrawals, annuity payments and expense charges. ---
Growth-Income Series:
Variable annuity deposits....................................... 2
Terminations, withdrawals, annuity payments and expense charges. ---
Worldwide Equity Series:
Variable annuity deposits....................................... ---
High Grade Income Series:
Variable annuity deposits....................................... ---
Managed Asset Allocation Series:
Variable annuity deposits....................................... 1
Terminations, withdrawals, annuity payments and expense charges. ---
Equity Income Series:
Variable annuity deposits....................................... 1
Terminations, withdrawals, annuity payments and expense charges. ---
Social Awareness Series:
Variable annuity deposits....................................... 2
Value Series:
Variable annuity deposits....................................... 1
Select 25 Series:
Variable annuity deposits....................................... 1
Terminations, withdrawals, annuity payments and expense charges. ---
