<PAGE>
File No. 811-5017
File No. 33-11466
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 11
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 11
TMK/UNITED FUNDS, INC.
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Sharon K. Pappas, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
__X__ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
==================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the
Registrant's fiscal year ended December 31, 1993 was filed on February 24,
1994. It is anticipated that Notice for the Registrant's fiscal year
ending December 31, 1994 will be filed on or about February 24, 1995.
<PAGE>
TMK/UNITED FUNDS, INC.
======================
Cross Reference Sheet
=====================
Part A of
Form N-1A
Item No. Prospectus Caption
- --------- ------------------
1 ........................ Cover Page
2(a) ..................... *
(b) ..................... Prospectus Summary
(c) ..................... *
3(a) ..................... Financial Highlights
(b) ..................... Financial Highlights
(c) ..................... Performance Information
(d)...................... Financial Highlights
4(a) ..................... The Fund; Other Information; Investment Goals
and Policies of the Portfolios
(b) ..................... Investment Goals and Policies of the
Portfolios
(c) ..................... Investment Goals and Policies of the
Portfolios
5(a) ..................... Other Information
(b)...................... Management; Back Cover
(c) ..................... Management
(d) ..................... Management; Back Cover
(e) ..................... *
(f) ..................... Management
(g)(i) .................. *
(g)(ii) ................. *
5A......................... *
6(a) ..................... The Fund; Other Information
(b) ..................... *
(c) ..................... *
(d) ..................... *
(e) ..................... Other Information
(f)...................... Dividends and Distributions
(g) ..................... Taxes
7(a) ..................... Management; Back Cover
(b) ..................... Net Asset Value; Purchases and Redemptions
(c) ..................... *
(d) ..................... *
(e) ..................... *
(f) ..................... *
8(a) ..................... Purchases and Redemptions
(b) ..................... *
(c) ..................... *
(d) ..................... Purchases and Redemptions
9 ........................ *
Part B of
Form N-1A
Item No. SAI Caption
- --------- -----------
10(a) ..................... Cover Page
(b) ..................... *
11 ........................ Cover Page
12 ........................ *
13(a) ..................... Investment Policies
(b) ..................... Investment Policies
(c) ..................... Investment Policies
(d) ..................... Investment Policies
14(a) ..................... Directors and Officers
(b) ..................... Directors and Officers
(c) ..................... *
15(a) ..................... *
(b) ..................... *
(c) ..................... *
16(a)(i) .................. Investment Management and Other Services
(a)(ii) ................. Directors and Officers
(a)(iii) ................ Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... *
(d) ..................... Investment Management and Other Services
(e) ..................... *
(f) ..................... *
(g) ..................... *
(h) ..................... Investment Management and Other Services
(i) ..................... *
17(a) ..................... Portfolio Transactions and Brokerage
(b) ..................... *
(c) ..................... Portfolio Transactions and Brokerage
(d) ..................... *
(e) ..................... *
18(a) ..................... Other Information
(b) ..................... *
19(a) ..................... Purchases and Redemptions
(b) ..................... Net Asset Value; Purchases and Redemptions
(c) ..................... Purchases and Redemptions
20 ........................ Taxes
21(a) ..................... Investment Management and Other Services
(b) ..................... *
(c) ..................... *
22(a)...................... Performance Information
(b)...................... Performance Information
23 ........................ Financial Statements
- ---------------------------------------------------------------------------
*Not Applicable or Negative Answer
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
- -----------------------------------------------------------------
May 1, 1995
PROSPECTUS
- -----------------------------------------------------------------
TMK/United Funds, Inc. (the "Fund") is a diversified open-end
management investment company commonly known as a mutual fund, with ten
separate Portfolios each with separate goals and investment policies. The
investment goals and policies of the Portfolios, which may be changed by
the Directors of the Fund without a vote of the shareholders, are generally
as follows:
Money Market Portfolio
Maximum current income consistent with stability of principal by
investing in money market securities.
Bond Portfolio
Current income with an emphasis on preservation of capital by
investing primarily in debt securities of varying yields, quality and
maturities.
High Income Portfolio
Primary goal of high current income with a secondary goal of capital
growth by investing primarily in high-yield, high-risk fixed income
securities but with the ability to invest not more than 20% of assets in
common stocks.
Growth Portfolio
Primary goal of capital growth with a secondary goal of current income
by investing in common stocks or securities convertible into common stocks.
Income Portfolio
Maintenance of current income, subject to market conditions, by
investing primarily in common stocks or securities convertible into common
stocks.
International Portfolio
Primary goal of long-term appreciation of capital with a secondary
goal of current income by investing primarily in securities issued by
companies or governments of any nation.
Small Cap Portfolio
Capital growth through a diversified holding of securities, primarily
in the common stocks of, or securities convertible into the common stocks
of, relatively new or unseasoned companies, companies which are in their
early stages of development or smaller companies positioned in new and
emerging industries where the opportunity for rapid growth is anticipated
to be above average.
Balanced Portfolio
Primary goal of current income with a secondary goal of long-term
appreciation of capital by investing in a variety of securities, including
debt securities, common stocks and preferred stocks.
Limited-Term Bond Portfolio
High level of current income consistent with preservation of capital
by investing primarily in debt securities of investment grade, including
debt securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government Securities"). The Portfolio will
maintain a dollar weighted average maturity of two to five years.
Asset Strategy Portfolio
High total return with reduced risk over the long term through
investments in stocks, bonds and short-term instruments.
This Prospectus contains concise information about the Fund of which
you should be aware before applying for certain variable life insurance
policies and variable annuity policies offered by Participating Insurance
Companies. Additional information about the Fund has been filed with the
Securities and Exchange Commission and is contained in the Statement of
Additional Information (the "SAI") dated May 1, 1995. You may obtain a
copy of the SAI free of charge by request to the Fund or its Distributor,
Waddell & Reed, Inc., at the address or telephone number shown above or
from United Investors Life Insurance Company, Variable Products Division,
P.O. Box 156, Birmingham, Alabama 35201-0156. The SAI is incorporated by
reference into this Prospectus and you will not be aware of all facts
unless you read both this Prospectus and the SAI.
An investment in the Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government. There can be no assurance that the
Money Market Portfolio will be able to maintain a stable net asset value of
$1.00 per share.
Investments in high-yield, high-risk securities may entail risks that
are different or more pronounced than those involved in higher-rated
securities. See "Risk Factors of High-Yield Investing" included in this
Prospectus for a discussion of the risks associated with non-investment
grade debt securities.
Retain This Prospectus For Future Reference.
SHARES OF THE FUND ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A
FUNDING OR INVESTMENT VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL
TYPES OF VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY POLICIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing in the body of the Prospectus. Cross-
references in this summary are to headings in the body of the Prospectus.
The Portfolios: This Prospectus describes ten separate portfolios (each
a "Portfolio") of an open-end, management investment
company with different investment goals and policies.
Each of the Portfolios is a diversified portfolio.
Shares of the Fund are being marketed exclusively as a
funding or investment vehicle for life insurance
companies writing various types of variable life
insurance policies and variable annuity policies.
Investment Goals and Policies:
Money Market Portfolio: Maximum current income consistent with
stability of principal by investing in money market securities.
Bond Portfolio: Current income with an emphasis on preservation of
capital by investing primarily in debt securities of varying yields,
quality and maturities.
High Income Portfolio: Primary goal of high current income with a
secondary goal of capital growth by investing primarily in high-yield,
high-risk fixed income securities but with the ability to invest not more
than 20% of its assets in common stocks.
Growth Portfolio: Primary goal of capital growth with a secondary
goal of current income by investing in common stocks or securities
convertible into common stocks.
Income Portfolio: Maintenance of current income, subject to market
conditions, by investing primarily in common stocks or securities
convertible into common stocks.
International Portfolio: Primary goal of long-term appreciation of
capital with a secondary goal of current income by investing primarily in
securities issued by companies or governments of any nation.
Small Cap Portfolio: Capital growth through a diversified holding of
securities, primarily in the common stocks of, or securities convertible
into the common stocks of, relatively new or unseasoned companies,
companies which are in their early stages of development or smaller
companies positioned in new and emerging industries where the opportunity
for rapid growth is anticipated to be above average.
Balanced Portfolio: Primary goal of current income with a secondary
goal of long-term appreciation of capital by investing in a variety of
securities, including debt securities, common stocks and preferred stocks.
Limited-Term Bond Portfolio: High level of current income consistent
with preservation of capital by investing primarily in debt securities of
investment grade, including U.S. Government Securities. The Portfolio will
maintain a dollar weighted average maturity of its portfolio of two to five
years.
Asset Strategy Portfolio: High total return with reduced risk over
the long term by allocating its assets among stocks, bonds and short-term
instruments.
There can be no assurance that a Portfolio will be successful in
meeting its investment goal. For a further description of the ten
Portfolios, their investment techniques and certain risks which may be
associated with investments in repurchase agreements, the securities of
foreign issuers, non-investment grade debt securities, options and futures
contracts, and with other investment techniques, see "Investment Policies
Common to the Ten Portfolios."
Investment Manager: Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc., acts as
investment manager for each Portfolio. See
"Management."
Distributor: Waddell & Reed, Inc. acts as principal distributor and
underwriter for the Fund. See "Management."
Purchases: The Fund is the funding or investment vehicle for
variable life insurance policies and variable annuity
policies offered by the separate accounts of certain
life insurance companies. As of the date of this
Prospectus, the only participating insurance company is
United Investors Life Insurance Company. Individual
policyowners are not direct shareholders of the Fund.
The participating insurance companies and their
separate accounts are the actual shareholders. The
separate accounts of the participating insurance
companies place orders to purchase shares of each
Portfolio. Shares of a Portfolio are sold at their net
asset value and a sales charge is not incurred upon the
purchase of shares of a Portfolio. See "Purchases and
Redemptions" and "The Fund."
Redemptions: The separate accounts of the participating insurance
companies place orders to redeem shares of each
Portfolio. Redemptions are made at net asset value.
See "Purchases and Redemptions."
Dividends: Dividends are ordinarily declared and paid annually,
except by the Money Market Portfolio which is declared
and paid daily.
Dividends and other distributions are paid in
additional full and fractional shares of the paying
Portfolio. See "Dividends and Distributions."
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
(Audited)
The following information has been audited by Price Waterhouse LLP,
independent accountants, and should be read in conjunction with the
financial statements and notes thereto, together with the report of Price
Waterhouse LLP included in the SAI.
(For a share outstanding throughout each period)
THE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846 $5.0000
------- ------- ------- ------- ------- ------- ------ -------
Income from investment
operations:
Net investment
income ........ 0.1211 0.0537 0.1013 0.1229 0.1661 0.1611 0.1539 0.0523
Net realized and
unrealized gain
(loss) on
investments ... 0.0268 0.8087 1.0653 1.6636 (0.4546) 1.2150 0.4944 (0.2154)
------- ------- ------- ------- ------- ------- ------ -------
Total from investment
operations ...... 0.1479 0.8624 1.1666 1.7865 (0.2885) 1.3761 0.6483 (0.1631)
------- ------- ------- ------- ------- ------- ------ -------
Less distributions:
Dividends from net
investment
income ........ (0.1211) (0.0537) (0.1013) (0.1229) (0.1661) (0.1611) (0.1539) (0.0523)
Distribution from
capital gains . (0.3244) (0.7569) (0.5121) (1.0142) (0.0000) (0.7962) (0.2953) (0.0000)
Distribution in
excess of capital
gains ......... (0.0000) (0.0061) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- ------- ------ -------
Total distributions (0.4455) (0.8167) (0.6134) (1.1371) (0.1661) (0.9573) (0.4492) (0.0523)
------- ------- ------- ------- ------- ------- ------ -------
Net asset value,
end of period ... $5.8986 $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846
======= ======= ======= ======= ======= ======= ====== =======
Total return ...... 2.39% 14.02% 20.84% 36.10% -5.34% 27.61% 13.55% -6.86%
Net assets, end of
period (000
omitted) ........ $276,737 $220,590 $122,363 $69,044 $37,440 $28,510 $14,521 $5,636
Ratio of expenses
to average net
assets .......... 0.77% 0.78% 0.80% 0.86% 0.86% 0.85% 0.96% 0.91%
Ratio of net investment
income to average
net assets ...... 2.07% 1.01% 2.00% 2.43% 3.58% 3.40% 3.79% 4.92%
Portfolio turnover
rate ............ 277.36% 297.81% 225.87% 316.72% 331.15% 344.71% 278.57% 127.80%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a capital share outstanding for the
period from July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a capital share outstanding for the
period from July 16, 1991 (initial offering) through December 31, 1991. The International Portfolio, Small Cap
Portfolio, Balanced Portfolio and Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since
these Portfolios did not have any investment activity or incur expenses prior to the date of initial offering,
the per share information is for a capital share outstanding for the period from May 3, 1994 (initial offering)
through December 31, 1994. Ratios and portfolio turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
</TABLE>
<PAGE>
THE INCOME PORTFOLIO
For the fiscal year ended December 31,
--------------------------------------------
1994 1993 1992 1991**
---- ---- ---- ----
Net asset value,
beginning of
period .......... $6.9180 $5.9530 $5.3158 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income ........ 0.0702 0.0651 0.0803 0.0633
Net realized and
unrealized gain
on investments (0.1490) 0.9650 0.6496 0.3158
------- ------ ------ ------
Total from investment
operations ...... (0.0788) 1.0301 0.7299 0.3791
------- ------ ------ ------
Less distributions:
Dividends from net
investment
income ........ (0.0703) (0.0651) (0.0803) (0.0633)
Distribution from
capital gains (0.0000) (0.0000) (0.0124) (0.0000)
------- ------- ------- -------
Total distributions (0.0703) (0.0651) (0.0927) (0.0633)
------- ------- ------- -------
Net asset value,
end of period ... $6.7689 $6.9180 $5.9530 $5.3158
======= ======= ======= =======
Total return ...... -1.14% 17.30% 13.78% 17.43%
Net assets, end of
period (000
omitted) ........ $218,774 $155,092 $65,027 $15,640
Ratio of expenses
to average net
assets .......... 0.77% 0.79% 0.85% 0.89%
Ratio of net investment
income to average
net assets ...... 1.16% 1.36% 1.78% 2.47%
Portfolio turnover
rate ............ 23.32% 18.38% 15.74% 4.41%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and
Growth Portfolio's inception date is December 2, 1986; however, since
these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from July 13, 1987 (initial
offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any
investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for
the period from July 16, 1991 (initial offering) through December 31,
1991. The International Portfolio, Small Cap Portfolio, Balanced
Portfolio and Limited-Term Bond Portfolio's inception date is April 28,
1994; however, since these Portfolios did not have any investment activity
or incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May 3,
1994 (initial offering) through December 31, 1994. Ratios and portfolio
turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
<PAGE>
THE INTERNATIONAL PORTFOLIO
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0207
Net realized and
unrealized loss
on investments .. (0.0074)
-------
Total from investment
operations ....... 0.0133
Less dividends from net
investment
income .......... (0.0207)
-------
Net asset value,
end of period .... $4.9926
=======
Total return........ 0.26%
Net assets, end of
period (000
omitted) ......... $26,020
Ratio of expenses
to average net
assets ............ 1.26%
Ratio of net investment
income to average
net assets ....... 1.37%
Portfolio turnover
rate ............. 23.23%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and
Growth Portfolio's inception date is December 2, 1986; however, since
these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from July 13, 1987 (initial
offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any
investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for
the period from July 16, 1991 (initial offering) through December 31,
1991. The International Portfolio, Small Cap Portfolio, Balanced
Portfolio and Limited-Term Bond Portfolio's inception date is April 28,
1994; however, since these Portfolios did not have any investment activity
or incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May 3,
1994 (initial offering) through December 31, 1994. Ratios and portfolio
turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
<PAGE>
THE SMALL CAP PORTFOLIO
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0376
Net realized and
unrealized gain
on investments .. 1.0086
-------
Total from investment
operations ....... 1.0462
-------
Less distributions:
Dividends from net
investment income (0.0376)
Distributions from
capital gains.... (0.0168)
-------
Total distributions (0.0544)
-------
Net asset value,
end of period .... $5.9918
=======
Total return........ 20.92%
Net assets, end of
period (000
omitted) ......... $16,080
Ratio of expenses
to average net
assets ............ 1.08%
Ratio of net investment
income to average
net assets ....... 2.35%
Portfolio turnover
rate ............. 21.61%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and
Growth Portfolio's inception date is December 2, 1986; however, since
these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from July 13, 1987 (initial
offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any
investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for
the period from July 16, 1991 (initial offering) through December 31,
1991. The International Portfolio, Small Cap Portfolio, Balanced
Portfolio and Limited-Term Bond Portfolio's inception date is April 28,
1994; however, since these Portfolios did not have any investment activity
or incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May 3,
1994 (initial offering) through December 31, 1994. Ratios and portfolio
turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
<PAGE>
THE BALANCED PORTFOLIO
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0460
Net realized and
unrealized loss
on investments .. (0.0641)
-------
Total from investment
operations ....... (0.0181)
Less dividends from net
investment
income .......... (0.0460)
-------
Net asset value,
end of period .... $4.9359
=======
Total return........ -0.37%
Net assets, end of
period (000
omitted) ......... $8,671
Ratio of expenses
to average net
assets ............ 0.95%
Ratio of net investment
income to average
net assets ....... 3.14%
Portfolio turnover
rate ............. 19.74%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and
Growth Portfolio's inception date is December 2, 1986; however, since
these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from July 13, 1987 (initial
offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any
investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for
the period from July 16, 1991 (initial offering) through December 31,
1991. The International Portfolio, Small Cap Portfolio, Balanced
Portfolio and Limited-Term Bond Portfolio's inception date is April 28,
1994; however, since these Portfolios did not have any investment activity
or incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May 3,
1994 (initial offering) through December 31, 1994. Ratios and portfolio
turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
<PAGE>
THE MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
Net investment
income .......... 0.0368 0.0260 0.0324 0.0536 0.0753 0.0852 0.0677 0.0297
Less dividends
declared ........ (0.0368) (0.0260) (0.0324) (0.0536) (0.0753) (0.0852) (0.0677) (0.0297)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total return ...... 3.72% 2.63% 3.29% 5.49% 7.82% 8.91% 7.37% 6.57%
Net assets, end of
period (000
omitted) ........ $30,812 $26,000 $23,995 $19,797 $16,870 $11,753 $8,711 $5,868
Ratio of expenses
to average net
assets .......... 0.65% 0.65% 0.65% 0.76% 0.79% 0.78% 0.94% 0.89%
Ratio of net investment
income to average
net assets ...... 3.72% 2.61% 3.17% 5.33% 7.52% 8.49% 6.84% 6.81%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses prior
to the date of initial offering, the per share information is for a capital share outstanding for the period from
July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception date is May 16, 1991;
however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for the period from July 16, 1991 (initial
offering) through December 31, 1991. The International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since these Portfolios did not have any
investment activity or incur expenses prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 3, 1994 (initial offering) through December 31, 1994. Ratios
and portfolio turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
</TABLE>
<PAGE>
THE LIMITED-TERM BOND PORTFOLIO
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.1507
Net realized and
unrealized loss
on investments .. (0.1375)
-------
Total from investment
operations ....... 0.0132
-------
Less distributions:
Dividends from net
investment
income .......... (0.1507)
Distribution from
capital gains ... (0.0014)
-------
Total distributions (0.1521)
-------
Net asset value,
end of period .... $4.8611
=======
Total return........ 0.26%
Net assets, end of
period (000
omitted) ......... $1,645
Ratio of expenses
to average net
assets ............ 0.93%
Ratio of net investment
income to average
net assets ....... 5.89%
Portfolio turnover
rate ............. 93.83%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and
Growth Portfolio's inception date is December 2, 1986; however, since
these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from July 13, 1987 (initial
offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any
investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for
the period from July 16, 1991 (initial offering) through December 31,
1991. The International Portfolio, Small Cap Portfolio, Balanced
Portfolio and Limited-Term Bond Portfolio's inception date is April 28,
1994; however, since these Portfolios did not have any investment activity
or incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May 3,
1994 (initial offering) through December 31, 1994. Ratios and portfolio
turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
<PAGE>
THE BOND PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246 $5.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ........ 0.3507 0.3334 0.3643 0.3867 0.4025 0.4155 0.4088 0.1861
Net realized and
unrealized gain
(loss) on
investments ... (0.6652) 0.3046 0.0216 0.3771 (0.0715) 0.1397 (0.0394) (0.0249)
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ...... (0.3145) 0.6380 0.3859 0.7638 0.3310 0.5552 0.3694 0.1612
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment
income ........ (0.3507) (0.3334) (0.3643) (0.3867) (0.4025) (0.4155) (0.4088) (0.1861)
Distribution from
capital gains . 0.0000 (0.1627) (0.0251) (0.0644) (0.0000) (0.0000) (0.0000) (0.0505)
------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.3507) (0.4961) (0.3894) (0.4511) (0.4025) (0.4155) (0.4088) (0.2366)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ... $4.7393 $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246
======= ======= ======= ======= ======= ======= ======= =======
Total return ...... -5.90% 12.37% 7.67% 16.19% 7.03% 11.82% 7.74% 7.20%
Net assets, end of
period (000
omitted) ........ $74,017 $81,727 $49,428 $29,112 $16,464 $11,530 $6,465 $2,923
Ratio of expenses
to average net
assets .......... 0.62% 0.62% 0.64% 0.72% 0.78% 0.81% 0.96% 0.79%
Ratio of net investment
income to average
net assets ...... 6.73% 6.01% 6.91% 7.65% 8.05% 8.34% 8.17% 8.96%
Portfolio turnover
rate ............ 135.82% 68.75% 44.32% 52.50% 51.50% 42.83% 29.18% 187.93%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses prior
to the date of initial offering, the per share information is for a capital share outstanding for the period from
July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception date is May 16, 1991;
however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for the period from July 16, 1991 (initial
offering) through December 31, 1991. The International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since these Portfolios did not have any
investment activity or incur expenses prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 3, 1994 (initial offering) through December 31, 1994. Ratios and
portfolio turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
</TABLE>
<PAGE>
THE HIGH INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333 $5.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ........ 0.4106 0.3899 0.4050 0.4368 0.4346 0.5810 0.5263 0.2425
Net realized and
unrealized gain
(loss) on
investments ... (0.5255) 0.3487 0.2116 0.6703 (0.7221) (0.7549) 0.1595 (0.2667)
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ...... (0.1149) 0.7386 0.6166 1.1071 (0.2875) (0.1739) 0.6858 (0.0242)
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from
net investment
income ........ (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5263) (0.2425)
Distribution from
capital gains . (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0091) (0.0000)
------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5354) (0.2425)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period $4.1118 $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333
======= ======= ======= ======= ======= ======= ======= =======
Total return ...... -2.55% 17.90% 15.70% 34.19% -7.44% -4.19% 15.14% -0.99%
Net assets, end of
period (000
omitted) ........ $72,644 $71,265 $41,456 $24,394 $13,868 $15,717 $12,779 $4,521
Ratio of expenses
to average net
assets .......... 0.74% 0.75% 0.77% 0.87% 0.90% 0.82% 0.91% 0.79%
Ratio of net investment
income to average
net assets ...... 9.03% 8.66% 9.48% 11.32% 11.55% 12.54% 10.85% 10.70%
Portfolio turnover
rate ............ 37.86% 54.22% 60.79% 34.00% 12.21% 74.97% 46.75% 7.09%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses prior
to the date of initial offering, the per share information is for a capital share outstanding for the period from
July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception date is May 16, 1991;
however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for the period from July 16, 1991 (initial
offering) through December 31, 1991. The International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since these Portfolios did not have any
investment activity or incur expenses prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 3, 1994 (initial offering) through December 31, 1994. Ratios
and portfolio turnover rates have been annualized.
The Asset Strategy Portfolio was created in 1995.
Information regarding the performance of the Portfolios is contained in the
Fund's annual report to shareholders which may be obtained without charge
by request to the Fund at the address or phone number shown on the cover of
this Prospectus.
</TABLE>
<PAGE>
THE FUND
The Fund is a series fund consisting of ten Portfolios: the Money
Market Portfolio, the Bond Portfolio, the High Income Portfolio, the Growth
Portfolio, the Income Portfolio, the International Portfolio, the Small Cap
Portfolio, the Balanced Portfolio, the Limited-Term Bond Portfolio and the
Asset Strategy Portfolio (individually or collectively hereinafter referred
to as "a Portfolio" or "the Portfolios"). The Fund is the funding or
investment vehicle for variable life insurance policies and variable
annuity policies (hereinafter collectively referred to as the "Policies")
offered by the separate accounts of certain life insurance companies
("Participating Insurance Companies"). As of the date of this Prospectus
the only Participating Insurance Company is United Investors Life Insurance
Company. The Policies are described in the accompanying prospectus issued
by the Participating Insurance Company. The Fund assumes no responsibility
for such prospectus.
The Fund does not perceive any risks to the Policyowners resulting
from the use of the same funding vehicle for both annuity and life
insurance policies nor any disadvantages to Policyowners arising from the
fact that the interests of annuity and life insurance Policyowners may
differ. Nevertheless, the Board of Directors will monitor events in order
to identify any material, irreconcilable conflict in the interests of such
Policyowners which may arise.
The individual Policyowners are not direct shareholders of the Fund.
Rather, the Participating Insurance Companies and their separate accounts
are the actual shareholders. To the extent required by law, Policyowners
are entitled to give voting instructions with respect to Fund shares held
in the separate accounts of the Participating Insurance Companies.
Performance Information
From time to time advertisements or information furnished may include
performance data. Performance may be shown by presenting one or more
performance measurements, including yield, total return and performance
rankings. Performance data will be accompanied by or used in calculating
performance data for the respective separate accounts that invest in the
Portfolio.
Bond Portfolio, High Income Portfolio, Growth Portfolio, Income Portfolio,
Limited-Term Bond Portfolio
A Portfolio's (other than Money Market Portfolio) yield is based on a
30-day period ending on a specific date and is computed by dividing the
Portfolio's net investment income per share earned during the period by the
Portfolio's maximum offering price per share on the last day of the period.
Bond Portfolio, High Income Portfolio, Growth Portfolio, Income Portfolio,
International Portfolio, Small Cap Portfolio, Balanced Portfolio, Limited-
Term Bond Portfolio
A Portfolio's total return is its overall change in value for the
period shown including the effect of reinvesting dividends and capital
gains distributions and any change in the net asset value per share. A
cumulative total return reflects the Portfolio's change in value over a
stated period of time. An average annual total return reflects the
hypothetical annually compounded return that would have produced the
cumulative total return for a stated period if the Portfolio's performance
had been constant during each year of that period. Average annual total
returns are not actual year-by-year results and investors should realize
that total returns will fluctuate. No sales charge is required to be paid
by the Participating Insurance Companies for purchase of Portfolio shares.
The Fund may also provide non-standardized performance information.
Money Market Portfolio
The "current yield" of the Money Market Portfolio refers to the income
generated by an investment in the Portfolio over a stated seven-day period.
This income is then "annualized." That is, the amount of income generated
by the investment during that period is assumed to be generated each week
over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Portfolio is assumed to be reinvested. The
"effective yield" will be slightly higher than the "current yield" because
of the compounding effect of the assumed reinvestment.
General
From time to time advertisements and information furnished to present
or prospective Policyholders may include performance rankings as published
by recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. A Portfolio's performance may also be
compared to that of other selected mutual funds or selected recognized
market indicators. Performance information may be quoted numerically or
presented in a table, graph or other illustration.
All performance information included in advertisements or information
provided to present or prospective Policyholders is historical in nature
and is not intended to represent or guarantee future results. Yield
information cannot necessarily be used to compare Portfolio shares with
investment alternatives which provide fixed yields, such as bank accounts
(which accounts may be insured), or with yields of similar investment
companies which may be computed in a different manner. An investment in
Portfolio shares is not insured. The value of any Portfolio's shares when
redeemed may be more or less than their original cost. See the SAI for
total return and yield and methods of computation.
INVESTMENT GOALS AND POLICIES OF THE PORTFOLIOS
Each of the ten Portfolios has a different investment goal which it
pursues through separate investment policies which are described below.
The different goals of the Portfolios and the different investment policies
utilized by each Portfolio in attempting to achieve its goal can be
expected to affect the degree of market and financial risk to which each
Portfolio is subject as well as the return of each Portfolio. There can be
no assurance that a Portfolio will achieve its goals; some market risks are
inherent in all securities to varying degrees.
The investment goals, policies and restrictions of each Portfolio may,
unless otherwise specifically stated, be changed by the Directors of the
Fund without a vote of the shareholders. In addition to the investment
policies for each Portfolio discussed below, each Portfolio may engage in
certain other investment strategies described under "Investment Policies
Common to the Ten Portfolios." Additional information concerning
investment policies may be found in the SAI.
The Money Market Portfolio
The goal of this Portfolio is maximum current income consistent with
stability of principal. The Portfolio seeks to achieve this goal by
investing in money market securities such as commercial paper, including
variable amount master demand notes, corporate debt obligations, bank
obligations of domestic and foreign banks and foreign branches of domestic
banks and instruments secured by bank obligations, obligations of the U.S.
and Canadian governments or their respective agencies and instrumentalities
and repurchase agreements.
Investments are limited to those that are dollar denominated and that
are rated in one of the two highest rating categories by the requisite
nationally recognized statistical rating organization(s) or are comparable
unrated securities. See Appendix A to this Prospectus for a description of
some of these ratings. Investments in the securities of any one issuer
(except U.S. Government Securities) are limited to no more than 5% of the
Portfolio's assets. Investments in securities rated in the second highest
rating category by the requisite rating organization(s) or comparable
unrated securities are limited to no more than 5% of the Portfolio's
assets, with investments in such securities of any one issuer (except U.S.
Government Securities) being limited to the greater of one percent of the
Portfolio's assets or $1,000,000. The Portfolio may only invest in
securities with a remaining maturity of not more than thirteen months.
The Portfolio seeks to maintain a constant net asset value of $1.00
per share, although this may not always be possible. It uses the amortized
cost method of securities valuation. The Portfolio's income fluctuates
with changes in prevailing interest rates and there is no assurance that
its goal will be achieved. See the SAI for a discussion of the valuation
method.
The Bond Portfolio
The goal of this Portfolio is to provide current income with an
emphasis on preservation of capital. It ordinarily invests at least 65% of
its assets in debt securities of varying yields, quality and maturities.
In selecting debt securities for this Portfolio, the Fund's
Manager, Waddell & Reed Investment Management Company (the "Manager"),
considers yield and relative safety and, in the case of convertible
securities, the possibility of capital growth. The Portfolio may not
purchase any securities other than debt securities if after such purchase
more than 10% of its total assets would be invested in non-debt securities.
However, this 10% limit does not include any non-debt securities held as a
result of conversion of a debt security or exercise of a warrant. The
Portfolio may invest in debt securities rated in any rating category of the
established rating services and unrated securities judged by the Manager to
be of equivalent quality. See "Risk Factors of High-Yield Investing" for a
discussion of the risks associated with non-investment grade debt
securities.
The Portfolio may invest a significant, but varying, percentage of its
assets in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government Securities"). See
"Investment Policies Common to the Ten Portfolios" for a further discussion
of the Portfolio's ability to invest in U.S. Government Securities. Under
unusual market or economic conditions, for temporary defensive purposes,
the Portfolio may invest up to all of its assets in cash or cash
equivalents. Taking a defensive position might result in a lower
yield.
The Portfolio is actively managed and may have a turnover rate in
excess of 200% which will result in correspondingly high commission
expenses and transaction costs and may result in certain tax consequences.
In determining what proportion of the Portfolio will be invested in what
type and quality of securities the Manager considers what investments will
be most effective in achieving the Portfolio's goal. The proportions may
vary depending upon the outlook for the economy and the securities markets,
the quality of available investments, the level of interest rates, the
ability to preserve capital and other factors.
The Portfolio's income will vary and the net asset value of its shares
will increase or decrease with changes in the market prices of its
investments. Market prices of debt securities will increase or decrease
depending in large part on changes in prevailing interest rates. If
interest rates increase, the value of debt securities is likely to go down;
if rates decrease the value may go up. There is no assurance that the goal
of the Bond Portfolio will be achieved.
The High Income Portfolio
The primary goal of this Portfolio is high current income; as a
secondary goal it seeks capital growth when consistent with the primary
goal. The Portfolio attempts to achieve these goals by investing primarily
in a diversified portfolio of high-yield, high-risk fixed income
securities. These include corporate bonds and notes, convertible
securities and preferred stocks which are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's
Investors Service, Inc. ("MIS") or BBB or lower by Standard and Poor's
Ratings Group ("S&P")), or are unrated securities which are, in the opinion
of the Manager, of similar quality to rated bonds in these categories. The
Portfolio may invest in debt securities rated in any rating category of the
established rating services and unrated securities judged by the Manager to
be of equivalent quality. See Appendix A to this Prospectus for a
description of bond ratings. See "Risk Factors of High-Yield Investing"
for a discussion of the risks associated with non-investment grade debt
securities.
Under normal market conditions at least 65% of the value of the
Portfolio's total assets will be invested to seek a high level of current
income, which securities may include high-yield, high-risk securities. A
portion of the Portfolio's assets may be invested in common stocks;
however, the Portfolio will not purchase any common stocks if after such
purchase more than 20% of the value of its total assets would be invested
in common stocks. This 20% limit includes common stocks acquired on
conversion of convertible securities, on exercise of warrants or call
options or in any other voluntary manner. The Portfolio will invest in
common stocks in order to attempt to achieve either a combination of its
primary and secondary goals, in which case the common stocks will be
dividend-paying, or to achieve its secondary goal, in which case the common
stocks may not pay dividends. The Portfolio does not anticipate investing
more than 4% of its total assets in non-dividend-paying common stocks.
Under unusual market or economic conditions, for temporary defensive
purposes, the Portfolio may invest up to all of its assets in (i) higher-
rated securities if the Manager believes that the risk of loss of income
and principal may be reduced with a relatively small reduction in yield; or
(ii) cash or cash equivalents. Taking a defensive position might result in
a lower yield.
The Portfolio may invest in zero coupon securities. Although the
Manager does not believe that investing in such securities results in
material risks, such investing may jeopardize the Portfolio's ability to
meet its investment goals or meet the requirements of Subchapter M of the
Internal Revenue Code.
The Portfolio's income will vary and the net asset value of its shares
will increase or decrease with changes in the market prices of its
investments. There is no assurance that the goals of the High Income
Portfolio will be achieved. The Portfolio is actively managed and may have
a turnover rate in excess of 100% which will result in correspondingly
higher commission expenses and transaction costs and may result in certain
tax consequences.
The Growth Portfolio
The goal of this Portfolio is capital growth with current income as a
secondary goal. It seeks to achieve these goals by investing in common
stocks or securities convertible into common stocks. The Portfolio is free
to invest in a wide range of marketable securities offering the potential
for growth. This enables it to pursue investment values in various sectors
of the market.
Under unusual market or economic conditions, for temporary defensive
purposes, the Portfolio may invest up to all of its assets in cash or fixed
income securities or in common stocks chosen for their relative stability
rather than for growth potential. Taking a defensive position might result
in a lower yield.
As an operating (i.e., nonfundamental) policy, the Portfolio does
not intend to invest in non-investment grade debt securities if as a result
of such investment more than 5% of its assets would consist of such
investments. Subject to this limitation, the Portfolio may invest in debt
securities rated in any rating category of the established rating
services.
The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the investments held by the
Portfolio. There is no assurance that the goals of the Portfolio will be
achieved. The Portfolio is actively managed and may have a turnover rate
in excess of 200% which will result in correspondingly higher commission
expenses and transaction costs and may result in certain tax consequences.
The Income Portfolio
The goal of this Portfolio is the maintenance of current income,
subject to market conditions. It seeks to achieve this goal by investing
primarily in common stocks, or securities convertible into common stocks,
of companies which have the potential for capital growth or which may be
expected to resist market decline. When investment conditions are such
that stocks with high yields are less attractive than other common stocks,
lower yielding common stocks may be held because of their prospects for
appreciation. At other times, the Portfolio may seek to achieve this goal
by holding cash or investing in debt securities and preferred stocks when
the return on these securities is attractive relative to the return on
common stocks. As an operating (i.e., nonfundamental) policy, this
Portfolio does not intend to invest in non-investment grade debt securities
if as a result of such investment more than 5% of its assets would consist
of such investments. Subject to this limitation, the Portfolio may invest
in debt securities rated in any rating category of the established ratings
services.
The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the investments held by the
Portfolio. There is no assurance that the goal of the Portfolio will be
achieved. The Portfolio may have a portfolio turnover rate which will
result in correspondingly greater commission expenses and transaction costs
and may result in certain tax consequences.
The International Portfolio
The primary goal of the Portfolio is the long-term appreciation of
capital. Current income is a secondary goal. The Portfolio seeks to
achieve these goals by investing primarily in securities issued by
companies or governments of any nation. The securities selected to attempt
to achieve the Portfolio's primary goal are those issued by companies which
the Manager believes have the potential for long-term growth. There are
three main kinds of securities that the Portfolio may own: common stocks,
preferred stocks and debt securities. Securities purchased because they
may increase in value over the long term will usually be common stocks,
securities which may be converted into common stocks or rights for the
purchase of common stocks.
Under unusual market or economic conditions, for temporary defensive
purposes, up to all of the Portfolio's assets may be invested in either
debt securities (including commercial paper or short-term U.S. Government
securities) or preferred stocks or both. Taking a defensive position may
result in a lower yield.
As an operating (i.e., nonfundamental) policy, the Portfolio does
not intend to invest in non-investment grade debt securities if as a result
of such investment more than 5% of its assets would consist of such
investments. Subject to this limitation, the Portfolio may invest in debt
securities rated in any rating category of the established ratings
services. The Portfolio will not invest more than 5% of its assets, taken
at market value at the time of investment, in companies, including
predecessors, with less than three years continuous operation. The
Portfolio may buy shares of other investment companies which do not redeem
their shares, subject to the conditions stated in the SAI.
All or a substantial portion of the Portfolio's assets may be invested
in foreign securities if, in the opinion of the Manager, doing so might
assist in achieving the Portfolio's goal. The Portfolio may purchase
restricted foreign securities provided that after such purchase not more
than 5% of its assets consist of such securities. See "Investment Policies
Common to the Ten Portfolios" for a further discussion of the Portfolio's
ability to invest in foreign securities.
The Portfolio's income will vary and the net asset value of its shares
will increase or decrease with changes in the market prices of its
investments. There is no assurance that the goals of the Portfolio will be
achieved. The Portfolio may have a turnover rate in excess of 100% which
will result in correspondingly higher commission expenses and transaction
costs and may result in certain tax consequences. The ability to invest
all or a substantial amount of the Portfolio's assets in foreign securities
may result in a higher turnover rate and higher costs.
The Small Cap Portfolio
The goal of the Small Cap Portfolio is to seek the growth of capital.
The Portfolio seeks to achieve this goal through a diversified holding of
securities, primarily in the common stocks of, or securities convertible
into the common stocks of, companies which are relatively new or
unseasoned, in their early stages of development or smaller and positioned
in new and emerging industries where the opportunity for rapid growth is
above average. Under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in those companies which have
market capitalization of up to $500,000,000 as of the company's latest
annual report. Subject to such limitations, the Portfolio may occasionally
invest in securities of larger companies which are being fundamentally
changed and revitalized or have a position which is considered strong
relative to the market as a whole or which otherwise offer unusual
opportunities for above-average growth. There are three main kinds of
securities that the Portfolio may own: common stocks, preferred stocks and
debt securities.
Under unusual market or economic conditions, for temporary defensive
purposes, up to all of the assets of the Portfolio may be invested in
either debt securities (including commercial paper or short-term U.S.
Government Securities) or preferred stocks or both. Taking a defensive
position may result in a lower yield.
The Portfolio may buy shares of other investment companies which do
not redeem their shares, subject to the conditions stated in the SAI. The
Portfolio may purchase foreign securities as described in this Prospectus
and the SAI. The Portfolio will not invest more than 5% of its assets,
taken at market value at the time of investment, in companies, including
predecessors, with less than three years continuous operation.
As an operating (i.e., nonfundamental) policy, the Portfolio does
not intend to invest in non-investment grade debt securities if as a result
of such investment more than 5% of its assets would consist of such
investments. Subject to this limitation, the Portfolio may invest in debt
securities rated in any rating category of the established ratings
services. The Portfolio may borrow money on an unsecured basis in order to
purchase securities which increases both investment opportunity and risk.
Since substantially all of the Portfolio's assets fluctuate in value, but
borrowing obligations are fixed, net asset value per share will tend to
correspondingly increase or decrease more when the portfolio assets
increase or decrease in value, a factor known as leveraging. The Portfolio
may borrow money only to the extent that the value of its assets, less its
liabilities other than borrowing, is equal to at least 300% of all
borrowings including the proposed borrowing.
The Portfolio is designed for investors who are willing to accept
greater risks than are present with many other mutual funds. It is not
intended for those investors who desire assured income and conservation of
capital. The Portfolio ordinarily invests in securities whose market price
often is subject to rapid and wide fluctuation. In selecting companies,
the Manager may look for such characteristics as aggressive or creative
management, technological or specialized expertise, new or unique products
or services, entry into new or emerging industries and special situations
arising out of governmental priorities and programs. Certain risks are
associated with securities of companies which are relatively new or
unseasoned, in their early stages of development or smaller companies
positioned in new or emerging industries where the opportunity for growth
is above average, including potential greater volatility in share price due
to the less established nature of the companies.
The Portfolio's income will vary and the net asset value of its shares
will increase or decrease with changes in the market prices of its
investments. There is no assurance that the goal of the Portfolio will be
achieved. The Portfolio may have a turnover rate in excess of 100% which
will result in correspondingly higher commission expenses and transaction
costs and may result in certain tax consequences.
The Balanced Portfolio
The primary goal of the Portfolio is to provide current income to the
extent that, in the opinion of the Manager, market and economic conditions
permit. Secondarily, the Portfolio seeks long-term appreciation of
capital. The Portfolio usually will purchase securities because of the
dividends and interest paid on them and may also purchase securities
because they may increase in value. There are three main kinds of
securities that the Portfolio may own: debt securities, common stocks and
preferred stocks. The Portfolio will ordinarily have at least 25% of its
total assets invested in fixed income senior securities. Under unusual
market or economic conditions, for temporary defensive purposes, the
Portfolio may have up to all of its assets invested in common stock or
other securities which are not fixed income senior securities or both.
Taking a defensive position may result in a lower yield.
As an operating (i.e., nonfundamental) policy, the Portfolio does
not intend to invest in non-investment grade debt securities if as a result
of such investment more than 5% of its assets would consist of such
investments. Subject to this limitation, the Portfolio may invest in debt
securities rated in any rating category of the established ratings
services. The Portfolio may buy shares of other investment companies which
do not redeem their shares, subject to the conditions stated in the
SAI.
The Portfolio's income will vary and the net asset value of its shares
will increase or decrease with changes in the market prices of its
investments. There is no assurance that the goals of the Portfolio will be
achieved. The Portfolio may have a turnover rate in excess of 100% which
will result in correspondingly higher commission expenses and transaction
costs and may result in certain tax consequences.
The Limited-Term Bond Portfolio
The goal of Limited-Term Bond Portfolio is to provide a high level of
current income consistent with preservation of capital by investing
primarily in debt securities of investment grade (subject to the policy
regarding non-investment grade securities described below), including U.S.
Government Securities. "Limited-Term" means that the Portfolio will
maintain a dollar weighted average maturity of its portfolio of not less
than two years and not more than five years. The maturity of
collateralized mortgage obligations ("CMOs") and other asset backed
securities will be deemed to be the estimated average life of such
securities, as determined in accordance with certain prescribed models or
formulas, such as those provided by the Public Securities Association. The
maturity of other debt securities will be deemed to be the earlier of the
call date or the maturity date, whichever is appropriate. The debt
securities, other than U.S. Government Securities, in which the Portfolio
may invest include, without limitation, corporate bonds, medium-term notes,
asset-backed securities (such as mortgage-backed securities) and other
financial obligations which are commonly considered debt, all of which
securities will be denominated in U.S. dollars. At least 65% of the
Portfolio's total assets during normal market conditions will be invested
in debt securities. The Portfolio intends to invest a significant
percentage of its net assets in CMOs. Subject to the Portfolio's other
policies, the two main kinds of securities that the Portfolio may own are
common stocks and debt securities. It may also own convertible securities,
including convertible preferred stock in certain circumstances.
Under unusual market or economic conditions, for temporary defensive
purposes, the Portfolio may, with respect to up to all of its assets: (i)
shorten the average maturity of the Portfolio's portfolio; (ii) hold cash
or cash equivalents; (iii) emphasize debt securities of a higher quality
than those the Portfolio would ordinarily hold; or (iv) invest in
convertible preferred stock. Taking a defensive position may result in a
lower yield.
As an operating (i.e., nonfundamental) policy, the Portfolio does
not intend to invest in non-investment grade debt securities if as a result
of such investment more than 5% of its assets would consist of such
investments. Subject to this limitation, the Portfolio may invest in debt
securities rated in any rating category of the established ratings
services. The Portfolio will not invest more than 5% of its assets, taken
at market value at the time of investment, in companies, including
predecessors, with less than three years continuous operation.
The Portfolio's income will vary and the net asset value of its shares
will increase or decrease with changes in the market prices of its
investments. There is no assurance that the goal of the Portfolio will be
achieved. The Portfolio may have a turnover rate in excess of 300% which
will result in correspondingly higher commission expenses and transaction
costs and may result in certain tax consequences.
The Asset Strategy Portfolio
The goal of Asset Strategy Portfolio is high total return with reduced
risk over the long term. The Portfolio seeks to achieve this goal by
allocating its assets among stocks, bonds, and short-term instruments.
Allocating assets among different types of investments allows the Portfolio
to take advantage of opportunities wherever they may occur, but also
subjects the Portfolio to the risks of a given investment type. Stock
values generally fluctuate in response to the activities of individual
companies and general market and economic conditions. The value of bonds
and short-term instruments generally fluctuates based on changes in
interest rates and in the credit quality of the issuer. The Manager
regularly reviews Asset Strategy Portfolio's allocation of assets and makes
changes to favor investments that it believes provide the most favorable
outlook for achieving the Portfolio's goal.
The Portfolio allocates its assets among the following classes, or
types, of investments. The stock class includes equity securities of all
types. The bond class includes all varieties of fixed-income instruments
with maturities of more than three years (including adjustable rate
preferred stocks) and U.S. Government Securities. The short-term class
includes all types of short-term instruments with remaining maturities of
three years or less. Within each of these classes, the Portfolio may
aggressively invest in both domestic and foreign securities.
The Manager has the ability to allocate the Portfolio's assets within
specified ranges. The Portfolio's mix indicates the benchmark for its
combination of investments in each class over time. The Manager may change
the mix within the specified ranges from time to time. The range and
approximate percentage of the mix for each asset class are shown below.
Some types of investments, such as indexed securities, can fall into more
than one asset class. The Portfolio may also make other investments that
do not fall within these classes if the Manager believes that doing so will
help the Portfolio achieve its goal.
Mix Range
------------- ------
Stock class 10-60%
40%
Bond class 20-60%
40%
Short-term class 0-70%
20%
The Portfolio's approach spreads the Portfolio's assets among all
three classes, attempting to moderate the risk potential of stocks, bonds,
and short-term instruments. In pursuit of the Portfolio's goal, the
Manager will not try to pinpoint the precise moment when a major
reallocation should be made. Asset shifts among classes may be made
gradually over time. Under normal circumstances, a single reallocation
will not involve more than 10% of the Portfolio's total assets.
The Portfolio may not invest more than 35% of its assets in lower-
quality debt securities (those rated below BBB by S&P or Baa by MIS and
unrated securities judged by the Manager to be of equivalent quality).
However, the Portfolio does not currently intend to invest more than 20% of
its total assets in securities rated below investment-grade or judged by
the Manager to be of equivalent quality. Subject to these limitations, the
Portfolio may invest in debt securities rated in any rating category of the
established rating services and unrated securities judged by the Manager to
be of equivalent quality. See "Risk Factors of High-Yield Investing" for a
discussion of the risks associated with non-investment grade debt
securities. The Portfolio does not currently intend to invest in money-
market instruments rated below A-1 by S&P or Prime 1 by MIS, or judged by
the Manager to be of equivalent quality. The Portfolio may invest in
preferred stock rated in any rating category by an established rating
service and unrated preferred stock judged by the Manager to be of
equivalent quality.
The Portfolio may invest in zero coupon bonds. Although the Manager
does not believe that investing in such securities results in material
risks, such investing may jeopardize the Portfolio's ability to meet its
investment goals or meet the requirements of Subchapter M of the Internal
Revenue Code.
The Portfolio may borrow from banks. As a fundamental policy, the
Portfolio may borrow only for emergency or extraordinary purposes, but not
in an amount exceeding 33 1/3% of its total assets. The Portfolio may not
invest more than 5% of its assets taken at market value at the time of
investment in companies, including predecessors, with less than three years
continuous operation. The Portfolio may buy shares of other investment
companies that do not redeem their shares, subject to certain conditions
explained in the SAI.
The Manager normally invests the Portfolio's assets according to its
investment strategy; however, as a temporary defensive measure at times
when the Manager believes that stocks, bonds and certain short-term
instruments do not offer a good investment opportunity, it may temporarily
invest up to all of the Portfolio's assets in money market instruments
rated A-1 by S&P or Prime 1 by MIS, or unrated securities judged by the
Manager to be of equivalent quality.
The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the investments held by the
Portfolio. There is no assurance that the goals of the Portfolio will be
achieved. The Asset Strategy Portfolio cannot precisely predict what its
portfolio turnover rates will be; however, it is anticipated that the
annual turnover rate for the common stock portion of its portfolio will not
exceed 200% and the annual turnover rate for the other portion of its
portfolio will not exceed 200%.
The Asset Strategy Portfolio diversifies across investment types more
than most mutual funds. No one mutual fund, however, can provide an
appropriate balanced investment plan for all investors.
Investment Policies Common to the Ten Portfolios
Except as otherwise noted, the investment policies described below are
applicable to each of the ten Portfolios.
Repurchase Agreements
A repurchase agreement is an instrument under which a Portfolio
purchases a security and the seller of that security agrees, at the time of
purchase, that it will repurchase the security at a specified time and
price. The amount by which the resale price is greater than the purchase
price reflects an agreed-upon market interest rate for the period of the
agreement. A Portfolio may enter into repurchase agreements as a means of
increasing income. The primary risk is that the Portfolio may suffer a
loss if the seller fails to pay the agreed-upon amount on the delivery date
and that amount is greater than the resale price of the underlying
securities and other collateral held by the Portfolio. Repurchase
agreements are entered into only with those issuers approved on the basis
of criteria established by the Board of Directors. Each of the Portfolios
may purchase securities subject to repurchase agreements subject to its
limitation on investment in illiquid securities, which include repurchase
agreements not terminable within seven days.
Options, Futures and Other Strategies
As described below, certain of the Portfolios may use certain options,
forward currency contracts and indexed securities to attempt to enhance
income or yield or may attempt to reduce the overall risk of their
investments by using certain options, futures contracts, forward currency
contracts, and certain other strategies described herein. The strategies
described below may be used in an attempt to manage the risks of a
Portfolio's investments that can affect fluctuation in its net asset value.
The Asset Strategy Portfolio may also use various techniques to
increase or decrease its exposure to changing security prices, interest
rates, currency exchange rates, commodity prices, or other factors that
affect security values. These techniques may involve derivative
transactions such as buying and selling options and futures contracts,
entering into forward currency contracts or swap agreements, and purchasing
indexed securities. However, the Asset Strategy Portfolio does not intend
to invest more than 50% of its total assets in a combination of forward
currency contracts, swap agreements, mortgage-backed securities, asset-
backed securities, stripped securities, zero-coupon securities and when-
issued and delayed-delivery transactions.
A Portfolio's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. A Portfolio might
not use any of these strategies, and there can be no assurance that any
strategy that is used will succeed. The risks associated with such
strategies are described below. Also see the SAI for more information on
these strategies and risk considerations relating thereto.
Options and Futures. A call option gives the purchaser the right to
buy, and obligates the writer to sell, the underlying investment at the
agreed upon exercise price during the option period. A put option gives
the purchaser the right to sell, and obligates the writer to buy, the
underlying investment at the agreed upon exercise price during the option
period. Purchasers of options pay an amount, known as a premium, to the
option writer in exchange for the right under the option contract.
The Bond Portfolio, High Income Portfolio, Growth Portfolio and Income
Portfolio may each write (sell) covered call options on securities on up to
25% of its assets. The International Portfolio may write (sell) covered
call options on securities on no more than 10% of its total assets.
"Covered" means that the Portfolio owns the securities subject to the call
or has the right to acquire them without additional payment. Each of these
Portfolios may purchase a call option on a security only to close its
position in a call it has written. Calls written by these Portfolios must
be listed on a domestic securities exchange; however, the Bond Portfolio,
High Income Portfolio, Growth Portfolio and Income Portfolio may write
over-the-counter ("OTC") calls on U.S. Government Securities. Writing
calls may increase each of these Portfolio's turnover rates and result in
higher brokerage commissions.
The Small Cap Portfolio and Balanced Portfolio may each write (sell)
covered call options on securities on not more than 25% of its total assets
and may each purchase calls and write and purchase puts on securities in
which the Portfolio may invest. Calls written by these Portfolios must be
listed on a domestic securities exchange. Each of these Portfolios may
only purchase or sell options on securities issued by the Options Clearing
Corporation ("OCC"), except that each may write OTC put options and
purchase OTC put and call options on U.S. Government Securities and may
purchase optional delivery standby commitments.
The Limited-Term Bond Portfolio may write (sell) and purchase listed
and OTC options on domestic debt securities, which securities include,
without limitation, U.S. Government Securities ("Domestic Debt
Securities"). The Limited-Term Bond Portfolio may not write call options
having aggregate exercise prices greater than 25% of its net assets.
Each Portfolio (other than the Money Market Portfolio) may write
options on securities for the purpose of increasing income in the form of
premiums paid by the purchaser of the options. While writing covered calls
may result in the realization of income, the Portfolio will lose the
opportunity to profit from an increase in the price of the security subject
to the call over the exercise price. When one of these Portfolios (other
than the Asset Strategy Portfolio) writes a put, it will maintain
designated cash or readily marketable assets adequate to purchase the
related investments should the put be exercised. In writing puts, the
Portfolio assumes the risk of loss should the market value of the
underlying security decline below the exercise price at which the Portfolio
is obligated to purchase the security.
The Small Cap Portfolio, Balanced Portfolio and Limited-Term Bond
Portfolio may each purchase calls to take advantage of an expected rise in
the market value of securities and to close positions in calls it has
written. Each may purchase puts on related investments it owns
("protective puts") or on related investments it does not own
("nonprotective puts"). Buying a protective put permits the Portfolio to
protect itself during the put period against a decline in the value of the
related investments below the exercise price by selling them through the
exercise of the put. Buying a nonprotective put permits the Portfolio, if
the market price of the related investments is below the put price during
the put period, either to resell the put or to buy the related investments
and sell them at the exercise price. Each of these Portfolios may also
purchase puts to close positions in puts it has written. If an option
purchased by a Portfolio is not exercised or sold, it will become worthless
at its expiration date and the Portfolio will lose the amount of the
premium it paid.
Each of the Small Cap Portfolio and Balanced Portfolio may also write
(sell) and purchase listed options on stock indices that are not limited to
stocks of any industry or group of industries ("broadly-based stock
indices"). Each may write options on broadly-based stock indices to
generate income. Each may purchase calls on broadly-based stock indices to
hedge against an anticipated increase in the price of securities it wishes
to acquire and may purchase puts on broadly-based stock indices to hedge
against an anticipated decline in the market value of its portfolio
securities. Because stock index options are settled in cash, a Portfolio
cannot provide in advance for its potential settlement obligations on a
call it has written on a stock index by holding the underlying securities.
Each Portfolio bears the risk that the value of the securities it holds
will vary from the value of the index.
There is no limitation on the types of options that the Asset
Strategy Portfolio may purchase and sell. See the SAI for the limitations
on the Asset Strategy Portfolio's use of options.
Options offer large amounts of leverage, which will result in a
Portfolio's net asset value being more sensitive to changes in the value of
the related investment. There is no assurance that a liquid secondary
market will exist for exchange-listed options. The market for options that
are not listed on an exchange may be less active than the market for
exchange-listed options. If a Portfolio is not able to enter into a
closing transaction on an option it has written, it will be required to
maintain the securities, or cash in the case of an option on a stock index,
subject to the call or the collateral underlying the put until a closing
transaction can be entered into or the option expires. Option transactions
may increase the portfolio turnover rate creating greater commission
expenses and transaction costs.
When a Portfolio purchases a futures contract, it incurs an
obligation to take delivery of a specified amount of the obligation
underlying the contract at a specified time in the future for a specified
price. When a Portfolio sells a futures contract it incurs an obligation
to deliver the specified amount of the underlying obligation at a specified
time in return for an agreed upon price.
When a Portfolio writes an option on a futures contract it becomes
obligated, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time during the term
of the option. If a Portfolio has written a call it assumes a short
futures position. If it has written a put it assumes a long futures
position. When a Portfolio purchases an option on a futures contract it
acquires a right in return for the premium it pays to assume a position in
a futures contract (a long position if the option is a call and a short
position if the option is a put).
Each of the Small Cap Portfolio and Balanced Portfolio may buy and
sell futures contracts on debt securities ("Debt Futures"), futures
contracts on broadly-based stock indices ("Stock Index Futures"), and
options on Debt Futures and Stock Index Futures. The Limited-Term Bond
Portfolio may buy and sell futures on Domestic Debt Securities ("Domestic
Debt Futures") and options on Domestic Debt Futures. Each of these
Portfolios may purchase or sell futures contracts and options thereon for
the purpose of hedging against changes in the market value of its portfolio
securities or changes in the market value of securities that the Manager
anticipates it may wish to include in the Portfolio's portfolio. Each of
these Portfolios may write options on futures contracts to increase income.
The Limited-Term Bond Portfolio may not purchase or sell options on
securities, futures contracts or options on futures contracts if the
aggregate value of such options and futures held by that Portfolio would
exceed 25% of its assets.
Each of the Small Cap Portfolio and Balanced Portfolio may not
purchase options on securities or futures contracts if the aggregate value
of the premiums paid (adjusted for the portion of any premium attributable
to the difference between the "strike price" of the option and the market
price of the underlying security or futures contract at the time of
purchase) exceeds 20% of the Portfolio's total assets. The aggregate
amount of the obligations underlying put options on securities or futures
contracts written by each of the Small Cap Portfolio and Balanced Portfolio
may not exceed 25% of its net assets computed at the time of sale.
See the SAI for the limitations on the Asset Strategy Portfolio's
use of futures contracts and options on futures contracts.
Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which a Portfolio invests without
the large cash investments required for dealing in such markets, they may
subject the Portfolio to greater and more volatile risks than might
otherwise be the case. The principal risks associated with the use of
options and futures are: (i) imperfect correlation between movements in
the market price of the portfolio investment (held or intended to be
purchased) being hedged and in the price of the futures contract or option;
(ii) possible lack of a liquid secondary market for closing out futures or
options positions; (iii) the need for additional portfolio management
skills and techniques; and (iv) losses due to unanticipated market price
movements. For a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security being
hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment
that is being hedged. The Manager will attempt to create a closely
correlated hedge, but hedging activity may not be completely successful in
eliminating market value fluctuation. The ordinary spreads between prices
in the cash and futures markets, due to differences in the nature of those
markets, are subject to distortion. Due to the possibility of distortion,
a correct forecast of interest rate or stock market trends by the Manager
may still not result in a successful transaction. The Manager may be
incorrect in its expectations as to the extent of various interest rate or
stock market movements or the time span within which the movements take
place. See the SAI for further information about these instruments and
their risks.
Forward Currency Exchange Contracts. A forward currency contract
is an obligation to purchase or sell a specific currency at a future date
at a fixed price. The International Portfolio may enter into forward
currency contracts provided that it does not thereafter have more than 15%
of its assets committed to the consummation of such contracts; however, it
will not enter into forward currency contracts or maintain a net exposure
to such forward currency contracts where the consummation of the forward
currency contracts would obligate the International Portfolio to deliver an
amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. The International
Portfolio enters into forward currency contracts to attempt to protect
against losses that may result from changes in the value of currencies but
at the same time forward currency contracts tend to limit any potential
gain that might result from currency changes.
The Asset Strategy Portfolio may enter into forward currency contracts
for the purchase or sale of a specified currency at a specified future date
either with respect to specific transactions or with respect to portfolio
positions in order to minimize the risk to the Portfolio from adverse
changes in the relationship between the U.S. dollar and foreign currencies.
For example, when the Manager anticipates purchasing or selling a security,
the Portfolio may enter into a forward currency contract in order to set
the exchange rate at which the transaction will be made. The Asset
Strategy Portfolio also may enter into a forward currency contract to sell
an amount of a foreign currency approximating the value of some or all of
the Portfolio's securities positions denominated in such currency. The
Asset Strategy Portfolio may also use forward currency contracts in one
currency or basket of currencies to attempt to hedge against fluctuations
in the value of securities denominated in a different currency if the
Manager anticipates that there will be a correlation between the two
currencies.
The Asset Strategy Portfolio may also use forward currency contracts
to shift the Portfolio exposure to foreign currency exchange rate changes
from one foreign currency to another. For example, if the Portfolio owns
securities denominated in a foreign currency and the Manager believes that
currency will decline relative to another currency, it might enter into a
forward contract to sell the appropriate amount of the first foreign
currency with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as
"cross hedging." Use of a different foreign currency magnifies the
Portfolio's exposure to foreign currency exchange rate fluctuations. The
Asset Strategy Portfolio may also purchase forward currency contracts to
enhance income when the Manager anticipates that the foreign currency will
appreciate in value, but securities denominated in that currency do not
present attractive investment opportunities.
The Asset Strategy Portfolio may purchase and sell foreign currency
and invest in foreign currency deposits. Currency conversion involves
dealer spreads and other costs, although commissions usually are not
charged.
Successful use of forward currency contracts will depend on the
Manager's skill in analyzing and predicting currency values. Forward
currency contracts may substantially change a Portfolio's investment
exposure to changes in currency exchange rates, and could result in losses
to the Portfolio if currencies do not perform as the Manager anticipates.
There is no assurance that the Manager's use of forward currency contracts
will be advantageous to a Portfolio or that it will hedge at an appropriate
time.
See the SAI for further information about these instruments and their
risks.
Swaps, Caps and Floors. The Limited-Term Bond Portfolio may enter
into interest rate swap transactions, and purchase or sell interest rate
caps and floors, with respect to domestic interest rates. These
transactions may only be entered into for hedging purposes. The Limited-
Term Bond Portfolio expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Limited-Term Bond Portfolio anticipates purchasing at a later date.
The Asset Strategy Portfolio is not limited in the type of swap, cap,
collar or floor it may enter into as long as the Manager determines it is
consistent with the Portfolio's investment goal and policies. Depending on
how they are used, the swap, cap, collar and floor agreements used by the
Asset Strategy Portfolio may increase or decrease the overall volatility of
its investments and its share price and yield. The most significant factor
in the performance of these agreements is the change in the specific
interest rate, currency, or other factors that determine the amounts of
payments due to and from the Portfolio.
Swaps involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of a cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined value, to receive payments on a notional principal amount
from the party selling such cap. The purchase of a floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
value, to receive payments on a notional principal amount from the party
selling such floor. An interest rate collar combines elements of buying a
cap and selling a floor.
A Portfolio usually will enter into swaps on a net basis, i.e., the
two payment streams are netted out, with the Portfolio receiving or paying,
as the case may be, only the net amount of the two payments. If, however,
an agreement calls for payments by a Portfolio, the Portfolio must be
prepared to make such payments when due. The creditworthiness of firms
with which a Portfolio enters into swaps, caps, collars or floors will be
monitored by the Manager in accordance with procedures adopted by the Board
of Directors. If a firm's creditworthiness declines, the value of an
agreement would be likely to decline, potentially resulting in losses. If
a default occurs by the other party to such transaction, the Portfolio will
have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation.
The Portfolios understand that the position of the staff of the
Securities and Exchange Commission is that assets involved in such
transactions are illiquid securities and are, therefore, subject to the
limitations on investment in illiquid securities as described in the
SAI.
See the SAI for further information about these instruments and their
risks.
Indexed Securities. Each Portfolio (other than Growth Portfolio)
may purchase and sell indexed securities, which are securities whose prices
are indexed to the prices of other securities, securities indices,
currencies, precious metals or other commodities, or other financial
indicators, as long as the Manager determines that it is consistent with
the Portfolio's investment goal and policies. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument
or statistic. The performance of indexed securities depends to a great
extent on the performance of the security, currency, or other instrument to
which they are indexed, and may also be influenced by interest rate changes
in the U.S. and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Indexed securities may be more volatile than the underlying
instruments.
Foreign Securities
The Money Market Portfolio may invest up to 10% of its total assets in
Canadian Government obligations and may also invest in foreign bank
obligations and obligations of foreign branches of domestic banks, subject
to the diversification requirements applicable to the Money Market
Portfolio. The Money Market Portfolio will not invest more than 25% of its
assets in a combination of Canadian Government obligations and foreign bank
obligations, both of which must be denominated in U.S. dollars.
The International Portfolio normally invests at least 80% of its
assets in foreign securities. It may not purchase a particular foreign
security if as a result more than 75% of its assets would be invested in
issuers of that foreign country. For defensive purposes, the Portfolio may
at times temporarily invest completely or substantially in U.S. securities.
Under normal market conditions, the International Portfolio intends to have
at least 65% of its assets invested in issuers of at least three different
countries outside of the U.S. The International Portfolio will not invest
more than 25% of its assets in securities issued by the government of any
one foreign country.
The Balanced Portfolio may purchase an unlimited amount of foreign
securities. Normally, however, less than 10% of this Portfolio's total
assets will consist of foreign securities. This percentage might increase
in the event the Manager believed that, in light of U.S. economic
conditions, there were increased investment opportunities in foreign
securities.
Under normal conditions, the Asset Strategy Portfolio intends to
limit its investments in foreign securities to no more than 50% of its
total assets. The Asset Strategy Portfolio currently intends to limit its
investments in obligations of any single foreign government to less than
25% of its total assets.
The other Portfolios, except the Limited-Term Bond Portfolio, may
invest up to 20% of their respective total assets in securities of foreign
issuers. The Limited-Term Bond Portfolio may not invest in foreign
securities.
Investments in foreign securities may involve a higher degree of
risk than U.S. securities because of the absence of uniform accounting,
auditing and financial standards, less government regulation, changes in
currency rates and in exchange regulations, political instability, limited
publicly available information, less liquidity and the difficulty of
obtaining and enforcing a judgment against a foreign issuer. These
considerations generally are intensified for investments in developing
countries. Developing countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade
a small number of securities. See the SAI for further information
regarding the types of and risks associated with foreign securities in
which the Portfolios may invest.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government include a
variety of Treasury securities and other securities that differ as to
interest rates, maturities and dates of issuance. Except for U.S. Treasury
securities, obligations of U.S. Government agencies and instrumentalities
may or may not be supported by the full faith and credit of the United
States. Some are backed by the right of the issuer to borrow from the
Treasury; others by discretionary authority of the U.S. Government to
purchase the agencies' obligations; while still others are supported only
by the credit of the instrumentality. In the case of securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency issuing or guaranteeing the obligation for
ultimate repayment. A Portfolio (other than the Asset Strategy Portfolio)
will invest in securities of such instrumentalities only when the Manager
is satisfied that the credit risk is acceptable. Among the U.S. Government
Securities that the Bond Portfolio may purchase are "mortgage-backed
securities" of the Government National Mortgage Association ("Ginnie Mae").
In addition, the Limited-Term Bond Portfolio and the Asset Strategy
Portfolio may also purchase "mortgage-backed securities" of the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National
Mortgage Association ("Fannie Mae"). These mortgage-backed securities
include pass-through securities, participation certificates and CMOs. See
"Mortgage-Backed and Asset-Backed Securities."
Mortgage-Backed and Asset-Backed Securities
Mortgage-backed and asset-backed securities may include pools of
consumer loans or mortgages, such as collateralized mortgage obligations
and stripped mortgage-backed securities. The value of these securities may
be significantly affected by changes in interest rates, the market's
perception of the issuers, and the creditworthiness of the parties
involved. The Portfolios (other than the Money Market Portfolio and the
Growth Portfolio) may invest in mortgage-backed and asset-backed securities
as long as the Manager determines that it is consistent with the
Portfolio's investment goal and policies. The Asset Strategy Portfolio
does not currently intend to invest in any non-mortgage asset-backed
securities.
The yield characteristics of mortgage-backed and asset-backed
securities differ from those of traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently on mortgage-backed and asset-backed securities and that
principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if a
Portfolio purchases these securities at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity while a prepayment
rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if a Portfolio purchases these
securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity.
Accelerated prepayments on securities purchased by a Portfolio at a premium
also impose a risk of loss of principal because the premium may not have
been fully amortized at the time the principal is repaid in full.
Timely payment of principal and interest on pass-through securities of
Ginnie Mae (but not Freddie Mac or Fannie Mae) is guaranteed by the full
faith and credit of the United States Government. This is not a guarantee
against market decline of the value of these securities or shares of a
Portfolio. It is possible that the availability (i.e., liquidity) of these
securities could be adversely affected by actions of the U.S. government to
tighten the availability of its credit.
Stripped Securities
Stripped securities are the separate income or principal components of
a debt instrument. These involve risks that are similar to those of other
debt securities, although they may be more volatile. The prices of
stripped mortgage-backed securities may be particularly affected by changes
in interest rates. The Portfolios may invest in stripped securities as
long as the Manager determines that it is consistent with the Portfolio's
investment goal and policies.
Direct Debt
The Asset Strategy Portfolio may invest in direct debt instruments.
Loans and other direct debt instruments are interests in amounts owed to
another party by a company, government, or other borrower. They have
additional risks beyond conventional debt securities.
Investments in direct debt instruments may entail less legal
protection for a Portfolio. Certain types of direct indebtedness purchased
by a Portfolio, such as letters of credit, revolving credit facilities, or
other standby financing commitments, obligate a Portfolio to pay additional
cash on demand. These commitments may have the effect of requiring a
Portfolio to increase its investment in a borrower at a time when it would
not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid. Other types of direct debt
instruments, such as loans through direct assignment of a financial
institution's interest with respect to a loan, may involve additional risks
to a Portfolio. For example, if a loan is foreclosed, a Portfolio could
become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or
the dividend paid on preferred stock until the convertible security matures
or is redeemed, converted or exchanged. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields
than those of common stocks of the same or similar issuers, but lower
yields than comparable non-convertible securities, (2) are less subject to
fluctuation in value than the underlying stock because they have fixed
income characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
Convertible securities are usually subordinated to comparable-tier non-
convertible securities but rank senior to common stock in the corporation's
capital structure. The value of a convertible security is a function of
(1) its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege,
and (2) its worth, at market value, if converted into the underlying common
stock.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market
value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates,
with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other
factors also may have an effect on the convertible security's investment
value. The conversion value of a convertible security is determined by the
market price of the underlying common stock. If the conversion value is
low relative to the investment value, the price of the convertible security
is governed principally by its investment value and generally the
conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right
to acquire the underlying common stock while holding a fixed income
security.
Convertible securities are typically issued by smaller capitalized
companies whose stock prices may be volatile. A convertible security may
be subject to redemption at the option of the issuer at a price established
in the security's governing instrument. If a convertible security held by
a Portfolio is called for redemption, a Portfolio will be required to
convert it into the underlying common stock, sell it to a third party or
permit the issuer to redeem the security. Any of these actions could have
an adverse effect on a Portfolio's ability to achieve its investment
objective.
Certain Other Securities
The debt securities in which a Portfolio may invest may include
certain instruments whose performance is linked to a specified equity
security or securities index. The preferred stock in which a Portfolio may
invest may include certain preferred stock that converts to common stock
either automatically after a specified period of time or at the option of
the issuer.
When-issued and Delayed Delivery Transactions
A Portfolio may without limitation purchase securities on a "when-
issued" or delayed delivery basis or without limitation sell them on a
delayed delivery basis in order to secure what is considered to be, at the
time of entering into the transaction, an advantageous price and yield.
From the time of entering into the transaction until delivery and payment
is made at a later date, the securities which are the subject of the
transaction are subject to market fluctuations.
Lending Securities
A Portfolio may lend its securities on a short-term or long-term
basis for the purpose of increasing income. As a fundamental policy, not
more than 30% of the total assets of the Limited-Term Bond Portfolio and no
more than 10% of the total assets of any other Portfolio, will be loaned at
any one time, and loans must be fully collateralized. There are risks
associated with loans of securities including possible loss of, or delay
in, recovering the collateral. If a material event is to be voted upon
affecting a Portfolio's investment which are on loan, the Portfolio will
take such action as may be appropriate in order to vote its shares.
Restricted Securities and Illiquid Investments
Subject to their respective limitations on investment in illiquid
investments described in the SAI, each portfolio (other than the Bond
Portfolio, Small Cap Portfolio, Balanced Portfolio and Limited-Term Bond
Portfolio) may invest in certain securities which are exempt from
registration under the Securities Act of 1933 and are, therefore, subject
to certain restrictions on resale ("restricted securities").
Warrants and Rights
The Bond Portfolio, High Income Portfolio, Growth Portfolio, Income
Portfolio and Small Cap Portfolio may invest up to 5% of their respective
net assets in warrants. The Asset Strategy Portfolio may invest in
warrants and rights to purchase securities. The Portfolio does not
currently intend to purchase warrants, valued at the lower of cost or
market, in excess of 5% of its net assets. Included in that amount, but
not to exceed 2% of its net assets, may be warrants that are not listed on
the New York Stock Exchange or the American Stock Exchange. Warrants
acquired by the Asset Strategy Portfolio in units or attached to securities
are not subject to these restrictions. The International Portfolio may
invest in warrants and rights to purchase securities, provided that as a
result of such investment not more than 5% of its net assets consist of
warrants, rights or a combination thereof.
Risk Factors of High-Yield Investing
The market for high-yield, high-risk debt securities is relatively new
and much of its growth paralleled a long economic expansion, during which
this market involved a significant increase in the use of high-yield debt
securities to fund highly leveraged corporate acquisitions and
restructurings. Thereafter, this market was affected by a relatively high
percentage of defaults with respect to high-yield securities as compared
with higher rated securities. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market, the value
of high-yield debt securities in a portfolio, a Portfolio's net asset value
and the ability of the bonds' issuers to repay principal and interest, meet
projected business goals and obtain additional financing than on higher
rated securities. An investment in a Portfolio which invests primarily in
high-yield debt securities may be considered more speculative than
investment in shares of a fund which invests primarily in higher rated debt
securities.
Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments.
Debt securities with longer maturities, which may have higher yields, may
increase or decrease in value more than debt securities with shorter
maturities. Market prices of high-yield debt securities structured as zero
coupon or pay-in-kind securities are affected to a greater extent by
interest rate changes and may be more volatile than securities which pay
interest periodically and in cash. Where it deems it appropriate and in
the best interests of Portfolio shareholders, a Portfolio may incur
additional expenses to seek recovery on a debt security on which the issuer
has defaulted and to pursue litigation to protect the interests of security
holders of its portfolio companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price
volatility for these securities and limited liquidity in the resale market.
Unrated securities are usually not as attractive to as many buyers as rated
securities are, a factor which may make unrated securities less marketable.
These factors may have the effect of limiting the availability of the
securities for purchase by a Portfolio and may also limit the ability of a
Portfolio to sell such securities at their fair value either to meet
redemption requests or in response to changes in the economy or the
financial markets. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of
high-yield debt securities, especially in a thinly traded market. To the
extent a Portfolio owns or may acquire illiquid or restricted high-yield
securities, these securities may involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties. Changes in values of debt securities which a Portfolio owns
will affect its net asset value per share. If market quotations are not
readily available for a Portfolio's lower rated or unrated securities,
these securities will be valued by a method that the Fund's Board of
Directors believes accurately reflects fair value. Valuation becomes more
difficult and judgment plays a greater role in valuing high-yield debt
securities than with respect to securities for which more external sources
of quotations and last sale information are available.
While credit ratings are only one factor the Manager relies on in
evaluating high-yield debt securities, certain risks are associated with
using credit ratings. Credit ratings evaluate the safety of principal and
interest payments, not market value risk. Credit rating agencies may fail
to timely change the credit ratings to reflect subsequent events; however,
the Manager continuously monitors the issuers of high-yield debt securities
in its portfolios in an attempt to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments. Achievement of a Portfolio's investment goal may be more
dependent upon the Manager's credit analysis than is the case for higher
quality debt securities. Credit ratings for individual securities may
change from time to time and a Portfolio may retain a portfolio security
whose rating has been changed.
During the fiscal year ended December 31, 1994, the percentage of
the assets of the Bond Portfolio and High Income Portfolio invested in debt
securities in each of the rating categories of S&P, and the debt securities
not rated by an established rating service, determined on a dollar weighted
average, were as follows:
Rated by Percentage of
S&P Fund Assets
-------- -------------
Bond Portfolio High Income Portfolio
-------------- ---------------------
AAA ___% 0.0%
AA ___ 0.0
A ___ 0.0
BBB ___ 0._
BB ___ ___
B ___ ___
CCC 0.0 ___
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Unrated ___ ___
The percentage of assets in each category was calculated on the basis
of a monthly dollar weighted average. The monthly dollar weighted average
was calculated using the market value of the securities in the Portfolio's
portfolio at the end of each month in the thirteen-month period ended with
the Portfolio's last fiscal year, averaged over the Portfolio's last fiscal
year. The rating used for each security is that security's rating as of
the end of each month and, as ratings may change over time, does not
necessarily indicate past or future ratings of any particular security or
the ratings of securities in the portfolio in general. Asset composition
of a Portfolio by rating categories at any particular time does not
necessarily indicate future asset composition by rating categories.
MANAGEMENT
Waddell & Reed, Inc. and its predecessors served as investment
manager to the Fund since its inception and to each of the registered
investment companies in the United Group of Mutual Funds, except United
Asset Strategy Fund, Inc. since 1940 or the inception of the investment
company, whichever was later. On January 8, 1992, subject to the authority
of the Fund's Board of Directors, Waddell & Reed, Inc. assigned its
investment management duties (and assigned its professional staff for
investment management services) to Waddell & Reed Investment Management
Company, a wholly-owned subsidiary of Waddell & Reed, Inc. The Manager has
also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992, Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. since each commenced operations in
February 1993 and United Asset Strategy Fund, Inc. since it commenced
operations in ________, 1995. Waddell & Reed, Inc. serves as distributor
and underwriter for the Fund and for each of the investment companies in
the United Group of Mutual Funds and Waddell & Reed Funds, Inc. Waddell &
Reed, Inc. is an indirect subsidiary of Torchmark Corporation, a holding
company, and United Investors Management Company, a holding company, and a
direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
Subject to the authority of the Fund's Board of Directors, the Manager
provides investment advice and supervises investments for which it is paid
a fee consisting of two elements: (i) a specific fee computed on each
Portfolio's net asset value as of the close of business each day at the
following annual rates: Money Market Portfolio - none; Bond Portfolio -
.03 of 1% of net assets; High Income Portfolio - .15 of 1% of net assets;
Growth Portfolio - .20 of 1% of net assets; Income Portfolio - .20 of 1% of
net assets; International Portfolio - .30 of 1% of net assets; Small Cap
Portfolio - .35 of 1% of net assets; Balanced Portfolio - .10 of 1% of net
assets; Limited-Term Bond Portfolio - .05 of 1% of net assets; Asset
Strategy Portfolio - .30 of 1% of net assets; and (ii) a base fee computed
each day on the combined net asset values of all of the Portfolios and
allocated among the Portfolios based on their relative net asset size at
the annual rates shown in the following table.
Base Fee Rate
Group Net Asset Level Annual Base Fee
all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 750 .51 of 1%
From $ 750 to $1,500 .49 of 1%
From $1,500 to $2,250 .47 of 1%
Over $2,250 .45 of 1%
Prior to September 1, 1994, the annual base fee was .51 of 1%. Prior
to the above-described assignment to the Manager on January 8, 1992, the
fees were paid to Waddell & Reed, Inc.
As of December 31, 1994, the combined net assets of all of the
Portfolios then in existence were $725,399,035.
For the fiscal year ended December 31, 1994, management fees for each
Portfolio then in existence as a percent of each such Portfolio's average
net assets and total expenses for each such Portfolio as a percent of the
Portfolio's average net assets for that year are as follows:
Management Fees Total Expenses
Money Market Portfolio 0.51% 0.65%
Bond Portfolio 0.54% 0.62%
High Income Portfolio 0.66% 0.74%
Growth Portfolio 0.71% 0.77%
Income Portfolio 0.71% 0.77%
International Portfolio* 0.81% 1.26%
Small Cap Portfolio* 0.86% 1.08%
Balanced Portfolio* 0.61% 0.95%
Limited-Term Bond Portfolio* 0.56% 0.93%
*The International Portfolio, Small Cap Portfolio, Balanced Portfolio
and Limited-Term Bond Portfolio commenced operations April 29, 1994.
The Asset Strategy Portfolio commenced operations in 1995.
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc.,
acts as Agent ("Accounting Services Agent") in providing bookkeeping and
accounting services and assistance to the Fund and pricing daily the value
of shares of each Portfolio. For these services, each Portfolio pays the
Accounting Services Agent a monthly fee of one-twelfth of the annual fee
shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Portfolio
- ------------------------- -----------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund is responsible for the payment of certain expenses, including
the management fees and accounting services fees described above, fees and
expenses of certain directors, costs of materials sent to shareholders,
audit and outside legal fees, taxes, brokerage commissions, interest,
insurance premiums, fees payable under securities laws and to the
Investment Company Institute, costs of shareholder records, costs of
systems or services used to price Portfolio securities and extraordinary
expenses, including litigation and indemnification relating to litigation.
Richard K. Poettgen is primarily responsible for the day-to-day
management of the portfolio of the Money Market Portfolio. Mr. Poettgen
has held his responsibilities for the Money Market Portfolio since January
1989. He is Vice President of the Manager. He is Vice President and
Assistant Treasurer of the Fund and Vice President and Assistant Treasurer
of other investment companies for which the Manager serves as investment
manager. Mr. Poettgen has served as the portfolio manager for other
investment companies managed by Waddell & Reed, Inc. or the Manager since
January 1989 and has been an employee of Waddell & Reed, Inc. or its
successor, the Manager, since April 1968.
James C. Cusser is primarily responsible for the day-to-day management
of the portfolio of the Bond Portfolio. Mr. Cusser has held his
responsibilities for the Bond Portfolio since August 1992. He is Vice
President of the Manager. He is Vice President of the Fund and Vice
President of other investment companies for which the Manager serves as
investment manager. Mr. Cusser has served as the portfolio manager for
other investment companies managed by Waddell & Reed, Inc. or the Manager
since August 1992 and has been an employee of the Manager since August
1992. Prior to that date, Mr. Cusser was a fixed income strategist for a
major brokerage firm.
Louise D. Rieke is primarily responsible for the day-to-day management
of the portfolio of the High Income Portfolio. Ms. Rieke has held her
responsibilities for the High Income Portfolio since July 1987. She is
Vice President of the Manager and Vice President of Waddell & Reed Asset
Management Company, an affiliate of the Manager. She is Vice President of
the Fund and Vice President of other investment companies for which the
Manager serves as investment manager. Ms. Rieke has served as the
portfolio manager for other investment companies managed by Waddell & Reed,
Inc. or its successor, the Manager, since January 1990 and has been an
employee of Waddell & Reed, Inc. or its successor, the Manager, since May
1971.
Antonio Intagliata is primarily responsible for the day-to-day
management of the portfolio of the Growth Portfolio. Mr. Intagliata has
held his responsibilities for the Growth Portfolio since July 1987. He is
Senior Vice President of the Manager. He is Vice President of the Fund and
Vice President of other investment companies for which the Manager serves
as investment manager. Mr. Intagliata has served as the portfolio manager
for other investment companies managed by Waddell & Reed, Inc. or the
Manager since February 1979 and has been an employee of Waddell & Reed,
Inc. or its successor, the Manager, since June 1973.
Russell E. Thompson is primarily responsible for the day-to-day
management of the portfolio of the Income Portfolio. Mr. Thompson has held
his responsibilities for the Income Portfolio since July 1991, the
Portfolio's inception. He is Senior Vice President of the Manager and
Senior Vice President of Waddell & Reed Asset Management Company, an
affiliate of the Manager. He is Vice President of the Fund and Vice
President of other investment companies for which the Manager serves as
investment manager. Mr. Thompson has served as the portfolio manager for
other investment companies managed by Waddell & Reed, Inc. or the Manager
since January 1976 and has been an employee of Waddell & Reed, Inc. or its
successor, the Manager, since March 1971.
Mark L. Yockey is primarily responsible for the day-to-day management
of the portfolio of the International Portfolio. Mr. Yockey has held his
responsibilities for the International Portfolio since July 1994, the
Portfolio's inception. He is Vice President of the Manager. He is Vice
President of the Fund and Vice President of other investment companies for
which the Manager serves as investment manager. Mr. Yockey has served as
the portfolio manager for other investment companies managed by Waddell &
Reed, Inc. or the Manager since January 1990 and has been an employee of
Waddell & Reed, Inc. and its successor, the Manager, since November 1986.
Mark G. Seferovich is primarily responsible for the day-to-day
management of the portfolio of the Small Cap Portfolio. Mr. Seferovich has
held his responsibilities for the Small Cap Portfolio since July 1994, the
Portfolio's inception. He is Vice President of the Manager. He is Vice
President of the Fund and Vice President of other investment companies for
which the Manager serves as investment manager. Mr. Seferovich has served
as the portfolio manager for other investment companies managed by Waddell
& Reed, Inc. since February 1989 and has been an employee of Waddell &
Reed, Inc. and its successor, the Manager, since February 1989. He also
previously served as portfolio manager for a brokerage firm.
Cynthia P. Prince-Fox is primarily responsible for the day-to-day
management of the portfolio of the Balanced Portfolio. Ms. Prince-Fox has
held her responsibilities for the Balanced Portfolio since July 1994, the
Portfolio's inception. She is Vice President of the Manager. She is Vice
President of the Fund and Vice President of other investment companies for
which the Manager serves as investment manager. Ms. Prince-Fox has served
as the portfolio manager for other investment companies managed by Waddell
& Reed, Inc. or the Manager since January 1993 and has been an employee of
Waddell & Reed, Inc. and its successor, the Manager, since February 1983.
Patrick W. Sterner is primarily responsible for the day-to-day
management of the portfolio of the Limited-Term Bond Portfolio. Mr.
Sterner has held his responsibilities for the Limited-Term Bond Portfolio
since July 1994, the Portfolio's inception. He is Vice President of the
Manager. He is Vice President of the Fund and Vice President of other
investment companies for which the Manager serves as investment manager.
Mr. Sterner has served as the portfolio manager for other investment
companies managed by Waddell & Reed, Inc. or the Manager since September
1992 and has been an employee of the Manager since August 1992. Prior to
that date, Mr. Sterner was Chief Investment Officer of a bank.
James D. Wineland is primarily responsible for the day-to-day
management of the portfolio of the Asset Strategy Portfolio. Mr. Wineland
has held his responsibilities for the Asset Strategy Portfolio since the
inception of the Portfolio. He is Vice President of the Manager, Vice
President of the Fund and Vice President of other investment companies for
which the Manager serves as investment manager. Mr. Wineland has served as
the portfolio manager for other investment companies managed by Waddell &
Reed, Inc. and its successor, the Manager, since January 1988 and has been
an employee of Waddell & Reed, Inc. and its successor, the Manager, since
November 1984.
Other members of the Manager's investment management department
provide input on market outlook, economic conditions, investment research
and other considerations relating to the investments of the Portfolios.
NET ASSET VALUE
The net asset value of a share of a Portfolio is the value of its
assets, less liabilities, divided by the total number of shares.
The net asset value per share of each Portfolio is computed daily
as of the later of the close of the regular session of the New York Stock
Exchange (the "Exchange") or the close of the regular session of any other
securities or commodities exchange on which an option or future held by a
Portfolio is traded on each day that the Exchange is open for trading. The
Exchange's regular session ordinarily closes at 4:00 P.M. eastern time.
The Money Market Portfolio uses the amortized cost method for valuing
its portfolio securities. See the SAI for discussion of this method. Net
asset value of the Money Market Portfolio is normally fixed at $1.00 per
share. See the SAI for a discussion of extraordinary circumstances which
could result in a change in this fixed share value.
The securities of the other Portfolios listed or traded on a U.S. or
foreign stock exchange are valued at the last sales price on that day. OTC
securities traded on NASDAQ are valued at a price which is the mean between
the closing bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a major dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Short-term debt securities with a maturity of
60 days or less are valued at amortized cost. When market quotations for
options and futures positions or non-exchange traded foreign securities
held by a Portfolio are readily available, those positions and securities
will be valued based upon such quotations. Market quotations generally
will not be available for options traded in the OTC market. When market
quotations are not readily available, securities, options, futures and
other assets are valued at fair value in a manner determined in good faith
under procedures established by and under the general supervision and
responsibility of the Board of Directors.
Certain of the Portfolios may invest in securities listed on foreign
exchanges which may trade on Saturdays and on customary U.S. national
business holidays when the New York Stock Exchange is closed.
Consequently, the net asset value of a Portfolio could be significantly
affected on days when the Portfolio does not price its shares.
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of each Portfolio based on, among
other things, the amount of premium payments to be invested and the number
of surrender and transfer requests to be effected on any day according to
the terms of the Policies. Shares of a Portfolio are sold at their net
asset value per share next determined after receipt of the order to
purchase from the Participating Insurance Company. No sales charge is
required to be paid by the Participating Insurance Company for purchase of
shares.
Redemptions will be made at the net asset value per share of the
Portfolio next determined after receipt of the request to redeem from the
Participating Insurance Company. Payment is generally made within seven
days after receipt of a proper request to redeem. No fee is charged to
shareholders upon redemption of Portfolio shares. The Fund may suspend the
right of redemption of shares of any Portfolio and may postpone payment for
any period if any of the following conditions exist: (i) the New York
Stock Exchange is closed other than customary weekend and holiday closings
or trading on the New York Stock Exchange is restricted; (ii) the
Securities and Exchange Commission has determined that a state of emergency
exists which may make payment or transfer not reasonably practicable; (iii)
the Securities and Exchange Commission has permitted suspension of the
right of redemption of shares for the protection of the security holders of
the Fund; or (iv) applicable laws and regulations otherwise permit the Fund
to suspend payment on the redemption of shares. Redemptions are ordinarily
made in cash.
Should any conflict between Policyowners arise which would require
that a substantial amount of net assets be withdrawn from the Fund, orderly
management of portfolio securities could be disrupted to the potential
detriment of Policyowners.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all the net
investment income, if any, of each Portfolio. For dividend purposes, net
investment income of each Portfolio, other than the Money Market Portfolio,
consists of dividends and interest received by such Portfolio less the
estimated expenses of such Portfolio. The Money Market Portfolio's net
investment income for dividend purposes consists of all interest income
accrued on the Portfolio's securities, plus or minus realized gains or
losses on those securities, less the Portfolio's expenses.
Dividends from the Money Market Portfolio are declared and
reinvested daily in additional full and fractional shares. Dividends from
the Growth Portfolio, Bond Portfolio, High Income Portfolio, Income
Portfolio, International Portfolio, Small Cap Portfolio, Balanced
Portfolio, Limited-Term Bond Portfolio and the Asset Strategy Portfolio
usually are declared, paid and reinvested annually in December in
additional full and fractional shares of the respective Portfolio.
Ordinarily, dividends are paid on shares starting on the day after they are
issued and through the day they are redeemed.
All net realized long-term or short-term capital gains of each
Portfolio, if any, other than the Money Market Portfolio, are declared and
reinvested annually in December in additional full and fractional shares of
the respective Portfolio. Short-term capital gains of the Money Market
Portfolio--it does not anticipate realizing any long-term capital gains--
are declared and reinvested daily in additional full and fractional shares
of that Portfolio.
TAXES
Each of the Portfolios has qualified or, if a new Portfolio, intends
to qualify for treatment as a "regulated investment company" ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
So long as a Portfolio qualifies as such, the Portfolio will be relieved of
Federal income tax on the income and gains distributed to its shareholders.
Each Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder.
These requirements, which are in addition to the diversification
requirements imposed on the Portfolios by the 1940 Act and Subchapter M of
the Code, place certain limitations on the assets of each separate account
- -- and, because section 817(h) and those regulations treat the assets of
each Portfolio as assets of the related separate account, of each Portfolio
- -- that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter or within 30 days
thereafter, no more than 55% of a Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are
considered a single investment, and while each U.S. government agency and
instrumentality is considered a separate issuer, a particular foreign
government and its agencies, instrumentalities and political subdivisions
all will be considered the same issuer. Section 817(h) provides, as a safe
harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are
satisfied and no more than 55% of the value of the account's total assets
are cash and cash items, government securities and securities of other
RICs. Failure of a Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Participating Insurance Companies and
treatment of the Policyowners other than as described in the prospectuses
for the Policies.
The foregoing is only a summary of some of the important Federal
income tax considerations generally affecting the Portfolios; see the SAI
for a more detailed discussion.
Because the only shareholders of the Portfolios will be the
Participating Insurance Companies and their separate accounts, no
discussion is included herein as to the Federal income tax consequences to
the Portfolios' shareholders. For information concerning the Federal tax
consequences to Policyowners, see the prospectuses for the Policies.
Prospective investors are urged to consult with their tax advisers.
OTHER INFORMATION
The Fund was incorporated in Maryland on December 2, 1986. It has a
Board of Directors which has overall responsibility for the management of
its affairs. Capital stock is currently divided into the ten classes that
are designated the Money Market Portfolio, the Bond Portfolio, the High
Income Portfolio, the Growth Portfolio, the Income Portfolio, the
International Portfolio, the Small Cap Portfolio, the Balanced Portfolio,
the Limited-Term Bond Portfolio and the Asset Strategy Portfolio. The Fund
may establish additional portfolios in the future. Shares of each class
are fully paid and nonassessable when issued. The Fund does not hold
annual meetings of shareholders; however, certain significant corporate
matters, such as the approval of a new investment advisory agreement or a
change in a fundamental investment policy, which require shareholder
approval, will be presented to shareholders at an annual meeting or special
meeting called by the Board of Directors for such purpose.
All shares of the Fund have equal voting rights (regardless of the net
asset value per share) except that on matters affecting only one Portfolio,
only shares of the respective Portfolio are entitled to vote. Matters in
which the interests of all the Portfolios are substantially identical are
voted on by all shareholders without regard to the separate Portfolios.
Matters that affect all the Portfolios but where the interests of the
Portfolios are not substantially identical are voted on separately by each
Portfolio. Matters affecting only one Portfolio, such as a change in its
fundamental policies, are voted on separately by the Portfolio.
Shareholder inquiries may be addressed to the Fund or Waddell & Reed,
Inc. at the address that appears on the front cover.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities
which the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
eligibility of securities for the Portfolios.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to Standard
& Poor's by the issuer or obtained by Standard & Poor's from other sources
it considers reliable. Standard & Poor's does not perform any audit in
connection with any ratings and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn
as a result of changes in, or unavailability of, such information, or based
on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable Standard and Poor's rating
symbols and their meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high-quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs
from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace periods. The D rating
will also be used upon a filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of
credit quality, the ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
NR -- Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating, or that
Standard & Poor's does not rate a particular type of obligation as a matter
of policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories (AAA, AA, A, BBB, commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In
addition, the Legal Investment Laws of various states governing legal
investments may impose certain rating or other standards for obligations
eligible for investment by savings banks, trust companies, insurance
companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the
rating.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's preferred stock
rating is an assessment of the capacity and willingness of an issuer to pay
preferred stock dividends and any applicable sinking fund obligations. A
preferred stock rating differs from a bond rating inasmuch as it is
assigned to an equity issue, which issue is intrinsically different from,
and subordinated to, a debt issue. Therefore, to reflect this difference,
the preferred stock rating symbol will normally not be higher than the debt
rating symbol assigned to, or that would be assigned to, the senior debt of
the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA -- This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues
rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
make payments for a preferred stock in this category than for issues in the
'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer
in default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of
preferred stock quality, the rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on
other circumstances.
Moody's Investors Service, Inc. Note: Moody's applies numerical
modifiers 1, 2 and 3 in each rating classification; the modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well-maintained in the
foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than
in the aaa and aa classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over
any great length of time.
ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in
this class.
b -- An issue which is rated b generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate
the future status of payments.
ca -- An issue which is rated ca is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Group commercial paper rating is a
current assessment of the likelihood of timely payment of debt considered
short-term in the relevant market. Ratings are graded into several
categories, ranging from A-1 for the highest quality obligations to D for
the lowest. Issuers rated A are further referred to by use of numbers 1, 2
and 3 to indicate the relative degree of safety. Issues assigned an A
rating (the highest rating) are regarded as having the greatest capacity
for timely payment. An A-1 designation indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation. An A-2 rating indicates that capacity for timely payment is
satisfactory; however, the relative degree of safety is not as high as for
issues designated A-1. Issues rated A-3 have adequate capacity for timely
payment; however, they are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issues rated B are regarded as having only speculative capacity for timely
payment. A C rating is assigned to short-term debt obligations with a
doubtful capacity for payment. Debt rated D is in payment default, which
occurs when interest payments or principal payments are not made on the
date due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
Moody's Investors Service, Inc. commercial paper ratings are opinions
of the ability of issuers to repay punctually promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
designations of Prime 1, Prime 2 and Prime 3, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
Issuers rated Prime 1 have a superior capacity for repayment of short-term
promissory obligations and repayment capacity will normally be evidenced by
(1) leading market positions in well established industries; (2) high rates
of return on funds employed; (3) conservative capitalization structures
with moderate reliance on debt and ample asset protection; (4) broad
margins in earnings coverage of fixed financial charges and high internal
cash generation; and (5) well established access to a range of financial
markets and assured sources of alternate liquidity. Issuers rated Prime 2
also have a strong capacity for repayment of short-term promissory
obligations as will normally be evidenced by many of the characteristics
described above for Prime 1 issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation;
capitalization characteristics, while still appropriate, may be more
affected by external conditions; and ample alternate liquidity is
maintained. Issuers rated Prime 3 have an acceptable capacity for
repayment of short-term promissory obligations, as will normally be
evidenced by many of the characteristics above for Prime 1 issuers, but to
a lesser degree. The effect of industry characteristics and market
composition may be more pronounced; variability in earnings and
profitability may result in changes in the level of debt protection
measurements and requirement for relatively high financial leverage; and
adequate alternate liquidity is maintained.
DESCRIPTION OF NOTE RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's note rating
reflects the liquidity factors and market access risks unique to notes.
Notes maturing in 3 years or less will likely receive a note rating. Note
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
--Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Investors Service, Inc. Moody's Short-Term Loan Ratings --
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of major
importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
Dollar-Weighted Average Maturity
Dollar-Weighted Average Maturity is derived by multiplying the value
of each investment by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the
Portfolio's portfolio. An obligation's maturity is typically determined on
a stated final maturity basis, although there are some exceptions to this
rule.
For example, if it is probable that the issuer of an instrument will
take advantage of a maturity-shortening device, such as a call, refunding,
or redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
Also, the maturities of mortgage-backed securities and some asset-backed
securities, such as collateralized mortgage obligations, are determined on
a weighted average life basis, which is the average time for principal to
be repaid. For a mortgage security, this average time is calculated by
assuming a constant prepayment rate for the life of the mortgage. The
weighted average life of these securities is likely to be substantially
shorter than their stated final maturity.
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
May 1, 1995
Custodian
UMB Bank, n. a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart
1800 M Street NW
Washington, D. C.
Independent Accountants
Price Waterhouse LLP
Kansas City, Missouri
Investment Manager
Waddell & Reed Investment Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Distributor and Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Accounting Services Agent
Waddell & Reed Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
TABLE OF CONTENTS
Prospectus Summary ..................... 2
Financial Highlights ................... 4
The Fund ............................... 5
Investment Goals and Policies
of the Portfolios .................... 5
Management ............................. 17
Net Asset Value ........................ 20
Purchases and Redemptions .............. 21
Dividends and Distributions ............ 21
Taxes .................................. 22
Other Information ...................... 22
Appendix A ............................. 24
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913/236-2000
May 1, 1995
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. This SAI should be read in conjunction with the prospectus
(the "Prospectus") of TMK/United Funds, Inc. (the "Fund") dated May 1,
1995, which may be obtained by request to the Fund or its Distributor and
Underwriter, Waddell & Reed, Inc., at the address or telephone number shown
above.
TABLE OF CONTENTS
Investment Policies .............................. 2
Investment Management and Other Services ......... 33
Net Asset Value .................................. 36
Purchases and Redemptions ........................ 40
Shareholder Communications ....................... 41
Taxes ............................................ 41
Dividends and Distributions ...................... 44
Portfolio Transactions and Brokerage ............. 45
Directors and Officers ........................... 47
Other Information ................................ 53
Financial Statements ............................. 55
<PAGE>
PERFORMANCE INFORMATION
From time to time, advertisements and sales materials for one or more
of the Portfolios may include total return information, yield information
and/or performance rankings. Performance data will be accompanied by or
used in calculating performance data for the respective separate accounts
that invest in the Portfolio.
Total Return
The following relates to Bond Portfolio, High Income Portfolio, Growth
Portfolio, Income Portfolio, International Portfolio, Small Cap Portfolio,
Balanced Portfolio, Limited-Term Bond Portfolio and Asset Strategy
Portfolio. An average annual total return quotation is computed by finding
the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the
ending redeemable value. Total return is calculated by assuming an initial
$1,000 investment. No sales charge is required to be paid by the
Participating Insurance Companies for purchase of shares. All dividends
and distributions are assumed to be reinvested at net asset value as of the
day the dividend or distribution is paid. The formula used to calculate
the total return is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for
the periods shown.
The average annual total return quotations as of December 31, 1994,
which is the most recent balance sheet included in this Statement of
Additional Information, for the periods shown were as follows:
One-year Five-year
period from period from Period from
1-1-94 to 1-1-89 to 7-13-872 to
12-31-941 12-31-94 12-31-94
----------- ----------- -----------
Bond Portfolio -5.90% 7.21% 7.88%
High Income Portfolio -2.55% 10.58% 8.29%
Growth Portfolio 2.39% 12.69% 13.33%
Income Portfolio -1.14% 10.67%3
International Portfolio 0.26%4
Small Cap Portfolio 20.92%4
Balanced Portfolio -0.37%4
Limited-Term Bond Portfolio 0.26%4
1Asset Strategy Portfolio began operations in 1995.
2Date of initial public offering.
3Period from May 16, 1991, date of initial public offering, to December 31,
1994.
4Period from April 29, 1994, date of initial public offering, to December
31, 1994.
Unaveraged or cumulative total return may also be quoted. Such total
return data reflects the change in value of an investment over a stated
period of time. Cumulative total returns will be calculated according to
the formula indicated above but without averaging the rate for the number
of years in the period. The Fund may also provide non-standardized
performance information.
Yield
The following relates to Bond Portfolio, High Income Portfolio, Growth
Portfolio, Income Portfolio and Limited-Term Bond Portfolio. A yield
quoted for a Portfolio is computed by dividing the net investment income
per share earned during the period for which the yield is shown by the
maximum offering price per share on the last day of that period according
to the following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
The yield computed according to the formula for the 30-day period ended on
December 31, 1994, the date of the most recent balance sheet included in this
SAI, is as follows:
Bond Portfolio _____%
High Income Portfolio _____%
Growth Portfolio _____%
Income Portfolio _____%
Limited-Term Bond Portfolio _____%
The following relates to the Money Market Portfolio. There are two methods
by which Money Market Portfolio's yield for a specified time is calculated. The
first method, which results in an amount referred to as the "current yield,"
assumes an account containing exactly one share at the beginning of the period.
The net asset value of this share will be $1.00 except under extraordinary
circumstances. The net change in the value of the account during the period is
then determined by subtracting this beginning value from the value of the
account
at the end of the period which will include all dividends accrued; however,
capital changes are excluded from the calculation, i.e., realized gains and
losses from the sale of securities and unrealized appreciation and depreciation.
However, so that the change will not reflect the capital changes to be excluded,
the dividends used in the yield computation may not be the same as the dividends
actually declared, as certain realized gains and losses and, under unusual
circumstances, unrealized gains and losses (see "Purchases and Redemptions"),
will be taken into account in the calculation of dividends actually declared.
Instead, the dividends used in the yield calculation will be those which would
have been declared if the capital changes had not affected the dividends.
This net change in the account value is then divided by the value of the
account at the beginning of the period (i.e., normally $1.00 as discussed above)
and the resulting figure (referred to as the "base period return") is then
annualized by multiplying it by 365 and dividing it by the number of days in the
period with the resulting current yield figure carried to at least the nearest
hundredth of one percent.
The second method results in a figure referred to as the "effective yield."
This represents an annualization of the current yield with dividends reinvested
daily. Effective yield is calculated by compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1
from the result and rounding the result to the nearest hundredth of one percent
according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)] -1
The Money Market Portfolio's current yield as calculated above for the
seven
days ended December 31, 1994, the date of the most recent balance sheet included
in this Statement of Additional Information, was ____% and its effective yield
calculated for the same period was _____%.
Performance Rankings
The following relates to each of the Portfolios. From time to time,
advertisements and information furnished to present or prospective
Policyholders may include performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical
Services, Inc., or by publications of general interest such as Forbes,
Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. A Portfolio's performance may also be
compared to that of other selected mutual funds or recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average. Performance information may be quoted numerically or
presented in a table, graph or other illustration.
General
Change in yields primarily reflect different interest rates received
by a Portfolio as its portfolio securities change. Yield is also affected
by portfolio quality, portfolio maturity, type of securities held and
operating expense ratio.
All performance information included in advertisements or sales
material is historical in nature and is not intended to represent or
guarantee future results. The value of a Portfolio's shares when redeemed
may be more or less than their original cost.
INVESTMENT POLICIES
The following information supplements the disclosure in the Prospectus
concerning the investment policies of each Portfolio. Unless otherwise
specified, this information pertains to each of the Portfolios. The
investment policies described may be changed by the Directors of the Fund
without a vote of shareholders, unless otherwise stated.
The Money Market Portfolio
The Money Market Portfolio may invest in the money market obligations
and instruments listed below. Under Rule 2a-7 of the Investment Company
Act of 1940 (the "Rule"), investments are limited to those that are
denominated in U.S. dollars and that are rated in one of the two highest
rating categories by the requisite nationally recognized statistical rating
organization(s) ("NRSRO(s)"), as defined in the Rule, or are comparable
unrated securities. See the Prospectus Appendix for a description of some
of these ratings. In addition, the Rule limits investments in securities
of any one issuer (except securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities ("U.S. Government
Securities")) to no more than 5% of the Portfolio's assets. Investments in
securities rated in the second highest rating category by the requisite
NRSRO(s) or comparable unrated securities are limited to no more than 5% of
the Portfolio's assets, with investments in such securities of any one
issuer (except U.S. Government Securities) being limited to the greater of
one percent of the Portfolio's assets or $1,000,000. Under the Rule, the
Portfolio may only invest in securities with a remaining maturity of not
more than thirteen months, as further described in the Rule.
(1) U.S. Government Securities: See "U.S. Government Securities."
(2) Bank obligations and instruments secured thereby: Subject to the
limitations described above, time deposits, certificates of deposit,
bankers' acceptances and other bank obligations if they are obligations of
a bank subject to regulation by the U.S. Government (including obligations
issued by foreign branches of these banks) or obligations issued by a
foreign bank having total assets equal to at least U.S. $500,000,000, and
instruments secured by any such obligation. A "bank" includes commercial
banks and savings and loan associations. Time deposits are monies kept on
deposit with U.S. banks or other U.S. financial institutions for a stated
period of time at a fixed rate of interest. At present, bank time deposits
are not considered by the Board of Directors or Waddell & Reed Investment
Management Company, (the "Manager") to be readily marketable. There may be
penalties for the early withdrawal of such time deposits, in which case,
the yield of these investments will be reduced.
(3) Commercial Paper Obligations Including Variable Amount Master
Demand Notes: Commercial paper rated as described above. See Appendix A
to the Prospectus for a description of some of these ratings. A variable
amount master demand note represents a borrowing arrangement under a letter
agreement between a commercial paper issuer and an institutional lender.
(4) Corporate Debt Obligations: Corporate debt obligations if they
are rated as described above. See Appendix A to the Prospectus for a
description of some of these bond ratings.
(5) Canadian Government Obligations: Obligations of, or obligations
guaranteed by, the Government of Canada, a Province of Canada or any
agency, instrumentality or political subdivision of that Government or any
Province. The Portfolio will not invest in Canadian Government obligations
if more than 10% of the value of its total assets would then be so
invested, subject to the diversification requirements applicable to the
Money Market Portfolio.
(6) Certain Other Obligations: Obligations other than those listed
in (1) through (5) above only if such other obligation is guaranteed as to
principal and interest by either a bank or a corporation whose securities
the Portfolio is eligible to hold under the Rule.
The value of the obligations and instruments in which the Portfolio
invests will fluctuate depending in large part on changes in prevailing
interest rates. If these rates go up after the Portfolio buys an
obligation or instrument, its value may go down; if these rates go down,
its value may go up. Changes in interest rates will be more quickly
reflected in the yield of a portfolio of short-term obligations than in the
yield of a portfolio of long-term obligations.
The High Income Portfolio
The High Income Portfolio may invest in certain high-yield, high-risk
non-investment grade debt securities. As discussed in the Prospectus, the
market for such securities may differ from that for investment grade debt
securities. See the Prospectus for a discussion of the risks associated
with non-investment grade debt securities.
The Asset Strategy Portfolio
The Asset Strategy Portfolio allocates its assets among the following
classes, or types, of investments:
The short-term class includes all types of domestic and foreign
securities and money market instruments with remaining maturities of three
years or less. The Manager will seek to maximize total return within the
short-term asset class by taking advantage of yield differentials between
different instruments, issuers, and currencies. Short-term instruments may
include corporate debt securities, such as commercial paper and notes;
government securities issued by U.S. or foreign governments or their
agencies or instrumentalities; bank deposits and other financial
institution obligations; repurchase agreements involving any type of
security; and other similar short-term instruments. These instruments may
be denominated in U.S. dollars or foreign currency.
The bond class includes all varieties of domestic and foreign fixed-
income securities with maturities greater than three years. The Manager
seeks to maximize total return within the bond class by adjusting the
Portfolio's investments in securities with different credit qualities,
maturities, and coupon or dividend rates, and by seeking to take advantage
of yield differentials between securities. Securities in this class may
include bonds, notes, adjustable-rate preferred stocks, convertible bonds,
mortgage-related and asset-backed securities, domestic and foreign
government and government agency securities, zero coupon bonds, and other
intermediate and long-term securities. As with the short-term class, these
securities may be denominated in U.S. dollars or foreign currency. The
Portfolio may also invest in lower quality, high-yielding debt securities
(commonly referred to as "junk bonds"). The Portfolio currently intends to
limit its investments in these securities to 20% of its assets.
The stock class includes domestic and foreign equity securities of all
types (other than adjustable rate preferred stocks which are included in
the bond class). The Manager seeks to maximize total return within this
asset class by actively allocating assets to industry sectors expected to
benefit from major trends, and to individual stocks that the Manager
believes to have superior growth potential. Securities in the stock class
may include common stocks, fixed-rate preferred stocks (including
convertible preferred stocks), warrants, rights, depositary receipts,
securities of closed-end investment companies, and other equity securities
issued by companies of any size, located anywhere in the world.
The Manager intends to take advantage of yield differentials by
considering the purchase or sale of instruments when differentials on
spreads between various grades and maturities of such instruments approach
extreme levels relative to long-term norms.
In making asset allocation decisions, the Manager typically evaluates
projections of risk, market conditions, economic conditions, volatility,
yields, and returns.
Foreign Securities
The International Portfolio and Small Cap Portfolio may each
purchase foreign securities only if they (i) are listed or admitted to
trading on a domestic or foreign securities exchange, with the exception of
warrants, rights or restricted securities which need not be so listed or
admitted; or (ii) are represented by American depositary receipts (receipts
issued against securities of foreign issuers deposited or to be deposited
with an American depository) so listed or admitted on a domestic securities
exchange or traded in the United States over-the-counter market; or (iii)
are issued or guaranteed by any foreign government or any subdivision,
agency or instrumentality thereof. The Asset Strategy Portfolio may invest
in foreign securities, subject to the limitations described in the
Prospectus.
In general, depositary receipts are securities convertible into and
evidencing ownership of securities of foreign corporate issuers, although
depositary receipts may not necessarily be denominated in the same currency
as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically
issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. International depositary receipts and European
depositary receipts, in bearer form, are foreign receipts evidencing a
similar arrangement and are designed for use by non-U.S. investors and
traders in non-U.S. markets. Global depositary receipts are more recently
developed receipts designed to facilitate the trading of foreign issuers by
U.S. and non-U.S. investors and traders.
The Manager believes that while there are investment risks (see below)
in investing in foreign securities, there are also investment opportunities
in foreign securities. Individual foreign economies may differ favorably
or unfavorably from the U.S. economy or each other in such matters as gross
national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the
same industry. Foreign currencies may be stronger or weaker than the U.S.
dollar or than each other. An investment in foreign securities may be
affected by changes in currency rates and in exchange control regulations
(i.e., currency blockage). There may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. Most foreign stock markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are
less liquid and more volatile than securities of comparable domestic
companies. There is generally less government regulation of stock
exchanges, brokers and listed companies than in the United States. In
addition, with respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, political or social instability
or diplomatic developments which could adversely affect investments in
securities of issuers located in those countries. If it should become
necessary, the Fund would normally encounter greater difficulties in
commencing a lawsuit against the issuer of a foreign security than it would
against a domestic issuer.
A Portfolio (other than the Asset Strategy Portfolio) will not
speculate in foreign currencies, but each Portfolio, except the Money
Market Portfolio and Limited-Term Bond Portfolio, may briefly hold foreign
currencies in connection with the purchase or sale of foreign securities.
The Asset Strategy Portfolio may purchase and sell foreign currency and
invest in foreign currency deposits as described in the Prospectus and this
SAI, and the Asset Strategy Portfolio and the International Portfolio may
enter into forward currency contracts as described in the Prospectus and
this SAI. A Portfolio may incur a transaction charge in connection with
the exchange of currency.
Borrowing
From time to time the Small Cap Portfolio may increase its ownership
of securities by borrowing on an unsecured basis at fixed rates of interest
and investing the borrowed funds. Any such borrowing will be made only
from banks and only to the extent that the value of its assets, less its
liabilities other than borrowings, is equal to at least 300% of all
borrowings including the proposed borrowing.
As a fundamental policy, the Asset Strategy Portfolio may borrow
money for emergency or extraordinary purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of the value of its total
assets (less liabilities other than borrowings). The Portfolio may borrow
money only from a bank and the Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
The 300% asset coverage requirement is contained in the Investment
Company Act of 1940. If the value of a Portfolio's assets so computed
should fail to meet the 300% asset coverage requirement, it is required
within three days to reduce its borrowings to the extent necessary to meet
that requirement and may have to sell a portion of its investments at a
time when independent investment judgment would not dictate such sale. For
purposes of this limitation, "three days" means three days, exclusive of
Sundays and holidays.
Interest on money borrowed is an expense the Portfolio would not
otherwise incur, so that it may have little or no net investment income
during periods of substantial borrowings. Borrowing for investment
increases both investment opportunity and risk.
U.S. Government Securities
U.S. Government Securities include Treasury Bills which mature within
one year of the date they are issued, Treasury Notes which have maturities
of one to ten years and Treasury Bonds which generally have maturities of
more than 10 years. All such Treasury securities are backed by the full
faith and credit of the United States.
U.S. government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing
Administration, Federal National Mortgage Association, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Farm Credit Banks, Maritime
Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities are not always supported by the full faith and credit of
the United States. Some, such as securities issued by the Federal Home
Loan Banks, are backed by the right of the agency or instrumentality to
borrow from the Treasury. Others, such as securities issued by the Federal
National Mortgage Association, are supported only by the credit of the
instrumentality and not by the Treasury. If the securities are not backed
by the full faith and credit of the United States, the owner of the
securities must look principally to the agency issuing the obligation for
repayment and may not be able to assert a claim against the United States
in the event that the agency or instrumentality does not meet its
commitment. A Portfolio will invest in securities of agencies and
instrumentalities only if the Manager is satisfied that the credit risk
involved is acceptable.
U.S. Government Securities may include "mortgage-backed securities"
of the Government National Mortgage Association ("Ginnie Mae"), the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National
Mortgage Association ("Fannie Mae"). These mortgage-backed securities
include "pass-through" securities and "participation certificates."
Another type of mortgage-backed security is the "collateralized mortgage
obligation." See "Mortgage-Backed Securities." Timely payment of
principal and interest on Ginnie Mae pass-throughs is guaranteed by the
full faith and credit of the United States. Freddie Mac and Fannie Mae are
both instrumentalities of the U.S. government, but their obligations are
not backed by the full faith and credit of the United States. It is
possible that the availability and the marketability (i.e., liquidity) of
the securities discussed in this section could be adversely affected by
actions of the U.S. government to tighten the availability of its credit or
to affect adversely the tax effects of owning them.
Certain Portfolios may also invest in deposits in banks (represented
by certificates of deposit or other evidence of deposit issued by such
banks of varying maturities) to the extent that the principal of such
deposits is insured by the Federal Deposit Insurance Corporation; such
deposits are referred to as "Insured Deposits." Such insurance (and
accordingly, the Funds' aggregated investments) is currently limited to
$100,000 per bank; any interest above that amount is not insured. Insured
Deposits are not marketable, and a Portfolio may invest in them only within
the 10% limit mentioned below under "Illiquid Investments" unless such
obligations are payable at principal amount plus accrued interest on demand
or within seven days after demand.
Zero Coupon Bonds
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as
two individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the interest
and principal components of an outstanding U.S. Treasury bond and selling
them as individual securities. Bonds issued by the Resolution Funding
Corporation (REFCORP) and the Financing Corporation (FICO) can also be
separated in this fashion. Original issue zeros are zero coupon securities
originally issued by the U.S. government, a government agency, or a
corporation in zero coupon form.
Mortgage-Backed Securities
A mortgage-backed security may be an obligation of the issuer backed
by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Mortgage-backed securities are based on different types
of mortgages including those on commercial real estate or residential
properties. Some mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), make payments of both principal and interest
at a variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Pass-through securities and participation certificates represent pools of
mortgages that are assembled, with interests sold in the pool; the assembly
is made by an "issuer," such as a mortgage banker, commercial bank or
savings and loan association, which assembles the mortgages in the pool and
passes through payments of principal and interest for a fee payable to it.
Payments of principal and interest by individual mortgagors are passed
through to the holders of the interest in the pool. Monthly or other
regular payments on pass-through securities and participation certificates
include payments of principal (including prepayments on mortgages in the
pool) rather than only interest payments.
Other types of mortgage-backed securities will likely be developed in
the future, and a Portfolio may invest in them if the Manager determines
they are consistent with its investment objective and policies.
The value of mortgage-backed securities may change due to shifts in
the market's perception of issuers. In addition, regulatory or tax changes
may adversely affect the mortgage securities market as a whole. Non-
government mortgage-backed securities may offer higher yields than those
issued by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject to
prepayment risk. Prepayment, which occurs when unscheduled or early
payments are made on the underlying mortgages, may shorten the effective
maturities of these securities and may lower their total returns.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments
from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase
prices of POs. Rising interest rates can have the opposite effect.
Asset-Backed Securities
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend
upon payment of the underlying loans by individuals, although the
securities may be supported by letters of credit or other credit
enhancements. The value of asset-backed securities may also depend on the
creditworthiness of the servicing agent for the loan pool, the originator
of the loans, or the financial institution providing the credit
enhancement.
Variable or Floating Rate Instruments
Variable or Floating Rate Instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and carry
rights that permit holders to demand payment of the unpaid principal
balance plus accrued interest from the issuers or certain financial
intermediaries. Floating rate securities have interest rates that change
whenever there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the interest
rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
Loans and Other Direct Debt Instruments
Direct debt instruments are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and
loan participations), to suppliers of goods or services (trade claims or
other receivables), or to other parties. Direct debt instruments are
subject to a Portfolio's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of
principal and interest. Direct debt instruments may not be rated by any
nationally recognized rating service. If a Portfolio does not receive
scheduled interest or principal payments on such indebtedness, the
Portfolio's share price and yield could be adversely affected. Loans that
are fully secured offer a Portfolio more protections than an unsecured loan
in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral could
be liquidated. Indebtedness of borrowers whose creditworthiness is poor
involves substantially greater risks, and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of developing countries also involves a risk that the
governmental entities responsible for the repayment of the debt may be
unable, or unwilling, to pay interest and principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks
to a Portfolio. For example, if a loan is foreclosed, a Portfolio could
become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. Direct
debt instruments may also involve a risk of insolvency of the lending bank
or other intermediary. Direct debt instruments that are not in the form of
securities may offer less legal protection to a Portfolio in the event of
fraud or misrepresentation. In the absence of definitive regulatory
guidance, a Portfolio relies on the Manager's research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect
the Portfolio.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the
loan or other indebtedness, a Portfolio has direct recourse against the
borrower, it may have to rely on the agent to apply appropriate credit
remedies against a borrower. If assets held by the agent for the benefit
of a Portfolio were determined to be subject to the claims of the agent's
general creditors, the Portfolio might incur certain costs and delays in
realizing payment on the loan or loan participation and could suffer a loss
of principal or interest.
Direct indebtedness purchased by a Portfolio may include letters of
credit, revolving credit facilities, or other standby financing commitments
obligating a Portfolio to pay additional cash on demand. These commitments
may have the effect of requiring a Portfolio to increase its investment in
a borrower at a time when it would not otherwise have done so, even if the
borrower's condition makes it unlikely that the amount will ever be repaid.
A Portfolio will set aside appropriate liquid assets in a segregated
custodial account to cover its potential obligations under standby
financing commitments.
For purposes of the limitations on the amount of total assets that a
Portfolio will invest in any one issuer or in issuers within the same
industry , a Portfolio generally will treat the borrower as the "issuer" of
indebtedness held by the Portfolio. In the case of loan participations
where a bank or other lending institution serves as financial intermediary
between a Portfolio and the borrower, if the participation does not shift
to the Portfolio the direct debtor-creditor relationship with the borrower,
SEC interpretations require the Portfolio, in appropriate circumstances, to
treat both the lending bank or other lending institution and the borrower
as "issuers" for these purposes. Treating a financial intermediary as an
issuer of indebtedness may restrict a Portfolio's ability to invest in
indebtedness related to a single financial intermediary, or a group of
intermediaries engaged in the same industry, even if the underlying
borrowers represent many different companies and industries.
Lending Securities
One of the ways in which a Portfolio may try to increase income is by
lending its securities. If a Portfolio does this, the borrower pays the
Portfolio an amount equal to the dividends or interest on the securities
that the Portfolio would have received if it had not loaned the securities.
The Portfolio also receives additional compensation as discussed below.
Any securities loans which a Portfolio makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines").
Under the present Guidelines, the collateral must consist of cash or U.S.
Government Securities (as defined in the Prospectus) or bank letters of
credit at least equal in value to the market value of the securities loaned
on each day that the loan is outstanding. If the market value of the
loaned securities exceeds the value of the collateral, the borrower must
add more collateral so that it at least equals the market value of the
securities loaned. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans.
The first is to receive a negotiated loan fee from the borrower. This
method is available for all three types of collateral. The second method,
which is not available when letters of credit are used as collateral, is
for a Portfolio to receive interest on the investment of the cash
collateral or to receive interest on the U.S. Government Securities used as
collateral. Part of the interest received in either case may be shared
with the borrower.
The letters of credit which a Portfolio may accept as collateral are
agreements by banks (other than the borrowers of the Portfolio's
securities), entered into at the request of the borrower and for its
account and risk, under which the banks are obligated to pay to the
Portfolio, while the letter is in effect, amounts demanded by the Portfolio
if the demand meets the terms of the letter. The Portfolio's right to make
this demand secures the borrower's obligations to it. The terms of any
such letters and the creditworthiness of the banks providing them (which
might include the Portfolio's custodian bank) must be satisfactory to the
Portfolio.
A Portfolio will lend securities only to creditworthy broker-dealers
and financial institutions and will make loans only under rules of the New
York Stock Exchange, which presently require the borrower to return the
securities to the Portfolio within five business days after the Portfolio
instructs it to do so. The Manager will evaluate the creditworthiness of
the borrower. If a Portfolio loses its voting rights on securities loaned,
it will have the securities returned to it in time to vote them if a
material event affecting the investment is to be voted on. The Portfolio
may pay reasonable finder's, administrative and custodian fees in
connection with loans of securities.
There may be risks of delay in receiving additional collateral from
the borrower if the market value of the securities loaned increases, risks
of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower fail financially.
Repurchase Agreements
Each of the Portfolios may purchase securities subject to
repurchase agreements, subject to its limitation on investment in illiquid
investments. See "Illiquid Investments." A repurchase agreement is an
instrument under which a Portfolio purchases a security and the seller
(normally a commercial bank or broker-dealer) agrees, at the time of
purchase, that it will repurchase the security at a specified time and
price. The amount by which the resale price is greater than the purchase
price reflects an agreed-upon market interest rate effective for the period
of the agreement. The return on the securities subject to the repurchase
agreement may be more or less than the return on the repurchase agreement.
The majority of repurchase transactions in which a Portfolio would
engage are overnight transactions, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The primary
risk is that a Portfolio may suffer a loss if the seller fails to pay the
agreed-upon amount on the delivery date and that amount is greater than the
resale price of the underlying securities and other collateral held by the
Portfolio. In the event of bankruptcy or other default by the seller,
there may be possible delays and expenses in liquidating the underlying
securities or other collateral, decline in their value or loss of interest.
A Portfolio's repurchase agreements can be considered as collateralized
loans (such agreements being defined as loans under and for the purpose of
the Investment Company Act of 1940) and will be structured so as to fully
collateralize the loans. The value of the securities subject to the
agreement, which will be held by the Portfolio's custodian bank or by a
third party that qualifies as a custodian under section 17(f) of the
Investment Company Act of 1940, is and, during the entire term of the
agreement, remains at least equal to the value of the loan, including the
accrued interest earned thereon. A Portfolio's repurchase agreements are
entered into only with those entities approved on the basis of criteria
established by the Board of Directors.
Options, Futures Contracts and Other Strategies
As discussed in the Prospectus, the Manager may use a variety of
financial instruments ("Financial Instruments"), including certain options,
futures contracts (sometimes referred to as "futures"), options on futures
contracts and forward currency contracts to attempt to enhance the
Portfolios' income or yield or to attempt to hedge the Portfolios'
portfolios.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission ("SEC"), the several exchanges on
which they are traded, the Commodity Futures Trading Commission ("CFTC")
and various state regulatory authorities. In addition, the Portfolios'
ability to use these instruments will be limited by tax considerations.
See "Taxes."
In addition to the instruments, strategies and risks described below
and in the Prospectus, the Manager expects to discover additional
opportunities in connection with options, futures contracts, options on
futures contracts and other similar or related techniques. These
opportunities may become available as the Manager develops new techniques,
as regulatory authorities broaden the range of permitted transactions and
as new options, futures contracts, options on futures contracts, forward
currency contracts and other techniques are developed. The Manager may
utilize these opportunities to the extent that they are consistent with a
Portfolio's investment goals and are permitted by the Portfolio's
investment limitations and applicable regulatory authorities. The
Portfolios' Prospectus or SAI will be supplemented to the extent that new
products or techniques involve materially different risks than those
described below or in the Prospectus.
Certain Limitations. The Limited-Term Bond Portfolio may not purchase
or sell options, futures contracts or options on futures contracts if the
aggregate value of such options and futures held by that Portfolio would
exceed 25% of its assets.
Each of the Small Cap Portfolio and Balanced Portfolio may not
purchase options on securities or futures contracts if the aggregate value
of the premiums paid (adjusted for the portion of any premium attributable
to the difference between the "strike price" of the option and the market
price of the underlying security or futures contract at the time of
purchase) exceeds 20% of the Portfolio's total assets. The aggregate
amount of the obligations underlying put options on securities or futures
contracts written by each of the Small Cap Portfolio and Balanced Portfolio
may not exceed 25% of its net assets computed at the time of sale.
The Asset Strategy Portfolio will not: (a) sell futures contracts,
purchase put options, or write call options if, as a result, more than 50%
of the Portfolio's total assets would be hedged with futures and options
under normal conditions; or (b) purchase futures contracts or write put
options if, as a result, the Portfolio's total obligations upon settlement
or exercise of purchased futures contracts and written put options would
exceed 25% of its total assets. These limitations do not apply to options
attached to or acquired or traded together with their underlying
securities, and do not apply to securities that incorporate features
similar to options.
For as long as required by applicable state securities regulation,
(1) the aggregate value of securities underlying put options written
by the Asset Strategy Portfolio, determined as of the date the put options
are written, will not exceed 50% of the Portfolio's net assets,
(2) the Asset Strategy Portfolio will only buy or sell (a) options on
securities, indices or futures contracts, or (b) futures contracts, in each
case that are offered through the facilities of a national securities
association or that are listed on a national securities or commodities
exchange, other than the permitted over-the-counter ("OTC") options
described under "Limitations on the Use of Options" below,
(3) the aggregate premiums paid on all options on securities, indices
or futures contracts purchased by the Asset Strategy Portfolio that are
held at any time will not exceed 20% of the Portfolio's total net assets,
and
(4) the aggregate margin deposits on all futures and options thereon
held at any time by the Asset Strategy Portfolio will not exceed 5% of the
Portfolio's total assets.
Options. As discussed in the Prospectus, certain of the Portfolios
may purchase and/or write (sell) call and put options on equity and debt
securities, foreign currencies, stock indices and bond indices. The
purchase of call options serves as a long hedge, and the purchase of put
options serves as a short hedge. Writing put or call options can enable a
Portfolio to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price on the
option, minus the premium received, the Portfolio would expect to suffer a
loss.
If a Portfolio writes a call, it agrees to sell to the purchaser of
the call the securities subject to the call at a fixed price; this is
referred to as the exercise price. This price may be equal to, or more or
less than, the market price of the securities covered by the call. During
the period of a call, the Portfolio must, if the call is exercised, sell at
the exercise price no matter what happens to the market price of the
securities subject to the call.
As compensation for writing a call option, a Portfolio receives a
premium. Should the market price of the security on which a Portfolio has
written a call go down during the call period, the premium would help to
offset that decline. However, the Portfolio would lose the opportunity to
profit from an increase in the market price of the securities that are
subject to the call over the exercise price except to the extent that the
premium represents such a profit. A Portfolio will write calls when the
Manager believes that the amount of the premium represents adequate
compensation for the loss of this opportunity.
Writing calls is a highly specialized activity, which involves
investment techniques and risks different from those ordinarily associated
with investment companies. The personnel engaging in this activity have
had experience with other funds in the United Group and in managed accounts
engaging in this activity. It is believed that the Portfolios' limitations
on writing calls will tend to reduce these risks.
A Portfolio may purchase calls to close its position in a call that it
has written. To do this, it will make a "closing transaction." As
discussed below, some Portfolios may also purchase calls other than as part
of a closing transaction. This involves buying a call on the same security
with the same exercise price and expiration date as the call it has
written. When a Portfolio sells a security on which it has written a call,
it may effect a closing transaction. (If a Portfolio may only write
covered call options, it will effect a closing transaction when it sells
the security on which it has written the call.) A Portfolio may also
effect a closing transaction to avoid having to sell a security on which it
has written a call if the call is exercised. A Portfolio will have a
profit or loss from a closing transaction, depending on the amount of
option transaction costs and on whether the amount it pays to purchase the
call is less or more than the premium it received on the call that is
closed out. A profit will also be realized if the call lapses unexercised
because the Portfolio retains the premium received. There is no assurance
that a Portfolio will be able to effect a closing transaction; if a
Portfolio cannot do so, it may be required to hold the security on which
the call was written until the call expires or is exercised even though it
might otherwise be desirable to sell the security. If a call that a
Portfolio wrote is exercised, it could deliver the securities that it owns
(or the securities that it has the right to get). It could also deliver
other securities that it purchases.
A Portfolio's securities will be bought and sold in order to attempt
to achieve the goals of that Portfolio. However, the fact that calls can
be written on a particular security may be a factor in buying or keeping it
if it is otherwise considered suitable for the Portfolio.
A Portfolio's custodian bank, or a securities depository acting for
it, will act as the Portfolio's escrow agent as to the related investments
on which the Portfolio (other than Asset Strategy Portfolio) has written
calls, or as to other assets held for escrow, so that, pursuant to the
rules of the OCC and certain exchanges, no margin deposit will be required
of the Portfolio on such calls. Until the related investments are released
from escrow, they cannot be sold by the Portfolio; this release will take
place on the expiration of the call or when the Portfolio enters into a
closing transaction.
When a Portfolio writes a put, it receives a premium and agrees to
purchase the related investments from the purchaser of the put during the
put period at a fixed exercise price (which may differ from the market
price of the related investments) regardless of market price changes during
the put period. If the put is exercised, the Portfolio must purchase the
related investments at the exercise price. Puts are ordinarily sold when a
Portfolio anticipates that, during the option period, the market price of
the underlying security will decline by less than the amount of the
premium. In writing puts, a Portfolio assumes the risk of loss should the
market value of the underlying security decline below the exercise price of
the option. A Portfolio's cost of purchasing the investments will be
adjusted by the amount of the premium it has received.
To terminate its obligation on a put that it has written, a Portfolio
may purchase a put in a "closing transaction." As discussed below, some
Portfolios may also purchase puts other than as part of a closing
transaction. A profit or loss will be realized depending on the amount of
option transaction costs and whether the premium previously received is
more or less than the cost of the put purchased. A profit will also be
realized if the put lapses unexercised because the Portfolio retains the
premium received.
When a Portfolio buys a call, it pays a premium and has the right to
buy the related investments from the seller of the call during the call
period at a fixed exercise price. The Portfolio benefits only if the
market price of the related investments is above the call price prior to
the expiration date and the call is either exercised or sold at a profit.
If the call is not exercised or sold (whether or not at a profit), it will
become worthless at its expiration date and the Portfolio will lose the
premium paid and the right to purchase the related investments.
A Portfolio may purchase a put on a security it owns ("protective
put") or on a security it does not own ("nonprotective put"). When a
Portfolio buys a put, it pays a premium and has the right to sell the
related investments to the seller of the put during the put period at a
fixed exercise price. Buying a protective put permits a Portfolio to
protect itself prior to the time the put expires against a decline in the
value of the related investments below the exercise price by selling them
through the exercise of the put. Buying a nonprotective put permits a
Portfolio, if the market price of the related investments is below the put
price during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. If the market price of
the related investments is above the exercise price and as a result the put
is not exercised or resold (whether or not at a profit), the put will
become worthless at its expiration date.
A type of put that the Small Cap Portfolio, Balanced Portfolio and the
Asset Strategy Portfolio may each purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to a
Portfolio. An optional delivery standby commitment gives a Portfolio the
right to sell the security back to the seller on specified terms. This
right is provided as an inducement to purchase the security.
Risks of Options on Securities. Certain of the Portfolios may
purchase or write both exchange-traded and OTC options. Exchange markets
for options on debt securities and foreign currencies exist, but these
instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization
affiliated with the exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between a Portfolio and its contra
party (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Portfolio purchases an OTC option, it relies on
the contra party from whom it purchased the option to make or take delivery
of the underlying investment upon exercise of the option. The Manager
evaluates the creditworthiness of all such parties and intends to enter
into OTC option transactions for a Portfolio (other than the Asset Strategy
Portfolio) only with major dealers in OTC options. The market for these
options may be less active than the market for exchange-listed options.
The Manager evaluates the ability to enter into closing transactions on OTC
options prior to investing in them.
Generally, the OTC foreign currency options used by a Portfolio are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of
the option.
A Portfolio's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market.
However, there can be no assurance that such a market will exist at any
particular time. Closing transactions can be made for OTC options only by
negotiating directly with the contra party, or by a transaction in the
secondary market if any such market exists. Although a Portfolio will
enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Portfolio, there is
no assurance that the Portfolio will in fact be able to close out an OTC
option position at a favorable price prior to expiration. In the event of
insolvency of the contra party, the Portfolio might be unable to close out
an OTC option position at any time prior to its expiration.
A Portfolio's put and call activities may affect its turnover rate and
brokerage commission payments. The exercise of calls or puts written by a
Portfolio may cause it to sell or purchase related investments, thus
increasing its turnover rate in a manner beyond its control. Once a
Portfolio has received an exercise notice on an option it has written, it
cannot effect a closing transaction in order to terminate its obligation
under the option and must deliver or receive the underlying securities at
the exercise price. The exercise of puts purchased by a Portfolio may also
cause the sale of related investments, also increasing turnover; although
such exercise is within a Portfolio's control, holding a protective put
might cause it to sell the related investments for reasons that would not
exist in the absence of the put. A Portfolio will pay a brokerage
commission each time it buys or sells a put or call. Such commissions may
be higher than those that would apply to direct purchases or sales.
Option premiums paid to control an amount of related investments are
small in relation to the market value of related investments and,
consequently, put and call options offer large amounts of leverage. The
leverage offered by trading in options will result in a Portfolio's net
asset value being more sensitive to changes in the value of the related
investment.
Options on Indices. Puts and calls on indices are similar to puts
and calls on securities or futures contracts except that all settlements
are in cash and gain or loss depends on changes in the index in question
rather than on price movements in individual securities or futures
contracts. When a Portfolio writes a call on an index, it receives a
premium and agrees that, prior to the expiration date, the purchaser of the
call, upon exercise of the call, will receive from the Portfolio an amount
of cash if the closing level of the index upon which the call is based is
greater than the exercise price of the call. The amount of cash is equal
to the difference between the closing price of the index and the exercise
price of the call times a specified multiple ("multiplier"), which
determines the total dollar value for each point of such difference. When
a Portfolio buys a call on an index, it pays a premium and has the same
rights as to such call as are indicated above. When a Portfolio buys a put
on an index, it pays a premium and has the right, prior to the expiration
date, to require the seller of the put, upon the Portfolio's exercise of
the put, to deliver to the Portfolio an amount of cash if the closing level
of the index upon which the put is based is less than the exercise price of
the put, which amount of cash is determined by the multiplier, as described
above for calls. When a Portfolio writes a put on an index, it receives a
premium and the purchaser has the right, prior to the expiration date, to
require the Portfolio to deliver to it an amount of cash equal to the
difference between the closing level of the index and the exercise price
times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options
are settled in cash, when a Portfolio writes a call on an index it cannot
provide in advance for its potential settlement obligations by acquiring
and holding the underlying securities. A Portfolio can offset some of the
risk of writing a call index option by holding a diversified portfolio of
securities similar to those on which the underlying index is based.
However, a Portfolio cannot, as a practical matter, acquire and hold a
portfolio containing exactly the same securities as underlie the index and,
as a result, bears a risk that the value of the securities held will vary
from the value of the index.
Even if a Portfolio could assemble a portfolio that exactly reproduced
the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in
writing index options. When an index option is exercised, the amount of
cash that the holder is entitled to receive is determined by the difference
between the exercise price and the closing index level on the date when the
option is exercised. As with other kinds of options, a Portfolio as the
call writer will not learn that it has been assigned until the next
business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as
of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the
writer of an index call holds securities that exactly match the composition
of the underlying index, it will not be able to satisfy its assignment
obligations by delivering those securities against payment of the exercise
price. Instead, it will be required to pay cash in an amount based on the
closing index value on the exercise date. By the time it learns that it
has been assigned, the index may have declined, with a corresponding
decline in the value of its portfolio. This "timing risk" is an inherent
limitation on the ability of index call writers to cover their risk
exposure by holding securities positions.
If a Portfolio has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk that
the level of the underlying index may subsequently change. If such a
change causes the exercised option to fall out-of-the-money, the Portfolio
will be required to pay the difference between the closing index value and
the exercise price of the option (times the applicable multiplier) to the
assigned writer.
Limitations on the Use of Options. The Portfolios' use of options
is governed by the following guidelines which can be changed by the Fund's
Board of Directors without a shareholder vote.
The Bond Portfolio, High Income Portfolio, Growth Portfolio and Income
Portfolio may each write (sell) covered call options on securities on up to
25% of its assets. The International Portfolio may write (sell) covered
call options on securities on no more than 10% of its total assets.
"Covered" means that the Portfolio owns the securities subject to the call
or has the right to acquire them without additional payment. Each of these
Portfolios may purchase a call option on a security only to close its
position in a call it has written. Calls written by these Portfolios must
be listed on a domestic securities exchange; however, the Bond Portfolio,
High Income Portfolio, Growth Portfolio and Income Portfolio may write OTC
calls on U.S. Government Securities. Writing calls may increase each of
these Portfolio's turnover rates and result in higher brokerage
commissions.
The Money Market Portfolio may not write call options on securities.
The Small Cap Portfolio and Balanced Portfolio may each write (sell)
covered call options on securities on not more than 25% of its total
assets. These calls must be issued by the Options Clearing Corporation
("OCC") and listed on a domestic securities exchange.
The Small Cap Portfolio and Balanced Portfolio may each write (sell)
put options and purchase calls and puts on securities in which the
Portfolio may invest. Each of these Portfolios has an operating policy
that provides that only put options on securities issued by the OCC may be
sold, except that each may write OTC put options on U.S. Government
Securities. Each of these Portfolios has an operating policy that provides
that only options on securities issued by the OCC may be purchased, except
that each may purchase OTC put and call options on U.S. Government
Securities and optional delivery standby commitments.
Each of the Small Cap Portfolio and Balanced Portfolio may write
(sell) and purchase listed options on stock indices that are not limited to
stocks of any industry or group of industries ("broadly-based stock
indices"). Each may write options on broadly-based stock indices to
generate income when the Manager anticipates that the index price will not
increase or decrease by more than the premium received by the Portfolio.
Each may purchase calls on broadly-based stock indices to hedge against an
anticipated increase in the price of securities it wishes to acquire and
may purchase puts on broadly-based stock indices to hedge against an
anticipated decline in the market value of its portfolio securities.
The Limited-Term Bond Portfolio may write (sell) listed and OTC
options on domestic debt securities, which securities include, without
limitation, U.S. Government Securities ("Domestic Debt Securities"). The
Limited-Term Bond Portfolio may not write call options having aggregate
exercise prices greater than 25% of its net assets. The Limited-Term Bond
Portfolio may purchase listed and OTC options on Domestic Debt Securities.
The Asset Strategy Portfolio may purchase a put or call option
(including any straddles or spreads) only if the value of its premium, when
aggregated with the premiums on all other options held by the Portfolio,
does not exceed 5% of the Portfolio's total assets. For so long as
required by applicable state securities regulation, the Asset Strategy
Portfolio will only trade OTC options (a) if exchange-traded options are
not available, (b) there is an active OTC market in such options, and (c)
transactions are all through a broker-dealer with a minimum net worth of
$20 million.
For further limitations on certain Portfolios' use of options, see
"Limitations on the Use of Futures Contracts and Options Thereon" below.
Futures Contracts and Options Thereon. When a Portfolio purchases a
futures contract, it incurs an obligation to take delivery of a specified
amount of the obligation underlying the contract at a specified time in the
future for a specified price. When a Portfolio sells a futures contract,
it incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price. In the
case of a futures contract on an index, the obligation underlying the
futures contract is an amount of cash equal to a specified dollar amount
times the difference between the index value at the close of the last
trading day of the futures contract and the price at which the futures
contract is originally struck. In the case of a futures contract on a
security, the underlying obligation is the related debt security.
When a Portfolio writes an option on a futures contract, it becomes
obligated, in return for the premium paid, to assume a position in the
futures contract at a specified exercise price at any time during the term
of the option. If a Portfolio has written a call, it becomes obligated to
assume a "short" position in the futures contract, which means that it is
required to deliver the underlying securities. If it has written a put, it
becomes obligated to assume a "long" position in the futures contract,
which means that it is required to take delivery of the underlying
securities. When a Portfolio purchases an option on a futures contract, it
acquires the right, in return for the premium it paid, to assume a position
in the futures contract, a "long" position if the option is a call and a
"short" position if the option is a put.
Each of the Small Cap Portfolio and Balanced Portfolio may sell
futures contracts on broadly-based stock indices ("Stock Index Futures"),
or write a call or purchase a put on a Stock Index Future, if the Manager
anticipates that a general market or market sector decline may adversely
affect the market value of any or all of the Portfolio's common stock
holdings. Each of the Small Cap Portfolio and Balanced Portfolio may buy a
Stock Index Future, or purchase a call or sell a put on a Stock Index
Future, if the Manager anticipates a significant market sector advance in
the common stock it intends to purchase for the Portfolio's portfolio.
Each of the Small Cap Portfolio and Balanced Portfolio may purchase a Stock
Index Future, or purchase a call or sell a put thereon, as a temporary
substitute for the purchase of individual stocks that may then be purchased
in an orderly fashion.
In the case of debt securities, each of the Small Cap Portfolio and
Balanced Portfolio could sell futures contracts on debt securities ("Debt
Futures"), or write a call or purchase a put on a Debt Future, to attempt
to protect against the risk that the value of the debt securities held by
the Portfolio might decline. The Limited-Term Bond Portfolio could sell
futures contracts on domestic debt securities ("Domestic Debt Futures"), or
write a call or purchase a put on a Domestic Debt Future, in the same way.
Each of the Small Cap Portfolio and Balanced Portfolio could purchase a
Debt Future, or purchase a call or write a put on a Debt Future, to protect
against the risk of an increase in the value of debt securities at a time
when the Portfolio is not invested in debt securities to the extent
permitted by its investment policies. The Limited-Term Bond Portfolio
could purchase a Domestic Debt Future, or purchase a call or write a put on
a Domestic Debt Future, in the same way. As securities are purchased,
corresponding futures or options positions would be terminated.
Futures strategies also can be used to manage the average duration of
a Portfolio's portfolio. If the Manager wishes to shorten the average
duration of a Portfolio, the Portfolio may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
the Manager wishes to lengthen the average duration of a Portfolio, the
Portfolio may purchase a futures contract or a call option thereon, or sell
a put option thereon.
Unlike when a Portfolio purchases or sells securities, no price is
paid or received by it when it purchases or sells a futures contract.
Initially, the Portfolio will be required to deposit an amount of cash or
U.S. Treasury Bills equal to a varying specified percentage of the contract
amount. This amount is known as initial margin. Cash held in the margin
account is not income producing. Subsequent payments, called variation
margin, to and from the broker will be made on a daily basis as the price
of the underlying debt securities or index fluctuates making the futures
contract more or less valuable, a process known as "marking-to-market."
If a Portfolio writes an option on a futures contract, it will be
required to deposit initial and variation margin pursuant to the
requirements similar to those applicable to futures contracts. Premiums
received from the writing of an option on a futures contract are included
in the initial margin deposit.
Changes in variation margin are recorded by a Portfolio as
unrealized gains or losses. Initial margin payments will be deposited with
a Portfolio's custodian bank in an account registered in the broker's name;
access to the assets in that account may be made by the broker only under
specified conditions. At any time prior to expiration of a futures
contract or option thereon, a Portfolio may elect to close the position by
taking an opposite position, which will operate to terminate its position
in the futures contract or option. A final determination of variation
margin is then made, additional cash is required to be paid by or released
to the Portfolio and the Portfolio realizes a loss or a gain. Although
futures contracts by their terms call for the actual delivery or
acquisition of the underlying obligation, in most cases the contractual
obligation is fulfilled without having to make or take delivery. The
Portfolios do not generally intend to make or take delivery of the
underlying obligation. All transactions in futures contracts and options
thereon are made, offset or fulfilled through a clearing house associated
with the exchange on which the contracts are traded. Although the
Portfolios (other than the Asset Strategy Portfolio) intend to buy and sell
futures contracts and options thereon only on exchanges where there appears
to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular futures contract or option
thereon at any particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or option thereon
can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily
price limits do not limit potential losses because prices could move to the
daily limit for several consecutive days with little or no trading, thereby
preventing the liquidation of unfavorable positions.
If a Portfolio were unable to liquidate a futures contract or option
thereon due to the absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses. The Portfolio would
continue to be subject to market risk with respect to the position. In
addition, the Portfolio would be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
futures contract or option or to maintain cash or securities in a
segregated account.
Each Portfolio must operate within certain restrictions as to
positions in futures contracts and options thereon under a rule ("CFTC
Rule") adopted by the CFTC under the Commodity Exchange Act ("CEA") to be
eligible for the exclusion provided by the CFTC Rule from registration by
the Portfolio with the CFTC as a "commodity pool operator" (as defined
under the CEA), and must represent to the CFTC that it will operate within
such restrictions. Under these restrictions, to the extent that a
Portfolio enters into futures contracts and options on futures contracts
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets. (In general, a call option on a futures contract
is "in-the-money" if the value of the underlying futures contract exceeds
the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract
is exceeded by the strike price of the put.)
Risks of Futures Contracts and Options Thereon. Since futures
contracts and options thereon can replicate movements in the cash markets
for the securities in which a Portfolio invests without the large cash
investments required for dealing in such markets, they may subject a
Portfolio to greater and more volatile risks than might otherwise be the
case. The principal risks associated with the use of such instruments are
(i) imperfect correlation between movements in the market price of the
portfolio investments (held or intended to be purchased) being hedged and
in the price of the futures contract or option; (ii) possible lack of a
liquid secondary market for closing out futures contracts or options
positions; (iii) the need for additional portfolio management skills and
techniques; and (iv) losses due to unanticipated market price movements.
For a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security being
hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment
that is being hedged. The Manager will attempt to create a closely
correlated hedge, but hedging activity may not be completely successful in
eliminating market value fluctuation. See below for additional discussion
of correlation as it relates to Stock Index Futures.
The ordinary spreads between prices in the cash and futures markets
(including the options on futures market), due to differences in the
natures of those markets, are subject to the following factors, which may
create distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions, which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point
of view of speculators, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate or stock market trends by the
Manager may still not result in a successful transaction. The Manager may
be incorrect in its expectations as to the extent of various interest rate
or stock market movements or the time span within which the movements take
place.
The risk of imperfect correlation between movements in the price of
an index future and movements in the price of the securities that are the
subject of the hedge increases as the composition of a Portfolio's
portfolio diverges from the securities included in the applicable index.
The price of the index futures may move more than or less than the price of
the securities being hedged. If the price of the index future moves less
than the price of the securities that are the subject of the hedge, the
hedge will not be fully effective but, if the price of the securities being
hedged has moved in an unfavorable direction, the Portfolio would be in a
better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage
will be partially offset by the futures contract. If the price of the
futures contract moves more than the price of the securities, a Portfolio
will experience either a loss or a gain on the futures contract that will
not be completely offset by movements in the price of the securities that
are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of the securities being hedged and movements in
the price of the index futures, a Portfolio may buy or sell index futures
in a greater dollar amount than the dollar amount of the securities being
hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the
securities included in the index. It is also possible that, where a
Portfolio has sold futures contracts to hedge its portfolio against decline
in the market, the market may advance and the value of the common stocks
held in the portfolio may decline. If this occurred, a Portfolio would
lose money on the futures contract and also experience a decline in value
of its portfolio securities. However, while this could occur for a very
brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction
as the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before a Portfolio is able to invest in them in
an orderly fashion, it is possible that the market may decline instead. If
the Portfolio then concludes not to invest in them at that time because of
concern as to possible further market decline or for other reasons, it will
realize a loss on the futures contract that is not offset by a reduction in
the price of the securities it had anticipated purchasing.
Limitations on the Use of Futures Contracts and Options Thereon. The
Portfolios' use of futures is governed by the following guidelines, which
can be changed by the Fund's Board of Directors without a shareholder vote.
Each of the Small Cap Portfolio and Balanced Portfolio may buy and
sell Debt Futures, Stock Index Futures, and options on Debt Futures and
Stock Index Futures. The Limited-Term Bond Portfolio may buy and sell
futures on Domestic Debt Futures and options on Domestic Debt Futures.
Each of these Portfolios may purchase or sell futures contracts and options
thereon for the purpose of hedging against changes in the market value of
its portfolio securities or changes in the market value of securities that
the Manager anticipates it may wish to include in the Portfolio's
portfolio.
Each of these Portfolios may write options on futures contracts to
increase income.
The Limited-Term Bond Portfolio may purchase futures contracts and
options thereon only if no more than 30% of its total assets would be so
invested. The value of all futures contracts sold by the Limited-Term Bond
Portfolio may not exceed the total market value of its portfolio.
To the extent that Asset Strategy Portfolio enters into futures
contracts or related options, in each case other than for bona fide hedging
purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by
which options are "in-the-money") will not exceed 5% of the liquidation
value of the Portfolio's portfolio, after taking into account unrealized
profits and unrealized losses on any contracts the Portfolio has entered
into. This guideline does not limit to 5% the percentage of the
Portfolio's assets that are at risk in futures contracts and related
options transactions.
Foreign Currency Hedging Strategies--Special Considerations. Certain
of the Portfolios may use options and futures contracts on foreign
currencies, as described above, and foreign currency forward contracts, as
described below, to attempt to hedge against movements in the values of the
foreign currencies in which the Portfolios' securities are denominated.
Such currency hedges can protect against price movements in a security that
a Portfolio owns or intends to acquire that are attributable to changes in
the value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are
attributable to other causes.
The Portfolios might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are
available or such Financial Instruments are more expensive than certain
other Financial Instruments. In such cases, a Portfolio may seek to hedge
against price movements in that currency by entering into transactions
using Financial Instruments on another currency or basket of currencies,
the values of which the Manager believes will have a high degree of
positive correlation to the value of the currency being hedged. The risk
that movements in the price of the Financial Instrument will not correlate
perfectly with movements in the price of the currency subject to the
hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might
involve substantially larger amounts than those involved in the use of such
Financial Instruments, the Portfolios could be disadvantaged by having to
deal in the odd lot market (generally consisting of transactions of less
than $1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large
transactions in the interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The interbank market in
foreign currencies is a global, round-the-clock market. To the extent the
U.S. options or futures markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements
might take place in the underlying markets that cannot be reflected in the
markets for the Financial Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying
currency. Thus, a Portfolio might be required to accept or make delivery
of the underlying foreign currency in accordance with any U.S. or foreign
regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
Forward Currency Contracts. The Asset Strategy Portfolio and the
International Portfolio may enter into forward currency contracts to
purchase or sell foreign currencies for a fixed amount of U.S. dollars or
another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days (term) from the date of the forward
currency contract agreed upon by the parties, at a price set at the time of
the forward currency contract. These forward currency contracts are traded
directly between currency traders (usually large commercial banks) and
their customers.
Such transactions may serve as long hedges; for example, a Portfolio
may purchase a forward currency contract to lock in the U.S. dollar price
of a security denominated in a foreign currency that the Portfolio intends
to acquire. Forward currency contract transactions may also serve as short
hedges; for example, a Portfolio may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated
sale of a security, dividend or interest payment denominated in a foreign
currency.
Each of these Portfolios may also use forward contracts to hedge
against a decline in the value of existing investments denominated in
foreign currency. For example, if a Portfolio owned securities denominated
in pounds sterling, it could enter into a forward contract to sell pounds
sterling in return for U.S. dollars to hedge against possible declines in
the pound's value. Such a hedge, sometimes referred to as a "position
hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by
other factors. Each of these Portfolios could also hedge the position by
selling another currency expected to perform similarly to the pound
sterling, for example, by entering into a forward contract to sell Deutsche
Marks or European Currency Units in return for U.S. dollars. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges
may result in losses if the currency used to hedge does not perform
similarly to the currency in which the hedged securities are denominated.
The Asset Strategy Portfolio also may use forward currency contracts
for "cross-hedging." Under this strategy, the Portfolio would increase its
exposure to foreign currencies that the Manager believes might rise in
value relative to the U.S. dollar, or shift its exposure to foreign
currency fluctuations from one country to another. For example, if a
Portfolio owned securities denominated in a foreign currency and the
Manager believed that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign
currency.
The cost to a Portfolio of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees
or commissions are involved. When a Portfolio enters into a forward
currency contract, it relies on the contra party to make or take delivery
of the underlying currency at the maturity of the contract. Failure by the
contra party to do so would result in the loss of any expected benefit of
the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or
purchasing, respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not exist for forward
currency contracts, with the result that closing transactions generally can
be made for forward currency contracts only by negotiating directly with
the contra party. Thus, there can be no assurance that a Portfolio will in
fact be able to close out a forward currency contract at a favorable price
prior to maturity. In addition, in the event of insolvency of the contra
party, a Portfolio might be unable to close out a forward currency contract
at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position, and
would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or securities in a
segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change
after the foreign currency contract has been established. Thus, a
Portfolio might need to purchase or sell foreign currencies in the spot
(cash) market to the extent such foreign currencies are not covered by
forward contracts. The projection of short-term currency market movements
is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The International Portfolio does not
intend to enter into forward currency contracts on a regular basis.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with respect to
overall diversification strategies. However, the Manager believes that it
is important to have flexibility to enter into forward currency contracts
when it determines that the best interests of a Portfolio may be served.
Limitations on the Use of Forward Currency Contracts. The
International Portfolio may enter into forward currency contracts, provided
that it does not thereafter have more than 15% of the value of its assets
committed to the consummation of all such forward currency contracts;
however, it will not enter into forward currency contracts or maintain a
net exposure to such forward currency contracts where the consummation of
the forward currency contracts would obligate the International Portfolio
to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency. The
International Portfolio may hold foreign currency only in connection with
forward currency contracts, only up to four business days, as well as in
connection with the purchase or sale of foreign securities, but not
otherwise. Generally, the International Portfolio will not enter into a
Forward Contract with a term greater than one year.
Combined Positions. A Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For a example, a Portfolio may purchase a put option and write a
call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in
the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs
and may be more difficult to open and close out.
Cover for Financial Instruments. Transactions using Financial
Instruments (other than options that a Portfolio has purchased) expose the
Portfolio to an obligation to another party. A Portfolio will not enter
into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies, or other options, futures
contracts or forward currency contracts, or (2) cash, receivables and
short-term debt securities with a value sufficient at all times to cover
its potential obligations not covered as provided in (1) above. Each
Portfolio will comply with SEC guidelines regarding cover for these
instruments and, if the guidelines so require, set aside cash, U.S.
Government Securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Financial Instrument is open,
unless they are replaced with similar assets. As a result, the commitment
of a large portion of a Portfolio's assets to cover or segregated accounts
could impede portfolio management or the Portfolio's ability to meet
redemption requests or other current obligations.
Swaps, Caps, Collars and Floors. Swap agreements, including caps,
collars and floors, can be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or
decrease a Portfolio's exposure to long- or short-term interest rates (in
the U.S. or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates, or other factors such as security
prices or inflation rates.
Swap agreements will tend to shift a Portfolio's investment exposure
from one type of investment to another. For example, if a Portfolio agrees
to exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the Portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options.
The net amount of the excess, if any, of a Portfolio's obligations
over its entitlements with respect to each swap will be accrued on a daily
basis and an amount of cash, U.S. Government Securities or other liquid
high grade debt obligations having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account by the
Portfolio's custodian that satisfies the requirements of the Investment
Company Act of 1940, as amended. Each Portfolio will also establish and
maintain such segregated accounts with respect to its total obligations
under any swaps that are not entered into on a net basis and with respect
to any caps or floors that are written by the Portfolio. The Manager and
the Fund believe that such obligations do not constitute senior securities
under the Investment Company Act of 1940, as amended, and, accordingly,
will not treat them as being subject to a Portfolio's borrowing
restrictions.
Indexed Securities. Each Portfolio (other than Growth Portfolio) may
purchase securities whose prices are indexed to the prices of other
securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators, as long as the Manager
determines that it is consistent with the Portfolio's investment goal and
policies. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. Gold-indexed
securities, for example, typically provide for a maturity value that
depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values
of one or more specified foreign currencies, and may offer higher yields
than U.S. dollar-denominated securities of equivalent issuers. Currency-
indexed securities may be positively or negatively indexed; that is, their
maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar
to a put on the underlying currency. Currency-indexed securities may also
have prices that depend on the values of a number of different foreign
currencies relative to each other.
Recent issuers of indexed securities have included banks,
corporations, and certain U.S. government agencies. The Manager will use
its judgment in determining whether indexed securities should be treated as
short-term instruments, bonds, stocks, or as a separate asset class for
purposes of Asset Strategy Portfolio's investment allocations, depending on
the individual characteristics of the securities. Certain indexed
securities that are not traded on an established market may be deemed
illiquid.
Warrants and Rights
Each Portfolio except the Money Market Portfolio, Limited-Term Bond
Portfolio, and Balanced Portfolio may purchase warrants. The Bond
Portfolio, the High Income Portfolio, the Growth Portfolio, the Income
Portfolio and the Small Cap Portfolio may purchase warrants provided that
such purchase will not cause more than 5% of their respective net assets,
valued at the lower of cost or market, to be invested in warrants. The
Asset Strategy Portfolio does not currently intend to purchase warrants,
valued at the lower of cost or market, in excess of 5% of the Portfolio's
net assets. Included in that amount, but not to exceed 2% of the Asset
Strategy Portfolio's net assets, may be warrants that are not listed on the
New York Stock Exchange or the American Stock Exchange. Warrants acquired
by the Asset Strategy Portfolio in units or attached to securities are not
subject to these restrictions. The International Portfolio may purchase
warrants and rights to purchase securities, provided that as a result of
such purchase not more than 5% of its net assets will consist of warrants,
rights or a combination thereof. Warrants are options to purchase equity
securities at specific prices valid for a specific period of time. Their
prices do not necessarily move parallel to the prices of the underlying
securities. Rights are similar to warrants but normally have a shorter
duration and are distributed directly by the issuer to its shareholders.
Warrants and rights have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer. Warrants and rights
acquired in units or attached to other securities are not considered for
purposes of computing the 5% limitation. Certain states may impose a lower
percentage limit on investments in warrants and rights.
When-Issued and Delayed Delivery Transactions
A Portfolio may purchase securities on a when-issued or delayed
delivery basis or sell them on a delayed delivery basis. Delivery may take
place a month or more after the date of the transaction. The purchase or
sale price is fixed on the transaction date. A Portfolio will enter into
when-issued or delayed delivery transactions in order to secure what is
considered to be an advantageous price and yield at the time of entering
into the transaction. The securities so purchased by a Portfolio are
subject to market fluctuation. Therefore, their value may be less when
delivered than the purchase price paid. No interest accrues to a Portfolio
until delivery and payment are completed. When a Portfolio makes a
commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value of
the securities in determining its net asset value per share. The
securities sold by a Portfolio on a delayed delivery basis are also subject
to market fluctuation. Therefore, their value when a Portfolio delivers
them may be more than the purchase price the Portfolio receives. When a
Portfolio makes a commitment to sell securities on a delayed basis, it will
record the transaction and thereafter value the securities at the sales
price in determining the Portfolio's net asset value per share.
Ordinarily, a Portfolio purchases securities on a when-issued or
delayed delivery basis with the intention of actually taking delivery of
the securities. However, before the securities are delivered and before it
has paid for them (the "settlement date"), a Portfolio may sell the
securities for investment reasons. The Portfolio will segregate cash or
high-quality debt obligations at least equal in value to the amount it will
have to pay on the settlement date; these segregated securities will be
sold at or before the settlement date.
Restricted Securities
The Portfolios may purchase commercial paper that is issued in
reliance on the exemption from registration which is afforded by Section
4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper").
Section 4(2) paper is subject to legal or contractual restrictions on
resale under the federal securities laws. It is generally sold to
institutional investors who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. Section 4(2) paper may be determined to be liquid in
accordance with procedures adopted by the Fund's Board of Directors.
Although there is no assurance that a market will exist for Section 4(2)
paper which a Portfolio may own, purchased Section 4(2) paper must meet the
credit, maturity and other criteria that apply to other securities in which
the Portfolios invest. These restricted securities will be valued in the
same manner as other commercial paper held by the Portfolios is valued.
See "Net Asset Value."
The High Income Portfolio, the Growth Portfolio, the Income
Portfolio and the Asset Strategy Portfolio may also invest in other
securities which are subject to restrictions on resale because they have
not been registered under the Securities Act of 1933, as amended or are
otherwise subject to contractual restrictions on resale. These securities
are generally referred to as private placements or restricted securities.
The International Portfolio may also purchase foreign restricted
securities; provided that it will not purchase restricted securities if as
a result of such purchase more than 5% of its total assets would consist of
restricted securities. Restricted securities in which the International
Portfolio seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed
securities.
The Bond Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio do not intend to invest in restricted
securities.
Limitations on the resale of such securities may have an adverse
effect on their marketability and may prevent a Portfolio from disposing of
them promptly at reasonable prices. Restricted securities may be
determined to be liquid in accordance with procedures adopted by the Fund's
Board of Directors. A Portfolio may have to bear the expense of
registering such securities for resale and the risk of substantial delays
in effecting such registration.
The Portfolios do not anticipate adjusting for any diminution in value
of these securities on account of their restrictive feature if there is an
active market which creates liquidity and if actual market quotations for
these restricted securities are available. In the event that there should
cease to be an active market for these securities or actual market
quotations become unavailable, the securities will be valued at fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Board of Directors.
Certain Other Securities
Certain Portfolios may purchase debt securities whose principal
amount at maturity is dependent upon the performance of a specified equity
security. The issuer of such debt securities, typically an investment
banking firm, is unaffiliated with the issuer of the equity security to
whose performance the debt security is linked. Equity-linked debt
securities differ from ordinary debt securities in that the principal
amount received at maturity is not fixed, but is based on the price of the
linked equity security at the time the debt security matures. The
performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by
interest rate changes. In addition, although the debt securities are
typically adjusted for diluting events such as stock splits, stock
dividends and certain other events affecting the market value of the
linked equity security, the debt securities are not adjusted for
subsequent issuances of the linked equity security for cash. Such an
issuance could adversely affect the price of the debt security. In
addition to the equity risk relating to the linked equity security, such
debt securities are also subject to credit risk with regard to the issuer
of the debt security. In general, however, such debt securities are less
volatile than the equity securities to which they are linked.
Certain Portfolios may also invest in a type of convertible preferred
stock that pays a cumulative, fixed dividend that is senior to, and
expected to be in excess of, the dividends paid on the common stock of the
issuer. At the mandatory conversion date, the preferred stock is converted
into not more than one share of the issuer's common stock at the "call
price" that was established at the time the preferred stock was issued. If
the price per share of the related common stock on the mandatory conversion
date is less than the call price, the holder of the preferred stock will
nonetheless receive only one share of common stock for each share of
preferred stock (plus cash in the amount of any accrued but unpaid
dividends). At any time prior to the mandatory conversion date, the issuer
may redeem the preferred stock upon issuing to the holder a number of
shares of common stock equal to the call price of the preferred stock in
effect on the date of redemption divided by the market value of the common
stock, with such market value typically determined one or two trading days
prior to the date notice of redemption is given. The issuer must also pay
the holder of the preferred stock cash in an amount equal to any accrued
but unpaid dividends on the preferred stock. This convertible preferred
stock is subject to the same market risk as the common stock of the issuer,
except to the extent that such risk is mitigated by the higher dividend
paid on the preferred stock. The opportunity for equity appreciation
afforded by an investment in such convertible preferred stock, however, is
limited, because in the event the market value of the issuer's common stock
increases to or above the call price of the preferred stock, the issuer may
(and would be expected to) call the preferred stock for redemption at the
call price. This convertible preferred stock is also subject to credit
risk with regard to the ability of the issuer to pay the dividend
established upon issuance of the preferred stock. Generally, convertible
preferred stock is less volatile than the related common stock of the
issuer.
Illiquid Investments
A Portfolio (other than the Asset Strategy Portfolio) may not make
illiquid investments if thereafter more than 10% of its net assets would
consist of such investments. The Asset Strategy Portfolio does not
currently intend to purchase any security if, as a result, more than 15% of
its net assets would be invested in illiquid investments. The investments
considered by the Portfolios to be illiquid are: (i) repurchase agreements
not terminable within seven days; (ii) fixed time deposits subject to
withdrawal penalties other than overnight deposits; (iii) securities for
which market quotations are not readily available; (iv) certain restricted
securities (as described above); (v) unlisted purchased options and options
relating to options written by a Portfolio (see discussion below); (vi)
securities involved in swap, cap, collar and floor transactions; and (vii)
non-government stripped fixed-rate mortgage-backed securities. Illiquid
investments do not include any obligations payable at principal amount plus
accrued interest on demand or within seven days after demand. Certain
Portfolios may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the
Portfolio. The assets used as cover for OTC options written by a Portfolio
will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Portfolio may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the
option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
Shares of Investment Companies
The International Portfolio, Small Cap Portfolio and Balanced
Portfolio may buy shares of investment companies which do not redeem their
shares if it does it in a regular transaction in the open market and then
does not have more than 10% of its total assets in these shares; however,
these Portfolios do not have any current intent to invest more than 5% of
their respective assets in such securities in the foreseeable future.
These Portfolios may also buy these shares as part of a merger or
consolidation.
The Asset Strategy Portfolio does not currently intend to (a)
purchase securities of other investment companies, except in the open
market where no commission except the ordinary broker's commission is paid
and if, as a result of such purchase, the Portfolio does not have more than
10% of its total assets invested in such securities, or (b) purchase or
retain securities issued by other open-end investment companies.
Limitations (a) and (b) do not apply to securities received as dividends,
through offers of exchange, or as a result of a reorganization,
consolidation, or merger.
As a shareholder in an investment company, a Portfolio would bear its
pro rata share of that investment company's expenses, which could result in
duplication of certain fees, including management and administrative
fees.
Investment Restrictions
The following investment restrictions are fundamental policies of
each Portfolio other than the Asset Strategy Portfolio and may not be
changed without shareholder approval. A Portfolio (other than the Asset
Strategy Portfolio) may not:
(i) Issue senior securities (except that each Portfolio may borrow
money as described below);
(ii) Buy or sell commodities or commodity contracts except that each
Portfolio may use options, futures contracts, forward currency
contracts and interest rate swaps, caps and floors, and purchase
and sell foreign currencies, in the manner described in the
Prospectus and SAI;
(iii) Buy real estate or any nonliquid interests in real estate
investment trusts;
(iv) Make loans, except loans of portfolio securities and except to the
extent that investment in debt securities may be deemed to be a
loan;
(v) Invest for the purpose of exercising control or management of
other companies;
(vi) Sell securities short, buy securities on margin or engage in
arbitrage transactions;
(vii) Engage in the underwriting of securities, except insofar as it may
be deemed an underwriter in selling shares of a Portfolio and
except as it may be deemed such in the sale of restricted
securities;
(viii) Except for the Small Cap Portfolio (See "Borrowing"), borrow money
except from banks as a temporary measure or for extraordinary or
emergency purposes and not for investment purposes, and only up to
5% of the value of a Portfolio's total assets;
(ix) Pledge, mortgage or hypothecate assets as security for
indebtedness except to secure permitted borrowings;
(x) Buy a security if, as a result, a Portfolio would own more than
ten percent of the issuer's voting securities, or if more than
five percent of its total assets would be invested in securities
of that issuer, or if more than twenty-five percent of its assets
would then be invested in securities of companies in any one
industry (U.S. Government securities are not included in these
restrictions.
The following are fundamental policies of the Asset Strategy
Portfolio and may not be changed without shareholder approval. The Asset
Strategy Portfolio may not:
(i) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than obligations issued or
guaranteed by the United States government, or any of its
agencies or instrumentalities) if, as a result thereof, (a) more
than 5% of the Portfolio's total assets would be invested in the
securities of such issuer, or (b) the Portfolio would hold more
than 10% of the outstanding voting securities of such issuer;
(ii) issue bonds or any other class of securities preferred over
shares of the Portfolio in respect of the Portfolio's assets or
earnings, provided that the Portfolio may issue additional
classes of shares in accordance with the Fund's Articles of
Incorporation;
(iii) sell securities short, provided that transactions in futures
contracts, options and other financial instruments are not deemed
to constitute short sales;
(iv) purchase securities on margin, except that the Portfolio may
obtain such short-term credits as are necessary for the clearance
of transactions, and provided that the Portfolio may make initial
and variation margin payments in connection with transactions in
futures contracts, options and other financial instruments;
(v) borrow money, except that the Portfolio may borrow money for
emergency or extraordinary purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of the value of
its total assets (less liabilities other than borrowings). Any
borrowings that come to exceed 33 1/3% of the value of the
Portfolio's total assets by reason of a decline in net assets
will be reduced within three days to the extent necessary to
comply with the 33 1/3% limitation. For purposes of this
limitation, "three days" means three days, exclusive of Sundays
and holidays;
(vi) underwrite securities issued by others, except to the extent that
the Portfolio may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities;
(vii) purchase the securities of any issuer (other than obligations
issued or guaranteed by the United States government or any of
its agencies or instrumentalities) if, as a result, more than 25%
of the Portfolio's total assets (taken at current value) would be
invested in the securities of issuers having their principal
business activities in the same industry;
(viii) invest in real estate limited partnerships or purchase or sell
real estate unless acquired as a result of ownership of
securities (but this shall not prevent the Portfolio from
purchasing and selling securities issued by companies or other
entities or investment vehicles that deal in real estate or
interests therein, nor shall this prevent the Portfolio from
purchasing interests in pools of real estate mortgage loans);
(ix) purchase or sell physical commodities unless acquired as a result
of ownership of securities (but this shall not prevent the
Portfolio from purchasing and selling currencies, futures
contracts, options, forward currency contracts or other financial
instruments);
(x) make loans, except (a) by lending portfolio securities provided
that no securities loan will be made if, as a result thereof,
more than 10% of the Portfolio's total assets (taken at current
value) would be lent to another party; (b) through the purchase
of a portion of an issue of debt securities in accordance with
its investment objective, policies, and limitations; and (c) by
engaging in repurchase agreements with respect to portfolio
securities; or
(xi) purchase or retain the securities of an issuer if the officers
and directors of the Portfolio and of the Manager owning
beneficially more than .5 of 1% of the securities of an issuer
together own beneficially more than 5% of the securities of that
issuer.
In addition to the fundamental policies described above, the
Portfolios indicated below have adopted the following investment policies
which, unlike the fundamental policies, may be changed without shareholder
approval.
(i) A Portfolio may not buy shares of other investment companies
which redeem their shares. Certain Portfolios may buy shares of
other investment companies which do not redeem their shares as
described in the Prospectus and the SAI; or
(ii) A Portfolio may not participate on a joint, or a joint and
several, basis in any trading account in any securities; (but
this does not prohibit the "bunching" of orders for the sale or
purchase of Portfolio securities with any other Portfolio or with
other advisory accounts of the Manager or any of its affiliates
to reduce brokerage commissions or otherwise to achieve best
execution).
(iii) The Asset Strategy Portfolio does not currently intend to lend
assets other than securities to other parties, except by
acquiring loans, loan participations, or other forms of direct
debt instruments. (This limitation does not apply to purchases
of debt securities or to repurchase agreements.)
(iv) The Asset Strategy Portfolio does not currently intend to
purchase the securities of any issuer (other than securities
issued or guaranteed by domestic or foreign governments or
political subdivision thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less
than three years of continuous operation. This restriction does
not apply to any obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or to CMO's, other
mortgage-related securities, asset-backed securities or indexed
securities.
(v) The Asset Strategy Portfolio does not currently intend to invest
in oil, gas, or other mineral exploration or development programs
or leases.
Portfolio Turnover
A Portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year
and dividing it by the monthly average of the market value of such
securities during the year, excluding certain short-term securities. A
Portfolio's turnover rate may vary greatly from year to year as well as
within a particular year.
The portfolio turnover rates for the fiscal years ended December
31, 1994 and December 31, 1993 for each of the Portfolios then in existence
were as follows:
1994 1993
---- ----
Money Market Portfolio 0.00% 0.00%
Bond Portfolio 135.82 68.75
High Income Portfolio 37.86 54.22
Growth Portfolio 277.36 297.81
Income Portfolio 23.32 18.38
The International Portfolio, Small Cap Portfolio, Balanced Portfolio
and Limited-Term Bond Portfolio began operations April 29, 1994. These
Portfolios cannot accurately predict what their respective portfolio
turnover rates will be, but it is anticipated that the annual turnover rate
will not exceed 200% for any of these Portfolios, except that Limited-Term
Bond Portfolio may have an annual turnover rate in excess of 300%. The
Asset Strategy Portfolio began operations in 1995. The Asset Strategy
Portfolio cannot precisely predict what its portfolio turnover rate will
be, but it is anticipated that the annual turnover rate for the common
stock portion of its portfolio will not exceed 200% and that the annual
turnover rate for the other portion of its portfolio will not exceed
200%.
The high portfolio turnover rate for the Growth Portfolio was due to
the active management of the portfolio and the volatility of the stock
market during this period. A high turnover rate will increase transaction
costs and commission costs that will be borne by the Fund and may generate
taxable income or loss. Because short-term securities are generally
excluded from computation of the turnover rate, a rate will not be computed
for the Money Market Portfolio.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
the Management Agreement and all related investment management duties (and
related professional staff) to Waddell & Reed Investment Management
Company, a wholly-owned subsidiary of Waddell & Reed, Inc. Under the
Management Agreement, the Manager is employed to supervise the investments
of each Portfolio and provide investment advice to each Portfolio. The
address of the Manager and Waddell & Reed, Inc. is 6300 Lamar Avenue, P. O.
Box 29217, Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc. is
the Fund's distributor and underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate
of Waddell & Reed, Inc. to enter into a separate agreement for accounting
services ("Accounting Services Agreement") with the Fund. The Management
Agreement contains detailed provisions as to the matters to be considered
by the Fund's Directors prior to approving any Accounting Services
Agreement.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell
& Reed, Inc., the Agent provides the Fund with bookkeeping and accounting
services and assistance including maintenance of the Fund's records,
pricing of the Portfolios' shares, and preparation of prospectuses, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Directors
without shareholder approval.
Torchmark Corporation and United Investors Management Company
The Manager is a wholly-owned subsidiary of Waddell & Reed, Inc.
Waddell & Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed
Financial Services, Inc., a holding company. Waddell & Reed Financial
Services, Inc. is a wholly-owned subsidiary of United Investors Management
Company which in turn is a wholly-owned subsidiary of Torchmark
Corporation. Torchmark Corporation is a publicly held company. The
address of Torchmark Corporation and United Investors Management Company is
2001 Third Avenue South, Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment
manager to the Fund and to each of the registered investment companies in
the United Group of Mutual Funds, except United Asset Strategy Fund, Inc.,
since 1940 or the company's inception date, whichever was later, until
January 8, 1992, when it assigned its duties as investment manager for
these funds (and the related professional staff) to the Manager. The
Manager has also served as investment manager for Waddell & Reed Funds,
Inc. since its inception in September 1992, Torchmark Government Securities
Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc. since they each
commenced operations in February 1993 and United Asset Strategy Fund, Inc.
since it began operations in 1995. Waddell & Reed, Inc. serves as
principal underwriter and distributor for the Fund and for the investment
companies in the United Group of Mutual Funds and Waddell & Reed Funds,
Inc.
Payments by the Fund for Management and Accounting Services
Under the Management Agreement, for the Manager's management
services, the Fund pays the Manager a fee as described in the Prospectus.
Prior to the above-described assignment from Waddell & Reed, Inc. to
Waddell & Reed Investment Management Company, all fees were paid to Waddell
& Reed, Inc. The management fees paid to the investment manager, during
the fiscal years ended December 31, 1994, 1993 and 1992, for each Portfolio
then in existence were as follows:
Periods ended December 31,**
----------------------------
1994 1993 1992
---- ---- ----
Bond Portfolio $424,370 $357,307 $208,351
High Income Portfolio $494,237 367,396 221,169
Growth Portfolio $1,813,171 1,179,870 650,038
Money Market Portfolio $116,644 122,205 108,092
Income Portfolio $1,374,533 747,849 268,089
International Portfolio* $63,291
Small Cap Portfolio* $36,355
Balanced Portfolio* $15,489
Limited-Term Bond Portfolio* $4,712
*Began operations April 29, 1994.
**The Asset Strategy Portfolio began operations in 1995.
The Fund accrues and pays this fee daily.
Under the Accounting Services Agreement, the Fund pays Waddell &
Reed Services Company a fee for accounting services as described in the
Prospectus. Fees paid to the Agent for the fiscal years ended December 31,
1994, 1993 and 1992 for each Portfolio then in existence were as follows:
Periods ended December 31,**
----------------------------
1994 1993 1992
---- ---- ----
Bond Portfolio $30,000 $30,000 $20,000
High Income Portfolio 30,000 26,667 20,000
Growth Portfolio 50,000 40,833 32,500
Money Market Portfolio 10,833 12,500 10,000
Income Portfolio 44,167 35,833 19,167
International Portfolio* 3,333
Small Cap Portfolio* 1,667
Balanced Portfolio* ---
Limited-Term Bond Portfolio* ---
*Began operations April 29, 1994.
**The Asset Strategy Portfolio began operations in 1995.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the
Manager and Waddell & Reed Services Company, respectively, pay all of their
own expenses in providing these services. Waddell & Reed, Inc. and
affiliates pay the Fund's Directors and officers who are affiliated with
the Manager and Waddell & Reed, Inc. The Fund pays the fees and expenses
of the Fund's other Directors. The Fund pays all of its other expenses.
These include the costs of printing and mailing materials sent to
shareholders, audit and outside legal fees, taxes, brokerage commissions,
interest, insurance premiums, fees payable under securities laws and to the
Investment Company Institute, cost of processing and maintaining
shareholder records, cost of systems or services used to price Portfolio
securities and nonrecurring and extraordinary expenses, including
litigation and indemnification relating to litigation.
Custodial and Auditing Services
The Custodian for each Portfolio is UMB Bank, n.a., Kansas City,
Missouri. In general, the Custodian is responsible for holding the
Portfolios' cash and securities. If a Portfolio's assets are held in
foreign countries, the Portfolio will comply with Rule 17f-5 under the
Investment Company Act of 1940. Price Waterhouse LLP, Kansas City,
Missouri, the Fund's independent accountants, audits the Fund's financial
statements.
NET ASSET VALUE
The net asset value of one of the shares of a Portfolio is the
value of the Portfolio's assets, less liabilities, divided by the total
number of shares outstanding. For example, if on a particular day a
Portfolio owned securities worth $100 and held cash of $15, the total value
of the assets would be $115. If it had a liability of $5, the net asset
value would be $110 ($115 minus $5). If it had 11 shares outstanding, the
net asset value of one share would be $10 ($110 divided by 11).
The net asset value per share of each Portfolio is computed on each
day that the New York Stock Exchange (the "Exchange") is open for trading
as of the later of the close of the regular session of the Exchange or the
close of the regular session of any other securities or commodities
exchange on which an option or future held by a Portfolio is traded. The
Exchange ordinarily closes at 4:00 P.M. Eastern time. The Exchange
annually announces the days on which it will not be open for trading. The
most recent announcement indicates that the Exchange will not be open on
the following days: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, it is possible that the Exchange may close on other days.
Under Rule 2a-7 of the Investment Company Act of 1940, the Money
Market Portfolio uses the "amortized cost method" for valuing its portfolio
securities provided it meets certain conditions. The conditions imposed
under the Rule relating to the Portfolio's investments include the
following: (i) the Portfolio must not maintain a dollar weighted average
portfolio maturity in excess of 90 days; (ii) it must limit its
investments, including repurchase agreements, to those instruments which
are denominated in U.S. dollars and which the Fund's Board of Directors
determines present minimal credit risks and which are rated in one of the
two highest rating categories by the requisite NRSRO(s), as defined in the
Rule; or, in the case of any instrument that is not rated, of comparable
quality as determined under procedures established by and under the general
supervision and responsibility of the Fund's Board of Directors; (iii) it
must limit its investments in the securities of any one issuer (except U.S.
Government Securities) to no more than 5% of its assets; (iv) it must limit
its investments in securities rated in the second highest rating category
by the requisite NRSRO(s) or comparable unrated securities to no more than
5% of its assets; (v) it must limit its investments in the securities of
any one issuer which are rated in the second highest rating category by the
requisite NRSRO(s) or comparable unrated securities to the greater of 1% of
its assets or $1,000,000; and (vi) it must limit its investments to
securities with a remaining maturity of not more than thirteen months. The
Rule sets forth the method by which the maturity of a security is
determined. The amortized cost method involves valuing an instrument at
its cost and thereafter assuming a constant amortization rate to maturity
of any discount or premium, and does not reflect the impact of fluctuating
interest rates on the market value of the security. This method does not
take into account unrealized gains or losses.
While the amortized cost method provides some degree of certainty in
valuation, there may be periods during which value, as determined by
amortized cost, is higher or lower than the price the Portfolio would
receive if it sold the instrument. During periods of declining interest
rates, the daily yield on the Portfolio's shares may tend to be higher than
a like computation made by a fund with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices
for all of its portfolio instruments and changing its dividends based on
these changing prices. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Portfolio's shares would be able to obtain a
somewhat higher yield than would result from investment in such a fund, and
existing investors in the Portfolio's shares would receive less investment
income. The converse would apply in a period of rising interest rates.
Under the Rule, the Fund's Board of Directors must establish
procedures designed to stabilize, to the extent reasonably possible, the
Portfolio's price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures must include review of the portfolio
holdings by the Board at such intervals as it may deem appropriate and at
such intervals as are reasonable in light of current market conditions to
determine whether the Portfolio's net asset value calculated by using
available market quotations (see below) deviates from the per share value
based on amortized cost.
For the purpose of determining whether there is any deviation between
the value of the Portfolio based on amortized cost and that determined on
the basis of available market quotations, if there are readily available
market quotations, investments are valued at the mean between the bid and
asked prices. If such market quotations are not available, the investments
will be valued at their fair value as determined in good faith under
procedures established by and under the general supervision and
responsibility of the Fund's Board of Directors, including being valued at
prices based on market quotations for investments of similar type, yield
and duration.
Under the Rule, if the extent of any deviation between the net asset
value per share based upon available market quotations and the net asset
value per share based on amortized cost exceeds one-half of 1%, the Board
must promptly consider what action, if any, will be initiated. When the
Board believes that the extent of any deviation may result in material
dilution or other unfair results, it is required to take such action as it
deems appropriate to eliminate or reduce to the extent reasonably
practicable such dilution or unfair results. Such actions could include
the sale of portfolio securities prior to maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding dividends
or payment of distributions from capital or capital gains, redemptions of
shares in kind, or establishing a net asset value per share using available
market quotations.
The portfolio securities of the Portfolios (other than the Money
Market Portfolio) listed or traded on U.S. or foreign stock exchanges are
valued at the last sales price on that day or, lacking any sales on such
day, at the mean of the last bid and asked prices available. In cases
where securities or other instruments are traded on more than one exchange,
such securities or other instruments generally are valued on the exchange
designated by the Manager (under procedures established by and under the
general supervision and responsibility of the Board of Directors) as the
primary market. Securities traded in the OTC market and included in the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") are valued at the last available sale price on NASDAQ prior to
the time of valuation; other OTC securities and instruments are valued at
the mean of the closing bid and asked prices.
Bonds, other than convertible bonds, are valued using a pricing system
provided by a major dealer in bonds. Convertible bonds are valued using
this pricing system only on days when there is no sale reported. Short-
term debt securities held by the Portfolios (other than the Money Market
Portfolio) are valued at amortized cost. When market quotations for
options and futures positions and non-exchange traded foreign securities
held by a Portfolio are readily available, those positions and securities
will be valued based upon such quotations. Market quotations generally
will not be available for options traded in the OTC market. Warrants and
rights to purchase securities are valued at market value. When market
quotations are not readily available, securities, options, futures and
other assets are valued at fair value as determined in good faith under
procedures established by and under the general supervision and
responsibility of the Board of Directors.
When a Portfolio writes a call or a put option, an amount equal to the
premium received is included in that Portfolio's Statement of Assets and
Liabilities as an asset, and an equivalent deferred credit is included in
the liability section. The deferred credit is "marked-to-market" to
reflect the current market value of the option. If an option a Portfolio
wrote is exercised, the proceeds received on the sale of the related
investment are increased by the amount of the premium that the Portfolio
received. If an option written by a Portfolio expires, it has a gain in
the amount of the premium; if it enters into a closing transaction, it will
have a gain or loss depending on whether the premium was more or less than
the cost of the closing transaction.
All securities and other assets quoted in foreign currency and
forward currency contracts are valued weekly in U.S. dollars on the basis
of the foreign currency exchange rate prevailing at the time such valuation
is determined by the Portfolio's Custodian. Foreign currency exchange rates
are generally determined prior to the close of the Exchange. Occasionally,
events affecting the value of foreign securities and such exchange rates
occur between the time at which they are determined and the close of the
Exchange, which events will not be reflected in a computation of the
Portfolio's net asset value. If events materially affecting the value of
such securities or assets or currency exchange rates occurred during such
time period, the securities or assets would be valued at their fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Board of Directors. The
foreign currency exchange transactions of a Portfolio conducted on a spot
basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. Under normal market conditions
this rate differs from the prevailing exchange rate by an amount generally
less than one-tenth of one percent due to the costs of converting from one
currency to another.
Optional delivery standby commitments are valued at fair value under
the general supervision and responsibility of the Fund's Board of
Directors. They are accounted for in the same manner as exchange-listed
puts.
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of each Portfolio based on, among
other things, the amount of premium payments to be invested and the number
of surrender and transfer requests to be effected on any day according to
the terms of the Policies. Shares of a Portfolio are sold at their net
asset value per share. No sales charge is paid by the Participating
Insurance Company for purchase of shares. Redemptions will be made at the
net asset value per share of the Portfolio. Payment is generally made
within seven days after receipt of a proper request to redeem. The Fund
may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period if any of the following conditions exist:
(i) the New York Stock Exchange is closed other than customary weekend and
holiday closings or trading on the New York Stock Exchange is restricted;
(ii) the Securities and Exchange Commission has determined that a state of
emergency exists which may make payment or transfer not reasonably
practicable; (iii) the Securities and Exchange Commission has permitted
suspension of the right of redemption of shares for the protection of the
shareholders of the Fund; or (iv) applicable laws and regulations otherwise
permit the Fund to suspend payment on the redemption of shares.
Redemptions are ordinarily made in cash but under extraordinary conditions
the Fund's Board may determine that the making of cash payments is
undesirable. In such case, redemption payments may be made in Portfolio
securities. The redeeming shareholders would incur brokerage costs in
selling such securities. The Fund has elected to be governed by Rule 18f-1
under the Investment Company Act of 1940, pursuant to which it is obligated
to redeem shares solely in cash up to the lesser of $250,000 or 1% of its
net asset value during any 90-day period for any one shareholder.
Should any conflict between Policyowners arise which would require
that a substantial amount of net assets be withdrawn from a Portfolio,
orderly portfolio management could be disrupted to the potential detriment
of Policyowners. The Fund need not accept any purchase order and it may
discontinue offering the shares of any Portfolio.
SHAREHOLDER COMMUNICATIONS
Policyowners will receive from the Participating Insurance Companies
financial statements of the Fund as required under the Investment Company
Act of 1940. Each report shows the investments owned by the Portfolio and
the market values thereof and provides other information about the Fund and
its operations.
TAXES
General
Shares of the Portfolios are offered only to insurance company
separate accounts that fund variable annuity contracts ("Contracts"). See
the applicable Contract prospectus for a discussion of the special taxation
of insurance companies with respect to such accounts and of the Contract
holders.
Each Portfolio is treated as a separate corporation for Federal income
tax purposes. In order to qualify or continue to qualify for treatment as
a regulated investment company ("RIC") under the Internal Revenue Code of
1986, as amended ("Code"), each Portfolio must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-
term capital gain and, for each Portfolio other than the Money Market
Portfolio, net gains from certain foreign currency transactions) and must
meet several additional requirements. With respect to each Portfolio,
these requirements include the following: (1) the Portfolio must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or, in the case of the International Portfolio,
Forward Contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Portfolio
must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for less than three months -- options or futures, or foreign
currencies or (in the case of the International Portfolio) Forward
Contracts that are not directly related to the Fund's principal business of
investing in securities (or options and futures with respect to securities)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, U.S. Government Securities,
securities of other RICs and other securities that are limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. Government
Securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to
continue to, comply with the diversification requirements imposed by
section 817(h) of the Code and the regulations thereunder. These
requirements, which are in addition to the diversification requirements
mentioned in (3) and (4) above, place certain limitations on the proportion
of each Portfolio's assets that may be represented by any single investment
(which includes all securities of the same issuer). For these purposes,
each U.S. Government agency or instrumentality is treated as a separate
issuer, while a particular foreign government and its agencies,
instrumentalities and political subdivisions all are considered the same
issuer.
Income from Foreign Securities
Dividends and interest received by a Portfolio (other than the
Limited-Term Bond Portfolio) may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce
the yield on its securities. Tax conventions between certain countries and
the United States may reduce or eliminate these foreign taxes, however, and
many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
Foreign Currency Gains and Losses
For each Portfolio (other than the Money Market Portfolio and Limited-
Term Bond Portfolio), gains or losses (1) from the disposition of foreign
currencies, (2) from the disposition of debt securities denominated in
foreign currency that are attributable to fluctuations in the value of the
foreign currency between the date of acquisition of each security and the
date of disposition, and (3) that are attributable to fluctuations in
exchange rates that occur between the time a Portfolio accrues interest,
dividends or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually
collects the receivables or pays the liabilities, generally are treated as
ordinary income or loss. Gains or losses from these transactions, referred
to in the Code as "section 988 transactions," may increase or decrease the
amount of a Portfolio's investment company taxable income to be distributed
to its shareholders.
Income from Options, Futures Contracts and Currencies
The use of hedging strategies, such as writing (selling) and
purchasing options and futures in a designated hedging transaction and
entering into Forward Contracts, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the
gains and losses a Portfolio realizes in connection therewith. Income from
foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures and
(in the case of the International Portfolio) Forward Contracts derived by a
Portfolio with respect to its business of investing in securities, will
qualify as permissible income under the Income Requirement. However,
income from the disposition of options and futures, and income from the
disposition of foreign currencies and (in the case of the International
Portfolio) Forward Contracts that are not directly related to a Portfolio's
principal business of investing in securities (or options and futures with
respect to securities), will be subject to the Short-Short Limitation if
they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net
gain (if any) from the designated hedge will be included in gross income
for purposes of that limitation. Each Portfolio authorized to engage in
hedging transactions intends that, when it does so engage, the hedging
transactions will qualify for this treatment, but at the present time it is
not clear whether this treatment will be available for all of each such
Portfolio's hedging transactions. To the extent this treatment is not
available, such a Portfolio may be forced to defer the closing out of
certain options, futures and (in the case of the International Portfolio)
Forward Contracts beyond the time when it otherwise would be advantageous
to do so, in order for the Portfolio to qualify or continue to qualify as a
RIC.
Any income a Portfolio earns from writing options is taxed as
short-term capital gains. If a Portfolio enters into a closing purchase
transaction, it will have a short-term capital gain or loss based on the
difference between the premium it receives for the option it wrote and the
premium it pays for the option it buys. If an option written by a
Portfolio expires without being exercised, the premium it receives also
will be a short-term gain. If such an option is exercised and thus the
Portfolio sells the securities subject to the option, the premium the
Portfolio receives will be added to the exercise price to determine the
gains or losses on the sale. A Portfolio will not write so many options
that it could fail to continue to qualify as a RIC.
Certain options and futures in which a Portfolio may invest will be
"section 1256 contracts." Section 1256 contracts held by a Portfolio at
the end of each taxable year, other than section 1256 contracts that are
part of a "mixed straddle" with respect to which the Portfolio has made an
election not to have the following rules apply, are "marked-to-market"
(that is, treated as sold for their fair market value) for Federal income
tax purposes, with the result that unrealized gains or losses are treated
as though they were realized. Sixty percent of any net gains or losses
recognized on these deemed sales, and 60% of any net realized gains or
losses from any actual sales of section 1256 contracts, are treated as
long-term capital gains or losses, and the balance is treated as short-term
capital gains or losses. Section 1256 contracts also may be marked-to-
market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) may also affect the
taxation of options and futures contracts in which a Portfolio may invest.
Section 1092 defines a "straddle" as offsetting positions with respect to
personal property; for these purposes, options and futures contracts are
personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent
the loss exceeds the unrealized gain on the offsetting position(s) of the
straddle. Section 1092 also provides certain "wash sale" rules, which
apply to transactions where a position is sold at a loss and a new
offsetting position is acquired within a prescribed period, and "short
sale" rules applicable to straddles. If a Portfolio makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions will be determined under rules
that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to a Portfolio are not entirely
clear.
Zero Coupon and Payment-in-Kind Securities
As the holder of zero coupon or other securities issued with original
issue discount, a Portfolio must include in its income the original issue
discount that accrues on the securities during the taxable year, even if
the Portfolio receives no corresponding payment on the securities during
the year. Similarly, a Portfolio must include in its gross income
securities it receives as "interest" on payment-in-kind securities.
Because a Portfolio annually must distribute substantially all of its
investment company taxable income, including any original issue discount
and other non-cash income, in order to satisfy the distribution requirement
described above and to avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those
distributions will be made from a Portfolio's cash assets or from the
proceeds of sales of portfolio securities, if necessary. A Portfolio may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gains.
In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the Short-Short
Limitation, any such gains would reduce a Portfolio's ability to sell other
securities, or options or futures, held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.
The foregoing is only a general summary of some of the important
Federal income tax considerations generally affecting the Portfolios. No
attempt is made to present a complete explanation of the Federal tax
treatment of their activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult with their own tax advisers for more detailed information
and for information regarding any state, local or foreign taxes applicable
to the Portfolios and to dividends and other distributions therefrom.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all the net
investment income, if any, of each Portfolio. For dividend purposes, net
investment income of each Portfolio, other than the Money Market Portfolio,
will consist of all payments of dividends or interest received by such
Portfolio less the estimated expenses of such Portfolio. The Money Market
Portfolio's net investment income for dividend purposes consists of all
interest income accrued on the Portfolio, plus or minus realized gains or
losses on portfolio securities, less the Portfolio's expenses.
Dividends on the Money Market Portfolio are declared and reinvested
daily in additional full and fractional shares. Dividends from investment
income of the Growth Portfolio, Bond Portfolio, High Income Portfolio,
Income Portfolio, International Portfolio, Small Cap Portfolio, Balanced
Portfolio, Limited-Term Bond Portfolio and Asset Strategy Portfolio will
usually be declared, paid and reinvested annually in December in additional
full and fractional shares of the respective Portfolio. Ordinarily,
dividends are paid on shares starting on the day after they are issued and
on shares the day they are redeemed. Under the amortized cost procedures
which pertain to the Money Market Portfolio in certain circumstances
dividends of the Money Market Portfolio might be eliminated or reduced.
All net realized long-term or short-term capital gains of the
Portfolios, if any, other than short-term capital gains of the Money Market
Portfolio, are declared and distributed annually in December to the
shareholders of the Portfolios to which such gains are attributable.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager in the Management
Agreement is the purchase and sale of securities for the Portfolios.
Purchases and sales of securities for the Money Market Portfolio and of
securities for the other Portfolios, other than those for which an exchange
is the primary market, are generally done with underwriters, dealers acting
as principals ("dealers") or directly with issuers. Purchases from
underwriters include a commission or concession paid by the issuer to the
underwriter and purchases from dealers will include the spread between the
bid and the asked prices. If the execution and price offered by more than
one dealer are equal, the order may be allocated to a dealer which has
provided research advice, quotations on portfolio securities or other
services. Brokerage commissions are paid on such transactions only if it
appears likely that a better price or execution can be obtained.
To effect the portfolio transactions of each Portfolio in securities
traded on an exchange, the Manager is authorized to engage broker-dealers
("brokers") which, in its best judgment based on all relevant factors, will
implement the policy of the Portfolio to achieve "best execution" (prompt
and reliable execution at the best price obtainable) for reasonable and
competitive commissions. The Manager need not seek competitive commission
bidding but is expected to minimize the commissions paid to the extent
consistent with the interests and policies of the Portfolio. Subject to
review by the Board of Directors, such policies include the selection of
brokers which provide execution and/or research services and other
services, including pricing or quotation services directly or through
others ("brokerage services") considered by the Manager to be useful or
desirable for its investment management of the Portfolio and/or the other
funds and accounts over which the Manager or its affiliates has investment
discretion.
Brokerage services are, in general, defined by reference to Section
28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling
securities and the availability of securities and purchasers or sellers;
(ii) furnishing analyses and reports; or (iii) effecting securities
transactions and performing functions incidental thereto (such as
clearance, settlement and custody). "Investment discretion" is, in
general, defined as having authorization to determine what securities shall
be purchased or sold for an account, or making those decisions even though
someone else has responsibility.
The commissions paid to brokers that provide such brokerage services
may be higher than another qualified broker would charge if a good faith
determination is made by the Manager that the commission is reasonable in
relation to the services provided. No allocation of brokerage or principal
business is made to provide any other benefits to the Manager or its
affiliates.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of the Manager or its
affiliates and investment research received for the commissions of those
other accounts may be useful both to a Portfolio and one or more of such
other accounts. To the extent that electronic or other products provided
by such brokers to assist the Manager in making investment management
decisions are used for administration or other non-research purposes, a
reasonable allocation of the cost of the product attributable to its non-
research use is made by the Manager.
Such investment research, which may be supplied by a third party at
the instance of a broker, includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the
price of securities held in a Portfolio or being considered for purchase.
The individual who manages a Portfolio may manage other advisory
accounts with similar investment objectives. It can be anticipated that
the manager will frequently place concurrent orders for all or most
accounts for which the Manager has responsibility. Combining purchases and
sales in that manner may result in a lower negotiated commission being paid
for the transaction. However, large transactions could affect the price of
the securities by driving the price up in the case of a purchase by the
accounts or driving the price down in the case of a sale.
The table below sets forth the brokerage commissions paid during
the fiscal years ended December 31, 1994, 1993 and 1992:
Periods ended December 31,**
-------------------------------
1994 1993 1992
---- ---- ----
Bond Portfolio $ --- $ --- $ ---
High Income Portfolio 1,580 ---
Growth Portfolio 1,163,320 433,732
Money Market Portfolio --- ---
Income Portfolio 150,525 70,663
International Portfolio*
Small Cap Portfolio*
Balanced Portfolio*
Limited-Term Bond Portfolio*
-------- --------
$1,315,425 $504,395
========== ========== ========
*Began operations April 29, 1994.
**The Asset Strategy Portfolio began operations in 1995.
The next table shows the transactions, other than principal
transactions, which were directed to broker-dealers who provided research
as well as execution and the brokerage commissions paid for the fiscal year
ended December 31, 1994. These transactions were allocated to these
broker-dealers by the internal allocation procedures described above.
Amount of Brokerage
Transactions** Commissions
------------ -----------
Bond Portfolio $ $
High Income Portfolio
Growth Portfolio
Money Market Portfolio --- ---
Income Portfolio
International Portfolio*
Small Cap Portfolio*
Balanced Portfolio*
Limited-Term Bond Portfolio*
------------ --------
$ $
============ ========
*Began operations April 29, 1994.
**The Asset Strategy Portfolio began operations in 1995.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside
organizations selected by the Board of Directors. The Board has
responsibility for establishing broad corporate policies for the Fund and
for overseeing overall performance of the selected experts. It has the
benefit of advice and reports from independent counsel and independent
auditors.
The principal occupation of each Director and officer during at
least the past five years is given below. Each of the persons listed
through and including Mr. Wright is a member of the Fund's Board of
Directors. The other persons are officers but not Board members. For
purposes of this section, the term "Fund Complex" includes the Fund, each
of the funds in the United Group of Mutual Funds, Waddell & Reed Funds,
Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-
Free Fund, Inc.
Each of the Fund's Directors is also a Director of each of the funds
in the Fund Complex and each of the Fund's officers is also an officer of
one or more of the funds in the Fund Complex.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors of Waddell &
Reed Financial Services, Inc., United Investors Management Company and
United Investors Life Insurance Company; Chairman of the Board of Directors
and Chief Executive Officer of Torchmark Corporation; Chairman of the Board
of Directors of Vesta Insurance Group, Inc.; formerly, Chairman of the
Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund and each of the other funds in the Fund Complex;
President, Chief Executive Officer and Director of Waddell & Reed Financial
Services, Inc.; Chairman of the Board of Directors of the Manager, Waddell
& Reed, Inc., Waddell & Reed Services Company, Waddell & Reed Asset
Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief
Executive Officer and President of United Investors Management Company;
Vice Chairman of the Board of Directors of Torchmark Corporation; Director
of Southwestern Life Corporation; formerly, partner in Trivest, a private
investment concern; formerly, Director of Atlantis Group, Inc., a
diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the Fund and the
funds in the United Group of Mutual Funds, Waddell & Reed Funds, Inc.,
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free
Fund, Inc., he served in such capacity for the Fund and the funds in the
United Group.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Advisory Director, The Hand Companies; President, Buchanan Ranch
Corp.; formerly, Senior Vice President and Director of Marketing Services,
The Meyer Group of Management Consultants; formerly, Chairman, Department
of Marketing, Transportation and Tourism, University of Colorado; formerly,
Professor of Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards
Company; formerly, Partner in Dillingham Farms, a farming operation.
JOHN F. HAYES*
335 N. Washington
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; formerly, President of Gilliland & Hayes, P.A., a law
firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial
Corporation and subsidiaries.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of
the Fund, each Fund in the United Group of Mutual Funds, Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of
Directors and President of these Funds on April 30, 1993); formerly,
President, Director and Chief Executive Officer of the Manager and Waddell
& Reed, Inc.; formerly, Chairman of the Board of Directors of Waddell &
Reed Services Company; formerly, Director of Waddell & Reed Asset
Management Company, United Investors Management Company and United
Investors Life Insurance Company, affiliates of Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate
management and investment; formerly, Director of The Vendo Company, a
manufacturer and distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund and each
of the other funds in the Fund Complex; Vice President, Chief Operations
Officer, Director and Treasurer of Waddell & Reed Financial Services, Inc.;
Executive Vice President, Principal Financial Officer, Director and
Treasurer of the Manager; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director
and Treasurer of Waddell & Reed Asset Management Company; President,
Director and Treasurer of Waddell & Reed Services Company; Vice President,
Treasurer and Director of Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund and each of the other funds in the Fund
Complex; Vice President, Chief Investment Officer and Director of Waddell &
Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.; President,
Chief Executive Officer, Chief Investment Officer and Director of the
Manager and Waddell & Reed Asset Management Company; Senior Vice President
and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the
Fund and each of the other funds in the Fund Complex; Vice President of
Waddell & Reed Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund and each of
the other funds in the Fund Complex; Vice President, Secretary and General
Counsel of Waddell & Reed Financial Services, Inc.; Senior Vice President,
Secretary and General Counsel of the Manager and Waddell & Reed, Inc.;
Director, Senior Vice President, Secretary and General Counsel of Waddell &
Reed Services Company; Director, Secretary and General Counsel of Waddell &
Reed Asset Management Company; Vice President, Secretary and General
Counsel of Torchmark Distributors, Inc.; formerly, Assistant General
Counsel of the Manager, Waddell & Reed Financial Services, Inc., Waddell &
Reed, Inc., Waddell & Reed Asset Management Company and Waddell & Reed
Services Company.
James C. Cusser
Vice President of the Fund and two other funds in the Fund Complex;
Vice President of the Manager; formerly, Vice President of Kidder Peabody &
Company.
Antonio Intagliata
Vice President of the Fund and one other fund in the Fund Complex;
Senior Vice President of the Manager; formerly, Senior Vice President of
Waddell & Reed, Inc.
Richard K. Poettgen
Vice President of the Fund and one other fund in the Fund Complex;
Vice President of the Manager; formerly, Vice President of Waddell & Reed,
Inc.
Cynthia P. Prince-Fox
Vice President of the Fund and one other fund in the Fund Complex;
Vice President of the Manager; Vice President of Waddell & Reed Asset
Management Company; employee of Waddell & Reed, Inc.
Louise D. Rieke
Vice President of the Fund and two other funds in the Fund Complex;
Vice President of the Manager; Vice President of Waddell & Reed Asset
Management Company; formerly, Vice President of Waddell & Reed, Inc.
Mark G. Seferovich
Vice President of the Fund and two other funds in the Fund Complex;
Vice President of the Manager; formerly, a fund manager with Securities
Management Company, a brokerage firm; formerly, Vice President of Waddell &
Reed, Inc.
W. Patrick Sterner
Vice President of the Fund and one other fund in the Fund Complex;
Vice President of the Manager; Vice President of Waddell & Reed Asset
Management Company; formerly, Chief Investment Officer of the Merchants
Bank.
Carl E. Sturgeon
Vice President of the Fund and eleven other funds in the Fund
Complex; Vice President of the Manager; formerly, Vice President of Waddell
& Reed, Inc.
Russell E. Thompson
Vice President of the Fund and two other funds in the Fund Complex;
Senior Vice President of the Manager; Vice President of Waddell and Reed
Asset Management Company; formerly, Senior Vice President of Waddell &
Reed, Inc.
Mark L. Yockey
Vice President of the Fund and one other fund in the Fund Complex;
Vice President of the Manager.
The address of each person is 6300 Lamar Avenue, P. O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, four of the Funds' Directors may be
deemed to be "interested persons" as defined in the Investment Company Act
of 1940 of its Manager and Waddell & Reed, Inc. The Directors who may be
deemed to be "interested persons" are indicated as such by an asterisk.
The Board has created an honorary position of Director Emeritus, which
position a Director may elect after resignation from the Board provided the
Director has attained the age of 75 and has served as a Director of the
Funds for a total of at least five years. A Director Emeritus receives
fees in recognition of his past services whether or not services are
rendered in his capacity as Director Emeritus, but has no authority or
responsibility with respect to management of the Fund. Currently, no
person serves as Director Emeritus.
The Fund, the Funds in the United Group of Mutual Funds and Waddell &
Reed Funds, Inc. pay to each Director $40,000 per year, plus $1,000 for
each meeting of the Board of Directors attended (prior to January 1, 1995
each Director received $500 for each meeting of the Board of Directors
attended) and $500 for each committee meeting attended which is not in
conjunction with a Board of Directors meeting, other than Directors who are
affiliates of Waddell & Reed, Inc. The fees are divided among the
Portfolios, the funds in the United Group and the series of Waddell & Reed
Funds, Inc. based on their relative net asset size. During the Fund's
fiscal year ended December 31, 1994, its share was $21,273. The officers
are paid by the Manager or its affiliates.
OTHER INFORMATION
Capital Stock
The Fund was incorporated in Maryland on December 2, 1986. Capital
stock is currently divided into the following classes which are a type of
class designated a "series" as that term is defined in the Articles of
Incorporation of the Fund: the Money Market Portfolio, Bond Portfolio,
High Income Portfolio, Growth Portfolio, Income Portfolio, International
Portfolio, Small Cap Portfolio, Balanced Portfolio, and Limited-Term Bond
Portfolio.
The balance of shares authorized but not divided into classes may be
issued to an existing Portfolio, or to new series having the number of
shares and descriptions, powers, and rights, and the qualifications,
limitations, and restrictions as the Board of Directors may determine. The
Board of Directors may also change the designation of any Portfolio and may
increase or decrease the numbers of shares of any Portfolio but may not
decrease the number of shares of any Portfolio below the number of shares
then outstanding.
Each issued and outstanding share in a Portfolio is entitled to
participate equally in dividends and distributions declared by the
respective Portfolio and, upon liquidation or dissolution, in net assets of
such Portfolio remaining after satisfaction of outstanding liabilities.
The shares of each Portfolio when issued are fully paid and nonassessable.
Voting Rights
All shares of the Fund have equal voting rights (regardless of the net
asset value per share) except that on matters affecting only one Portfolio,
only shares of the respective Portfolio are entitled to vote. The shares
do not have cumulative voting rights. Accordingly, the holders of more
than 50% of the shares of the Fund voting for the election of directors can
elect all of the directors of the Fund if they choose to do so, and in such
event the holders of the remaining shares would not be able to elect any
directors.
Matters in which the interests of all the Portfolios are substantially
identical (such as the election of Directors or the approval of independent
public accountants) will be voted on by all shareholders without regard to
the separate Portfolios. Matters that affect all the Portfolios but where
the interests of the Portfolios are not substantially identical (such as
approval of the Investment Management Agreement) will be voted on
separately by each Portfolio. Matters affecting only one Portfolio, such
as a change in its fundamental policies, will be voted on separately by the
Portfolio.
Matters requiring separate shareholder voting by a Portfolio shall
have been effectively acted upon with respect to any Portfolio if a
majority of the outstanding voting securities of that Portfolio votes for
approval of the matter, notwithstanding that: (1) the matter has not been
approved by a majority of the outstanding voting securities of any other
Series; or (2) the matter has not been approved by a majority of the
outstanding voting securities of the Fund.
The phrase "a majority of the outstanding voting securities" of a
series (or of a Fund) means the vote of the lesser of: (1) 67% of the
shares of a series (or the Fund) present at a meeting if the holders of
more than 50% of the outstanding shares are present in person or by proxy;
or (2) more than 50% of the outstanding shares of a series (or a Fund).
To the extent required by law, Policyholders are entitled to give
voting instructions with respect to Fund shares held in the separate
accounts of Participating Insurance Companies. Participating Insurance
Companies will vote the shares in accordance with such instructions unless
otherwise legally required or permitted to act with respect to such
instructions.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS
Banks and Savings and Loans - 3.54%
Bank of Boston Corporation ............. 100,000 $ 2,587,500
City National Corporation .............. 100,000 1,062,500
First Chicago Corporation .............. 60,000 2,865,000
Grupo Financiero Bancomer, S.A. de
C.V., C (A)............................ 1,000,000 550,000
Midlantic Corporation .................. 75,000 1,992,150
Roosevelt Financial Group, Inc. ........ 50,000 746,850
Total ................................. 9,804,000
Biotechnology and Medical Services - 0.59%
Centocor, Inc.* ........................ 100,000 1,631,200
Building - 0.52%
United Dominion Realty Trust, Inc. ..... 100,000 1,437,500
Chemicals Major - 3.24%
Air Products & Chemicals, Inc. ......... 75,000 3,346,875
du Pont (E.I.) de Nemours and Company .. 100,000 5,625,000
Total ................................. 8,971,875
Computers and Office Equipment - 5.99%
Cerner Corporation* .................... 18,200 805,350
Compuware Corporation* ................. 100,000 3,587,500
General Motors Corporation, Class E .... 90,000 3,465,000
HBO & Company .......................... 50,000 1,718,750
Informix Corporation* .................. 100,000 3,206,200
International Business Machines
Corporation ........................... 40,000 2,940,000
Parametric Technology Corporation* ...... 25,000 859,375
Total ................................. 16,582,175
Domestic Oil - 0.28%
Seagull Energy Corporation* ............ 40,000 765,000
Drugs and Hospital Supply - 4.96%
Abbott Laboratories .................... 150,000 4,893,750
Baxter International Inc. .............. 100,000 2,825,000
Schering-Plough Corporation ............ 50,000 3,700,000
Warner-Lambert Company ................. 30,000 2,310,000
Total ................................. 13,728,750
Electrical Equipment - 5.30%
Emerson Electric Co. ................... 100,000 6,250,000
General Electric Company ............... 165,000 8,415,000
Total ................................. 14,665,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Electronics - 5.31%
cisco Systems, Inc.* ................... 85,000 $ 2,980,270
Hewlett-Packard Company ................ 50,000 4,993,750
Level One Communications, Incorporated* 50,000 762,500
Micron Technology, Inc. ................ 50,000 2,206,250
Texas Instruments Incorporated ......... 50,000 3,743,750
Total ................................. 14,686,520
Financial - 1.01%
American Express Company ............... 75,000 2,212,500
Grupo Financiero Banamex Accival, S.A.
de C.V., C (A) ........................ 200,000 576,000
Total ................................. 2,788,500
Food and Related - 2.96%
CPC International Inc. ................. 60,000 3,195,000
Pet Incorporated ....................... 125,000 2,468,750
Sara Lee Corporation ................... 100,000 2,525,000
Total ................................. 8,188,750
Hospital Management - 6.20%
American Medical Holdings, Inc.* ...... 100,000 2,412,500
Columbia/HCA Healthcare Corporation .... 150,000 5,475,000
National Medical Enterprises, Inc.* .... 300,000 4,237,500
Sierra Health Services, Inc.* .......... 73,600 2,327,600
United HealthCare Corporation .......... 60,000 2,707,500
Total ................................. 17,160,100
Insurance - 6.40%
American General Corporation ........... 150,000 4,237,500
American Re Corporation* ............... 75,000 2,418,750
First Colony Corporation ............... 100,000 2,237,500
NWNL Companies, Inc. (The) ............. 50,000 1,450,000
National Re Corporation ................ 45,900 1,204,875
PartnerRe Holding, Ltd. ................ 100,000 2,075,000
Presidential Life Corporation .......... 100,000 518,700
TIG Holdings, Inc. ..................... 125,000 2,343,750
USLIFE Corporation ..................... 35,000 1,220,625
Total ................................. 17,706,700
Leisure Time - 3.42%
Comcast Corporation, Class A ........... 150,000 2,353,050
Tele-Communications, Inc., Class A* .... 125,000 2,726,500
Time Warner Incorporated ............... 125,000 4,390,625
Total ................................. 9,470,175
Machinery - 0.40%
Ingersoll-Rand Company ................. 35,000 1,102,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Metals and Mining - 1.12%
Phelps Dodge Corporation ............... 50,000 $ 3,093,750
Multi-Industry - 2.40%
ITT Corporation ........................ 75,000 6,646,875
Public Utilities - Electric - 3.49%
Peco Energy Company .................... 100,000 2,450,000
Unicom Corporation ..................... 300,000 7,200,000
Total ................................. 9,650,000
Railroads - 4.99%
Chicago and North Western Transportation
Company* .............................. 100,000 1,925,000
Kansas City Southern Industries, Inc. .. 76,000 2,346,500
Norfolk Southern Corporation ........... 75,000 4,546,875
Southern Pacific Rail Corporation* ..... 125,000 2,265,625
Union Pacific Corporation .............. 60,000 2,737,500
Total ................................. 13,821,500
Retailing - 0.85%
Charming Shoppes Inc. .................. 100,000 656,200
Family Dollar Stores, Inc. ............. 135,000 1,687,500
Total ................................. 2,343,700
Steel - 1.16%
National Steel Corporation, Class B* ... 100,000 1,450,000
USX Corporation - U.S. Steel Group ..... 50,000 1,775,000
Total ................................. 3,225,000
Telecommunications - 8.49%
AT&T Corporation ....................... 150,000 7,537,500
LDDS Communications, Inc.* ............. 40,000 780,000
MCI Communications Corporation ......... 200,000 3,687,400
Motorola, Inc. ......................... 50,000 2,893,750
Ortel Corporation* ..................... 117,000 3,071,250
Sprint Corporation ..................... 50,000 1,381,250
Telefonaktiebolaget LM Ericsson,
ADR, Class B .......................... 75,000 4,143,750
Total ................................. 23,494,900
TOTAL COMMON STOCKS - 72.62% $200,964,470
(Cost: $210,483,893)
PREFERRED STOCKS
Hospital Management - 0.76%
National Health Investors,
Convertible ........................... 90,000 2,103,750
Telecommunications - 0.81%
Nokia Corporation* ..................... 30,000 2,250,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
TOTAL PREFERRED STOCKS - 1.57% $ 4,353,750
(Cost: $4,451,929)
SHORT-TERM SECURITIES
Banks and Savings and Loans - 2.86%
ANZ (Delaware) Inc.,
6.02%, 1-4-95 ......................... $ 7,000 6,996,488
U.S. Bancorp,
Master Note ........................... 918 918,000
Total ................................. 7,914,488
Chemicals Specialty and Miscellaneous
Technology - 3.65%
Minnesota Mining and Manufacturing
Company,
5.8%, 1-6-95 .......................... 10,105 10,096,860
Computers and Office Equipment - 1.80%
Honeywell Inc.,
6.05%, 1-19-95 ........................ 5,000 4,984,875
Consumer Electronics and Appliances - 1.74%
TDK (USA) Corp.,
6.03%, 1-20-95 ........................ 4,835 4,819,612
Drugs and Hospital Supply - 1.65%
Baxter International Inc.,
6.2%, 1-31-95 ......................... 4,600 4,576,233
Financial - 1.99%
Textron Financial Corp.,
6.25%, 1-12-95 ........................ 2,800 2,794,653
USAA Capital Corp.,
5.95%, 1-19-95 ........................ 2,715 2,706,923
Total ................................. 5,501,576
Food and Related - 2.91%
ConAgra, Inc.,
6.0%, 1-11-95 ......................... 2,495 2,490,842
General Mills, Inc.,
Master Note ........................... 855 855,000
Heinz (H.J.) Company,
5.9%, 1-23-95 ......................... 4,200 4,184,857
Sara Lee Corporation,
Master Note............................ 531 531,392
Total ................................. 8,062,091
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Paper - 1.14%
Champion International Corporation,
6.15%, 1-9-95 ......................... $ 3,145 $ 3,140,702
Public Utilities - Electric - 5.29%
PS Colorado Credit Corp.,
6.18%, 1-13-95 ........................ 3,250 3,243,305
Pacificorp,
6.05%, 1-13-95 ........................ 2,000 1,995,967
Potomac Electric Power Co.,
6.03%, 1-13-95 ........................ 3,395 3,388,176
Western Resources Inc.,
6.18%, 1-6-95 ......................... 6,000 5,994,850
Total ................................. 14,622,298
Public Utilities - Gas - 1.39%
Bay State Gas Co.,
5.98%, 1-13-95 ........................ 3,850 3,842,326
Public Utilities - Pipeline - 1.42%
Enron Corp.,
6.0%, 1-31-95 ......................... 3,950 3,930,250
TOTAL SHORT-TERM SECURITIES - 25.84% $ 71,491,311
(Cost: $71,491,311)
TOTAL INVESTMENT SECURITIES - 100.03% $276,809,531
(Cost: $286,427,133)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.03%) (72,896)
NET ASSETS - 100.00% $276,736,635
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS
Aerospace - 0.96%
Boeing Company (The) ................... 24,500 $ 1,145,375
Sundstrand Corporation ................. 21,000 955,500
Total ................................. 2,100,875
Airlines - 1.51%
AMR Corporation* ....................... 28,000 1,491,000
Southwest Airlines Co. ................. 108,000 1,809,000
Total ................................. 3,300,000
Automotive - 6.73%
Chrysler Corporation ................... 75,500 3,699,500
Daimler-Benz AG, ADS ................... 10,460 515,155
Dana Corporation ....................... 53,000 1,238,875
Eaton Corporation ...................... 35,000 1,732,500
Ford Motor Company ..................... 130,500 3,654,000
General Motors Corporation ............. 69,500 2,936,375
Magna Group, Inc., Class A ............. 24,500 940,188
Total ................................. 14,716,593
Banks and Savings and Loans - 2.50%
Citicorp ............................... 52,000 2,151,500
First Bank Systems, Inc. ............... 35,000 1,163,750
First Interstate Bancorp ............... 21,000 1,420,125
Midlantic Corporation .................. 28,000 743,736
Total ................................. 5,479,111
Beverages - 1.12%
PepsiCo, Inc. .......................... 67,500 2,446,875
Biotechnology and Medical Services - 1.81%
Medtronic, Inc. ........................ 28,000 1,557,500
Ventritex, Inc.* ....................... 89,000 2,397,393
Total ................................. 3,954,893
Building - 5.84%
Armstrong World Industries, Inc. ....... 62,500 2,406,250
Centex Corporation ..................... 82,000 1,865,500
Georgia-Pacific Corporation ............ 29,500 2,109,250
Louisiana-Pacific Corporation .......... 47,000 1,280,750
Pulte Corporation ...................... 89,200 2,051,600
Temple-Inland Inc. ..................... 24,500 1,105,563
Weyerhaeuser Company ................... 52,000 1,950,000
Total ................................. 12,768,913
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Chemicals Major - 6.60%
Air Products & Chemicals, Inc. ......... 70,000 $ 3,123,750
Albemarle Corporation .................. 72,800 1,010,100
du Pont (E.I.) de Nemours and Company .. 68,500 3,853,125
PPG Industries, Inc. ................... 87,000 3,229,875
Praxair, Inc. .......................... 69,500 1,424,750
Union Carbide Corporation .............. 61,000 1,791,875
Total ................................. 14,433,475
Chemicals Specialty and Miscellaneous Technology - 5.15%
Betz Laboratories, Inc. ................ 35,000 1,548,750
Geon Company (The) ..................... 100,600 2,753,925
Minnesota Mining and Manufacturing
Company ............................... 35,000 1,868,125
Polaroid Corporation ................... 97,500 3,168,750
Xerox Corporation ...................... 19,500 1,930,500
Total ................................. 11,270,050
Computers and Office Equipment - 3.55%
General Motors Corporation, Class E .... 69,500 2,675,750
International Business Machines
Corporation ........................... 35,000 2,572,500
Microsoft Corporation* ................. 21,000 1,286,250
Oracle Systems Corporation* ............ 28,000 1,239,000
Total ................................. 7,773,500
Consumer Electronics and Appliances - 1.62%
Harman International Industries,
Incorporated .......................... 23,000 851,000
Whirlpool Corporation .................. 53,500 2,688,375
Total ................................. 3,539,375
Electrical Equipment - 2.72%
Emerson Electric Co. ................... 28,000 1,750,000
General Electric Company ............... 82,500 4,207,500
Total ................................. 5,957,500
Electronics - 8.38%
AMP Incorporated ....................... 38,500 2,800,875
Analog Devices, Inc.* .................. 101,000 3,547,625
Applied Materials, Inc.* ............... 60,000 2,520,000
cisco Systems, Inc.* ................... 69,500 2,436,809
Intel Corporation ...................... 52,500 3,346,875
LSI Logic Corporation* ................. 67,200 2,713,200
Molex Inc., Class A .................... 31,250 976,563
Total ................................. 18,341,947
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Engineering and Construction - 0.93%
Fluor Corporation ...................... 28,000 $ 1,207,500
Foster Wheeler Corporation ............. 28,000 833,000
Total ................................. 2,040,500
Financial - 2.20%
Federal Home Loan Mortgage Corporation . 35,000 1,767,500
Federal National Mortgage Association .. 20,500 1,493,938
Household International, Inc. .......... 42,000 1,559,250
Total ................................. 4,820,688
Food and Related - 1.33%
CPC International Inc. ................. 35,000 1,863,750
Pet Incorporated ....................... 53,500 1,056,625
Total ................................. 2,920,375
Hospital Management - 0.93%
United Healthcare Corp. ................ 45,000 2,030,625
Household Products - 3.60%
Colgate-Palmolive Company .............. 42,000 2,661,750
Gillette Company (The) ................. 35,000 2,616,250
Procter & Gamble Company (The) ......... 42,000 2,604,000
Total.................................. 7,882,000
Leisure Time - 2.34%
Walt Disney Company (The) .............. 49,000 2,260,125
McDonald's Corporation ................. 97,500 2,851,875
Total ................................. 5,112,000
Machinery - 6.61%
Caterpillar Inc. ....................... 109,500 6,036,188
Clark Equipment Company ................ 35,000 1,898,750
Deere & Company ........................ 47,500 3,146,875
Ingersoll-Rand Company ................. 28,000 882,000
Parker Hannifin Corporation ............ 28,000 1,274,000
Trinova Corporation .................... 42,000 1,233,750
Total ................................. 14,471,563
Metals and Mining - 0.55%
Phelps Dodge Corporation ............... 19,500 1,206,563
Multi-Industry - 2.05%
ITT Corporation ........................ 50,500 4,475,563
Paper - 2.15%
International Paper Company ............ 40,500 3,052,688
Union Camp Corporation ................. 35,000 1,649,375
Total ................................. 4,702,063
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Railroads - 3.33%
CSX Corporation ........................ 24,500 $ 1,705,813
Conrail, Inc. .......................... 42,000 2,121,000
Norfolk Southern Corporation ........... 21,000 1,273,125
Southern Pacific Rail Corporation* ..... 32,000 580,000
Union Pacific Corporation .............. 35,000 1,596,875
Total ................................. 7,276,813
Retailing - 10.68%
Circuit City Stores, Inc. .............. 111,500 2,480,875
Dayton Hudson Corporation .............. 32,500 2,299,375
Dillard Department Stores, Inc.,
Class A ............................... 66,000 1,765,500
Gap, Inc. (The) ........................ 49,000 1,494,500
Home Depot, Inc. (The) ................. 53,500 2,461,000
Limited, Inc. (The) .................... 52,000 942,500
May Department Stores Company (The) .... 67,500 2,278,125
Nordstrom, Inc. ........................ 26,000 1,095,250
OfficeMax, Inc.* ....................... 46,500 1,232,250
Penney (J.C.) Company, Inc. ............ 47,000 2,097,375
Sears, Roebuck and Co. ................. 14,000 644,000
Tommy Hilfiger Corporation* ............ 54,400 2,454,800
Toys "R" Us Inc.* ...................... 21,000 640,500
Wal-Mart Stores, Inc. .................. 69,500 1,476,875
Total ................................. 23,362,925
Telecommunications - 9.02%
AT&T Corporation ....................... 35,000 1,758,750
BellSouth Corporation .................. 22,000 1,190,750
General Instrument Corporation* ........ 69,500 2,085,000
MCI Communications Corporation ......... 130,000 2,396,810
MFS Communications Company, Inc.* ...... 29,900 986,700
Motorola, Inc. ......................... 115,500 6,684,563
Telefonaktiebolaget LM Ericsson,
Class B, ADR ......................... 35,000 1,933,750
Vanguard Cellular Systems, Inc.,
Class A* .............................. 105,000 2,690,625
Total ................................. 19,726,948
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Tire and Rubber - 1.07%
Goodyear Tire & Rubber Company (The) ... 69,500 $ 2,336,938
TOTAL COMMON STOCKS - 95.28% $208,448,671
(Cost: $192,074,625)
TOTAL SHORT-TERM SECURITIES - 4.75% $ 10,395,856
(Cost: $10,395,856)
TOTAL INVESTMENT SECURITIES - 100.03% $218,844,527
(Cost: $202,470,481)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.03%) (70,925)
NET ASSETS - 100.00% $218,773,602
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS
Australia - 2.14%
Westpac Banking Corp. (A) .............. 165,500 $ 556,742
Finland - 8.88%
Enso-Gutzeit Oy (A) .................... 40,400 347,036
Kymmene (A) ............................ 13,000 353,964
Metsa Serla Oy, Class B (A) ............ 20,000 878,080
Nokia Corporation (A) .................. 2,950 435,874
Tampella Oy (A)* ....................... 100,000 295,500
Total ................................. 2,310,454
France - 5.52%
Credit Lyonnais SA (A)* ................ 4,700 389,245
Lapeyre (A) ............................ 6,625 333,913
Societe Industrielle de Transports
Automobiles S.A. (A) .................. 2,700 351,095
Television Francaise 1-TF1 (A) ......... 4,000 362,900
Total ................................. 1,437,153
Germany - 7.37%
Dorries Scharmann AG (A)* .............. 1,000 122,620
Mannesman AG (A) ....................... 2,000 544,690
TRAUB AG (A)* .......................... 4,000 552,436
VEBA AG (A) ............................ 2,000 696,998
Total ................................. 1,916,744
Japan - 3.82%
Hitachi (A) ............................ 30,000 297,420
NEC (A) ................................ 16,000 182,848
NKK (A)* ............................... 120,000 331,920
Sharp (A) .............................. 10,000 180,450
Total ................................. 992,638
Mexico - 3.65%
Cemex, S.A., CPO Shares (A) ............ 41,500 204,180
Desc-Sociedad de Fomento Industrial,
S.A. de C.V., B (A) ................... 43,000 215,000
Grupo Carso, S.A. de C.V., Class 1 (A)* 29,000 213,150
Grupo Financiero Bancomer, S.A. de
C.V., C (A) ........................... 286,000 157,300
Grupo Iusacell S.A. de C.V., D, ADS* ... 1,400 22,400
Grupo Iusacell S.A. de C.V., L, ADS* ... 1,400 26,075
Telefonos de Mexico S.A. de C.V., ADR .. 2,700 110,700
Total ................................. 948,805
Norway - 2.29%
Den Norske Luftfartselskap A/S,
Class B (A)* .......................... 18,900 594,972
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Sweden - 10.77%
ASTRA AB A (A) ......................... 14,000 $ 361,592
Avesta Sheffield AB (A)* ............... 20,000 197,740
Kinnevik (A) ........................... 21,500 711,478
Skandia Enskilda Banken, Class A (A)* .. 91,000 520,247
Trelleburg AB, Series B (A)* ........... 30,000 437,850
AB Volvo (A) ........................... 30,500 574,407
Total ................................. 2,803,314
United Kingdom - 6.79%
AMEC (A) ............................... 210,000 226,800
BTR PLC (A) ............................ 40,000 183,880
House of Fraser PLC (A) ................ 111,000 303,363
Next plc (A) ........................... 131,000 527,275
Pilkington PLC (A) ..................... 104,000 270,400
United Biscuits (Holdings) Public
Limited Co. (A) ....................... 50,000 256,100
Total ................................. 1,767,818
TOTAL COMMON STOCKS - 51.23% $ 13,328,640
(Cost: $13,979,307)
PREFERRED STOCK - 1.15%
Germany
Hornbach-Baumarkt-AG (A) ............... 300 $ 300,097
(Cost: $313,526)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Banks and Savings and Loans - 3.57%
U.S. Bancorp,
Master Note ........................... $ 930 930,000
Consumer Electronics and Appliances - 2.68%
TDK (USA) Corp.,
6.03%, 1-20-95 ........................ 700 697,772
Financial - 20.69%
BHP Finance (USA) Inc.,
6.02%, 1-31-95 ........................ 1,000 994,983
International Business Machines Credit
Corporation,
7.25%, 1-3-95 ......................... 600 599,758
Kerr-McGee Credit Corp.,
6.2%, 1-11-95 ......................... 600 598,967
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Financial (Continued)
Nestle Capital Corp.,
5.9%, 1-31-95 ......................... $ 700 $ 696,558
PHH Corp.,
6.02%, 1-27-95 ........................ 700 696,957
Textron Financial Corp.,
6.25%, 1-12-95 ........................ 700 698,663
USAA Capital Corp.,
5.95%, 1-19-95 ........................ 600 598,215
USL Capital Corp.,
6.0%, 1-17-95 ......................... 500 498,667
Total ................................. 5,382,768
Food and Related - 9.80%
ConAgra, Inc.,
6.0%, 1-11-95 ......................... 700 698,833
General Mills, Inc.,
Master Note ........................... 950 950,000
Sara Lee Corporation,
Master Note............................ 900 900,402
Total ................................. 2,549,235
Paper - 3.07%
Champion International Corporation,
6.0%, 1-19-95 ......................... 800 797,600
Public Utilities - Electric - 4.22%
Potomac Electric Power Co.,
6.0%, 1-13-95 ......................... 600 598,794
Public Service Co. of Colorado,
6.18%, 1-13-95 ........................ 500 498,970
Total ................................. 1,097,764
Public Utilities - Gas - 2.68%
Questar Corp.,
6.05%, 1-20-95 ........................ 700 697,765
TOTAL SHORT-TERM SECURITIES - 46.71% $12,152,904
(Cost: $12,152,904)
TOTAL INVESTMENT SECURITIES - 99.09% $25,781,641
(Cost: $26,445,737)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.91% 237,993
NET ASSETS - 100.00% $26,019,634
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS
Biotechnology and Medical Services - 5.05%
EP Technologies, Inc.* ................. 50,000 $ 453,100
Protocol Systems, Inc.* ................ 16,000 144,000
Pyxis Corp.* ........................... 5,000 95,310
St. Jude Medical, Inc. ................. 1,000 39,500
Ventritex, Inc.* ....................... 3,000 80,811
Total ................................. 812,721
Computers and Office Equipment - 15.65%
Affiliated Computer Services, Inc.,
Class A* .............................. 10,000 217,500
America Online, Inc.*. ................. 2,000 112,000
Broderbund Software, Inc.* ............. 2,000 94,000
Cerner Corporation* .................... 1,000 44,250
Learning Company (The)* ................ 3,000 74,250
Macromedia, Inc.* ...................... 7,500 193,125
MapInfo Corporation* ................... 5,000 126,875
Minnesota Educational Computing
Corporation* .......................... 10,000 160,000
Parametric Technology Corporation* ..... 12,000 412,500
Shiva Corporation* ..................... 10,000 398,750
Synopsys, Inc.* ........................ 5,000 217,500
Wall Data Incorporated* ................ 10,000 398,750
Wonderware Corporation* ................ 2,000 67,000
Total ................................. 2,516,500
Drugs and Hospital Supply - 4.22%
LUNAR CORPORATION* ..................... 25,000 459,375
OmniCare, Inc. ......................... 5,000 219,375
Total ................................. 678,750
Electronics - 0.52%
Micro Linear Corporation* .............. 10,000 83,750
Hospital Management - 1.28%
Inphynet Medical Management Inc.* ...... 8,000 98,000
Quorum Health Group, Inc.* ............. 1,000 19,125
Sierra Health Services, Inc.* .......... 2,800 88,550
Total ................................. 205,675
Leisure Time - 2.18%
Cannondale Corporation* ................ 25,000 262,500
Longhorn Steaks, Inc.* ................. 10,000 87,500
Total ................................. 350,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Retailing - 5.95%
BABY SUPERSTORE, INC.* ................. 7,500 $ 344,063
Central Tractor Farm & Ctry* ........... 10,000 147,500
Hollywood Entertainment Corporation* ... 6,000 180,000
Just for Feet, Inc.* ................... 9,000 155,250
Movie Gallery, Inc.* ................... 5,000 129,375
Total ................................. 956,188
Services, Consumer and Business - 0.19%
Stewart Enterprises, Inc., Class A ..... 1,300 31,525
Telecommunications - 5.05%
Mobile Telecommunication Technologies
Corp.* ................................ 3,000 58,686
Ortel Corporation* ..................... 16,400 430,500
TESSCO Technologies Incorporated ....... 20,000 322,500
Total ................................. 811,686
Textiles and Apparel - 1.98%
Department 56, Inc.* ................... 8,000 318,000
Trucking - 0.89%
Knight Transportation, Inc.* ........... 10,000 143,750
TOTAL COMMON STOCKS - 42.96% $ 6,908,545
(Cost: $5,600,266)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Banks and Savings and Loans - 2.84%
U.S. Bancorp,
Master Note ........................... $ 457 457,000
Chemicals Specialty and Miscellaneous
Technology - 1.86%
Minnesota Mining and Manufacturing
Company,
5.8%, 1-6-95 .......................... 300 299,758
Consumer Electronics and Appliances - 3.10%
TDK (USA) Corp.,
6.03%, 1-20-95 ........................ 500 498,409
Drugs and Hospital Supply - 3.56%
Baxter International Inc.,
6.2%, 1-31-95 ......................... 575 572,029
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Financial - 23.54%
BHP Finance (USA) Inc.,
6.02%, 1-31-95 ........................ $ 400 $ 397,993
Block Financial Corp.,
5.97%, 1-23-95 ........................ 450 448,358
Kerr-McGee Credit Corp.,
6.2%, 1-11-95 ......................... 350 349,397
Merrill Lynch & Co., Inc.,
6.1%, 2-1-95 .......................... 500 497,374
Nestle Capital Corp.,
5.9%, 1-31-95 ......................... 600 597,050
PHH Corp.,
6.02%, 1-27-95 ........................ 500 497,826
Textron Financial Corp.,
6.25%, 1-12-95 ........................ 500 499,045
USAA Capital Corp.,
5.95%, 1-19-95 ........................ 500 498,513
Total ................................. 3,785,556
Food and Related - 6.94%
ConAgra, Inc.,
6.0%, 1-11-95 ......................... 300 299,500
General Mills, Inc.,
Master Note ........................... 492 492,000
Sara Lee Corporation,
Master Note............................ 324 323,678
Total ................................. 1,115,178
Paper - 3.10%
Champion International Corporation,
6.0%, 1-19-95 ......................... 500 498,500
Public Utilities - Electric - 6.21%
PS Colorado Credit Corp.,
6.18%, 1-13-95 ........................ 500 498,970
Potomac Electric Power Co.,
6.03%, 1-13-95 ........................ 500 498,995
Total ................................. 997,965
Public Utilities - Gas - 2.48%
Questar Corp.,
6.05%, 1-20-95 ........................ 400 398,723
Public Utilities - Pipelines - 3.09%
Enron Corp.,
6.0%, 1-31-95 ......................... 500 497,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1994
Value
TOTAL SHORT-TERM SECURITIES - 56.72% $ 9,120,618
(Cost: $9,120,618)
TOTAL INVESTMENT SECURITIES - 99.68% $16,029,163
(Cost: $14,720,884)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.32% 50,999
NET ASSETS - 100.00% $16,080,162
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS
Aerospace - 1.83%
TRW Inc. ............................... 2,400 $ 158,400
Automotive - 3.45%
Eaton Corporation ...................... 1,800 89,100
General Motors Corporation ............. 2,700 114,075
AB Volvo, ADR, Series B ................ 5,100 96,263
Total ................................. 299,438
Banks and Savings and Loans - 0.59%
Norwest Corporation .................... 2,200 51,425
Biotechnology and Medical Services - 1.00%
St. Jude Medical, Inc. ................. 2,200 86,900
Building - 2.95%
Simon Property Group, Inc. ............. 3,900 94,575
Temple-Inland Inc. ..................... 800 36,100
York International Corporation ......... 3,400 125,375
Total ................................. 256,050
Chemicals Major - 2.72%
Air Products and Chemicals, Inc. ....... 1,900 84,788
du Pont (E.I.) de Nemours and Company .. 1,200 67,500
Praxair, Inc. .......................... 1,200 24,600
Union Carbide Corporation .............. 2,000 58,750
Total ................................. 235,638
Chemicals Specialty and Miscellaneous
Technology - 1.28%
Betz Laboratories, Inc. ................ 2,500 110,625
Domestic Oil - 2.24%
Amoco Corporation ....................... 1,600 94,600
Apache Corporation ..................... 4,000 100,000
Total ................................. 194,600
Electronics - 0.67%
AMP Incorporated ....................... 800 58,200
Engineering and Construction - 0.86%
Foster Wheeler Corporation ............. 2,500 74,375
Financial - 1.34%
Federal National Mortgage Association .. 1,600 116,600
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Food and Related - 4.13%
CPC International Inc. ................. 1,200 $ 63,900
Deans Foods Company .................... 3,600 104,400
Hormel Foods Corporation ............... 4,200 103,950
Sara Lee Corporation ................... 3,400 85,850
Total ................................. 358,100
Hospital Management - 4.06%
LTC Properties Inc. .................... 9,000 119,250
National Medical Enterprises, Inc.* .... 8,600 121,475
Sierra Health Services, Inc.* .......... 1,800 56,925
United HealthCare Corporation .......... 1,200 54,150
Total ................................. 351,800
Insurance - 2.95%
SAFECO Corporation ..................... 1,500 78,188
St. Paul Companies, Inc. (The) ......... 2,200 98,450
UNUM Corporation ....................... 2,100 79,275
Total ................................. 255,913
Machinery - 4.00%
Caterpillar Inc. ....................... 1,200 66,150
Cleveland-Cliffs Inc. .................. 500 18,500
Deere & Company ........................ 2,000 132,500
Timken Company (The) ................... 1,000 35,250
Trinova Corporation .................... 3,200 94,000
Total ................................. 346,400
Multi-Industry - 1.12%
ITT Corporation ........................ 1,100 97,488
Paper - 2.11%
Union Camp Corporation ................. 1,800 84,825
Westvaco Corporation ................... 2,500 98,125
Total ................................. 182,950
Publishing and Advertising - 1.00%
McGraw-Hill, Inc. ...................... 1,300 86,938
Railroads - 3.52%
Burlington Northern Inc. ............... 400 19,250
CSX Corp. .............................. 1,900 132,288
ConRail, Inc. .......................... 1,600 80,800
Norfolk Southern Corporation ........... 1,200 72,750
Total ................................. 305,088
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Retailing - 5.33%
Kohl's Corporation* ..................... 2,000 $ 79,500
Limited, Inc. (The) .................... 4,000 72,500
May Department Stores Company (The) .... 1,900 64,125
Mercantile Stores Company, Inc. ........ 1,000 39,500
Penney (J.C.) Company, Inc. ............ 2,000 89,250
Tommy Hilfiger Corporation* ............ 2,600 117,325
Total ................................. 462,200
Steel - 0.94%
Bethlehem Steel Corporation* ........... 4,500 81,000
Telecommunications - 3.02%
BellSouth Corporation .................. 1,200 64,950
MCI Communications Corporation ......... 6,000 110,622
Telefonos de Mexico S.A. de C.V., ADR .. 2,100 86,100
Total ................................. 261,672
Textiles and Apparel - 0.93%
Cygne Designs, Inc.* ................... 6,000 81,000
TOTAL COMMON STOCKS - 52.04% $ 4,512,800
(Cost: $4,737,268)
PREFERRED STOCKS
Airlines - 0.30%
Delta Air Lines, Inc., Depository Shares,
Convertible, Series C ................. 600 26,250
Computers and Office Equipment - 0.73%
General Motors Corporation, Class E,
Depository Shares, Convertible ........ 1,100 63,113
Telecommunications - 0.35%
Nokia Corporation, ADS* ................ 400 30,000
TOTAL PREFERRED STOCKS - 1.38% $ 119,363
(Cost: $106,718)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES - 6.18%
United States Treasury:
6.875%, 8-31-99 ....................... $250 $ 240,625
6.375%, 8-15-2002 ..................... 100 91,562
6.25%, 8-15-2023 ...................... 250 203,243
Total ................................. $ 535,430
(Cost: $559,041)
SHORT-TERM SECURITIES
Banks and Savings and Loans - 4.31%
U.S. Bancorp,
Master Note ........................... 374 374,000
Consumer Electronics and Appliances - 3.45%
TDK (USA) Corp.,
6.03%, 1-20-95 ........................ 300 299,045
Financial - 10.69%
BHP Finance (USA) Inc.,
6.02%, 1-31-95 ........................ 250 248,746
Kerr-McGee Credit Corp.,
6.2%, 1-11-95 ......................... 230 229,604
PHH Corp.,
6.02%, 1-27-95 ........................ 250 248,913
USAA Capital Corp.,
5.95%, 1-19-95 ........................ 200 199,405
Total ................................. 926,668
Food and Related - 10.68%
ConAgra, Inc.,
6.0%, 1-11-95 ......................... 300 299,500
General Mills, Inc.,
Master Note ........................... 375 375,000
Sara Lee Corporation,
Master Note............................ 252 251,592
Total ................................. 926,092
Paper - 3.45%
Champion International Corporation,
6.0%, 1-19-95 ......................... 300 299,100
Public Utilities - Electric - 6.90%
Potomac Electric Power Co.,
6.03%, 1-13-95 ........................ 300 299,397
Public Service Co. of Colorado,
6.18%, 1-13-95 ........................ 300 299,382
Total ................................. 598,779
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1994
Value
TOTAL SHORT-TERM SECURITIES - 39.48% $3,423,684
(Cost: $3,423,684)
TOTAL INVESTMENT SECURITIES - 99.08% $8,591,277
(Cost: $8,826,711)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.92% 79,791
NET ASSETS - 100.00% $8,671,068
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
BANK OBLIGATIONS
Certificates of Deposit
Domestic - 1.62%
PNC Bank, N.A.,
5.7%, 4-20-95 ......................... $ 500 $ 499,401
Eurodollar - 1.62%
NationsBank Corp. Europe,
5.4%, 5-19-95 ......................... 500 499,999
Total Certificates of Deposit - 3.24% 999,400
Notes - 3.25%
Abbey National Treasury Services plc,
7.4%, 12-15-95 ........................ 500 500,000
Comerica Bank,
5.83%, 1-3-95 ......................... 500 500,000
Total ................................. 1,000,000
TOTAL BANK OBLIGATIONS - 6.49% $ 1,999,400
(Cost: $1,999,400)
CORPORATE OBLIGATIONS
Commercial Paper
Building - 2.59%
Weyerhaeuser Company,
5.9%, 1-23-95 ......................... 800 797,116
Financial - 19.49%
AT&T Capital Corp.,
5.88%, 1-3-95 ......................... 800 799,739
B.A.T. Capital Corp.,
5.9%, 1-25-95 ......................... 500 498,033
BHP Finance (USA) Inc.,
6.02%, 1-31-95 ........................ 700 696,488
Block Financial Corp.,
5.97%, 1-23-95 ........................ 600 597,811
General Electric Capital Corp.,
6.0%, 2-17-95 ......................... 800 793,733
Merrill Lynch & Co., Inc.,
5.72%, 1-17-95 ........................ 600 598,475
Nestle Capital Corp.,
5.9%, 1-31-95 ......................... 630 626,902
PHH Corp.,
6.02%, 1-27-95 ........................ 800 796,522
Philip Morris Capital Corp.,
5.9%, 1-25-95 ......................... 600 597,640
Total ................................. 6,005,343
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
Food and Related - 12.17%
General Mills, Inc.,
Master Note ........................... $1,060 $ 1,060,000
Heinz (H.J.) Company,
5.9%, 1-23-95 ......................... 800 797,115
Quaker Oats Co.,
5.95%, 1-17-95 ........................ 800 797,884
Sara Lee Corporation,
Master Note ........................... 1,094 1,093,781
Total ................................. 3,748,780
Paper - 2.59%
Kimberly-Clark Corp.,
5.9%, 1-23-95 ......................... 800 797,115
Public Utilities - Electric - 9.39%
Pacific Gas and Electric Co.,
6.0%, 1-13-95 ......................... 800 798,400
Pacificorp,
5.72%, 1-11-95 ........................ 500 499,206
Potomac Electric Power Co.,
6.03%, 1-13-95 ........................ 800 798,392
Southern California Edison Company,
6.05%, 1-20-95 ........................ 800 797,446
Total ................................. 2,893,444
Public Utilities - Gas - 4.85%
Bay State Gas Co.,
5.9%, 1-25-95 ......................... 800 796,853
Questar Corp.,
5.75%, 1-13-95 ........................ 700 698,658
Total ................................. 1,495,511
Publishing and Advertising - 2.59%
Times Mirror Company (The),
6.05%, 1-11-95 ........................ 800 798,656
Telecommunications - 1.61%
Southwestern Bell Capital Corp.,
6.04%, 2-2-95 ......................... 500 497,316
Total Commercial Paper - 55.28% 17,033,281
Commercial Paper (backed by irrevocable
bank letter of credit)
Financial - 1.62%
Spiegel Funding Corp. (Dresdner
Bank A.G.),
5.75%, 1-17-95 ........................ 500 498,722
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (backed by irrevocable
bank letter of credit) (Continued)
Public Utilities - Electric - 2.59%
AES Barbers Point Inc. (Bank of
America N.T. & S.A.),
6.03%, 1-19-95 ........................ $ 800 $ 797,588
Total Commercial Paper (backed by
irrevocable bank letter of credit) - 4.21% 1,296,310
Notes
Beverages - 1.62%
PepsiCo, Inc.,
5.845%, 1-3-95 ........................ 500 500,000
Financial - 1.62%
AVCO Financial Services Inc.,
5.87%, 1-3-95 ......................... 500 500,000
Public Utilities - Electric - 1.62%
Georgia Power Co.,
5.125%, 9-1-95 ........................ 500 497,889
Total Notes - 4.86% 1,497,889
TOTAL CORPORATE OBLIGATIONS - 64.35% $19,827,480
(Cost: $19,827,480)
MUNICIPAL OBLIGATIONS
California - 2.60%
City of Anaheim, California, Certificates
of Participation (1993 Arena Financing
Project), Municipal Adjustable Rate
Taxable Securities (Credit Suisse),
5.78%, 2-1-95 ......................... 800 800,000
Georgia - 2.60%
Development Authority of Richmond
County (Georgia), Taxable Industrial
Revenue Bonds (NutraSweet Project),
Series 1990 (Union Bank of Switzerland),
5.71, 6-2-95 .......................... 800 800,000
Michigan - 2.27%
Michigan Underground Storage Tank Financial
Assurance Authority, State of Michigan,
Series 1 (Canadian Imperial Bank of Commerce),
6.4%, 1-11-95 ......................... 700 698,756
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
New Hampshire - 1.62%
The Industrial Development Authority
of the State of New Hampshire,
Pollution Control Revenue Bonds
(Public Service Company of New
Hampshire Project-1991 Taxable
Series D and E) (Barklays Bank),
6.45%, 2-14-95 ........................ $ 500 $ 500,000
Texas - 1.61%
Metrocrest Hospital Authority, Series 1989A
(The Bank of New York),
6.118%, 1-20-95 ....................... 500 498,385
TOTAL MUNICIPAL OBLIGATIONS - 10.70% $ 3,297,141
(Cost: $3,297,141)
UNITED STATES GOVERNMENT
OBLIGATIONS
Federal Home Loan Banks,
5.9%, 1-9-95 .......................... 1,000 1,000,000
Federal Home Loan Mortgage Corporation,
5.95%, 3-7-95 ......................... 1,000 1,000,000
Federal National Mortgage Association,
5.9%, 3-20-95 ......................... 500 500,000
TOTAL UNITED STATES GOVERNMENT
OBLIGATIONS - 8.11% $ 2,500,000
(Cost: $2,500,000)
TOTAL INVESTMENT SECURITIES - 89.65% $27,624,021
(Cost: $27,624,021)
CASH AND OTHER ASSETS,
NET OF LIABILITIES - 10.35% 3,188,242
NET ASSETS - 100.00% $30,812,263
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Airlines - 3.10%
Federal Express Corporation,
9.75%, 5-15-96 ........................ $ 50 $ 51,010
Automotive - 2.98%
General Motors Corporation,
7.625%, 2-15-97 ....................... 50 49,011
Banks and Savings and Loans - 12.38%
BankAmerica Corporation,
9.7%, 8-1-2000 ........................ 50 52,361
Boatmen's Bancshares, Inc.,
9.25%, 11-1-2001 ...................... 50 51,396
NCNB Corporation,
10.5%, 3-15-99 ........................ 50 51,375
Norwest Financial, Inc.,
7.75%, 8-15-2001 ...................... 50 48,476
Total ................................. 203,608
Chemicals Major - 8.33%
Dow Chemical Company, Inc. (The),
4.625%, 10-15-95 ...................... 60 58,650
ICI Welmington, Inc.,
9.5%, 11-15-2000 ...................... 75 78,438
Total ................................. 137,088
Chemicals Specialty and Miscellaneous
Technology - 5.98%
Waste Management, Inc.,
6.25%, 12-15-96 ....................... 50 49,247
Xerox Credit Corporation,
6.25%, 1-15-96 ........................ 50 49,138
Total ................................. 98,385
Domestic Oil - 3.13%
BP America Inc.,
9.5%, 1-1-98 .......................... 50 51,490
Drugs and Hospital Supply - 3.09%
Baxter International Inc.,
9.25%, 9-15-96 ........................ 50 50,802
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Financial - 11.76%
Associates Corporation of North America,
8.8%, 8-1-98 .......................... $ 50 $ 50,452
Avco Financial Services, Inc.,
5.5%, 4-1-2000 ........................ 50 44,137
Ford Motor Credit Company,
8.0%, 1-15-99 ......................... 50 49,390
Household Finance Corporation,
7.75%, 6-15-97 ........................ 50 49,447
Total ................................. 193,426
Insurance - 6.06%
ITT Hartford,
7.25%, 12-1-96 ........................ 50 49,099
Transamerica Finance Corporation,
8.75%, 10-1-99 ........................ 50 50,583
Total ................................. 99,682
International Oil - 6.09%
Chevron Corporation,
8.11%, 12-1-2004 ...................... 50 48,734
Texaco Capital Inc.,
9.0%, 12-15-99 ........................ 50 51,433
Total ................................. 100,167
Multi-Industry - 3.12%
ITT Financial Corporation,
8.875%, 6-15-2003 ..................... 50 51,336
Public Utilities - Pipelines - 6.14%
Consolidated Natural Gas Company,
8.75%, 6-1-99 ......................... 50 50,642
Tenneco Credit Corporation,
9.0%, 7-15-95 ......................... 50 50,345
Total ................................. 100,987
Retailing - 6.28%
Penney (J.C.) Company, Inc.,
10.0%, 10-15-97 ....................... 50 52,140
Sears, Roebuck and Co.,
9.25%, 4-15-98 ........................ 50 51,273
Total ................................. 103,413
TOTAL CORPORATE DEBT SECURITIES - 78.44% $1,290,405
(Cost: $1,324,967)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
United States Treasury:
5.125%, 11-30-98 ...................... $100 $ 90,969
6.375%, 8-15-2002...................... 100 91,562
6.25%, 2-15-2003 ...................... 100 90,437
TOTAL UNITED STATES GOVERNMENT SECURITIES - 16.59% $ 272,968
(Cost: $286,093)
TOTAL SHORT-TERM SECURITIES - 2.86% $ 47,000
(Cost: $47,000)
TOTAL INVESTMENT SECURITIES - 97.89% $1,610,373
(Cost: $1,658,060)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 2.11% 34,773
NET ASSETS - 100.00% $1,645,146
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Aerospace - 1.39%
McDonnell Douglas Corporation,
9.25%, 4-1-2002 ....................... $1,000 $ 1,026,960
Airlines - 1.26%
Federal Express Corporation,
7.89%, 9-23-2008 ...................... 1,000 935,770
Automotive - 5.70%
General Motors Corporation,
8.8%, 3-1-2021 ........................ 2,600 2,661,958
Toyota Motor Credit Corporation, Medium Term,
Three Year Basket Inverse Floating Rate,
3.02%, 8-5-96 (B) ..................... 1,750 1,557,500
Total ................................. 4,219,458
Banks and Savings and Loans - 13.77%
BankAmerica Corporation,
8.125%, 8-15-2004 ..................... 1,000 950,710
BarclaysAmericanCorporation,
9.125%, 12-1-97 ....................... 225 229,478
Bayerische Landesbank Girozentale, NY
Branch, CD, Currency Protected Deutschemark
Swap Rate Inverse Floating Rate,
3.06%, 3-28-97 (C) .................... 1,000 890,000
Central Fidelity Banks,
8.15%, 11-15-2002 ..................... 500 483,140
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-2005 ...................... 500 420,000
Citicorp,
7.75%, 6-15-2006 ...................... 1,000 929,430
First Union Corporation,
8.0%, 11-15-2002 ...................... 1,000 958,460
Great Western Financial Corporation,
8.6%, 2-1-2002 ........................ 1,500 1,489,380
Kansallis-Osake-Pankki,
10.0%, 5-1-2002 ....................... 1,000 1,073,220
Riggs National Corporation,
8.5%, 2-1-2006 ........................ 1,000 925,000
Skandia Enskilda Banken, NY Branch
Certificate of Deposit Dollarized
Australian Dollar Reset,
6.125%, 4-5-99 (D) .................... 1,000 840,000
Wells Fargo & Company,
8.75%, 5-1-2002 ....................... 1,000 1,005,950
Total ................................. 10,194,768
Building - 7.93%
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-2002 ...................... 1,000 932,840
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Building (Continued)
Cemex, S.A.,
8.875%, 6-10-98 ....................... $1,000 $ 870,000
Doman Industries Limited,
8.75%, 3-15-2004 ...................... 500 441,250
Noranda Forest Inc.,
7.5%, 7-15-2003 ....................... 1,000 921,820
Noranda Inc.,
8.625%, 7-15-2002 ..................... 950 942,524
Owens-Corning Fiberglas Corporation,
8.875%, 6-1-2002 ...................... 1,000 999,330
Del Webb Corporation,
10.875%, 3-31-2000 .................... 800 760,000
Total ................................. 5,867,764
Chemicals Major - 1.37%
Dow Capital BV,
9.0%, 5-15-2010 ....................... 1,000 1,014,920
Domestic Oil - 4.96%
Apache Corporation,
9.25%, 6-1-2002 ....................... 500 509,670
LASMO (USA) INC.,
7.125%, 6-1-2003 ...................... 1,000 889,720
Seagull Energy Corporation,
7.875%, 8-1-2003 ...................... 1,500 1,297,500
Union Texas Petroleum Holdings, Inc.,
8.25%, 11-15-99 ....................... 1,000 971,680
Total ................................. 3,668,570
Electrical Equipment - 3.29%
General Electric Capital Corporation:
8.3%, 9-20-2009 ....................... 1,500 1,528,515
8.65%, 5-1-2018 ....................... 895 902,769
Total ................................. 2,431,284
Financial - 10.48%
Banc One Credit Card Master Trust,
7.55%, 12-15-99 ....................... 1,000 985,930
Chrysler Financial Corporation,
12.75%, 11-1-99 ....................... 1,000 1,161,360
Countrywide Mortgage Backed Securities,
Inc.,
6.5%, 4-25-2024 ....................... 2,000 1,839,720
DLJ Mortgage Acceptance Corp., 1994-3 A13,
6.5%, 4-25-2024 ....................... 980 849,216
General Motors Acceptance Corporation,
8.875%, 6-1-2010 ...................... 1,000 1,038,310
Greyhound Financial Corporation,
8.79%, 11-15-2001 ..................... 1,000 1,002,150
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Financial (Continued)
JCP Master Credit Card Trust,
9.625%, 6-15-2000 ..................... $ 500 $ 524,685
National Credit Card Trust 1989-4,
9.45%, 12-31-97 ....................... 350 355,796
Total ................................. 7,757,167
Hospital Management - 1.36%
HealthTrust Inc.:
10.75%, 5-1-2002 ...................... 500 531,250
8.75%, 3-15-2005 ...................... 500 477,500
Total ................................. 1,008,750
Household Products - 2.68%
Proctor & Gamble Company (The),
8.0%, 9-1-2024 ........................ 2,000 1,983,760
International Oil - 0.49%
YPF Sociedad Anoima,
8.0%, 2-15-2004 ....................... 500 360,000
Leisure Time - 4.91%
Marriott International, Inc.,
6.75%, 12-15-2003 ..................... 1,000 881,960
Tele-Communications, Inc.,
9.8%, 2-1-2012 ........................ 1,000 1,000,210
Time Warner Incorporated,
7.95%, 2-1-2000 ....................... 1,000 937,460
Turner Broadcasting System, Inc.,
8.375%, 7-1-2013 ...................... 1,000 813,080
Total ................................. 3,632,710
Machinery - 0.72%
Caterpillar, Inc.,
9.375%, 8-15-2011 ..................... 500 534,840
Multi-Industry - 1.22%
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 1,000 905,000
Public Utilities - Electric - 1.28%
Kansas Gas & Electric Company,
7.6%, 12-15-2003 ...................... 1,000 943,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Public Utilities - Pipelines - 2.76%
Arkla, Inc.,
8.875%, 7-15-99 ....................... $1,000 $ 975,000
Coastal Corporation (The),
10.375%, 10-1-2000 .................... 500 531,595
Tenneco Inc.,
10.375%, 11-15-2000 ................... 500 536,825
Total ................................. 2,043,420
Publishing and Advertising - 1.86%
News America Holdings Incorporated:
9.125%, 10-15-99 ...................... 500 503,975
8.25%, 8-10-2018 ...................... 1,000 875,610
Total ................................. 1,379,585
Railroad Equipment - 0.01%
Union Tank Car Co.,
9.5%, 12-15-95 ........................ 9 9,131
Railroads - 1.42%
Louisville & Nashville Railroad
Equipment Trust Certificates, Series 10,
12.3%, 2-1-95 ......................... 8 8,008
Penn Central Corporation (The),
10.625%, 4-15-2000 .................... 1,000 1,045,170
Total ................................. 1,053,178
Steel - 1.33%
USX Corporation,
8.21%, 1-21-2000 ...................... 1,000 980,750
Telecommunications - 4.74%
New England Telephone & Telegraph Company,
7.875%, 11-15-2029 .................... 2,000 2,081,560
Southwestern Bell Telephone Company,
7.0%, 8-26-2002 ....................... 1,000 930,980
US WEST Financial Services, Inc.,
8.4%, 9-15-99 ......................... 500 498,625
Total ................................. 3,511,165
TOTAL CORPORATE DEBT SECURITIES - 74.93% $55,462,450
(Cost: $59,389,451)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
OTHER GOVERNMENT SECURITIES
Argentina - 0.48%
Republic of Argentina,
8.375%, 12-20-2003 .................... $ 500 $ 356,250
Canada - 4.24%
Hydro Quebec,
8.05%, 7-7-2024 ....................... 1,000 961,420
Province of Manitoba,
9.125%, 1-15-2018 ..................... 2,000 2,179,440
Total ................................. 3,140,860
Supernationals - 1.41%
Inter-American Development Bank,
8.4%, 9-1-2009 ........................ 1,000 1,039,730
TOTAL OTHER GOVERNMENT SECURITIES - 6.13% $ 4,536,840
(Cost: $4,789,818)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
7.5%, 11-15-2017 ...................... 1,538 1,439,953
7.5%, 4-15-2019 ....................... 1,190 1,019,068
7.0%, 1-15-2021 ....................... 500 440,000
Federal National Mortgage Association,
7.5%, 9-1-2009 ........................ 1,000 956,926
United States Treasury:
6.5%, 5-15-97 ......................... 1,000 972,340
5.75%, 10-31-97 ....................... 2,500 2,369,925
11.25%, 2-15-2015 ..................... 1,000 1,321,250
8.875%, 8-15-2017 ..................... 2,000 2,178,740
7.5%, 11-15-2024 ...................... 1,000 956,560
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 15.75% $11,654,762
(Cost: $12,071,117)
TOTAL SHORT-TERM SECURITIES - 1.24% $ 922,000
(Cost: $922,000)
TOTAL INVESTMENT SECURITIES - 98.05% $72,576,052
(Cost: $77,172,386)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.95% 1,440,798
NET ASSETS - 100.00% $74,016,850
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1994
Shares Value
COMMON STOCKS AND WARRANTS
Leisure Time - 0.98%
Infinity Broadcasting Corporation,
Class A* .............................. 22,500 $ 711,563
Miscellaneous - 0.91%
Dial Page Inc., Warrants ............... 1,000 1,250
LTC Properties, Inc. ................... 50,000 662,500
Total ................................. 663,750
TOTAL COMMON STOCKS AND WARRANTS - 1.89% $1,375,313
(Cost: $967,468)
PREFERRED STOCKS - 0.69%
Banks and Savings and Loans
California Federal Bank, F.S.B. ........ 5,000 $ 501,250
(Cost: $500,000)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Automotive - 2.53%
Aftermarket Technology Corp.,
12.0%, 8-1-2004 (E).................... $ 500 516,250
Lear Seating Corporation,
8.25%, 2-1-2002 ....................... 1,500 1,320,000
Total ................................. 1,836,250
Beverages - 1.69%
Dr Pepper Bottling Holdings, Inc.,
0.0%, 2-15-2003 (F).................... 500 345,000
ROYAL CROWN CORPORATION,
9.75%, 8-1-2000 ....................... 1,000 880,000
Total ................................. 1,225,000
Biotechnology and Medical Services - 2.08%
Abbey Healthcare Group, Incorporated,
9.5%, 11-1-2022 ....................... 500 450,000
Quorum Health Group, Inc.,
11.875%, 12-15-2002 ................... 1,000 1,060,000
Total ................................. 1,510,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Building - 7.66%
American Standard Inc.:
9.875%, 6-1-2001 ...................... $1,000 $ 970,000
9.25%, 12-1-2016 ...................... 500 457,500
Beazer Homes USA, Inc.,
9.0%, 3-1-2004 ........................ 750 615,000
Eagle Industries, Inc.,
0.0%, 7-15-2003 (F) ................... 1,500 975,000
Hillsborough Company,
17.0%, 1-1-96 (G) ..................... 500 305,000
NVR L.P.,
11.0%, 4-15-2003 ...................... 1,000 840,000
Nortek, Inc.,
9.875%, 3-1-2004 ...................... 500 445,000
Triangle Pacific Corp.,
10.5%, 8-1-2003 ....................... 1,000 957,500
Total ................................. 5,565,000
Chemicals Specialty and Miscellaneous Technology - 5.34%
Buckeye Cellulose Corporation,
10.25%, 5-15-2001 ..................... 1,250 1,168,750
Carlisle Plastics Inc.,
10.25%, 6-15-97 ....................... 500 492,500
Envirotest Systems Corp.,
9.125%, 3-15-2001 ..................... 1,000 840,000
LaRoche Industries Inc.,
13.0%, 8-15-2004 ...................... 1,000 920,000
OSi Specialties, Inc.,
9.25%, 10-1-2003 ...................... 500 457,500
Total ................................. 3,878,750
Computers and Office Equipment - 0.60%
Mail-Well Corporation,
10.5%, 2-15-2004 ...................... 500 435,000
Consumer Electronics and Appliances - 1.07%
Sealy Corporation,
9.5%, 5-1-2003 ........................ 825 779,625
Domestic Oil - 1.57%
Clark R&M Holdings, Inc.,
0.0%, 2-15-2000 ....................... 2,000 1,140,000
Drugs and Hospital Supply - 2.79%
Amerisource Distribution Corporation,
11.25%, 7-15-2005 ..................... 1,112 1,059,788
General Medical Corporation,
12.125%, 8-15-2005 .................... 1,000 969,202
Total ................................. 2,028,990
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Electronics - 1.29%
Essex Group, Inc.,
10.0%, 5-1-2003 ....................... $1,000 $ 940,000
Food and Related - 2.21%
General Nutrition, Incorporated,
11.375%, 3-1-2000 ..................... 393 433,774
Pilgrim's Pride Corporation,
10.875%, 8-1-2003 ..................... 300 282,750
Specialty Foods Corporation,
10.25%, 8-15-2001 ..................... 1,000 890,000
Total ................................. 1,606,524
Hospital Management - 3.30%
LTC Properties, Inc.,
8.5%, 1-1-2000 ........................ 1,000 1,005,000
Pathmark Stores, Inc.,
9.625%, 5-1-2003 ...................... 1,000 890,000
Surgical Health Corporation,
11.5%, 7-15-2004 ...................... 500 500,000
Total ................................. 2,395,000
Household Products - 1.66%
Exide Corporation:
10.75%, 12-15-2002 .................... 750 750,000
0.0%, 12-15-2004 (F) .................. 500 352,500
MacAndrews & Forbes Group Incorporated,
13.0%, 3-1-99 ......................... 100 100,250
Total ................................. 1,202,750
Leisure Time - 16.50%
Argosy Gaming Company,
12.0%, 6-1-2001 ....................... 908 860,330
Cablevision Industries Corporation,
10.75%, 1-30-2002 ..................... 500 497,500
California Hotel Finance Corporation,
11.0%, 12-1-2002 ...................... 1,000 920,000
Comcast Corporation,
0.0%, 3-5-2000 ........................ 1,000 670,000
Continental Cablevision, Inc.:
10.625%, 6-15-2002 .................... 500 503,750
8.875%, 9-15-2005 ..................... 500 452,500
11.0%, 6-1-2007 ....................... 500 507,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Leisure Time (Continued)
Family Restaurants, Inc.,
9.75%, 2-1-2002 ....................... $ 500 $ 392,500
FLAGSTAR COMPANIES, INC.:
10.75%, 9-15-2001 ..................... 1,000 937,500
11.25%, 11-1-2004 ..................... 1,000 825,000
GNS Finance Corp.,
9.25%, 3-15-2003 ...................... 1,500 1,440,000
Infinity Broadcasting Corporation,
10.375%, 3-15-2002 .................... 1,000 1,010,000
Plitt Theatres, Inc.,
10.875%, 6-15-2004 .................... 1,000 930,000
Showboat, Inc.,
9.25%, 5-1-2008 ....................... 1,000 835,000
Sinclair Broadcast Group Inc.,
10.0%, 12-15-2003 ..................... 375 348,750
Viacom International, Inc.,
8.0%, 7-7-2006 ........................ 1,000 857,500
Total ................................. 11,987,830
Multi-Industry - 3.74%
Federal Industries Ltd.,
10.25%, 6-15-2000 ..................... 500 468,750
Jordan Industries, Inc.,
10.375%, 8-1-2003 ..................... 1,000 890,000
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 1,500 1,357,500
Total ................................. 2,716,250
Oil Services - 1.40%
Wainoco Oil Corporation,
12.0%, 8-1-2002 ....................... 1,000 1,020,000
Packaging and Containers - 7.02%
Anchor Glass Container Corporation,
9.875%, 12-15-2008 .................... 500 430,000
Container Corporation of America,
11.25%, 5-1-2004 ...................... 1,500 1,537,500
Gaylord Container Corporation,
11.5%, 5-15-2001 ...................... 1,000 1,030,000
Owens-Illinois, Inc.,
10.25%, 4-1-99 ........................ 1,000 990,000
Silgan Corporation,
0.0%, 12-15-2002 (F)................... 500 420,000
Sweetheart Cup Company, Inc.,
10.5%, 9-1-2003 ....................... 750 690,000
Total ................................. 5,097,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Paper - 3.73%
Fort Howard Corporation:
11.0%, 1-2-2002 ....................... $ 475 $ 474,484
14.125%, 11-1-2004 .................... 500 503,750
Stone Container Corporation,
10.75%, 10-1-2002 ..................... 1,000 995,000
Williamhouse-Regency of Delaware, Inc.,
11.5%, 6-15-2005 ..................... 800 736,000
Total ................................. 2,709,234
Publishing and Advertising - 3.94%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................... 1,000 1,025,000
Big Flower Press, Inc.,
10.75%, 8-1-2003 ...................... 1,000 935,000
Outdoor Systems, Inc.,
10.75%, 8-15-2003 ..................... 1,000 900,000
Total ................................. 2,860,000
Retailing - 9.97%
Barnes & Noble, Inc.,
11.875%, 1-15-2003 ................... 500 535,000
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ...................... 500 395,000
Bradlees, Inc.,
9.25%, 3-1-2003 ...................... 1,000 825,000
Color Tile, Inc.,
10.75%, 12-15-2001 .................... 1,000 880,000
Kroger Co. (The),
9.75%, 2-15-2004 ...................... 1,000 1,011,250
Musicland Stores, Inc.,
9.0%, 6-15-2003 ....................... 1,500 1,245,000
Penn Traffic Company,
10.375%, 10-1-2004 .................... 1,500 1,447,500
WestPoint Stevens Inc.,
9.375%, 12-15-2005 .................... 1,000 905,000
Total ................................. 7,243,750
Services, Consumer and Business - 0.98%
Bell & Howell Company,
10.75%, 10-1-2002 ..................... 750 712,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Steel - 2.10%
AK Steel,
10.75%, 4-1-2004 ...................... $1,000 $ 990,000
Inland Steel,
12.75%, 12-15-2002 .................... 500 538,125
Total ................................. 1,528,125
Telecommunications - 3.60%
Dial Call Communications, Inc.,
0.0%, 4-15-2004 (F) ................... 1,000 345,000
MFS Communications Company, Inc.,
0.0%, 1-15-2004 (F) ................... 500 295,000
PanAmSat, L.P.:
9.75%, 8-1-2000 ....................... 1,000 942,500
0.0%, 8-1-2003 (F) .................... 1,000 625,000
USA Mobile Communications, Inc.,
9.5%, 2-1-2004 ........................ 500 405,000
Total ................................. 2,612,500
Textiles and Apparel - 1.27%
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 ...................... 1,000 925,000
TOTAL CORPORATE DEBT SECURITIES - 88.04% $63,955,578
(Cost: $68,357,699)
SHORT-TERM SECURITIES
Banks and Savings and Loans - 1.96%
U.S. Bancorp,
Master Note ........................... 1,423 1,423,000
Food and Related - 4.95%
General Mills, Inc.,
Master Note ........................... 2,267 2,267,000
Sara Lee Corporation,
Master Note ........................... 1,326 1,326,000
Total ................................. 3,593,000
TOTAL SHORT-TERM SECURITIES - 6.91% $ 5,016,000
(Cost: $5,016,000)
TOTAL INVESTMENT SECURITIES - 97.53% $70,848,141
(Cost: $74,841,167)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 2.47% 1,795,534
NET ASSETS - 100.00% $72,643,675
See Notes to Schedules of Investments on page .
<PAGE>
Notes to Schedules of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside of the United States.
(B) Coupon resets semiannually based on the arithmetic mean of two year
swap rates in four nations: Italy, France, Spain and the United
Kingdom, determined by the following formula (minimum coupon of 0%):
19.65% - 2 x (average two year swap rate in the aforementioned
nations).
(C) Coupon resets semiannually based on 14.13% - 1.5 x (5 year
Deutschemark swap rate). Coupon guaranteed at 3%.
(D) Coupon resets on 4-5-95 based on the greater of 4% and 4% + 5 x (6.65%
- 3 year Australian Dollar swap rate). After 4-5-95 the coupon
becomes fixed. Minimum coupon is 4% and the maximum coupon is 7.5%.
(E) As of December 31, 1994, the following restricted security was owned
in the High Income Portfolio:
Principal
Acquisition Amount Acquisition Market
Security Date (in 000's) Cost Value
---------------- --------------------------------------------
Aftermarket Technology
Corp.,
12.0%, 8-1-2004 7/21/94 $500 $500,000 $516,250
======== ========
The total market value of restricted securities represents
approximately 0.71% of the total net assets in the High Income
Portfolio at December 31, 1994.
(F) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(G) Non-income producing as the issuer has either missed its most recent
interest payment or declared bankruptcy:
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
Growth IncomeInternational
Portfolio Portfolio Portfolio
Assets ----------- ---------- -----------
Investment securities--at
value (Notes 1 and 3) $276,809,531$218,844,527 $25,781,641
Cash .............. 6,687 4,431 1,384
Receivables:
Dividends and interest 567,231 332,243 42,859
Fund shares sold .. 113,778 177,059 210,565
Investment securities
sold ............ --- 203,448 ---
Prepaid insurance
premium ........... 3,991 2,819 182
------------------------ -----------
Total assets .... 277,501,218 219,564,527 26,036,631
Liabilities ------------------------ -----------
Payable for investment
securities purchased 548,125 610,437 ---
Payable for Fund shares
redeemed .......... 199,058 169,428 5,151
Accrued accounting
services fee ...... 4,167 4,167 833
Other .............. 13,233 6,893 11,013
------------------------ -----------
Total liabilities 764,583 790,925 16,997
------------------------ -----------
Total net assets $276,736,635$218,773,602 $26,019,634
Net Assets ======================== ===========
$0.01 par value capital stock
Capital stock ..... $ 469,159$ 323,206 $ 52,116
Additional paid-in
capital ......... 285,885,078 202,539,201 26,652,623
Accumulated undistributed
gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized loss on
investment transactions
and foreign currency
transactions ..... --- (462,851) (21,009)
Net unrealized appreciation
(depreciation) of investments
at end of period . (9,617,602) 16,374,046 (664,096)
------------------------ -----------
Net assets applicable to
outstanding units
of capital ..... $276,736,635$218,773,602 $26,019,634
======================== ===========
Net asset value, redemption
and offering price per share $5.8986 $6.7689 $4.9926
======= ======= =======
Capital shares outstanding 46,915,868 32,320,625 5,211,592
Capital shares authorized 100,000,000 100,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
Small Cap BalancedMoney Market
Portfolio Portfolio Portfolio
Assets ---------- ---------- -----------
Investment securities--at
value (Notes 1 and 3) $16,029,163 $8,591,277 $27,624,021
Cash .............. 7,362 6,057 18,970
Receivables:
Dividends and interest 6,098 29,433 64,604
Fund shares sold .. 110,867 69,600 3,480,604
Investment securities
sold ............ --- --- ---
Prepaid insurance
premium ........... 182 182 1,506
----------- ---------- -----------
Total assets .... 16,153,672 8,696,549 31,189,705
Liabilities ----------- ---------- -----------
Payable for investment
securities purchased 66,102 --- ---
Payable for Fund shares
redeemed .......... 4,142 23,625 373,894
Accrued accounting
services fee ...... 833 --- 1,667
Other .............. 2,433 1,856 1,881
----------- ---------- -----------
Total liabilities 73,510 25,481 377,442
----------- ---------- -----------
Total net assets $16,080,162 $8,671,068 $30,812,263
Net Assets =========== ========== ===========
$0.01 par value capital stock
Capital stock ..... $ 26,837 $ 17,567 $ 308,123
Additional paid-in
capital ......... 14,745,046 8,892,153 30,504,140
Accumulated undistributed
gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized loss on
investment transactions
and foreign currency
transactions ..... --- (3,218) ---
Net unrealized appreciation
(depreciation) of investments
at end of period . 1,308,279 (235,434) ---
----------- ---------- -----------
Net assets applicable to
outstanding units
of capital ..... $16,080,162 $8,671,068 $30,812,263
=========== ========== ===========
Net asset value, redemption
and offering price per share $5.9918 $4.9359 $1.0000
======= ======= =======
Capital shares outstanding 2,683,680 1,756,720 30,812,263
Capital shares authorized 100,000,000 100,000,000 200,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
Limited-Term Bond High Income
Bond Portfolio Portfolio Portfolio
Assets ------------------------- -----------
Investment securities--at
value (Notes 1 and 3) $1,610,373 $72,576,052 $70,848,141
Cash .............. 4,791 7,680 5,708
Receivables:
Dividends and interest 32,608 1,432,762 1,553,672
Fund shares sold .. --- 21,190 69,923
Investment securities
sold ............ --- --- 261,345
Prepaid insurance
premium ........... 182 2,062 2,200
---------- ----------- -----------
Total assets .... 1,647,954 74,039,746 72,740,989
Liabilities ---------- ----------- -----------
Payable for investment
securities purchased --- --- ---
Payable for Fund shares
redeemed .......... 2,439 17,625 92,213
Accrued accounting
services fee ...... --- 2,500 2,500
Other .............. 369 2,771 2,601
---------- ----------- -----------
Total liabilities 2,808 22,896 97,314
---------- ----------- -----------
Total net assets $1,645,146 $74,016,850 $72,643,675
Net Assets ========== =========== ===========
$0.01 par value capital stock
Capital stock ..... $ 3,384 $ 156,178 $ 176,670
Additional paid-in
capital ......... 1,689,449 81,936,702 78,205,135
Accumulated undistributed
gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized loss on
investment transactions
and foreign currency
transactions ..... --- (3,479,696) (1,745,104)
Net unrealized appreciation
(depreciation) of investments
at end of period . (47,687) (4,596,334) (3,993,026)
---------- ----------- -----------
Net assets applicable to
outstanding units
of capital ..... $1,645,146 $74,016,850 $72,643,675
========== =========== ===========
Net asset value, redemption
and offering price per share $4.8611 $4.7393 $4.1118
======= ======= =======
Capital shares outstanding 338,428 15,617,757 17,667,001
Capital shares authorized 100,000,000 100,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1994
Growth IncomeInternational
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income:
Interest .......... $ 1,893,626 $ 382,961 $158,020
Dividends ......... 5,347,449 3,354,791 47,329
----------- ---------- --------
Total income .... 7,241,075 3,737,752 205,349
----------- ---------- --------
Expenses (Note 2):
Investment management
fee ............. 1,813,171 1,374,533 63,291
Accounting services
fee ............. 50,000 44,167 3,333
Custodian fees .... 38,479 21,378 30,318
Audit fees ........ 7,101 5,540 ---
Legal fees ........ 5,105 8,638 1,502
Other ............. 40,985 35,239 288
----------- ---------- --------
Total expenses .. 1,954,841 1,489,495 98,732
----------- ---------- --------
Net investment income 5,286,234 2,248,257 106,617
----------- ---------- --------
Realized and Unrealized Gain (Loss)
on Investments
Realized net gain (loss)
on investments .... 14,371,377 684,147 (21,009)
Unrealized appreciation
(depreciation)in value
of investments during
the period ........ (13,761,465) (6,030,073) (664,096)
----------- ---------- --------
Net gain (loss) on
investments..... 609,912 (5,345,926) (685,105)
----------- ---------- --------
Net increase (decrease)
in net assets
resulting from
operations ... $ 5,896,146 $(3,097,669) $(578,488)
=========== ========== ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1994
Small Cap BalancedMoney Market
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income:
Interest .......... $ 144,765 $ 64,909 $999,857
Dividends ......... 292 38,828 ---
---------- -------- --------
Total income .... 145,057 103,737 999,857
---------- -------- --------
Expenses (Note 2):
Investment management
fee ............. 36,355 15,489 116,644
Accounting services
fee ............. 1,667 --- 10,833
Custodian fees .... 5,953 7,174 11,635
Audit fees ........ --- --- 4,635
Legal fees ........ 1,452 1,421 696
Other ............. 283 43 3,980
---------- -------- --------
Total expenses .. 45,710 24,127 148,423
---------- -------- --------
Net investment income 99,347 79,610 851,434
---------- -------- --------
Realized and Unrealized Gain (Loss)
on Investments
Realized net gain (loss)
on investments .... 44,381 (3,218) ---
Unrealized appreciation
(depreciation) in value
of investments during
the period ........ 1,308,279 (235,434) ---
---------- -------- --------
Net gain (loss) on
investments..... 1,352,660 (238,652) ---
---------- -------- --------
Net increase (decrease)
in net assets
resulting from
operations ... $1,452,007 $(159,042) $851,434
========== ======== ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1994
Limited-Term Bond High Income
Bond Portfolio Portfolio Portfolio
--------------- ---------- ----------
Investment Income
Income:
Interest .......... $57,386 $ 5,773,265 $7,220,542
Dividends ......... --- --- 92,656
------- ----------- ----------
Total income .... 57,386 5,773,265 7,313,198
------- ----------- ----------
Expenses (Note 2):
Investment management
fee ............. 4,712 424,370 494,237
Accounting services
fee ............. --- 30,000 30,000
Custodian fees .... 1,531 10,046 7,962
Audit fees ........ --- 4,977 4,766
Legal fees ........ 1,404 1,595 1,511
Other ............. 207 15,304 13,039
------- ----------- ----------
Total expenses .. 7,854 486,292 551,515
------- ----------- ----------
Net investment income 49,532 5,286,973 6,761,683
------- ----------- ----------
Realized and Unrealized Gain (Loss)
on Investments
Realized net gain (loss)
on investments .... 455 (3,479,696) (1,428,391)
Unrealized appreciation
(depreciation) in value
of investments during
the period ........ (47,687) (6,740,515) (7,299,167)
------- ----------- ----------
Net gain (loss) on
investments..... (47,232)(10,220,211) (8,727,558)
------- ----------- ----------
Net increase (decrease)
in net assets
resulting from
operations ... $ 2,300$( 4,933,238)$(1,965,875)
======= =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1994
Growth IncomeInternational
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 5,286,234$ 2,248,257 $ 106,617
Realized net gain (loss)
on investments .. 14,371,377 684,147 (21,009)
Unrealized appreciation
(depreciation) .. (13,761,465) (6,030,073) (664,096)
------------------------ -----------
Net increase (decrease)
in net assets resulting
from operations. 5,896,146 (3,097,669) (578,488)
------------------------ -----------
Dividends to shareholders from:*
Net investment income (5,286,234) (2,248,257) (106,617)
Realized gains on securities
transactions .... (14,154,374) --- ---
------------------------ -----------
(19,440,608) (2,248,257) (106,617)
------------------------ -----------
Capital share
transactions** .... 69,690,925 69,027,272 26,704,739
------------------------ -----------
Total increase
(decrease)...... 56,146,463 63,681,346 26,019,634
Net Assets
Beginning of period 220,590,172 155,092,256 ---
------------------------ -----------
End of period ...... $276,736,635$218,773,602 $26,019,634
======================== ===========
Undistributed net
investment income $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages .
**Shares issued from sale
of shares .......... 11,752,596 11,914,285 5,355,035
Shares issued from reinvest-
ment of dividends and/or
distributions ...... 3,295,800 332,145 21,355
Shares redeemed ...... (3,733,563) (2,344,370) (164,798)
---------- ---------- ---------
Increase in outstanding
capital shares ...... 11,314,833 9,902,060 5,211,592
========== ========== =========
Value issued from sale
of shares .......... $73,683,884 $83,060,254 $27,436,654
Value issued from reinvest-
ment of dividends and/or
distributions ...... 19,440,608 2,248,256 106,617
Value redeemed ....... (23,433,567)(16,281,238) (838,532)
----------- ----------- -----------
Increase in
outstanding capital $69,690,925 $69,027,272 $26,704,739
=========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1994
Small Cap BalancedMoney Market
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 99,347 $ 79,610 $ 851,434
Realized net gain (loss)
on investments .. 44,381 (3,218) ---
Unrealized appreciation
(depreciation) .. 1,308,279 (235,434) ---
----------- ---------- -----------
Net increase (decrease)
in net assets resulting
from operations. 1,452,007 (159,042) 851,434
----------- ---------- -----------
Dividends to shareholders from:*
Net investment income (99,347) (79,610) (851,434)
Realized gains on securities
transactions .... (44,381) --- ---
----------- ---------- -----------
(143,728) (79,610) (851,434)
----------- ---------- -----------
Capital share
transactions** .... 14,771,883 8,909,720 4,812,395
----------- ---------- -----------
Total increase
(decrease) .... 16,080,162 8,671,068 4,812,395
Net Assets
Beginning of period --- --- 25,999,868
----------- ---------- -----------
End of period ...... $16,080,162 $8,671,068 $30,812,263
=========== ========== ===========
Undistributed net
investment income $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages .
**Shares issued from sale
of shares .......... 2,722,519 1,795,318 183,043,231
Shares issued from reinvest-
ment of dividends and/or
distributions ...... 23,987 16,128 851,433
Shares redeemed ...... (62,826) (54,726)(179,082,269)
--------- --------- -----------
Increase in outstanding
capital shares..... 2,683,680 1,756,720 4,812,395
========= ========= ==========
Value issued from sale
of shares .......... $14,980,266 $9,104,454$183,043,231
Value issued from reinvest-
ment of dividends and/or
distributions ...... 143,729 79,610 851,433
Value redeemed ....... (352,112) (274,344)(179,082,269)
----------- ----------------------
Increase in
outstanding capital $14,771,883 $8,909,720$ 4,812,395
=========== ======================
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1994
Limited-Term Bond High Income
Bond Portfolio Portfolio Portfolio
-------------- ----------- -----------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 49,532 $ 5,286,973 $ 6,761,683
Realized net gain (loss)
on investments .. 455 (3,479,696) (1,428,391)
Unrealized appreciation
(depreciation) .. (47,687) (6,740,515) (7,299,167)
---------- ----------- -----------
Net increase (decrease)
in net assets resulting
from operations. 2,300 (4,933,238) (1,965,875)
---------- ----------- -----------
Dividends to shareholders
from:*
Net investment income (49,532) (5,286,973) (6,761,683)
Realized gains on securities
transactions .... (455) --- ---
---------- ----------- -----------
(49,987) (5,286,973) (6,761,683)
---------- ----------- -----------
Capital share
transactions**..... 1,692,833 2,510,419 10,105,884
---------- ----------- -----------
Total increase
(decrease) ..... 1,645,146 (7,709,792) 1,378,326
Net Assets
Beginning of period --- 81,726,642 71,265,349
---------- ----------- -----------
End of period ...... $1,645,146 $74,016,850 $72,643,675
========== =========== ===========
Undistributed net
investment income $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages .
**Shares issued from sale
of shares .......... 331,301 3,002,124 3,768,168
Shares issued from reinvest-
ment of dividends and/or
distributions ...... 10,283 1,081,257 1,593,245
Shares redeemed ...... (3,156) (3,587,525) (3,062,321)
------- --------- ---------
Increase in outstanding
capital shares ..... 338,428 495,856 2,299,092
======= ========= =========
Value issued from sale
of shares .......... $1,658,566 $15,437,912 $16,942,683
Value issued from reinvest-
ment of dividends and/or
distributions ...... 49,987 5,286,973 6,761,683
Value redeemed ....... (15,720)(18,214,466)(13,598,482)
---------- ----------- -----------
Increase in
outstanding capital $1,692,833 $ 2,510,419 $10,105,884
========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1993
Growth Income
Portfolio Portfolio
----------- -----------
Increase in Net Assets
Operations:
Net investment income $ 1,680,381$ 1,435,262
Realized net gain (loss)
on investments .. 23,645,698 (1,146,998)
Unrealized appreciation
(depreciation) .. (3,724,710) 16,703,139
------------------------
Net increase in net
assets resulting
from operations. 21,601,369 16,991,403
------------------------
Dividends to shareholders:*
From net investment
income ........... (1,680,381) (1,435,262)
From realized net gain on
investment transactions(23,645,698) ---
In excess of realized net
gain from investment
transactions .... (217,003) ---
------------------------
(25,543,082) (1,435,262)
------------------------
Capital share
transactions**..... 102,168,632 74,508,737
------------------------
Total increase .. 98,226,919 90,064,878
Net Assets
Beginning of period 122,363,253 65,027,378
------------------------
End of period ...... $220,590,172$155,092,256
========================
Undistributed net
investment income $--- $---
==== ====
*See "Financial Highlights" on pages .
**Shares issued from sale
of shares .......... 13,254,238 12,309,850
Shares issued from reinvest-
ment of dividends and/or
distributions ....... 4,122,379 207,468
Shares redeemed ...... (1,670,417) (1,022,164)
---------- ----------
Increase in outstanding
capital shares ...... 15,706,200 11,495,154
========== ==========
Value issued from sale
of shares .......... $ 87,620,284 $79,652,858
Value issued from reinvest-
ment of dividends and/or
distributions ....... 25,543,082 1,435,262
Value redeemed ....... (10,994,734) (6,579,383)
------------ -----------
Increase in outstanding
capital ............ $102,168,632 $74,508,737
============ ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1993
Money Market Bond High Income
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment income $ 624,768 $ 3,976,047 $ 4,820,553
Realized net gain (loss)
on investments .. --- 2,377,676 776,421
Unrealized appreciation
(depreciation) .. --- 584,399 3,303,758
----------- ----------- -----------
Net increase in net
assets resulting
from operations. 624,768 6,938,122 8,900,732
----------- ----------- -----------
Dividends to shareholders:*
From net investment income (624,768) (3,976,047) (4,820,553)
From realized net gain on
investment transactions --- (2,377,676) ---
In excess of realized net
gain from investment
transactions .... --- --- ---
----------- ----------- -----------
(624,768) (6,353,723) (4,820,553)
----------- ----------- -----------
Capital share transactions**2,004,876 31,714,436 25,728,675
----------- ----------- -----------
Total increase .. 2,004,876 32,298,835 29,808,854
Net Assets
Beginning of period 23,994,992 49,427,807 41,456,495
----------- ----------- -----------
End of period ...... $25,999,868 $81,726,642 $71,265,349
=========== =========== ===========
Undistributed net
investment income $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages .
**Shares issued from sale
of shares .......... 188,336,077 5,709,768 6,007,488
Shares issued from reinvest-
ment of dividends and/or
distributions ....... 624,768 1,156,980 1,068,165
Shares redeemed ...... (186,955,969) (1,137,054) (1,374,357)
----------- --------- ---------
Increase in outstanding
capital shares ...... 2,004,876 5,729,694 5,701,296
=========== ========= =========
Value issued from sale
of shares .......... $188,336,077 $31,672,885 $27,116,169
Value issued from reinvest-
ment of dividends and/or
distributions ....... 624,768 6,353,723 4,820,553
Value redeemed ....... (186,955,969) (6,312,172) (6,208,047)
------------ ----------- -----------
Increase in outstanding
capital ............ $ 2,004,876 $31,714,436 $25,728,675
============ =========== ===========
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE GROWTH PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
THE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846 $5.0000
------- ------- ------- ------- ------- ------- ------ -------
Income from investment
operations:
Net investment
income ........ 0.1211 0.0537 0.1013 0.1229 0.1661 0.1611 0.1539 0.0523
Net realized and
unrealized gain
(loss) on
investments ... 0.0268 0.8087 1.0653 1.6636 (0.4546) 1.2150 0.4944 (0.2154)
------- ------- ------- ------- ------- ------- ------ -------
Total from investment
operations ...... 0.1479 0.8624 1.1666 1.7865 (0.2885) 1.3761 0.6483 (0.1631)
------- ------- ------- ------- ------- ------- ------ -------
Less distributions:
Dividends from net
investment
income ........ (0.1211) (0.0537) (0.1013) (0.1229) (0.1661) (0.1611) (0.1539) (0.0523)
Distribution from
capital gains . (0.3244) (0.7569) (0.5121) (1.0142) (0.0000) (0.7962) (0.2953) (0.0000)
Distribution in
excess of capital
gains ......... (0.0000) (0.0061) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- ------- ------ -------
Total distributions (0.4455) (0.8167) (0.6134) (1.1371) (0.1661) (0.9573) (0.4492) (0.0523)
------- ------- ------- ------- ------- ------- ------ -------
Net asset value,
end of period ... $5.8986 $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846
======= ======= ======= ======= ======= ======= ====== =======
Total return ...... 2.39% 14.02% 20.84% 36.10% -5.34% 27.61% 13.55% -6.86%
Net assets, end of
period (000
omitted) ........ $276,737 $220,590 $122,363 $69,044 $37,440 $28,510 $14,521 $5,636
Ratio of expenses
to average net
assets .......... 0.77% 0.78% 0.80% 0.86% 0.86% 0.85% 0.96% 0.91%
Ratio of net investment
income to average
net assets ...... 2.07% 1.01% 2.00% 2.43% 3.58% 3.40% 3.79% 4.92%
Portfolio turnover
rate ............ 277.36% 297.81% 225.87% 316.72% 331.15% 344.71% 278.57% 127.80%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a capital share outstanding for the
period from July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a capital share outstanding for the
period from July 16, 1991 (initial offering) through December 31, 1991. The International Portfolio, Small Cap
Portfolio, Balanced Portfolio and Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since
these Portfolios did not have any investment activity or incur expenses prior to the date of initial offering,
the per share information is for a capital share outstanding for the period from May 3, 1994 (initial offering)
through December 31, 1994. Ratios and portfolio turnover rates have been annualized.
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
--------------------------------------------
1994 1993 1992 1991**
---- ---- ---- ----
Net asset value,
beginning of
period .......... $6.9180 $5.9530 $5.3158 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income ........ 0.0702 0.0651 0.0803 0.0633
Net realized and
unrealized gain
on investments (0.1490) 0.9650 0.6496 0.3158
------- ------ ------ ------
Total from investment
operations ...... (0.0788) 1.0301 0.7299 0.3791
------- ------ ------ ------
Less distributions:
Dividends from net
investment
income ........ (0.0703) (0.0651) (0.0803) (0.0633)
Distribution from
capital gains (0.0000) (0.0000) (0.0124) (0.0000)
------- ------- ------- -------
Total distributions (0.0703) (0.0651) (0.0927) (0.0633)
------- ------- ------- -------
Net asset value,
end of period ... $6.7689 $6.9180 $5.9530 $5.3158
======= ======= ======= =======
Total return ...... -1.14% 17.30% 13.78% 17.43%
Net assets, end of
period (000
omitted) ........ $218,774 $155,092 $65,027 $15,640
Ratio of expenses
to average net
assets .......... 0.77% 0.79% 0.85% 0.89%
Ratio of net investment
income to average
net assets ...... 1.16% 1.36% 1.78% 2.47%
Portfolio turnover
rate ............ 23.32% 18.38% 15.74% 4.41%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and
Growth Portfolio's inception date is December 2, 1986; however, since
these Portfolios did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from July 13, 1987 (initial
offering) through December 31, 1987. The Income Portfolio's inception
date is May 16, 1991; however, since this Portfolio did not have any
investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for
the period from July 16, 1991 (initial offering) through December 31,
1991. The International Portfolio, Small Cap Portfolio, Balanced
Portfolio and Limited-Term Bond Portfolio's inception date is April 28,
1994; however, since these Portfolios did not have any investment activity
or incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May 3,
1994 (initial offering) through December 31, 1994. Ratios and portfolio
turnover rates have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INTERNATIONAL PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0207
Net realized and
unrealized loss
on investments .. (0.0074)
-------
Total from investment
operations ....... 0.0133
Less dividends from net
investment
income .......... (0.0207)
-------
Net asset value,
end of period .... $4.9926
=======
Total return........ 0.26%
Net assets, end of
period (000
omitted) ......... $26,020
Ratio of expenses
to average net
assets ............ 1.26%
Ratio of net investment
income to average
net assets ....... 1.37%
Portfolio turnover
rate ............. 23.23%
*The International Portfolio's inception date is April 28, 1994; however,
since this Portfolio did not have any investment activity or incur
expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SMALL CAP PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0376
Net realized and
unrealized gain
on investments .. 1.0086
-------
Total from investment
operations ....... 1.0462
-------
Less distributions:
Dividends from net
investment income (0.0376)
Distributions from
capital gains.... (0.0168)
-------
Total distributions (0.0544)
-------
Net asset value,
end of period .... $5.9918
=======
Total return........ 20.92%
Net assets, end of
period (000
omitted) ......... $16,080
Ratio of expenses
to average net
assets ............ 1.08%
Ratio of net investment
income to average
net assets ....... 2.35%
Portfolio turnover
rate ............. 21.61%
*The Small Cap Portfolio's inception date is April 28, 1994; however,
since this Portfolio did not have any investment activity or incur
expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BALANCED PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0460
Net realized and
unrealized loss
on investments .. (0.0641)
-------
Total from investment
operations ....... (0.0181)
Less dividends from net
investment
income .......... (0.0460)
-------
Net asset value,
end of period .... $4.9359
=======
Total return........ -0.37%
Net assets, end of
period (000
omitted) ......... $8,671
Ratio of expenses
to average net
assets ............ 0.95%
Ratio of net investment
income to average
net assets ....... 3.14%
Portfolio turnover
rate ............. 19.74%
*The Balanced Portfolio's inception date is April 28, 1994; however,
since this Portfolio did not have any investment activity or incur
expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE MONEY MARKET PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
Net investment
income .......... 0.0368 0.0260 0.0324 0.0536 0.0753 0.0852 0.0677 0.0297
Less dividends
declared ........ (0.0368) (0.0260) (0.0324) (0.0536) (0.0753) (0.0852) (0.0677) (0.0297)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total return ...... 3.72% 2.63% 3.29% 5.49% 7.82% 8.91% 7.37% 6.57%
Net assets, end of
period (000
omitted) ........ $30,812 $26,000 $23,995 $19,797 $16,870 $11,753 $8,711 $5,868
Ratio of expenses
to average net
assets .......... 0.65% 0.65% 0.65% 0.76% 0.79% 0.78% 0.94% 0.89%
Ratio of net investment
income to average
net assets ...... 3.72% 2.61% 3.17% 5.33% 7.52% 8.49% 6.84% 6.81%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses prior
to the date of initial offering, the per share information is for a capital share outstanding for the period from
July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception date is May 16, 1991;
however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for the period from July 16, 1991 (initial
offering) through December 31, 1991. The International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since these Portfolios did not have any
investment activity or incur expenses prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 3, 1994 (initial offering) through December 31, 1994. Ratios
and portfolio turnover rates have been annualized.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE LIMITED-TERM BOND PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
ended
12/31/94*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.1507
Net realized and
unrealized loss
on investments .. (0.1375)
-------
Total from investment
operations ....... 0.0132
-------
Less distributions:
Dividends from net
investment
income .......... (0.1507)
Distribution from
capital gains ... (0.0014)
-------
Total distributions (0.1521)
-------
Net asset value,
end of period .... $4.8611
=======
Total return........ 0.26%
Net assets, end of
period (000
omitted) ......... $1,645
Ratio of expenses
to average net
assets ............ 0.93%
Ratio of net investment
income to average
net assets ....... 5.89%
Portfolio turnover
rate ............. 93.83%
*The Limited-Term Bond Portfolio's inception date is April 28, 1994;
however, since this Portfolio did not have any investment activity or
incur expenses prior to the date of initial offering, the per share
information is for a capital share outstanding for the period from May
3, 1994 (initial offering) through December 31, 1994. Ratios and the
portfolio turnover rate have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BOND PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246 $5.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ........ 0.3507 0.3334 0.3643 0.3867 0.4025 0.4155 0.4088 0.1861
Net realized and
unrealized gain
(loss) on
investments ... (0.6652) 0.3046 0.0216 0.3771 (0.0715) 0.1397 (0.0394) (0.0249)
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ...... (0.3145) 0.6380 0.3859 0.7638 0.3310 0.5552 0.3694 0.1612
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment
income ........ (0.3507) (0.3334) (0.3643) (0.3867) (0.4025) (0.4155) (0.4088) (0.1861)
Distribution from
capital gains . 0.0000 (0.1627) (0.0251) (0.0644) (0.0000) (0.0000) (0.0000) (0.0505)
------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.3507) (0.4961) (0.3894) (0.4511) (0.4025) (0.4155) (0.4088) (0.2366)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ... $4.7393 $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246
======= ======= ======= ======= ======= ======= ======= =======
Total return ...... -5.90% 12.37% 7.67% 16.19% 7.03% 11.82% 7.74% 7.20%
Net assets, end of
period (000
omitted) ........ $74,017 $81,727 $49,428 $29,112 $16,464 $11,530 $6,465 $2,923
Ratio of expenses
to average net
assets .......... 0.62% 0.62% 0.64% 0.72% 0.78% 0.81% 0.96% 0.79%
Ratio of net investment
income to average
net assets ...... 6.73% 6.01% 6.91% 7.65% 8.05% 8.34% 8.17% 8.96%
Portfolio turnover
rate ............ 135.82% 68.75% 44.32% 52.50% 51.50% 42.83% 29.18% 187.93%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses prior
to the date of initial offering, the per share information is for a capital share outstanding for the period from
July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception date is May 16, 1991;
however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for the period from July 16, 1991 (initial
offering) through December 31, 1991. The International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since these Portfolios did not have any
investment activity or incur expenses prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 3, 1994 (initial offering) through December 31, 1994. Ratios and
portfolio turnover rates have been annualized.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE HIGH INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333 $5.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ........ 0.4106 0.3899 0.4050 0.4368 0.4346 0.5810 0.5263 0.2425
Net realized and
unrealized gain
(loss) on
investments ... (0.5255) 0.3487 0.2116 0.6703 (0.7221) (0.7549) 0.1595 (0.2667)
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ...... (0.1149) 0.7386 0.6166 1.1071 (0.2875) (0.1739) 0.6858 (0.0242)
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from
net investment
income ........ (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5263) (0.2425)
Distribution from
capital gains . (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0091) (0.0000)
------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5354) (0.2425)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period $4.1118 $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333
======= ======= ======= ======= ======= ======= ======= =======
Total return ...... -2.55% 17.90% 15.70% 34.19% -7.44% -4.19% 15.14% -0.99%
Net assets, end of
period (000
omitted) ........ $72,644 $71,265 $41,456 $24,394 $13,868 $15,717 $12,779 $4,521
Ratio of expenses
to average net
assets .......... 0.74% 0.75% 0.77% 0.87% 0.90% 0.82% 0.91% 0.79%
Ratio of net investment
income to average
net assets ...... 9.03% 8.66% 9.48% 11.32% 11.55% 12.54% 10.85% 10.70%
Portfolio turnover
rate ............ 37.86% 54.22% 60.79% 34.00% 12.21% 74.97% 46.75% 7.09%
*The Money Market Portfolio, Bond Portfolio, High Income Portfolio and Growth Portfolio's inception date is
December 2, 1986; however, since these Portfolios did not have any investment activity or incur expenses prior
to the date of initial offering, the per share information is for a capital share outstanding for the period from
July 13, 1987 (initial offering) through December 31, 1987. The Income Portfolio's inception date is May 16, 1991;
however, since this Portfolio did not have any investment activity or incur expenses prior to the date of initial
offering, the per share information is for a capital share outstanding for the period from July 16, 1991 (initial
offering) through December 31, 1991. The International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio's inception date is April 28, 1994; however, since these Portfolios did not have any
investment activity or incur expenses prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 3, 1994 (initial offering) through December 31, 1994. Ratios
and portfolio turnover rates have been annualized.
</TABLE>
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 -- Significant Accounting Policies
TMK/United Funds, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment
company. Capital stock is currently divided into the nine classes that are
designated the Growth Portfolio, the Income Portfolio, the International
Portfolio, the Small Cap Portfolio, the Balanced Portfolio, the Money
Market Portfolio, the Limited-Term Bond Portfolio, the Bond Portfolio and
the High Income Portfolio. The assets belonging to each Portfolio are held
separately by the Custodian. The capital shares of each Portfolio
represent a pro rata beneficial interest in the principal, net income, and
realized and unrealized capital gains or losses of its respective
investments and other assets. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of
its financial statements. The policies are in conformity with generally
accepted accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal
period as reported by the principal securities exchange on which the
issue is traded or, if no sale is reported for a stock, the average of
the latest bid and asked prices. Bonds, other than convertible bonds,
are valued using a pricing system provided by a major dealer in bonds.
Convertible bonds are valued using this pricing system only on days
when there is no sale reported. Stocks which are traded over-the-
counter are priced using NASDAQ (National Association of Securities
Dealers Automated Quotations) which provides information on bid and
asked or closing prices quoted by major dealers in such stocks.
Securities for which quotations are not readily available are valued
as determined in good faith in accordance with procedures established
by and under the general supervision of the Fund's Board of Directors.
Short-term debt securities are valued at amortized cost, which
approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Securities gains and losses are calculated
on the identified cost basis. Original issue discount (as defined in
the Internal Revenue Code), premiums on the purchase of bonds and
post-1984 market discount are amortized for both financial and tax
reporting purposes over the remaining lives of the bonds. Dividend
income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income is recorded on the
accrual basis. See Note 3 -- Investment Securities Transactions.
C. Foreign currency translations -- All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars
daily. Purchases and sales of investment securities and accruals of
income and expenses are translated at the rate of exchange prevailing
on the date of the transaction. For assets and liabilities other than
investments in securities, net realized and unrealized gains and
losses from foreign currency translations arise from changes in
currency exchange rates. The Fund combines fluctuations from currency
exchange rates and fluctuations in market value when computing net
realized and unrealized gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue
Code. In addition, the Fund intends to pay distributions as required
to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by each Portfolio on the record date. Net
investment income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
due to differing treatments for items such as deferral of wash sales
and post-October losses, foreign currency transactions, net operating
losses and expiring capital loss carryforwards.
NOTE 2 -- Investment Management And Payments To Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The
fee consists of two elements: (i) a "Specific" fee computed on net asset
value as of the close of business each day at the following annual rates:
Growth Portfolio - .20% of net assets; Income Portfolio - .20% of net
assets; International Portfolio - .30% of net assets; Small Cap Portfolio -
.35% of net assets; Balanced Portfolio - .10% of net assets; Money Market
Portfolio - none; Limited-Term Bond Portfolio - .05% of net assets; Bond
Portfolio - .03% of net assets; High Income Portfolio - .15% of net assets
and (ii) a base fee computed each day on the combined net asset values of
all of the Portfolios (approximately $725.4 million of combined net assets
at December 31, 1994) and allocated among the Portfolios based on their
relative net asset size at the annual rates of .51% of the first $750
million dollars of combined net assets, .49% on that amount between $750
million and $1.5 billion, .47% between $1.5 billion and $2.25 billion, and
.45% of that amount over $2.25 billion. The Fund accrues and pays this fee
daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. (W&R), Waddell & Reed Investment
Management Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as
the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of each
Portfolio. For these services, each Portfolio pays WARSCO a monthly fee of
one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Portfolio
-------------------------- -----------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund paid Directors' fees of $21,273.
W&R is an indirect subsidiary of Torchmark Corporation, a holding
company, and United Investors Management Company, a holding company, and
a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Investment securities transactions for the year ended December 31,
1994, are summarized as follows:
Growth Income International
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $610,720,993 $110,216,798 $15,533,923
Purchases of U.S. Government
securities --- --- ---
Purchases of short-term
securities 587,088,754 122,085,281 123,647,756
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 599,584,276 43,252,090 1,220,081
Proceeds from maturities
and sales of U.S.
Government securities --- --- ---
Proceeds from maturities
and sales of short-term
securities 541,578,604 119,015,514 111,641,229
Small Cap BalancedMoney Market
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $5,949,448 $5,205,411 $---
Purchases of U.S. Government
securities --- 558,734 ---
Purchases of short-term
securities 97,663,698 42,037,927 301,240,425
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 393,563 358,207 ---
Proceeds from maturities
and sales of U.S.
Government securities --- --- ---
Proceeds from maturities
and sales of short-term
securities 88,681,760 38,660,425 303,613,144
<PAGE>
Limited- High
Term Bond Bond Income
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $1,272,587$68,447,930 $32,290,564
Purchases of U.S. Government
securities 972,063 39,942,617 ---
Purchases of short-term
securities 3,157,000 62,965,209 51,306,202
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 52,702 61,694,962 26,035,941
Proceeds from maturities
and sales of U.S.
Government securities 688,031 40,410,384 ---
Proceeds from maturities
and sales of short-term
securities 3,111,930 66,437,462 48,207,575
For Federal income tax purposes, cost of investments owned at December
31, 1994 and the related unrealized appreciation (depreciation) were as
follows:
Aggregate
Cost Appreciation Depreciation Appreciation
----------------------------------------------
Growth Portfolio $286,427,133 $5,310,898 $(14,928,500) $(9,617,602)
Income Portfolio 202,473,404 22,487,056 (6,115,933) 16,371,123
International Portfolio 26,445,737 529,294 (1,193,390) (664,096)
Small Cap Portfolio 14,720,884 1,448,308 (140,029) 1,308,279
Balanced Portfolio 8,826,711 98,975 (334,409) (235,434)
Money Market Portfolio 27,624,021 0 0 0
Limited-Term Bond Portfolio 1,658,060 0 (47,687) (47,687)
Bond Portfolio 77,172,386 68,638 (4,664,972) (4,596,334)
High Income Portfolio 74,841,167 852,083 (4,845,109) (3,993,026)
NOTE 4 -- Federal Income Tax Matters
The Fund's income and expenses attributed to each Portfolio and the
gains and losses on security transactions of each Portfolio have been
attributed to that Portfolio for Federal income tax purposes as well as for
accounting purposes. For Federal income tax purposes, Growth, Small Cap
and Limited-Term Bond Portfolios realized capital gain net income of
$14,154,374, $44,381 and $455, respectively, during the year ended December
31, 1994. The capital gain net income was paid to shareholders during the
year ended December 31, 1994. For Federal income tax purposes the Income
Portfolio realized capital gain net income of $685,306 during the year
ended December 31, 1994. These capital gains were entirely offset by
utilization of capital loss carryforwards. Remaining prior year capital
loss carryforwards of Income Portfolio aggregated $459,928 at December 31,
1994, and are available to offset future realized capital gain net income
through December 31, 2001. For Federal income tax purposes, Bond, High
Income, Balanced and International Portfolios realized capital losses of
$3,479,696, $1,428,392, $3,218 and $21,009, respectively, during the year
ended December 31, 1994. These amounts are available to offset future
realized capital gain net income through December 31, 2002. In addition,
the High Income Portfolio has $316,713 in capital loss carryforwards from
prior years, which are available to offset future realized capital gain net
income through December 31, 1999.
Note 5 -- Organization
The inception date of the International Portfolio, the Small Cap
Portfolio, the Balanced Portfolio, and the Limited-Term Bond Portfolio is
April 28, 1994; however, these Portfolios did not have any investment
activity or incur expenses prior to the date of initial offering, May 3,
1994. The statement of operations and the statement of changes in net
assets for the remaining Portfolios are for the fiscal year ended December
31, 1994.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
TMK/United Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedules of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of each of
the nine portfolios comprising TMK/United Funds, Inc., issuer of the
respective nine classes of capital shares (Growth Portfolio, Income
Portfolio, International Portfolio, Small Cap Portfolio, Balanced
Portfolio, Money Market Portfolio, Limited-Term Bond Portfolio, Bond
Portfolio and High Income Portfolio) at December 31, 1994, the results of
their operations, and the changes in their net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1995
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements -- TMK/United Funds, Inc.
Included in Part B:
-------------------
As of December 31, 1994
Statements of Assets and Liabilities
For the year ended December 31, 1994
Statements of Operations
For each of the two years in the period ended December 31, 1994
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of December 31, 1994
Report of Independent Accountants
Included in Part C:
-------------------
Consent of Independent Accountants
Articles of Incorporation, as amended, attached hereto as EX-99.B1-
tmkart
Articles Supplementary (includes new portfolio), attached hereto as
EX-99.B1-tmksup1
Articles Supplementary filed March 11, 1994, attached hereto as EX-
99.B1-tmksup2
Articles Supplementary filed May 16, 1991, attached hereto as EX-
99.B1-tmksup3
Investment Management Agreement, with amended fee schedule, attached
hereto as EX-99.B5-tmkima
Form of Distribution Contract to reflect new portfolio, attached
hereto as EX-99.B6-tmkdisco
Agreement between United Investors Life Insurance Company and
International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio, attached hereto as EX-99.B13-tmkuil
Financial Data Schedules, attached hereto as EX-27.B17-tmkfds
Other schedules prescribed by Regulation S-X are not filed because the
required matter is not present or is insignificant.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A of our report dated January 31, 1995
relating to the financial statements and the financial highlights of
TMK/United Funds, Inc., which appears in such Statement of Additional
Information. We further consent to the reference to us under the heading
"Custodial and Auditing Services" in the Statement of Additional
Information and to the reference to us under the heading "Financial
Highlights" in the Prospectus constituting part of this Post-Effective
Amendment.
PRICE WATERHOUSE LLP
Kansas City, Missouri
February 15, 1995
<PAGE>
(b) Exhibits:
(1) Articles of Incorporation, as amended, attached hereto
(1) Articles Supplementary reflecting the addition of Asset
Strategy Portfolio, attached hereto
(2) Articles Supplementary filed March 11, 1994, attached hereto
(3) Articles Supplementary filed May 16, 1991, attached hereto
(2) By-Laws filed January 22, 1987 as Exhibit (b)(2) to the initial
Registration Statement on Form N-1A*
Amendment to By-Laws filed February 27, 1990 as Exhibit (b)(2) on
Form SE to Form N-SAR for the quarter ended December 31, 1989*
(3) Not applicable
(4) Article FIFTH and Article SEVENTH of the Articles of
Incorporation of Registrant, attached hereto as Exhibit No.
(b)(1); Article I, Article IV and Article VII of the Bylaws of
the Registrant filed January 22, 1987 as Exhibit (b)(2) to the
initial Registration Statement on Form N-1A*
(5) Investment Management Agreement with fee schedule amended to
reflect the addition of Asset Strategy Portfolio, attached hereto
Assignment of Investment Management Agreement filed April 21,
1992 as Exhibit No. (b)(5)(1) to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A*
(6) Form of Distribution Contract reflecting addition of Asset
Strategy Portfolio, attached hereto
Principal Underwriting Agreement between Waddell & Reed, Inc. and
United Investors Life Insurance Company filed April 21, 1992 as
Exhibit (b)(2) to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A*
(7) Not applicable
(8) Custodian Agreements for Money Market Portfolio, Bond Portfolio,
High Income Portfolio, Growth Portfolio and Income Portfolio
filed May 16, 1991 as Exhibits (b)(8) to Post-Effective Amendment
No. 7 to the Registration Statement on Form N-1A*
Custodian Agreements for International Portfolio, Small Cap
Portfolio, Balanced Portfolio and Limited-Term Bond Portfolio,
filed March 9, 1994 as Exhibits (b)(8) on Form SE to Post-
Effective Amendment No. 10 to the Registration Statement on Form
N-1A*
Custodian Agreement for Asset Strategy Portfolio to be filed with
Post-Effective Amendment No. 12
(9) Accounting Services Agreement filed February 25, 1991 as Exhibit
2 on Form SE to Form N-SAR for the period ended December 31,
1990*
(10) Opinion and Consent of Counsel filed March 18, 1987 as Exhibit
(b)(10) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A*
- ---------------------------------
*Incorporated herein by reference
(11) Not applicable
(12) Not applicable
(13) Agreement between United Investors Life Insurance Company and
Income Portfolio filed April 21, 1992 as Exhibit No. 13 to Post-
Effective Amendment No. 8 to the Registration Statement on Form
N-1A*
Agreement between United Investors Life Insurance Company and
International Portfolio, Small Cap Portfolio, Balanced Portfolio
and Limited-Term Bond Portfolio, attached hereto
Agreement between United Investors Life Insurance Company and
Asset Strategy Portfolio to be filed with Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A
(14) Not applicable
(15) Not applicable
(16) Schedules for yield and total return computation to be filed with
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A
(17) Financial Data Schedules, attached hereto
25. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
26. Number of Holders of Securities
-------------------------------
Number of Record Holders as of
Title of Class December 31, 1994
-------------- ------------------------------
Common Three
27. Indemnification
---------------
Reference is made to Section 7 of Article SEVENTH of the Articles of
Incorporation of Registrant, as amended, attached hereto as Exhibit
(b)(1), and to Paragraph 7 of the Distribution Agreement between
United Investors Life Insurance Company and the Registrant, attached
hereto as Exhibit (b)(6), each of which provides for indemnification.
Also refer to Section 2-418 of the Maryland General Corporation Law
regarding indemnification of directors, officers, employees and
agents.
28. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager
of the Registrant. Under the terms of an Investment Management
Agreement between Waddell & Reed, Inc. and the Registrant, Waddell &
Reed, Inc. is to provide investment management services to the
Registrant. Waddell & Reed, Inc. assigned its investment management
duties under this agreement to Waddell & Reed Investment Management
Company on January 8, 1992. Waddell & Reed Investment Management
Company is not engaged in any business other than the provision of
investment management services to those registered investment
- ---------------------------------
*Incorporated herein by reference
companies as described in Part A and Part B of this Post-Effective
Amendment.
Each director and executive officer of Waddell & Reed Investment
Management Company or its predecessors, has had as his sole business,
profession, vocation or employment during the past two years only his
duties as an executive officer and/or employee of Waddell & Reed
Investment Management Company or its predecessors, except as to
persons who are directors and/or officers of the Registrant and have
served in the capacities shown in the Statement of Additional
Information of the Registrant, and except for Mr. Ronald K. Richey.
Mr. Richey is Chairman of the Board and Chief Executive Officer of
Torchmark Corporation, the parent company of Waddell & Reed, Inc., and
Chairman of the Board of United Investors Management Company, a
holding company of which Waddell & Reed, Inc. is an indirect
subsidiary. Mr. Richey's address is 2001 Third Avenue South,
Birmingham, Alabama 35233. The address of the others is 6300 Lamar
Avenue, Shawnee Mission, Kansas 66202-4200.
As to each director and officer of Waddell & Reed Investment
Management Company, reference is made to the Prospectus and SAI of
this Registrant.
29. Principal Underwriter and Distributor
-------------------------------------
(a) Waddell & Reed, Inc. is the Principal Underwriter and Distributor
of the Registrant's shares. It is the principal underwriter to
the following investment companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
Waddell & Reed Funds, Inc.
and is depositor of the following unit investment trusts:
United Periodic Investment Plans to acquire shares of United
Science and Energy Fund
United Periodic Investment Plans to acquire shares of United
Accumulative Fund
United Income Investment Programs
United International Growth Investment Programs
United Continental Income Investment Programs
United Vanguard Investment Programs
(b) The information contained in the underwriter's application on
form BD, under the Securities Exchange Act of 1934, is herein
incorporated by reference.
- ---------------------------------
*Incorporated herein by reference
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or
any affiliated person of such affiliated person.
30. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of M. Sharon K.
Pappas and Mr. Robert L. Hechler, as officers of the Registrant, each
of whose business address is Post Office Box 29217, Shawnee Mission,
Kansas 66201-9217.
31. Management Services
-------------------
There are no service contracts other than as discussed in Part A and B
of this Post-Effective Amendment and as listed in response to Item
(b)(9) hereof.
32. Undertakings
------------
(a) Not applicable
(b) The Fund agrees to file a post-effective amendment, using
financial statements which need not be certified, within four to
six months from the effective date of this Post-Effective
Amendment.
(c) The Fund agrees to furnish to each person to whom a prospectus is
delivered a copy of the Fund's latest annual report to
shareholders upon request and without charge.
(d) To the extent that Section 16(c) of the Investment Company Act of
1940, as amended, applies to the Fund, the Fund agrees, if
requested in writing by the shareholders of record of not less
than 10% of the Fund's outstanding shares, to call a meeting of
the shareholders of the Fund for the purpose of voting upon the
question of removal of any director and to assist in
communications with other shareholders as required by Section
16(c).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Post-Effective Amendment
pursuant to Rule 485(a) of the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Overland Park, and
State of Kansas, on the 15th day of February, 1995.
TMK/UNITED FUNDS, INC.
(Registrant)
By /s/ Keith A. Tucker*
------------------------
Keith A. Tucker, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been
signed below by the following persons in the capacities and on the date
indicated.
Signatures Title
---------- -----
/s/Ronald K. Richey* Chairman of the Board February 15, 1995
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director February 15, 1995
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer February 15, 1995
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and February 15, 1995
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director February 15, 1995
- ---------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director February 15, 1995
- --------------------- ----------------
Dodds I. Buchanan
/s/Jay B. Dillingham* Director February 15, 1995
- -------------------- ----------------
Jay B. Dillingham
/s/John F. Hayes* Director February 15, 1995
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director February 15, 1995
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director February 15, 1995
- ------------------- ----------------
William T. Morgan
/s/Doyle Patterson* Director February 15, 1995
- ------------------- ----------------
Doyle Patterson
/s/Frederick Vogel, III* Director February 15, 1995
- ------------------- ----------------
Frederick Vogel, III
/s/Paul S. Wise* Director February 15, 1995
- ------------------- ----------------
Paul S. Wise
/s/Leslie S. Wright* Director February 15, 1995
- ------------------- ----------------
Leslie S. Wright
*By
Sharon K. Pappas
Attorney-in-Fact
ATTEST:
Amy D. Eisenbeis
Assistant Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TMK/UNITED FUNDS, INC., WADDELL & REED FUNDS, INC., TORCHMARK INSURED TAX-FREE
FUND, INC. AND TORCHMARK GOVERNMENT SECURITIES FUND, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, and SHARON K. PAPPAS, and each of them individually, their true and
lawful attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable to
enable each Corporation to comply with the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and any rules, regulations, orders
or other requirements of the United States Securities and Exchange Commission
thereunder, in connection with the registration under the Securities Act of 1933
and/or the Investment Company Act of 1940, as amended, including specifically,
but without limitation of the foregoing, power and authority to sign the names
of each of such directors and officers in his behalf as such director or officer
has indicated below opposite his signature hereto, to any amendment or
supplement to the Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and to any instruments or documents filed or to be filed as a
part of or in connection with such Registration Statement; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Date: September 1, 1994 /s/Keith A. Tucker*
---------------------
Keith A. Tucker, President
/s/Ronald K. Richey* Chairman of the Board September 1, 1994
- -------------------- --------------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director September 1, 1994
- -------------------- (Principal Executive Officer) --------------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer September 1, 1994
- -------------------- and Principal Accounting --------------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and September 1, 1994
- -------------------- Principal Financial --------------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director September 1, 1994
- -------------------- --------------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director September 1, 1994
- -------------------- --------------------
Dodds I. Buchanan
/s/Jay B. Dillingham* Director September 1, 1994
- -------------------- --------------------
Jay B. Dillingham
/s/John F. Hayes* Director September 1, 1994
- -------------------- --------------------
John F. Hayes
/s/Glendon E. Johnson* Director September 1, 1994
- -------------------- --------------------
Glendon E. Johnson
/s/William T. Morgan* Director September 1, 1994
- -------------------- --------------------
William T. Morgan
/s/Doyle Patterson* Director September 1, 1994
- -------------------- --------------------
Doyle Patterson
/s/Frederick Vogel, III* Director September 1, 1994
- -------------------- --------------------
Frederick Vogel, III
/s/Paul S. Wise* Director September 1, 1994
- -------------------- --------------------
Paul S. Wise
/s/Leslie S. Wright* Director September 1, 1994
- -------------------- --------------------
Leslie S. Wright
Attest:
/s/Sharon K. Pappas
- --------------------------------
Sharon K. Pappas, Vice President
and Secretary
EX-99.B1-TMKart
ARTICLES OF INCORPORATION
OF
TMK/UNITED FUNDS, INC.
(as amended)
THIS IS TO CERTIFY:
FIRST: THE UNDERSIGNED, Rodney O. McWhinney, whose post office address is
2400 Pershing Road, Kansas City, Missouri 64108-2504, being of full legal age,
does under and by virtue of the General Laws of the State of Maryland
authorizing the formation of corporations, act as incorporator with the
intention of forming a corporation.
SECOND: The name of the corporation is TMK/United Funds, Inc. (hereinafter
called the "Corporation").
THIRD: The purpose or purposes for which the Corporation is formed and the
business or objects to be transacted, carried on and promoted by it are as
follows:
(1) To hold, invest and reinvest its funds, and in connection
therewith to hold part or all of its funds in cash, and to purchase or
otherwise acquire, hold for investment or otherwise, sell, assign,
negotiate, transfer, exchange or otherwise dispose of or turn to account or
realize upon, securities (which term "securities" shall for the purposes of
these Articles of Incorporation, without limitation of the generality
thereof, be deemed to include any stocks, shares, bonds, debentures, notes,
mortgages or other obligations, and any certificates, receipts, warrants,
options, futures contracts or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or
representing any other rights or interests therein, or in any property or
assets) created or issued by any issuer (which term "issuer" shall for the
purposes of these Articles of Incorporation, without limitation of the
generality thereof, be deemed to include any persons, firms, associations,
corporations, syndicates, combinations, organizations, governments, or
subdivisions thereof); and to exercise, as owner or holder of any
securities, all rights, powers and privileges in respect thereof; and to do
any and all acts and things for the preservation, protection, improvement
and enhancement in value of any or all such securities.
(2) To issue and sell shares of its own capital stock of any class or
series in such amounts and on such terms and conditions, for such purposes
and for such amount or kind of consideration (including without limitation
thereto, securities) now or hereafter permitted by the laws of Maryland and
by these Articles of Incorporation, as its Board of Directors may
determine.
(3) To purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its stock of any class or
series, in any manner and to the extent now or hereafter permitted by the
laws of said State and by these Articles of Incorporation.
(4) To conduct its business in all its branches at one or more
offices in Maryland and elsewhere in any part of the world, without
restriction or limit as to extent.
(5) To carry out all or any of the foregoing objects and purposes as
principal or agent, and alone or with associates or, to the extent now or
hereafter permitted by the laws of Maryland, as a member of, or as the
owner or holder of any securities of any issuer, and in connection
therewith to make or enter into such deeds or contracts with any issuers
and to do such acts and things and to exercise such powers, as a natural
person could lawfully make, enter into, do or exercise.
(6) To do any and all such further acts and things and to exercise
any and all such further powers as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
The foregoing objects and purposes shall, except as otherwise expressly
provided, be in no way limited or restricted by reference to, or inference from,
the terms of any other clause of this or any other Article of these Articles of
Incorporation, and shall each be regarded as independent, and construed as
powers as well as objects and purposes, and the enumeration of specific
purposes, objects and powers shall not be construed to limit or restrict in any
manner the meaning of general terms or the general powers of the Corporation now
or hereafter conferred by the laws of the State of Maryland, nor shall the
expression of one thing be deemed to exclude another, though it be of like
nature, not expressed; provided, however, that the Corporation shall not have
power to carry on within the State of Maryland any business whatsoever the
carrying on of which would preclude it from being classified as an ordinary
business corporation under the laws of said State; nor shall it carry on any
business, or exercise any powers, in any other state, territory, district or
country except to the extent that the same may lawfully be carried on or
exercised under the laws thereof.
FOURTH: The post office address of the place at which the principal office
of the Corporation in the State of Maryland will be located is 32 South Street,
Baltimore, Maryland 21202.
The Corporation's resident agent is The Corporation Trust Incorporated,
whose post office address is 32 South Street, Baltimore, Maryland 21202. Said
resident agent is a corporation of the State of Maryland.
FIFTH: (1) The total number of shares of stock of all classes (which term
as used herein shall include a class designated as a "Series" as set forth
below) which the Corporation has authority to issue is 1,000,000,000
shares. The number of the shares of stock of each class is such number, if
any, of shares of unissued stock as is classified or reclassified into such
class by the Corporation's Board of Directors pursuant to the authority
contained in Section 2-105 of the Maryland General Corporation Law (or any
successor provision). The par value of the shares of stock of each class
is one cent ($0.01) per share. The aggregate par value of all the shares
of all classes is $10,000,000.00. A description of each class, including
any preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemptions is set forth below. Unless and until the Corporation's Board
of Directors classifies unissued stock into one or more classes which are
in addition to a single outstanding class, or after the Board has
reclassified issued stock of one or more classes into a single class, all
shares of stock of the Corporation shall be of a single class designated as
"Capital Stock." The Board of Directors of the Corporation may classify
unissued shares into one or more additional classes which shall, together
with the issued shares of stock of the Corporation, have such designations
as the Board shall determine (provided that such designation shall include
the word "Class"), and which shall be treated for all purposes other than
as to dividends as if all shares were shares of one class. The dividends
payable to the holders of each such class shall, subject to any applicable
rule, regulation or order of the Securities and Exchange Commission or
other applicable law or regulation, be determined by the Board and need not
be individually declared but may be declared and paid in accordance with a
formula adopted by the Board. The Board of Directors of the Corporation
may in the alternative classify unissued shares into one or more additional
classes, which shall, together with the issued shares of stock of the
Corporation, have such designations as the Board may determine (provided
that such designation shall include the word "Series"), and shall, subject
to any applicable rule, regulation or order of the Securities and Exchange
Commission or other applicable law or regulation, have the following
characteristics.
(a) All consideration received by the Corporation for the issue or
sale of shares of stock of each such class, together with all income,
earnings, profits, and proceeds thereof, including any proceeds derived
from the sale, exchange or liquidation thereof, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same
may be, shall irrevocably belong to the class of shares of stock with
respect to which such assets, payments, or funds were received by the
Corporation for all purposes, subject only to the rights of creditors, and
shall be so handled upon the books of account of the Corporation. Such
assets, income, earnings, profits and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation thereof, any asset
derived from any reinvestment of such proceeds, in whatever form the same
may be, are herein referred to as "assets belonging to" such class.
(b) Dividends or distributions on shares of any such class of stock,
whether payable in stock or cash, shall be paid only out of earnings,
surplus or other assets belonging to such class and need not be
individually declared but may be declared and paid in accordance with a
formula adopted by the Board of Directors of the Corporation.
(c) In the event of the liquidation or dissolution of the
Corporation, shareholders of each such class shall be entitled to receive,
as a class, out of the assets of the Corporation available for distribution
to shareholders, but other than general assets not belonging to any
particular class of stock, the assets belonging to such class; and the
assets so distributable to the shareholders of any such class shall be
distributed among such shareholders in proportion to the number of shares
of such class held by them and recorded on the books of the Corporation.
In the event that there are any general assets not belonging to any
particular class of stock and available for distribution, such distribution
shall be made to the holders of stock of all classes in proportion to the
asset value of the respective classes.
(d) The assets belonging to any such class of stock shall be charged
with the liabilities in respect to such class and shall also be charged
with its share of the general liabilities of the Corporation, in proportion
to the asset value of the respective classes. The determination of the
Board of Directors shall be conclusive as to the amount of liabilities,
including accrued expenses and reserves, and as to the allocation of the
same as to a given class, and as to whether the same, or general assets of
the Corporation, are allocable to one or more classes. The liabilities so
allocated to a class are herein referred to as "liabilities belonging to"
such class.
(e) At all meetings of stockholders each stockholder of each share of
stock of each such class of the Corporation shall be entitled to one vote
for each share of stock irrespective of the class standing in his name on
the books of the Corporation, except that where a vote of the holders of
the shares of stock of any class, or of more than one class, voting by
class, is required by the Investment Company Act of 1940 and/or Maryland
law as to any proposal, only the holders of such class or classes, voting
by class, shall be entitled to vote upon such proposal and the holders of
any other class or classes shall not be entitled to vote thereon. Any
fractional share, if any such fractional shares are outstanding, shall
carry proportionately all the rights of a whole share, including the right
to vote and the right to receive dividends.
(f) The provisions of paragraph (2) of this Article FIFTH relating to
voting shall apply when the Corporation has only one class of shares
outstanding or when the Corporation has more than one class of shares
outstanding but which differ only as to their dividend rights.
(g) When the Corporation has more than one class of shares
outstanding having separate assets and liabilities: (i) the redemption
rights provided to the holders of the Corporation's shares shall be deemed
to apply only to the assets belonging to the class of stock in question;
and (ii) the net asset value per share computation as provided for in
Article SEVENTH shall be applied as if each such class of shares were the
Corporation as referred to in such computation, but with its assets limited
to the assets belonging to such class and its liabilities limited to the
liabilities belonging to such class.
(2) At all meetings of stockholders each stockholder of the Corporation
shall be entitled to one vote for each share of stock standing in his name on
the books of the Corporation. Any fractional share, if any such fractional
shares are outstanding, shall carry proportionately all the rights of a whole
share, including the right to vote and the right to receive dividends.
(3) Each holder of the capital stock (which term as used in the remainder
of these Articles of Incorporation shall be deemed to refer to stock of any
class or series) of the Corporation, upon proper written request (including
signature guarantees, if required by the Board of Directors) to the Corporation,
or other proper non-written request if so determined by the Board of Directors,
accompanied, when stock certificates representing such shares are outstanding,
by surrender of the appropriate stock certificate or certificates in proper form
for transfer, or any such other form as the Board of Directors may provide,
shall be entitled to require the Corporation to redeem all or any part of the
capital stock standing in the name of such holder on the books of the
Corporation, at the net asset value of such shares. The method of computing
such net asset value, the time as of which such net asset value shall be
computed and the time within which the Corporation shall make payment therefore
shall be determined as hereinafter provided in Article SEVENTH of these Articles
of Incorporation. Notwithstanding the foregoing, the right of the holders of
the capital stock of the Corporation to require the Corporation to redeem such
capital stock shall be suspended when such suspension is required under the 1940
Act (which term the "1940 Act" shall for the purposes of these Articles of
Incorporation mean the Investment Company Act of 1940 as from time to time
amended and any rule, regulation or order thereunder) and may be suspended when
such suspension is permitted under the 1940 Act.
(4) All shares of the capital stock of the Corporation now or hereafter
authorized shall be subject to redemption and redeemable, in the sense used in
the Maryland General Corporation Law, at the redemption price for any such
shares, determined in the manner set out in these Articles of Incorporation.
The number of the authorized shares of the stock of any class of the Corporation
shall not be reduced by the number of any shares of such class redeemed or
purchased by it; shares redeemed or purchased shall be retired automatically and
shall have the status of authorized but unissued stock.
(5) Notwithstanding any provision of Maryland law requiring any action to
be taken or authorized by the affirmative vote of the holders of a majority or
other designated proportion of the shares, or of any class or series of shares,
or to be otherwise taken or authorized by a vote of the stockholders, such
action shall be effective and valid if taken or authorized by the affirmative
vote of the holders of a majority of the total number of shares (or a majority
of the total number of shares of such class or series) outstanding and entitled
to vote thereon pursuant to the provisions of these Articles of Incorporation.
(6) No holder of capital stock of the Corporation shall, as such holder,
have any right to purchase or subscribe for any shares of the capital stock of
the Corporation which it may issue or sell (whether out of the number of shares
authorized by these Articles of Incorporation, or out of any shares of the stock
of the Corporation acquired by it after the issue thereof, or otherwise) other
than such right, if any, as the Board of Directors, in its discretion, may
determine.
(7) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of these Articles of Incorporation.
SIXTH: The number of Directors of the Corporation shall be twelve and the
names of those who shall act as such until the first annual meeting or until
their successors are duly chosen and qualified are as follows:
Henry L. Bellmon Benjamin C. Korschot
Wallace F. Bennett John A. Kroh
Dodds I. Buchanan William T. Morgan
Jay B. Dillingham Doyle Patterson
Herbert P. Evert Frederick Vogel, III
Glendon E. Johnson Leslie S. Wright
However, the By-Laws of the Corporation may fix the number of Directors at
a number greater or less than that named in these Articles of Incorporation and
may authorize the Board of Directors, by the vote of a majority of the entire
Board of Directors, to increase or decrease the number of Directors fixed by
these Articles of Incorporation or by the By-Laws within a limit specified in
the By-Laws, provided that in no case shall the number of Directors be less than
three, and to fill the vacancies created by any such increase in the number of
Directors. Unless otherwise provided by the By-Laws of the Corporation, the
Directors of the Corporation need not be stockholders therein.
SEVENTH: The following provisions are hereby adopted for the purpose of
defining and regulating the powers of the Corporation and of the Directors and
stockholders.
(1) The By-Laws of the Corporation may divide the Directors of the
Corporation into classes and prescribe the tenure of office of the several
classes, but no class shall be elected for a period shorter than that from
the time of the election following the division into classes until the next
annual meeting and thereafter for a period shorter than the interval
between annual meetings or for a period longer than five years, and the
term of office of at least one class shall expire each year.
Notwithstanding the foregoing, no such division into classes shall be made
prior to the first annual meeting of stockholders of the Corporation.
(2) The holders of shares of the Corporation shall have only such
rights to inspect the records, documents, accounts and books of the
Corporation as are provided by Maryland law, subject to reasonable
regulations of the Board of Directors, not contrary to Maryland law, as to
whether and to what extent, and at which times and places, and under what
conditions and regulations such rights shall be exercised.
(3) Any officer elected or appointed by the Board of Directors or by
any committee of said Board or by the stockholders or otherwise, may be
removed at any time with or without cause, in such lawful manner as may be
provided in the By-Laws of the Corporation. A Director may be removed only
as permitted by Maryland law.
(4) If the By-Laws so provide, the Board of Directors of the
Corporation shall have power to hold their meetings, to have an office or
offices and, subject to the provisions of the laws of Maryland, to keep the
books of the Corporation outside of said State at such places as may from
time to time be designated by them.
(5) In addition to the powers and authority herein or by statute
expressly conferred upon them, the Board of Directors may exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to the express provisions of the laws
of Maryland, of these Articles of Incorporation and of the By-Laws of the
Corporation.
(6) Shares of stock in other corporations shall be voted by the
President or a Vice President, or such officer or officers of the
Corporation or such other person or persons as the Board of Directors shall
designate for the purpose, or by a proxy or proxies thereunto duly
authorized by the Board of Directors, except as otherwise ordered by vote
of the holders of a majority of the shares of the capital stock of the
Corporation outstanding and entitled to vote in respect thereto.
(7) (a) Subject to the provisions of the 1940 Act, any director,
officer or employee individually, or any partnership of which any director,
officer or employee may be a member, or any corporation or association of
which any director, officer or employee may be an officer, director,
trustee, employee or stockholder, may be a party to, or may be pecuniarily
or otherwise interested in, any contract or transaction of the Corporation,
and in the absence of fraud no contract or other transaction shall be
thereby affected or invalidated; provided that in case a director, or a
partnership, corporation or association of which a director is a member,
officer, director, trustee, employee or stockholder is so interested, such
fact shall be disclosed or shall have been known to the Board of Directors,
or a majority thereof; and any director of the Corporation who is so
interested, or who is also a director, officer, trustee, employee or
stockholder of such other corporation or association or a member of such
partnership which is so interested, may be counted in determining the
existence of a quorum at any meeting of the Board of Directors of the
Corporation which shall authorize any such contract or transaction, and may
vote thereat to authorize any such contract or transaction, with like force
and effect as if he were not such director, officer, trustee, employee or
stockholder of such other corporation or association or not so interested
or a member of a partnership so interested.
(b) Specifically, but without limitation of the foregoing, the
Corporation may enter into a management or investment advisory contract or
underwriting contract and other contracts with, and may otherwise do
business with any manager or investment adviser for the Corporation and/or
principal underwriter of the Corporation or any subsidiary or affiliate of
any such manager or investment adviser and/or principal underwriter and may
permit any such firm or corporation to enter into any contracts or other
arrangements with any other firm or corporation relating to the Corporation
notwithstanding that the Board of Directors of the Corporation may be
composed in part of partners, directors, officers or employees of any such
firm or corporation, and officers of the Corporation may have been or may
be or become partners, directors, officers or employees of any such firm or
corporation, and in the absence of fraud the Corporation and any such firm
or corporation may deal freely with each other, and no such contract or
transaction between the Corporation and any such firm or corporation shall
be invalidated or in any wise affected thereby, nor shall any director or
officer of the Corporation be liable to the Corporation or to any
stockholder or creditor thereof or to any other persons for any loss
incurred by it or him solely because of the existence of any such contract
or transaction; provided that nothing herein shall protect any director or
officer of the Corporation against any liability to the Corporation or to
its security holders 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.
(c)(1) As used in this paragraph (c) of this paragraph (7) of
this Article SEVENTH, the following terms shall have the meanings set forth
below:
(i) the term "indemnitee" shall mean any present or former
director, officer or employee of the Corporation, (which term as used
in this paragraph (7) shall include a "Corporation" as defined in
Section 2-418(A)(2) of the Maryland General Corporation Law) and any
person who while a director, officer or employee of the Corporation is
or was serving at the request of the Corporation as a director,
officer, partner, trustee or employee or agent of another Corporation,
partnership, joint venture, trust, other enterprise or employee
benefit plan, any present or former investment adviser of the
Corporation and the heirs, executors, administrators and successors of
any of the foregoing; however, whenever conduct by an indemnitee is
referred to, the conduct shall be that of the original indemnitee
rather than that of the heir, executor, administrator or successor;
(ii) the term "covered proceeding" shall mean any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which an indemnitee is
or was a party or is threatened to be made a party by reason of the
fact or facts under which he or it is an indemnitee as defined above;
(iii) the term "disabling conduct" shall mean willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office in question and, in the
case of a director or former director of the Corporation; failure to
meet the standard of conduct set forth in Section 2-418(B)(1) of the
Maryland General Corporation Law;
(iv) the term "covered expenses" shall mean judgments,
penalties, fines, settlements and reasonable expenses (including
attorney's fees) actually incurred by an indemnitee in connection with
a covered proceeding; and
(v) the term "adjudication of liability" shall mean, as to any
covered proceeding and as to any indemnitee, an adverse determination
as to the indemnitee whether by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent.
(2) The Corporation shall not indemnify any indemnitee for any
covered expenses in any covered proceeding if there has been an
adjudication of liability against such indemnitee expressly based on a
finding of disabling conduct.
(3) Except as set forth in (2) above or except as limited in Section
2-418(B) or 2-418(C) of the Maryland General Corporation Law, the
Corporation shall indemnify any indemnitee for covered expenses in any
covered proceeding, whether or not there is an adjudication of liability as
to such indemnitee if a determination has been made that indemnification is
permissible since the indemnitee was not liable by reason of disabling
conduct by (i) a final decision on the merits of the court or other body
before which the covered proceeding was brought; or (ii) in the absence of
such decision, a reasonable determination, based on a review of the facts,
by either (a) the vote of a majority of a quorum of directors who are
neither interested persons, as defined in the 1940 Act nor parties to the
covered proceeding or (b) any independent legal counsel in a written
opinion, such legal counsel to be selected in the manner set forth in
Section 2-418(E)(II) of the Maryland General Corporation Law; in voting on
such matter, or in giving such opinion, such directors or counsel may
consider that the dismissal of a covered proceeding against an indemnitee
for insufficiency of evidence of any disabling conduct with which the
indemnitee has been charged would provide reasonable assurance that the
indemnitee was not liable by reason of disabling conduct. In the event
such determination is made by legal counsel, authorization of
indemnification and determination as to reasonableness of expenses shall be
made as provided in Section 2-418(E) of the Maryland General Corporation
Law.
(4) Covered expenses incurred by an indemnitee in connection with a
covered proceeding shall be advanced by the Corporation to an indemnitee
prior to the final disposition of a covered proceeding upon the request of
the indemnitee for which such advance, the written affirmation required by
Section 2-418(F)(1)(I) of the Maryland General Corporation Law and the
written undertaking by or on behalf of the indemnitee to repay the advance
unless it is ultimately determined that the indemnitee is entitled to
indemnification hereunder, but only if one or more of the following is the
case: (i) the indemnitee shall provide security for such undertaking; (ii)
the Corporation shall be insured against losses arising out of any lawful
advances; or (iii) there shall have been a determination, based on a review
of the readily available facts (as opposed to a full trial-type inquiry)
that there is reason to believe that the indemnitee ultimately will be
found entitled to indemnification and that such facts would not preclude
indemnification under Section 2-418 of the Maryland General Corporation Law
by either independent legal counsel (selected as set forth in (3) above)
in a written opinion or by the vote of a majority of a quorum of directors
who are neither interested persons as defined in the 1940 Act nor parties
to the covered proceeding. In the event such determination is made by
legal counsel, authorization of the advance and determination of
reasonableness of expenses shall be made as provided in Section 2-418(E) of
the Maryland General Corporation Law.
(5) Nothing herein shall be deemed to affect the right of the
Corporation and/or any indemnitee to acquire and pay for any insurance
covering any or all indemnitees to the extent permitted by the 1940 Act or
to affect any other indemnification rights to which any indemnitee may be
entitled to the extent permitted by the 1940 Act.
(8) The computation of net asset value of each share of capital stock, as
in these Articles of Incorporation referred to, shall be determined as provided
in the 1940 Act and in subsection 8(e) hereof, and, except as so provided shall
be computed in accordance with the following rules:
(a) The net asset value of each share of stock of the
Corporation tendered to the Corporation for redemption shall be determined
as of the later of the close of business on the New York Stock Exchange or
the close of business of any securities exchange or commodities exchange on
which any investment held by the Corporation is traded, next succeeding the
tender of such shares;
(b) The net asset value of each share of stock of the
Corporation for the purpose of the issue of such share shall be determined
as of the last close of business referenced in subparagraph 8(a), next
succeeding the receipt of an order to purchase such share;
(c) The net asset value of each share of stock of the
Corporation, shall be the quotient obtained by dividing the value, as at
the last close of business referenced in subparagraph 8(a) of the net
assets of the Corporation (i.e., the value of the assets of the Corporation
less the liabilities of the Corporation exclusive of the par value of its
shares and surplus) by the total number of shares of stock of the
Corporation outstanding at such close. The assets and liabilities of the
Corporation shall be determined in accordance with generally accepted
accounting principles; provided, however, that in determining the
liabilities, there shall be included such reserves for taxes or contingent
liabilities as may be authorized or approved by the Board of Directors, and
provided further that in determining the value of the assets of the
Corporation for the purpose of obtaining the net asset value, each security
listed on the New York Stock Exchange shall be valued on the basis of the
closing sale thereof on the New York Stock Exchange on the business day as
of which such value is being determined; if there be no sale on such day,
then the security shall be valued on the basis of the mean between closing
bid and asked prices on such day; if no bid and asked prices are quoted for
such day, then the security shall be valued by such method as the Board of
Directors shall deem in good faith to reflect its fair market value;
securities not listed on the New York Stock Exchange shall be valued in
like manner on the basis of quotations on any other stock exchange which
the Board of Directors may from time to time approve for that purpose;
readily marketable securities traded in the over-the-counter market shall
be valued at the mean between their bid and asked prices, or, if the Board
of Directors shall so determine, at their bid prices; options shall be
valued at the last sale price thereof on the exchange on which they are
traded, or, if there are no transactions, at the mean between bid and asked
prices; futures purchased by the Corporation shall be valued at the closing
price or the bid price on the exchange on which the future is traded;
futures sold by the Corporation shall be valued at the closing price or the
asked price on the exchange on which the future is traded; and all other
securities and other assets of the Corporation and all securities as to
which the Corporation might be considered an "underwriter" (as that term is
used in the Securities Act of 1933), whether or not such securities are
listed or traded in the over-the-counter market, shall be valued by such
method as they shall deem in good faith to reflect their fair market value.
In connection with the accrual of any fee or refund payable to or by an
investment adviser of the Corporation, the amount of which accrual is not
definitely determinable as of any time at which the net asset value of each
share of the capital stock of the Corporation is being determined due to
the contingent nature of such fee or refund, the Board of Directors is
authorized to establish from time to time formulae for such accrual, on the
basis of the contingencies in question to the date of such determination,
or on such other basis as the Board of Directors may establish.
For the purposes hereof:
(A) Shares of stock to be issued shall be deemed to be
outstanding as of the time of the determination of the net asset value
per share applicable to such issuance and the net price thereof shall
be deemed to be an asset of the Corporation.
(B) Shares of stock to be redeemed by the Corporation shall be
deemed to be outstanding until the time of the determination of the
net asset value applicable to such redemption and thereupon and until
paid the redemption price thereof shall be deemed to be a liability of
the Corporation.
(d) The net asset value of each share of capital stock of the
Corporation, as of any time other than the last close of business
referenced in subparagraph 8(a), may be determined by applying to the net
asset value as of such close on the preceding business day, computed as
provided in paragraph 7(c) of this Article SEVENTH, such adjustments as are
authorized by or pursuant to the direction of the Board of Directors and
designed reasonably to reflect any material changes in the market value of
securities and other assets of the Corporation and any other material
changes in the assets or liabilities of the Corporation and in the number
of its outstanding shares which shall have taken place since the close of
business on such preceding business day.
(e) In addition to the foregoing, the Board of Directors is
empowered, in its absolute discretion, to establish other bases or times,
or both, for determining the net asset value of each share of stock of the
Corporation in accordance with the 1940 Act and to authorize the voluntary
purchase by the Corporation, either directly or through an agent, of shares
of capital stock of the Corporation upon such terms and conditions and for
such consideration as the Board of Directors shall deem advisable in
accordance with the 1940 Act. Without limiting the generality of the
foregoing, the Board of Directors may authorize the payment of dividends on
each day, the amounts of which are designed to reflect all income and
expenses and all realized and unrealized capital gains and losses, to the
end that the net asset value per share remains fixed, unless and until the
Board of Directors elects to change such dividend policy.
(f) Payment of the net asset value of shares of capital stock of
the Corporation properly surrendered to it for redemption shall be made by
the Corporation within seven days after tender of such stock to the
Corporation for such purpose plus any period of time during which the right
of the holders of the shares of capital stock of the Corporation to require
the Corporation to redeem such capital stock has been suspended. Any such
payment may be made in portfolio securities of the Corporation and/or in
cash, as the Board of Directors shall deem advisable, and no shareholder
shall have a right, other than as determined by the Board of Directors, to
have his shares redeemed in kind.
(g) The Board of Directors is empowered to cause the redemption
of the shares held in any account if the aggregate net asset value of such
shares (taken at cost or value, as determined by the Board) has been
reduced by an investor to $500 or less upon such notice to the shareholders
in question, with such permission to increase the investment in question
and upon such other terms and conditions as may be fixed by the Board of
Directors in accordance with the 1940 Act.
(h) In the event that any person advances the organizational
expenses of the Corporation, such advances shall become an obligation of
the Corporation, subject to such terms and conditions as may be fixed by,
and on a date fixed by, or determined in accordance with criteria fixed by
the Board of Directors, to be amortized over a period or periods to be
fixed by the Board.
(i) Whenever any action is taken under these Articles of
Incorporation under any authorization to take action which is permitted by
the 1940 Act, such action shall be deemed to have been properly taken if
such action is in accordance with the construction of the 1940 Act then in
effect as expressed in "no action" letters of the staff of the Securities
and Exchange Commission or any release, rule, regulation or order under the
1940 Act or any decision of a court of competent jurisdiction
notwithstanding that any of the foregoing shall later be found to be
invalid or otherwise reversed or modified by any of the foregoing.
(j) Any action which may be taken by the Board of Directors of
the Corporation under these Articles of Incorporation may be taken by the
description thereof in the then effective prospectus relating to the
Corporation's shares under the Securities Act of 1933 rather than by formal
resolution of the Board.
(k) Whenever under these Articles of Incorporation, the Board of
Directors of the Corporation is permitted or required to place a value on
assets of the Corporation, such action may be delegated by the Board,
and/or determined in accordance with a formula determined by the Board, to
the extent permitted by the 1940 Act.
(9) Subject to the provisions of the 1940 Act, the Corporation may borrow
from banks for the purpose of obtaining funds for investment purposes or for
temporary or emergency purposes and mortgage or pledge assets of the Corporation
in connection therewith.
EIGHTH: From time to time any of the provisions of these Articles of
Incorporation may be amended, altered or repealed upon the vote of the holders
of a majority of the shares of capital stock of the Corporation outstanding and
entitled to vote, and other provisions which might under the statutes of the
State of Maryland at the time in force be lawfully contained in articles of
incorporation, may be added or inserted upon such a vote and all rights at any
time conferred upon the stockholders of the Corporation by these Articles of
Incorporation are granted subject to the provisions of this Article EIGHTH.
The term "these Articles of Incorporation" as used herein and in the By-
Laws of the Corporation shall be deemed to mean these Articles of Incorporation
as from time to time amended and restated.
IN WITNESS WHEREOF, the undersigned incorporator of Advantage Funds, Inc.,
who executed the foregoing Articles of Incorporation hereby acknowledges the
same to be his act and further acknowledges that, to the best of his knowledge,
information and belief the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated the 26th day of November, 1986.
/s/Rodney O. McWhinney
Rodney O. McWhinney
STATE OF MISSOURI )
)ss.
COUNTY OF JACKSON)
This is to certify that on this 26th day of November, 1986, before me, the
subscriber, a Notary Public of the State of Missouri, personally appeared Rodney
O. McWhinney and acknowledged the foregoing Articles of Incorporation to be his
act.
Witness my hand and Notarial Seal the day and year last above written.
(SEAL) /s/Sharon K. Amerine
Sharon K. Amerine, Notary
Public
My Commission Expires:
EX-99.B1-TMKsup1
TMK/UNITED FUNDS, INC.
ARTICLES SUPPLEMENTARY
TMK/UNITED FUNDS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Maryland, having its
principal office in the State of Maryland in Baltimore, Maryland (hereinafter
referred to as the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting held
on February 8, 1995, adopted resolutions authorizing the creation of an
additional class of shares of the capital stock of the Corporation designated
Asset Strategy Portfolio by setting, before the issuance of such shares, the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption thereof as hereinafter set forth.
SECOND: That there are no changes in the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the Corporation's
capital stock, as set forth in the Corporation's Articles of Incorporation.
THIRD: That the Board of Directors reclassified and designated the one
billion (1,000,000,000) authorized shares of capital stock of the Corporation,
each having the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in the Corporation's Articles of
Incorporation, as follows:
100,000,000 shares International Portfolio
100,000,000 shares Small Cap Portfolio
50,000,000 shares Balanced Portfolio
50,000,000 shares Limited-Term Bond Portfolio
100,000,000 shares Bond Portfolio
100,000,000 shares Income Portfolio
100,000,000 shares High Income Portfolio
100,000,000 shares Growth Portfolio
200,000,000 shares Money Market Portfolio
100,000,000 shares Asset Strategy Portfolio
FOURTH: That the aforesaid action by the Board of Directors was taken in
accordance with the authority contained in Article Fifth of the Corporation's
Articles of Incorporation.
IN WITNESS WHEREOF, TMK/United Funds, Inc. has caused its corporate seal to
be hereunto affixed and these Articles Supplementary to be signed in its name
and on its behalf by Sharon K. Pappas, its Vice President, and attested by Amy
D. Eisenbeis, its Assistant Secretary, this 9th day of February, 1995.
TMK/UNITED FUNDS, INC.
(Corporate seal)
By:___________________
Sharon K. Pappas
Vice President
ATTEST:
________________
Amy D. Eisenbeis
Assistant Secretary
I, Sharon K. Pappas, a Vice President of TMK/United Funds, Inc., am duly
authorized to make this verification, and hereby state that I executed the
foregoing Articles Supplementary, and acknowledge, in the name and on behalf of
the corporation, the same to be the act of TMK/United Funds, Inc., and further
that to the best of my knowledge, information and belief the matters and facts
set forth therein are true in all material respects and that this statement is
made under the penalties for perjury.
___________________
Sharon K. Pappas
EX-99.B1-TMKsup2
TMK/UNITED FUNDS, INC.
ARTICLES SUPPLEMENTARY
TMK/UNITED FUNDS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Maryland, having its
principal office in the State of Maryland in Baltimore, Maryland (hereinafter
referred to as the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting held
on December 8, 1993, adopted resolutions authorizing the creation of four (4)
additional classes of shares of the capital stock of the Corporation designated
International Portfolio, Small Cap Portfolio, Balanced Portfolio and Limited-
Term Bond Portfolio by setting, before the issuance of such shares, the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption thereof as hereinafter set forth.
SECOND: That there are no changes in the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the Corporation's
capital stock, as set forth in the Corporation's Articles of Incorporation.
THIRD: That the Board of Directors reclassified and designated the one
billion (1,000,000,000) authorized shares of capital stock of the Corporation,
each having the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in the Corporation's Articles of
Incorporation, as follows:
100,000,000 shares International Portfolio
100,000,000 shares Small Cap Portfolio
100,000,000 shares Balanced Portfolio
100,000,000 shares Limited-Term Bond Portfolio
100,000,000 shares Bond Portfolio
100,000,000 shares Income Portfolio
100,000,000 shares High Income Portfolio
100,000,000 shares Growth Portfolio
200,000,000 shares Money Market Portfolio
FOURTH: That the aforesaid action by the Board of Directors was taken in
accordance with the authority contained in Article Fifth of the Corporation's
Articles of Incorporation.
IN WITNESS WHEREOF, TMK/United Funds, Inc. has caused its corporate seal to
be hereunto affixed and these Articles Supplementary to be signed in its name
and on its behalf by Rodney O. McWhinney, its Vice President, and attested by
Sharon K. Pappas, its Secretary, this 28th day of April, 1994.
TMK/UNITED FUNDS, INC.
(Corporate seal)
By:/s/Rodney O. McWhinney
Rodney O. McWhinney
Vice President
ATTEST:
/s/Sharon K. Pappas
Sharon K. Pappas
Secretary
I, Rodney O. McWhinney, a Vice President of TMK/United Funds, Inc., am duly
authorized to make this verification, and hereby state that I executed the
foregoing Articles Supplementary, and acknowledge, in the name and on behalf of
the corporation, the same to be the act of TMK/United Funds, Inc., and further
that to the best of my knowledge, information and belief the matters and facts
set forth therein are true in all material respects and that this statement is
made under the penalties for perjury.
/s/Rodney O. McWhinney
Rodney O. McWhinney
EX-99.B1-tmksup3
TMK/UNITED FUNDS, INC.
ARTICLES SUPPLEMENTARY
TMK/UNITED FUNDS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Maryland, having its
principal office in the State of Maryland in Baltimore, Maryland (hereinafter
referred to as the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting held
on May 15, 1991, adopted resolutions authorizing the creation of a new class of
shares of the capital stock of the Corporation designated Income Portfolio, by
allocating 100,000,000 of the authorized but unissued and unclassified shares of
capital stock of the Corporation, par value $.01 per share, to the new class by
setting, before the issuance of such shares, the preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms of
redemptions of, and the conversion or other rights thereof as hereinafter set
forth.
SECOND: That there are no changes in the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the Corporation's capital stock, as
set out in the Corporation's Articles of Incorporation.
THIRD: That the aforesaid action by the Board of Directors was taken in
accordance with the authority contained in Article FIFTH of the Corporation's
Articles of Incorporation.
IN WITNESS WHEREOF, TMK/United Funds, Inc. has caused its corporate seal to
be hereunto affixed and these Articles Supplementary to be signed in its name
and on its behalf by Rodney O. McWhinney, its Vice President, and attested by
Sharon K. Pappas, its Secretary, this 15th day of May, 1991.
TMK/UNITED FUNDS, INC.
(Corporate Seal)
By: /s/Rodney O. McWhinney
Rodney O. McWhinney
Vice President
ATTEST:
/s/Sharon K. Pappas
Sharon K. Pappas
Secretary
I, Rodney O. McWhinney, a Vice President of TMK/United Funds, Inc., am duly
authorized to make this verification, and hereby state that I executed the
foregoing Articles Supplementary, and acknowledge, in the name and on behalf of
the corporation, the same to be the act of TMK/United Funds, Inc., and further
that to the best of my knowledge, information and belief the matters and facts
set forth therein are true in all material respects and that this statement is
made under the penalties for perjury.
/s/Rodney O. McWhinney
Rodney O. McWhinney
EX-99.B5-tmkima
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this 1st day of July, 1990, by and between TMK/UNITED FUNDS, INC.
(hereinafter called "United"), and WADDELL & REED, INC.
WITNESSETH:
In consideration of the mutual promises and agreements herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and between the parties hereto as follows:
I. In General
Waddell & Reed, Inc., agrees to act as investment adviser to United with
respect to the investment of its assets and in general to supervise the
investments of United, subject at all times to the direction and control of the
Board of Directors of United, all as more fully set forth herein.
II. Duties of Waddell & Reed, Inc., with respect to investment of assets of
United
A. Waddell & Reed Inc., shall regularly provide investment
advice to United and shall, subject to the succeeding provisions of this
section, continuously supervise the investment and reinvestment of cash,
securities or other property comprising the assets of the investment portfolios
of United; and in furtherance thereof, Waddell & Reed, Inc., shall:
1. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or one or more of the
portfolios of United, and whether concerning the individual companies whose
securities are included in United's portfolios or the industries in which they
engage, or with respect to securities which Waddell & Reed, Inc., considers
desirable for inclusion in United's portfolios;
2. furnish continuously an investment program for each of the portfolios
of United;
3. determine what securities shall be purchased or sold by United;
4. take, on behalf of United, all actions which appear to Waddell & Reed,
Inc., necessary to carry into effect such investment programs and supervisory
functions as aforesaid, including the placing of purchase and sale orders.
B. Waddell & Reed, Inc., shall make appropriate and regular reports to the
Board of Directors of United on the actions it takes pursuant to Section II.A.
above. Any investment programs furnished by Waddell & Reed, Inc., under this
section, or any supervisory function taken hereunder by Waddell & Reed, Inc.,
shall at all times conform to and be in accordance with any requirements imposed
by:
1. the provisions of the Investment Company Act of 1940 and any rules or
regulations in force thereunder;
2. any other applicable provision of law;
3. the provisions of the Articles of Incorporation of United as amended
from time to time;
4. the provisions of the Bylaws of United as amended from time to time;
5. the terms of the registration statements of United, as amended from
time to time, under the Securities Act of 1933 and the Investment Company Act of
1940.
C. Any investment programs furnished by Waddell & Reed, Inc., under this
section or any supervisory functions taken hereunder by Waddell & Reed, Inc.,
shall at all times be subject to any directions of the Board of Directors of
United, its Executive Committee, or any committee or officer of United acting
pursuant to authority given by the Board of Directors.
III. Allocation of Expenses
The expenses of United and the expenses of Waddell & Reed, Inc., in
performing its functions under this Agreement shall be divided into two classes,
to wit:
(i) those expenses which will be paid in full by Waddell & Reed, Inc., as
set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid
in full by United, as set forth in subparagraph "B" hereof.
A. With respect to the duties of Waddell & Reed, Inc., under Section II
above, it shall pay in full, except as to the brokerage and research services
acquired through the allocation of commissions as provided in Section IV
hereinafter, for (a) the salaries and employment benefits of all employees of
Waddell & Reed, Inc. who are engaged in providing these advisory services; (b)
adequate office space and suitable office equipment for such employees; and (c)
all telephone and communications costs relating to such functions. In addition,
Waddell & Reed, Inc., shall pay the fees and expenses of all directors of United
who are employees of Waddell & Reed, Inc., or an affiliated corporation and the
salaries and employment benefits of all officers of United who are affiliated
persons of Waddell & Reed, Inc.
B. United shall pay in full for all of its expenses which are not listed
above (other than those assumed by Waddell & Reed, Inc., or its affiliates in
its capacity as Accounting Services Agent for United), including (a) the costs
of preparing and printing prospectuses and reports to shareholders of United
including mailing costs; (b) the costs of printing all proxy statements and all
other costs and expenses of meetings of shareholders of United; (c) interest,
taxes, brokerage commission and premiums on fidelity and other insurance; (d)
audit fees and expenses of independent accountants and legal fees and expenses
of attorneys, but not of attorneys who are employees of Waddell & Reed, Inc.;
(e) fees and expenses of its directors; (f) custodian fees and expenses; (g)
fees payable by United under the Securities Act of 1933, the Investment Company
Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees
and assessments of the Investment Company Institute or any successor
organization; (i) such non recurring or extraordinary expenses as may arise,
including litigation affecting United and any indemnification by United of its
officers, directors, employees and agents with respect thereto; (j) the costs
and expenses of maintaining shareholder records and processing transactions for
the issuance and redemption of its shares; and (k) the costs and expenses
provided for in any Accounting Services Agreement, including amendments thereto,
contemplated by subsection C of this section III.
C. Waddell & Reed, Inc., or an affiliate of Waddell & Reed, Inc., may also
act as accounting services agent of United if at the time in question there is a
separate agreement, "Accounting Services Agreement," covering such functions
between United and Waddell & Reed, Inc., or such affiliate. The corporation,
whether Waddell & Reed, Inc., or its affiliate, which is the party to such
Agreement with United is referred to as the "Agent." Any such Agreement shall
provide in substance that it shall not go into effect, or may be amended, or a
new agreement covering the same topics between United and the Agent may be
entered into only if the terms of such Agreement, such amendment or such new
agreement have been approved by the Board of Directors of United, including the
vote of a majority of the directors who are not "interested persons" as defined
in the Investment Company Act of 1940, of either party to the Agreement, such
amendment or such new agreement (considering Waddell & Reed, Inc., to be such a
party even if at the time in question the Agent is an affiliate of Waddell &
Reed, Inc.), cast in person at a meeting called for the purpose of voting on
such approval. Such a vote is referred to as a "disinterested director" vote.
Any such Agreement shall also provide in substance for its continuance, unless
terminated, for a specified period which shall not exceed two years from the
date of its execution and from year to year thereafter only if such continuance
is specifically approved at least annually by a disinterested director vote, and
that any disinterested director vote shall include a determination that (i) the
Agreement, amendment, new agreement or continuance in question is in the best
interests of United and its shareholders; (ii) the services to be performed
under the Agreement, the Agreement as amended, new agreement or agreement to be
continued are services required for the operation of United; (iii) the Agent can
provide services the nature and quality of which are at least equal to those
provided by others offering the same or similar services; and (iv) the fees for
such services are fair and reasonable in light of the usual and customary
charges made by others for services of the same nature and quality. Any such
Agreement may also provide in substance that any disinterested director vote may
be conditioned on the favorable vote of the holders of a majority (as defined in
or under the Investment Company Act of 1940) of the outstanding shares of each
class of United. Any such Agreement shall also provide in substance that it may
be terminated by the Agent at any time without penalty upon giving United one
hundred twenty (120) days' written notice (which notice may be waived by United)
and may be terminated by United at any time without penalty upon giving the
Agent sixty (60) days' written notice (which notice may be waived by the Agent),
provided that such termination by United shall be directed or approved by the
vote of a majority of the Board of Directors of United in office at the time or
by the vote of the holders of a majority (as defined in or under the Investment
Company Act of 1940) of the outstanding shares of each class of United.
IV. Brokerage
(a) Waddell & Reed, Inc., may select brokers to effect the portfolio
transactions of United on the basis of its estimate of their ability to obtain,
for reasonable and competitive commissions, the best execution of particular and
related portfolio transactions. For this purpose, "best execution" means prompt
and reliable execution at the most favorable price obtainable. Such brokers may
be selected on the basis of all relevant factors including the execution
capabilities required by the transaction or transactions, the importance of
speed, efficiency, or confidentiality, and the willingness of the broker to
provide useful or desirable investment research and/or special execution
services. Waddell & Reed, Inc., shall have no duty to seek advance competitive
commission bids and may select brokers based solely on its current knowledge of
prevailing commission rates.
(b) Subject to the foregoing, Waddell & Reed, Inc., shall have discretion,
in the interest of United, to direct the execution of its portfolio transactions
to brokers who provide brokerage and/or research services (as such services are
defined in Section 28(e) of the Securities Exchange Act of 1934) for United
and/or other accounts for which Waddell & Reed, Inc., and its affiliates
exercise "investment discretion" (as that term is defined in Section 3(a)(35) of
the Securities Act of 1934); and in connection with such transactions, to pay
commission in excess of the amount another adequately qualified broker would
have charged if Waddell & Reed, Inc., determines, in good faith, that such
commission is reasonable in relation to the value of the brokerage and/or
research services provided by such broker, viewed in terms of either that
particular transaction or the overall responsibilities of Waddell & Reed, Inc.,
and its investment advisory affiliates with respect to the accounts for which
they exercise investment discretion. In reaching such determination, Waddell &
Reed, Inc., will not be required to attempt to place a specified dollar amount
on the brokerage and/or research services provided by such broker; provided that
Waddell & Reed, Inc., shall be prepared to demonstrate that such determinations
were made in good faith, and that all commissions paid by United over a
representative period selected by its Board of Directors were reasonable in
relation to the benefits to United.
(c) Subject to the foregoing provisions of this Paragraph "IV," Waddell &
Reed, Inc., may also consider sales of insurance policies funded by United's
shares and sales of shares of investment companies distributed by Waddell &
Reed, Inc., or its affiliates, and portfolio valuation or pricing services as a
factor in the selection of brokers to execute brokerage and principal portfolio
transactions.
V. Compensation of Waddell & Reed, Inc.
As compensation in full for services rendered and for the facilities and
personnel furnished under sections I, II, and IV of this Agreement, United will
pay to Waddell & Reed, Inc., for each day the fees specified in Exhibit A
hereto. The amounts payable to Waddell & Reed, Inc., shall be determined as of
the close of business each day; shall, except as set forth below, be based upon
the value of net assets computed in accordance with the Articles of
Incorporation of United; and shall be paid in arrears whenever requested by
Waddell & Reed, Inc. Notwithstanding the foregoing, if the laws, regulations or
policies of any state in which shares of United are qualified for sale limit the
operation and management expenses of United, Waddell & Reed, Inc., will refund
to United the amount by which such expenses exceed the lowest of such state
limitations.
VI. Undertakings of Waddell & Reed, Inc.; Liabilities
Waddell & Reed, Inc., shall give to United the benefit of its best
judgment, efforts and facilities in rendering advisory services hereunder.
Waddell & Reed, Inc., shall at all times be guided by and be subject to
United's investment policies, the provisions of its Articles of Incorporation
and Bylaws as each shall from time to time be amended, and to the decision and
determination of United's Board of Directors.
This Agreement shall be performed in accordance with the requirements of
the Investment Company Act of 1940, the Investment Advisers Act of 1940, the
Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent
that the subject matter of this Agreement is within the purview of such Acts.
Insofar as applicable to Waddell & Reed, Inc., as an investment adviser and
affiliated person of United, Waddell & Reed, Inc., shall comply with the
provisions of the Investment Company Act of 1940, the Investment Advisers Act of
1940 and the respective rules and regulations of the Securities and Exchange
Commission thereunder.
In the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations or duties hereunder on the part of Waddell &
Reed, Inc., it shall not be subject to liability to United or to any stockholder
of United (direct or beneficial) for any act or omission in the course of or
connected with rendering services thereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
VII. Duration of this Agreement
This Agreement shall become effective at the start of business on the date
hereof and shall continue in effect, unless terminated as hereinafter provided,
for a period of one year and from year-to-year thereafter only if such
continuance is specifically approved at least annually by the Board of
Directors, including the vote of a majority of the directors who are not parties
to this Agreement or "interested persons" (as defined in the Investment Company
Act of 1940) of any such party, cast in person at a meeting called for the
purpose of voting on such approval, or by the vote of the holders of a majority
(as so defined) of the outstanding voting securities of each class of United and
by the vote of a majority of the directors who are not parties to this Agreement
or "interested persons" (as so defined) of any such party, cast in person at a
meeting called for the purpose of voting on such approval.
VIII. Termination
This Agreement may be terminated by Waddell & Reed, Inc., at any time
without penalty upon giving United one hundred twenty (120) days' written notice
(which notice may be waived by United) and may be terminated by United at any
time without penalty upon giving Waddell & Reed, Inc. sixty (60) days' written
notice (which notice may be waived by Waddell & Reed, Inc.), provided that such
termination by United shall be directed or approved by the vote of a majority of
the Board of Directors of United in office at the time or y the vote of a
majority (as defined in the Investment Company Act of 1940) of the outstanding
voting securities of United. This Agreement shall automatically terminate in
the event of its assignment, the term "assignment" for this purpose having the
meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the
rules and regulations thereunder.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to
be executed by their duly authorized officers and their corporate seal to be
hereunto affixed, all as of the day and year first above written.
(Seal) TMK/UNITED FUNDS, INC.
By:/s/Rodney O. McWhinney
Rodney O. McWhinney
Vice President
ATTEST:
/s/Sharon K. Pappas
Sharon K. Pappas, Secretary
(Seal) WADDELL & REED, INC.
By:/s/Robert L. Hechler
Robert L. Hechler
Executive Vice President
ATTEST:
/s/Rodney O. McWhinney
Rodney O. McWhinney, Secretary
<PAGE>
EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT
TMK/UNITED FUNDS, INC.
FEE SCHEDULE
1. A "specific" fee computed each day on net asset value at the annual
rates listed below:
Class of Shares
Money Market Portfolio None
Bond Portfolio .03 of 1%
High Income Portfolio .15 of 1%
Growth Portfolio .20 of 1%
Income Portfolio .20 of 1%
International Portfolio .30 of 1%
Small Cap Portfolio .35 of 1%
Balanced Portfolio .10 of 1%
Limited-Term Bond Portfolio .05 of 1%
Asset Strategy Portfolio .30 of 1%
2. A "base" fee computed each day on the combined net asset values of all
the portfolios of TMK/United Funds, Inc. and allocated among the ten classes of
shares based on their relative net asset size at the annual rates shown in the
following table:
Base Fee Rate
Combined Net Asset Level Annual Base
(all dollars in millions) Fee Rate for Each Level
__________________________ ___________________________
From $ 0 to $ 750 .51 of 1%
From 750 to $l,500 .49 of 1%
From $1,500 to $2,250 .47 of 1%
Over $2,250 .45 of 1%
EX-99.B6-tmkdisco
United Investors Life Insurance Company
2001 Third Avenue South
Birmingham, Alabama 35233
VARIABLE ACCOUNTS
Distribution Contract
TMK/United Funds, Inc. (hereinafter TMK) is a Maryland corporation registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 (the "Act") as a management class, open-end, diversified investment
company. It offers its shares exclusively to insurance companies as the
investment vehicles for variable life and variable annuity policies. TMK has
authorized nine classes of shares each of which is a separate fund (Portfolio)
being: Money Market Portfolio, Bond Portfolio, High Income Portfolio, Growth
Portfolio, Income Portfolio, International Portfolio, Small Cap Portfolio,
Balanced Portfolio,Limited-Term Bond Portfolio and Asset Strategy Portfolio.
You have advised TMK that you are sponsoring two variable accounts, United
Investors Life Variable Account and United Investors Annuity Variable Account,
each of which is an investment company organized and registered with the
Securities and Exchange Commission as a unit investment trust under the Act
(hereinafter collectively, the Trust). You advised that you wish to arrange for
the acquisition of TMK's shares as the exclusive funding medium for each of the
Trusts. TMK agrees to make the shares of its nine Portfolios available to you
for said purposes subject to the following terms and conditions:
1. TMK will sell its shares directly to you and on request redeem its shares
at the time and prices specified in its then current prospectus and
statement of additional information (SAI) for the purposes of funding the
investment divisions of the two Trusts as is more particularly set forth in
the Trusts' then current prospectuses.
2. (a) Payment for shares in investable funds shall be due on issuance of
shares.
(b) TMK will make payment on redemption of its shares as stated in its
prospectus and SAI.
(c) Purchases and redemptions of shares of the same Portfolio on the same
day may be netted so as to result in a single purchase or single redemption
for the day.
(d) Shares of one Portfolio may be exchanged for shares of another
Portfolio by redemption of shares of a particular Portfolio and the
immediate purchase of shares of the other Portfolio. On your request, TMK
will effect such exchanges by transfer of monies from one Portfolio to the
other as appropriate.
(e) All dividends and capital gains distributions shall be reinvested in
additional shares.
3. TMK will furnish you with adequate number of copies of its annual and
semiannual reports to shareholders and TMK's proxy material for shareholder
meetings as you may request for furnishing to the policyowners and will
reimburse you for your expenses in mailing the reports and proxy materials
to the policyowners including return postage with respect to the voting of
proxy cards. With TMK's prior consent, you may include additional items in
the mailing of TMK's reports to shareholders provided any extra costs are
paid by you.
4. You shall vote the shares held by the policyholders as set forth in the
Trust's prospectuses and any SAI's.
5. TMK will furnish you with a copy of its current prospectus and SAI and all
amendments thereto. You shall print and reproduce at your expense such
copies thereof as you may desire with respect to the distribution of
interests in the Trusts. You may use TMK's shareholder reports in the
distribution process. Copies of the reports will be furnished for such
purpose as you request at your expense.
6. The foregoing, notwithstanding, TMK shall not engage directly or indirectly
in financing any activity which is primarily intended to result in the sale
of its shares issued by it.
7. Indemnification
A. TMK agrees with you for your benefit and each person, if any, who
controls you within the meaning of Section 15 of the Securities Act of 1933
(the "Securities Act") and each and all and any of them, to indemnify and
hold you harmless and any such controlling person from and against any and
all losses, claims, damages or liabilities, joint or several, to which you,
they or any of them may become subject under the Securities Act, under any
other statute, at common law or otherwise, and to reimburse you and such
controlling persons, if any, for any legal or other expenses (including the
cost of any investigation and preparation) reasonably incurred by you, them
or any of them in connection with any litigation whether or not resulting
in any liability, insofar as such losses, claims, damages, liabilities or
litigation arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any registration statement
or any prospectus or any amendment thereof or supplement thereto or arise
out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this indemnity
agreement shall not apply to amounts paid in settlement of any such
litigation if such settlement is effected without the consent of TMK or to
any such losses, claims, damages, liabilities or litigation arising out of
or based upon any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus or any
amendment thereof or supplement thereto, or arising out of or based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, which statement or omission was made in reliance upon
information furnished in writing to TMK by you for inclusion in any
registration statement or any prospectus or any amendment thereof or
supplement thereto. You and each such controlling person shall promptly,
after the complaint shall have been served upon you or such controlling
person in any litigation against you or such controlling person in respect
of which indemnity may be sought from TMK on account of its agreement
contained in this paragraph, notify TMK in writing of the commencement
thereof. Your omission or such controlling person so to notify TMK of any
such litigation shall relieve TMK from any liability which it may have to
you or such controlling person on account of the indemnity agreement
contained in this paragraph but shall not relieve TMK from any liability
which it may have to you or controlling person otherwise than on account of
the indemnity agreement contained in this paragraph. In case any such
litigation shall be brought against you or any such controlling person and
you or such controlling person shall notify TMK of the commencement
thereof, TMK shall be entitled to participate in (and, to the extent that
it shall wish, to direct) the defense thereof at its own expense but such
defense shall be conducted by counsel of good standing and satisfactory to
you or such controlling person or persons, defendant or defendants in the
litigation. The indemnity agreement of TMK contained in this paragraph
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of you or any such controlling person
and shall survive any delivery of shares of TMK. TMK agrees to notify you
promptly of the commencement of any litigation or proceeding against it or
any of its officers or directors of which it may be advised in connection
with the issue and sale of its shares.
B. Anything herein to the contrary notwithstanding TMK's agreement in the
foregoing, insofar as it constitutes a basis for reimbursement by TMK for
liabilities (other than payment by TMK of expenses incurred or paid in the
successful defense of any action, suit or proceeding) arising under the
Securities Act, shall not extend to the extent of any interest therein of
any person who is deemed to be an underwriter or a partner or controlling
person of an underwriter within the meaning of Section 15 of the Securities
Act or who, at the date of this Agreement, is a director of TMK, except to
the extent that an interest of such character shall have been determined by
a court of appropriate jurisdiction the question of whether or not such
interest is against public policy as expressed in the Securities Act.
C. You agree to indemnify and hold harmless TMK and its directors and such
officers as shall have signed any registration statement from and against
any and all losses, claims, damages or liabilities, joint or several, to
which TMK or such directors or officers may become subject under the
Securities Act, under any other statute, at common law or otherwise, and
will reimburse TMK or such directors or officers for any legal or other
expenses (including the cost of any investigation and preparation)
reasonably incurred by it or them or any of them in connection with any
litigation, whether or not resulting in any liability insofar as such
losses, claims, damages, liabilities or litigation arise out of, or are
based upon, any untrue statement or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, which statement or omission was made in
reliance upon information furnished in writing to TMK by you for inclusion
in any registration statement or any prospectus, or any amendment thereof
or supplement thereto, or which statement was made in, or the alleged
omission was from, any advertising or sales literature (including any
reports to shareholders used as such) which relate to TMK.
You shall not be liable for amounts paid in settlement of any such
litigation if such settlement was effected without its consent. TMK and
its directors and such officers, defendant or defendants, in any such
litigation shall, promptly after the complaint shall have been served upon
TMK or any such director or officer in any litigation against TMK or any
such director or officer in respect of which indemnity may be sought from
TMK on account of its agreement contained in this paragraph, notify you in
writing of the commencement thereof. The omission of TMK or such director
or officer so to notify you of any such litigation shall relieve you from
any liability which it may have to TMK or such director or officer on
account of the indemnity agreement contained in this paragraph, but shall
not relieve you from any liability which it may have to TMK or such
director or officer otherwise than on account of the indemnity agreement
contained in this paragraph. In case any such litigation shall be brought
against TMK or any such officer or director and notice of the commencement
thereof shall have been given to you, you shall be entitled to participate
in (and, to the extent that it shall wish, to direct) the defense thereof
at its own expense, but such defense shall be conducted by counsel of good
standing and satisfactory to TMK. The indemnity agreement of TMK contained
in this paragraph shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of TMK and shall
survive any delivery of shares of TMK. You agree to notify TMK promptly of
the commencement of any litigation or proceeding against you or any of your
officers or directors or against any such controlling person of which you
may be advised, in connection with the issue and sale of TMK.
D. Notwithstanding any provision contained in this Agreement, no party
hereto and no person or persons in control of any party hereto shall be
protected against any liability to TMK or its security holders, including
beneficial owners or its security to which they would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of their duties or by reason of their reckless disregard of
their obligations and duties under this Agreement.
8. TMK will make shares available and otherwise carry out the terms of this
Agreement until the Trusts are terminated; provided, however, it will have
no obligation to issuance of shares other than for purposes of exchange
among Portfolios and reinvestment of dividends and distribution, should the
registration of the Trust securities under the Securities Act of 1933
terminate. TMK agrees to use its best efforts to keep an adequate number
of shares at all times authorized, but it will not be required to issue its
shares if all TMK shares be issued and outstanding. TMK will be relieved
of responsibility hereunder for issuing shares by reason of any
governmental rule, regulation or order or order of court of any competent
jurisdiction or when for reasons beyond its control, it is unable to issue
such shares.
If the foregoing is in accordance with your understanding of our Agreement,
please execute your acceptance hereof on the duplicates hereto enclosed for that
purpose and return one copy to TMK/United Funds, Inc., whereupon this shall
become a binding Agreement between you and TMK/United Funds, Inc.
TMK/United Funds, Inc.
By: _______________________________
Sharon K. Pappas, Vice President
Accepted this __ day of____, 1995
United Investors Life Insurance Company
By: _____________________________
Authorized Signature
EX-99.B13-tmkuil
UNITED INVESTORS LIFE INSURANCE COMPANY
UNIT TRANSACTIONS TO ESTABLISH NEW VARIABLE ACCOUNTS
02-May-94
UNIT TOTAL
SALE OF OLD UNITS VALUE UNITS VALUE
LIFE MONEY MARKET PORTFOLIO 1.40189459 500,000.000 700,947.30
ANNUITY MONEY MARKET PORTFOLIO 1.37353840 500,000.000 686,769.20
TOTAL SALES (CLOSE OUT UNITS) 1,000,000.000 1,387,716.50
PURCHASE OF NEW UNITS
LIFE VARIABLE ACCOUNT
LIMITED-TERM BOND PORTFOLIO 1.00000000 500,000.000 500,000.00
INTERNATIONAL PORTFOLIO 1.00000000 65,000.000 65,000.00
SMALL CAP PORTFOLIO 1.00000000 65,000.000 65,000.00
BALANCED PORTFOLIO 1.00000000 65,000.000 65,000.00
TOTAL LIFE PURCHASES (NEW UNITS) 695,000.000 695,000.00
ANNUITY VARIABLE ACCOUNT
LIMITED-TERM BOND PORTFOLIO 1.00000000 500,000.000 500,000.00
INTERNATIONAL PORTFOLIO 1.00000000 65,000.000 65,000.00
SMALL CAP PORTFOLIO 1.00000000 65,000.000 65,000.00
BALANCED PORTFOLIO 1.00000000 62,716.500 62,716.50
TOTAL ANNUITY PURCHASES (NEW UNITS) 692,716.500 692,716.50
TOTAL PURCHASES 1,387,716.50 1,387,716.50
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREDHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 27,627,021
<INVESTMENTS-AT-VALUE> 27,624,021
<RECEIVABLES> 3,545,208
<ASSETS-OTHER> 1,506
<OTHER-ITEMS-ASSETS> 18,970
<TOTAL-ASSETS> 31,189,705
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 377,442
<TOTAL-LIABILITIES> 377,442
<SENIOR-EQUITY> 308,123
<PAID-IN-CAPITAL-COMMON> 30,504,140
<SHARES-COMMON-STOCK> 30,812,263
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 30,812,263
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 999,857
<OTHER-INCOME> 0
<EXPENSES-NET> 148,423
<NET-INVESTMENT-INCOME> 851,434
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 851,434
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 851,434
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 183,043,231
<NUMBER-OF-SHARES-REDEEMED> 179,082,269
<SHARES-REINVESTED> 851,433
<NET-CHANGE-IN-ASSETS> 4,812,395
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 116,644
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 148,423
<AVERAGE-NET-ASSETS> 22,871,453
<PER-SHARE-NAV-BEGIN> 1
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 77,172,386
<INVESTMENTS-AT-VALUE> 72,576,052
<RECEIVABLES> 1,453,952
<ASSETS-OTHER> 2,062
<OTHER-ITEMS-ASSETS> 7,680
<TOTAL-ASSETS> 74,039,746
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,896
<TOTAL-LIABILITIES> 22,896
<SENIOR-EQUITY> 156,178
<PAID-IN-CAPITAL-COMMON> 81,936,702
<SHARES-COMMON-STOCK> 15,617,757
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,479,696)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,596,334)
<NET-ASSETS> 74,016,850
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,773,265
<OTHER-INCOME> 0
<EXPENSES-NET> 486,292
<NET-INVESTMENT-INCOME> 5,286,973
<REALIZED-GAINS-CURRENT> (3,479,696)
<APPREC-INCREASE-CURRENT> (6,740,515)
<NET-CHANGE-FROM-OPS> (10,220,211)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,286,973
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,002,124
<NUMBER-OF-SHARES-REDEEMED> 3,587,525
<SHARES-REINVESTED> 1,081,257
<NET-CHANGE-IN-ASSETS> (7,709,792)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 424,370
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 486,292
<AVERAGE-NET-ASSETS> 78,587,023
<PER-SHARE-NAV-BEGIN> 5.40
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> (.67)
<PER-SHARE-DIVIDEND> .35
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.74
<EXPENSE-RATIO> .62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 3
<NAME> HIGH INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 74,841,167
<INVESTMENTS-AT-VALUE> 70,848,141
<RECEIVABLES> 1,884,940
<ASSETS-OTHER> 2,200
<OTHER-ITEMS-ASSETS> 5,708
<TOTAL-ASSETS> 72,740,989
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,314
<TOTAL-LIABILITIES> 97,314
<SENIOR-EQUITY> 176,670
<PAID-IN-CAPITAL-COMMON> 78,205,135
<SHARES-COMMON-STOCK> 17,667,001
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,745,104)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,993,026)
<NET-ASSETS> 72,643,675
<DIVIDEND-INCOME> 92,656
<INTEREST-INCOME> 7,220,542
<OTHER-INCOME> 0
<EXPENSES-NET> 551,515
<NET-INVESTMENT-INCOME> 6,761,683
<REALIZED-GAINS-CURRENT> (1,428,391)
<APPREC-INCREASE-CURRENT> (7,299,167)
<NET-CHANGE-FROM-OPS> (1,965,875)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,761,683
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,768,168
<NUMBER-OF-SHARES-REDEEMED> 3,062,321
<SHARES-REINVESTED> 1,593,245
<NET-CHANGE-IN-ASSETS> 1,378,326
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 494,237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 551,515
<AVERAGE-NET-ASSETS> 74,887,129
<PER-SHARE-NAV-BEGIN> 4.64
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> (.53)
<PER-SHARE-DIVIDEND> .41
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.11
<EXPENSE-RATIO> .74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 4
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 286,427,133
<INVESTMENTS-AT-VALUE> 276,809,531
<RECEIVABLES> 681,009
<ASSETS-OTHER> 3,991
<OTHER-ITEMS-ASSETS> 6,687
<TOTAL-ASSETS> 277,501,218
<PAYABLE-FOR-SECURITIES> 548,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 216,458
<TOTAL-LIABILITIES> 764,583
<SENIOR-EQUITY> 469,159
<PAID-IN-CAPITAL-COMMON> 285,885,078
<SHARES-COMMON-STOCK> 46,915,868
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9,617,602)
<NET-ASSETS> 276,736,635
<DIVIDEND-INCOME> 5,347,449
<INTEREST-INCOME> 1,893,626
<OTHER-INCOME> 0
<EXPENSES-NET> 1,954,841
<NET-INVESTMENT-INCOME> 5,286,234
<REALIZED-GAINS-CURRENT> 14,371,377
<APPREC-INCREASE-CURRENT> (13,761,465)
<NET-CHANGE-FROM-OPS> 5,896,146
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,286,234
<DISTRIBUTIONS-OF-GAINS> 14,154,374
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,752,596
<NUMBER-OF-SHARES-REDEEMED> 3,733,563
<SHARES-REINVESTED> 3,295,800
<NET-CHANGE-IN-ASSETS> 56,146,463
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,812,171
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,954,841
<AVERAGE-NET-ASSETS> 255,376,262
<PER-SHARE-NAV-BEGIN> 6.20
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> .03
<PER-SHARE-DIVIDEND> .12
<PER-SHARE-DISTRIBUTIONS> .32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.90
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 5
<NAME> INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 202,470,481
<INVESTMENTS-AT-VALUE> 218,844,527
<RECEIVABLES> 712,750
<ASSETS-OTHER> 2,819
<OTHER-ITEMS-ASSETS> 4,431
<TOTAL-ASSETS> 219,564,527
<PAYABLE-FOR-SECURITIES> 610,437
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 180,488
<TOTAL-LIABILITIES> 790,925
<SENIOR-EQUITY> 323,206
<PAID-IN-CAPITAL-COMMON> 202,539,201
<SHARES-COMMON-STOCK> 32,320,625
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (462,851)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,374,046
<NET-ASSETS> 218,773,602
<DIVIDEND-INCOME> 3,354,791
<INTEREST-INCOME> 382,961
<OTHER-INCOME> 0
<EXPENSES-NET> 1,489,495
<NET-INVESTMENT-INCOME> 2,248,257
<REALIZED-GAINS-CURRENT> 684,147
<APPREC-INCREASE-CURRENT> (6,030,073)
<NET-CHANGE-FROM-OPS> (3,097,669)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,248,257
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,914,285
<NUMBER-OF-SHARES-REDEEMED> 2,344,370
<SHARES-REINVESTED> 332,145
<NET-CHANGE-IN-ASSETS> 63,681,346
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,374,533
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,489,495
<AVERAGE-NET-ASSETS> 193,596,175
<PER-SHARE-NAV-BEGIN> 6.92
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> (0.15)
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.77
<EXPENSE-RATIO> .77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 6
<NAME> INTERNATIONAL PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 26,445,737
<INVESTMENTS-AT-VALUE> 25,781,641
<RECEIVABLES> 253,424
<ASSETS-OTHER> 182
<OTHER-ITEMS-ASSETS> 1,384
<TOTAL-ASSETS> 26,036,631
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,997
<TOTAL-LIABILITIES> 16,997
<SENIOR-EQUITY> 52,116
<PAID-IN-CAPITAL-COMMON> 26,652,623
<SHARES-COMMON-STOCK> 5,211,592
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,009)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (664,096)
<NET-ASSETS> 26,019,634
<DIVIDEND-INCOME> 47,329
<INTEREST-INCOME> 158,020
<OTHER-INCOME> 0
<EXPENSES-NET> 98,732
<NET-INVESTMENT-INCOME> 106,617
<REALIZED-GAINS-CURRENT> (21,009)
<APPREC-INCREASE-CURRENT> (664,096)
<NET-CHANGE-FROM-OPS> (578,488)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 106,617
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,355,035
<NUMBER-OF-SHARES-REDEEMED> 164,798
<SHARES-REINVESTED> 21,355
<NET-CHANGE-IN-ASSETS> 26,019,634
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 63,291
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 98,732
<AVERAGE-NET-ASSETS> 11,736,614
<PER-SHARE-NAV-BEGIN> 5
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> .02
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.99
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 7
<NAME> SMALL CAP PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 14,720,884
<INVESTMENTS-AT-VALUE> 16,029,163
<RECEIVABLES> 116,965
<ASSETS-OTHER> 182
<OTHER-ITEMS-ASSETS> 7,362
<TOTAL-ASSETS> 16,153,672
<PAYABLE-FOR-SECURITIES> 66,102
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,408
<TOTAL-LIABILITIES> 73,510
<SENIOR-EQUITY> 26,837
<PAID-IN-CAPITAL-COMMON> 14,745,046
<SHARES-COMMON-STOCK> 2,683,680
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,308,279
<NET-ASSETS> 16,080,162
<DIVIDEND-INCOME> 292
<INTEREST-INCOME> 144,765
<OTHER-INCOME> 0
<EXPENSES-NET> 45,710
<NET-INVESTMENT-INCOME> 99,347
<REALIZED-GAINS-CURRENT> 44,381
<APPREC-INCREASE-CURRENT> 1,308,279
<NET-CHANGE-FROM-OPS> 1,452,007
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 99,347
<DISTRIBUTIONS-OF-GAINS> 44,381
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,722,519
<NUMBER-OF-SHARES-REDEEMED> 62,826
<SHARES-REINVESTED> 23,987
<NET-CHANGE-IN-ASSETS> 16,080,162
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36,355
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 45,710
<AVERAGE-NET-ASSETS> 6,349,716
<PER-SHARE-NAV-BEGIN> 5
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .02
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.99
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC,
<SERIES>
<NUMBER> 8
<NAME> BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 8,826,711
<INVESTMENTS-AT-VALUE> 8,591,277
<RECEIVABLES> 99,033
<ASSETS-OTHER> 182
<OTHER-ITEMS-ASSETS> 6,057
<TOTAL-ASSETS> 8,696,549
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25,481
<TOTAL-LIABILITIES> 25,481
<SENIOR-EQUITY> 17,567
<PAID-IN-CAPITAL-COMMON> 8,892,153
<SHARES-COMMON-STOCK> 1,756,720
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,218)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (235,434)
<NET-ASSETS> 8,671,068
<DIVIDEND-INCOME> 38,828
<INTEREST-INCOME> 64,909
<OTHER-INCOME> 0
<EXPENSES-NET> 24,127
<NET-INVESTMENT-INCOME> 79,610
<REALIZED-GAINS-CURRENT> (3,218)
<APPREC-INCREASE-CURRENT> (235,434)
<NET-CHANGE-FROM-OPS> (159,042)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 79,610
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,795,318
<NUMBER-OF-SHARES-REDEEMED> 54,726
<SHARES-REINVESTED> 16,128
<NET-CHANGE-IN-ASSETS> 8,671,068
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15,489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24,127
<AVERAGE-NET-ASSETS> 3,814,066
<PER-SHARE-NAV-BEGIN> 5
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> (.06)
<PER-SHARE-DIVIDEND> .02
<PER-SHARE-DISTRIBUTIONS> .05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.94
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 9
<NAME> LIMITED-TERM BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 1,658,060
<INVESTMENTS-AT-VALUE> 1,610,373
<RECEIVABLES> 32,608
<ASSETS-OTHER> 182
<OTHER-ITEMS-ASSETS> 4,791
<TOTAL-ASSETS> 1,647,954
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,808
<TOTAL-LIABILITIES> 2,808
<SENIOR-EQUITY> 3,384
<PAID-IN-CAPITAL-COMMON> 1,689,449
<SHARES-COMMON-STOCK> 338,428
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (47,687)
<NET-ASSETS> 1,645,146
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 57,386
<OTHER-INCOME> 0
<EXPENSES-NET> 7,854
<NET-INVESTMENT-INCOME> 49,532
<REALIZED-GAINS-CURRENT> 455
<APPREC-INCREASE-CURRENT> (47,687)
<NET-CHANGE-FROM-OPS> 2,300
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 49,532
<DISTRIBUTIONS-OF-GAINS> 455
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 331,301
<NUMBER-OF-SHARES-REDEEMED> 3,156
<SHARES-REINVESTED> 10,283
<NET-CHANGE-IN-ASSETS> 1,645,146
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,712
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,854
<AVERAGE-NET-ASSETS> 1,263,918
<PER-SHARE-NAV-BEGIN> 5
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> (.14)
<PER-SHARE-DIVIDEND> .15
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.86
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
