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. 16
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 16
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)
__X__ on April 4, 1997 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ 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, 1996 was filed on February 25, 1997.
<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) ..................... *
(c) ..................... Performance Information
(d)...................... Financial Highlights; Performance Information
4(a) ..................... The Fund; Goals and Investment Policies of the
Portfolios; Other Information
(b) ..................... Goals and Investment Policies of the Portfolios
(c) ..................... Goals and Investment Policies of the Portfolios
5(a) ..................... Other Information
(b)...................... Management; Back Cover
(c) ..................... Management
(d) ..................... Management; Back Cover
(e) ..................... *
(f) ..................... Management
(g)...................... *
5A......................... **
6(a) ..................... The Fund; Other Information
(b) ..................... *
(c) ..................... *
(d) ..................... *
(e) ..................... Other Information
(f)...................... Dividends and Distributions
(g) ..................... Taxes
(h) ..................... *
7(a) ..................... Management; Back Cover
(b) ..................... Net Asset Value
(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) ..................... Goals and Investment Policies
(b) ..................... Goals and Investment Policies
(c) ..................... Goals and Investment Policies
(d) ..................... Goals and Investment Policies
14(a) ..................... Directors and Officers
(b) ..................... Directors and Officers
(c) Directors and Officers
15(a) ..................... *
(b) ..................... *
(c) ..................... *
16(a)(i) .................. Investment Management and Other Services
(a)(ii) ................. Investment Management and Other Services;
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) ..................... Portfolio Transactions and Brokerage
(e) ..................... Portfolio Transactions and Brokerage
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) ..................... Investment Management and Other Services
(c) ..................... *
22(a)...................... Performance Information
(b)(i)................... Performance Information
(b)(ii).................. Performance Information
(b)(iii)................. *
(b)(iv).................. Performance Information
23 ........................ Financial Statements
- ---------------------------------------------------------------------------
*Not Applicable or Negative Answer
**Contained in the Annual Report to Shareholders
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
- ---------------------------------------------------------------
April 4, 1997
PROSPECTUS
- -----------------------------------------------------------------
TMK/United Funds, Inc. (the "Fund") is a diversified, open-end management
investment company commonly known as a mutual fund, with eleven separate
Portfolios each with separate goals and investment policies. The goals and
investment 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 that 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 its portfolio 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.
Science and Technology Portfolio
Long-term capital growth through investments primarily in science and
technology securities.
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 April 4, 1997. 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.
THE HIGH INCOME PORTFOLIO MAY INVEST UP TO ALL OF ITS ASSETS IN BONDS
ISSUED BY DOMESTIC OR FOREIGN ISSUERS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," WHICH ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN
THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING. SEE "GOALS AND INVESTMENT POLICIES OF THE
PORTFOLIOS" INCLUDED IN THIS PROSPECTUS FOR A DISCUSSION OF THE RISKS ASSOCIATED
WITH NON-INVESTMENT GRADE DEBT SECURITIES. SEE APPENDIX A FOR A DISCUSSION OF
BOND RATINGS.
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 VARIOUS
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 eleven separate portfolios (each a
"Portfolio" and, collectively, the "Portfolios") of an open-
end, management investment company with different goals and
investment 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 that 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.
Science and Technology Portfolio: Long-term capital growth through
investing primarily in science and technology securities.
There can be no assurance that a Portfolio will be successful in meeting
its investment goal. For a further description of the eleven 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 "Securities and Investment Practices."
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 of
insurance products for which the Fund is the investment
vehicle. 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 those by Money Market Portfolio which are 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
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31, 1996
and by Price Waterhouse LLP, independent accountants, with respect to all other
fiscal years and should be read in conjunction with the financial statements and
notes thereto, together with the report of Deloitte & Touche LLP included in the
SAI.
(For a share outstanding throughout each period)
GROWTH PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $6.8260 $5.8986 $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846 $5.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income ... 0.0877 0.0903 0.1211 0.0537 0.1013 0.1229 0.1661 0.1611 0.1539 0.0523
Net realized and
unrealized gain
(loss) on investments . 0.6589 2.1842 0.0268 0.8087 1.0653 1.6636 (0.4546) 1.2150 0.4944 (0.2154)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations .............. 0.7466 2.2745 0.1479 0.8624 1.1666 1.7865 (0.2885) 1.3761 0.6483 (0.1631)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income ..... (0.0877) (0.0903) (0.1211) (0.0537) (0.1013) (0.1229) (0.1661) (0.1611) (0.1539) (0.0523)
Distribution from
capital gains ......... (0.6882) (1.2568) (0.3244) (0.7569) (0.5121) (1.0142) (0.0000) (0.7962) (0.2953) (0.0000)
Distribution in excess
of capital gains ...... (0.0000) (0.0000) (0.0000) (0.0061) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ....... (0.7759) (1.3471) (0.4455) (0.8167) (0.6134) (1.1371) (0.1661) (0.9573) (0.4492) (0.0523)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ........... $6.7967 $6.8260 $5.8986 $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return .............. 10.94% 38.57% 2.39% 14.02% 20.84% 36.10% -5.34% 27.61% 13.55% -6.86%
Net assets, end of period
(000 omitted) ........... $513,163 $418,826 $276,737 $220,590 $122,363 $69,044 $37,440 $28,510 $14,521 $5,636
Ratio of expenses to
average net assets ...... 0.73% 0.75% 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 .............. 1.44% 1.35% 2.07% 1.01% 2.00% 2.43% 3.58% 3.40% 3.79% 4.92%
Portfolio turnover rate ... 243.00% 245.80% 277.36% 297.81% 225.87% 316.72% 331.15% 344.71% 278.57% 127.80%
Average commission
rate paid ............... $0.0572
*Growth Portfolio's inception date is December 2, 1986; 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 13, 1987 (initial offering) through December 31, 1987. Ratios and portfolio turnover rate have been annualized.
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
INCOME PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992 1991*
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .... $8.6756 $6.7689 $6.9180 $5.9530 $5.3158 $5.0000
------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income .. 0.0835 0.0839 0.0702 0.0651 0.0803 0.0633
Net realized and
unrealized gain
(loss) on investments 1.6239 2.0525 (0.1490) 0.9650 0.6496 0.3158
------- ------- ------- ------- ------- -------
Total from investment
operations ............. 1.7074 2.1364 (0.0788) 1.0301 0.7299 0.3791
------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.0835) (0.0839) (0.0703) (0.0651) (0.0803) (0.0633)
Distribution from
capital gains ........ (0.1622) (0.1457) (0.0000) (0.0000) (0.0124) (0.0000)
Distribution in excess
of capital gains ..... (0.0000) (0.0001) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- -------
Total distributions ...... (0.2457) (0.2297) (0.0703) (0.0651) (0.0927) (0.0633)
------- ------- ------- ------- ------- -------
Net asset value,
end of period .......... $10.1373 $8.6756 $6.7689 $6.9180 $5.9530 $5.3158
======== ======= ======= ======= ======= =======
Total return ............. 19.68% 31.56% -1.14% 17.30% 13.78% 17.43%
Net assets, end of period
(000 omitted) .......... $462,391 $331,194 $218,774 $155,092 $65,027 $15,640
Ratio of expenses to
average net assets ..... 0.73% 0.77% 0.77% 0.79% 0.85% 0.89%
Ratio of net investment
income to average
net assets ............. 0.97% 1.13% 1.16% 1.36% 1.78% 2.47%
Portfolio turnover rate .. 22.95% 15.00% 23.32% 18.38% 15.74% 4.41%
Average commission
rate paid .............. $0.0586
*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. Ratios and portfolio turnover rate have
been annualized.
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
INTERNATIONAL PORTFOLIO
For the fiscal year ended For the
December 31, period
----------------- ended
1996 1995 12/31/94*
---- ---- --------
Net asset value,
beginning of period .... $5.2790 $4.9926 $5.0000
------- ------- -------
Income from investment
operations:
Net investment income .. 0.0663 0.0846 0.0207
Net realized and
unrealized gain (loss)
on investments ....... 0.7300 0.2790 (0.0074)
------- ------- -------
Total from investment
operations ............. 0.7963 0.3636 0.0133
------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.0636) (0.0772) (0.0207)
Distributions from
capital gains ........ (0.0127) (0.0000) (0.0000)
------- ------- -------
Total distributions ...... (0.0763) (0.0772) (0.0207)
------- ------- -------
Net asset value,
end of period .......... $5.9990 $5.2790 $4.9926
======= ======= =======
Total return ............. 15.09% 7.28% 0.26%
Net assets, end of period
(000 omitted) .......... $79,849 $50,196 $26,020
Ratio of expenses to
average net assets ..... 1.00% 1.02% 1.26%
Ratio of net investment
income to average
net assets ............. 1.42% 1.99% 1.36%
Portfolio turnover rate .. 75.01% 34.93% 23.23%
Average commission
rate paid .............. $0.0217
*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 portfolio turnover rate have been annualized.
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
SMALL CAP PORTFOLIO
For the fiscal year For the
ended December 31, period
------------------ ended
1996 1995 12/31/94*
---- ---- --------
Net asset value,
beginning of period .... $7.6932 $5.9918 $5.0000
------- ------- -------
Income from investment
operations:
Net investment income .. 0.0163 0.0900 0.0376
Net realized and
unrealized gain
on investments ....... 0.6241 1.8470 1.0086
------- ------- -------
Total from investment
operations ............. 0.6404 1.9370 1.0462
------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.0163) (0.0900) (0.0376)
Distribution from
capital gains ........ (0.2997) (0.1456) (0.0168)
------- ------- -------
Total distributions ...... (0.3160) (0.2356) (0.0544)
------- ------- -------
Net asset value,
end of period .......... $8.0176 $7.6932 $5.9918
======= ======= =======
Total return ............. 8.33% 32.32% 20.92%
Net assets, end of period
(000 omitted) .......... $97,408 $55,591 $16,080
Ratio of expenses to
average net assets ..... 0.91% 0.96% 1.08%
Ratio of net investment
income to average
net assets ............. 0.25% 1.77% 2.35%
Portfolio turnover rate .. 133.77% 43.27% 21.61%
Average commission
rate paid .............. $0.0448
*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.
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
BALANCED PORTFOLIO
For the fiscal year ended For the
December 31, period
----------------- ended
1996 1995 12/31/94*
---- ---- --------
Net asset value,
beginning of period .... $5.9000 $4.9359 $5.0000
------- ------- -------
Income from investment
operations:
Net investment income .. 0.1502 0.1333 0.0460
Net realized and
unrealized gain (loss)
on investments ....... 0.4890 1.0611 (0.0641)
------- ------- -------
Total from investment
operations ............. 0.6392 1.1944 (0.0181)
------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.1504) (0.1333) (0.0460)
Distribution from
capital gains ........ (0.1921) (0.0970) (0.0000)
------- ------- -------
Total distributions ...... (0.3425) (0.2303) (0.0460)
------- ------- -------
Net asset value,
end of period .......... $6.1967 $5.9000 $4.9359
======= ======= =======
Total return ............. 10.84% 24.19% -0.37%
Net assets, end of period
(000 omitted) .......... $42,427 $23,603 $8,671
Ratio of expenses to
average net assets ..... 0.70% 0.72% 0.95%
Ratio of net investment
income to average
net assets ............. 3.18% 3.22% 3.14%
Portfolio turnover rate .. 44.23% 62.87% 19.74%
Average commission
rate paid .............. $0.0579
*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 portfolio turnover rate have been annualized.
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
ASSET STRATEGY PORTFOLIO
For the For the
fiscal year period ended
ended December 31, December 31,
1996 1995*
----------- ----------
Net asset value,
beginning of period .... $5.0137 $5.0000
------- -------
Income from investment
operations:
Net investment income .. 0.1755 0.0717
Net realized and
unrealized gain
on investments ....... 0.1203 0.0193
------- -------
Total from investment
operations ............. 0.2958 0.0910
------- -------
Less distributions:
Dividends from net
investment income .... (0.1752) (0.0713)
Distribution from
capital gains ........ (0.0000) (0.0060)
------- -------
Total distributions ...... (0.1752) (0.0773)
------- -------
Net asset value,
end of period .......... $5.1343 $5.0137
======= =======
Total return ............. 5.92% 1.80%
Net assets, end of period
(000 omitted) .......... $8,474 $4,344
Ratio of expenses to
average net assets ..... 0.93% 0.91%
Ratio of net investment
income to average
net assets ............. 3.92% 4.42%
Portfolio turnover rate .. 49.92% 149.17%
Average commission
rate paid .............. $0.0375
*Asset Strategy Portfolio's inception date is February 14, 1995; 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 1, 1995 (initial offering) through
December 31, 1995. Ratios have been annualized.
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
MONEY MARKET PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <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 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income ................. 0.0486 0.0542 0.0368 0.0260 0.0324 0.0536 0.0753 0.0852 0.0677 0.0297
Less dividends declared .. (0.0486) (0.0542) (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 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return ............. 5.01% 5.56% 3.72% 2.63% 3.29% 5.49% 7.82% 8.91% 7.37% 6.57%
Net assets, end of
period (000 omitted) ... $37,258 $36,872 $30,812 $26,000 $23,995 $19,797 $16,870 $11,753 $8,711 $5,868
Ratio of expenses to
average net assets ..... 0.61% 0.62% 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 ............. 4.87% 5.42% 3.72% 2.61% 3.17% 5.33% 7.52% 8.49% 6.84% 6.81%
*Money Market Portfolio's inception date is December 2, 1986; 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 13, 1987 (initial offering) through December 31, 1987. Ratios have been annualized.
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
LIMITED-TERM BOND PORTFOLIO
For the fiscal year For the
ended December 31, period
----------------- ended
1996 1995 12/31/94*
---- ---- --------
Net asset value,
beginning of period .... $5.2521 $4.8611 $5.0000
------- ------- -------
Income from investment
operations:
Net investment income .. 0.2694 0.2841 0.1507
Net realized and
unrealized gain (loss)
on investments ....... (0.0870) 0.4122 (0.1375)
------- ------- -------
Total from investment
operations ............. 0.1824 0.6963 0.0132
------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.2694) (0.2841) (0.1507)
Distribution from
capital gains ........ (0.0012) (0.0212) (0.0014)
------- ------- -------
Total distributions ...... (0.2706) (0.3053) (0.1521)
------- ------- -------
Net asset value,
end of period .......... $5.1639 $5.2521 $4.8611
======= ======= =======
Total return ............. 3.51% 14.29% 0.26%
Net assets, end of period
(000 omitted) .......... $3,715 $2,853 $1,645
Ratio of expenses to
average net assets ..... 0.76% 0.71% 0.93%
Ratio of net investment
income to average
net assets ............. 5.92% 6.22% 5.89%
Portfolio turnover rate .. 15.81% 18.16% 93.83%
*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 portfolio turnover rate have been annualized.
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
BOND PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .... $5.3592 $4.7393 $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246 $5.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income .. 0.3170 0.3556 0.3507 0.3334 0.3643 0.3867 0.4025 0.4155 0.4088 0.1861
Net realized and
unrealized gain
(loss) on investments (0.1560) 0.6202 (0.6652) 0.3046 0.0216 0.3771 (0.0715) 0.1397 (0.0394) (0.0249)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ............. 0.1610 0.9758 (0.3145) 0.6380 0.3859 0.7638 0.3310 0.5552 0.3694 0.1612
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.3198) (0.3559) (0.3507) (0.3334) (0.3643) (0.3867) (0.4025) (0.4155) (0.4088) (0.1861)
Distribution from
capital gains ........ (0.0000) (0.0000) (0.0000) (0.1627) (0.0251) (0.0644) (0.0000) (0.0000) (0.0000) (0.0505)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ...... (0.3198) (0.3559) (0.3507) (0.4961) (0.3894) (0.4511) (0.4025) (0.4155) (0.4088) (0.2366)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .......... $5.2004 $5.3592 $4.7393 $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return ............. 3.04% 20.56% -5.90% 12.37% 7.67% 16.19% 7.03% 11.82% 7.74% 7.20%
Net assets, end of period
(000 omitted) .......... $92,367 $88,570 $74,017 $81,727 $49,428 $29,112 $16,464 $11,530 $6,465 $2,923
Ratio of expenses to
average net assets ..... 0.59% 0.60% 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 ............. 6.39% 6.73% 6.73% 6.01% 6.91% 7.65% 8.05% 8.34% 8.17% 8.96%
Portfolio turnover
rate ................... 64.02% 71.17% 135.82% 68.75% 44.32% 52.50% 51.50% 42.83% 29.18% 187.93%
*Bond Portfolio's inception date is December 2, 1986; 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 13, 1987 (initial offering) through December 31, 1987. Ratios and portfolio turnover rate have been annualized.
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited by Deloitte & Touche LLP,
independent accountants, with respect to the fiscal year ended December 31,
1996, and by Price Waterhouse LLP, independent accountants, with respect to all
other fiscal years, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Deloitte & Touche LLP
included in the SAI.
(For a share outstanding throughout each period)
HIGH INCOME PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .... $4.4448 $4.1118 $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333 $5.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income .. 0.3861 0.4165 0.4106 0.3899 0.4050 0.4368 0.4346 0.5810 0.5263 0.2425
Net realized and
unrealized gain
(loss) on investments 0.1302 0.3330 (0.5255) 0.3487 0.2116 0.6703 (0.7221) (0.7549) 0.1595 (0.2667)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ............. 0.5163 0.7495 (0.1149) 0.7386 0.6166 1.1071 (0.2875) (0.1739) 0.6858 (0.0242)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income .... (0.3861) (0.4165) (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) (0.0000) (0.0000) (0.0091) (0.0000)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ...... (0.3861) (0.4165) (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5354) (0.2425)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .......... $4.5750 $4.4448 $4.1118 $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return ............. 11.66% 18.19% -2.55% 17.90% 15.70% 34.19% -7.44% -4.19% 15.14% -0.99%
Net assets, end of period
(000 omitted) .......... $97,406 $86,686 $72,644 $71,265 $41,456 $24,394 $13,868 $15,717 $12,779 $4,521
Ratio of expenses to
average net assets ..... 0.71% 0.72% 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 ............. 9.10% 9.25% 9.03% 8.66% 9.48% 11.32% 11.55% 12.54% 10.85% 10.70%
Portfolio turnover rate .. 58.91% 41.78% 37.86% 54.22% 60.79% 34.00% 12.21% 74.97% 46.75% 7.09%
*High Income Portfolio's inception date is December 2, 1986; 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 13, 1987 (initial offering) through December 31, 1987. Ratios and portfolio turnover rate have been annualized.
</TABLE>
Science and Technology Portfolio was created in 1997.
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 and phone number shown on the cover of this
Prospectus.
<PAGE>
THE FUND
The Fund is a series fund consisting of eleven Portfolios: Money Market
Portfolio, Bond Portfolio, High Income Portfolio, Growth Portfolio, Income
Portfolio, International Portfolio, Small Cap Portfolio, Balanced Portfolio,
Limited-Term Bond Portfolio, Asset Strategy Portfolio and Science and Technology
Portfolio. 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. 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.
Bond Portfolio, High Income Portfolio, Growth Portfolio, Income Portfolio,
International Portfolio, Small Cap Portfolio, Balanced Portfolio, Limited-Term
Bond Portfolio, Asset Strategy Portfolio, Science and Technology 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 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 data and methods of
computation.
GOALS AND INVESTMENT POLICIES OF THE PORTFOLIOS
Each of the eleven Portfolios has a different goal that it pursues through
separate investment policies that are described below. The different goal(s) of
the Portfolios and the different investment policies utilized by each Portfolio
in attempting to achieve its goal(s) 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 goal(s); some market risks are inherent in all securities to varying
degrees.
The goals, investment policies and restrictions of each Portfolio are
not fundamental and thus 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 "Securities and
Investment Practices." Additional information concerning investment policies
may be found in the SAI.
Money Market Portfolio
The goal of Money Market Portfolio is maximum current income consistent
with stability of principal. The Portfolio seeks to achieve this goal by
investing in a portfolio of money market instruments. Subject to the
diversification requirements of Rule 2a-7 under the Investment Company Act of
1940, as amended (the "1940 Act"), the Portfolio may invest only in the
following U.S. dollar-denominated money market obligations and instruments:
U.S. Government obligations (including obligations of U.S. Government agencies
and instrumentalities); bank obligations and instruments secured by bank
obligations, such as letters of credit; commercial paper; corporate debt
obligations, including variable amount master demand notes; Canadian Government
obligations; and certain other obligations (including municipal obligations)
guaranteed as to principal and interest by a bank in whose obligations the
Portfolio may invest or a corporation in whose commercial paper the Portfolio
may invest. The Portfolio may, however, only invest in bank obligations if they
are obligations of a bank subject to regulation by the U.S. Government
(including foreign branches of these banks) or obligations of a foreign bank
having total assets equal to at least U.S. $500,000,000, and instruments secured
by any such obligation.
Investments are limited to those 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 397 calendar days.
Consistent with its investment policies, the Portfolio may invest in
only those municipal obligations that either (i) are guaranteed as to principal
and interest by a bank in whose obligations the Portfolio may invest or by a
corporation in whose commercial paper the Portfolio may invest, or (ii) depend
for their repayment solely upon a corporate issuer whose debt obligations are
rated at least A by Standard & Poor's, a division of The McGraw-Hill Companies
("S&P") or Moody's Investor's Service, Inc. ("MIS").
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.
Bond Portfolio
The goal of Bond 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 investment
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 a significant, but varying, percentage of its
assets in U.S. Government Securities. See "Securities and Investment Practices"
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 higher 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.
High Income Portfolio
The primary goal of High Income 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
that are rated in the lower rating categories of the established rating services
(Baa or lower by MIS or BBB or lower by S&P), or are unrated securities that
are, in the opinion of the Manager, of similar quality to rated bonds in these
categories.
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.
Growth Portfolio
The goal of Growth 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.
Income Portfolio
The goal of Income 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 that
have the potential for capital growth or that 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.
International Portfolio
The primary goal of International 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 that 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 that 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.
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 "Securities and Investment Practices" for a
further discussion of the Portfolio's ability to invest in foreign securities.
Small Cap Portfolio
The goal of 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 that are relatively new or unseasoned, in their
early stages of development or smaller companies 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 that 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 that are being fundamentally changed and revitalized or have a
position that is considered strong relative to the market as a whole or that
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 borrow money on an unsecured basis in order to purchase
securities. Borrowing for investment 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 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.
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 that 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.
Balanced Portfolio
The primary goal of Balanced 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 that are not fixed-income senior securities or
both. Taking a defensive position may result in a lower yield.
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 that are commonly considered debt, all of which securities
will be denominated in U.S. dollars. The Portfolio may invest in deposits in
banks (represented by certificates of deposit or other evidence of deposit
issued by such banks of varying maturities) the principal of which is insured by
the Federal Deposit Insurance Corporation. 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.
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. Although the Manager uses
its expertise and resources in choosing investments and allocating assets, the
Manager's decisions may not always be advantageous to the Portfolio.
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). 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 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.
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 does not currently intend to invest in money-market
instruments rated below the highest rating category by S&P or MIS, or judged by
the Manager to be of equivalent quality; provided, however, that the Portfolio
may invest in money-market instruments rated below the highest rating category
by S&P or MIS if such instrument is subject to a letter of credit or similar
unconditional credit enhancement which is rated A-1 by S&P or Prime 1 by
MIS.
The Portfolio may borrow from banks. As a fundamental policy, the
Portfolio may borrow only 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. 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. This restriction does not
apply to any U.S. Government Securities, or to CMOs, other mortgage-related
securities or indexed securities. The Portfolio may buy shares of other
investment companies that do not redeem their shares, subject to certain
conditions stated 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 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.
Science and Technology Portfolio
The goal of Science and Technology Portfolio is long-term capital growth.
The Portfolio seeks to achieve this goal by concentrating its investments in
science and technology securities. Science and technology securities are
securities of companies whose products, processes or services, in the Manager's
opinion, are being or are expected to be significantly benefited by the
utilization or commercial application of scientific or technological discoveries
or developments in such areas as aerospace, communications and electronic
equipment, computer systems, computer software and services, electronics,
electronic media, business machines, office equipment and supplies,
biotechnology, medical and hospital supplies and services, medical devices and
drugs. Certain risks are associated with science and technology securities,
including the impact of governmental regulation and rapid obsolescence of
issuers' products or processes.
Under normal economic and market conditions, Science and Technology
Portfolio will not invest in any securities other than science securities or
technology securities if, after such investment, more than 20% of its total
assets would be invested in such other securities. The Portfolio may own common
stock, preferred stock, debt securities and convertible securities. At times,
as a temporary defensive measure, the Portfolio may invest up to all of its
assets in U.S. Government Securities or other debt securities.
Risk Considerations
There are risks inherent in any investment. Each Portfolio is subject to
varying degrees of market risk, financial risk and, in some cases, prepayment
risk. Market risk is the potential for fluctuations in the price of the
security because of market factors. Because of market risk, you should
anticipate that the share price of each Portfolio will fluctuate. Financial
risk is based on the financial situation of the issuer. The financial risk of
each Portfolio depends on the credit quality of the underlying securities.
Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid prior to
its expected maturity date.
Because each Portfolio owns different types of investments, its
performance will be affected by a variety of factors. The value of a
Portfolio's investments and the income it generates will vary from day to day,
generally reflecting changes in interest rates, market conditions and other
company and economic news. Performance will also depend on the Manager's skill
in selecting investments and, with respect to Asset Strategy Portfolio,
performance will also depend on the Manager's skill in allocating assets among
the classes, or types, of investments.
The Portfolios may also invest in certain derivative instruments, including
options, futures contracts, options on futures contracts, indexed securities,
swaps, caps, collars, floors, stripped securities and mortgage-backed
securities. The use of derivative instruments involves special risks. See
"Risks of Derivative Instruments" for further information on the risks of
investing in these instruments.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Portfolios may invest and strategies the Manager may
employ in pursuit of the Portfolios' goal(s). A summary of risks associated
with these instrument types and investment practices is included as well.
Except as otherwise noted, the investment policies described below are
applicable to each of the eleven Portfolios.
The Manager might not buy all of these instruments or use all of these
techniques to the full extent permitted by a Portfolio's investment policies and
restrictions unless it believes that doing so will help a Portfolio achieve its
goal(s).
Certain of the investment policies and restrictions of each Portfolio are
also stated below. Policies and limitations are typically considered at the
time of purchase; the sale of instruments is usually not required in the event
of a subsequent change in circumstances.
Please see the SAI for further information concerning the following
instruments and associated risks and the Portfolios' investment policies and
restrictions.
Equity Securities
Equity securities represent an ownership interest in an issuer. This
ownership interest often gives an investor the right to vote on measures
affecting the issuer's organization and operations. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The equity securities in which a Portfolio (other than Money Market
Portfolio) invests may include preferred stock that converts to common stock
either automatically or after a specified period of time or at the option of the
issuer.
Preferred Stock
Preferred stock is rated by S&P and MIS, as described in Appendix A to this
Prospectus. The Portfolios (other than Money Market 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.
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 (i) have higher yields than those of common stocks of the
same or similar issuers, but lower yields than comparable nonconvertible
securities, (ii) are less subject to fluctuation in value than the underlying
stock because they have fixed income characteristics, and (iii) 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 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.
Policies and Restrictions: Each Portfolio (other than Money Market
Portfolio) may invest in convertible securities.
Debt Securities
Bonds and other debt instruments are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest,
and must repay the amount borrowed at maturity. Some debt securities, such as
zero coupon bonds, do not pay current interest, but are purchased at a discount
from their face values. The debt securities in which the Portfolios (other than
Money Market Portfolio) may invest may include debt securities whose performance
is linked to a specified equity security or securities index.
Debt securities have varying levels of sensitivity to changes in interest
rates and varying degrees of quality. As a general matter, however, when
interest rates rise, the values of fixed-rate debt securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt securities
rise. The values of floating and adjustable-rate debt securities are not as
sensitive to changes in interest rates as the values of fixed-rate debt
securities. Longer-term bonds are generally more sensitive to interest rate
changes than shorter-term bonds.
U.S. Government Securities are high-quality instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while 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 Asset Strategy Portfolio) will invest in securities of such agencies
and instrumentalities only when the Manager is satisfied that the credit risk is
acceptable.
Zero coupon bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its dividends, a
Portfolio takes into account as income a portion of the difference between a
zero coupon bond's purchase price and its face value.
Municipal obligations are issued by a wide range of state and local
governments, agencies and authorities for various purposes. The two main kinds
of municipal bonds are "general obligation" bonds and "revenue" bonds. In
"general obligation" bonds, the issuer has pledged its full faith, credit and
taxing power for the payment of principal and interest. "Revenue" bonds are
payable only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
Industrial development bonds are revenue bonds issued by or on behalf of public
authorities to obtain funds to finance privately operated facilities. Their
credit quality is generally dependent on the credit standing of the company
involved.
Lower-quality debt securities (commonly called "junk bonds") are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these securities
may fluctuate more than high-quality securities and may decline significantly in
periods of general economic difficulty. While the market for high-yield, high-
risk corporate debt securities has been in existence for many years and has
weathered previous economic downturns, the 1980s brought a dramatic increase in
the use of such securities to fund highly-leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication of the
future performance of the high-yield, high-risk bond market, especially during
periods of economic recession.
The market for lower-rated debt securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. Adverse publicity and changing investor
perceptions may decrease the values and liquidity of lower-rated debt
securities, especially in a thinly-traded market. Valuation becomes more
difficult and judgment plays a greater role in valuing lower-rated debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available. Since the risk of default
is higher for lower-rated debt securities, the Manager's research and credit
analysis are an especially important part of managing securities of this type
held by a Portfolio. The Manager continuously monitors the issuers of lower-
rated debt securities in a Portfolio's portfolio in an attempt to determine if
the issuers will have sufficient cash flow and profits to meet required
principal and interest payments. A Portfolio may choose, at its expense or in
conjunction with others, to pursue litigation or otherwise to exercise its
rights as a security holder to seek to protect the interests of security holders
if it determines this to be in the best interest of a Portfolio's shareholders.
Subject to its investment restrictions, a Portfolio may invest in debt
securities rated in any rating category of the established rating services,
including securities rated in the lowest category (D by S&P and C by MIS). In
addition, a Portfolio will treat unrated securities judged by the Manager to be
of equivalent quality to a rated security to be equivalent to securities having
that rating. The rating categories of S&P and MIS are described in Appendix A.
While credit ratings are only one factor the Manager relies on in evaluating
high-yield debt securities, certain risks are associated with 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 the Portfolios in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. Credit ratings for individual
securities may change from time to time and a Portfolio may retain a security
whose rating has been changed.
Policies and Restrictions: Asset Strategy 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, Asset Strategy 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. Each of
Growth Portfolio, Income Portfolio, Limited-Term Bond Portfolio, Balanced
Portfolio, Small Cap Portfolio, International Portfolio and Science and
Technology Portfolio do not intend to invest in non-investment grade debt
securities if, as a result of such investment, more than 5% of their respective
assets would consist of such investments. Subject to these limitations, each of
these Portfolios 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.
High Income Portfolio and Bond 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.
Debt Holdings, by Rating. During the fiscal year ended December 31,
1996, the percentage of the assets of Bond Portfolio, High Income Portfolio and
Asset Strategy Portfolio invested in debt securities in each of the rating
categories of S&P, and the corporate debt securities not rated by an established
rating service, determined on a dollar-weighted average, were as follows:
Percentage of Fund Assets
Rated Bond High Income Asset Strategy
by S&P Portfolio Portfolio Portfolio
- ------ --------- ----------- --------------
AAA 32.2% 0.0% 25.5%
AA 11.2 0.8 9.9
A 20.8 2.2 21.9
BBB 17.5 2.0 2.6
BB 13.7 23.0 6.0
B 2.3 61.0 3.4
CCC 0.0 2.1 0.0
CC 0.0 0.0 0.0
C 0.0 0.0 0.0
D 0.0 0.0 0.0
Unrated 1.3 2.7 4.0
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 its last fiscal
year, averaged over its 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.
Foreign Securities
Foreign securities and foreign currencies can involve significant risks in
addition to the risks inherent in U.S. investments. The value of securities
denominated in or indexed to foreign currencies, and of dividends and interest
from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets, and
prices on some foreign markets can be highly volatile. Many foreign countries
lack uniform accounting and disclosure standards comparable to those applicable
to U.S. companies, and it may be more difficult to obtain reliable information
regarding an issuer's financial condition and operations. In addition, the
costs of foreign investing, including withholding taxes, brokerage commissions
and custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
governmental supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest, or adverse diplomatic
developments. There is no assurance that the Manager will be able to anticipate
these potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. A developing country is a nation that, in the Manager's
opinion, is likely to experience long-term gross domestic product growth above
that expected to occur in the United States, the United Kingdom, France,
Germany, Italy, Japan and Canada. Developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
Policies and Restrictions: Subject to the diversification requirements of
Rule 2a-7, 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 Money Market Portfolio. 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.
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,
International Portfolio intends to have at least 65% of its assets invested in
issuers of at least three different countries outside of the United States.
International Portfolio will not invest more than 25% of its assets in
securities issued by the government of any one foreign country.
International Portfolio and Small Cap Portfolio (subject to the limitation
set forth below) may each purchase foreign securities only if they are (i)
listed or admitted to trading on a domestic or foreign securities exchange or
quoted on an automated quotations system, with the exception of warrants, rights
or restricted securities, which need not be so listed or admitted, or (ii)
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 OTC market, or (iii) issued or guaranteed by any foreign government or
any subdivision, agency or instrumentality thereof.
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, Asset Strategy Portfolio intends to limit its
investments in foreign securities to no more than 50% of its total assets.
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 Limited-Term Bond Portfolio, may invest up to
20% of their respective total assets in securities of foreign issuers. Limited-
Term Bond Portfolio may not invest in foreign securities.
Options, Futures and Other Strategies
Certain of the Portfolios may use certain swaps, caps, collars, floors,
options, futures contracts, 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, swaps, caps, collars and floors and certain other strategies
described herein. The strategies described below may be used in an attempt to
manage certain risks of a Portfolio's investments that can affect fluctuation in
its net asset value.
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.
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 instruments and
strategies and their risk considerations.
Options. 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.
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.
A Portfolio will be able to close a position in an option it has written only if
there is a market for the put or call. 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 an index, subject
to the call or the collateral underlying the put until a closing transaction can
be entered into or the option expires. Because index options are settled in
cash, a Portfolio cannot provide in advance for its potential settlement
obligations on a call it has written on an index by holding the underlying
securities. The Portfolio bears the risk that the value of the securities it
holds will vary from the value of the index.
Policies and Restrictions: Bond Portfolio, High Income Portfolio, Growth
Portfolio and Income Portfolio may each write (sell) covered call options on
securities on up to 25% of the respective assets of each Portfolio. 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, Bond
Portfolio, High Income Portfolio, Growth Portfolio and Income Portfolio may
write over-the-counter ("OTC") calls on U.S. Government Securities.
Small Cap Portfolio, Balanced Portfolio and Science and Technology
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 (the "OCC"), except that each may write unlisted put
options and purchase unlisted put and call options on U.S. Government Securities
and may purchase optional delivery standby commitments.
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"). Limited-
Term Bond Portfolio may not write call options having aggregate exercise prices
greater than 25% of its net assets.
Each Portfolio (other than 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. 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.
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 Small Cap Portfolio, Balanced Portfolio and Science and Technology
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 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. Small Cap
Portfolio and Balanced Portfolio may write options on broadly-based stock
indices to generate income. 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 Asset Strategy
Portfolio may purchase and sell. See the SAI for the limitations on Asset
Strategy Portfolio's use of options.
Futures Contracts and Options on Futures Contracts. 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).
Policies and Restrictions: Each of Small Cap Portfolio, Balanced
Portfolio and Science and Technology Portfolio may buy and sell futures
contracts on debt securities ("Debt Futures"), futures contracts on Stock Index
Futures and options on Debt Futures and Stock Index Futures. 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 (other
than Science and Technology Portfolio) may write options on futures contracts to
increase income.
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.
Small Cap Portfolio and Balanced Portfolio may not purchase options on
securities or futures contracts, and Science and Technology Portfolio may not
purchase options on securities, indices 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
Small Cap Portfolio, Balanced Portfolio and Science and Technology Portfolio may
not exceed 25% of its net assets computed at the time of sale.
There is no limitation on the types of futures contracts and options
thereon that Asset Strategy Portfolio may purchase or sell. See the SAI for the
limitations on Asset Strategy Portfolio's use of futures contracts and options
on futures contracts.
Forward Contracts and Currencies. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date at a fixed
price. 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 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 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. 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.
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. 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. Asset Strategy Portfolio may also use forward currency contracts
in one currency or a 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.
Asset Strategy Portfolio may also use forward currency contracts to shift
the Portfolio's 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. 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.
Asset Strategy Portfolio does not currently intend to invest more than 5%
of its total assets in forward currency contracts.
Asset Strategy Portfolio may purchase and sell foreign currency and
invest in foreign currency deposits. International Portfolio may only hold
foreign currency in connection with forward currency contracts for up to four
business days and in connection with the purchase or sale of foreign securities.
The other Portfolios (other than Money Market Portfolio and Limited-Term Bond
Portfolio) may briefly hold foreign currencies in connection with the purchase
or sale of foreign securities. 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.
Indexed Securities. Each Portfolio (other than Growth Portfolio) may
purchase and sell indexed securities, which are securities the value of which
varies in relation to the value of other securities, securities indices,
currencies, precious metals or other commodities, or other financial indicators.
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 indexed securities in which Money Market Portfolio
invests include securities whose prices are indexed to 90-day Treasury Bill
rates, the London Inter-Bank Offering Rate (LIBOR), prime interest rates,
Federal composite commercial paper rates and Federal funds rates, as long as
such indexed securities are U.S. dollar denominated.
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 United
States 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. Certain
indexed securities that are not traded on an established market may be deemed
illiquid.
Policies and Restrictions: Money Market Portfolio will not invest in any
security whose interest rate or principal amount to be repaid, or timing of
payments, varies or floats with the value of a foreign currency, the rate of
interest payable on foreign currency borrowings, or with any interest rate or
index expressed in a currency other than U.S. dollars.
Swaps, Caps and Floors. 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. 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 Limited-Term Bond Portfolio anticipates purchasing at a
later date.
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 goal and investment policies. Depending on how they are used,
the swap, cap, collar and floor agreements used by 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.
Mortgage-Backed and Other Asset-Backed Securities are bonds backed by
specific types of assets. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. Government mortgage-backed securities are issued or
guaranteed as to principal and interest (but not as to market value) by the
Government National Mortgage Association, Fannie Mae (formerly the Federal
National Mortgage Association), Federal Home Loan Mortgage Corporation or other
government-sponsored enterprises. Other mortgage-backed securities are
sponsored or issued by private entities, including investment banking firms and
mortgage originators.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest payments allocable to the IO class, and therefore
the yield to investors, generally will be reduced. In some instances, an
investor in an IO may fail to recoup all of his or her initial investment, even
if the security is government guaranteed or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Other asset-backed securities are similar to mortgage-backed securities,
except that the underlying assets are different. These underlying assets may be
nearly any type of financial asset or receivable, such as motor vehicle
installment sales contracts, home equity loans, leases of various types of real
and personal property and receivables from credit cards.
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 and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. Generally, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Mortgage- and
asset-backed securities may also decrease in value as a result of increases in
interest rates and, because of prepayments, may benefit less than other bonds
from declining interest rates. Reinvestments of prepayments may occur at lower
interest rates than the original investment, thus adversely affecting a
Portfolio's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the Portfolio
purchased the security.
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. Government mortgage-backed
securities. CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Policies and Restrictions: The Portfolios may invest in mortgage-backed
securities as long as the manager determines that it is consistent with the
Portfolio's goal(s) and investment policies. Asset Strategy Portfolio does not
currently intend to invest more than 40% of its total assets in mortgage-backed
securities. Each Portfolio (other than Money Market Portfolio) may invest no
more than 30% of its total assets in asset-backed securities. Each of the
Portfolios may invest in IOs and POs as long as the Manager determines that it
is consistent with the Portfolio's goal(s) and investment policies. Asset
Strategy Portfolio does not currently intend to invest more than 5% of its total
assets in IOs and POs.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, forward contracts, swaps, caps, collars, floors
and the investment in mortgage-backed securities, asset-backed securities,
stripped securities and indexed securities, involve special risks, including (i)
possible imperfect or no correlation between price movements of the portfolio
investments (held or intended to be purchased) involved in the transaction and
price movements of the instruments involved in the transaction, (ii) possible
lack of a liquid secondary market for any particular instrument at a particular
time, (iii) the need for additional portfolio management skills and techniques,
(iv) losses due to unanticipated market price movements, (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in investments involved in the transaction, (vi) incorrect forecasts
by the Manager concerning interest or currency exchange rates or direction of
price fluctuations of the investment involved in the transaction, which may
result in the strategy being ineffective, (vii) loss of premiums paid by a
Portfolio on options it purchases, and (viii) the possible inability of a
Portfolio to purchase or sell a portfolio security at a time when it would
otherwise be favorable for it to do so, or the possible need for a Portfolio to
sell a portfolio security at a disadvantageous time, due to the need for the
Portfolio to maintain "cover" or to segregate assets in connection with such
transactions and the possible inability of a Portfolio to close out or liquidate
its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Portfolios' respective portfolios diverges from instruments
underlying a hedging instrument. Such equal price changes are not always
possible because the investment underlying the hedging instruments 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 Manager may use derivative instruments, including securities with
embedded derivatives, for hedging purposes to adjust the risk characteristics of
a Portfolio's portfolio of investments and may use some of these instruments to
adjust the return characteristics of a Portfolio's portfolio of investments. An
embedded derivative is a derivative that is part of another financial
instrument. Embedded derivatives typically, but not always, are debt securities
whose return of principal or interest, in part, is determined by something that
is not intrinsic to the security itself. The use of derivative instruments for
speculative purposes can increase investment risk. If the Manager judges market
conditions incorrectly or employs a strategy that does not correlate well with a
Portfolio's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques may
increase the volatility of a Portfolio and may involve a small investment of
cash relative to the magnitude of the risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction does
not perform as promised or if there is not a liquid secondary market to close
out a position that a Portfolio has entered into.
The ordinary spreads between prices in the cash and futures markets, due to
the differences in the natures of those markets, are subject to distortion. Due
to the possibility of distortion, a correct forecast of general interest rate,
foreign currency exchange 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 or foreign exchange rate
movements or stock market movements or the time span within which the movements
take place.
Options and futures transactions may increase portfolio turnover rates,
which results in correspondingly greater commission expenses and transactions
costs and may result in certain tax consequences.
New financial products and risk management techniques continue to be
developed. Each Portfolio may use these instruments and techniques to the
extent consistent with its goal(s), investment policies and regulatory
requirements applicable to investment companies.
When-Issued and Delayed-Delivery Transactions
When-issued and delayed-delivery transactions are trading practices in
which payment and delivery for the securities take place at a future date. The
market value of a security could change during this period, which could affect a
Fund's yield.
When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. When a Fund has sold a security on a delayed-delivery basis, a
Fund does not participate in further gains or losses with respect to the
security. If the other party to a delayed-delivery transaction fails to deliver
or pay for the securities, a Fund could miss a favorable price or yield
opportunity, or could suffer a loss.
Policies and Restrictions: Each Portfolio may, without limitation,
purchase securities on a "when-issued" or delayed-delivery basis or 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.
Repurchase Agreements
In a repurchase agreement, a Portfolio buys a security at one price and
simultaneously agrees to sell it back at a higher price. Delays or losses could
result if the other party to the agreement defaults or becomes insolvent.
Repurchase agreements are entered into only with those issuers approved on the
basis of criteria established by the Board of Directors.
Policies and Restrictions: Each of the Portfolios may purchase securities
subject to repurchase agreements subject to its limitation on investment in
illiquid investments, which include repurchase agreements not terminable within
seven days.
Restricted Securities and Illiquid Investments
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. Restricted securities may be illiquid due
to restrictions on their resale. Subject to their respective limitations on
investment in illiquid investments and certain other limitations described in
the SAI, each Portfolio may invest in restricted securities. Restricted
securities may be determined to be liquid pursuant to guidelines adopted by the
Fund's Board of Directors.
Illiquid investments may be difficult to sell promptly at an acceptable
price. Difficulty in selling securities may result in a loss or may be costly
to a Portfolio.
Diversification
Diversifying a Portfolio's investment portfolio can reduce the risks of
investing. This may include limiting the amount of money invested in any one
issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, no Portfolio (other
than Asset Strategy Portfolio) may invest in a security if, as a result, it
would own more than 10% of the voting securities of an issuer, or if more than
5% of the Portfolio's total assets would be invested in securities of that
issuer. U.S. Government Securities are not included in these restrictions. As
a fundamental policy, with respect to 75% of its total assets, Asset Strategy
Portfolio may not 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, the Portfolio would hold more than
10% of the outstanding voting securities of such issuer or more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer.
As a fundamental policy, no Portfolio, other than Science and Technology
Portfolio, may buy a security if, as a result, 25% or more of the Portfolio's
total assets would then be invested in securities of companies in any one
industry. U.S. Government Securities are not included in this restriction.
Borrowing
If a Portfolio borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. The Portfolios may only borrow
from banks. If a Portfolio makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
Policies and Restrictions: Small Cap Portfolio may borrow money only
from banks and only to the extent that the value of the Fund's assets, less its
liabilities other than borrowings, is equal to at least 300% of all borrowings
including the proposed borrowing. As a fundamental policy, Asset Strategy
Portfolio may borrow money only from banks and only for emergency or
extraordinary purposes, but not in an amount exceeding 33 1/3% of its total
assets. As a fundamental policy, none of the other Portfolios may 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
their respective total assets.
Lending Securities
A Portfolio may lend its securities on a short-term or long-term basis
for the purpose of increasing income. This practice could result in a loss or a
delay in recovering a Portfolio's securities. Loans will be made only to
parties deemed creditworthy by the Manager.
Policies and Restrictions: As a fundamental policy, not more than 30% of
the total assets of Limited-Term Bond Portfolio and no more than 10% of the
total assets of any other Portfolio will be loaned at any one time. 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 with
respect to securities that are on loan, the Portfolio will take such action as
may be appropriate in order to vote its shares.
Other Instruments
Other instruments may include warrants and securities of closed-end
investment companies. 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.
Policies and Restrictions: Each of Balanced Portfolio, Small Cap
Portfolio, International Portfolio, Asset Strategy Portfolio and Science and
Technology Portfolio may purchase shares of other investment companies that do
not redeem their shares, subject to the conditions stated in the SAI.
Each of International Portfolio, Small Cap Portfolio, Limited-Term Bond
Portfolio and Asset Strategy 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. This
restriction does not apply to any U.S. Government Securities, or to CMOs, other
mortgage-related securities or indexed securities.
Bond Portfolio, High Income Portfolio, Growth Portfolio, Income
Portfolio and Small Cap Portfolio may invest up to 5% of their respective net
assets, valued at the lower of cost or market, in warrants. Asset Strategy
Portfolio may invest in warrants and rights to purchase securities. This
Portfolio does not currently intend to purchase warrants, valued at the lower of
cost or market, in excess of 5% of its net assets. Warrants acquired by Asset
Strategy Portfolio in units or attached to securities are not subject to this
restriction. 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.
MANAGEMENT
Waddell & Reed, Inc. and its predecessors have 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 the
Manager, 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 and United Asset Strategy Fund, Inc. since it commenced
operations in March 1995. Waddell & Reed, Inc. serves as the distributor for
insurance products for which the Fund is the underlying investment vehicle and
as underwriter 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 Science and
Technology Portfolio - .20 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%.
As of December 31, 1996, the combined net assets of all of the
Portfolios were approximately $1.4 billion.
For the fiscal year ended December 31, 1996, management fees for each
Portfolio 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 0.50% 0.61%
Bond Portfolio 0.53% 0.59%
High Income Portfolio 0.65% 0.71%
Growth Portfolio 0.70% 0.73%
Income Portfolio 0.70% 0.73%
International Portfolio 0.80% 1.00%
Small Cap Portfolio 0.85% 0.91%
Balanced Portfolio 0.60% 0.70%
Limited-Term Bond Portfolio 0.55% 0.76%
Asset Strategy Portfolio 0.80% 0.93%
Note: The Science and Technology Portfolio commenced operations on April 4,
1997.
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 Money Market Portfolio. Mr. Poettgen has held his
responsibilities for 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 investment companies managed by Waddell & Reed, Inc.
and its successor, the Manager, since January 1989 and has been an employee of
Waddell & Reed, Inc. and its successor, the Manager, since April 1968.
James C. Cusser is primarily responsible for the day-to-day management of
the portfolio of Bond Portfolio. Mr. Cusser has held his responsibilities for
Bond Portfolio since August 1992. 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. Cusser has served as the
portfolio manager for investment companies managed by 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 High Income Portfolio. Ms. Rieke has held her responsibilities
for High Income Portfolio since July 1987, the Portfolio's inception. 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
investment companies managed by Waddell & Reed, Inc. and its successor, the
Manager, since January 1990 and has been an employee of Waddell & Reed, Inc. and
its successor, the Manager, since May 1971.
Daniel P. Becker is primarily responsible for the day-to-day management
of the portfolio of Growth Portfolio. Mr. Becker has held his responsibilities
for Growth Portfolio since January 1997. He is Vice President of the Manager
and of Waddell & Reed Asset Management Company, an affiliate of the Manager. He
is Vice President of the Fund. Mr. Becker has served as an investment analyst
with the Manager and Waddell & Reed, Inc. since October 1989.
Russell E. Thompson is primarily responsible for the day-to-day management
of the portfolio of Income Portfolio. Mr. Thompson has held his
responsibilities for 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 investment companies managed by Waddell & Reed, Inc. and
its successor, the Manager, since January 1976 and has been an employee of
Waddell & Reed, Inc. and its successor, the Manager, since March 1971.
Thomas A. Mengel is primarily responsible for the day-to-day management
of the portfolio of International Portfolio. Mr. Mengel has held his
responsibilities for International Portfolio since May 1, 1996. 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. From
1993 to May 1, 1996, Mr. Mengel was the President of Sal. Oppenheim jr. & Cie.
Securities, Inc.; from 1992 until 1993, Mr. Mengel was a Vice President of Hauck
& Hope Securities; and from 1989 until 1992, Mr. Mengel was Manager of German
equities at Berliner Bank in Berlin, Germany.
Zachary H. Shafran is primarily responsible for the day-to-day management
of the portfolio of Small Cap Portfolio. Mr. Shafran has held his
responsibilities for Small Cap Portfolio since January 2, 1996. He is Vice
President of the Manager and Vice President of the Fund. Mr. Shafran has been
an investment analyst with Waddell & Reed, Inc. and its successor, the Manager,
since June 1990.
Cynthia P. Prince-Fox is primarily responsible for the day-to-day
management of the portfolio of Balanced Portfolio. Ms. Prince-Fox has held her
responsibilities for Balanced Portfolio since July 1994, the Portfolio's
inception. She 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. Ms. Prince-Fox has served as the portfolio manager for
investment companies managed by the Manager since January 1993, and has been an
investment analyst with 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 Limited-Term Bond Portfolio. Mr. Sterner has held his
responsibilities for Limited-Term Bond Portfolio since July 1994, the
Portfolio's inception. He is Vice President of the Manager, Vice President of
the Fund and Vice President of investment companies for which the Manager serves
as investment manager. Mr. Sterner has served as the portfolio manager for
investment companies managed by 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.
Michael L. Avery is primarily responsible for the day-to-day management
of the equity portion of the portfolio of Asset Strategy Portfolio. Mr. Avery
has held his responsibilities for the Asset Strategy Portfolio since January
1997. He is Senior Vice President of the Manager, Vice President of Waddell &
Reed Asset Management Company, an affiliate of the Manager, Vice President of
the Fund and Vice President of other investment companies for which the Manager
serves as investment manager. Mr. Avery has served as the portfolio manager for
investment companies managed by Waddell & Reed, Inc. and its successor, the
Manager, since February 1, 1994, has served as the director of research of
Waddell & Reed, Inc. and its successor, WRIMCO, since August 1987, and has been
an employee of Waddell & Reed, Inc. and its successor, the Manager, since June
1981.
Daniel J. Vrabac is primarily responsible for the day-to-day management of
the fixed-income portion of the portfolio of Asset Strategy Portfolio. Mr.
Vrabac has held his responsibilities for the Asset Strategy Portfolio since
January 1997. He is Vice President of Waddell & Reed Asset Management Company,
an affiliate of the Manager, Vice President of the Fund and Vice President of
other investment companies managed by the Manager. Mr. Vrabac has served as an
investment analyst with the Manager since May 1994, and was a Vice President of
Kansas City Life Insurance Company from May 1983 to May 1994.
Abel Garcia is primarily responsible for the day-to-day management of the
portfolio of Science and Technology Portfolio. Mr. Garcia has held his
responsibilities for Science and Technology Portfolio since April 4, 1997. He
is Vice President of the Manager, Vice President of Waddell & Reed Asset
Management Company, an affiliate of the Manager, Vice President of the Fund, and
Vice President of other investment companies managed by the Manager. Mr. Garcia
has been an employee of Waddell & Reed, Inc. and its successor, the Manager,
since August 1983.
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 business of the NYSE 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 NYSE is open for trading.
The NYSE's regular session ordinarily closes at 4:00 p.m. eastern time.
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 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 that are 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 third-party pricing system. 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 NYSE 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 Exchange is closed other than customary weekend and
holiday closings or trading on the 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 Money Market Portfolio, consists
of dividends and interest received by such Portfolio less the estimated expenses
of such Portfolio. 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 Money Market Portfolio are declared and paid daily in
additional full and fractional shares. Dividends from Growth Portfolio, Bond
Portfolio, High Income Portfolio, Income Portfolio, International Portfolio,
Small Cap Portfolio, Balanced Portfolio, Limited-Term Bond Portfolio, Asset
Strategy Portfolio and Science and Technology Portfolio usually are declared and
paid annually in December in additional full and fractional shares of that
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 Money Market Portfolio, are declared and paid annually in
December in additional full and fractional shares of the respective Portfolio.
Short-term capital gains of Money Market Portfolio--it does not anticipate
realizing any long-term capital gains--are declared and paid 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. The Fund is
governed by a Board of Directors which has overall responsibility for the
management of its affairs. Capital stock is currently divided into the eleven
classes that are designated Money Market Portfolio, Bond Portfolio, High Income
Portfolio, Growth Portfolio, Income Portfolio, International Portfolio, Small
Cap Portfolio, Balanced Portfolio, Limited-Term Bond Portfolio, Asset Strategy
Portfolio and Science and Technology 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 that Portfolio.
Shareholder inquiries may be addressed to the Fund or Waddell & Reed, Inc.
at the address that appears on the front cover of this Prospectus.
<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, a division of The McGraw-Hill Companies. An S&P
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 S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P 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 S&P 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 S&P 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 S&P 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 MIS
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, a division of The McGraw-Hill Companies. An S&P
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 S&P 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: MIS 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
S&P 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 S&P believes that such payments will be made
during such grace period.
MIS 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. MIS 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, a division of the McGraw-Hill Companies. An S&P 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. Notes
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. MIS Short-Term Loan Ratings -- MIS 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.
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
April 4, 1997
Custodian
UMB Bank, n. a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue NW
Washington, D. C. 20036
Independent Accountants
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106
Investment Manager
Waddell & Reed Investment Management Company
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
Our INTERNET address is:
http://www.waddell.com
TABLE OF CONTENTS
Prospectus Summary ..................... 2
Financial Highlights ................... 4
The Fund ............................... 14
Goals and Investment Policies
of the Portfolios .................... 15
Management ............................. 34
Net Asset Value ........................ 38
Purchases and Redemptions .............. 38
Dividends and Distributions ............ 39
Taxes .................................. 39
Other Information ...................... 40
Appendix A .............................41
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913/236-2000
April 4, 1997
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 April 4, 1997, 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
Performance Information .......................... 2
Goals and Investment Policies .................... 5
Investment Management and Other Services ......... 45
Net Asset Value .................................. 48
Purchases and Redemptions ........................ 51
Shareholder Communications ....................... 52
Taxes ............................................ 52
Dividends and Distributions ...................... 57
Portfolio Transactions and Brokerage ............. 58
Directors and Officers ........................... 61
Other Information ................................ 67
Financial Statements ............................. 70
<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, Asset Strategy Portfolio and
Science and Technology 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, 1996,
which is the most recent balance sheet included in this SAI, for the periods
shown were as follows:
One-year Five-year
period from period from Period from
1-1-96 to 1-1-92 to 7-13-87* to
12-31-96 12-31-96 12-31-96
----------- ----------- -----------
Bond Portfolio 3.04% 7.44% 8.62%
High Income Portfolio 11.66% 11.90% 9.64%
Growth Portfolio 10.94% 16.74% 15.49%
Income Portfolio 19.68% 15.75% 15.87**
International Portfolio 15.09% 8.33%***
Small Cap Portfolio 8.33% 22.91%***
Balanced Portfolio 10.84% 12.58%***
Limited-Term Bond Portfolio 3.51% 6.61%***
Asset Strategy Portfolio 5.92% 4.61%****
*Date of initial public offering.
**Period from July 16, 1991, date of initial offering, to December 31, 1996.
***Period from May 3, 1994, date of initial offering, to December 31, 1996.
****Period from May 1, 1995, date of initial offering, to December 31, 1996.
Science and Technology Portfolio commenced operations in 1997.
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 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, 1996, the date of the most recent balance sheet included in this
SAI, is as follows:
Bond Portfolio 6.39%
High Income Portfolio 8.97%
Limited-Term Bond Portfolio 7.63%
The following relates to 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, 1996, the date of the most recent balance sheet
included in this SAI, was 4.80% and its effective yield calculated for the same
period was 4.92%.
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.
GOALS AND INVESTMENT POLICIES
The following information supplements the disclosure in the Prospectus
concerning the goals and investment policies of each Portfolio. Unless
otherwise specified, this information pertains to each of the Portfolios. The
investment policies described are not fundamental and thus may be changed by the
Directors of the Fund without a vote of shareholders, unless otherwise
stated.
Money Market Portfolio
Money Market Portfolio may invest in the money market obligations and
instruments listed below. Under Rule 2a-7 ("Rule 2a-7") of the Investment
Company Act of 1940, as amended (the "1940 Act"), investments are limited to
those that are U.S. dollar denominated 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 Rule 2a-7, or are comparable
unrated securities. See Appendix A to the Prospectus for a description of some
of these ratings. In addition, Rule 2a-7 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 Rule 2a-7, the Portfolio may only invest in
securities with a remaining maturity of not more than 397 calendar days, 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) (such as municipal obligations) above only if any 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.
High Income Portfolio
High Income Portfolio may invest in certain high-yield, high-risk, non-
investment grade debt securities (commonly referred to as "junk bonds"). 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.
Asset Strategy Portfolio
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; U.S. Government Securities or
securities issued by 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-yield debt securities. The Portfolio currently intends to limit its
investments in these securities to 20% of its total 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.
Science and Technology Portfolio
As described in the Prospectus, the portfolio of Science and Technology
Portfolio emphasizes science and technology securities. Science and technology
securities are securities of companies whose products, processes or services, in
the opinion of the Manager, are being or are expected to be significantly
benefited by the utilization or commercial application of scientific or
technological discoveries or developments in such areas as aerospace,
communications and electronic equipment, computer systems, computer software and
services, electronics, electronic media, business machines, office equipment and
supplies, biotechnology, medical and hospital supplies and services, medical
devices and drugs.
Securities - General
The main types of securities in which the Portfolios may invest include
common stock, preferred stock, debt securities and convertible securities, as
described in the Prospectus. These securities may include the following
securities from time to time.
Each of the Portfolios (other than Money Market Portfolio) 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.
The Portfolios (other than Money Market Portfolio) 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.
Specific Securities and Investment Practices
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,
Fannie Mae (formerly, the Federal National Mortgage Association, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), 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 Fannie Mae, are supported only
by the credit of the instrumentality and by a pool of mortgage assets. 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 (other than Asset Strategy Portfolio) will invest in
securities of such 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 issued
by U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities
include "pass-through" securities and "participation certificates." Another
type of mortgage-backed security is a collateralized mortgage obligation
("CMO"). 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.
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.
A 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
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to in this SAI as CMOs. The U.S.
Government mortgage-backed securities in which the Portfolios may invest include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by Ginnie Mae, Fannie Mae or Freddie
Mac. Other mortgage-backed securities are issued by private issuers, generally
originators of and investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers and special purpose
entities. Payments of principal and interest (but not the market value) of such
private mortgage-backed securities may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. Government or one of its agencies or instrumentalities, or they may
be issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. These credit enhancements
do not protect investors from changes in market value.
The Portfolios may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders or other
financial institutions. 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 the Portfolio's goal(s) and investment
policies.
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.
Asset-Backed Securities
Asset-backed securities have structural characteristics similar to
mortgage-backed securities, as discussed above. However, the underlying assets
are not first lien mortgage loans or interests therein, but include assets such
as motor vehicle installment sales contracts, other installment sale contracts,
home equity loans, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts or special purpose corporations. Payments
or distributions of principal and interest may be guaranteed up to a certain
amount and for a certain time period by a letter of credit or pool insurance
policy issued by a financial institution unaffiliated with the issuer, or other
credit enhancements may be present. 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. The Portfolios may invest in asset-backed securities as long as
the Manager determines that it is consistent with the Portfolio's goal(s) and
investment policies.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage- 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, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a
pool of mortgage loans are influenced by a variety of economic, geographic,
social and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the mortgage-
backed securities, and this delay reduces the effective yield to the holder of
such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield.
Bank Deposits
Among the other debt securities in which Limited-Term Bond Portfolio may
invest are deposits in banks (represented by certificates of deposit or other
evidence of deposit issued by such banks) of varying maturities. The Federal
Deposit Insurance Corporation insures the principal of certain such deposits,
currently to the extent of $100,000 per bank. Bank deposits are not marketable,
and Limited-Term Bond Portfolio will 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.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries on dates prior to
their stated maturities. 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. Each Portfolio may invest in variable or floating
rate instruments as long as the Manager determines that it is consistent with
the Portfolio's goal(s) and investment policies.
Indexed Securities
Subject to the requirements of Rule 2a-7, Money Market Portfolio may
purchase securities whose prices are indexed to the prices of other securities,
securities indices, precious metals or other commodities, or other financial
indicators. Each other 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 goal and investment 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.
Foreign Securities and Currency
Subject to the diversification requirements of Rule 2a-7, 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. Each of these obligations must be U.S.
dollar denominated. The Portfolio does not intend to invest more than 25% of
its total assets in a combination of these obligations. Investments in
obligations of domestic branches of foreign banks will not be considered to be
foreign securities if the Manager has determined that the nature and extent of
federal and state regulation and supervision of the branch in question is
substantially equivalent to federal or state chartered domestic banks doing
business in the same jurisdiction.
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 there are investment opportunities as well as
risks in investing 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. The Manager believes that ability to invest assets
abroad might enable a Portfolio to take advantage of these differences and
strengths where they are favorable.
Further, an investment in foreign securities may be affected by changes in
currency rates and in exchange control regulations (i.e., currency blockage). A
Portfolio may bear a transaction charge in connection with the exchange of
currency. 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 (the
"NYSE") 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 that could adversely affect
investments in securities of issuers located in those countries. If it should
become necessary, a Portfolio would normally encounter greater difficulties in
commencing a lawsuit against the issuer of a foreign security than it would
against a U.S. issuer.
A Portfolio (other than Asset Strategy Portfolio) will not speculate in
foreign currencies, but each Portfolio, except Money Market Portfolio and
Limited-Term Bond Portfolio, may briefly hold foreign currencies in connection
with the purchase or sale of foreign securities. Asset Strategy Portfolio may
purchase and sell foreign currency and invest in foreign currency deposits as
described in the Prospectus and this SAI, and Asset Strategy Portfolio and
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.
Restricted Securities
The Portfolios may purchase commercial paper that is issued in reliance
on the exemption from registration 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. Any such paper purchased must meet the credit,
maturity and other criteria that apply to other securities in which the
Portfolios invest. Although the Manager is of the opinion that this type of
paper is nearly as liquid as other commercial paper in which the Portfolios
invest, there is no assurance that a market will exist for Section 4(2) paper
that the Portfolios may own. The Manager will determine the liquidity of
Section 4(2) paper in accordance with guidelines established by the Board of
Directors. These restricted securities will be valued in the same manner as
other commercial paper held by the Portfolios is valued. See "Net Asset Value."
High Income Portfolio, Growth Portfolio, Income Portfolio, Asset Strategy
Portfolio and Science and Technology Portfolio may also invest in other
securities that are subject to legal or contractual restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "1933 Act") or are otherwise subject to contractual restrictions on
resale. These securities are generally referred to as private placements or
restricted securities. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
1933 Act, or in a registered public offering. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expense and a
considerable period may elapse between the time it decides to seek registration
and the time the Portfolio may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Portfolio might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
International Portfolio and Asset Strategy Portfolio may also purchase
foreign restricted securities; provided that International Portfolio 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 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.
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 guidelines established by the Fund's Board of Directors.
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.
Lending Securities
One of the ways in which a Portfolio may try to realize 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.
Any securities loans that 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 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 that 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 may lend securities only to broker-dealers and financial
institutions deemed creditworthy by the Manager. The Portfolios will make loans
only under rules of the NYSE, which presently require the borrower to give the
securities back to the Portfolio within five business days after the Portfolio
gives notice 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. A 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.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to: (i) whom securities may be loaned; (ii) the investment of cash collateral;
or (iii) voting rights.
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 agreements 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 1940 Act) and will be structured so as to fully
collateralize the loans. The value of the underlying securities, 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 1940 Act, 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 Fund's Board of Directors.
Borrowing
As a fundamental policy, 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). This Portfolio may borrow money only from a bank and
will not purchase any security while borrowings representing more than 5% of its
total assets are outstanding.
From time to time 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.
The 300% asset coverage requirement is contained in the 1940 Act. 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.
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. Asset Strategy Portfolio's investments in
direct debt instruments are subject to its 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 Asset Strategy 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 the 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 the Portfolio.
For example, if a loan is foreclosed, the 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 the Portfolio in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the 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, the 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 the 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.
Investments in direct debt instruments may entail less legal protection for
the Portfolio. Direct indebtedness purchased by the Portfolio may include
letters of credit, revolving credit facilities, or other standby financing
commitments obligating the Portfolio to pay additional cash on demand. These
commitments may have the effect of requiring the 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. The Portfolio will set aside appropriate liquid assets in a segregated
custodial account to cover its potential obligations under standby financing
commitments. 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 the Portfolio. For example, if a loan is
foreclosed, the Portfolio could become part owner of any collateral, and would
bear the costs and liabilities associated with owning and disposing of the
collateral.
For purposes of the limitations on the amount of total assets that Asset
Strategy Portfolio will invest in any one issuer or in issuers within the same
industry, the 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 the
Portfolio and the borrower, if the participation does not shift to the Portfolio
the direct debtor-creditor relationship with the borrower, Securities and
Exchange Commission ("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 the 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.
Warrants and Rights
Each Portfolio (other than Money Market Portfolio, Limited-Term Bond
Portfolio and Balanced Portfolio) may purchase warrants. Bond Portfolio, High
Income Portfolio, Growth Portfolio, Income Portfolio, Small Cap Portfolio and
Science and Technology 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. 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. Warrants
acquired by Asset Strategy Portfolio in units or attached to securities are not
subject to these restrictions. 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.
When-Issued and Delayed-Delivery Transactions
Each 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. The
value of when-issued or delayed-delivery securities may be less or more when
delivered than the purchase price paid or received. Typically, 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 may, however, be sold at or before the settlement
date to pay the purchase price of the when-issued or delayed-delivery
securities.
Illiquid Investments
A Portfolio (other than Asset Strategy Portfolio) may not make illiquid
investments if thereafter more than 10% of its net assets would consist of such
investments. 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. Investments currently considered to be illiquid include:
(i) repurchase agreements not terminable within seven days; (ii) bank deposits,
unless they are payable at principal amount plus accrued interest on demand or
within seven days after demand; (iii) securities for which market quotations are
not readily available; (iv) restricted securities not determined to be liquid
pursuant to guidelines established by or under the direction of the Fund's Board
of Directors; (v) OTC options and their underlying collateral; (vi) securities
involved in swap, cap, collar and floor transactions; (vii) non-government
stripped fixed-rate mortgage-backed securities; and (viii) direct debt
instruments. Illiquid investments do not include any obligations payable at
principal amount plus accrued interest on demand or within seven days after
demand. 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.
Securities of Other Investment Companies
International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Science and Technology Portfolio may buy shares of investment companies that 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.
Asset Strategy Portfolio does not currently intend to (i) 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 (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) 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.
Options, Futures Contracts and Other Strategies
General. As discussed in the Prospectus, the Manager may use certain
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, forward currency contracts, swaps and indexed securities
(collectively, "Financial Instruments") to attempt to enhance a Portfolio's
income or yield or to attempt to hedge the Portfolio's portfolio. A Portfolio's
ability to use a particular Financial Instrument may be limited by its
investment limitations or operating policies. See "Investment
Restrictions."
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a Portfolio's portfolio. Thus, in a short hedge a Portfolio
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Portfolio intends to acquire. Thus, in a
long hedge a Portfolio takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, a Portfolio does not
own a corresponding security and, therefore, the transaction does not relate to
a security the Portfolio owns. Rather, it relates to a security that the
Portfolio intends to acquire. If a Portfolio does not complete the hedge by
purchasing the security it anticipated purchasing, the effect on the Portfolio's
portfolio is the same as if the transaction were entered into for speculative
purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that a
Portfolio owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which a Portfolio has invested or expects to invest.
Financial Instruments on debt securities may be used to hedge either individual
securities or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations of
the SEC, the several exchanges on which they are traded, the Commodity Futures
Trading Commission (the "CFTC"). In addition, the Portfolios' ability to use
Financial Instruments will be limited by tax considerations. See "Taxes."
In addition to the Financial 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, forward currency contracts, swaps, caps, collars, floors 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, swaps, caps, collars, floors or other
techniques are developed. The Manager may utilize these opportunities to the
extent that they are consistent with a Portfolio's goal(s) 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.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon the
Manager's ability to predict movements of the overall securities, currency and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. There can be no assurance that any
particular strategy will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match a Portfolio's current or anticipated investments exactly. A Portfolio
may invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Portfolio's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Portfolio's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interests rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options, futures
and securities are traded, or from imposition of daily price fluctuation limits
or trading halts. A Portfolio may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Portfolio's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if a
Portfolio entered into a short hedge because the Manager projected a decline in
the price of a security in the Portfolio's portfolio, and the price of that
security increased instead, the gain from that increase might be wholly or
partially offset by a decline in the price of the Financial Instrument.
Moreover, if the price of the Financial Instrument declined by more than the
increase in the price of the security, the Portfolio could suffer a loss. In
either such case, the Portfolio would have been in a better position had it not
attempted to hedge at all.
(4) As described below, a Portfolio might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If a Portfolio were unable
to close out its positions in such Financial Instruments, it might be required
to continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Portfolio's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Portfolio sell a
portfolio security at a disadvantageous time. A Portfolio's ability to close
out a position in a Financial Instrument prior to expiration or maturity depends
on the existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of the other party to the transaction (the
"counterparty") to enter into a transaction closing out the position.
Therefore, there is no assurance that any position can be closed out at a time
and price that is favorable to the Portfolio.
Cover. Transactions using Financial Instruments, other than purchased
options, expose a 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 contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient 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 will, if the guidelines so
require, set aside cash or liquid assets in a segregated account with its
custodian in the prescribed amount as determined daily.
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 other appropriate assets. As a result, the commitment of a large
portion of a Portfolio's assets for use as cover or segregated accounts could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
Certain Limitations. 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.
Small Cap Portfolio, Balanced Portfolio and Science and Technology
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 Small Cap Portfolio, Balanced Portfolio and Science and
Technology Portfolio may not exceed 25% of its net assets computed at the time
of sale.
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.
Options. As discussed in the Prospectus and below, certain of the
Portfolios may purchase and/or write (sell) call and put options on equity and
debt securities, foreign currencies, broadly-based 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 of the option,
minus the premium received, the Portfolio would expect to suffer a loss.
Writing call options can also serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Portfolio will be
obligated to sell the security at less than its market value. If the call
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and a Portfolio will be
obligated to purchase the security or currency at more than its market value.
If the put option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described in "Illiquid Investments."
The value of an option position will reflect, among other things, a current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options that expire unexercised have no value.
A Portfolio may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Portfolio may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Portfolio may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit a Portfolio to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that each of Small Cap Portfolio, Balanced Portfolio,
Asset Strategy Portfolio and Science and Technology Portfolio may 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-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 counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when a Portfolio purchases an
OTC option, it relies on the counterparty from whom it purchased the option to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Portfolio as well as the loss of any expected benefit of the
transaction.
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
counterparty, or by a transaction in the secondary market if any such market
exists. Although a Portfolio (other than Asset Strategy Portfolio) will enter
into OTC options only with major dealers in unlisted options, 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. The Manager will evaluate
the ability to enter into closing purchase transactions on OTC options prior to
writing them. In the event of insolvency of the counterparty, the Portfolio
might be unable to close out an OTC option position at any time prior to its
expiration.
If a Portfolio were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Portfolio could cause material losses because the Portfolio would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
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 of the put 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:
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. 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, Bond Portfolio, High Income Portfolio, Growth Portfolio and Income
Portfolio may write OTC calls on U.S. Government Securities.
Money Market Portfolio may not purchase or sell options on securities or
indices.
Small Cap Portfolio, Balanced Portfolio and Science and Technology
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 (the "OCC") and listed on a domestic securities exchange.
Small Cap Portfolio, Balanced Portfolio and Science and Technology
Portfolio may each write (sell) put options and purchase calls and puts on
securities in which the Portfolio may invest. Each of these Portfolios may only
sell put options on securities issued by the OCC, except that each may write
unlisted put options on U.S. Government Securities. Each of these Portfolios
may only purchase options on securities issued by the OCC, except that each may
purchase unlisted put and call options on U.S. Government Securities and may
purchase optional delivery standby commitments.
Each of Small Cap Portfolio, Balanced Portfolio and Science and Technology
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 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. Small Cap
Portfolio and Balanced Portfolio 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.
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"). Limited-
Term Bond Portfolio may not write call options having aggregate exercise prices
greater than 25% of its net assets.
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 further limitations on certain Portfolios' use of options, see
"Limitations on the Use of Futures Contracts and Options Thereon" below.
Futures Contracts and Options on Futures Contracts. Each of Small Cap
Portfolio, Balanced Portfolio and Science and Technology 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 Small Cap Portfolio, Balanced Portfolio and Science and Technology 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
Small Cap Portfolio, Balanced Portfolio and Science and Technology 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 Small Cap Portfolio, Balanced
Portfolio and Science and Technology Portfolio may 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. Limited-Term Bond Portfolio may
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 Small Cap Portfolio, Balanced Portfolio and Science and Technology Portfolio
may 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. Limited-Term Bond Portfolio may 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.
The purchase of futures or call options on futures can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as
a limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of a
Portfolio's fixed-income portfolio. If the Manager wishes to shorten the
average duration of a Portfolio's fixed-income portfolio, the Portfolio may sell
a debt 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's fixed-income portfolio, the Portfolio may buy a debt futures
contract or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit "initial
margin" consisting of cash or U.S. Government Securities in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the Portfolio may be required by an exchange to increase the level
of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Portfolio's obligations to or from a
futures broker. When a Portfolio purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when a
Portfolio purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of adverse price movements. If the Portfolio has insufficient cash
to meet daily variation margin requirements, it might need to sell securities at
a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may
be closed only on an exchange or board of trade that provides a secondary
market. The Portfolios (other than 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. However, there can be 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 liquidation of
unfavorable positions.
If a Portfolio were unable to liquidate a futures contract or options on
futures position 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, except in the case of purchased options, the Portfolio would continue
to 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.
Risks of Futures Contracts and Options Thereon. 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, currency exchange 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,
currency exchange rate or stock market movements or the time span within which
the movements take place.
Index Futures. 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 less 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 securities 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 Small Cap Portfolio, Balanced Portfolio and Science and Technology
Portfolio may buy and sell Debt Futures, Stock Index Futures, and options on
Debt Futures and Stock Index Futures. Limited-Term Bond Portfolio may buy and
sell 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. Science and
Technology Portfolio may write options on futures contracts for hedging purposes
only. Each of these other Portfolios may write options on futures contracts to
increase income.
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 Limited-Term Bond Portfolio may not
exceed the total market value of its portfolio.
To the extent that a Portfolio enters into futures contracts, options on
futures contracts or options on foreign currencies traded on a CFTC-regulated
exchange, 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. (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.) 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 a 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. Asset Strategy Portfolio and International
Portfolio may enter into forward currency contracts ("forward contracts") to
purchase or sell foreign currencies for a fixed amount of U.S. dollars or
another foreign currency. A forward 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 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 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 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.
Asset Strategy Portfolio also may use forward 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 contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. When a
Portfolio enters into a forward contract, it relies on the counterparty to make
or take delivery of the underlying currency at the maturity of the contract.
Failure by the counterparty 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
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 contracts, with the result that closing
transactions generally can be made for forward contracts only by negotiating
directly with the counterparty. Thus, there can be no assurance that a
Portfolio will in fact be able to close out a forward contract at a favorable
price prior to maturity. In addition, in the event of insolvency of the
counterparty, a Portfolio might be unable to close out a forward 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 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
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.
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 Contracts. International Portfolio may
enter into forward 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 contracts; however, it will not enter into forward contracts or maintain
a net exposure to such forward contracts where the consummation of the forward
contracts would obligate 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. International Portfolio may hold foreign currency
only in connection with forward contracts, only up to four business days, as
well as in connection with the purchase or sale of foreign securities, but not
otherwise. Generally, International Portfolio will not enter into a Forward
Contract with a term greater than one year.
Asset Strategy Portfolio does not currently intend to invest more than 5%
of its total assets in forward contracts.
Combined Positions. A Portfolio 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.
Turnover. A Portfolio's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by a Portfolio, and the sale or purchase of futures contracts, may cause
it to sell or purchase related investments, thus increasing its turnover rate.
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 or purchases or sells a futures contract. Such commissions may be higher
than those that would apply to direct purchases or sales.
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 United States 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 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 Fund's Board of Directors. If a default occurs by the
other party to such transaction, a Portfolio will have contractual remedies
pursuant to the agreements related to the transaction.
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 or liquid assets 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 1940 Act. 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 Portfolios believe that such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a Portfolio's borrowing restrictions.
Investment Restrictions
The following investment restrictions are fundamental policies of each
Portfolio, other than Asset Strategy Portfolio, and may not be changed without
shareholder approval. A Portfolio (other than 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
this 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 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 10% 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 25% 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); provided, however, that Science and
Technology Portfolio may invest more than 25% of its assets in
securities of companies in the science and technology industries.
The following are fundamental policies of Asset Strategy Portfolio and may
not be changed without shareholder approval. 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 (other than Asset Strategy Portfolio) may not buy shares
of other investment companies that 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;
(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) 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) 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 CMOs,
other mortgage-related securities, asset-backed securities or indexed
securities; and
(v) 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,
1996 and December 31, 1995 for each of the Portfolios then in existence were as
follows:
1996 1995
---- ----
Money Market Portfolio 0.00% 0.00%
Bond Portfolio 64.02 71.17
High Income Portfolio 58.91 41.78
Growth Portfolio 243.00 245.80
Income Portfolio 22.95 15.00
International Portfolio 75.01 34.93
Small Cap Portfolio 133.77 43.27
Balanced Portfolio 44.23 62.87
Limited-Term Bond Portfolio 15.81 18.16
Asset Strategy Portfolio 49.92 149.17
Asset Strategy Portfolio began operations in 1995.
Science and Technology Portfolio began operations in 1997. Science and
Technology Portfolio cannot precisely predict what its portfolio turnover rate
will be, but it is anticipated that, under normal conditions, the annual
turnover rate will not exceed 200%.
The high portfolio turnover rate for 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 is not computed for 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 the Manager, 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.
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 and
United Asset Strategy Fund, Inc. since it began operations in March 1995.
Waddell & Reed, Inc. serves as distributor for insurance products for which the
Fund is the underlying investment vehicle and as underwriter for the investment
companies in the United Group of Mutual Funds and Waddell & Reed Funds, Inc.
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 Board of Directors without
shareholder approval.
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 the Manager, all fees were
paid to Waddell & Reed, Inc. The management fees paid to the investment
manager, during the last three fiscal years for each Portfolio then in existence
were as follows:
Periods ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Bond Portfolio $ 469,708$ 440,716$ 424,370
High Income Portfolio 590,009 527,940 494,237
Growth Portfolio 3,238,802 2,425,494 1,813,171
Money Market Portfolio 181,734 147,383 116,644
Income Portfolio 2,772,236 1,979,061 1,374,533
International Portfolio* 513,923 321,777 63,291
Small Cap Portfolio* 689,578 302,739 36,355
Balanced Portfolio* 194,884 96,718 15,489
Limited-Term Bond Portfolio* 18,112 12,948 4,712
Asset Strategy Portfolio** 59,397 10,993
*Began operations April 29, 1994.
**Began operations May 1, 1995.
Science and Technology Portfolio began operations April 4, 1997.
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 last three fiscal years for each Portfolio then
in existence were as follows:
Periods ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Bond Portfolio $30,000 $30,000 $30,000
High Income Portfolio 30,000 30,000 30,000
Growth Portfolio 60,000 55,000 50,000
Money Market Portfolio 20,000 20,000 10,833
Income Portfolio 59,167 50,000 44,167
International Portfolio* 30,000 20,000 3,333
Small Cap Portfolio* 30,000 19,167 1,667
Balanced Portfolio* 19,167 9,167 ---
Limited-Term Bond Portfolio* --- --- ---
Asset Strategy Portfolio** --- ---
*Began operations April 29, 1994.
**Began operations May 1, 1995.
Science and Technology Portfolio began operations April 4, 1997.
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. Deloitte & Touche 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 NYSE is open for trading as of the later of the close of the regular
session of the NYSE 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 NYSE ordinarily closes at 4:00 p.m. Eastern time. The NYSE
annually announces the days on which it will not be open for trading. The most
recent announcement indicates that it 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
NYSE may close on other days. The net asset value will change every business
day, since the value of the assets and the number of shares outstanding change
every business day.
Under Rule 2a-7, Money Market Portfolio uses the "amortized cost method"
for valuing its portfolio securities provided it meets certain conditions. As a
general matter, the primary conditions imposed under Rule 2a-7 relating to the
Portfolio's investments are that the Portfolio must: (i) not maintain a dollar-
weighted average portfolio maturity in excess of 90 days; (ii) limit its
investments, including repurchase agreements, to those instruments which are
U.S. dollar denominated 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 Rule 2a-7; 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) limit its investments in
the securities of any one issuer (except U.S. Government Securities) to no more
than 5% of its assets; (iv) 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) 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) limit its investments to
securities with a remaining maturity of not more than 397 days. Rule 2a-7 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 Rule 2a-7, 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 Rule 2a-7, 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 Money Market
Portfolio) that are 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 Nasdaq (National Association of
Securities Dealers Automated Quotations system) 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 NYSE. 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 NYSE, 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.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors 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. Wise 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 and Waddell & Reed Funds, 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. Father of Linda Graves, Director of the Fund and each of
the other funds in the Fund Complex.
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 WRIMCO, 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
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma.
DODDS I. BUCHANAN
905 13th Street
Boulder, Colorado 80302
Advisory Director, The Hand Companies, an actuarial consulting company;
President, Buchanan Ranch Corporation; formerly, Professor and Chairman of
Marketing, College of Business, University of Colorado.
LINDA GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, partner, Levy and Craig, P.C., a law firm.
Daughter of Ronald K. Richey, Chairman of the Board of the Fund and each of the
other funds in the Fund Complex.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Kansas Bankshares,
a bank holding company; Director of Central Properties, Inc., a real estate
holding company; Chairman, Gilliland & Hayes, P.A., a law firm; formerly,
President, Gilliland & Hayes, P.A.
GLENDON E. JOHNSON
7300 Corporate Center Drive
P. O. Box 020270
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and subsidiaries.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO 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.
WILLIAM L. ROGERS
1999 Avenue of the Stars
Los Angeles, California 90067
Principal, Colony Capital, Inc., a real estate related investment company;
formerly, partner in Trivest, a private investment concern.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, University of Missouri-Kansas City.
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, a fertilizer company.
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 WRIMCO;
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 WRIMCO 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 WRIMCO 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 WRIMCO, Waddell &
Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell & Reed Asset
Management Company and Waddell & Reed Services Company.
Michael L. Avery
Vice President of the Fund and three other funds in the Fund Complex;
Senior Vice President of the Manager; Vice President of Waddell & Reed Asset
Management Company; formerly, Vice President of Waddell & Reed, Inc.
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.
Abel Garcia
Vice President of the Fund and one other fund in the Fund Complex; Senior
Vice President of WRIMCO; Vice President of Waddell & Reed Asset Management
Company; formerly, Vice President of Waddell & Reed, Inc.
Daniel P. Becker
Vice President of the Fund; Vice President of the Manager; employee of
Waddell & Reed, Inc.
Thomas A. Mengel
Vice President of the Fund and two other funds in the Fund Complex; Vice
President of the Manager; formerly, President of Sal. Oppenheim jr. & Cie.
Securities, Inc., Vice President of Hauck and Hope Securities, and Manager of
German Equities at Berliner Bank, in Berlin, Germany.
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 two other funds in the Fund Complex; Vice
President of the Manager; Vice President of Waddell & Reed Asset Management
Company.
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.
Zachary H. Shafran
Vice President of the Fund; Vice President of the Manager.
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.
Daniel J. Vrabac
Vice President of the Fund and two other funds 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, six of the Fund's Directors may be deemed to be
"interested persons," as defined in the 1940 Act, of the 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. Messrs. Doyle Patterson and Jay B.
Dillingham retired as Directors of the Fund and of each of the Funds in the Fund
Complex effective January 1, 1997, and January 14, 1997, respectively, and each
has elected a position as Director Emeritus. During the Fund's fiscal year
ended December 31, 1996, Mr. Patterson received total compensation for his
service as a Director of $48,000 from the Fund Complex and the Fund and
aggregate compensation from the Fund of $3,595 and Mr. Dillingham received total
compensation for his service as a Director of $49,000 from the Fund Complex and
the Fund and aggregate compensation from the Fund of $3,673..
As of April 1, 1996, the Fund, the Funds in the United Group of Mutual
Funds and Waddell & Reed Funds, Inc. pay to each Director a total of $44,000 per
year, plus $1,000 for each meeting of the Board of Directors attended (prior to
April 1, 1996, the funds in the United Group (with the exception of United Asset
Strategy Fund, Inc.), the Fund and Waddell & Reed Funds, Inc. paid to each
Director a fee of $40,000 per year, plus $1,000 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, 1996, the Fund's Directors received the following fees for service as a
director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Ronald K. Richey $ 0 $ 0
Keith A Tucker 0 0
Henry L. Bellmon 3,673 49,000
Dodds I. Buchanan 3,673 49,000
Linda Graves 3,673 49,000
John F. Hayes 3,673 49,000
Glendon E. Johnson 3,595 48,000
William T. Morgan 3,673 49,000
William L. Rogers 864 11,000
Frank J. Ross, Jr. 864 11,000
Eleanor B. Schwartz 3,600 48,000
Frederick Vogel III 3,673 49,000
Paul S. Wise 3,673 49,000
*No pension or retirement benefits have been accrued as a part of Fund expenses.
The officers are paid by the Manager or its affiliates.
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 NYSE is closed other than customary weekend
and holiday closings or trading on the NYSE is restricted; (ii) the SEC has
determined that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) the SEC 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 1940 Act, 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 1940 Act. 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 life insurance or 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 (the "Code"), each Portfolio must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of taxable 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) ("Distribution Requirement"), 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 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, foreign
currencies or forward contracts that are not directly related to the Fund's
principal business of investing in securities (or in 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 ("50% Diversification Requirement"); 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, comply or
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.
Each of International Portfolio, Asset Strategy Portfolio, Balanced
Portfolio, Growth Portfolio, Income Portfolio, Small Cap Portfolio, Bond
Portfolio, High Income Portfolio and Science and Technology Portfolio may invest
in the stock of "passive foreign investment companies" ("PFICs"). A PFIC is a
foreign corporation that, in general, meets either of the following tests: (i)
at least 75% of its gross income is passive or (ii) an average of at least 50%
of its assets produce, or are held for the production of, passive income. Under
certain circumstances, a Portfolio will be subject to Federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of any
gain on disposition of the stock (collectively "PFIC income"), plus interest
thereon, even if the Portfolio distributes the PFIC income as a taxable dividend
to its shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If a Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Portfolio will be required to include in income each
year its pro rata share of the QEF's annual ordinary earnings and net capital
gain -- which would have to be distributed by the Portfolio to satisfy the
Distribution Requirement and to avoid imposition of the Excise Tax -- even if
those earnings and gain were not distributed to the Portfolio by the QEF. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Portfolios,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of such a
PFIC's stock over the adjusted basis in that stock (including mark-to-market
gain for each prior year for which an election was in effect).
Foreign Currency Gains and Losses
For each Portfolio (other than Money Market Portfolio and Limited-Term Bond
Portfolio), gains or losses (i) from the disposition of foreign currencies,
(ii) from the disposition of a debt security denominated in a foreign currency
that are attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition, and
(iii) 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. These gains or losses, referred to
under the Code as "section 988 gains or losses," 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 and option income 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. Gains from the disposition
of foreign currencies (except certain gains that may be excluded by future
regulations), and gains from options, futures and forward contracts derived by a
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options, futures and forward contracts
(other than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures and forward contracts
thereon, that are not directly related to the Portfolio's principal business of
investing in securities (or options and futures with respect to securities) also
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 forward contracts and/or foreign
currency positions 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 lapses without being
exercised, the premium it receives also will be a short-term capital 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 gain or loss 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 contracts 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 gain or loss, and the balance is
treated as short-term capital gain or loss. 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. That section
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 any 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 accrued original issue discount and other non-cash income, in order to
satisfy the Distribution Requirement 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 gain. 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 certain options,
futures or forward contracts or forward currency positions, 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 Money Market Portfolio, will
consist of all payments of dividends or interest received by such Portfolio less
the estimated expenses of such Portfolio. 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 Money Market Portfolio are declared and reinvested daily in
additional full and fractional shares. Dividends from investment income of
Growth Portfolio, Bond Portfolio, High Income Portfolio, Income Portfolio,
International Portfolio, Small Cap Portfolio, Balanced Portfolio, Limited-Term
Bond Portfolio, Asset Strategy Portfolio and Science and Technology Portfolio
will usually be declared, paid and reinvested annually in December in additional
full and fractional shares of that 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 Money Market
Portfolio in certain circumstances dividends of 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 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, 1996, 1995 and 1994:
Periods ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
Bond Portfolio $ --- $ 313$ ---
High Income Portfolio 7,574 --- 1,268
Growth Portfolio 2,297,780 1,761,353 1,567,746
Money Market Portfolio --- --- ---
Income Portfolio 250,273 137,932 199,012
International Portfolio* 324,673 140,000 49,880
Small Cap Portfolio* 117,166 16,816 3,450
Balanced Portfolio* 36,529 28,505 6,437
Limited-Term Bond Portfolio* --- --- ---
Asset Strategy Portfolio** 8,679 1,483
---------- -------- --------
$3,042,674 $2,086,402$1,827,793
========== ========== ========
*Began operations April 29, 1994.
**Began operations May 1, 1995.
Science and Technology Portfolio began operations April 4, 1997.
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, 1996. 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 2,441,618 5,619
Growth Portfolio 1,256,714,940 1,719,358
Money Market Portfolio --- ---
Income Portfolio 151,319,823 208,887
International Portfolio 929,169 1,800
Small Cap Portfolio 16,935,999 35,000
Balanced Portfolio 17,216,607 25,219
Limited-Term Bond Portfolio --- ---
Asset Strategy Portfolio* 2,826,157 5,610
------------ ----------
$1,448,384,313 $2,001,493
============ ==========
*Began operations May 1, 1995.
Science and Technology Portfolio began operations April 4, 1997.
As of December 31, 1996, Money Market Portfolio owned Merrill Lynch &
Co., Inc. securities in the aggregate amount of $1,000,000. Merrill Lynch &
Co., Inc. is a regular broker of the Portfolio. As of December 31, 1996,
Balanced Portfolio owned Salomon Inc. securities in the aggregate amount of
$302,500. Salomon Inc. is a regular broker of the Portfolio. As of December
31, 1996, Asset Strategy Portfolio owned Salomon Inc. securities in the
aggregate amount of $169,400. Salomon Inc. is a regular broker of the
Portfolio.
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: Money Market Portfolio, Bond Portfolio, High Income Portfolio,
Growth Portfolio, Income Portfolio, International Portfolio, Small Cap
Portfolio, Balanced Portfolio, Limited-Term Bond Portfolio, Asset Strategy
Portfolio and Science and Technology 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, 1996
Shares Value
COMMON STOCKS
Building Materials and Garden Supplies - 1.22%
Home Depot, Inc. (The) ................. 125,000 $ 6,265,625
Business Services - 4.46%
Automatic Data Processing, Inc. ........ 135,000 5,788,125
Broderbund Software, Inc.* ............. 75,000 2,226,525
Cerner Corporation* .................... 300,000 4,612,500
Computer Associates International, Inc. 100,000 4,975,000
Intuit Inc.* ........................... 50,000 1,587,500
Physician Computer Network* ............ 130,000 1,105,000
Shared Medical Systems Corporation ..... 40,000 1,970,000
Summit Medical Systems, Inc.* .......... 84,000 624,708
Total ................................. 22,889,358
Chemicals and Allied Products - 13.68%
American Home Products Corporation ..... 275,000 16,121,875
Amgen Inc.* ............................ 100,000 5,443,700
Astra AB, Class A, ADR ................. 124,900 6,120,100
Lilly (Eli) and Company ................ 100,000 7,300,000
Liposome Company, Inc. (The)* .......... 200,000 3,837,400
Pfizer Inc. ............................ 75,000 6,215,625
Schering-Plough Corporation ............ 125,000 8,093,750
SmithKline Beecham plc, ADR ............ 175,000 11,900,000
Warner-Lambert Company ................. 69,000 5,175,000
Total ................................. 70,207,450
Communication - 2.63%
Intermedia Communications of Florida,
Inc.* ................................ 155,000 3,981,485
Nokia Corporation, Series A, ADS ....... 75,000 4,321,875
360 Communications Company* ............ 225,000 5,203,125
Total ................................. 13,506,485
Depository Institutions - 19.63%
AmSouth Bancorporation ................. 100,000 4,837,500
Banc One Corporation ................... 125,000 5,375,000
Bank of New York Company, Inc. (The) ... 185,000 6,243,750
Barnett Banks, Inc. .................... 150,000 6,168,750
Chase Manhattan Corporation (The) ...... 175,000 15,618,750
Dime Bancorp, Inc.* .................... 250,000 3,687,500
First American Corporation ............. 75,000 4,331,250
First Bank System, Inc. ................ 75,000 5,118,750
Glendale Federal Bank, Federal
Savings Bank* ......................... 71,100 1,653,075
Hibernia Corporation, Class A ......... 175,000 2,318,750
KeyCorp ................................ 110,000 5,555,000
Long Island Bancorp, Inc. .............. 145,400 5,089,000
Mercantile Bancorporation Inc. ......... 100,000 5,137,500
Northern Trust Corporation ............. 100,000 3,631,200
Norwest Corporation .................... 125,000 5,437,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Depository Institutions (Continued)
Roosevelt Financial Group, Inc. ........ 300,000 $ 6,262,500
SouthTrust Corporation ................. 75,000 2,615,625
U.S. Trust Corporation ................. 20,000 1,577,500
Wells Fargo & Company .................. 30,000 8,092,500
Wilmington Trust Corporation ........... 50,000 1,987,500
Total ................................. 100,738,900
Electric, Gas and Sanitary Services - 3.63%
Columbia Gas System, Inc. (The) ........ 50,000 3,181,250
PanEnergy Corporation .................. 200,000 9,000,000
Sonat Inc. ............................. 125,000 6,437,500
Total ................................. 18,618,750
Engineering and Management Services - 1.50%
Fluor Corporation ...................... 75,000 4,706,250
Neurex Corporation* .................... 175,000 2,985,850
Total ................................. 7,692,100
Food and Kindred Products - 2.61%
ConAgra, Inc. .......................... 125,000 6,218,750
Heinz (H. J.) Company .................. 200,000 7,150,000
Total ................................. 13,368,750
General Merchandise Stores - 3.72%
Federated Department Stores, Inc.* ..... 150,000 5,118,750
May Department Stores Company (The) .... 175,000 8,181,250
Sears, Roebuck and Co. ................. 125,000 5,765,625
Total ................................. 19,065,625
Health Services - 2.58%
Beverly Enterprises, Inc.* ............. 235,000 2,996,250
Columbia/HCA Healthcare Corporation .... 200,000 8,150,000
MedPartners, Inc.* ..................... 100,000 2,100,000
Total ................................. 13,246,250
Holding and Other Investment Offices - 3.34%
Conseco, Inc. .......................... 175,000 11,156,250
Duke Realty Investments, Inc. .......... 75,000 2,887,500
Equity Residential Properties .......... 75,000 3,093,750
Total ................................. 17,137,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Instruments and Related Products - 7.52%
Baxter International Inc. .............` 350,000 $ 14,350,000
General Signal Corporation ............. 125,000 5,343,750
Raytheon Company ....................... 200,000 9,625,000
St. Jude Medical, Inc.* ................ 100,000 4,262,500
Target Therapeutics, Inc.* ............. 119,000 4,990,503
Total ................................. 38,571,753
Insurance Carriers - 13.20%
Allstate Corporation (The) ............. 250,000 14,468,750
American International Group, Inc. ..... 120,500 13,044,125
Berkley (W. R.) Corporation ............ 111,000 5,667,882
Berkshire Hathaway Inc.* ............... 165 5,626,500
Chartwell Re Corporation ............... 20,000 535,000
Chubb Corporation (The) ................ 50,000 2,687,500
Guarantee Life Companies Inc. (The) .... 250,000 4,656,250
NAC Re Corporation ..................... 140,000 4,742,500
TIG Holdings, Inc. ..................... 245,000 8,299,375
Trenwick Group Inc. .................... 110,000 5,115,000
Western National Corporation ........... 150,000 2,887,500
Total ................................. 67,730,382
Nondepository Institutions - 2.54%
Federal National Mortgage Association .. 350,000 13,037,500
Oil and Gas Extraction - 0.49%
Enron Oil & Gas Company ................ 100,000 2,525,000
Petroleum and Coal Products - 4.69%
Coastal Corporation (The) .............. 125,000 6,109,375
Exxon Corporation ...................... 125,000 12,250,000
Valero Energy Corporation .............. 200,000 5,725,000
Total ................................. 24,084,375
Railroad Transportation - 1.09%
Illinois Central Corporation,
Class A ............................... 175,000 5,600,000
Security and Commodity Brokers - 1.16%
Lehman Brothers Holdings Inc. .......... 100,000 3,137,500
Paine Webber Group Inc. ................ 100,000 2,812,500
Total ................................. 5,950,000
Transportation by Air - 0.96%
Southwest Airlines Co. ................. 223,200 4,938,300
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Transportation Equipment - 1.77%
AlliedSignal Inc. ...................... 135,300 $ 9,065,100
Wholesale Trade -- Durable Goods - 4.00%
Johnson & Johnson ...................... 275,000 13,681,250
Lockheed Martin Corporation ............ 75,000 6,862,500
Total ................................. 20,543,750
TOTAL COMMON STOCKS - 96.42% $494,782,953
(Cost: $464,840,860)
TOTAL SHORT-TERM SECURITIES - 3.44% $ 17,665,498
(Cost: $17,665,498)
TOTAL INVESTMENT SECURITIES - 99.86% $512,448,451
(Cost: $482,506,358)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.14% 714,239
NET ASSETS - 100.00% $513,162,690
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 1.15%
Gap, Inc. (The) ........................ 177,300 $ 5,341,162
Apparel and Other Textile Products - 1.17%
Tommy Hilfiger Corporation* ............ 113,200 5,433,600
Building Materials and Garden Supplies - 0.68%
Home Depot, Inc. (The) ................. 62,400 3,127,800
Business Services - 4.45%
Computer Associates International, Inc. 45,825 2,279,794
Electronic Data Systems Corporation .... 88,200 3,814,650
Manpower Inc. .......................... 13,200 429,000
Microsoft Corporation* ................. 69,200 5,721,940
Oracle Systems Corporation* ............ 134,550 5,608,986
3Com Corporation* ...................... 31,400 2,301,997
White Pine Software, Inc.* ............. 61,400 437,475
Total ................................. 20,593,842
Chemicals and Allied Products - 14.86%
Abbott Laboratories .................... 93,900 4,765,425
Air Products and Chemicals, Inc. ....... 93,800 6,483,925
Amgen Inc.* ............................ 36,000 1,959,732
BetzDearborn Inc. ...................... 40,700 2,380,950
Colgate-Palmolive Company .............. 48,900 4,511,025
Crompton & Knowles Corporation ......... 98,500 1,896,125
Dow Chemical Company (The) ............. 46,900 3,675,787
du Pont (E.I.) de Nemours and Company .. 81,600 7,701,000
Geon Company (The) ..................... 100,600 1,974,275
IMC Global, Inc. ....................... 51,500 2,014,937
Lilly (Eli) and Company ................ 27,200 1,985,600
Merck & Co., Inc. ...................... 60,200 4,770,850
PPG Industries, Inc. ................... 101,900 5,719,137
Pfizer Inc. ............................ 54,700 4,533,263
Praxair, Inc. .......................... 81,600 3,763,800
Procter & Gamble Company (The) ......... 48,900 5,256,750
Union Carbide Corporation .............. 71,400 2,918,475
Warner-Lambert Company ................. 31,800 2,385,000
Total ................................. 68,696,056
Communication - 2.34%
AT&T Corporation ....................... 40,800 1,774,800
MCI Communications Corporation ......... 152,900 4,997,842
SBC Communications Inc. ................ 40,300 2,085,525
360 Communications Company* ............ 85,800 1,984,125
Total ................................. 10,842,292
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Depository Institutions - 4.49%
BankAmerica Corporation ................ 43,700 $ 4,359,075
Chase Manhattan Corporation (The) ...... 48,300 4,310,775
Citicorp ............................... 48,300 4,974,900
First Bank System, Inc. ................ 40,800 2,784,600
Norwest Corporation .................... 99,500 4,328,250
Total ................................. 20,757,600
Electric, Gas and Sanitary Services - 0.34%
WMX Technologies, Inc. ................. 48,900 1,595,363
Electronic and Other Electric Equipment - 13.21%
AMP Incorporated ....................... 89,700 3,442,237
Analog Devices, Inc.* .................. 289,800 9,816,975
Duracell International Inc. ............ 85,300 5,960,337
Emerson Electric Co. ................... 32,600 3,154,050
General Electric Company ............... 97,900 9,679,862
Harman International Industries,
Incorporated .......................... 24,150 1,343,344
Intel Corporation ...................... 124,800 16,340,938
LSI Logic Corporation* ................. 134,400 3,595,200
Molex Incorporated, Class A ............ 78,187 2,780,486
Rival Company (The) .................... 130,300 3,200,429
TRINOVA Corporation .................... 48,900 1,778,737
Total ................................. 61,092,595
Engineering and Management Services - 0.44%
Fluor Corporation ...................... 32,600 2,045,650
Food and Kindred Products - 1.72%
CPC International Inc. ................. 40,800 3,162,000
PepsiCo, Inc. .......................... 163,200 4,773,600
Total ................................. 7,935,600
Food Stores - 0.47%
Kroger Co. (The)* ...................... 46,300 2,152,950
Forestry - 1.17%
Georgia-Pacific Corporation ............ 34,700 2,498,400
Weyerhaeuser Company ................... 61,200 2,899,350
Total ................................. 5,397,750
Furniture and Home Furnishings Stores - 0.85%
Circuit City Stores, Inc. .............. 130,500 3,931,312
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
General Building Contractors - 0.50%
Pulte Corporation ...................... 74,600 $ 2,293,950
General Merchandise Stores - 3.58%
Dayton Hudson Corporation .............. 113,700 4,462,725
Kmart Corporation* ..................... 357,600 3,710,100
May Department Stores Company (The) .... 81,600 3,814,800
Penney (J.C.) Company, Inc. ............ 55,100 2,686,125
Wal-Mart Stores, Inc. .................. 81,600 1,866,600
Total ................................. 16,540,350
Health Services - 1.77%
Columbia/HCA Healthcare Corporation .... 108,200 4,409,150
Tenet Healthcare Corporation* .......... 81,600 1,785,000
Vencor, Incorporated* .................. 62,800 1,986,050
Total ................................. 8,180,200
Heavy Construction, Excluding Building - 0.26%
Foster Wheeler Corporation ............. 32,600 1,210,275
Hotels and Other Lodging Places - 0.88%
ITT Corporation* ....................... 93,600 4,059,900
Industrial Machinery and Equipment - 12.22%
Applied Materials, Inc.* ............... 141,100 5,070,711
Case Corporation ....................... 146,200 7,967,900
Caterpillar Inc. ....................... 107,000 8,051,750
cisco Systems, Inc.* ................... 147,700 9,406,570
Compaq Computer Corporation* ........... 31,700 2,353,725
Deere & Company ........................ 167,600 6,808,750
Eaton Corporation ...................... 40,800 2,845,800
Harnischfeger Industries, Inc. ......... 49,000 2,358,125
Hewlett-Packard Company ................ 72,000 3,618,000
Ingersoll-Rand Company ................. 32,600 1,450,700
Parker Hannifin Corporation ............ 48,900 1,894,875
United Technologies Corporation ........ 70,800 4,672,800
Total ................................. 56,499,706
Instruments and Related Products - 1.74%
General Motors Corporation, Class H .... 14,400 810,000
Guidant Corporation .................... 49,600 2,827,200
Medtronic, Inc. ........................ 65,200 4,433,600
Total ................................. 8,070,800
Insurance Carriers - 0.49%
Aetna Life & Casualty Company .......... 28,100 2,248,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Miscellaneous Manufacturing Industries - 1.10%
Armstrong World Industries, Inc. ....... 73,400 $ 5,101,300
Miscellaneous Retail - 0.24%
OfficeMax, Inc.* ....................... 104,625 1,111,641
Motion Pictures - 0.86%
Walt Disney Company (The) .............. 57,100 3,975,587
Nondepository Institutions - 2.83%
Federal Home Loan Mortgage Corporation . 63,400 6,981,925
Federal National Mortgage Association .. 163,400 6,086,650
Total ................................. 13,068,575
Paper and Allied Products - 1.66%
Champion International Corporation ..... 41,300 1,786,225
International Paper Company ............ 97,900 3,952,713
Union Camp Corporation ................. 40,800 1,948,200
Total ................................. 7,687,138
Petroleum and Coal Products - 2.44%
Mobil Corporation ...................... 36,100 4,413,225
Royal Dutch Petroleum Company .......... 26,200 4,473,650
Tosco Corporation ...................... 30,100 2,381,663
Total ................................. 11,268,538
Primary Metal Industries - 1.04%
Aluminum Company of America ............ 56,000 3,570,000
Nucor Corporation ...................... 24,500 1,249,500
Total ................................. 4,819,500
Railroad Transportation - 0.53%
Union Pacific Corporation .............. 40,800 2,453,100
Rubber and Miscellaneous Plastics Products - 0.91%
Goodyear Tire & Rubber Company (The) ... 81,600 4,192,200
Special Trade Contractors - 1.06%
Telefonaktiebolaget LM Ericsson,
Class B, ADR ......................... 163,100 4,923,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Transportation by Air - 2.25%
AMR Corporation* ....................... 32,600 $ 2,872,875
Southwest Airlines Co. ................. 90,000 1,991,250
USAir Group, Inc.* ..................... 236,500 5,528,188
Total ................................. 10,392,313
Transportation Equipment - 7.22%
AlliedSignal Inc. ...................... 61,900 4,147,300
Boeing Company (The) ................... 51,800 5,510,225
Chrysler Corporation ................... 179,400 5,920,200
Dana Corporation ....................... 62,000 2,022,750
Ford Motor Company ..................... 92,600 2,951,625
General Motors Corporation ............. 81,600 4,549,200
Northrop Grumman Corporation ........... 78,300 6,479,325
Sundstrand Corporation ................. 42,000 1,785,000
Total ................................. 33,365,625
Wholesale Trade -- Durable Goods - 0.86%
Motorola, Inc. ......................... 65,100 3,995,513
Wholesale Trade -- Nondurable Goods - 1.83%
Gillette Company (The) ................. 81,600 6,344,400
Safeway Inc.* .......................... 49,700 2,124,675
Total ................................. 8,469,075
TOTAL COMMON STOCKS - 93.61% $432,870,358
(Cost: $292,364,327)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Depository Institutions - 0.03%
U.S. Bancorp,
Master Note............................ $ 129 129,000
Electric, Gas and Sanitary Services - 0.88%
Pacificorp,
5.45%, 2-3-97 ......................... 1,925 1,915,383
Western Resources Inc.,
5.6%, 1-16-97 ......................... 2,165 2,159,948
Total ................................. 4,075,331
Food and Kindred Products - 0.04%
General Mills, Inc.,
Master Note............................ 196 196,000
Food Stores - 0.77%
Albertson's Inc.,
5.45%, 2-7-97 ......................... 3,560 3,540,059
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Instruments and Related Products - 1.46%
Baxter International Inc.,
5.5%, 1-17-97 ......................... 6,780 6,763,427
Metal Mining - 1.17%
BHP Finance (USA) Inc.,
5.35%, 1-28-97 ........................ 5,425 5,403,232
Textile Mill Products - 0.19%
Sara Lee Corporation,
Master Note............................ 902 902,000
Total Commercial Paper - 4.54% 21,009,049
Municipal Obligations - 2.19%
Louisiana
Industrial Development Board of the Parish
of Calcasieu, Inc., Environmental Revenue
Bonds (CITGO Petroleum Corporation Project),
Series 1996 (Taxable), (ABN AMRO Bank N.V.),
5.48%, 1/9/97 ......................... 10,100 10,100,000
TOTAL SHORT-TERM SECURITIES - 6.73% $ 31,109,049
(Cost: $31,109,049)
TOTAL INVESTMENT SECURITIES - 100.34% $463,979,407
(Cost: $323,473,376)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.34%) (1,587,987)
NET ASSETS - 100.00% $462,391,420
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS
Argentina - 1.65%
Disco S.A., Sponsored ADR* ............. 46,700 $ 1,319,275
Australia - 2.34%
Publishing & Broadcasting PBL (A) ...... 150,000 729,718
Westpac Banking Corporation Limited (A) 200,000 1,138,297
Total ................................. 1,868,015
Brazil - 0.96%
Telebras S.A., ADR ...................... 10,000 765,000
Denmark - 2.34%
Bang & Olufsen Holding A/S, Class B (A) 20,000 972,607
Neurosearch A/S (A)* ................... 20,000 893,064
Total ................................. 1,865,671
Finland - 1.09%
Nokia Corporation, Series K (A) ........ 15,000 868,241
France - 4.01%
Business Objects S.A., ADR* ............ 31,000 422,375
But S.A. (A) ........................... 8,000 470,434
Compagnie Generale des Eaux (A) ........ 7,500 929,782
Elf Aquitaine S.A. (A) ................. 7,000 637,419
Societe Industrielle de Transports
Automobiles S.A. (A) .................. 3,500 742,283
Total ................................. 3,202,293
Germany - 9.67%
CKAG Colonia Konzern AG (A) ............ 11,000 908,027
Commerzbank AG (A) ..................... 30,000 762,431
Daimler-Benz AG (A)* ................... 31,500 2,170,296
GILDEMEISTER Aktiengesellschaft (A)* ... 8,750 383,897
Herlitz International Trading AG (A) ... 1,500 382,190
Mannesmann AG (A) ...................... 4,300 1,864,218
Metallgesellschaft AG (A)* ............. 20,000 409,490
Schering AG (A) ........................ 10,000 844,329
Total ................................. 7,724,878
Hong Kong - 11.12%
Amoy Properties Ltd. (A) ............... 500,000 720,796
Cheung Kong Holdings Ltd. (A) .......... 100,000 888,875
Cheung Kong Infrastructure Holdings
Limited (A)* .......................... 254,000 673,217
First Pacific Company Limited (A) ...... 750,000 974,530
Guangdong Corporation Limited (A) ...... 1,000,000 963,217
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Hong Kong (Continued)
Guangdong Tannery Ltd.(A)* ............. 50,000 $ 12,606
Guangnan Holdings Limited (A) .......... 800,000 687,827
HSBC Holdings plc (A) .................. 60,000 1,283,858
Hysan Development Company Limited (A) .. 150,000 597,324
JCG Holdings Ltd. (A) .................. 650,000 634,495
National Mutual Asia Ltd. (A) .......... 800,000 760,230
Wing Hang Bank Limited (A) ............. 150,000 680,716
Total ................................. 8,877,691
Indonesia - 2.81%
PT Bank NISP, F (A) .................... 500,000 566,018
PT Matahari Putra Prima, F (A) ......... 573,750 667,716
PT Steady Safe Transportation
Service, F (A) ........................ 453,333 580,335
PT United Tractors, F (A) .............. 205,000 429,433
Total ................................. 2,243,502
Italy - 2.63%
Istituto Mobiliare Italiano SpA (A)* .... 69,500 593,225
Mediolanum S.p.A. (A)* ................. 70,000 662,507
STET - Societa Financiaria
Telefonica p.a. (A) ................... 250,000 844,657
Total .................................. 2,100,389
Japan - 6.20%
Aloka Co. Ltd. (A) ..................... 13,000 148,174
Daiichi Corporation (A) ................ 30,000 606,165
Eisai Co., Ltd. (A) .................... 30,000 590,623
Matsushita Electric Industrial (A) ..... 40,000 652,793
NEC Corporation (A) .................... 60,000 725,326
Nintendo Corp., Ltd. (A) ............... 13,000 930,576
Promise Co., Ltd. (A) .................. 16,000 787,497
Xebio Co., Ltd. (A) .................... 17,000 506,433
Total ................................. 4,947,587
Mexico - 5.80%
Corporacion Industrial Sanluis, S.A.
de C.V., CPO (A) ...................... 75,500 468,039
Desc-Sociedad de Fomento Industrial,
S.A. de C.V., Class B (A)* ............ 200,000 1,092,480
Empresas ICA Sociedad Controladora,
S.A. de C.V., ADS* .................... 50,000 731,250
Gruma, S.A., Class B (A)* .............. 70,000 426,829
Grupo Financiero Bancomer, S.A. de
C.V., B, CPO Shares (A)* .............. 2,000,000 800,305
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Mexico (Continued)
Grupo Financiero Inbursa S.A. de
C.V., Class B (A) ..................... 175,234 $ 598,805
Grupo Televisa, S.A., GDR* ............. 20,100 515,062
Total ................................. 4,632,770
Netherlands - 3.23%
Internatio-Muller NV (A) ............... 25,000 628,439
Koninklijke Boskalis
Westminster N.V. (A) .................. 35,000 709,528
Ordina Beheer N.V. (A)* ................ 10,000 448,885
Vendex International N.V. (A) .......... 18,500 791,862
Total ................................. 2,578,714
Norway - 2.32%
Merkantildata A/S (A) .................. 61,000 1,115,976
Schibsted AS (A) ....................... 40,000 734,915
Total ................................. 1,850,891
Portugal - 0.80%
Telecel-Comunicacaoes Pessoais, SA (A)* 10,000 638,504
Spain - 1.04%
Sociedad General de Aquas de
Barcelona, S.A. (A) ................... 20,000 833,526
Sweden - 9.72%
Althin Medical AB, Class B (A) ......... 13,000 280,180
Astra AB, Class A (A) .................. 35,000 1,717,635
Biacore International AB, ADR* ......... 25,000 546,875
Celsius Industrier AB, Class B (A)* .... 20,000 313,092
Diligentia AB (A)* ..................... 15,000 234,819
Enator AB (A)* ......................... 30,000 762,342
Frontec AB, Class B (A)* ............... 54,900 943,381
Kinnevik AB, B Shares (A) .............. 21,500 588,612
Skandia Enskilda Banken, Class A (A) ... 150,000 1,529,052
Skandia Group Insurance Company Ltd. (A) 30,000 843,163
Total ................................. 7,759,151
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Switzerland - 6.56%
Brauerei Eichhof AG (A) ................ 280 $ 564,896
CS Holding, Registered Shares (A) ...... 7,000 719,196
Choco Lindt & Spru AG, Registered (A) .. 50 912,538
Novartis AG (A)* ....................... 907 1,038,565
SMH Swiss Corporation for Microelectronics
and Watchmaking Industries Ltd.(A) .... 1,000 616,453
Zurich Insurance Company (A) ........... 5,000 1,389,823
Total ................................. 5,241,471
Thailand - 1.42%
Bank of Ayudhya Public Company
Limited, F (A) ........................ 150,000 353,732
Srithai Superware Public Company
Limited, F (A) ........................ 130,000 780,355
Total ................................. 1,134,087
United Kingdom - 8.29%
Corporate Services Group plc (A) ....... 575,000 1,698,984
Dr Solomon's Group PLC, ADR* ........... 25,000 423,425
Michael Page Group plc (A) ............. 100,000 710,854
Professional Staff plc, ADR* ........... 55,000 467,500
Storehouse PLC (A) ..................... 150,000 664,177
Tomkins plc (A) ........................ 200,000 924,966
Vodafone Group Plc (A) ................. 250,000 1,057,716
Whitbread and Company, Public Limited
Company (A) ........................... 50,000 674,026
Total ................................. 6,621,648
United States - 0.73%
Rofin-Sinar Technologies Inc.* ......... 50,000 581,250
TOTAL COMMON STOCKS - 84.73% $67,654,554
(Cost: $58,433,029)
PREFERRED STOCKS
Brazil - 0.81%
Banco Itau S.A., (A) ................... 1,500,000 649,976
Germany - 3.07%
Marschollek, Lautenschlager und
Partner AG (A) ........................ 12,890 1,792,954
Moebel Walther AG (A) .................. 10,000 656,484
Total ................................. 2,449,438
TOTAL PREFERRED STOCKS - 3.88% $ 3,099,414
(Cost: $1,946,091)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Communication - 2.81%
Bell Atlantic Financial Services Inc.,
5.33%, 1-24-97......................... $2,250 $ 2,242,338
Depository Institutions - 1.29%
U.S. Bancorp,
Master Note............................ 1,030 1,030,000
Food and Kindred Products - 0.43%
General Mills, Inc.,
Master Note............................ 343 343,000
Food Stores - 2.81%
Albertson's Inc.,
5.35%, 1-21-97 ........................ 2,250 2,243,312
Forestry - 3.72%
Weyerhaeuser Co.,
5.45%, 2-24-97 ........................ 3,000 2,975,475
Textile Mill Products - 0.80%
Sara Lee Corporation,
Master Note............................ 637 637,000
TOTAL SHORT-TERM SECURITIES - 11.86% $ 9,471,125
(Cost: $9,471,125)
TOTAL INVESTMENT SECURITIES - 100.47% $80,225,093
(Cost: $69,850,245)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.47%) (375,640)
NET ASSETS - 100.00% $79,849,453
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS
Business Services - 24.45%
America Online, Inc.* .................. 60,000 $ 1,995,000
Cerner Corporation* .................... 183,100 2,815,162
Dr Solomon's Group PLC, ADR* ........... 50,000 846,850
Health Systems Design Corporation* ..... 140,000 1,190,000
IMNET Systems, Inc.* ................... 90,000 2,160,000
Intelligroup, Inc.* .................... 45,000 511,875
Intuit Inc.* ........................... 50,000 1,587,500
Mechanical Dynamics, Inc.* ............. 105,500 1,443,979
Netscape Communications Corporation* ... 20,000 1,137,500
Object Design, Inc.* ................... 100,000 1,156,200
Parametric Technology Corporation* ..... 36,000 1,851,732
PHAMIS, Inc.* .......................... 110,000 1,430,000
Pure Atria Corporation* ................ 45,000 1,105,290
Segue Software, Inc.* .................. 60,000 1,083,720
Summit Medical Systems, Inc.* .......... 160,000 1,189,920
Sync Research, Inc.* ................... 120,000 1,627,440
Synopsys, Inc.* ........................ 15,000 690,000
Total ................................. 23,822,168
Chemicals and Allied Products - 1.28%
Carson, Inc.* .......................... 90,000 1,248,750
Communication - 4.31%
Intermedia Communications of Florida,
Inc.* ................................ 100,000 2,568,700
MFS Communications Company, Inc.* ...... 30,000 1,631,250
Total ................................. 4,199,950
Eating and Drinking Places - 2.00%
Longhorn Steaks, Inc.* ................. 90,000 1,710,000
Pizza Inn, Inc.* ....................... 50,000 234,350
Total ................................. 1,944,350
Electronic and Other Electric Equipment - 2.91%
Etec Systems, Inc.* .................... 64,000 2,416,000
XeTel Corporation* ..................... 105,000 413,385
Total ................................. 2,829,385
Engineering and Management Services - 4.18%
Owen Healthcare, Inc.* ................. 70,000 1,855,000
Transition Systems, Inc.* .............. 160,000 2,220,000
Total ................................. 4,075,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Health Services - 11.15%
American Healthcorp, Inc.* ............. 100,000 $ 1,137,500
Emeritus Corporation* .................. 50,000 675,000
Inphynet Medical Management Inc.* ...... 115,000 2,026,875
Physicians Resource Group, Inc.* ....... 85,000 1,508,750
Quorum Health Group, Inc.* ............. 100,000 2,962,500
Renal Care Group, Inc.* ................ 66,000 2,107,842
Sterling House Corporation* ............ 50,000 437,500
Total ................................. 10,855,967
Industrial Machinery and Equipment - 2.30%
Integrated Process Equipment Corp.* .... 125,000 2,242,125
Instruments and Related Products - 15.76%
Cymer, Inc.* ........................... 102,000 4,915,074
DePuy, Inc.* ........................... 100,000 2,025,000
Hologic, Inc.* ......................... 65,000 1,608,750
LUNAR CORPORATION* ..................... 40,000 1,385,000
St. Jude Medical, Inc.* ................ 40,000 1,705,000
Ventritex, Inc.* ....................... 65,000 1,588,405
Waters Corporation* .................... 70,000 2,126,250
Total ................................. 15,353,479
Insurance Agents, Brokers and Service - 0.92%
CRA Managed Care, Inc.* ................ 20,000 892,500
Insurance Carriers - 1.96%
CMAC Investment Corporation ............ 52,000 1,911,000
Personal Services - 3.45%
Carriage Services, Inc.* ............... 85,000 1,885,895
Equity Corporation International* ...... 75,000 1,471,875
Total ................................. 3,357,770
Real Estate - 2.09%
Stewart Enterprises, Inc., Class A ..... 60,000 2,040,000
Wholesale Trade -- Durable Goods - 0.92%
OmniCare, Inc. ......................... 28,000 899,500
TOTAL COMMON STOCKS - 77.68% $75,671,944
(Cost: $66,660,069)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES - 2.17%
Holding and Other Investment Offices
LTC Properties, Inc., Convertible:
8.25%, 7-1-2001 ....................... $1,000 1,037,500
7.75%, 1-1-2002 ....................... 1,000 1,075,000
Total ................................. 2,112,500
(Cost: $2,000,000)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Auto Repair, Services and Parking - 3.79%
PHH Corporation,
5.57%, 1-31-97 ........................ $3,705 $ 3,687,802
Depository Institutions - 3.75%
U.S. Bancorp,
Master Note............................ 3,655 3,655,000
Food and Kindred Products - 4.74%
General Mills, Inc.,
Master Note...........................z 4,620 4,620,000
Food Stores - 3.16%
Albertson's Inc.,
5.35%, 1-21-97 ........................ 3,085 3,075,831
Nondepository Institutions - 1.67%
Island Finance Puerto Rico Inc.,
5.55%, 1-31-97 ........................ 1,635 1,627,438
Textile Mill Products - 2.94%
Sara Lee Corporation,
Master Note............................ 2,865 2,865,000
TOTAL SHORT-TERM SECURITIES - 20.05% $19,531,071
(Cost: $19,531,071)
TOTAL INVESTMENT SECURITIES - 99.90% $97,315,515
(Cost: $88,191,140)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.10% 92,775
NET ASSETS - 100.00% $97,408,290
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 1.38%
Gap, Inc. (The) ........................ 10,000 $ 301,250
Talbots, Inc. (The) .................... 10,000 286,250
Total ................................. 587,500
Apparel and Other Textile Products - 0.82%
Liz Claiborne, Inc. .................... 9,000 347,625
Building Materials and Garden Supplies - 1.32%
Sherwin-Williams Company (The) ......... 10,000 560,000
Business Services - 0.60%
Broderbund Software, Inc.* ............. 6,300 187,028
Electronic Data Systems Corporation .... 1,548 66,951
Total ................................. 253,979
Chemicals and Allied Products - 10.30%
American Home Products Corporation ..... 7,000 410,375
Avon Products, Inc. .................... 8,300 474,138
Crompton & Knowles Corporation ......... 14,300 275,275
Dow Chemical Company (The) ............. 5,500 431,063
du Pont (E.I.) de Nemours and Company .. 2,400 226,500
IMC Global, Inc. ....................... 13,000 508,625
Merck & Co., Inc. ...................... 6,600 523,050
Nalco Chemical Company ................. 7,000 252,875
Pfizer Inc. ............................ 5,500 455,812
Praxair, Inc. .......................... 8,800 405,900
Warner-Lambert Company ................. 5,400 405,000
Total ................................. 4,368,613
Communication - 2.79%
AT&T Corporation ....................... 7,300 317,550
GTE Corporation ........................ 5,300 241,150
Nokia Corporation, Series A, ADS ....... 1,600 92,200
SBC Communications Inc. ................ 10,300 533,025
Total ................................. 1,183,925
Depository Institutions - 2.99%
BankAmerica Corporation ................ 4,500 448,875
Comerica Incorporated .................. 5,900 309,013
Wells Fargo & Company .................. 1,900 512,525
Total ................................. 1,270,413
Electric, Gas and Sanitary Services - 1.81%
Baltimore Gas and Electric Company ..... 7,600 203,300
Houston Industries Incorporated ........ 12,000 271,500
Southern Company (The) ................. 13,000 294,125
Total ................................. 768,925
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 6.51%
AMP Incorporated ....................... 10,800 $ 414,450
Duracell International Inc. ............ 7,500 524,062
Emerson Electric Co. ................... 4,500 435,375
General Electric Company ............... 7,500 741,563
LSI Logic Corporation* ................. 20,000 535,000
Lucent Technologies Inc. ............... 2,365 109,381
Total ................................. 2,759,831
Food and Kindred Products - 1.55%
ConAgra, Inc. .......................... 5,900 293,525
PepsiCo, Inc. .......................... 12,400 362,700
Total ................................. 656,225
Forestry - 1.15%
Georgia-Pacific Corporation ............ 6,800 489,600
General Merchandise Stores - 0.60%
May Department Stores Company (The) .... 5,400 252,450
Health Services - 1.01%
Tenet Healthcare Corporation* .......... 19,600 428,750
Heavy Construction, Excluding Building - 1.23%
bufete industrial, s.a., ADR* .......... 15,000 318,750
Foster Wheeler Corporation ............. 5,500 204,187
Total ................................. 522,937
Holding and Other Investment Offices - 2.84%
LTC Properties, Inc. ................... 18,000 333,000
National Health Investors, Inc. ........ 12,000 454,500
Zurich Insurance Company (A) ........... 1,500 416,947
Total ................................. 1,204,447
Industrial Machinery and Equipment - 2.12%
Applied Materials, Inc.* ............... 13,000 467,181
Deere & Company ........................ 6,000 243,750
York International Corporation ......... 3,400 189,975
Total ................................. 900,906
Instruments and Related Products - 1.60%
General Motors Corporation, Class H .... 6,600 371,250
St. Jude Medical, Inc.* ................ 7,200 306,900
Total ................................. 678,150
Insurance Carriers - 1.90%
Chubb Corporation (The) ................ 6,200 333,250
ITT Hartford Group, Inc. ............... 4,100 276,750
United HealthCare Corporation .......... 4,400 198,000
Total ................................. 808,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS (Continued)
Nondepository Institutions - 2.11%
Associates First Capital Corporation* .. 8,600 $ 379,475
Federal Home Loan Mortgage Corporation . 4,700 517,587
Total ................................. 897,062
Nonmetallic Minerals, Except Fuels - 1.20%
Potash Corporation of Saskatchewan Inc. 6,000 510,000
Oil and Gas Extraction - 1.85%
Noble Affiliates, Inc. ................. 8,500 406,937
Schlumberger Limited ................... 3,800 379,525
Total ................................. 786,462
Paper and Allied Products - 0.79%
Champion International Corporation ..... 5,800 250,850
Union Camp Corporation ................. 1,800 85,950
Total ................................. 336,800
Petroleum and Coal Products - 2.18%
Mobil Corporation ...................... 2,800 342,300
Royal Dutch Petroleum Company .......... 3,400 580,550
Total ................................. 922,850
Primary Metal Industries - 1.20%
Nucor Corporation ...................... 10,000 510,000
Printing and Publishing - 2.29%
Belo (A. H.) Corporation, Class A ...... 11,000 383,625
McGraw-Hill, Inc. ...................... 5,200 239,850
Viacom Inc., Class B* .................. 10,000 348,750
Total ................................. 972,225
Railroad Transportation - 0.29%
Conrail Inc. ........................... 1,224 121,941
Textile Mill Products - 1.56%
Sara Lee Corporation ................... 9,700 361,325
Unifi, Inc. ............................ 9,300 298,763
Total ................................. 660,088
Transportation by Air - 0.29%
Delta Air Lines, Inc. .................. 456 32,319
Southwest Airlines Co. ................. 4,000 88,500
Total ................................. 120,819
Wholesale Trade -- Nondurable Goods - 0.73%
Nu Skin Asia Pacific, Inc. - A* ........ 10,000 308,750
TOTAL COMMON STOCKS - 57.01% $24,189,273
(Cost: $20,873,288)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Building Materials and Garden Supplies - 0.92%
Home Depot, Inc. (The), Convertible,
3.25%, 10-1-2001 ...................... $ 400 $ 390,000
Electronic and Other Electric Equipment - 0.87%
Cooper Industries, Inc.,
6.0%, 1-1-99 (Exchangeable) ........... 257 368,125
Oil and Gas Extraction - 0.68%
Enron Corp.,
6.25%, 12-13-98 (Exchangeable) ........ 261 288,000
Security and Commodity Brokers - 0.71%
Salomon Inc.,
7.625%, 5-15-99 (Exchangeable) ........ 266 302,500
TOTAL CORPORATE DEBT SECURITIES - 3.18% $ 1,348,625
(Cost: $1,183,750)
UNITED STATES GOVERNMENT SECURITIES - 31.03%
United States Treasury:
5.625%, 8-31-97 ....................... 1,000 1,000,310
5.125%, 2-28-98 ....................... 1,000 993,590
5.5%, 2-28-99 ......................... 1,000 991,560
6.875%, 8-31-99 ....................... 250 255,235
7.75%, 11-30-99 ....................... 1,500 1,567,260
7.125%, 2-29-2000 ..................... 500 514,765
6.375%, 8-15-2002 ..................... 1,100 1,107,216
7.5%, 2-15-2005 ....................... 3,250 3,475,973
6.25%, 8-15-2023 ...................... 250 234,375
6.75%, 8-15-2026 ...................... 3,000 3,022,500
Total ................................. $13,162,784
(Cost: $13,168,658)
SHORT-TERM SECURITIES
Depository Institutions - 4.04%
U.S. Bancorp,
Master Note............................ 1,712 1,712,000
Electric, Gas and Sanitary Services - 2.70%
Commonwealth Edison Co.,
5.67%, 1-24-97 ........................ 1,150 1,145,834
Food and Kindred Products - 0.68%
General Mills, Inc.,
Master Note............................ 288 288,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Textile Mill Products - 0.42%
Sara Lee Corporation,
Master Note............................ $ 180 $ 180,000
TOTAL SHORT-TERM SECURITIES - 7.84% $ 3,325,834
(Cost: $3,325,834)
TOTAL INVESTMENT SECURITIES - 99.06% $42,026,516
(Cost: $38,551,530)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.94% 400,542
NET ASSETS - 100.00% $42,427,058
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS
Business Services - 4.66%
Broderbund Software, Inc.* ............. 8,000 $ 237,496
Maxis, Inc.* ........................... 13,000 157,625
Total ................................. 395,121
Chemicals and Allied Products - 4.19%
IMC Global, Inc. ....................... 4,000 156,500
Nalco Chemical Company ................. 5,500 198,688
Total ................................. 355,188
Communication - 5.59%
Cox Communications, Inc.* .............. 9,000 208,125
Nokia Corporation, Series A, ADS ....... 2,400 138,300
360 Communications Company* ............ 5,500 127,187
Total ................................. 473,612
Eating and Drinking Places - 2.12%
Sonic Corp.* ........................... 7,100 179,275
Food and Kindred Products - 4.52%
Seagram Company Ltd. (The) ............. 4,500 174,375
Whitbread and Company, Public
Limited Company (A) ................... 15,500 208,948
Total ................................. 383,323
Heavy Construction, Excluding Building - 1.98%
Koninklijke Boskalis Westminster N.V. (A) 8,288 168,016
Holding and Other Investment Offices - 0.98%
LTC Properties, Inc. ................... 4,500 83,250
Oil and Gas Extraction - 2.98%
Kerr-McGee Corporation ................. 3,500 252,000
Textile Mill Products - 0.98%
Polymer Group, Inc.* .................... 6,000 83,250
TOTAL COMMON STOCKS - 28.00% $2,373,035
(Cost: $2,228,144)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Amusement and Recreation Services - 2.34%
Trump Atlantic City Associates,
11.25%, 5-1-2006 ...................... $200 $ 198,000
Communication - 1.93%
MFS Communications Company, Inc.,
0.0%, 1-15-2006 (B) ................... 225 163,688
Electronic and Other Electric Equipment - 1.53%
VLSI Technology, Inc., Convertible,
8.25%, 10-1-2005 ...................... 130 129,432
Paper and Allied Products - 3.68%
Buckeye Cellulose Corporation,
9.25%, 9-15-2008 ...................... 300 312,000
Printing and Publishing - 1.81%
Viacom International Inc.,
9.125%, 8-15-99 ....................... 150 153,375
Security and Commodity Brokers - 2.00%
Salomon Inc.,
7.625%, 5-15-99 (Exchangeable) ........ 149 169,400
TOTAL CORPORATE DEBT SECURITIES - 13.29% $1,125,895
(Cost: $1,079,703)
UNITED STATES GOVERNMENT SECURITIES
United States Treasury:
6.875%, 2-28-97 ....................... 40 40,100
6.125%, 5-31-97 ....................... 400 401,124
7.25%, 2-15-98 ........................ 60 60,984
6.375%, 7-15-99 ....................... 1,050 1,059,513
7.125%, 2-29-2000 ..................... 60 61,772
7.5%, 2-15-2005 ....................... 130 139,039
5.875%, 11-15-2005 .................... 1,050 1,012,431
9.125%, 5-15-2018 ..................... 450 570,024
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 39.47% $3,344,987
(Cost: $3,378,749)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Depository Institutions - 1.85%
U.S. Bancorp,
Master Note ........................... $157 $ 157,000
Food and Kindred Products - 3.49%
General Mills, Inc.,
Master Note ........................... 296 296,000
Food Stores - 3.82%
Albertson's Inc.,
5.45%, 2-7-97 ......................... 325 323,180
Personal Services - 4.71%
Block Financial Corp.,
5.43%, 1-22-97 ........................ 400 398,733
Textile Mill Products - 4.32%
Sara Lee Corporation,
Master Note ........................... 366 366,000
TOTAL SHORT-TERM SECURITIES - 18.19% $1,540,913
(Cost: $1,540,913)
TOTAL INVESTMENT SECURITIES - 98.95% $8,384,830
(Cost: $8,227,509)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.05% 89,368
NET ASSETS - 100.00% $8,474,198
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
BANK OBLIGATIONS
Certificates of Deposit
Domestic - 2.68%
Bankers Trust New York Corp.,
5.47%, 1-7-97 ......................... $1,000 $ 999,753
Yankee - 5.37%
Creditanstalt - Bankverein,
5.38%, 3-7-97 ......................... 1,000 1,000,000
Societe Generale - New York,
5.3%, 2-21-97 ......................... 1,000 1,000,000
Total ................................. 2,000,000
Total Certificates of Deposit - 8.05% 2,999,753
Notes - 5.37%
Comerica Bank,
5.5855%, 2-14-97....................... 1,000 1,000,000
PNC Bank, N.A.,
5.5037%, 1-13-97 ...................... 1,000 999,696
Total ................................. 1,999,696
TOTAL BANK OBLIGATIONS - 13.42% $ 4,999,449
(Cost: $4,999,449)
CORPORATE OBLIGATIONS
Commercial Paper
Electric, Gas and Sanitary Services - 2.03%
Carolina Power & Light Co.,
5.4%, 2-12-97 ......................... 760 755,212
Food and Kindred Products - 4.19%
General Mills, Inc.,
Master Note ........................... 1,559 1,559,000
Forestry - 3.39%
Weyerhaeuser Co.,
5.45%, 2-20-97 ........................ 1,272 1,262,372
Insurance Carriers - 2.67%
Transamerica Finance Corporation,
5.38%, 1-28-97 ........................ 1,000 995,965
Metal Mining - 3.08%
BHP Finance (USA) Inc.,
5.4%, 2-5-97 .......................... 1,155 1,148,936
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
Nondepository Institutions - 2.68%
General Electric Capital Corporation,
5.47%, 1-17-97 ........................ $1,000 $ 997,569
Personal Services - 2.67%
Block Financial Corp.,
5.55%, 1-27-97 ........................ 1,000 995,992
Textile Mill Products - 1.62%
Sara Lee Corporation,
Master Note ........................... 602 602,000
Tobacco Products - 2.68%
B.A.T. Capital Corp.,
5.4%, 1-17-97 ......................... 1,000 997,600
Transportation Equipment - 2.66%
Echlin, Inc.,
5.55%, 2-18-97 ........................ 1,000 992,600
Total Commercial Paper - 27.67% 10,307,246
Notes
Auto Repair, Services and Parking - 2.68%
PHH Corporation,
5.8105%, 3-26-97 ...................... 1,000 999,864
Nondepository Institutions - 5.37%
Caterpillar Financial Services Corp.,
5.9585%, 1-1-97 ....................... 1,000 1,000,000
Deere (John) Capital Corp.,
5.95%, 6-30-97 ........................ 1,000 999,475
Total ................................. 1,999,475
Security and Commodity Brokers - 2.68%
Merrill Lynch & Co., Inc.,
5.6541%, 5-29-97 ...................... 1,000 1,000,000
Total Notes - 10.73% 3,999,339
TOTAL CORPORATE OBLIGATIONS - 38.40% $14,306,585
(Cost: $14,306,585)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS
California - 8.05%
California Pollution Control Financing
Authority, Environmental Improvement
Revenue Bonds (Shell Martinez Refining
Company Project), Series 1996 (Taxable),
5.52%, 1-2-97 ......................... $1,000 $ 1,000,000
City of Anaheim, California, Certificates
of Participation (1993 Arena Financing
Project), Municipal Adjustable Rate
Taxable Securities (Credit Suisse),
5.56%, 5-1-97 ......................... 1,000 1,000,000
Oakland-Alameda County Coliseum Lease Revenue
Bonds (Oakland Coliseum Project),1995 Series
B-1 (Canadian Imperial Bank of Commerce),
5.42%, 1-3-97 ......................... 1,000 1,000,000
Total ................................. 3,000,000
Indiana - 2.68%
City of Whiting, Indiana, Industrial Sewage
and Solid Waste Disposal Revenue Bonds (Amoco
Oil Company Project), Taxable Series 1995,
5.55%, 1-13-97 ........................ 1,000 1,000,000
Louisiana - 2.68%
Industrial District No. 3 of the Parish
of West Baton Rouge, State of Louisiana,
Variable Rate Demand Revenue Bonds (The
Dow Chemical Company Project),
Series 1995 (Taxable),
5.45%, 1-17-97 ........................ 1,000 1,000,000
New York - 4.57%
Health Insurance Plan of Greater New York
(Morgan Guaranty Trust Company of New York),
5.8%, 1-1-97 .......................... 1,700 1,700,000
Pennsylvania - 3.37%
Monroe County Industrial Development
Authority, Manufacturing Facilities
Revenue Bonds (United Steel Enterprises,
Inc., Project), Taxable Variable Rate Demand/
Fixed Rate Revenue Bonds, Series B of 1996
(CoreStates Bank, N.A.),
5.75%, 1-1-97 ......................... 165 165,000
Montgomery County Industrial Development
Authority, Taxable Fixed Rate/Variable
Rate Demand Revenue Bonds (410 Horsham
Associates Project), Series of 1995
(Meridian Bank),
5.75%, 1-1-97 ......................... 200 200,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
Pennsylvania (Continued)
Schuylkill County Industrial Development
Authority, Commercial Development Revenue
Bonds (Midway Supermarket, Inc. Project),
Taxable Series of 1995 (Meridian Bank),
5.75%, 1-1-97 ......................... $ 890 $ 890,000
Total ................................. 1,255,000
South Dakota - 2.68%
Central Plains Clinic Ltd., Floating Rate
Taxable Bonds, Series 1996 (Cooperatieve
Centrale Raiffeisen-Borenleenbank B.A.,
"Rabobank Nederland," New York Branch),
5.55%, 1-21-97 ........................ 1,000 1,000,000
Texas - 6.19%
City of Brownsville, Texas, Utilities System,
Taxable Commercial Paper Notes, Series A
(The Toronto-Dominion Bank),
5.48%, 1-15-97 ........................ 1,316 1,313,195
Metrocrest Hospital Authority, Series 1989A
(The Bank of New York),
5.406%, 3-3-97 ........................ 1,000 990,840
Total ................................. 2,304,035
TOTAL MUNICIPAL OBLIGATIONS - 30.22% $11,259,035
(Cost: $11,259,035)
UNITED STATES GOVERNMENT OBLIGATIONS
Federal Farm Credit Banks,
4.95%, 3-3-97.......................... 1,000 999,285
Federal Home Loan Banks,
5.82%, 11-6-97 ........................ 1,000 1,000,074
Federal National Mortgage Association,
5.15%, 6-20-97......................... 1,000 999,540
Student Loan Marketing Association,
5.52%, 1-7-97.......................... 1,000 1,000,000
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS - 10.73% $ 3,998,899
(Cost: $3,998,899)
TOTAL INVESTMENT SECURITIES - 92.77% $34,563,968
(Cost: $34,563,968)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 7.23% 2,693,634
NET ASSETS - 100.00% $37,257,602
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 7.71%
American Home Products Corporation,
7.7%, 2-15-2000 ....................... $100 $ 103,693
ICI Wilmington, Inc.,
9.5%, 11-15-2000 ...................... 75 82,520
Praxair, Inc.,
6.7%, 4-15-2001 ....................... 100 100,314
Total ................................. 286,527
Depository Institutions - 10.82%
BankAmerica Corporation,
9.7%, 8-1-2000 ........................ 100 109,914
Boatmen's Bancshares, Inc.,
9.25%, 11-1-2001 ...................... 50 55,192
First Chicago Corporation,
7.625%, 1-15-2003 ..................... 125 130,212
Wells Fargo & Company,
8.375%, 5-15-2002 ..................... 100 106,633
Total ................................. 401,951
Electric, Gas and Sanitary Services - 1.41%
Consolidated Natural Gas Company,
8.75%, 6-1-99 ......................... 50 52,585
General Merchandise Stores - 5.57%
Penney (J.C.) Company, Inc.,
10.0%, 10-15-97 ....................... 100 103,035
Sears, Roebuck and Co.,
9.25%, 4-15-98 ........................ 100 103,853
Total ................................. 206,888
Instruments and Related Products - 2.35%
Polaroid Corporation,
8.0%, 3-15-99 ......................... 85 87,246
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 15.31%
American General Finance Corporation,
8.25%, 1-15-98 ........................ $ 50 $ 51,086
Associates Corporation of North America,
7.875%, 9-30-2001 ..................... 100 104,885
Ford Motor Credit Company,
8.0%, 1-15-99 ......................... 150 154,884
General Motors Acceptance Corporation,
7.75%, 1-15-99 ........................ 100 102,825
Household Finance Corporation,
7.75%, 6-15-97 ........................ 50 50,417
Norwest Financial, Inc.,
7.75%, 8-15-2001 ...................... 50 52,145
Transamerica Finance Corporation,
8.75%, 10-1-99 ........................ 50 52,680
Total ................................. 568,922
Oil and Gas Extraction - 3.59%
Burlington Resources Inc.,
8.5%, 10-1-2001 ....................... 125 133,360
Paper and Allied Products - 2.72%
International Paper Company,
6.875%, 7-1-2000 ...................... 100 101,258
Petroleum and Coal Products - 4.30%
Chevron Corporation,
8.11%, 12-1-2004 ...................... 100 106,159
Texaco Capital Inc.,
9.0%, 12-15-99 ........................ 50 53,537
Total ................................. 159,696
Railroad Transportation - 2.82%
Union Pacific Corporation,
7.875%, 2-15-2002 ..................... 100 104,778
Transportation by Air - 2.85%
Federal Express Corporation,
10.0%, 9-1-98 ......................... 100 105,821
Transportation Equipment - 1.35%
General Motors Corporation,
7.625%, 2-15-97 ....................... 50 50,104
TOTAL CORPORATE DEBT SECURITIES - 60.80% $2,259,136
(Cost: $2,237,770)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
6.0%, 11-1-2000 ....................... $ 72 $ 69,982
5.0%, 12-25-2001 ...................... 29 29,258
6.5%, 12-1-2010 ....................... 99 96,820
6.0%, 1-1-2011 ........................ 93 88,925
6.5%, 2-1-2011 ........................ 94 92,465
7.0%, 5-1-2011 ........................ 97 96,660
7.0%, 7-1-2011 ........................ 96 96,462
11.0%, 10-1-2020 ...................... 33 37,585
7.0%, 4-1-2026 ........................ 99 97,150
Government National Mortgage Association,
7.0%, 9-15-2008 ....................... 75 75,529
United States Treasury:
6.375%, 8-15-2002 ..................... 100 100,656
6.25%, 2-15-2003....................... 100 99,875
7.25%, 5-15-2004....................... 100 105,219
TOTAL UNITED STATES GOVERNMENT SECURITIES - 29.25% $1,086,586
(Cost: $1,082,599)
SHORT-TERM SECURITIES
Depository Institutions - 4.74%
U.S. Bancorp,
Master Note ........................... 176 176,000
Food and Kindred Products - 1.53%
General Mills, Inc.,
Master Note ........................... 57 57,000
Textile Mill Products - 1.83%
Sara Lee Corporation,
Master Note ........................... 68 68,000
TOTAL SHORT-TERM SECURITIES - 8.10% $ 301,000
(Cost: $301,000)
TOTAL INVESTMENT SECURITIES - 98.15% $3,646,722
(Cost: $3,621,369)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.85% 68,702
NET ASSETS - 100.00% $3,715,424
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Amusement and Recreation Services - 2.26%
MGM Grand Hotel Finance Corp.,
11.75%, 5-1-99......................... $2,000 $ 2,087,500
Chemicals and Allied Products - 4.28%
Dow Capital BV,
9.0%, 5-15-2010 ....................... 500 572,970
Dow Chemical Company (The),
8.55%, 10-15-2009 ..................... 1,000 1,113,840
Procter & Gamble Company (The),
8.0%, 9-1-2024 ........................ 2,000 2,265,020
Total ................................. 3,951,830
Communication - 10.67%
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-2030 ..................... 1,000 1,175,140
BellSouth Telecommunications, Inc.,
5.85%, 11-15-2045 ..................... 1,000 984,930
Cablevision Industries Corporation,
9.25%, 4-1-2008 ....................... 1,000 1,060,610
Centel Capital Corporation,
9.0%, 10-15-2019 ...................... 1,000 1,185,140
Continental Cablevision, Inc.,
8.5%, 9-15-2001 ....................... 1,000 1,065,470
Infinity Broadcasting Corporation,
10.375%, 3-15-2002 .................... 250 263,750
Jones Intercable, Inc.,
9.625%, 3-15-2002 ..................... 500 525,000
Southwestern Bell Telephone Company,
7.0%, 8-26-2002 ....................... 1,000 1,016,440
Tele-Communications, Inc.,
6.58%, 2-15-2005 ...................... 1,000 1,034,210
Turner Broadcasting System, Inc.,
8.375%, 7-1-2013 ...................... 1,000 1,020,810
U S WEST, Inc.,
8.4%, 9-15-99 ......................... 500 523,955
Total ................................. 9,855,455
Depository Institutions - 10.47%
AmSouth Bancorporation,
6.75%, 11-1-2025 ...................... 1,500 1,478,130
BarclaysAmerican Corporation,
9.125%, 12-1-97 ....................... 225 230,760
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-2005 ...................... 500 510,000
Deutsche Bank Financial Inc.,
6.7%, 12-13-2006 ...................... 750 736,020
J.P. Morgan & Co. Incorporated,
7.54%, 1-15-2027 ...................... 750 732,968
Kansallis-Osake-Pankki,
10.0%, 5-1-2002 ....................... 1,000 1,134,900
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions (Continued)
NBD Bank, National Association,
8.25%, 11-1-2024 ...................... $1,000 $ 1,126,190
NationsBank Corporation,
8.57%, 11-15-2024 ..................... 1,000 1,144,510
Riggs National Corporation,
8.5%, 2-1-2006 ........................ 1,500 1,567,500
SouthTrust Bank of Alabama, N.A.:
5.58%, 2-6-2006 ....................... 500 483,340
7.69%, 5-15-2025 ...................... 500 528,215
Total ................................. 9,672,533
Electric, Gas and Sanitary Services - 2.57%
Arkla, Inc.,
10.0%, 11-15-2019 ..................... 975 1,086,111
El Paso Electric Company,
7.25%, 2-1-99 ......................... 250 249,385
Kansas Gas and Electric Company,
7.6%, 12-15-2003 ...................... 1,000 1,037,650
Total ................................. 2,373,146
Fabricated Metal Products - 1.12%
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 1,000 1,030,000
Food and Kindred Products - 3.58%
Coca-Cola Enterprises Inc.:
0.0%, 6-20-2020 ....................... 10,000 1,946,700
6.7%, 10-15-2036 ..................... 1,000 1,009,200
Nabisco, Inc.,
6.8%, 9-1-2001 ........................ 345 352,659
Total ................................. 3,308,559
General Building Contractors - 0.89%
Del Webb Corporation,
10.875%, 3-31-2000 .................... 800 824,000
Health Services - 0.57%
Tenet Healthcare Corporation,
8.625%, 12-1-2003 ..................... 500 527,500
Hotels and Other Lodging Places - 1.70%
Marriott International, Inc.,
7.875%, 4-15-2005 ..................... 1,000 1,038,710
RHG Finance Corporation,
8.875%, 10-1-2005 ..................... 500 528,560
Total ................................. 1,567,270
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Industrial Machinery and Equipment - 1.19%
Joy Technologies Inc.,
10.25%, 9-1-2003 ...................... $ 1,000 $ 1,102,500
Insurance Carriers - 1.76%
Penn Central Corporation (The),
10.625%, 4-15-2000 .................... 1,000 1,105,780
Reliance Group Holdings, Inc.,
9.0%, 11-15-2000 ...................... 500 515,000
Total ................................. 1,620,780
Lumber and Wood Products - 0.25%
Doman Industries Limited,
8.75%, 3-15-2004 ...................... 250 233,750
Metal Mining - 0.53%
Noranda Inc.,
7.0%, 7-15-2005 ....................... 500 493,630
Nondepository Institutions - 7.60%
Associates Corporation of North America,
7.95%, 2-15-2010 ...................... 500 547,385
Chrysler Financial Corporation,
12.75%, 11-1-99 ....................... 1,000 1,157,770
Countrywide Mortgage Backed Securities,
Inc.,
6.5%, 4-25-2024 ....................... 2,000 1,950,460
DLJ Mortgage Acceptance Corp.,
6.5%, 4-25-2024 ....................... 960 913,281
General Electric Capital Corporation,
8.3%, 9-20-2009 ....................... 250 278,760
General Motors Acceptance Corporation,
8.875%, 6-1-2010 ...................... 1,000 1,157,220
Residential Asset Securities Corporation,
Mortgage Pass-Through Certificates,
1995-KS3 Class D,
8.0%, 10-25-2024 ...................... 1,000 1,007,910
Total ................................. 7,012,786
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Oil and Gas Extraction - 4.03%
Anadarko Petroleum Corporation,
7.25%, 3-15-2025 ...................... $ 1,000 $ 1,036,330
Oryx Energy Company:
10.0%, 4-1-2001 ....................... 400 439,076
8.375%, 7-15-2004 ..................... 500 518,765
Seagull Energy Corporation,
7.875%, 8-1-2003 ...................... 500 504,375
Union Texas Petroleum Holdings, Inc.,
8.25%, 11-15-99 ....................... 250 257,777
YPF Sociedad Anoima,
8.0%, 2-15-2004 ....................... 1,000 965,000
Total ................................. 3,721,323
Paper and Allied Products - 1.67%
Boise Cascade Office Products Corporation,
9.875%, 2-15-2001 ..................... 500 529,395
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-2002 ...................... 1,000 1,015,980
Total ................................. 1,545,375
Petroleum and Coal Products - 0.61%
Coastal Corporation (The),
10.375%, 10-1-2000 .................... 500 561,245
Printing and Publishing - 1.72%
News America Holdings Incorporated,
9.125%, 10-15-99 ...................... 500 533,520
Viacom International Inc.:
9.125%, 8-15-99 ....................... 500 511,250
10.25%, 9-15-2001 ..................... 500 545,000
Total ................................. 1,589,770
Stone, Clay and Glass Products - 1.16%
Owens-Corning Fiberglas Corporation,
8.875%, 6-1-2002 ...................... 500 542,195
USG Corporation,
9.25%, 9-15-2001 ...................... 500 532,500
Total ................................. 1,074,695
Transportation Equipment - 1.53%
General Motors Corporation,
8.8%, 3-1-2021 ........................ 750 854,857
McDonnell Douglas Corporation,
9.25%, 4-1-2002 ....................... 500 558,450
Total ................................. 1,413,307
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Wholesale Trade -- Durable Goods- 2.86%
Fisher Scientific International Inc.,
7.125%, 12-15-2005 .................... $ 900 $ 885,564
Motorola, Inc.,
8.4%, 8-15-2031 ....................... 1,500 1,757,085
Total ................................. 2,642,649
TOTAL CORPORATE DEBT SECURITIES - 63.02% $58,209,603
(Cost: $57,018,774)
OTHER GOVERNMENT SECURITIES
Canada - 3.63%
Hydro Quebec:
8.05%, 7-7-2024 ....................... 1,000 1,099,520
7.4%, 3-28-2025 ....................... 1,000 1,118,440
Province of Nova Scotia,
8.25%, 11-15-2019...................... 1,000 1,132,270
Total ................................. 3,350,230
Supranational - 1.23%
Inter-American Development Bank,
8.4%, 9-1-2009 ........................ 1,000 1,141,330
TOTAL OTHER GOVERNMENT SECURITIES - 4.86% $ 4,491,560
(Cost: $4,270,754)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
6.83%, 7-3-2002 ....................... 500 497,030
7.5%, 2-15-2007 ....................... 2,000 2,048,120
7.5%, 11-15-2017 ...................... 1,538 1,573,559
7.5%, 4-15-2019 ....................... 1,383 1,354,979
7.95%, 12-15-2020 ..................... 3,000 3,070,290
Federal National Mortgage Association,
7.09%, 4-1-2004 ....................... 500 495,470
Government National Mortgage Association:
7.5%, 7-15-2023 ....................... 2,168 2,181,916
7.5%, 12-15-2023 ...................... 2,279 2,293,496
8.0%, 9-15-2025 ....................... 1,945 2,010,268
7.75%, 10-15-2031 ..................... 320 324,423
Tennessee Valley Authority,
5.98%, 4-1-2036 ....................... 1,000 1,015,640
United States Treasury:
5.5%, 2-28-99 ......................... 5,000 4,957,800
6.75%, 5-31-99 ........................ 1,000 1,017,030
0.0%, 5-15-2007 ....................... 3,000 1,531,770
TOTAL UNITED STATES GOVERNMENT SECURITIES - 26.39% $24,371,791
(Cost: $24,216,245)
See Notes to Schedules of Investments on page 75.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1996
Value
TOTAL SHORT-TERM SECURITIES - 4.28% $ 3,950,934
(Cost: $3,950,934)
TOTAL INVESTMENT SECURITIES - 98.55% $91,023,888
(Cost: $89,456,707)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.45% 1,342,898
NET ASSETS - 100.00% $92,366,786
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Shares Value
COMMON STOCKS AND WARRANTS
Chemicals and Allied Products - 0.24%
Carson, Inc.* .......................... 16,500 $ 228,938
Communication - 0.07%
Heartland Wireless Communications,
Inc., Warrants (C)* ................... 3,000 3,000
Microcell Telecommunications Inc.,
Conditional Warrants (C)* ............. 5,000 3,125
Microcell Telecommunications Inc.,
Warrants(C)* .......................... 5,000 62,500
Total ................................. 68,625
General Building Contractors - 0.33%
Walter Industries, Inc.* ............... 23,272 325,808
Hotels and Other Lodging Places - 0.71%
Trump Hotels & Casino Resorts, Inc.* ... 6,250 75,000
Wyndham Hotel Corporation* ............. 25,000 615,625
Total ................................. 690,625
Industrial Machinery and Equipment - 0.15%
Bell & Howell Company* ................. 6,250 148,437
Printing and Publishing - 0.44%
Knight-Ridder, Inc. .................... 5,000 191,250
Tribune Company ........................ 3,000 236,625
Total ................................. 427,875
TOTAL COMMON STOCKS AND WARRANTS - 1.94%.. $ 1,890,308
(Cost: $1,643,743)
PREFERRED STOCKS
Depository Institutions - 0.57%
California Federal Bank, F.S.B. ........ 5,000 555,000
Printing and Publishing - 0.48%
K-III Communications Corporation ....... 5,000 465,000
TOTAL PREFERRED STOCKS - 1.05% $ 1,020,000
(Cost: $1,000,000)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Agricultural Production -- Crops - 0.54%
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .................... $ 500 530,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Agricultural Production -- Livestock - 0.31%
Pilgrim's Pride Corporation,
10.875%, 8-1-2003 ..................... $ 300 $ 300,000
Amusement and Recreation Services - 5.49%
American Skiing Company,
12.0%, 7-15-2006 (C) .................. 500 528,750
California Hotel Finance Corporation,
11.0%, 12-1-2002 ...................... 1,500 1,567,500
Rio Hotel & Casino, Inc.,
10.625%, 7-15-2005 .................... 1,000 1,067,500
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 ...................... 500 551,250
Trump Atlantic City Associates,
11.25%, 5-1-2006 ...................... 500 495,000
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 ...................... 1,000 1,140,000
Total ................................. 5,350,000
Apparel and Other Textile Products - 2.62%
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 ...................... 1,000 1,006,250
Pillowtex Corporation,
10.0%, 11-15-2006 (C) ................. 500 515,000
WestPoint Stevens Inc.,
9.375%, 12-15-2005 .................... 1,000 1,030,000
Total ................................. 2,551,250
Business Services - 4.93%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ..................... 750 803,437
Alvey Systems, Inc.,
11.375%, 1-31-2003 .................... 1,000 1,042,500
Heritage Media Corporation,
8.75%, 2-15-2006 ...................... 500 480,000
Lamar Advertising Company,
9.625%, 12-1-2006 ..................... 1,000 1,032,500
Scotsman Group, Inc.,
9.5%, 12-15-2000 ...................... 500 512,500
Shared Technologies Fairchild
Communications Corp.,
0.0%, 3-1-2006 (B) .................... 500 417,500
Universal Outdoor, Inc.,
9.75%, 10-15-2006 ..................... 500 516,250
Total ................................. 4,804,687
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Chemicals and Allied Products - 3.22%
Dade International Inc.,
11.125%, 5-1-2006 ..................... $ 500 $ 542,500
Freedom Chemical Company,
10.625%, 10-15-2006 (C) ............... 750 787,500
Revlon Worldwide Corporation,
0.0%, 3-15-98 ......................... 1,500 1,290,000
Spinnaker Industries, Inc.,
10.75%, 10-15-2006 (C) ................ 500 517,500
Total ................................. 3,137,500
Communication - 16.52%
Adelphia Communications Corporation,
12.5%, 5-15-2002 ...................... 1,000 1,025,000
Allbritton Communications Company,
9.75%, 11-30-2007 ..................... 500 485,000
American Radio Systems Corporation,
9.0%, 2-1-2006 ........................ 750 735,000
Arch Communications Group, Inc.,
0.0%, 3-15-2008 (B) ................... 1,000 570,000
Argyle Television Operations, Inc.,
9.75%, 11-1-2005 ...................... 1,000 1,015,000
Cablevision Systems Corporation,
9.875%, 2-15-2013 ..................... 1,450 1,428,250
COMCAST CELLULAR CORPORATION,
0.0%, 3-5-2000 ........................ 500 360,000
Comcast Corporation,
9.5%, 1-15-2008 ....................... 350 362,250
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (B) .................. 500 360,000
Heartland Wireless Communications, Inc.,
13.0%, 4-15-2003 ...................... 500 497,500
Infinity Broadcasting Corporation,
10.375%, 3-15-2002 .................... 500 527,500
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (B) ................... 750 510,000
MFS Communications Company, Inc.:
0.0%, 1-15-2004 (B) ................... 500 433,750
0.0%, 1-15-2006 (B) ................... 1,000 727,500
Marcus Cable Operating Company, L.P.,
0.0%, 8-1-2004 (B) .................... 1,500 1,230,000
Metrocall, Inc.,
10.375%, 10-1-2007 .................... 500 430,000
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (B) .................... 1,250 696,875
RSL Communications, Ltd., Units,
12.25%, 11-15-2006 (C)(D) ............. 500 502,500
Rogers Cantel Inc.,
9.375%, 6-1-2008 ...................... 500 525,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (B) ................... $1,000 $ 682,500
Teleport Communications Group Inc.,
0.0%, 7-1-2007 (B)..................... 1,250 856,250
USA Mobile Communications, Inc. II,
9.5%, 2-1-2004 ........................ 500 475,000
Vanguard Cellular Systems, Inc.,
9.375%, 4-15-2006 ..................... 500 507,500
Videotron Plc,
0.0%, 8-15-2005 (B) ................... 1,000 805,000
Wireless One, Inc., Units,
0.0%, 8-1-2006 (B)(E) ................. 750 341,250
Total ................................. 16,088,625
Depository Institutions - 0.58%
First Nationwide Holdings Inc.,
12.5%, 4-15-2003 ...................... 500 560,000
Eating and Drinking Places - 0.53%
Foodmaker, Inc.,
9.25%, 3-1-99 ......................... 500 511,250
Electronic and Other Electric Equipment - 1.09%
Advanced Micro Devices, Inc.,
11.0%, 8-1-2003 ....................... 500 542,500
Rayovac Corporation,
10.25%, 11-1-2006 (C) ................. 500 516,250
Total ................................. 1,058,750
Engineering and Management Services - 0.74%
United International Holdings, Inc.,
0.0%, 11-15-99 ........................ 1,000 725,000
Fabricated Metal Products - 2.79%
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 1,500 1,545,000
Nortek, Inc.,
9.875%, 3-1-2004 ...................... 500 505,000
Silgan Corporation,
13.25%, 12-15-2002 .................... 139 139,869
U.S. Can Corporation,
10.125%, 10-15-2006 (C) ............... 500 525,625
Total ................................. 2,715,494
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food and Kindred Products - 2.41%
Dr Pepper Bottling Holdings, Inc.,
0.0%, 2-15-2003 (B) ................... $ 500 $ 470,000
Specialty Foods Corporation:
10.25%, 8-15-2001 ..................... 1,000 925,000
11.125%, 10-1-2002 .................... 1,000 950,000
Total ................................. 2,345,000
Food Stores - 5.70%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ...................... 500 462,500
Bruno's, Inc.,
10.5%, 8-1-2005 ....................... 1,500 1,590,000
Kroger Co. (The),
9.75%, 2-15-2004 ...................... 1,000 1,060,000
Penn Traffic Company (The),
10.375%, 10-1-2004 .................... 1,000 837,500
Ralphs Grocery Company,
11.0%, 6-15-2005 ...................... 1,000 1,050,000
Smith's Food & Drug Centers, Inc.,
11.25%, 5-15-2007 ..................... 500 552,500
Total ................................. 5,552,500
Furniture and Fixtures - 1.55%
Lear Seating Corporation,
8.25%, 2-1-2002 ....................... 1,500 1,511,250
General Building Contractors - 1.82%
Beazer Homes USA, Inc.,
9.0%, 3-1-2004 ........................ 750 723,750
NVR L.P.,
11.0%, 4-15-2003 ...................... 1,000 1,050,000
Total ................................. 1,773,750
Health Services - 2.63%
Abbey Healthcare Group Incorporated,
9.5%, 11-1-2002 ....................... 500 522,500
Quorum Health Group, Inc.,
8.75%, 11-1-2005 ...................... 1,000 1,025,000
Regency Health Services, Inc.,
9.875%, 10-15-2002 .................... 1,000 1,015,000
Total ................................. 2,562,500
Holding and Other Investment Offices - 2.40%
Grupo Industrial Durango, S.A. de C.V.,
12.625%, 8-1-2003 ..................... 1,000 1,095,000
LTC Properties, Inc., Convertible,
8.5%, 1-1-2000 ........................ 1,000 1,240,000
Total ................................. 2,335,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places - 5.88%
Boyd Gaming Corporation,
9.25%, 10-1-2003 ...................... $ 500 $ 490,000
Casino America, Inc.,
12.5%, 8-1-2003 ....................... 750 710,625
HMC Acquisition Properties, Inc.,
9.0%, 12-15-2007 ...................... 500 507,500
Prime Hospitality Corp.,
9.25%, 1-15-2006 ...................... 1,500 1,530,000
Red Roof Inns, Inc.,
9.625%, 12-15-2003 .................... 500 500,000
Showboat, Inc.,
9.25%, 5-1-2008 ....................... 1,000 982,500
Station Casinos, Inc.,
10.125%, 3-15-2006 .................... 1,000 1,005,000
Total ................................. 5,725,625
Industrial Machinery and Equipment - 2.44%
American Standard Inc.,
9.875%, 6-1-2001 ...................... 1,000 1,060,000
Bell & Howell Company,
10.75%, 10-1-2002 ..................... 750 798,750
Walbro Corporation,
9.875%, 7-15-2005 ..................... 500 515,000
Total ................................. 2,373,750
Instruments and Related Products - 2.58%
Cole National Group, Inc.,
9.875%, 12-31-2006 (C) ................ 500 515,000
IMED Corporation,
9.75%, 12-1-2006 (C) .................. 500 508,750
InterCel, Inc., Units,
0.0%, 2-1-2006 (B)(F) ................. 8 444,375
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ....................... 1,000 1,047,500
Total ................................. 2,515,625
Lumber and Wood Products - 1.08%
Triangle Pacific Corp.,
10.5%, 8-1-2003 ....................... 1,000 1,055,000
Miscellaneous Retail - 0.50%
Michaels Stores, Inc.,
10.875%, 6-15-2006 .................... 500 487,500
Motion Pictures - 1.14%
MacAndrews & Forbes Group, Incorporated,
13.0%, 3-1-99 ......................... 100 101,125
Plitt Theatres, Inc.,
10.875%, 6-15-2004 .................... 1,000 1,007,500
Total ................................. 1,108,625
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Oil and Gas Extraction - 1.62%
Flores & Rucks, Inc.,
9.75%, 10-1-2006 ...................... $1,000 $ 1,060,000
Kelley Oil & Gas Corporation,
10.375%, 10-15-2006 (C) ............... 500 521,250
Total ................................. 1,581,250
Paper and Allied Products - 4.57%
Asia Pulp & Paper Company Ltd,
11.75%, 10-1-2005 ..................... 1,000 1,072,500
Container Corporation of America,
11.25%, 5-1-2004 ...................... 1,500 1,627,500
Fort Howard Corporation,
11.0%, 1-2-2002 ....................... 453 477,611
Mail-Well Corporation,
10.5%, 2-15-2004 ...................... 500 495,000
Sweetheart Cup Company, Inc.,
10.5%, 9-1-2003 ....................... 750 780,000
Total ................................. 4,452,611
Personal Services - 0.56%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 (C) ................. 500 542,500
Primary Metal Industries - 1.05%
Essex Group, Inc.,
10.0%, 5-1-2003 ....................... 1,000 1,025,000
Printing and Publishing - 5.83%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................... 1,000 1,075,000
Big Flower Press, Inc.,
10.75%, 8-1-2003 ...................... 666 700,965
Jordan Industries, Inc.,
10.375%, 8-1-2003 ..................... 1,500 1,477,500
K-III Communications Corporation,
8.5%, 2-1-2006 ........................ 500 491,250
Viacom International, Inc.,
8.0%, 7-7-2006 ........................ 2,000 1,935,000
Total ................................. 5,679,715
Rubber and Miscellaneous Plastics Products - 0.46%
RBX Corporation,
11.25%, 10-15-2005 .................... 500 450,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Textile Mill Products - 1.09%
Avondale Mills, Inc.,
10.25%, 5-1-2006 ..................... $ 500 $ 515,000
Collins & Aikman Products Co.,
11.5%, 4-15-2006 ...................... 500 545,000
Total ................................. 1,060,000
Transportation Equipment - 1.62%
Aetna Industries, Inc.,
11.875%, 10-1-2006 .................... 500 535,000
Greenwich Air Services, Inc.,
10.5%, 6-1-2006 ....................... 500 532,500
Westinghouse Air Brake Company,
9.375%, 6-15-2005 ..................... 500 510,000
Total ................................. 1,577,500
Trucking and Warehousing - 0.54%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .................... 500 530,000
Wholesale Trade -- Durable Goods - 2.80%
E&S Holdings Corporation,
10.375%, 10-1-2006 (C) ................ 500 523,750
Exide Corporation:
0.0%, 12-15-2004 (B) .................. 500 460,000
10.0%, 4-15-2005 ...................... 500 518,750
General Medical Corporation,
12.125%, 8-15-2005 .................... 1,264 1,223,439
Total ................................. 2,725,939
Wholesale Trade -- Nondurable Goods - 0.57%
United Stationers Supply Co.,
12.75%, 5-1-2005 ...................... 500 556,250
TOTAL CORPORATE DEBT SECURITIES - 90.20% $87,859,446
(Cost: $85,241,309)
TOTAL SHORT-TERM SECURITIES - 4.74% $ 4,619,233
(Cost: $4,619,233)
TOTAL INVESTMENT SECURITIES - 97.93% $95,388,987
(Cost: $92,504,285)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 2.07% 2,017,084
NET ASSETS - 100.00% $97,406,071
See Notes to Schedules of Investments on page .
<PAGE>
TMK/UNITED FUNDS, INC.
Notes to Schedules of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside of the United States.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) As of December 31, 1996, the following restricted securities were owned in
the High Income Portfolio: Shares/
Principal
Acquisition Amount Acquisition Market
Security Date (in 000's) Cost Value
---------------- --------------------------------------------
Heartland Wireless Communications,
Inc., Warrants 4/20/95 3,000$ 18,500 $3,000
Microcell Telecommunications Inc.,
Conditional Warrants 6/13/96 5,000 --- 3,125
Microcell Telecommunications Inc.,
Warrants 6/13/96 5,000 61,247 62,500
American Skiing Company,
12.0%, 7-15-2006 6/25/96 $ 500 485,825 528,750
Cole National Group, Inc.,
9.875%, 12-31-2006 11/13/96 500 496,250 515,000
E&S Holdings Corporation,
10.375%, 10-1-2006 9/24/96 250 250,000 261,875
9/25/96 250 254,375 261,875
Freedom Chemical Company,
10.625%, 10-15-2006 10/10/96 500 500,000 525,000
10/15/96 250 253,438 262,500
IMED Corporation,
9.75%, 12-1-2006 11/19/96 500 500,000 508,750
Kelley Oil & Gas Corporation,
10.375%, 10-15-2006 10/25/96 500 498,750 521,250
Pillowtex Corporation,
10.0%, 11-15-2006 11/6/96 500 500,000 515,000
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 8/13/96 500 500,000 542,500
RSL Communications, Ltd., Units,
12.25%, 11-15-2006 9/30/96 500 500,000 502,500
Rayovac Corporation,
10.25%, 11-1-2006 10/17/96 500 500,000 516,250
Spinnaker Industries, Inc.,
10.75%, 10-15-200610/18/96 500 500,000 517,500
U.S. Can Corporation,
10.125%, 10-15-2006 10/10/96 500 500,000 525,625
--------------------
$6,318,385$6,573,000
====================
The total market value of restricted securities represents approximately
6.75% of the total net assets in the High Income Portfolio at December 31,
1996.
<PAGE>
TMK/UNITED FUNDS, INC.
Notes to Schedules of Investments
(D) Each Unit consists of one 12.25% senior note due 2006 and one warrant to
purchase Class A common stock.
(E) Each Unit consists of $1,000 principal amount of 13.5% senior discount
notes due 2006 and one warrant to purchase 2.274 shares of common stock.
(F) Each Unit consists of 10 senior discount notes due 2-1-2006 and 32
warrants.
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, 1996
Growth Income International
Portfolio Portfolio Portfolio
Assets ----------- ---------- -----------
Investment securities--at
value (Notes 1 and 3) $512,448,451 $463,979,407 $80,225,093
Cash ................. 13,765 5,243 5,496
Receivables:
Investment securities
sold ............... --- --- ---
Fund shares sold ..... 199,072 167,322 61,374
Dividends and interest 578,733 431,588 100,691
Prepaid insurance
premium .............. 3,137 2,095 575
------------ ----------- ----------
Total assets ....... 513,243,158 464,585,655 80,393,229
Liabilities ------------ ------------ -----------
Payable for investment
securities purchased . --- 2,141,771 525,759
Payable for Fund shares
redeemed ............. 60,077 34,968 3,217
Accrued accounting
services fee (Note 2). 5,000 5,000 2,500
Other ................. 15,391 12,496 12,300
------------ ------------ -----------
Total liabilities .. 80,468 2,194,235 543,776
------------ ------------ -----------
Total net assets .. $513,162,690 $462,391,420 $79,849,453
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock ........ $ 755,015 $ 456,129 $ 133,104
Additional paid-in
capital ............ 482,465,582 321,429,249 70,594,734
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized loss
on investment
transactions ....... --- --- (1,248,302)
Net unrealized appreciation
of investments at end
of period .......... 29,942,093 140,506,042 10,369,917
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital ........ $513,162,690 $462,391,420 $79,849,453
============ ============ ===========
Net asset value, redemption
and offering price per share $6.7967 $10.1373 $5.9990
======= ======== =======
Capital shares outstanding 75,501,538 45,612,852 13,310,431
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, 1996
Asset
Small Cap Balanced Strategy
Portfolio Portfolio Portfolio
Assets ------------ ------------ -----------
Investment securities--at
value (Notes 1 and 3). $97,315,515 $42,026,516 $8,384,830
Cash ................. 4,758 2,272 5,737
Receivables:
Investment securities
sold ............... 782,167 --- ---
Fund shares sold ..... 92,768 60,098 439
Dividends and interest 103,602 348,272 83,492
Prepaid insurance
premium .............. 600 350 145
----------- ----------- ----------
Total assets ....... 98,299,410 42,437,508 8,474,643
Liabilities ----------- ------------ ----------
Payable for investment
securities purchased . 881,250 --- ---
Payable for Fund shares
redeemed ............. 4,188 7,152 ---
Accrued accounting
services fee (Note 2) 2,500 1,667 ---
Other ................. 3,182 1,631 445
----------- ----------- ----------
Total liabilities .. 891,120 10,450 445
----------- ----------- ----------
Total net assets .. $97,408,290 $42,427,058 $8,474,198
Net Assets =========== =========== ==========
$0.01 par value capital stock
Capital stock ........ $ 121,492 $ 68,467 $ 16,505
Additional paid-in
capital ............ 88,162,423 38,883,605 8,346,900
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized loss
on investment
transactions ....... --- --- (46,572)
Net unrealized appreciation
of investments at end
of period .......... 9,124,375 3,474,986 157,365
----------- ----------- ----------
Net assets applicable to
outstanding units
of capital ........ $97,408,290 $42,427,058 $8,474,198
=========== =========== ==========
Net asset value, redemption
and offering price per share $8.0176 $6.1967 $5.1343
======= ======= =======
Capital shares outstanding 12,149,248 6,846,695 1,650,512
Capital shares authorized 100,000,000 50,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
Money Market Limited-Term Bond
Portfolio Bond Portfolio Portfolio
Assets ------------- ------------ -----------
Investment securities--at
value (Notes 1 and 3). $34,563,968 $3,646,722 $91,023,888
Cash ................. 3,157 2,548 4,462
Receivables:
Investment securities
sold ............... --- --- ---
Fund shares sold ..... 2,671,382 --- 59,499
Dividends and interest 227,123 66,241 1,348,197
Prepaid insurance
premium .............. 968 145 1,111
----------- ---------- ----------
Total assets ....... 37,466,598 3,715,656 92,437,157
Liabilities ----------- ---------- -----------
Payable for investment
securities purchased . --- --- ---
Payable for Fund shares
redeemed ............. 206,275 --- 65,440
Accrued accounting
services fee (Note 2). 1,667 --- 2,500
Other ................. 1,054 232 2,431
----------- ---------- -----------
Total liabilities .. 208,996 232 70,371
----------- ---------- -----------
Total net assets .. $37,257,602 $3,715,424 $92,366,786
Net Assets =========== ========== ===========
$0.01 par value capital stock
Capital stock ........ $ 372,576 $ 7,195 $ 177,614
Additional paid-in
capital ............ 36,885,026 3,682,876 93,241,722
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized loss
on investment
transactions ....... --- --- (2,619,731)
Net unrealized appreciation
of investments at end
of period .......... --- 25,353 1,567,181
----------- ---------- -----------
Net assets applicable to
outstanding units
of capital ........ $37,257,602 $3,715,424 $92,366,786
=========== ========== ===========
Net asset value, redemption
and offering price per share $1.0000 $5.1639 $5.2004
======= ======= =======
Capital shares outstanding 37,257,602 719,500 17,761,447
Capital shares authorized 200,000,000 50,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
High Income
Portfolio
Assets -------------
Investment securities--at
value (Notes 1 and 3). $95,388,987
Cash ................. 3,557
Receivables:
Investment securities
sold ............... ---
Fund shares sold ..... 81,991
Dividends and interest 2,035,604
Prepaid insurance
premium .............. 1,281
-----------
Total assets ....... 97,511,420
Liabilities -----------
Payable for investment
securities purchased . ---
Payable for Fund shares
redeemed ............. 100,021
Accrued accounting
services fee (Note 2) 2,500
Other ................. 2,828
-----------
Total liabilities .. 105,349
-----------
Total net assets .. $97,406,071
Net Assets ===========
$0.01 par value capital stock
Capital stock ........ $ 212,908
Additional paid-in
capital ............ 94,545,977
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income ---
Accumulated undistributed
net realized loss
on investment
transactions ....... (237,516)
Net unrealized appreciation
of investments at end
of period .......... 2,884,702
-----------
Net assets applicable to
outstanding units
of capital ........ $97,406,071
===========
Net asset value, redemption
and offering price per share $4.5750
=======
Capital shares outstanding 21,290,838
Capital shares authorized 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1996
Growth Income International
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income (Note 1B):
Interest ............. $ 2,967,518 $ 1,189,162 $ 768,107
Dividends ............ 7,032,017 5,508,654 778,353
----------- ----------- ----------
Total income 9,999,535 6,697,816 1,546,460
----------- ----------- ----------
Expenses (Note 2):
Investment management
fee ................ 3,238,802 2,772,236 513,923
Accounting services
fee ................ 60,000 59,167 30,000
Custodian fees ....... 37,764 19,618 82,193
Audit fees ........... 12,608 10,257 5,240
Legal fees ........... 10,474 9,018 2,024
Other ................ 20,632 18,036 3,175
----------- ----------- ----------
Total expenses ..... 3,380,280 2,888,332 636,555
----------- ----------- ----------
Net investment income 6,619,255 3,809,484 909,905
----------- ----------- ----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 51,959,601 7,401,806 (973,393)
Realized net gain (loss)
on foreign currency
transactions ......... 1,777 --- (63,943)
----------- ----------- ----------
Realized net gain (loss)
on investments ..... 51,961,378 7,401,806 (1,037,336)
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... (3,365,641) 60,154,057 9,364,785
----------- ----------- ----------
Net gain (loss) on
investments ....... 48,595,737 67,555,863 8,327,449
----------- ----------- ----------
Net increase
in net assets
resulting from
operations ...... $55,214,992 $71,365,347 $9,237,354
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1996
Small Cap Balanced Asset Strategy
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income (Note 1B):
Interest ............. $ 928,415 $ 870,557 $339,073
Dividends ............ 6,825 383,567 18,744
---------- ---------- --------
Total income ....... 935,240 1,254,124 357,817
---------- ---------- --------
Expenses (Note 2):
Investment management
fee ................ 689,578 194,884 59,397
Accounting services
fee ................ 30,000 19,167 ---
Custodian fees ....... 6,755 4,259 3,647
Audit fees ........... 5,303 5,093 4,982
Legal fees ........... 1,902 722 207
Other ................ 3,700 1,703 325
---------- ---------- --------
Total expenses ..... 737,238 225,828 68,558
---------- ---------- --------
Net investment income 198,002 1,028,296 289,259
---------- ---------- --------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 3,641,030 1,315,431 (46,572)
Realized net gain (loss)
on foreign currency
transactions ......... --- 1,290 (128)
---------- ---------- --------
Realized net gain (loss)
on investments ..... 3,641,030 1,316,721 (46,700)
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... 172,785 1,209,473 211,346
---------- ---------- --------
Net gain (loss) on
investments ....... 3,813,815 2,526,194 164,646
---------- ---------- --------
Net increase
in net assets
resulting from
operations ...... $4,011,817 $3,554,490 $453,905
========== ========== ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1996
Money Market Limited-Term Bond
Portfolio Bond Portfolio Portfolio
--------------- ---------- ----------
Investment Income
Income (Note 1B):
Interest ............. $1,980,105 $218,628 $6,148,572
Dividends ............ --- --- ---
---------- -------- ----------
Total income ....... 1,980,105 218,628 6,148,572
---------- -------- ----------
Expenses (Note 2):
Investment management
fee ................ 181,734 18,112 469,708
Accounting services
fee ................ 20,000 --- 30,000
Custodian fees ....... 5,502 1,361 6,481
Audit fees ........... 5,136 4,965 5,874
Legal fees ........... 7,482 75 1,984
Other ................ 2,149 316 4,839
---------- -------- ----------
Total expenses ..... 222,003 24,829 518,886
---------- -------- ----------
Net investment income 1,758,102 193,799 5,629,686
---------- -------- ----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ --- 848 (16,696)
Realized net gain (loss)
on foreign currency
transactions ......... --- --- 50,409
---------- -------- ----------
Realized net gain (loss)
on investments ..... --- 848 33,713
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... --- (66,484) (2,694,467)
---------- -------- ----------
Net gain (loss) on
investments ....... --- (65,636) (2,660,754)
---------- -------- ----------
Net increase
in net assets
resulting from
operations ...... $1,758,102 $128,163 $2,968,932
========== ======== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1996
High Income
Portfolio
---------------
Investment Income
Income (Note 1B):
Interest ............. $ 8,733,322
Dividends ............ 125,386
----------
Total income ....... 8,858,708
----------
Expenses (Note 2):
Investment management
fee ................ 590,009
Accounting services
fee ................ 30,000
Custodian fees ....... 6,361
Audit fees ........... 5,875
Legal fees ........... 2,042
Other ................ 4,862
----------
Total expenses ..... 639,149
----------
Net investment income 8,219,559
----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 2,951,518
Realized net gain (loss)
on foreign currency
transactions ......... ---
----------
Realized net gain (loss)
on investments ..... 2,951,518
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... (486,973)
----------
Net gain (loss) on
investments ....... 2,464,545
----------
Net increase
in net assets
resulting from
operations ...... $10,684,104
===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
Growth Income International
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 6,619,255 $ 3,809,484 $ 909,905
Realized net gain (loss)
on investments ..... 51,961,378 7,401,806 (1,037,336)
Unrealized appreciation
(depreciation) ..... (3,365,641) 60,154,057 9,364,785
------------ ------------ -----------
Net increase
in net assets
resulting from
operations......... 55,214,992 71,365,347 9,237,354
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (6,621,032) (3,809,484) (845,962)
From realized gains
on securities
transactions ....... (51,959,601) (7,400,042) (169,132)
In excess of realized
gains .............. --- --- ---
------------ ------------ -----------
(58,580,633) (11,209,526) (1,015,094)
------------ ------------ -----------
Capital share
transactions** ....... 97,702,647 71,041,567 21,430,848
------------ ------------ -----------
Total increase .... 94,337,006 131,197,388 29,653,108
Net Assets
Beginning of period ... 418,825,684 331,194,032 50,196,345
------------ ------------ -----------
End of period ......... $513,162,690 $462,391,420 $79,849,453
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
========== ========== ========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 10,798,375 9,532,901 4,545,608
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 8,618,982 1,105,770 169,211
Shares redeemed ......... (5,273,088) (3,201,312) (913,129)
--------- --------- ---------
Increase in outstanding
capital shares ......... 14,144,269 7,437,359 3,801,690
========= ========= =========
Value issued from sale
of shares ............. $76,770,633 $ 90,220,484 $ 25,545,695
Value issued from reinvest-
ment of dividends and/or
distributions .......... 58,580,633 11,209,526 1,015,094
Value redeemed .......... (37,648,619) (30,388,443) (5,129,941)
................. ----------- ----------- -----------
Increase in
outstanding capital ... $97,702,647 $71,041,567 $21,430,848
=========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
Small Cap Balanced Asset Strategy
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 198,002 $ 1,028,296 $ 289,259
Realized net gain (loss)
on investments ..... 3,641,030 1,316,721 (46,700)
Unrealized appreciation
(depreciation) ..... 172,785 1,209,473 211,346
----------- ----------- ----------
Net increase
in net assets
resulting from
operations......... 4,011,817 3,554,490 453,905
----------- ----------- ----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (198,002) (1,029,586) (289,131)
From realized gains
on securities
transactions ....... (3,641,030) --- ---
In excess of realized
gains .............. --- (1,315,431) ---
----------- ----------- ----------
(3,839,032) (2,345,017) (289,131)
----------- ----------- ----------
Capital share
transactions** ....... 41,644,058 17,614,713 3,965,482
----------- ----------- ----------
Total increase .... 41,816,843 18,824,186 4,130,256
Net Assets
Beginning of period ... 55,591,447 23,602,872 4,343,942
----------- ----------- ----------
End of period ......... $97,408,290 $42,427,058 $8,474,198
=========== =========== ==========
Undistributed net
investment income . $--- $--- $---
======= ======== ========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 5,458,630 2,884,829 1,038,946
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 478,826 378,430 56,314
Shares redeemed ......... (1,014,254) (417,037) (311,169)
---------- --------- ---------
Increase in outstanding
capital shares ......... 4,923,202 2,846,222 784,091
========= ========= =========
Value issued from sale
of shares ............. $46,147,982 $17,870,938 $5,287,460
Value issued from reinvest-
ment of dividends and/or
distributions .......... 3,839,032 2,345,016 289,131
Value redeemed .......... (8,342,956) (2,601,241) (1,611,109)
----------- ----------- -----------
Increase in
outstanding capital ... $41,644,058 $17,614,713 $3,965,482
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
Money Market Limited-Term Bond
Portfolio Bond Portfolio Portfolio
-------------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 1,758,102 $ 193,799 $ 5,629,686
Realized net gain (loss)
on investments ..... --- 848 33,713
Unrealized appreciation
(depreciation) ..... --- (66,484) (2,694,467)
----------- ---------- -----------
Net increase
in net assets
resulting from
operations......... 1,758,102 128,163 2,968,932
----------- ---------- -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (1,758,102) (193,799) (5,680,095)
From realized gains
on securities
transactions ....... --- (848) ---
In excess of realized
gains .............. --- --- ---
----------- ---------- -----------
(1,758,102) (194,647) (5,680,095)
----------- ---------- -----------
Capital share
transactions** ....... 385,358 928,429 6,508,442
----------- ---------- -----------
Total increase .... 385,358 861,945 3,797,279
Net Assets
Beginning of period ... 36,872,244 2,853,479 88,569,507
----------- ---------- -----------
End of period ......... $37,257,602 $3,715,424 $92,366,786
=========== ========== ===========
Undistributed net
investment income .. $--- $--- $---
==== ======= ==========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 217,565,342 223,662 2,284,864
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 1,758,186 37,694 1,092,242
Shares redeemed ......... (218,938,170) (85,156) (2,142,176)
----------- ------- ---------
Increase in outstanding
capital shares ......... 385,358 176,200 1,234,930
=========== ======= =========
Value issued from sale
of shares ............. $217,565,342 $1,180,216 $12,180,349
Value issued from reinvest-
ment of dividends and/or
distributions .......... 1,758,186 194,647 5,680,095
Value redeemed .......... (218,938,170) (446,434) (11,352,002)
----------- ---------- -----------
Increase in
outstanding capital ... $ 385,358 $ 928,429 $ 6,508,442
=========== ========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1996
High Income
Portfolio
-----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 8,219,559
Realized net gain (loss)
on investments ..... 2,951,518
Unrealized appreciation
(depreciation) ..... (486,973)
----------
Net increase
in net assets
resulting from
operations......... 10,684,104
----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (8,219,559)
From realized gains
on securities
transactions ....... ---
In excess of realized
gains .............. ---
-----------
(8,219,559)
-----------
Capital share
transactions** ....... 8,255,333
-----------
Total increase .... 10,719,878
Net Assets
Beginning of period ... 86,686,193
-----------
End of period ......... $97,406,071
===========
Undistributed net
investment income .. $---
==========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 2,475,713
Shares issued from reinvest-
ment of dividends and/or
distributions .......... 1,796,625
Shares redeemed ......... (2,484,538)
---------
Increase in outstanding
capital shares ......... 1,787,800
=========
Value issued from sale
of shares ............. $11,575,727
Value issued from reinvest-
ment of dividends and/or
distributions .......... 8,219,560
Value redeemed .......... (11,539,954)
-----------
Increase in
outstanding capital ... $ 8,255,333
===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1995
Growth Income International
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 4,620,896 $ 3,112,227 $ 791,682
Realized net gain (loss)
on investments ..... 64,283,233 5,870,913 (155,262)
Unrealized appreciation
(depreciation) ..... 42,925,336 63,977,939 1,669,228
------------ ------------ -----------
Net increase in net
assets resulting
from operations.... 111,829,465 72,961,079 2,305,648
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (4,621,508) (3,112,674) (721,188)
From realized gains
on securities
transactions ....... (64,282,621) (5,407,615) ---
In excess of realized
gains .............. ---- (1,764) ---
------------ ------------ -----------
(68,904,129) (8,522,053) (721,188)
------------ ------------ -----------
Capital share
transactions** ....... 99,163,713 47,981,404 22,592,251
------------ ------------ -----------
Total increase .... 142,089,049 112,420,430 24,176,711
Net Assets
Beginning of period ... 276,736,635 218,773,602 26,019,634
------------ ------------ -----------
End of period ......... $418,825,684 $331,194,032 $50,196,345
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 8,244,920 7,529,946 5,011,325
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 10,094,216 982,290 136,620
Shares redeemed ......... (3,897,735) (2,657,368) (850,796)
---------- --------- ---------
Increase in outstanding
capital shares ......... 14,441,401 5,854,868 4,297,149
========== ========= =========
Value issued from sale
of shares ............. $57,245,750 $60,548,279 $26,298,441
Value issued from reinvest-
ment of dividends and/or
distributions ......... 68,904,129 8,522,053 721,188
Value redeemed .......... (26,986,166) (21,088,928) (4,427,378)
----------- ----------- -----------
Increase in
outstanding capital ... $99,163,713 $47,981,404 $22,592,251
=========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1995
Small Cap Balanced Asset Strategy
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment income $ 625,470 $ 511,312 $ 60,277
Realized net gain (loss)
on investments ..... 1,011,622 375,170 4,660
Unrealized appreciation
(depreciation) ..... 7,643,311 2,500,947 (53,981)
----------- ----------- ----------
Net increase in net
assets resulting
from operations.... 9,280,403 3,387,429 10,956
----------- ----------- ----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (625,470) (511,312) (59,911)
From realized gains
on securities
transactions ....... (1,011,622) (371,952) (5,026)
In excess of realized
gains .............. ---- --- ---
----------- ----------- ----------
(1,637,092) (883,264) (64,937)
----------- ----------- ----------
Capital share
transactions** ....... 31,867,974 12,427,639 4,397,923
----------- ----------- ----------
Total increase .... 39,511,285 14,931,804 4,343,942
Net Assets
Beginning of period ... 16,080,162 8,671,068 ---
----------- ----------- ----------
End of period ......... $55,591,447 $23,602,872 $4,343,942
=========== =========== ==========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 4,818,197 2,264,439 876,052
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 212,809 149,718 12,955
Shares redeemed ......... (488,640) (170,404) (22,586)
--------- --------- -------
Increase in outstanding
capital shares........ 4,542,366 2,243,753 866,421
========= ========= =======
Value issued from sale
of shares ............. $33,624,752 $12,476,652 $4,448,147
Value issued from reinvest-
ment of dividends and/or
distributions ......... 1,637,092 883,263 64,938
Value redeemed .......... (3,393,870) (932,276) (115,162)
----------- ----------- ----------
Increase in
outstanding capital ... $31,867,974 $12,427,639 $4,397,923
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1995
Money Market Limited-Term Bond
Portfolio Bond Portfolio Portfolio
-------------- ----------- -----------
Increase in Net Assets
Operations:
Net investment income $ 1,574,075 $ 144,743 $ 5,511,692
Realized net gain (loss)
on investments ..... --- 10,804 882,169
Unrealized appreciation
(depreciation) ..... --- 139,524 8,857,982
----------- ---------- -----------
Net increase in net
assets resulting
from operations.... 1,574,075 295,071 15,251,843
----------- ---------- -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (1,574,075) (144,743) (5,517,200)
From realized gains
on securities
transactions ....... --- (10,804) ---
In excess of realized
gains .............. ---- --- ---
----------- ---------- -----------
(1,574,075) (155,547) (5,517,200)
Capital share
transactions**........ 6,059,981 1,068,809 4,818,014
----------- ---------- -----------
Total increase ..... 6,059,981 1,208,333 14,552,657
Net Assets
Beginning of period ... 30,812,263 1,645,146 74,016,850
----------- ---------- -----------
End of period ......... $36,872,244 $2,853,479 $88,569,507
=========== ========== ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 169,760,641 294,605 1,918,955
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,573,890 29,626 1,029,828
Shares redeemed ......... (165,274,550) (119,359) (2,040,023)
----------- ------- ---------
Increase in outstanding
capital shares ........ 6,059,981 204,872 908,760
=========== ======= =========
Value issued from sale
of shares ............. $169,760,641 $1,551,139 $9,976,902
Value issued from reinvest-
ment of dividends and/or
distributions ......... 1,573,890 155,548 5,517,200
Value redeemed .......... (165,274,550) (637,878) (10,676,088)
------------ ---------- ----------
Increase in
outstanding capital ... $ 6,059,981 $1,068,809 $4,818,014
============ ========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1995
High Income
Portfolio
-----------
Increase in Net Assets
Operations:
Net investment income $ 7,429,973
Realized net gain (loss)
on investments ..... (1,443,930)
Unrealized appreciation
(depreciation) ..... 7,364,701
-----------
Net increase in net
assets resulting
from operations.... 13,350,744
-----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (7,429,973)
From realized gains
on securities
transactions ....... ---
In excess of realized
gains .............. ---
-----------
(7,429,973)
-----------
Capital share
transactions**........ 8,121,747
-----------
Total increase ..... 14,042,518
Net Assets
Beginning of period ... 72,643,675
-----------
End of period ......... $86,686,193
===========
Undistributed net
investment income .. $---
====
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............. 2,353,273
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,672,287
Shares redeemed ......... (2,189,523)
................. ---------
Increase in outstanding
capital shares ........ 1,836,037
................. =========
Value issued from sale
of shares ............. $10,517,788
Value issued from reinvest-
ment of dividends and/or
distributions ......... 7,429,973
Value redeemed .......... (9,826,014)
................. -----------
Increase in
outstanding capital ... $ 8,121,747
................. ===========
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE GROWTH PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $6.8260 $5.8986 $6.1962 $6.1505 $5.5973
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0877 0.0903 0.1211 0.0537 0.1013
Net realized and
unrealized gain
on investments .. 0.6589 2.1842 0.0268 0.8087 1.0653
------- ------- ------- ------- -------
Total from investment
operations ....... 0.7466 2.2745 0.1479 0.8624 1.1666
------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment
income .......... (0.0877)(0.0903) (0.1211)(0.0537) (0.1013)
Distribution from
capital gains ... (0.6882)(1.2568) (0.3244)(0.7569) (0.5121)
Distribution in
excess of capital
gains ........... (0.0000)(0.0000) (0.0000)(0.0061) (0.0000)
------- ------- ------- ------- -------
Total distributions. (0.7759)(1.3471) (0.4455)(0.8167) (0.6134)
------- ------- ------- ------- -------
Net asset value,
end of period .... $6.7967 $6.8260 $5.8986 $6.1962 $6.1505
======= ======= ======= ======= =======
Total return ....... 10.94% 38.57% 2.39% 14.02% 20.84%
Net assets, end of
period (000
omitted) ......... $513,163$418,826 $276,737$220,590 $122,363
Ratio of expenses
to average net
assets ............ 0.73% 0.75% 0.77% 0.78% 0.80%
Ratio of net investment
income to average
net assets ....... 1.44% 1.35% 2.07% 1.01% 2.00%
Portfolio turnover
rate ............. 243.00% 245.80% 277.36% 297.81% 225.87%
Average commission
rate paid ........ $0.0572
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $ 8.6756 $6.7689 $6.9180 $5.9530 $5.3158
-------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0835 0.0839 0.0703 0.0651 0.0803
Net realized and
unrealized gain (loss)
on investments .. 1.6239 2.0525 (0.1491) 0.9650 0.6496
-------- ------- ------- ------- -------
Total from investment
operations ....... 1.7074 2.1364 (0.0788) 1.0301 0.7299
-------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment
income .......... (0.0835)(0.0839) (0.0703)(0.0651) (0.0803)
Distribution from
capital gains.... (0.1622)(0.1457) (0.0000)(0.0000) (0.0124)
Distribution in excess
of capital gains (0.0000)(0.0001) (0.0000)(0.0000) (0.0000)
-------- ------- ------- ------- -------
Total distributions. (0.2457)(0.2297) (0.0703)(0.0651) (0.0927)
-------- ------- ------- ------- -------
Net asset value,
end of period .... $10.1373 $8.6756 $6.7689 $6.9180 $5.9530
======== ======= ======= ======= =======
Total return........ 19.68% 31.56% -1.14% 17.30% 13.78%
Net assets, end of
period (000
omitted) ......... $462,391$331,194 $218,774$155,092 $65,027
Ratio of expenses
to average net
assets ............ 0.73% 0.77% 0.77% 0.79% 0.85%
Ratio of net investment
income to average
net assets ....... 0.97% 1.13% 1.16% 1.36% 1.78%
Portfolio turnover
rate ............. 22.95% 15.00% 23.32% 18.38% 15.74%
Average commission
rate paid ........ $0.0586
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INTERNATIONAL PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended For the
December 31, period
-------------------------- ended
1996 1995 12/31/94*
---------- ---------- ----------
Net asset value,
beginning of
period ........... $5.2790 $4.9926 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0663 0.0846 0.0207
Net realized and
unrealized gain (loss)
on investments... 0.7300 0.2790 (0.0074)
------- ------- -------
Total from investment
operations ....... 0.7963 0.3636 0.0133
------- ------- -------
Less distributions:
Dividends from net
investment
income .......... (0.0636) (0.0772) (0.0207)
Distributions from
capital gains ... (0.0127) (0.0000) (0.0000)
------- ------- -------
Total distributions. (0.0763) (0.0772) (0.0207)
Net asset value,
end of period .... $5.9990 $5.2790 $4.9926
======= ======= =======
Total return........ 15.09% 7.28% 0.26%
Net assets, end of
period (000
omitted) ......... $79,849 $50,196 $26,020
Ratio of expenses
to average net
assets ............ 1.00% 1.02% 1.26%
Ratio of net investment
income to average
net assets ....... 1.42% 1.99% 1.36%
Portfolio turnover
rate ............. 75.01% 34.93% 23.23%
Average commission
rate paid ........ $0.0217
*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.
**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 fiscal year ended For the
December 31, period
---------------------------- ended
1996 1995 12/31/94*
---------- ---------- ----------
Net asset value,
beginning of
period ........... $7.6932 $5.9918 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0163 0.0900 0.0376
Net realized and
unrealized gain
on investments .. 0.6241 1.8470 1.0086
------- ------- -------
Total from investment
operations ....... 0.6404 1.9370 1.0462
------- ------- -------
Less distributions:
Dividends from net
investment income (0.0163) (0.0900) (0.0376)
Distribution from
capital gains.... (0.2997) (0.1456) (0.0168)
------- ------- -------
Total distributions (0.3160) (0.2356) (0.0544)
------- ------- -------
Net asset value,
end of period .... $8.0176 $7.6932 $5.9918
======= ======= =======
Total return........ 8.33% 32.32% 20.92%
Net assets, end of
period (000
omitted) ......... $97,408 $55,591 $16,080
Ratio of expenses
to average net
assets ............ 0.91% 0.96% 1.08%
Ratio of net investment
income to average
net assets ....... 0.25% 1.77% 2.35%
Portfolio turnover
rate ............. 133.77% 43.27% 21.61%
Average commission
rate paid ........ $0.0448
*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 fiscal year ended For the
December 31, period
---------------------------- ended
1996 1995 12/31/94*
---------- ---------- ----------
Net asset value,
beginning of
period ........... $5.9000 $4.9359 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.1502 0.1333 0.0460
Net realized and
unrealized gain (loss)
on investments .. 0.4890 1.0611 (0.0641)
------- ------- -------
Total from investment
operations ....... 0.6392 1.1944 (0.0181)
------- ------- -------
Less distributions:
Dividends from net
investment
income .......... (0.1504) (0.1333) (0.0460)
Distribution from
capital gains.... (0.1921) (0.0970) (0.0000)
------- ------- -------
Total distributions (0.3425) (0.2303) (0.0460)
------- ------- -------
Net asset value,
end of period .... $6.1967 $5.9000 $4.9359
======= ======= =======
Total return........ 10.84% 24.19% -0.37%
Net assets, end of period
(000 omitted) .... $42,427 $23,603 $8,671
Ratio of expenses
to average net
assets ............ 0.70% 0.72% 0.95%
Ratio of net investment
income to average
net assets ....... 3.18% 3.22% 3.14%
Portfolio turnover
rate ............. 44.23% 62.87% 19.74%
Average commission
rate paid ........ $0.0579
*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 ASSET STRATEGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
fiscal year period
ended ended
12/31/96 12/31/95*
---------- ----------
Net asset value,
beginning of
period ........... $5.0137 $5.0000
------- -------
Income from investment
operations:
Net investment
income .......... 0.1755 0.0717
Net realized and
unrealized gain
on investments .. 0.1203 0.0193
------- -------
Total from investment
operations ....... 0.2958 0.0910
------- -------
Less distributions:
Dividends from net
investment
income .......... (0.1752) (0.0713)
Distribution from
capital gains.... (0.0000) (0.0060)
------- -------
Total distributions (0.1752) (0.0773)
------- -------
Net asset value,
end of period .... $5.1343 $5.0137
======= =======
Total return........ 5.92% 1.80%
Net assets, end of
period (000
omitted) ......... $8,474 $4,344
Ratio of expenses
to average net
assets ............ 0.93% 0.91%
Ratio of net investment
income to average
net assets ....... 3.92% 4.42%
Portfolio turnover
rate ............. 49.92% 149.17%
Average commission
rate paid ........ $0.0375
*The Asset Strategy Portfolio's inception date is February 14, 1995; 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 1, 1995 (initial offering)
through December 31, 1995. Ratios 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:
For the fiscal year ended December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Net investment
income .......... 0.0486 0.0542 0.0368 0.0260 0.0324
Less dividends
declared ......... (0.0486)(0.0542) (0.0368)(0.0260) (0.0324)
------- ------- ------- ------- -------
Net asset value,
end of period .... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return ....... 5.01% 5.56% 3.72% 2.63% 3.29%
Net assets, end of
period (000
omitted) ......... $37,258 $36,872 $30,812 $26,000 $23,995
Ratio of expenses
to average net
assets ............ 0.61% 0.62% 0.65% 0.65% 0.65%
Ratio of net investment
income to average
net assets ....... 4.87% 5.42% 3.72% 2.61% 3.17%
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 fiscal year ended For the
December 31, period
---------------------------- ended
1996 1995 12/31/94*
---------- ---------- ----------
Net asset value,
beginning of
period ........... $5.2521 $4.8611 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.2694 0.2841 0.1507
Net realized and
unrealized gain (loss)
on investments .. (0.0870) 0.4122 (0.1375)
------- ------- -------
Total from investment
operations ....... 0.1824 0.6963 0.0132
------- ------- -------
Less distributions:
Dividends from net
investment
income .......... (0.2694) (0.2841) (0.1507)
Distribution from
capital gains ... (0.0012) (0.0212) (0.0014)
------- ------- -------
Total distributions (0.2706) (0.3053) (0.1521)
------- ------- -------
Net asset value,
end of period .... $5.1639 $5.2521 $4.8611
======= ======= =======
Total return........ 3.51% 14.29% 0.26%
Net assets, end of
period (000
omitted) ......... $3,715 $2,853 $1,645
Ratio of expenses
to average net
assets ............ 0.76% 0.71% 0.93%
Ratio of net investment
income to average
net assets ....... 5.92% 6.22% 5.89%
Portfolio turnover
rate ............. 15.81% 18.16% 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:
For the fiscal year ended December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $5.3592 $4.7393 $5.4045 $5.2626 $5.2661
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.3170 0.3556 0.3507 0.3334 0.3643
Net realized and
unrealized gain
(loss) on
investments ..... (0.1560) 0.6202 (0.6652) 0.3046 0.0216
------- ------- ------- ------- -------
Total from investment
operations ....... 0.1610 0.9758 (0.3145) 0.6380 0.3859
------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment
income .......... (0.3198)(0.3559) (0.3507)(0.3334) (0.3643)
Distribution from
capital gains ... (0.0000)(0.0000) (0.0000)(0.1627) (0.0251)
------- ------- ------- ------- -------
Total distributions. (0.3198)(0.3559) (0.3507)(0.4961) (0.3894)
------- ------- ------- ------- -------
Net asset value,
end of period .... $5.2004 $5.3592 $4.7393 $5.4045 $5.2626
======= ======= ======= ======= =======
Total return ....... 3.04% 20.56% -5.90% 12.37% 7.67%
Net assets, end of
period (000
omitted) ......... $92,367 $88,570 $74,017 $81,727 $49,428
Ratio of expenses
to average net
assets ............ 0.59% 0.60% 0.62% 0.62% 0.64%
Ratio of net investment
income to average
net assets ....... 6.39% 6.73% 6.73% 6.01% 6.91%
Portfolio turnover
rate ............. 64.02% 71.17% 135.82% 68.75% 44.32%
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE HIGH INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $4.4448 $4.1118 $4.6373 $4.2886 $4.0770
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.3861 0.4165 0.4106 0.3899 0.4050
Net realized and
unrealized gain
(loss) on
investments ..... 0.1302 0.3330 (0.5255) 0.3487 0.2116
------- ------- ------- ------- -------
Total from investment
operations ....... 0.5163 0.7495 (0.1149) 0.7386 0.6166
------- ------- ------- ------- -------
Less dividends from
net investment
income ........... (0.3861)(0.4165) (0.4106)(0.3899) (0.4050)
------- ------- ------- ------- -------
Net asset value,
end of period .... $4.5750 $4.4448 $4.1118 $4.6373 $4.2886
======= ======= ======= ======= =======
Total return ....... 11.66% 18.19% -2.55% 17.90% 15.70%
Net assets, end of
period (000
omitted) ......... $97,406 $86,686 $72,644 $71,265 $41,456
Ratio of expenses
to average net
assets ............ 0.71% 0.72% 0.74% 0.75% 0.77%
Ratio of net investment
income to average
net assets ....... 9.10% 9.25% 9.03% 8.66% 9.48%
Portfolio turnover
rate ............. 58.91% 41.78% 37.86% 54.22% 60.79%
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 ten classes that are designated the
Growth Portfolio, the Income Portfolio, the International Portfolio, the Small
Cap Portfolio, the Balanced Portfolio, the Asset Strategy 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 pricing service or 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 System) 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. For International Portfolio,
dividend income is net of foreign withholding taxes of $88,163. 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.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
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; Asset Strategy Portfolio - .30% 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 $1.4 billion of combined net assets at
December 31, 1996) and allocated among the Portfolios based on their relative
net asset size at the annual rates of .51% of the first $750 million 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 $31,861.
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 period ended December 31, 1996
are summarized as follows:
Growth Income International
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $1,040,870,797 144,181,555 64,556,283
Purchases of U.S. Government
securities --- --- ---
Purchases of short-term
securities 846,781,140 291,692,250 150,382,170
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 996,546,863 85,178,243 37,686,374
Proceeds from maturities
and sales of U.S.
Government securities --- --- ---
Proceeds from maturities
and sales of short-term
securities 853,465,387 285,255,891 155,764,432
Small Cap BalancedAsset Strategy
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $125,946,580 19,355,388 4,751,742
Purchases of U.S. Government
securities --- 9,060,547 3,389,069
Purchases of short-term
securities 198,792,126 38,737,849 28,537,937
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 88,715,672 12,036,780 2,150,271
Proceeds from maturities
and sales of U.S.
Government securities --- --- ---
Proceeds from maturities
and sales of short-term
securities 198,541,634 39,071,000 30,702,807
Limited- High
Term Bond Bond Income
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $ 573,045 31,828,950 59,299,135
Purchases of U.S. Government
securities 748,694 27,115,480 ---
Purchases of short-term
securities 1,638,000 46,484,023 59,031,704
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 350,401 32,735,705 50,300,654
Proceeds from maturities
and sales of U.S.
Government securities 126,135 21,038,550 ---
Proceeds from maturities
and sales of short-term
securities 1,525,000 45,108,954 59,733,061
For Federal income tax purposes, cost of investments owned at December 31,
1996 and the related unrealized appreciation (depreciation) were as follows:
Aggregate
CostAppreciationDepreciationAppreciation
------------------------------------------------
Growth Portfolio $482,578,321$ 42,625,397$(12,755,267)$ 29,870,130
Income Portfolio 323,475,140 141,809,541 (1,305,274) 140,504,267
International Portfolio69,850,245 12,334,759 (1,959,911) 10,374,848
Small Cap Portfolio 88,191,140 13,864,367 (4,739,992) 9,124,375
Balanced Portfolio 38,551,530 4,064,071 (589,085) 3,474,986
Asset Strategy Portfolio8,227,509 249,550 (92,229) 157,321
Money Market Portfolio 34,563,968 -- -- --
Limited-Term Bond Portfolio3,621,369 41,817 (16,464) 25,353
Bond Portfolio 89,456,707 1,857,614 (290,433) 1,567,181
High Income Portfolio 92,504,285 3,928,471 (1,043,769) 2,884,702
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 accounting purposes.
For Federal income tax purposes, Growth, Income, Balanced, and Limited-Term Bond
Portfolios realized capital gain net income of $51,622,358, $7,401,806,
$1,315,431 and $848, respectively, during the year ended December 31, 1996. For
Federal income tax purposes, Small Cap Portfolio realized capital gain net
income of $8,896,601 for the year ended December 31, 1996, which included the
effect of certain losses deferred into the next fiscal year (see discussion
below). For Federal income tax purposes, High Income Portfolio realized capital
gain net income of $2,951,518 for the year ended December 31, 1996, which was
entirely offset by utilization of capital loss carryforwards. Remaining prior
year capital loss carryforwards of High Income Portfolio aggregated $237,516 as
of December 31, 1996, and are available to offset future capital gain net income
through December 31, 2003. For Federal income tax purposes, International
Portfolio, Asset Strategy Portfolio and Bond Portfolio realized capital losses
of $1,145,948, $46,572 and $16,696, respectively, during the year ended December
31, 1996. These amounts are available to offset future realized capital gain
net income through December 31, 2004. In addition, prior year capital loss
carryforwards of Bond Portfolio aggregated $2,603,035 as of December 31, 1996,
and are available to offset future realized capital gain net income through
December 31, 2002. The capital gain net income of Growth, Income, Balanced and
Limited-Term Bond Portfolios was paid to shareholders during the year ended
December 31, 1996. A portion of the capital gain net income of Small Cap
Portfolio was paid to shareholders during the period ended December 31, 1996.
Remaining capital gain net income will be distributed to shareholders.
Internal Revenue Code regulations permit each Portfolio to defer into its
next fiscal year net capital losses or net long-term capital losses incurred
between each November 1 and the end of its fiscal year ("post-October losses").
From November 1, 1996 through December 31, 1996, Small Cap Portfolio incurred
net capital losses of $5,285,152, which have been deferred to the calendar year
ending December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
TMK/United Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Growth Portfolio, Income
Portfolio, International Portfolio, Small Cap Portfolio, Balanced
Portfolio, Asset Strategy Portfolio, Money Market Portfolio, Limited-Term
Bond Portfolio, Bond Portfolio and High Income Portfolio (collectively
the "Portfolios") of TMK/United Funds, Inc., as of December 31, 1996,
the related statements of operations and changes in net assets for the
year then ended, and the financial highlights for the year then ended.
These financial statements and the financial highlights are the
responsibility of the Portfolios' management. Our responsibility is to
express an opinion on these financial statements and the financial
highlights based on our audits. The financial statements and the
financial highlights of the Portfolios for each of the years in the four-
year period ended December 31, 1995 were audited by other auditors whose
report, dated February 8, 1996, expressed an unqualified opinion on those
statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1996 by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of each
of the respective Portfolios of TMK/United Funds, Inc. as of December 31,
1996, the results of their operations, the changes in their net assets,
and their financial highlights for the year then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 7, 1997
<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, 1996
Statements of Assets and Liabilities
For the year ended December 31, 1996
Statements of Operations
For each of the two years ended December 31, 1996
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of December 31, 1996
Report of Independent Accountants
Included in Part C:
-------------------
Financial Data Schedules
Other schedules prescribed by Regulation S-X are not filed because the
required matter is not present or is insignificant.
(b) Exhibits:
(1) Articles of Incorporation, filed October 31, 1996 as EX-99.B1-tmkart
to Post-Effective Amendment No. 14 to the Registration Statement on
Form N-1A*
Articles Supplementary attached hereto as EX-99.B1-tkartsup
(2) By-Laws filed April 29, 1996 as EX-99.B2-tmkbylaw to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A*
(3) Not applicable
(4) Article FIFTH and Article SEVENTH of the Articles of Incorporation of
Registrant filed October 31, 1996 as EX-99.B1-tmkart to Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A*; Article
I, Article IV and Article VII of the Bylaws of the Registrant, filed
April 29, 1996 as EX-99.B2-tmkbylaw to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A*
(5) Investment Management Agreement with fee schedule amended to reflect
the addition of Science and Technology Portfolio filed October 31,
1996 as EX-99.B5-tmkima to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A*
Assignment of Investment Management Agreement attached hereto as
EX-99.B5-tkassign
(6) Form of Distribution Contract reflecting addition of Asset Strategy
Portfolio filed February 15, 1995 as EX-99.B6-tmkdisco to Post-
Effective Amendment No. 11 to the Registration Statement on Form N-1A*
Form of Distribution Contract reflecting addition of Science and
Technology Portfolio filed October 31, 1996 as EX-99.B6-variable to
Post-Effective Amendment No. 14 to the Registration Statement on Form
N-1A*
Principal Underwriting Agreement between Waddell & Reed, Inc. and
United Investors Life Insurance Company filed October 3, 1995 as
EX-99.B6-tmkpua to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A*
(7) Not applicable
(8) Custodian Agreement attached hereto as EX-99.B8-tmkca
(9) Accounting Services Agreement filed October 3, 1995 as EX-99.B9-tmkasa
to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A*
(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*
(11) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B11-tkconsnt
Consent of Price Waterhouse LLP, Independent Accountants, attached
hereto as EX-99.B11-tkpwcon
Opinion of Price Waterhouse LLP attached hereto as EX-99.B11-tkpwopin
(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 filed February 15, 1995 as EX-99.B13-
tmkuil to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A*
Agreement between United Investors Life Insurance Company and Asset
Strategy Portfolio filed October 3, 1995 as EX-99.B13-tmkuilasp to
Post-Effective Amendment No. 12 to the Registration Statement on Form
N-1A*
Agreement between United Investors Life Insurance Company and Science
and Technology Portfolio filed October 31, 1996 as EX-B.13-tmkuilst to
Post-Effective Amendment No. 14 to the Registration Statement on Form
N-1A*
(14) Not applicable
(15) Not applicable
(16) Schedules for yield and total return computation filed April 29, 1996
as EX-99.B16-tmksched to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A*
Schedule for yield computation for Money Market Portfolio filed
October 31, 1996 as EX-99.B16-tmkyldmm to Post-Effective Amendment No.
14 to the Registration Statement on Form N-1A*
(17) Financial Data Schedules, attached hereto as EX-27.B17-tmkfds1,
EX-27.B17-tmkfds2, EX-27.B17-tmkfds3, EX-27.B17-tmkfds4, EX-27.B17-
tmkfds5, EX-27.B17-tmkfds6, EX-27.B17-tmkfds7, EX-27.B17-tmkfds8,
EX-27.B17-tmkfds9, EX-27.B17-tmkfds10
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 February 28, 1997
-------------- ------------------------------
Common 2
27. Indemnification
---------------
Reference is made to Section 7 of Article SEVENTH of the Articles of
Incorporation of Registrant, as amended, filed October 31, 1996 as
EX-99.B1-tmkart to Post-Effective Amendment No. 14 to the Registration
Statement on Form N-1A*, and to Paragraph 7 of the Distribution Agreement
between United Investors Life Insurance Company and the Registrant, filed
October 31, 1996 as EX-99.B6-tmkdisco to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A*, 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 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.
United Asset Strategy Fund, 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 Technology 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.
(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 Ms. 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 for Science and Technology Portfolio 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).
- ---------------------------------
*Incorporated herein by reference
<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(B) 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 1st day of
April, 1997.
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 April 1, 1997
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director April 1, 1997
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer April 1, 1997
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and April 1, 1997
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director April 1, 1997
- ---------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director April 1, 1997
- --------------------- ----------------
Dodds I. Buchanan
/s/Linda Graves* Director April 1, 1997
- ------------------- ----------------
Linda Graves
/s/John F. Hayes* Director April 1, 1997
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director April 1, 1997
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director April 1, 1997
- ------------------- ----------------
William T. Morgan
/s/William L. Rogers* Director April 1, 1997
- ------------------- ----------------
William L. Rogers
/s/Frank J. Ross, Jr.* Director April 1, 1997
- ------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz* Director April 1, 1997
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director April 1, 1997
- ------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise* Director April 1, 1997
- ------------------- ----------------
Paul S. Wise
*By
Sharon K. Pappas
Attorney-in-Fact
ATTEST:
Sheryl Strauss
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. AND WADDELL & REED FUNDS, 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/her behalf as such director or officer as
indicated below opposite his/her signature hereto, to any Registration Statement
and 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 or amendment or supplement thereto; 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: February 5, 1997 /s/Keith A. Tucker
--------------------------
Keith A. Tucker, President
/s/Ronald K. Richey Chairman of the Board February 5, 1997
- -------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker President and Director February 5, 1997
- -------------------- (Principal Executive ----------------
Keith A. Tucker Officer)
/s/Theodore W. Howard Vice President, Treasurer February 5, 1997
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler Vice President and February 5, 1997
- -------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon Director February 5, 1997
- -------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan Director February 5, 1997
- -------------------- ----------------
Dodds I. Buchanan
/s/Linda Graves Director February 5, 1997
- -------------------- ----------------
Linda Graves
/s/John F. Hayes Director February 5, 1997
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director February 5, 1997
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director February 5, 1997
- -------------------- ----------------
William T. Morgan
/s/William L. Rogers Director February 5, 1997
- -------------------- ----------------
William L. Rogers
/s/Frank J. Ross, Jr. Director February 5, 1997
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor Schwartz Director February 5, 1997
- -------------------- ----------------
Eleanor Schwartz
/s/Frederick Vogel III Director February 5, 1997
- -------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise Director February 5, 1997
- -------------------- ----------------
Paul S. Wise
Attest:
/s/Sharon K. Pappas
- --------------------------------
Sharon K. Pappas, Vice President
and Secretary
EX-99.B-1-tkartsup
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 October 16, 1996, adopted resolutions authorizing the creation of an
additional class of shares of the capital stock of the Corporation designated
Science and Technology 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
100,000,000 shares Money Market Portfolio
100,000,000 shares Asset Strategy Portfolio
100,000,000 shares Science and Technology 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
Sheryl Strauss, its Assistant Secretary, this 4th day of April, 1997.
TMK/UNITED FUNDS, INC.
(Corporate seal)
By:/s/Sharon K. Pappas
----------------------
Sharon K. Pappas
Vice President
ATTEST:
/s/Sheryl Strauss
- -----------------
<PAGE>
Sheryl Strauss
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.
/s/Sharon K. Pappas
-------------------
Sharon K. Pappas
EX-99.B5-tkassign
Assignment
TMK/United Funds, Inc. Science and Technology Portfolio does hereby consent to
the assignment, transfer and conveyance, effective January 8, 1992 of the
Investment Management Agreement between Waddell & Reed, Inc. ("W&R") and
TMK/United Funds, Inc., dated July l, 1990, as amended, to Waddell & Reed
Investment Management Company ("WRIMCO"), a wholly owned subsidiary of W&R. W&R
has provided certain undertakings, agreements and guarantees in connection with
this assignment as provided in the Guarantee of Performance attached hereto as
Exhibit A which such undertakings, agreements and guarantees it hereby provides
to TMK/United Funds, Inc. Science and Technology Portfolio.
Executed this 4th day of April, 1997.
Waddell & Reed, Inc.
By: /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
TMK/United Funds, Inc. Science and Technology
Portfolio
By: /s/Robert L. Hechler
--------------------------
Robert L. Hechler, Vice President
Accepted:
Waddell & Reed Investment Management Company
By /s/Sharon K. Pappas
- -----------------------
Sharon K. Pappas, Sr. Vice President
<PAGE>
Guarantee of Performance
In consideration of each of the Funds' listed in Exhibit A hereto consent to the
assignment by Waddell & Reed, Inc., of the Investment Management Agreement
between Waddell & Reed, Inc., and the particular Fund to Waddell & Reed
Investment Management Company ("WRIMCO"), a wholly owned subsidiary of Waddell &
Reed, Inc., Waddell & Reed, Inc. hereby undertakes and agrees that at all times
WRIMCO shall be staffed and adequately supported to assure that WRIMCO is fully
capable of carrying out any and all of its obligations, duties and
responsibilities under the Investment Management Agreements assigned to it and
hereby further guarantees that WRIMCO shall perform its obligations, duties and
responsibilities in accordance with the terms of the several Investment
Management Agreements and in accordance with all applicable Federal laws and
regulations.
Dated this 11th day of December, 1991.
Waddell & Reed, Inc.
By: /s/Rodney O. McWhinney
- --------------------------
Rodney O. McWhinney
Senior Vice President
<PAGE>
EXHIBIT A
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science & Energy Fund
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United Government Securities Fund, Inc.
United Vanguard Fund, Inc.
United Vanguard Fund, Inc.
United Cash Management, Inc.
United Retirement Shares, Inc.
United High Income Fund II, Inc.
United Vanguard Fund, Inc.
United Gold & Government Fund, Inc.
United Continental Income Fund, Inc.
United International Growth Fund, Inc.
TMK/United Funds, Inc.
Bond Portfolio
Growth Portfolio
High Income Portfolio
Income Portfolio
Money Market Portfolio
<PAGE>
EX-99.B8-tmkca
CUSTODIAN AGREEMENT
Dated as of April 4, 1997
Between
UMB BANK, n.a.
and
TMK/UNITED FUNDS, INC. SCIENCE & TECHNOLOGY PORTFOLIO
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposit
2.13 Foreign Exchange Transactions
2.14 Securities Loan
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality
Appendices
Appendix "A"
Appendix "B"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 4th day of April, 1997, between TMK/United Funds,
Inc. Science and Technology Portfolio (the "Fund") and UMB Bank, n.a. (the
"Custodian").
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf
of the Fund in accordance with the provisions of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations thereunder,
under the terms and conditions set forth in this Agreement, and the Custodian
has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause
to be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and
keep safely the Assets in accordance with the terms and conditions hereof on
behalf of the Fund.
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the foregoing, unless it
receives Proper Instructions to the contrary, the Custodian shall register all
securities in the name of the Custodian's nominee as authorized by the Fund.
All securities held directly or indirectly by the Custodian hereunder shall at
all times be identifiable on the records of the Custodian. Except as otherwise
provided herein, the Custodian shall keep the Assets physically segregated from
those of other persons or entities. The Custodian shall execute and deliver all
certificates and documents in connection with registration of securities as may
be required by the applicable provisions of the Internal Revenue Code, the laws
of any State or territory of the United States and the laws of any jurisdiction
in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the
Custodian shall pay for and receive securities purchased for the account of the
Fund, provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions:
(i) in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a)
cash, certified check, bank cashier's check, bank credit, or bank wire transfer;
(b) credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member; or (c) credit
to the Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , a "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depository to
deliver the securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision
of this Agreement to the contrary, the Custodian shall promptly notify the Fund
in writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian
shall, following receipt or knowledge, convey such information to the Fund in a
timely manner based upon the circumstances of each particular case. Whenever
any such rights or privileges exist, the Fund will, in a timely manner based
upon the circumstances of each particular case, provide the Custodian with
Proper Instructions. Absent the Custodian's timely receipt of Proper
Instructions, the Custodian shall not be liable for not taking any action or not
exercising such rights prior to their expiration unless such failure is due to
Custodian's failure to give timely notice to the Fund in accordance with this
Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the broker-
dealer shall be responsible for determining the sufficiency of assets held in
any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option (including stock index options), then as
part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions,
or pursuant to the provisions of any futures margin procedural agreement among
the Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions.
Such Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt
of Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no
duty with respect to the selection of the currency brokers or Banking
Institutions with which the Fund deals or, so long as the Custodian acts in
accordance with Proper Instructions, for the failure of such brokers or Banking
Institutions to comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions,
the Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts
due and payable to the Fund with respect to portfolio securities and other
Assets; (b) promptly credit to the account of the Fund all income and other
payments relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian
shall promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and Custodian may agree in writing if any amount
payable with respect to portfolio securities or other Assets is not received by
the Custodian when due. The Custodian shall not be responsible for the
collection of amounts due and payable with respect to portfolio securities or
other Assets that are in default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the
Fund to pay dividends or other distributions to shareholders of the Fund and to
make payment to shareholders who have requested repurchase or redemption of
their shares of the Fund (collectively, the "Shares"), the Custodian shall
promptly release cash or securities (a) in the case of cash, upon receipt of
Proper Instructions, to one or more Distribution Accounts (as hereinafter
defined) designated by the Fund in such Proper Instructions; or (b) in the case
of securities, upon the receipt of Special Instructions (as hereinafter defined)
to such entity or account designated by the Fund in such Special Instructions.
For purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive
funds representing cash payments received for Shares issued or sold from time to
time by the Fund, and shall promptly credit such funds to the account of the
Fund. The Custodian shall promptly notify the Fund of Custodian's receipt of
cash in payment for Shares issued by the Fund by facsimile transmission or in
such other manner as the Fund and Custodian may agree in writing. Upon receipt
of Proper Instructions, the Custodian shall: (a) deliver all federal funds
received by the Custodian in payment for Shares in payment for such investments
as may be set forth in such Proper Instructions and at a time agreed upon
between the Custodian and the Fund; and (b) make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian, in the amount of checks received in payment for Shares which are
deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or
cause to be delivered to the Fund, in the most expeditious manner practicable,
all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend
to all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the
Custodian shall take such action as the Fund deems necessary or appropriate to
cause each deposit account established by the Custodian pursuant to this Section
2.21 to be insured to the maximum extent possible by all applicable deposit
insurers, including, without limitation, the Federal Deposit Insurance
Corporation.
Section 2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by the Fund in:
(a) The Depository Trust Company; (b) the Participants Trust Company; (c) any
book-entry system as provided in (i) Subpart O of Treasury Circular No. 300, 31
CFR 306.115 (ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31
CFR 350.2, or (iii) the book-entry regulations of federal agencies substantially
in the form of 31 CFR 306.115; or (d) any other domestic clearing agency
registered with the Securities and Exchange Commission ("SEC") under Section 17A
of the Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of the
Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate the
use of any Securities System (except the federal book-entry system) on behalf of
the Fund as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund maintained with such
Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions,
the Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall
provide any assistance reasonably requested by the Fund in the preparation of
reports to Fund shareholders and others, audits of accounts, and other
ministerial matters of like nature. The Custodian shall maintain complete and
accurate records with respect to securities and other Assets held for the
accounts of the Fund as required by the rules and regulations of the SEC
applicable to investment companies registered under the 1940 Act, including, but
not limited to: (a) journals or other records of original entry containing a
detailed and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in transfer, (ii) securities in physical possession, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of such collateral), and (v) dividends and interest received;
and (c) cancelled checks and bank records relating thereto. The Custodian shall
keep such other books and records of the Fund as the Fund shall reasonably
request. All such books and records maintained by the Custodian shall be
maintained in a form acceptable to the Fund and in compliance with the rules and
regulations of the SEC, including, but not limited to, books and records
required to be maintained by Section 31(a) of the 1940 Act and the rules and
regulations from time to time adopted thereunder. All books and records
maintained by the Custodian pursuant to this Agreement shall at all times be the
property of the Fund and shall be available during normal business hours for
inspection and use by the Fund and its agents, including without limitation, its
independent certified public accountants. Notwithstanding the preceding
sentence, the Funds shall not take any actions or cause the Custodian to take
any actions which would knowingly cause, either directly or indirectly, the
Custodian to violate any applicable laws, regulations or orders.
Notwithstanding the provisions of this Section 2.25, in the event the Fund
purchases cash, securities and other Assets requiring the use of a Domestic
Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be entitled to
rely upon and use the books, records and accountings of the Domestic
Subcustodian as its means of accounting to the Fund for all cash, securities and
other Assets deposited with such entities; provided however, that such books,
records and accountings on which the Bank may rely must be maintained in the
United States by such Domestic Subcustodian and, provided further, that any
agreement between the Custodian and such Domestic Subcustodian must state that
the Domestic Subcustodian agrees to make any records available upon request and
preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records
required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the
Custodian be entitled to rely upon and use books, records and accountings which
are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Fund's Form N-1A
and the Fund's Form N-SAR or other periodic reports to the SEC and with respect
to any other requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At
the request of the Fund, the Custodian shall deliver to the Fund a written
report prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in
writing ("Overdraft Notice") of any Overdraft by facsimile transmission or in
such other manner as the Fund and the Custodian may agree in writing. The
Custodian shall have a right of set-off against all Assets (except for Assets
held in a segregated margin account or otherwise pledged in connection with
options or futures contracts held for the benefit of the Fund and for Assets
allocated to any other Overdraft or loan made hereunder); provided, however, the
Custodian shall promptly notify the Fund in writing of any intent to exercise a
right of set-off against Assets hereunder and shall not exercise any such right
of set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial Code, the only rights or remedies
which the Custodian is entitled to with respect to Overdrafts is the right of
set-off granted herein.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument relating thereto, and (ii) delivered by hand, by
facsimile transmission or in such other manner as the Fund and the Custodian
agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed may appoint a Foreign Sub-
Subcustodian or Interim Sub-Subcustodian (as each are hereinafter defined) in
accordance with this Article IV. For purposes of this Agreement, all Domestic
Subcustodians, Special Subcustodians, Foreign Sub-Subcustodians and Interim Sub-
Subcustodians shall be referred to collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time
and from time to time, appoint any bank as defined in Section 2(a)(5) of the
1940 Act or any trust company or other entity any of which meet requirements of
a custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon by the parties
hereto in writing, from time to time, in accordance with the provisions of
Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. The Custodian may at any time appoint, or
cause a Domestic Subcustodian to appoint: (i) any bank, trust company or other
entity meeting requirements of an "eligible foreign custodian" under Section
17(f) of the 1940 Act and the rules and regulations thereunder or by order of
the Securities and Exchange Commission exempted therefrom, or (ii) any bank as
defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder to act on behalf of the Fund as a sub-subcustodian for purposes of
holding cash, securities and other Assets of the Fund and performing other
functions of the Domestic Subcustodian in countries other than the United States
of America (a "Foreign Sub-Subcustodian"); provided that, prior to the
appointment or approval of any Foreign Sub-Subcustodian the Custodian shall, or
shall cause the Domestic Subcustodian to, notify the Fund, in writing, of the
identity and qualifications of the proposed Foreign Sub-Subcustodian and make a
copy of the proposed sub-subcustodian agreement available to the Fund at least
sixty (60) days prior to the desired appointment; and provided further that the
Custodian shall have obtained written confirmation from two or more Authorized
Persons of the approval of the Board of Directors or other governing body of the
Fund (which approval may be withheld in the sole discretion of such Board of
Directors or other governing body or entity) with respect to (i) the identity
and qualifications of any proposed Foreign Sub-Subcustodian, and (ii) the
country or countries in which, and the securities depositories or clearing
agencies (hereinafter "Securities Depositories and Clearing Agencies"), if any,
through which, any proposed Foreign Sub-Subcustodian is authorized to hold
securities and other Assets of the Fund. Each such duly approved Foreign Sub-
Subcustodian and the countries where and the Securities Depositories and
Clearing Agencies through which they may hold securities and other Assets of the
Fund shall be listed on the Subcustodian List. The Fund shall be responsible
for informing the Custodian sufficiently in advance of a proposed investment
which is to be held in a country in which no Foreign Sub-Subcustodian is
authorized to act, in order that there shall be sufficient time for the
Custodian or any Domestic Subcustodian to effect the appropriate arrangements
with a proposed Foreign Sub-Subcustodian, including obtaining approval as
provided in this Section 4.02(a). In connection with the appointment of any
Foreign Sub-Subcustodian, the Custodian shall, or shall cause the Domestic
Subcustodian to, enter into a sub-subcustodian agreement with the Foreign Sub-
Subcustodian in form and substance approved by the Fund, provided that the
agreement shall, in all events, comply with the provisions of the 1940 Act and
the rules and regulations thereunder, and the terms and provisions of this
Agreement. The Custodian shall not and shall cause any Domestic Subcustodian
not to consent to the amendment of any sub-subcustodian agreement entered into
with a Foreign Sub-Subcustodian, or agree to any changes thereunder, or waive
any rights under such agreement, except upon prior approval pursuant to Special
Instructions.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the
event that the Fund shall invest in a security or other Asset to be held in a
country in which no Foreign Sub-Subcustodian is authorized to act, the Custodian
shall, or shall cause the Domestic Subcustodian to, promptly notify the Fund in
writing by facsimile transmission or in such other manner as the Fund and
Custodian shall agree in writing of the unavailability of an approved Foreign
Sub-Subcustodian in such country; and upon the receipt of Special Instructions,
the Custodian shall, or shall cause the Domestic Subcustodian to, appoint or
approve any Person (as hereinafter defined) designated by the Fund in such
Special Instructions, to hold such security or other Asset. (Any Person
appointed or approved as a sub-subcustodian pursuant to this Section 4.02(b) is
hereinafter referred to as an "Interim Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special
Instructions, the Custodian shall, on behalf of the Fund, appoint one or more
banks, trust companies or other entities designated in such Special Instructions
to act as a subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i)
cause each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause the appointment of a
replacement Subcustodian or Sub-Subcustodian in accordance with the provisions
of this Article IV. In addition to the foregoing, the Custodian (A) may, at any
time in its discretion, upon written notification to the Fund, terminate any
Domestic Subcustodian, and (B) shall, upon receipt of Special Instructions,
terminate any Special Subcustodian with respect to the Fund, in accordance with
the termination provisions under the applicable subcustodian agreement, and (C)
shall, upon receipt of Special Instructions, cause the Domestic Subcustodian to
terminate any Foreign Sub-Subcustodian or Interim Sub-Subcustodian as to its use
of such entities with respect to the Fund, in accordance with the termination
provisions under the applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on
behalf of the Custodian; (ii) the countries in which and the Securities
Depositories and Clearing Agents through which each such Foreign Sub-
Subcustodian is then holding cash, securities and other Assets of the Fund; and
(iii) such other information as may be requested by the Fund to ensure
compliance with rules and regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable
care and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
(c) Mitigation by Custodian. Upon the occurrence of any event which
causes or may cause any loss, damage or expense to the Fund, (i) the Custodian
shall, (ii) the Custodian shall cause any applicable Domestic Subcustodian or
Foreign Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts
to cause any applicable Interim Sub-Subcustodian or Special Subcustodian to, use
all commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be
liable to the Fund for any loss, damage or expense suffered or incurred by the
Fund resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (as hereinafter defined) or where any Person maintaining
securities, currencies, deposits or other Assets of the Fund in connection with
any such transactions has exercised reasonable care maintaining such property or
in connection with any such transaction involving such Assets. A "Sovereign
Risk" shall mean nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not
be liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall
not be liable for indemnification under this Section 5.06 unless the Fund shall
have promptly notified the Custodian in writing of the commencement of any
litigation or proceeding brought against the Fund in respect of which indemnity
may be sought under this Section 5.06. With respect to claims in such
litigation or proceedings for which indemnity by the Custodian may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Custodian shall be entitled to participate in any such litigation or
proceeding with counsel of its choice at its own expense in respect of that
portion of the litigation for which the Custodian may be subject to an
indemnification obligation; provided, however, the Fund shall be entitled to
participate in (but not control) at its own cost and expense, the defense of any
such litigation or proceeding if the Custodian has not acknowledged in writing
its obligation to indemnify the Fund with respect to such litigation or
proceeding. If the Custodian is not permitted to participate or control such
litigation or proceeding under applicable law or by a ruling of a court of
competent jurisdiction, or if the Custodian chooses not to so participate, the
Fund shall not consent to the entry of any judgement or enter into any
settlement in any such litigation or proceeding without providing the Custodian
with adequate notice of any such settlement or judgement, and without the
Custodian's prior written consent which consent shall not be unreasonably
withheld or delayed. The Fund shall submit written evidence to the Custodian
with respect to any cost or expense for which it is seeking indemnification in
such form and detail as the Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything
to the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an
obligation of the Custodian to enforce the Fund's rights. The Custodian agrees
to reimburse the Fund for out-of-pocket expenses incurred by it in connection
with the fulfillment of its obligations under this Section 5.07; provided,
however, that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first to
occur of: (a) termination by the Custodian by an instrument in writing
delivered or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
Account 2.22(A)
ADRs 2.06
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Distribution Account 2.16
Domestic Subcustodian 4.01
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement, provided that the
exercise by the Custodian or any Subcustodian of any such rights shall in all
events be in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Fund to the Custodian, at all times during the term
of this Agreement: (i) the Fund is duly organized under the laws of its
jurisdiction of organization and is registered as an open-end management
investment company under the 1940 Act or is a series of portfolio of such
entity; and (ii) the execution, delivery and performance by the Fund of this
Agreement are (w) within its power, (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Fund's corporate charter or other organizational document, or bylaws, or
any amendment thereof or any provision of its most recent Prospectus or
Statement of Additional Information.
(b) Representations and Warranties of the Custodian. The Custodian
hereby represents and warrants that each of the following shall be true, correct
and complete as of the date of execution of this Agreement and, unless notice to
the contrary is provided by the Custodian to the Fund, at all times during the
term of this Agreement: (i) the Custodian is duly organized under the laws of
its jurisdiction of organization and qualifies to serve as a custodian to open-
end management investment companies under the provisions of the 1940 Act; and
(ii) the execution, delivery and performance by the Custodian of this Agreement
are (w) within its power (x) have been duly authorized by all necessary action,
and (y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement
may be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought;
provided, however, the Subcustodian List may be amended from time to time by the
Fund's execution and delivery to the Custodian of an amended Subcustodian List,
in which case such amendment shall take effect immediately upon execution by the
Custodian.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which
are included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
TMK/United Funds, Inc. Science and Technology Portfolio
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7772
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have been signed
and delivered by each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties
hereto agree that each shall treat confidentially the terms and conditions of
this Agreement and all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party without
the prior consent of such providing party. The foregoing shall not be
applicable to any information that is publicly available when provided or
thereafter becomes publicly available other than through a breach of this
Agreement, or that is required to be disclosed by any bank examiner of the
Custodian or any Subcustodians, any auditor or examiner of the parties hereto,
by judicial or administrative process or otherwise by applicable law or
regulation. The provisions of this Section 9.11 and Section 9.01, 9.07, Section
2.28, Section 3.04, Section 4.05, Section 7.01, Article V and Article VI hereof
and any other rights or obligations incurred or accrued by any party hereto
prior to termination of this Agreement shall survive any termination of this
Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
TMK/UNITED FUNDS, INC. UMB BANK, n.a.
SCIENCE AND TECHNOLOGY PORTFOLIO
By: /s/Sharon K. Pappas By: /s/Ralph R. Santoro
- ------------------------ -------------------
Name: Sharon K. Pappas Name: Ralph R. Santoro
Title: Vice President Title: Vice President
<PAGE>
APPENDIX "A"
TO CUSTODIAN AGREEMENT
BETWEEN
TMK/UNITED FUNDS, INC. SCIENCE AND TECHNOLOGY PORTFOLIO
AND
UMB BANK, n.a.
Dated as of April 4, 1997
The following is a list of Domestic Subcustodians, Foreign Sub-Subcustodian
and Special Subcustodians under the Custodian Agreement as amended:
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
Country Sub-Custodian Depository
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, Brazil BOVESPA, CLC
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
Denmark Den Danske Bank VP
Finland Merita Securities Association
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing
Company
India Citibank, N.A., Mumbai None
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Honk Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De
Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. None
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United
Kingdom Midland Securities PLC CMO; CGO; CrestCo
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
TMK/UNITED FUNDS, INC. SCIENCE AND TECHNOLOGY PORTFOLIO
AND
UMB BANK, n.a.
Dated as of April 4, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets
held in the United States including but not limited to American Depositary
Receipts. Foreign assets shall include all assets held outside the United
States including but not limited to securities which clear through Euroclear or
CEDEL. The Custodian will provide as soon as practicable after receiving the
information provided by the Fund with respect to the net asset level numbers, a
bill for the Fund, including such reasonable detail in support of each bill as
may be reasonably requested by the Fund. As used in this Appendix "B", "United
Funds" shall mean all funds in the United Group of Funds, TMK/United Funds,
Inc., TMK/United Funds, Inc. Science and Technology Portfolio, Torchmark Insured
Tax-Free Fund, Inc. and Torchmark Government Securities Fund, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus
.00004 for any net assets exceeding $5,000,000,000 of the assets of all the
United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a)For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through the
New York office (physical settlement) 20.00
(c)For each futures/options contract written 25.00
(d)For each principal/interest paydown 6.00
(e)For each interfund note transaction 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and cash
management balances of each Fund at the Custodian to earn the Custodian's
daily repurchase agreement rate less reserve requirements and FDIC
premiums. Negative earnings credits will be charged on all uncollected
custody and cash management balances of each Fund at the Custodian's prime
rate less 150 basis points on each day a negative balance occurs. Positive
and/or negative earnings credits will be monitored daily for each Fund and
the net positive or negative amount for each Fund will be included in the
monthly statements. Excess positive credits for each Fund will be carried
forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
Market: Annual Asset Fees Transaction Fees
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Phillippines .0035 $95
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
Note: Fee Schedule eliminates sub-custodian asset and transaction-based out-
of-pocket expenses. Other sub-custodian out-of-pocket expenses (i.e. Scrip
fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
C. Short-term Dollar Denominated Global Assets
Eurodollar CDs, Time Deposits
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of short-term dollar denominated assets), at
the annual rate of:
.0004 on all short-term dollar denominated assets of the United Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members 153.00
First Chicago Clearing Centre-Income Collection 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of Euroclear issues), at the annual rate of:
2.5 basis points on all United Funds Euroclear assets held in account
at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
EX-99.B11-tkconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 19 to Registration
Statement No. 33-11466 of our report dated February 7, 1997 appearing in the
Statement of Additional Information, which is part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectuses, which also are a part of such Registration
Statement.
Deloitte & Touche LLP
Kansas City, Missouri
April 1, 1997
EX-99.B11-tkpwcon
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 16 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 8, 1996, relating to the statement of changes in net assets for the
year ended December 31, 1995 and the financial highlights for each of the nine
years in the period ended December 31, 1995 of TMK/United Funds, Inc., which
appears in such Statement of Additional Information, and to the incorporation by
reference of our report into the Prospectus which constitutes part of this
Registration Statement. We also consent to the reference to us under the
heading "Financial Highlights" in such Prospectus.
Price Waterhouse LLP
Kansas City, Missouri
April 1, 1997
EX-99.B11-tkpwopin
Report of Independent Accountants
To the Board of Directors and Shareholders of
TMK/United Funds, Inc.
In our opinion, the accompanying statement of changes in net assets and the
financial highlights present fairly, in all material respects, the changes in
the net assets and financial highlights of each of the ten portfolios comprising
TMK/United Funds, Inc. (the "Fund") for the year ended December 31, 1995 and for
each of the nine years in the period ended December 31, 1995, respectively, in
conformity with generally accepted accounting principles. These statements of
changes in net assets 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, 1995 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.
We have not audited the financial statements of TMK/United Funds, Inc. for the
twelve-month period ended December 31, 1996.
Price Waterhouse LLP
Kansas City, Missouri
February 8, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 01
<NAME> MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 34,563,968
<INVESTMENTS-AT-VALUE> 34,563,968
<RECEIVABLES> 2,898,505
<ASSETS-OTHER> 968
<OTHER-ITEMS-ASSETS> 3,157
<TOTAL-ASSETS> 37,466,598
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 208,996
<TOTAL-LIABILITIES> 208,996
<SENIOR-EQUITY> 372,576
<PAID-IN-CAPITAL-COMMON> 36,885,026
<SHARES-COMMON-STOCK> 37,257,602
<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> 37,257,602
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,980,105
<OTHER-INCOME> 0
<EXPENSES-NET> (222,003)
<NET-INVESTMENT-INCOME> 1,758,102
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,758,102
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,758,102)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 217,565,342
<NUMBER-OF-SHARES-REDEEMED> (218,938,170)
<SHARES-REINVESTED> 1,758,186
<NET-CHANGE-IN-ASSETS> 385,358
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 181,734
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 222,003
<AVERAGE-NET-ASSETS> 36,114,966
<PER-SHARE-NAV-BEGIN> 1
<PER-SHARE-NII> .049
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.049)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1
<EXPENSE-RATIO> .61
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 02
<NAME> BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 89,456,707
<INVESTMENTS-AT-VALUE> 91,023,888
<RECEIVABLES> 1,407,696
<ASSETS-OTHER> 1,111
<OTHER-ITEMS-ASSETS> 4,462
<TOTAL-ASSETS> 92,437,157
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 70,371
<TOTAL-LIABILITIES> 70,371
<SENIOR-EQUITY> 177,614
<PAID-IN-CAPITAL-COMMON> 93,241,722
<SHARES-COMMON-STOCK> 17,761,447
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,619,731)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,567,181
<NET-ASSETS> 92,366,786
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,148,572
<OTHER-INCOME> 0
<EXPENSES-NET> (518,886)
<NET-INVESTMENT-INCOME> 5,629,686
<REALIZED-GAINS-CURRENT> 33,713
<APPREC-INCREASE-CURRENT> (2,694,467)
<NET-CHANGE-FROM-OPS> 2,968,932
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,680,095)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,284,864
<NUMBER-OF-SHARES-REDEEMED> (2,142,176)
<SHARES-REINVESTED> 1,092,242
<NET-CHANGE-IN-ASSETS> 3,797,279
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 469,708
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 518,886
<AVERAGE-NET-ASSETS> 88,072,387
<PER-SHARE-NAV-BEGIN> 5.359
<PER-SHARE-NII> .317
<PER-SHARE-GAIN-APPREC> (.156)
<PER-SHARE-DIVIDEND> (.320)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.20
<EXPENSE-RATIO> .59
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 03
<NAME> HIGH INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 92,504,285
<INVESTMENTS-AT-VALUE> 95,388,987
<RECEIVABLES> 317,595
<ASSETS-OTHER> 1,281
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 97,511,420
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 105,349
<TOTAL-LIABILITIES> 105,349
<SENIOR-EQUITY> 212,908
<PAID-IN-CAPITAL-COMMON> 94,545,977
<SHARES-COMMON-STOCK> 21,290,838
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (237,516)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,884,702
<NET-ASSETS> 97,406,071
<DIVIDEND-INCOME> 125,386
<INTEREST-INCOME> 8,733,322
<OTHER-INCOME> 0
<EXPENSES-NET> (639,149)
<NET-INVESTMENT-INCOME> 8,219,559
<REALIZED-GAINS-CURRENT> 2,951,518
<APPREC-INCREASE-CURRENT> (486,973)
<NET-CHANGE-FROM-OPS> 10,684,104
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,219,559)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,475,713
<NUMBER-OF-SHARES-REDEEMED> (2,484,538)
<SHARES-REINVESTED> 1,796,625
<NET-CHANGE-IN-ASSETS> 10,719,878
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 590,009
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 639,149
<AVERAGE-NET-ASSETS> 90,275,672
<PER-SHARE-NAV-BEGIN> 4.445
<PER-SHARE-NII> .386
<PER-SHARE-GAIN-APPREC> .13
<PER-SHARE-DIVIDEND> (.386)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.575
<EXPENSE-RATIO> .71
<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, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 482,506,358
<INVESTMENTS-AT-VALUE> 512,448,451
<RECEIVABLES> 777,805
<ASSETS-OTHER> 3,137
<OTHER-ITEMS-ASSETS> 13,765
<TOTAL-ASSETS> 513,243,158
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 80,468
<TOTAL-LIABILITIES> 80,468
<SENIOR-EQUITY> 755,015
<PAID-IN-CAPITAL-COMMON> 482,465,582
<SHARES-COMMON-STOCK> 75,501,538
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,942,093
<NET-ASSETS> 513,162,690
<DIVIDEND-INCOME> 7,032,017
<INTEREST-INCOME> 2,967,518
<OTHER-INCOME> 0
<EXPENSES-NET> (3,380,280)
<NET-INVESTMENT-INCOME> 6,619,255
<REALIZED-GAINS-CURRENT> 51,961,378
<APPREC-INCREASE-CURRENT> (3,365,641)
<NET-CHANGE-FROM-OPS> 55,214,992
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,621,032)
<DISTRIBUTIONS-OF-GAINS> (51,959,601)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,798,375
<NUMBER-OF-SHARES-REDEEMED> (5,273,088)
<SHARES-REINVESTED> 8,618,982
<NET-CHANGE-IN-ASSETS> 94,337,006
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,238,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,380,280
<AVERAGE-NET-ASSETS> 460,328,655
<PER-SHARE-NAV-BEGIN> 6.826
<PER-SHARE-NII> .088
<PER-SHARE-GAIN-APPREC> .659
<PER-SHARE-DIVIDEND> (.088)
<PER-SHARE-DISTRIBUTIONS> (.688)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.797
<EXPENSE-RATIO> .73
<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, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 323,473,376
<INVESTMENTS-AT-VALUE> 463,979,407
<RECEIVABLES> 598,910
<ASSETS-OTHER> 2,095
<OTHER-ITEMS-ASSETS> 5,243
<TOTAL-ASSETS> 464,585,655
<PAYABLE-FOR-SECURITIES> 2,141,771
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,464
<TOTAL-LIABILITIES> 2,194,235
<SENIOR-EQUITY> 456,129
<PAID-IN-CAPITAL-COMMON> 321,429,249
<SHARES-COMMON-STOCK> 45,612,852
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 140,506,042
<NET-ASSETS> 462,391,420
<DIVIDEND-INCOME> 5,508,654
<INTEREST-INCOME> 1,189,162
<OTHER-INCOME> 0
<EXPENSES-NET> (2,888,332)
<NET-INVESTMENT-INCOME> 3,809,484
<REALIZED-GAINS-CURRENT> 7,401,806
<APPREC-INCREASE-CURRENT> 60,154,057
<NET-CHANGE-FROM-OPS> 71,365,347
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,809,484)
<DISTRIBUTIONS-OF-GAINS> (7,400,042)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,532,901
<NUMBER-OF-SHARES-REDEEMED> (3,201,312)
<SHARES-REINVESTED> 1,105,770
<NET-CHANGE-IN-ASSETS> 131,197,388
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,772,236
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,888,332
<AVERAGE-NET-ASSETS> 393,894,256
<PER-SHARE-NAV-BEGIN> 8.676
<PER-SHARE-NII> .084
<PER-SHARE-GAIN-APPREC> 1.624
<PER-SHARE-DIVIDEND> (.084)
<PER-SHARE-DISTRIBUTIONS> (.162)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.137
<EXPENSE-RATIO> .73
<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, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 69,850,245
<INVESTMENTS-AT-VALUE> 80,225,093
<RECEIVABLES> 162,065
<ASSETS-OTHER> 575
<OTHER-ITEMS-ASSETS> 5,496
<TOTAL-ASSETS> 80,393,229
<PAYABLE-FOR-SECURITIES> 525,759
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,017
<TOTAL-LIABILITIES> 543,776
<SENIOR-EQUITY> 133,104
<PAID-IN-CAPITAL-COMMON> 70,594,734
<SHARES-COMMON-STOCK> 13,310,431
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,248,302)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,369,917
<NET-ASSETS> 79,849,453
<DIVIDEND-INCOME> 778,353
<INTEREST-INCOME> 768,107
<OTHER-INCOME> 0
<EXPENSES-NET> (636,555)
<NET-INVESTMENT-INCOME> 909,905
<REALIZED-GAINS-CURRENT> (1,037,336)
<APPREC-INCREASE-CURRENT> 9,364,785
<NET-CHANGE-FROM-OPS> 9,237,354
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (845,962)
<DISTRIBUTIONS-OF-GAINS> (169,132)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,545,608
<NUMBER-OF-SHARES-REDEEMED> (913,129)
<SHARES-REINVESTED> 169,211
<NET-CHANGE-IN-ASSETS> 29,653,108
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 513,923
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 636,555
<AVERAGE-NET-ASSETS> 63,916,047
<PER-SHARE-NAV-BEGIN> 5.279
<PER-SHARE-NII> .066
<PER-SHARE-GAIN-APPREC> .73
<PER-SHARE-DIVIDEND> (.064)
<PER-SHARE-DISTRIBUTIONS> (.013)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.999
<EXPENSE-RATIO> 1
<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, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 88,191,140
<INVESTMENTS-AT-VALUE> 97,315,515
<RECEIVABLES> 978,537
<ASSETS-OTHER> 600
<OTHER-ITEMS-ASSETS> 4,758
<TOTAL-ASSETS> 98,299,410
<PAYABLE-FOR-SECURITIES> 881,250
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,870
<TOTAL-LIABILITIES> 891,120
<SENIOR-EQUITY> 121,492
<PAID-IN-CAPITAL-COMMON> 88,162,423
<SHARES-COMMON-STOCK> 12,149,248
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,124,375
<NET-ASSETS> 97,408,290
<DIVIDEND-INCOME> 6,825
<INTEREST-INCOME> 928,415
<OTHER-INCOME> 0
<EXPENSES-NET> (737,238)
<NET-INVESTMENT-INCOME> 198,002
<REALIZED-GAINS-CURRENT> 3,641,030
<APPREC-INCREASE-CURRENT> 172,785
<NET-CHANGE-FROM-OPS> 4,011,817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (198,002)
<DISTRIBUTIONS-OF-GAINS> (3,641,030)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,458,630
<NUMBER-OF-SHARES-REDEEMED> (1,014,254)
<SHARES-REINVESTED> 478,826
<NET-CHANGE-IN-ASSETS> 41,816,843
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 689,578
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 737,238
<AVERAGE-NET-ASSETS> 80,734,446
<PER-SHARE-NAV-BEGIN> 7.693
<PER-SHARE-NII> .016
<PER-SHARE-GAIN-APPREC> .624
<PER-SHARE-DIVIDEND> (.016)
<PER-SHARE-DISTRIBUTIONS> (.300)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.018
<EXPENSE-RATIO> .91
<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, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 38,551,530
<INVESTMENTS-AT-VALUE> 42,026,516
<RECEIVABLES> 408,370
<ASSETS-OTHER> 350
<OTHER-ITEMS-ASSETS> 2,272
<TOTAL-ASSETS> 42,437,508
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,450
<TOTAL-LIABILITIES> 10,450
<SENIOR-EQUITY> 68,467
<PAID-IN-CAPITAL-COMMON> 38,883,605
<SHARES-COMMON-STOCK> 6,846,695
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,474,986
<NET-ASSETS> 42,427,058
<DIVIDEND-INCOME> 383,567
<INTEREST-INCOME> 870,557
<OTHER-INCOME> 0
<EXPENSES-NET> (225,828)
<NET-INVESTMENT-INCOME> 1,028,296
<REALIZED-GAINS-CURRENT> 1,316,721
<APPREC-INCREASE-CURRENT> 1,209,473
<NET-CHANGE-FROM-OPS> 3,554,490
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,029,586)
<DISTRIBUTIONS-OF-GAINS> (1,315,431)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,884,829
<NUMBER-OF-SHARES-REDEEMED> (417,037)
<SHARES-REINVESTED> 378,430
<NET-CHANGE-IN-ASSETS> 18,824,186
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 194,884
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 225,828
<AVERAGE-NET-ASSETS> 32,297,840
<PER-SHARE-NAV-BEGIN> 5.9
<PER-SHARE-NII> .150
<PER-SHARE-GAIN-APPREC> .489
<PER-SHARE-DIVIDEND> (.150)
<PER-SHARE-DISTRIBUTIONS> (.192)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.197
<EXPENSE-RATIO> .7
<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, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 3,621,369
<INVESTMENTS-AT-VALUE> 3,646,722
<RECEIVABLES> 66,241
<ASSETS-OTHER> 145
<OTHER-ITEMS-ASSETS> 2,548
<TOTAL-ASSETS> 3,715,656
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 232
<TOTAL-LIABILITIES> 232
<SENIOR-EQUITY> 7,195
<PAID-IN-CAPITAL-COMMON> 3,682,876
<SHARES-COMMON-STOCK> 719,500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,353
<NET-ASSETS> 3,715,424
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 218,628
<OTHER-INCOME> 0
<EXPENSES-NET> (24,829)
<NET-INVESTMENT-INCOME> 193,799
<REALIZED-GAINS-CURRENT> 848
<APPREC-INCREASE-CURRENT> (66,484)
<NET-CHANGE-FROM-OPS> 128,163
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (193,799)
<DISTRIBUTIONS-OF-GAINS> (848)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 223,662
<NUMBER-OF-SHARES-REDEEMED> (85,156)
<SHARES-REINVESTED> 37,694
<NET-CHANGE-IN-ASSETS> 861,945
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 18,112
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24,829
<AVERAGE-NET-ASSETS> 3,273,213
<PER-SHARE-NAV-BEGIN> 5.252
<PER-SHARE-NII> .269
<PER-SHARE-GAIN-APPREC> (.087)
<PER-SHARE-DIVIDEND> (.269)
<PER-SHARE-DISTRIBUTIONS> (.001)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.164
<EXPENSE-RATIO> .76
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TMK/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 10
<NAME> ASSET STRATEGY PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 8,227,509
<INVESTMENTS-AT-VALUE> 8,384,830
<RECEIVABLES> 83,931
<ASSETS-OTHER> 145
<OTHER-ITEMS-ASSETS> 5,737
<TOTAL-ASSETS> 8,474,643
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 445
<TOTAL-LIABILITIES> 445
<SENIOR-EQUITY> 16,505
<PAID-IN-CAPITAL-COMMON> 8,346,900
<SHARES-COMMON-STOCK> 1,650,512
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46,572)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 157,365
<NET-ASSETS> 8,474,198
<DIVIDEND-INCOME> 18,744
<INTEREST-INCOME> 339,073
<OTHER-INCOME> 0
<EXPENSES-NET> (68,558)
<NET-INVESTMENT-INCOME> 289,259
<REALIZED-GAINS-CURRENT> (46,700)
<APPREC-INCREASE-CURRENT> 211,346
<NET-CHANGE-FROM-OPS> 453,905
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (289,131)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,038,946
<NUMBER-OF-SHARES-REDEEMED> (311,169)
<SHARES-REINVESTED> 56,314
<NET-CHANGE-IN-ASSETS> 4,130,256
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 59,397
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 68,558
<AVERAGE-NET-ASSETS> 7,388,024
<PER-SHARE-NAV-BEGIN> 5.014
<PER-SHARE-NII> .176
<PER-SHARE-GAIN-APPREC> .120
<PER-SHARE-DIVIDEND> (.175)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.134
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
TMK/UNITED FUNDS, INC.
6300 LAMAR AVENUE
P. O. BOX 29217
SHAWNEE MISSION, KANSAS 66201-9217
April 1, 1997
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N. W.
Judiciary Plaza
Washington, D. C. 20549
RE: TMK/United Funds, Inc.
Post-Effective Amendment No. 16
Dear Sir or Madam:
In connection with the filing of the above-referenced Post-Effective Amendment,
I hereby represent that the Amendment does not contain disclosures which would
render it ineligible to become effective pursuant to paragraph (b) of Rule 485.
Very truly yours,
Sharon K. Pappas
General Counsel
SKP/fr
