TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
- -----------------------------------------------------------------
May 1, 1998
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
Primary goal of maintenance of current income, subject to market
conditions, with a secondary goal of capital growth by investing primarily in
common stocks, or securities convertible into common stocks, that have a record
of paying regular dividends on common stock or have the potential for capital
growth or that may be expected to resist market decline.
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 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 May 1, 1998. 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: Primary goal of maintenance of current income, subject
to market conditions, with a secondary goal of capital growth by investing
primarily in common stocks, or securities convertible into common stocks, that
have a record of paying regular dividends on common stock or have the potential
for capital growth or that may be expected to resist market decline.
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 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."
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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
<TABLE>
GROWTH PORTFOLIO
For the fiscal year ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ........... $6.7967 $6.8260 $5.8986 $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837 $4.7846
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.0574 0.0990 0.0903 0.1211 0.0537 0.1013 0.1229 0.1661 0.1611 0.1539
Net realized and
unrealized gain
(loss) on
investments .... 1.4003 0.7478 2.1842 0.0268 0.8087 1.0653 1.6636 (0.4546) 1.2150 0.4944
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....... 1.4577 0.8468 2.2745 0.1479 0.8624 1.1666 1.7865 (0.2885) 1.3761 0.6483
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.0570) (0.0990) (0.0903) (0.1211) (0.0537) (0.1013) (0.1229) (0.1661) (0.1611) (0.1539)
From capital gains (0.6295) (0.7771) (1.2568) (0.3244) (0.7569) (0.5121) (1.0142) (0.0000) (0.7962) (0.2953)
In excess of capital
gains .......... (0.0000) (0.0000) (0.0000) (0.0000) (0.0061) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.6865) (0.8761) (1.3471) (0.4455) (0.8167) (0.6134) (1.1371) (0.1661) (0.9573) (0.4492)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .... $7.5679 $6.7967 $6.8260 $5.8986 $6.1962 $6.1505 $5.5973 $4.9479 $5.4025 $4.9837
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return ....... 21.45% 12.40% 38.57% 2.39% 14.02% 20.84% 36.10% -5.34% 27.61% 13.55%
Net assets, end of
period (000
omitted) ......... $639,359 $513,163 $418,826 $276,737 $220,590 $122,363 $69,044 $37,440 $28,510 $14,521
Ratio of expenses
to average net
assets ........... 0.72% 0.73% 0.75% 0.77% 0.78% 0.80% 0.86% 0.86% 0.85% 0.96%
Ratio of net investment
income to average
net assets ....... 0.75% 1.44% 1.35% 2.07% 1.01% 2.00% 2.43% 3.58% 3.40% 3.79%
Portfolio turnover
rate ............. 162.41% 243.00% 245.80% 277.36% 297.81% 225.87% 316.72% 331.15% 344.71% 278.57%
Average commission
rate paid ........ $0.0592 $0.0572
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
<TABLE>
INCOME PORTFOLIO
For the fiscal year ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991*
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ........... $10.1373 $ 8.6756 $6.7689 $6.9180 $5.9530 $5.3158 $5.0000
------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.0916 0.0856 0.0839 0.0702 0.0651 0.0803 0.0633
Net realized and
unrealized gain
(loss) on
investments .... 2.5598 1.6280 2.0525 (0.1490) 0.9650 0.6496 0.3158
------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....... 2.6514 1.7136 2.1364 (0.0788) 1.0301 0.7299 0.3791
------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.0915) (0.0856) (0.0839) (0.0703) (0.0651) (0.0803) (0.0633)
From capital gains (0.7357) (0.1663) (0.1457) (0.0000) (0.0000) (0.0124) (0.0000)
In excess of
capital gains .. (0.0000) (0.0000) (0.0001) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- ------- -------
Total distributions (0.8272) (0.2519) (0.2297) (0.0703) (0.0651) (0.0927) (0.0633)
------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .... $11.9615 $10.1373 $8.6756 $6.7689 $6.9180 $5.9530 $5.3158
======== ======== ======= ======= ======= ======= =======
Total return ....... 26.16% 19.75% 31.56% -1.14% 17.30% 13.78% 17.43%
Net assets, end of
period (000
omitted) ......... $636,904 $462,391 $331,194 $218,774 $155,092 $65,027 $15,640
Ratio of expenses
to average net
assets ........... 0.72% 0.73% 0.77% 0.77% 0.79% 0.85% 0.89%
Ratio of net investment
income to average
net assets ....... 0.80% 0.97% 1.13% 1.16% 1.36% 1.78% 2.47%
Portfolio turnover
rate ............. 36.61% 22.95% 15.00% 23.32% 18.38% 15.74% 4.41%
Average commission
rate paid ........ $0.0602 $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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the period
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout the period)
SCIENCE AND TECHNOLOGY PORTFOLIO
For the
period ended
December 31,
1997*
-----------
Net asset value,
beginning of
period ... $5.0000
------
Income from investment
operations:
Net investment
income .. 0.0146
Net realized and
unrealized gain
on investments 0.7971
------
Total from investment
operations 0.8117
------
Less distributions:
From net investment
income .. (0.0146)
From capital gains (0.0245)
------
Total distributions (0.0391)
------
Net asset value,
end of period $5.7726
======
Total return 16.24%
Net assets, end of
period (000
omitted) . $10,207
Ratio of expenses
to average net
assets .... 0.94%
Ratio of net investment
income to average
net assets 0.64%
Portfolio turnover
rate ..... 15.63%
Average commission
rate paid . $0.0361
*Science and Technology Portfolio's inception date is March 13, 1997; 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 April 4, 1997 (initial offering)
through December 31, 1997. Ratios have been annualized.
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
INTERNATIONAL PORTFOLIO
For the fiscal year ended For the
December 31, period
--------------------------- ended
1997 1996 1995 12/31/94*
---- ---- ---- --------
Net asset value,
beginning of
period ........... $5.9990 $5.2790 $4.9926 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.0485 0.0644 0.0846 0.0207
Net realized and
unrealized gain (loss)
on investments . 0.9534 0.7329 0.2790 (0.0074)
------- ------- ------- -------
Total from investment
operations ....... 1.0019 0.7973 0.3636 0.0133
------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.0463) (0.0644) (0.0772) (0.0207)
From capital gains (0.5704) (0.0129) (0.0000) (0.0000)
------- ------- ------- -------
Total distributions (0.6167) (0.0773) (0.0772) (0.0207)
------- ------- ------- -------
Net asset value,
end of period .... $6.3842 $5.9990 $5.2790 $4.9926
======= ======= ======= =======
Total return ....... 16.70% 15.11% 7.28% 0.26%
Net assets, end of
period (000
omitted) ......... $114,631 $79,849 $50,196 $26,020
Ratio of expenses
to average net
assets ........... 0.98% 1.00% 1.02% 1.26%
Ratio of net investment
income to average
net assets ....... 0.79% 1.42% 1.99% 1.36%
Portfolio turnover
rate ............. 117.37% 75.01% 34.93% 23.23%
Average commission
rate paid ........ $0.0093 $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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
SMALL CAP PORTFOLIO
For the fiscal year ended For the
December 31, period
--------------------------- ended
1997 1996 1995 12/31/94*
---- ---- ---- --------
Net asset value,
beginning of
period ........... $8.0176 $7.6932 $5.9918 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.0279 0.0170 0.0900 0.0376
Net realized and
unrealized gain
on investments . 2.5004 0.6367 1.8470 1.0086
------- ------- ------- -------
Total from investment
operations ....... 2.5283 0.6537 1.9370 1.0462
------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.0282) (0.0170) (0.0900) (0.0376)
From capital gains (2.1861) (0.3123) (0.1456) (0.0168)
------- ------- ------- -------
Total distributions (2.2143) (0.3293) (0.2356) (0.0544)
------- ------- ------- -------
Net asset value,
end of period .... $8.3316 $8.0176 $7.6932 $5.9918
======= ======= ======= =======
Total return ....... 31.53% 8.50% 32.32% 20.92%
Net assets, end of
period (000
omitted) ......... $148,238 $97,408 $55,591 $16,080
Ratio of expenses
to average net
assets ........... 0.90% 0.91% 0.96% 1.08%
Ratio of net investment
income to average
net assets ....... 0.32% 0.25% 1.77% 2.35%
Portfolio turnover
rate ............. 211.46% 133.77% 43.27% 21.61%
Average commission
rate paid ........ $0.0521 $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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
BALANCED PORTFOLIO
For the fiscal year ended For the
December 31, period
---------------------------- ended
1997 1996 1995 12/31/94*
---- ---- ---- --------
Net asset value,
beginning of
period ........... $6.1967 $5.9000 $4.9359 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.1805 0.1594 0.1333 0.0460
Net realized and
unrealized gain (loss)
on investments . 0.9650 0.5003 1.0611 (0.0641)
------- ------- ------- -------
Total from investment
operations ....... 1.1455 0.6597 1.1944 (0.0181)
------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.1805) (0.1594) (0.1333) (0.0460)
From capital gains (0.3931) (0.2036) (0.0970) (0.0000)
------- ------- ------- -------
Total distributions (0.5736) (0.3630) (0.2303) (0.0460)
------- ------- ------- -------
Net asset value,
end of period .... $6.7686 $6.1967 $5.9000 $4.9359
======= ======= ======= =======
Total return ....... 18.49% 11.19% 24.19% -0.37%
Net assets, end of
period (000
omitted) ......... $67,759 $42,427 $23,603 $8,671
Ratio of expenses
to average net
assets ........... 0.67% 0.70% 0.72% 0.95%
Ratio of net investment
income to average
net assets ....... 3.06% 3.18% 3.22% 3.14%
Portfolio turnover
rate ............. 55.66% 44.23% 62.87% 19.74%
Average commission
rate paid ........ $0.0546 $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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
ASSET STRATEGY PORTFOLIO
For the fiscal year For the
ended December 31 period ended
----------------- December 31,
1997 1996 1995*
---- ---- ----------
Net asset value,
beginning of
period ........... $5.1343 $5.0137 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.1915 0.1814 0.0717
Net realized and
unrealized gain
on investments 0.5277 0.1206 0.0193
------- ------- -------
Total from investment
operations ....... 0.7192 0.3020 0.0910
------- ------- -------
Less distributions:
From net investment
income ......... (0.1919) (0.1814) (0.0713)
From capital gains (0.4647) (0.0000) (0.0060)
------- ------- -------
Total distributions (0.6566) (0.1814) (0.0773)
------- ------- -------
Net asset value,
end of period .... $5.1969 $5.1343 $5.0137
======= ======= =======
Total return ....... 14.01% 6.05% 1.80%
Net assets, end of
period (000
omitted) ......... $9,810 $8,474 $4,344
Ratio of expenses
to average net
assets ........... 0.93% 0.93% 0.91%
Ratio of net investment
income to average
net assets ....... 3.55% 3.92% 4.42%
Portfolio turnover
rate ............. 222.50% 49.92% 149.17%
Average commission
rate paid ........ $0.0400 $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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
MONEY MARKET PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 ........... 0.0503 0.0486 0.0542 0.0368 0.0260 0.0324 0.0536 0.0753 0.0852 0.0677
Less dividends
declared ......... (0.0503) (0.0486) (0.0542) (0.0368) (0.0260) (0.0324) (0.0536) (0.0753) (0.0852) (0.0677)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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 ....... 5.13% 5.01% 5.56% 3.72% 2.63% 3.29% 5.49% 7.82% 8.91% 7.37%
Net assets, end of
period (000
omitted) ......... $43,300 $37,258 $36,872 $30,812 $26,000 $23,995 $19,797 $16,870 $11,753 $8,711
Ratio of expenses
to average net
assets ........... 0.58% 0.61% 0.62% 0.65% 0.65% 0.65% 0.76% 0.79% 0.78% 0.94%
Ratio of net investment
income to average
net assets ....... 5.04% 4.87% 5.42% 3.72% 2.61% 3.17% 5.33% 7.52% 8.49% 6.84%
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
LIMITED-TERM BOND PORTFOLIO
For the fiscal year ended For the
December 31, period
--------------------------- ended
1997 1996 1995 12/31/94*
---- ---- ---- --------
Net asset value,
beginning of
period ........... $5.1639 $5.2521 $4.8611 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.3086 0.2842 0.2841 0.1507
Net realized and
unrealized gain (loss)
on investments . 0.0451 (0.0870) 0.4122 (0.1375)
------- ------- ------- -------
Total from investment
operations ....... 0.3537 0.1972 0.6963 0.0132
------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.3086) (0.2842) (0.2841) (0.1507)
From capital gains (0.0208) (0.0012) (0.0212) (0.0014)
------- ------- ------- -------
Total distributions (0.3294) (0.2854) (0.3053) (0.1521)
------- ------- ------- -------
Net asset value,
end of period .... $5.1882 $5.1639 $5.2521 $4.8611
======= ======= ======= =======
Total return ....... 6.85% 3.79% 14.29% 0.26%
Net assets, end of
period (000
omitted) ......... $4,252 $3,715 $2,853 $1,645
Ratio of expenses
to average net
assets ........... 0.73% 0.76% 0.71% 0.93%
Ratio of net investment
income to average
net assets ....... 5.93% 5.92% 6.22% 5.89%
Portfolio turnover
rate ............. 35.62% 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 in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
BOND PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ........... $5.2004 $5.3592 $4.7393 $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852 $4.9246
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.3400 0.3407 0.3556 0.3507 0.3334 0.3643 0.3867 0.4025 0.4155 0.4088
Net realized and
unrealized gain
(loss) on
investments .... 0.1682 (0.1588) 0.6202 (0.6652) 0.3046 0.0216 0.3771 (0.0715) 0.1397 (0.0394)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....... 0.5082 0.1819 0.9758 (0.3145) 0.6380 0.3859 0.7638 0.3310 0.5552 0.3694
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.3400) (0.3407) (0.3559) (0.3507) (0.3334) (0.3643) (0.3867) (0.4025) (0.4155) (0.4088)
From capital gains (0.0000) (0.0000) (0.0000) (0.0000) (0.1627) (0.0251) (0.0644) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.3400) (0.3407) (0.3559) (0.3507) (0.4961) (0.3894) (0.4511) (0.4025) (0.4155) (0.4088)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .... $5.3686 $5.2004 $5.3592 $4.7393 $5.4045 $5.2626 $5.2661 $4.9534 $5.0249 $4.8852
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return ....... 9.77% 3.43% 20.56% -5.90% 12.37% 7.67% 16.19% 7.03% 11.82% 7.74%
Net assets, end of
period (000
omitted) ......... $99,489 $92,367 $88,570 $74,017 $81,727 $49,428 $29,112 $16,464 $11,530 $6,465
Ratio of expenses
to average net
assets ........... 0.58% 0.59% 0.60% 0.62% 0.62% 0.64% 0.72% 0.78% 0.81% 0.96%
Ratio of net investment
income to average
net assets ....... 6.35% 6.39% 6.73% 6.73% 6.01% 6.91% 7.65% 8.05% 8.34% 8.17%
Portfolio turnover
rate ............. 36.81% 64.02% 71.17% 135.82% 68.75% 44.32% 52.50% 51.50% 42.83% 29.18%
</TABLE>
<PAGE>
TMK/United Funds, Inc.
Financial Highlights
The following information has been audited in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the year
ended December 31, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
(For a share outstanding throughout each period)
HIGH INCOME PORTFOLIO
<TABLE>
For the fiscal year ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ........... $4.5750 $4.4448 $4.1118 $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837 $4.7333
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ......... 0.4098 0.4216 0.4165 0.4106 0.3899 0.4050 0.4368 0.4346 0.5810 0.5263
Net realized and
unrealized gain
(loss) on
investments .... 0.2324 0.1302 0.3330 (0.5255) 0.3487 0.2116 0.6703 (0.7221) (0.7549) 0.1595
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....... 0.6422 0.5518 0.7495 (0.1149) 0.7386 0.6166 1.1071 (0.2875) (0.1739) 0.6858
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment
income ......... (0.4098) (0.4216) (0.4165) (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5263)
From capital gains (0.0672) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0091)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.4770) (0.4216) (0.4165) (0.4106) (0.3899) (0.4050) (0.4368) (0.4346) (0.5810) (0.5354)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .... $4.7402 $4.5750 $4.4448 $4.1118 $4.6373 $4.2886 $4.0770 $3.4067 $4.1288 $4.8837
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return ....... 14.04% 12.46% 18.19% -2.55% 17.90% 15.70% 34.19% -7.44% -4.19% 15.14%
Net assets, end of
period (000
omitted) ......... $119,524 $97,406 $86,686 $72,644 $71,265 $41,456 $24,394 $13,868 $15,717 $12,779
Ratio of expenses
to average net
assets ........... 0.70% 0.71% 0.72% 0.74% 0.75% 0.77% 0.87% 0.90% 0.82% 0.91%
Ratio of net investment
income to average
net assets ....... 8.79% 9.10% 9.25% 9.03% 8.66% 9.48% 11.32% 11.55% 12.54% 10.85%
Portfolio turnover
rate ............. 65.28% 58.91% 41.78% 37.86% 54.22% 60.79% 34.00% 12.21% 74.97% 46.75%
</TABLE>
<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 telephone number listed on the front
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
such as the Standard & Poor's 500 Composite Stock Price Index. 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 "Government securities", as defined in the
1940 Act) 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 "Government securities", as defined in the 1940 Act) 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,
Inc. ("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 instruments issued or guaranteed as to principal or interest by the
U.S. Government or an agency or instrumentality of the U.S. Government ("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 10% 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 primary goal of Income Portfolio is the maintenance of current income,
subject to market conditions. As a secondary goal, the Portfolio seeks capital
growth. It seeks to achieve these goals by investing primarily in common
stocks, or securities convertible into common stocks, of companies that have a
record of paying regular dividends on common stock or 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. 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
$1,500,000,000 as of the time of purchase. 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. The Portfolio may 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.
At least 65% of the Portfolio's total assets during normal market
conditions will be invested in debt securities. 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 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 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 0-100%
70%
Bond class 0-100%
25%
Short-term class 0-100%
5%
The Manager seeks to balance the investment risks undertaken by Asset
Strategy Portfolio against the higher total returns that may be available by
reducing exposure to the stock market during down cycles and allowing a higher
allocation in the stock class during periods of strongly positive market
performance. The Portfolio has the ability to take a more defensive posture by
increasing its holdings in the bond or short-term class when the Manager
believes that there exists a potential bear market, prolonged downturn in stock
prices or significant loss in value. 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.
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 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 (i) 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,
or (ii) precious metals.
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, forward contracts,
swaps, caps, collars, floors, indexed securities, stripped securities and
mortgage-backed and other asset-backed securities. However, Money Market
Portfolio may not purchase or sell options, futures contracts, forward
contracts, swaps, caps, collars or floors. Money Market Portfolio may invest in
indexed securities, stripped securities and mortgage-backed and other asset-
backed securities, subject to the requirements of Rule 2a-7. 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' respective goals. 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 may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest; instead, they are sold at a deep
discount from their face value and are redeemed at face value when they mature.
Because zero coupon securities do not pay current income, their prices can be
very volatile when interest rates change and generally are subject to greater
fluctuations in response to changing interest rates than the prices of debt
obligations of comparable maturities that make current distributions of interest
in cash.
The Federal tax law requires that a holder of a security with OID accrue a
ratable portion of the OID on the security as income each year, even though the
holder may receive no interest payment on the security during the year.
Accordingly, although a Portfolio will receive no payments on its zero coupon
securities prior to their maturity or disposition, it will have current income
attributable to those securities. Nevertheless, for income and excise tax
purposes a Portfolio annually must distribute to its shareholders substantially
all of its net investment income, including OID. Accordingly, a Portfolio will
be required to include in its dividends an amount equal to the income
attributable to its zero coupon and other OID securities. See "Taxes" in the
SAI. These dividends will be paid from a Portfolio's cash assets or by a
liquidation of portfolio securities, if necessary, at a time when the Portfolio
otherwise might not have done so.
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 total assets in debt securities rated below BBB by S&P or Baa by
MIS and unrated securities 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, 1997,
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 35.9% 0.0% 13.8%
AA 10.3 0.0 0.0
A 20.0 4.8 18.0
BBB 17.7 1.1 1.0
BB 12.9 17.6 7.0
B 0.9 65.4 2.0
CCC 0.0 2.7 0.0
CC 0.0 0.0 0.0
C 0.0 0.0 0.0
D 0.0 0.0 0.0
Unrated (Equivalent To)
- -------
AAA 0.9% 0.0% 2.5%
AA 0.0 0.0 0.0
A 0.0 0.1 0.0
BBB 0.0 0.0 0.0
BB 0.1 1.2 7.6
B 0.0 2.0 0.0
CCC 0.0 0.7 0.0
CC 0.0 0.0 0.0
C 0.0 0.0 0.0
D 0.0 0.0 0.0
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 total 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, (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 Portfolios may use certain options, futures contracts, forward
currency contracts, swaps, caps, collars, floors, indexed securities, mortgage-
backed and other asset-backed securities and certain other strategies described
herein to attempt to enhance income or yield or to attempt to reduce the risk of
their investments. The strategies described below may be used in an attempt to
manage a Portfolio's foreign currency exposure as well as other risks of a
Portfolio's investments that can affect fluctuation in its net asset value. A
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.
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.
Policies and Restrictions: Subject to the further limitations stated in
the SAI, generally, each Portfolio (other than Money Market Portfolio) may
purchase and sell any type of derivative instrument including, without
limitation, futures contracts, options, forward contracts, swaps, caps, collars,
floors and indexed securities. However, a Portfolio will only purchase or sell
a particular derivative instrument if the Portfolio is authorized to invest in
the type of asset by which the return on, or value of, the derivative instrument
is primarily measured or, with respect to foreign currency derivatives, if the
Portfolio is authorized to invest in foreign securities. Money Market Portfolio
may not purchase or sell options, futures contracts, forward contracts, swaps,
caps, collars or floors.
Options. A Portfolio may engage in certain strategies involving options to
attempt to enhance its income or yield or to attempt to reduce the overall risk
of its investments. 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.
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 the futures
contract at a specified exercise price at any time during the term of the
option. If a Portfolio writes a call, it assumes a short futures position. If
it writes a put, it assumes a long futures position. When a Portfolio purchases
an option on a futures contract, it acquires the right, in return for the
premium it pays, to assume a position in the futures contract (a long position
if the option is a call and a short position if the option is a put).
Forward Currency Contracts and Foreign Currencies. Each Portfolio (other
than Money Market Portfolio and Limited-Term Bond 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 a foreign
currency. For example, when the Manager anticipates purchasing or selling a
security denominated in a foreign currency, a Portfolio may enter into a forward
currency contract in order to set the exchange rate at which the transaction
will be made. A 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. Each of these
Portfolios 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.
Each of these Portfolios 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 a 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 currency
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. Each of these Portfolios 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.
Successful use of forward currency contracts depends 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.
Each of the Portfolios (other than Money Market Portfolio and Limited-Term
Bond Portfolio) may also purchase and sell foreign currency and invest in
foreign currency deposits. Currency conversion involves dealer spreads and
other costs, although commissions usually are not charged.
Indexed Securities 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 may invest
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.
Policies and Restrictions: Each Portfolio may purchase and sell indexed
securities. 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. Each Portfolio (other than Money Market Portfolio)
may enter into swaps, caps, collars and floors as described below. A Portfolio
may enter into these transactions to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against any increase in the
price of securities the Portfolio anticipates purchasing at a later date or to
attempt to enhance income or yield.
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. A collar combines
elements of buying a cap and selling a floor.
Depending on how they are used, the swap, cap, collar and floor agreements
used by a 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.
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 Portfolios understand that the position of the staff of the Securities
and Exchange Commission is that assets involved in such transactions are
illiquid and are, therefore, subject to the limitations on investment in
illiquid investments as described in the SAI.
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), the 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 decline 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 other 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-backed and other 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-backed and other 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.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, forward contracts, swaps, caps, collars and
floors, and the investment in indexed securities, stripped securities and
mortgage-backed and other asset-backed 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 for hedging purposes to adjust
the risk characteristics of a Portfolio's portfolio of investments and may use
these instruments to adjust the return characteristics of a Portfolio's
portfolio of investments. The use of derivative techniques 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,
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 currency exchange rate 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
Portfolio's yield.
When purchasing securities on a delayed-delivery basis, a Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. When a Portfolio sells a security on a delayed-delivery basis, a
Portfolio 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 Portfolio could miss a favorable price or yield
opportunity, or could suffer a loss.
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. Certain 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.
Policies and Restrictions: Each Portfolio may purchase restricted
securities. A Portfolio (other than Asset Strategy Portfolio) may not invest
more than 10% of its net assets in illiquid investments. Asset Strategy
Portfolio may not purchase any security if, as a result, more than 15% of its
net assets would be invested in illiquid investments.
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, with respect to 75% of its total assets,
purchase securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act), if immediately after and as a result of
such purchase, (a) the value of the holdings of the Portfolio in the securities
of such issuer exceeds 5% of the value of the Portfolio's total assets, or (b)
the Portfolio owns more than 10% of the outstanding voting securities of such
issuer. 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, more than 25% 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.
Precious Metals
The ability of Asset Strategy Portfolio to purchase and hold precious
metals such as gold, silver and platinum may allow it to benefit from a
potential increase in the price of precious metals or stability in the price of
such metals at a time when the value of securities may be declining. For
example, during periods of declining stock prices, the price of gold may
increase or remain stable, while the value of the stock market may be subject to
a general decline.
Precious metals prices are affected by various factors, such as economic
conditions, political events and monetary policies. As a result, the price of
gold, silver or platinum may fluctuate widely. The sole source of return to
Asset Strategy Portfolio from such investments will be gains realized on sales;
a negative return will be realized if the metal is sold at a loss. Investments
in precious metals do not provide a yield. Asset Strategy Portfolio's direct
investment in precious metals may be limited by tax considerations. See "Taxes"
in the SAI.
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. Asset Strategy Portfolio may borrow only from
banks. As a fundamental policy, Asset Strategy Portfolio may borrow money 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. As a fundamental policy, Money Market
Portfolio may not pledge, mortgage or hypothecate assets as security for
indebtedness except to secure permitted borrowings. As an operating policy,
none of the other Portfolios may pledge its assets in connection with any
permitted borrowings; however, this policy does not prevent a Portfolio from
pledging its assets in connection with its purchase and sale of futures
contracts, options, forward contracts, swaps, caps, collars, floors and other
financial instruments.
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 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 Asset Strategy Portfolio, International Portfolio and Limited-Term
Bond Portfolio do not currently intend to purchase the securities of any issuer
(other than securities issued or guaranteed by domestic or foreign governments
or political subdivisions 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, or a state or local government authority, or
their respective agencies or instrumentalities, or to collateralized mortgage
obligations, other mortgage-related securities, asset-backed securities, indexed
securities or over-the-counter derivative financial instruments.
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 a direct subsidiary
of Waddell & Reed Financial Services, Inc., a holding company, and Waddell &
Reed Financial, 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, 1997, the combined net assets of all of the Portfolios
were approximately $1.9 billion.
For the fiscal year ended December 31, 1997, 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% 0.58%
Bond Portfolio 0.53% 0.58%
High Income Portfolio 0.65% 0.70%
Growth Portfolio 0.70% 0.72%
Income Portfolio 0.70% 0.72%
International Portfolio 0.80% 0.98%
Small Cap Portfolio 0.85% 0.90%
Balanced Portfolio 0.60% 0.67%
Limited-Term Bond Portfolio 0.55% 0.73%
Asset Strategy Portfolio 0.80% 0.93%
*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.
Mira Stevovich is primarily responsible for the day-to-day management of
the portfolio of Money Market Portfolio. Ms. Stevovich has held her
responsibilities for Money Market Portfolio since May 1998. She is Assistant
Vice President of the Manager, Vice President and Assistant Treasurer of the
Fund and Vice President and Assistant Treasurer of one other investment company
for which the Manager serves as investment manager. Ms. Stevovich has served as
the Assistant 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 March
1987.
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 been an employee of
the Manager and has served as the portfolio manager for investment companies
managed by the Manager since August 1992.
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. She is Vice President of the Fund and Vice
President of other investment companies for which the Manager serves as
investment manager. From November 1985 to March 1998, Ms. Rieke was Vice
President of Waddell & Reed Asset Management Company, an affiliate of the
Manager. Ms. Rieke has served as the portfolio manager for investment companies
managed by Waddell & Reed, Inc. and its successor, the Manager, since July 1986
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, Vice
President of the Fund and one other investment company for which the Manager
serves as investment manager. From January 1995 to March 1998, Mr. Becker was
Vice President of Waddell & Reed Asset Management Company, an affiliate of the
Manager. Mr. Becker has been an employee of Waddell & Reed, Inc. and its
successor, the Manager, and has served as an investment analyst with the Manager
and Waddell & Reed, Inc. since October 1989.
Russell E. Thompson and James D. Wineland are 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. He is Vice President of
the Fund and Vice President of other investment companies for which the Manager
serves as investment manager. From January 1992 to March 1998, Mr. Thompson was
Senior Vice President of Waddell & Reed Asset Management Company, an affiliate
of the 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.
Mr. Wineland has held his Fund responsibilities since July 1, 1997. 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 March 1995 to March 1998, Mr. Wineland was Vice President of Waddell & Reed
Asset Management Company, an affiliate of the Manager. Mr. Wineland has served
as the portfolio manager for investment companies managed by Waddell & Reed,
Inc. and its successor, the Manager, since January 1988 and has been an employee
of Waddell & Reed, Inc. and its successor, the Manager, since November 1984.
Thomas A. Mengel is primarily responsible for the day-to-day management of
the portfolio of International Portfolio. Mr. Mengel has been an employee of
the Manager and 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.
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 employee of Waddell & Reed, Inc. and its successor, the Manager, and has
served as 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. From January 1993 to March 1998, Ms. Prince-Fox was Vice
President of Waddell & Reed Asset Management Company, an affiliate of the
Manager. Ms. Prince-Fox has served as the portfolio manager for investment
companies managed by the Manager since January 1993, and has been an employee of
Waddell & Reed, Inc. and its successor, the Manager, and has served as 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. From August 1992 to March 1998, Mr. Sterner was Vice
President of Waddell & Reed Asset Management Company, as affiliate of the
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.
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 the Fund and Vice
President of other investment companies for which the Manager serves as
investment manager. From March 1995 to March 1998, Mr. Avery was Vice President
of Waddell & Reed Asset Management Company, an affiliate of the Manager. Mr.
Avery has served as the portfolio manager for investment companies managed by
the Manager since February 1, 1994, has served as the director of research of
Waddell & Reed, Inc. and its successor, the Manager, 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 the Fund and Vice President of other
investment companies managed by the Manager. From May 1994 to March 1998, Mr.
Vrabac was Vice President of Waddell & Reed Asset Management Company, an
affiliate of the Manager. Mr. Vrabac has been an employee of the Manager and
has served as an investment analyst with the Manager since May 1994. He 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, the
Portfolio's inception. He is Vice President of the Manager, Vice President of
the Fund, and Vice President of other investment companies managed by the
Manager. From May 1988 to March 1998, Mr. Garcia was Vice President of Waddell
& Reed Asset Management Company, an affiliate of 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 the Nasdaq Stock Market 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 or telephone number listed 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, Inc. 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, Inc. 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, Inc. 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
May 1, 1998
Custodian
UMB Bank, n. a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue NW
Washington, D. C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106-2232
Investment Manager
Waddell & Reed Investment Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
TABLE OF CONTENTS
Prospectus Summary ..................... 2
Financial Highlights ................... 4
The Fund ............................... 15
Goals and Investment Policies
of the Portfolios .................... 16
Management ............................. 36
Net Asset Value ........................ 40
Purchases and Redemptions .............. 40
Dividends and Distributions ............ 41
Taxes .................................. 41
Other Information ...................... 42
Appendix A ............................. 43
<PAGE>
TMK/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
May 1, 1998
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
This SAI should be read in conjunction with the prospectus (the "Prospectus") of
TMK/United Funds, Inc. (the "Fund") dated May 1, 1998, which may be obtained by
request to the Fund or its 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 ......... 41
Net Asset Value .................................. 44
Directors and Officers ........................... 47
Purchases and Redemptions ........................ 54
Shareholder Communications ....................... 54
Taxes ............................................ 55
Dividends and Distributions ...................... 59
Portfolio Transactions and Brokerage ............. 60
Other Information ................................ 63
Financial Statements ............................. 65
<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, 1997, 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
1-1-97 to 1-1-93 to 1-1-88 to
12-31-97 12-31-97 12-31-97
----------- ----------- -----------
Bond Portfolio 9.77% 7.57% 8.83%
High Income Portfolio 14.04% 11.73% 10.67%
Growth Portfolio 21.45% 17.17% 17.42%
Income Portfolio 26.16% 18.18% 17.42*
International Portfolio 16.70% 10.56%**
Small Cap Portfolio 31.53% 25.26%**
Balanced Portfolio 18.49% 14.26%**
Limited-Term Bond Portfolio 6.85% 6.75%**
Asset Strategy Portfolio 14.01% 8.08%***
*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. Its aggregate
total return for the period from 4-4-97 through 12-31-97 was 16.24%
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, 1997, the date of the most recent balance sheet included in this
SAI, is as follows:
Bond Portfolio 6.50%
High Income Portfolio 9.08%
Limited-Term Bond Portfolio 6.48%
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, 1997, the date of the most recent balance sheet
included in this SAI, was 5.51% and its effective yield calculated for the same
period was 5.64%.
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
Composite Stock Price 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 investor.
(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) 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 securities, 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 may not invest more than 35%
of its total assets in these securities.
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 world-wide.
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.
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, participation certificates and collateralized
mortgage obligations. See "Mortgage-Backed and Asset-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 Securities
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 and Asset-Backed Securities
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.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, 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.
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.
Bank Deposits
Among the other debt securities in which the Portfolios 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 a
Portfolio may invest in them only within the 10% limit mentioned below under
"Illiquid Investments" (15% limit for Asset Strategy Portfolio) unless such
obligations are payable at principal amount plus accrued interest on demand or
within seven days after demand.
Indexed Securities
Each 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, subject to its operating
policy regarding derivative instruments and subject, in the case of Money Market
Portfolio only, to the requirements of Rule 2a-7. 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
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.
Restricted Securities
Each of the Portfolios may invest in 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"). 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.
There are risks associated with investment in restricted securities in that
there can be no assurance of a ready market for resale. Also, the contractual
restrictions on resale might prevent a Portfolio from reselling the securities
at a time when such sale would be desirable. Restricted securities in which a
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. See
"Illiquid Investments."
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.
Under a Portfolio's current securities lending procedures, the 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. 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. In other words, 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.
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) may invest in warrants
and rights. 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 are highly volatile and, therefore, more
susceptible to a sharp decline in value than the underlying security might be.
They are also generally less liquid than an investment in the underlying shares.
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 invest more than
10% of its net assets in illiquid investments. Asset Strategy Portfolio may not
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) over-the-counter ("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, caps, collars, floors and
indexed securities (collectively, "Financial Instruments") to attempt to enhance
a Portfolio's income or yield or to attempt to hedge a Portfolio's investments.
Generally, a Portfolio may purchase and sell any type of Financial Instrument.
However, as an operating policy, a Portfolio will only purchase or sell a
Financial Instrument if the Portfolio is authorized to invest in the type of
asset by which the return on, or value of, the Financial Instrument is primarily
measured or, with respect to foreign currency derivatives, if the Portfolio is
authorized to invest in foreign securities.
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 and the Commodity
Futures Trading Commission (the "CFTC"). In addition, a Portfolio's 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 Financial Instruments and other similar or
related techniques. These new opportunities may become available as the Manager
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new Financial Instruments 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 permitted by a 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 interest 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 and
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 to the
extent 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 an account with its custodian in
the prescribed amount as determined daily.
Assets used as cover or held in an 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 to cover or to accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
Options. The purchase of call options can serve as a long hedge, and the
purchase of put options can serve 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 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 or currency
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 or currency 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 under "Illiquid
Investments."
The value of an option position will reflect, among other things, the
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 a 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. A Portfolio 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.
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. There can be no assurance that a Portfolio will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a 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 the
Portfolio 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.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a Portfolio great flexibility to tailor
the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, 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.
Futures Contracts and Options on Futures Contracts. 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 contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies 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" 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 or trade that provides a secondary
market. However, there can be no assurance that a liquid secondary market will
exist for a particular contract 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 an option on a futures
contract 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 an option on
a 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 liquid assets in an 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 futures moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, a Portfolio will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, a Portfolio may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where a Portfolio has sold
index futures contracts to hedge 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.
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" at the time
of purchase) 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 policy does not
limit to 5% the percentage of the Portfolio's assets that are at risk in futures
contracts, options on futures contracts and currency options.
Foreign Currency Hedging Strategies--Special Considerations. Each
Portfolio (other than Money Market Portfolio and Limited-Term Bond Portfolio)
may use options and futures contracts on foreign currencies, as described above,
and forward currency contracts, as described below, to attempt to hedge against
movements in the values of the foreign currencies in which the Portfolio's
securities are denominated or to attempt to enhance income or yield. 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.
Each of these 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, a Portfolio 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 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. Each Portfolio (other than Money Market
Portfolio and Limited-Term Bond Portfolio) may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, a Portfolio may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Portfolio intends to
acquire. Forward currency contract transactions may also serve as short hedges;
for example, a Portfolio may sell a forward currency contract to lock in the
U.S. dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
Each of these Portfolios may also use forward currency 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 currency 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
currency 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.
Each of these Portfolios also may use forward currency contracts to attempt
to enhance income or yield. A Portfolio could use forward currency contracts to
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 currency contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency.
The cost to a Portfolio of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Portfolio enters into a forward currency contract, it relies
on the 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
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can
be no assurance that a Portfolio will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counterparty, a Portfolio might be unable to close
out a forward currency contract at any time prior to maturity. In either event,
the Portfolio would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or liquid assets in an
account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a Portfolio might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward currency 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.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Manager believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of a Portfolio will be served.
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 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 U.S. 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 with the
Portfolio's custodian that satisfies the requirements of the 1940 Act. Each
Portfolio will also establish and maintain such account 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) Purchase or sell physical commodities; however, this policy shall not
prevent a Portfolio other than Money Market Portfolio from purchasing
and selling foreign currency, futures contracts, options, forward
contracts, swaps, caps, collars, floors and other financial
instruments;
(iii) Buy real estate or any nonliquid interests in real estate investment
trusts;
(iv) Make loans, except loans of portfolio securities, and a Portfolio may
buy debt securities and other obligations consistent with its goal(s)
and its other investment policies and restrictions;
(v) Invest for the purpose of exercising control or management of other
companies;
(vi) Sell securities short (unless, for a Portfolio other than Money Market
Portfolio, it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short) or purchase securities on
margin, except that, for a Portfolio other than Money Market Portfolio,
(1) this policy does not prevent the Portfolio from entering into short
positions in foreign currency, futures contracts, options, forward
contracts, swaps, caps, collars, floors and other financial
instruments, (2) the Portfolio may obtain such short-term credits as
are necessary for the clearance of transactions, and (3) the Portfolio
may make margin payments in connection with futures contracts, options,
forward contracts, swaps, caps, collars, floors and other financial
instruments;
(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; or
(ix) With respect to 75% of its total assets, purchase securities of any one
issuer (other than cash items and "Government securities" as defined in
the 1940 Act), if immediately after and as a result of such purchase,
(a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of the Portfolio's total assets, or
(b) the Portfolio owns more than 10% of the outstanding voting
securities of such issuer; or buy a security 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 this
restriction); 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.
As additional fundamental policies of Money Market Portfolio that may not
be changed without shareholder approval, Money Market Portfolio may not:
(i) Engage in arbitrage transactions; or
(ii) Pledge, mortgage or hypothecate assets as security for indebtedness
except to secure permitted borrowings.
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 (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short)
or purchase securities on margin, except that (1) this policy does not
prevent the Portfolio from entering into short positions in foreign
currency, futures contracts, options, forward contracts, swaps, caps,
collars, floors and other financial instruments, (2) the Portfolio may
obtain such short-term credits as are necessary for the clearance of
transactions, and (3) the Portfolio may make margin payments in
connection with futures contracts, options, forward contracts, swaps,
caps, collars, floors and other financial instruments;
(iv) 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;
(v) 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;
(vi) 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;
(vii) 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);
(viii) purchase or sell physical commodities, except that the Portfolio may
purchase and sell precious metals for temporary, defensive purposes;
however, this policy shall not prevent the Portfolio from purchasing
and selling foreign currency, futures contracts, options, forward
contracts, swaps, caps, collars, floors and other financial
instruments; or
(ix) 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 debt securities and
other obligations consistent with its goal and other investment
policies and restrictions; and (c) by engaging in repurchase
agreements with respect to portfolio securities.
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 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, 1997
and December 31, 1996 for each of the Portfolios then in existence were as
follows:
1997 1996
---- ----
Money Market Portfolio 0.00% 0.00%
Bond Portfolio 36.81 64.02
High Income Portfolio 65.28 58.91
Growth Portfolio 162.41 243.00
Income Portfolio 36.61 22.95
International Portfolio 117.37 75.01
Small Cap Portfolio 211.46 133.77
Balanced Portfolio 55.66 44.23
Limited-Term Bond Portfolio 35.62 15.81
Asset Strategy Portfolio 222.50 49.92
Science and Technology Portfolio 15.63
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 and Small Cap
Portfolio was due to the active management of each 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 Waddell & Reed Financial, Inc.
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 Waddell & Reed Financial, Inc. which in turn is a subsidiary
of Torchmark Corporation. Torchmark Corporation is a publicly held company.
The address of Torchmark Corporation 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,
----------------------------
1997 1996 1995
---- ---- ----
Bond Portfolio $ 491,520$ 469,708$ 440,716
High Income Portfolio 690,862 590,009 527,940
Growth Portfolio 4,150,034 3,238,802 2,425,494
Money Market Portfolio 192,321 181,734 147,383
Income Portfolio 3,955,628 2,772,236 1,979,061
International Portfolio 799,824 513,923 321,777
Small Cap Portfolio 1,018,984 689,578 302,739
Balanced Portfolio 324,830 194,884 96,718
Limited-Term Bond Portfolio 21,919 18,112 12,948
Asset Strategy Portfolio* 71,899 59,397 10,993
Science and Technology Portfolio** 27,836
*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,
----------------------------
1997 1996 1995
---- ---- ----
Bond Portfolio $30,000 $30,000 $30,000
High Income Portfolio 38,333 30,000 30,000
Growth Portfolio 67,500 60,000 55,000
Money Market Portfolio 20,000 20,000 20,000
Income Portfolio 65,833 59,167 50,000
International Portfolio 35,833 30,000 20,000
Small Cap Portfolio 38,333 30,000 19,167
Balanced Portfolio 25,833 19,167 9,167
Limited-Term Bond Portfolio --- --- ---
Asset Strategy Portfolio* --- --- ---
Science and Technology Portfolio** ---
*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 auditors, audits the Fund's annual financial statements.
Year 2000 Issue
Like other mutual funds, financial and business organizations and
individuals around the world, a Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Manager is taking steps that it believes are reasonably designed to address the
Year 2000 Problem with respect to the computer systems that it uses and to
obtain assurances that comparable steps are being taken by the Fund's other,
major service providers. Although there can be no assurances, the Manager
believes these steps will be sufficient to avoid any adverse impact on the Fund.
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, Martin Luther King, Jr. 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 are valued at the mean of the last 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 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; Director of Waddell & Reed Financial, Inc.; Chairman of the
Board of Directors of United Investors Life Insurance Company; Chairman of the
Executive Committee and Director of Torchmark Corporation; Chairman of the Board
of Directors of Vesta Insurance Group, Inc.; Director of Full House Resorts,
Inc., a developer of resorts and gaming casinos; formerly, Chairman of the Board
of Directors of Waddell & Reed, Inc.; formerly, Chairman of the Board of
Directors of Torchmark Corporation; formerly, Chairman of the Board of Directors
of Waddell & Reed Financial Services, Inc. Father of Linda Graves, Director of
the Fund and each of the other funds in the Fund Complex. Date of birth: June
16, 1926.
KEITH A. TUCKER*
President of the Fund and each of the other funds in the Fund Complex;
President, Chairman of the Board of Directors and Chief Executive Officer of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
WRIMCO, Waddell & Reed, Inc., Waddell & Reed Services Company and Waddell & Reed
Distributors, Inc., an affiliate of Waddell & Reed, Inc.; Chairman of the Board
of Directors, Chief Executive Officer, Chief Financial Officer and Principal
Financial Officer of Waddell & Reed Financial, Inc.; Director of Southwestern
Life Corporation; formerly, Vice Chairman of the Board of Directors and Director
of Torchmark Corporation; formerly, Chairman of the Board of Directors and
Director of Waddell & Reed Asset Management Company; formerly, partner in
Trivest, a private investment concern; formerly, Director of Atlantis Group,
Inc., a diversified company. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
Director and consultant, McDougal Construction Company; President, JoDill
Corp.; formerly Senior Vice President-Sales and Marketing, Garney Companies,
Inc., a specialty utility contractor. Date of birth: January 9, 1939.
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, Director of the Fund and each of the other funds
in the Fund Complex. Date of birth: July 29, 1953.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman, Gilliland & Hayes,
P.A., a law firm; formerly, President, Gilliland & Hayes, P.A. Date of birth:
December 11, 1919.
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. Date of birth: February 19, 1924.
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, Waddell & Reed Financial, Inc. and
United Investors Life Insurance Company, affiliates of Waddell & Reed, Inc.
Date of birth: April 27, 1928.
WILLIAM L. ROGERS
1999 Avenue of the Stars
Los Angeles, California 90067
Principal, Colony Capital, Inc., a real estate related investment company.
Date of birth: September 8, 1946.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm. Date of birth:
April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City. Date of birth: January 1,
1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan, a fertilizer company. Date
of birth: July 16, 1920.
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.; President, Director and Treasurer of Waddell
& Reed Services Company; President, Treasurer and Director of Waddell & Reed
Distributors, Inc.; Executive Vice President, Chief Operations Officer and
Director of Waddell & Reed Financial, Inc.; formerly, Director and Treasurer of
Waddell & Reed Asset Management Company. Date of birth: November 12, 1936.
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; President,
Chief Investment Officer, Treasurer and Director of Waddell & Reed Financial,
Inc.; formerly, President, Chief Executive Officer, Chief Investment Officer and
Director of Waddell & Reed Asset Management Company. Date of birth: December
8, 1942.
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. Date of birth: July 18, 1942.
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, General Counsel and
Director of Waddell & Reed Financial Services, Inc.; Senior Vice President,
Secretary and General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice
President, Secretary, General Counsel and Director of Waddell & Reed Services
Company; Vice President, Secretary and General Counsel of Waddell & Reed
Distributors, Inc.; Secretary and Director of Waddell & Reed Financial, 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.; formerly, Director, Secretary and General
Counsel of Waddell & Reed Asset Management Company. Date of birth: February 9,
1959.
Michael L. Avery
Vice President of the Fund and three other funds in the Fund Complex;
Senior Vice President of the Manager; formerly, Vice President of Waddell & Reed
Asset Management Company. Date of birth: September 15, 1953.
Daniel P. Becker
Vice President of the Fund and one other fund in the Fund Complex; Vice
President of the Manager; formerly, Vice President of Waddell & Reed Asset
Management Company; employee of Waddell & Reed, Inc. Date of birth: November
27, 1964.
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.
Date of birth: May 30, 1949.
Abel Garcia
Vice President of the Fund and two other funds in the Fund Complex; Senior
Vice President of the Manager; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: April 28, 1949.
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. Date of birth: April 13, 1957.
Cynthia P. Prince-Fox
Vice President of the Fund and two other funds in the Fund Complex; Vice
President of the Manager; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: January 11, 1959.
Louise D. Rieke
Vice President of the Fund and three other funds in the Fund Complex; Vice
President of the Manager; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: April 24, 1949.
Zachary H. Shafran
Vice President of the Fund; Vice President of the Manager. Date of birth:
October 12, 1965.
W. Patrick Sterner
Vice President of the Fund and one other fund in the Fund Complex; Vice
President of the Manager; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: January 11, 1949.
Mira Stevovich
Vice President and Assistant Treasurer of the Fund and one other fund in
the Fund Complex; Assistant Vice President of the Manager. Date of birth: July
30, 1953.
Carl E. Sturgeon
Vice President of the Fund and eleven other funds in the Fund Complex; Vice
President of the Manager. Date of birth: July 24, 1934.
Russell E. Thompson
Vice President of the Fund and two other funds in the Fund Complex; Senior
Vice President of the Manager; formerly, Senior Vice President of Waddell and
Reed Asset Management Company. Date of birth: March 3, 1940.
Daniel J. Vrabac
Vice President of the Fund and two other funds in the Fund Complex; Vice
President of the Manager; formerly, Vice President of Waddell & Reed Asset
Management company. Date of birth: July 24, 1954.
James D. Wineland
Vice President of the Fund and two other funds in the Fund Complex; Senior
Vice President of the Manager; formerly, Vice +President of Waddell & Reed Asset
Management Company. Date of birth: September 25, 1951.
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 or her past services whether or not services are rendered in
his or her capacity as Director Emeritus, but has no authority or responsibility
with respect to management of the Fund. Messrs. Doyle Patterson, Jay B.
Dillingham and Henry L. Bellmon retired as Directors of the Fund and of each of
the Funds in the Fund Complex effective January 1, 1997, January 14, 1997 and
February 11, 1998, respectively, and each has elected a position as Director
Emeritus.
The Fund, the Funds in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500 for
each meeting of the Board of Directors attended plus reimbursement of expenses
of attending such meeting (prior to January 1, 1998, the funds in the United
Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. paid to each
Director a fee of $44,000 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, 1997, 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
James M. Concannon 2,219 25,000
John A. Dillingham 2,219 25,000
Linda Graves 4,297 50,000
John F. Hayes 4,297 50,000
Glendon E. Johnson 4,297 50,000
William T. Morgan 4,297 50,000
William L. Rogers 4,210 49,000
Frank J. Ross, Jr. 4,297 50,000
Eleanor B. Schwartz 4,297 50,000
Frederick Vogel III 4,297 50,000
Paul S. Wise 4,297 50,000
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Messrs. Concannon and Dillingham were elected as Directors on July 24,
1997. 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"), a Portfolio must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income, net short-term capital gain and, for each
Portfolio other than Money Market Portfolio and Limited-Term Bond 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 contracts or forward contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) 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 (3) 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.
Dividends and distributions declared by a Portfolio in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Portfolio and received by the
shareholders on December 31 of that year if they are paid by the Portfolio
during the following January.
Each Portfolio will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gains net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. It is the Portfolio's policy to make sufficient distributions
each year to avoid imposition of the Excise Tax. The Code permits a Portfolio
to defer into the next calendar year net capital losses incurred between
November 1 and the end of the current calendar year.
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 Portfolio (other than Money Market Portfolio and Limited-Term Bond
Portfolio) may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Portfolio is a U.S. shareholder 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 probably 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.
The Portfolio may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Portfolio's adjusted basis therein as of the end of that year. Pursuant to
the election, the Portfolio also would be allowed to deduct (as an ordinary, not
capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the
fair market value thereof as of the taxable year-end, but only to the extent of
any net mark-to-market gains with respect to that stock included by the
Portfolio for prior taxable years. The Portfolio's adjusted basis in each
PFIC's stock with respect to which it makes this election will be adjusted to
reflect the amounts of income included and deductions taken under the election.
Regulations proposed in 1992 would provide a similar election with respect to
the stock of certain PFICs.
Foreign Currency Gains and Losses
Gains or losses (i) from the disposition of foreign currencies, (ii) from
the disposition of debt securities 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 and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, 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 contracts and forward currency
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.
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 the Portfolio thus 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.
Certain options and futures in which a Portfolio may invest will be
"section 1256 contracts." Section 1256 contracts held by a Portfolio at the end
of its 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. As of the date of this SAI, it is
not entirely clear whether that 60% portion will qualify for the reduced maximum
tax rates on net capital gain enacted by the Taxpayer Relief Act of 1997 - 20%
(10% for taxpayers in the 15% marginal tax bracket) for gain recognized on
capital assets held for more than 18 months - instead of the 28% rate in effect
before that legislation, which now applies to gain recognized on capital assets
held for more than one year but not more than 18 months, although technical
corrections legislation passed by the House of Representatives would treat it as
qualifying therefor. Section 1256 contracts also may be marked-to-market for
purposes of the Excise Tax and for other purposes. A Portfolio may need to
distribute any such gains to its shareholders to satisfy the Distribution
Requirement and/or avoid imposition of the Excise Tax even though it may not
have closed the transactions and received cash to pay the distributions.
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, that 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 ("OID"), a Portfolio must include in its income the OID 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 each Portfolio annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, in order to satisfy the Distribution
Requirement and to avoid imposition of the Excise Tax, a Portfolio 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.
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 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 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
request 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 Fund may also use its brokerage to pay for pricing or quotation
services to value securities.
The table below sets forth the brokerage commissions paid during the fiscal
years ended December 31, 1997, 1996 and 1995:
Periods ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Bond Portfolio $ --- $ --- $ 313
High Income Portfolio 2,998 7,574 ---
Growth Portfolio 1,785,220 2,297,780 1,761,353
Money Market Portfolio --- --- ---
Income Portfolio 421,831 250,273 137,932
International Portfolio 597,704 324,673 140,000
Small Cap Portfolio 238,000 117,166 16,816
Balanced Portfolio 56,431 36,529 28,505
Limited-Term Bond Portfolio --- --- ---
Asset Strategy Portfolio* 16,930 8,679 1,483
Science and Technology Portfolio** 8,143
---------- ---------- ----------
$3,127,257 $3,042,674 $2,086,402
========== ========== ==========
*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, 1997.
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 1,083,956 2,498
Growth Portfolio 1,133,091,282 1,277,313
Money Market Portfolio --- ---
Income Portfolio 257,313,102 338,439
International Portfolio 9,228,598 8,732
Small Cap Portfolio 54,857,584 119,860
Balanced Portfolio 32,617,859 42,378
Limited-Term Bond Portfolio --- ---
Asset Strategy Portfolio 6,842,280 9,817
Science and Technology Portfolio* 307,040 300
-------------- ----------
$1,495,341,701 $1,799,337
============== ==========
*Began operations April 4, 1997.
As of December 31, 1997, Money Market Portfolio owned Merrill Lynch & Co.,
Inc. securities in the aggregate amount of $1,500,011. Merrill Lynch & Co.,
Inc. is a regular broker of the Portfolio. As of December 31, 1997, Bond
Portfolio owned J.P. Morgan & Co. Incorporated securities in the aggregate
amount of $1,523,790. J.P. Morgan & Co. Incorporated is a regular broker of the
Portfolio. As of December 31, 1997, Income Portfolio owned Credit Suisse Group
securities in the aggregate amount of $3,201,834. Credit Suisse Group is a
regular broker of the Portfolio. As of December 31, 1997, International
Portfolio owned Credit Suisse Group securities in the aggregate amount of
$4,021,628. Credit Suisse Group is a regular broker of the Portfolio. As of
December 31, 1997, Small Cap Portfolio owned Merrill Lynch & Co. Inc. and J.P.
Morgan & Co. Incorporated securities in the aggregate amounts of $1,601,108 and
$1,605,893, respectively. Merrill Lynch & Co. Inc. and J.P. Morgan & Co.
Incorporated are each a regular broker of the Portfolio. As of December 31,
1997, Asset Strategy Portfolio owned Merrill Lynch & Co. Inc. and J.P. Morgan &
Co. Incorporated securities in the aggregate amounts of $399,027 and $497,181,
respectively. Merrill Lynch & Co. Inc. and J.P. Morgan & Co. Incorporated are
each a regular broker of the Portfolio. As of December 31, 1997, Science and
Technology Portfolio owned J.P. Morgan & Co. Incorporated securities in the
aggregate amount of $1,305,000. J.P. Morgan & Co. Incorporated is a regular
broker of the Portfolio.
The Fund, the Manager and Waddell & Reed, Inc. have adopted a Code of
Ethics which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
Buying and Selling With Other Funds
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. Transactions effected pursuant to such combined
orders are averaged as to price and allocated in accordance with the purchase or
sale orders actually placed for each fund or advisory account. One or more of
the Portfolios and one or more of the funds in the United Group and Waddell &
Reed Funds, Inc. or accounts over which Waddell & Reed Investment Management
Company exercises investment discretion frequently buy or sell the same
securities at the same time. If this happens, the amount of each purchase or
sale is divided. This is done on the basis of the amount of securities each
fund or account wanted to buy or sell. Sharing in large transactions could
affect the price a Portfolio pays or receives or the amount it buys or sells.
However, sometimes a better negotiated commission is available.
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, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 3.93%
Kohl's Corporation* .................... 140,000 $ 9,537,500
Nordstrom, Inc. ........................ 114,100 6,874,525
Payless ShoeSource, Inc.* .............. 130,000 8,726,250
Total ................................. 25,138,275
Building Materials and Garden Supplies - 2.12%
Home Depot, Inc. (The) ................. 230,000 13,541,250
Business Services - 1.33%
BMC Software, Inc.* .................... 18,000 1,180,116
Manpower Inc. .......................... 208,200 7,339,050
Total ................................. 8,519,166
Chemicals and Allied Products - 9.79%
Bristol-Myers Squibb Company ........... 70,000 6,623,750
Colgate-Palmolive Company .............. 197,000 14,479,500
Lilly (Eli) and Company ................ 120,000 8,355,000
Novartis AG (A) ........................ 4,600 7,461,502
Pfizer Inc. ............................ 131,000 9,767,622
Schering-Plough Corporation ............ 167,200 10,387,300
Warner-Lambert Company ................. 44,300 5,493,200
Total ................................. 62,567,874
Communication - 1.38%
AT&T Corporation ....................... 144,200 8,832,250
Depository Institutions - 9.34%
BankAmerica Corporation* ............... 165,400 12,074,200
Comerica Incorporated .................. 116,300 10,496,075
MBNA Corp. ............................. 289,000 7,893,168
Wells Fargo & Company .................. 86,200 29,259,469
Total ................................. 59,722,912
Electronic and Other Electric Equipment - 5.93%
Emerson Electric Co. ................... 101,900 5,750,930
General Electric Company ............... 152,000 11,153,000
Intel Corporation ...................... 79,300 5,568,288
Linear Technology Corporation .......... 33,100 1,905,302
Philips Electronics N.V. NY Shs ........ 130,000 7,865,000
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 152,400 5,691,073
Total ................................. 37,933,593
Food and Kindred Products - 4.73%
ConAgra, Inc. .......................... 200,000 6,562,400
Dean Foods Company ..................... 66,400 3,950,800
PepsiCo, Inc. .......................... 334,900 12,202,751
Wm. Wrigley Jr. Company ................ 95,000 7,558,390
Total ................................. 30,274,341
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Furniture and Home Furnishings Stores - 0.49%
CompUSA Inc.* .......................... 101,800 $ 3,155,800
General Merchandise Stores - 1.95%
Dollar General Corporation ............. 173,000 6,271,250
Wal-Mart Stores, Inc. .................. 157,200 6,199,496
Total ................................. 12,470,746
Health Services - 2.51%
Health Management Associates, Inc.,
Class A* .............................. 373,500 9,430,875
Tenet Healthcare Corporation* .......... 200,000 6,625,000
Total ................................. 16,055,875
Industrial Machinery and Equipment - 7.28%
Applied Materials, Inc.* ............... 263,300 7,923,487
Cisco Systems, Inc.* ................... 112,650 6,287,222
EMC Corporation* ....................... 396,600 10,881,514
Eaton Corporation ...................... 47,300 4,221,525
Parker Hannifin Corporation ............ 375,900 17,244,413
Total ................................. 46,558,161
Instruments and Related Products - 2.55%
Input/Output, Inc.* .................... 250,000 7,421,750
Medtronic, Inc. ........................ 170,000 8,893,040
Total ................................. 16,314,790
Insurance Carriers - 9.18%
Allstate Corporation (The) ............. 150,700 13,694,862
American International Group, Inc. ..... 97,800 10,635,750
MBIA Inc. .............................. 175,100 11,698,781
MGIC Investment Corporation ............ 222,200 14,776,300
Provident Companies .................... 203,700 7,867,913
Total ................................. 58,673,606
Miscellaneous Retail - 1.07%
Walgreen Co. ........................... 218,300 6,849,163
Motion Pictures - 1.38%
Walt Disney Company (The) .............. 89,000 8,816,518
Nondepository Institutions - 5.42%
Fannie Mae ............................. 319,000 18,202,778
Freddie Mac ............................ 160,000 6,709,920
SLM Holding Corporation ................. 69,800 9,737,100
Total ................................. 34,649,798
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Petroleum and Coal Products - 2.85%
Exxon Corporation ...................... 147,000 $ 8,994,489
Royal Dutch Petroleum Company .......... 170,000 9,211,790
Total ................................. 18,206,279
Printing and Publishing - 2.39%
Gannett Co., Inc. ...................... 151,400 9,358,337
Tribune Company ........................ 95,400 5,938,650
Total ................................. 15,296,987
Security and Commodity Brokers - 0.86%
Franklin Resources, Inc. ............... 63,000 5,488,875
Tobacco Products - 5.28%
Philip Morris Companies Inc. ........... 744,700 33,743,846
Transportation Equipment - 3.71%
Harley-Davidson, Inc. .................. 601,800 16,474,275
Sundstrand Corporation ................. 143,600 7,233,850
Total ................................. 23,708,125
Transportation Services - 0.52%
Dial Corporation (The) ................. 160,500 3,345,302
Water Transportation - 1.36%
Carnival Corporation, Class A .......... 156,800 8,682,800
Wholesale Trade -- Durable Goods - 1.24%
Johnson & Johnson ...................... 120,200 7,918,175
Wholesale Trade -- Nondurable Goods - 1.80%
Unilever N.V. .......................... 184,000 11,488,408
TOTAL COMMON STOCKS - 90.39% $577,952,915
(Cost: $490,175,285)
PREFERRED STOCK - 0.41%
Holding and Other Investment Offices
LTC Properties, Inc., 9.5% ............. 100,000 $ 2,600,000
(Cost: $2,500,000)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITY - 0.40%
Business Services
Adaptec Inc., Convertible,
4.75%, 2-1-2004 (B) ................... $2,500 $ 2,593,750
(Cost: $2,495,507)
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Commercial Paper
Chemicals and Allied Products - 0.93%
Abbott Laboratories,
5.77%, 1-14-98 ........................ $ 5,920 $ 5,907,665
Depository Institutions - 0.60%
J.P. Morgan & Co., Incorporated,
5.8%, 2-5-98 .......................... 3,880 3,858,121
Electric, Gas and Sanitary Services - 2.44%
Baltimore Gas and Electric Company,
5.8%, 1-8-98 .......................... 2,495 2,492,186
Bay State Gas Co.,
5.85%, 1-15-98 ........................ 3,117 3,109,909
Commonwealth Edison Co.,
6.15%, 1-15-98 ........................ 10,000 9,976,083
Total ................................. 15,578,178
Electronic and Other Electric Equipment - 1.01%
Whirlpool Corp.,
6.5%, 1-5-98 .......................... 6,460 6,455,335
Fabricated Metal Products - 0.24%
Danaher Corporation,
5.7227%, Master Note .................. 1,510 1,510,000
Food and Kindred Products - 0.01%
General Mills, Inc.,
5.5777%, Master Note .................. 67 67,000
Insurance Carriers - 0.92%
USAA Capital Corp.,
5.8%, 1-29-98 ......................... 5,900 5,873,384
Nondepository Institutions - 1.34%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 8,615 8,583,780
Petroleum and Coal Products - 0.60%
BP America Inc.,
5.9%, 1-21-98 ......................... 3,860 3,847,348
Security and Commodity Brokers - 0.56%
Merrill Lynch & Co. Inc.,
5.82%, 1-16-98 ........................ 3,580 3,571,319
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Textile Mill Products - 0.13%
Sara Lee Corporation,
5.5727%, Master Note .................. $ 852 $ 852,000
Total Commercial Paper - 8.78% 56,104,130
Commercial Paper (Backed by Irrevocable Letter
of Credit) - 1.37%
Electric, Gas and Sanitary Services
AES Hawaii Inc. (Bank of America NT & SA),
5.85%, 1-30-98 ........................ 8,810 8,768,483
TOTAL SHORT-TERM SECURITIES - 10.15% $ 64,872,613
(Cost: $64,872,613)
TOTAL INVESTMENT SECURITIES - 101.35% $648,019,278
(Cost: $560,043,405)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.35%) (8,659,941)
NET ASSETS - 100.00% $639,359,337
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 3.48%
Gap, Inc. (The) ........................ 265,950 $ 9,424,470
Kohl's Corporation* .................... 88,300 6,015,438
Payless ShoeSource, Inc.* .............. 100,300 6,732,637
Total ................................. 22,172,545
Building Materials and Garden Supplies - 0.87%
Home Depot, Inc. (The) ................. 93,600 5,510,700
Business Services - 1.39%
ABM Industries Incorporated ............ 24,600 751,825
Microsoft Corporation* ................. 62,900 8,127,812
Total ................................. 8,879,637
Chemicals and Allied Products - 17.85%
Air Products and Chemicals, Inc. ....... 93,800 7,709,141
Avon Products, Inc. .................... 42,100 2,583,888
BetzDearborn Inc. ...................... 53,000 3,236,286
Colgate-Palmolive Company .............. 97,800 7,188,300
Crompton & Knowles Corporation ......... 98,500 2,610,250
Dow Chemical Company (The) ............. 46,900 4,760,350
du Pont (E.I.) de Nemours and Company .. 163,200 9,802,118
Geon Company (The) ..................... 100,600 2,351,525
Gillette Company (The) ................. 158,711 15,940,457
Lilly (Eli) and Company ................ 116,200 8,090,425
Merck & Co., Inc. ...................... 60,200 6,396,250
Monsanto Company ....................... 156,300 6,564,600
Novartis AG (A) ........................ 1,200 1,946,479
PPG Industries, Inc. ................... 101,900 5,821,037
Pfizer Inc. ............................ 109,400 8,157,083
Praxair, Inc. .......................... 40,800 1,836,000
Procter & Gamble Company (The) ......... 97,800 7,805,614
Solutia Inc. ........................... 12,840 342,661
Union Carbide Corporation .............. 71,400 3,065,702
Warner-Lambert Company ................. 60,400 7,489,600
Total ................................. 113,697,766
Communication - 3.63%
AirTouch Communications* ............... 86,600 3,599,269
Cox Communications, Inc.* .............. 118,100 4,731,322
Grupo Televisa, S.A., GDR* ............. 50,300 1,945,956
SBC Communications Inc. ................ 40,300 2,951,975
Teleport Communications Group Inc.* .... 94,400 5,186,053
360. Communications Company* ........... 85,800 1,732,045
WorldCom, Inc.* ........................ 99,100 3,000,847
Total ................................. 23,147,467
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Depository Institutions - 5.20%
BankAmerica Corporation* ............... 87,400 $ 6,380,200
Chase Manhattan Corporation (The) ...... 48,300 5,288,850
Citicorp ............................... 47,200 5,967,826
Credit Suisse Group, Registered
Shares (A)............................. 20,700 3,201,834
Norwest Corporation .................... 199,000 7,686,375
U. S. Bancorp. ......................... 40,800 4,567,030
Total ................................. 33,092,115
Eating and Drinking Places - 0.07%
TRICON Global Restaurants, Inc.* ....... 16,320 474,292
Electric, Gas and Sanitary Services - 1.05%
Duke Energy Corp. ...................... 120,600 6,678,225
Electronic and Other Electric Equipment - 9.81%
Aeroquip-Vickers Inc. .................. 32,800 1,609,234
Analog Devices, Inc.* .................. 386,400 10,698,257
Emerson Electric Co. ................... 65,200 3,679,692
General Electric Company ............... 195,800 14,366,825
Harman International Industries,
Incorporated .......................... 24,150 1,026,375
Intel Corporation ...................... 160,200 11,248,924
Lucent Technologies Inc. ............... 40,900 3,266,887
Maytag Corporation ..................... 103,700 3,869,254
Molex Incorporated, Class A ............ 122,166 3,519,847
NextLevel Systems, Inc.* ............... 173,200 3,095,950
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 163,100 6,090,643
Total ................................. 62,471,888
Food and Kindred Products - 2.61%
CPC International Inc. ................. 65,900 7,117,200
Coca-Cola Company (The) ................ 53,900 3,591,088
PepsiCo, Inc. .......................... 163,200 5,946,518
Total ................................. 16,654,806
Food Stores - 0.54%
Kroger Co. (The)* ...................... 92,600 3,420,366
Forestry - 0.93%
Georgia-Pacific Corporation ............ 34,700 2,108,025
Georgia-Pacific Corporation, Timber
Group* ................................ 34,700 787,239
Weyerhaeuser Company ................... 61,200 3,002,594
Total ................................. 5,897,858
Furniture and Fixtures - 0.10%
Lear Corporation* ...................... 13,400 636,500
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Furniture and Home Furnishings Stores - 0.73%
Circuit City Stores, Inc. .............. 130,500 $ 4,640,841
General Building Contractors - 0.49%
Pulte Corporation ...................... 74,600 3,119,175
General Merchandise Stores - 3.28%
Dayton Hudson Corporation .............. 113,700 7,681,799
Federated Department Stores, Inc.* ..... 70,700 3,044,484
Wal-Mart Stores, Inc. .................. 258,000 10,174,746
Total ................................. 20,901,029
Health Services - 0.67%
Tenet Healthcare Corporation* .......... 128,600 4,259,875
Industrial Machinery and Equipment - 10.65%
Applied Materials, Inc.* ............... 181,700 5,467,898
Case Corporation ....................... 146,200 8,835,890
Caterpillar Inc. ....................... 214,000 10,392,268
Cisco Systems, Inc.* ................... 108,900 6,077,927
Compaq Computer Corporation* ........... 109,550 6,182,673
Deere & Company ........................ 167,600 9,773,091
Eaton Corporation ...................... 40,800 3,641,400
Hewlett-Packard Company ................ 20,200 1,262,500
Ingersoll-Rand Company ................. 48,900 1,977,369
International Business Machines
Corporation ........................... 54,400 5,688,173
Parker Hannifin Corporation ............ 73,350 3,364,931
United Technologies Corporation ........ 70,800 5,155,090
Total ................................. 67,819,210
Instruments and Related Products - 4.39%
General Motors Corporation, Class H .... 63,400 2,341,806
Guidant Corporation .................... 167,400 10,420,650
Medtronic, Inc. ........................ 130,400 6,821,485
Raytheon Company, Class A .............. 42,754 2,108,273
Xerox Corporation ...................... 84,500 6,237,114
Total ................................. 27,929,328
Insurance Carriers - 0.85%
American International Group, Inc. .... 49,500 5,383,125
Miscellaneous Retail - 0.75%
Costco Companies, Inc.* ................ 74,400 3,317,719
OfficeMax, Inc.* ....................... 104,625 1,490,906
Total ................................. 4,808,625
Motion Pictures - 0.89%
Walt Disney Company (The) .............. 57,100 5,656,440
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Nondepository Institutions - 3.67%
Associates First Capital Corporation ... 47,400 $ 3,409,814
Fannie Mae ............................. 163,400 9,323,931
Freddie Mac ............................ 253,600 10,635,223
Total ................................. 23,368,968
Paper and Allied Products - 1.12%
Champion International Corporation ..... 47,400 2,147,789
International Paper Company ............ 55,600 2,397,750
Willamette Industries, Inc. ............ 81,200 2,613,584
Total ................................. 7,159,123
Petroleum and Coal Products - 2.66%
British Petroleum Company p.l.c.
(The), ADR ............................ 39,200 3,123,730
Exxon Corporation ...................... 48,100 2,943,095
Mobil Corporation ...................... 72,200 5,211,901
Royal Dutch Petroleum Company .......... 104,800 5,678,798
Total ................................. 16,957,524
Primary Metal Industries - 0.62%
Aluminum Company of America ............ 56,000 3,941,000
Railroad Transportation - 0.45%
Burlington Northern Santa Fe Corporation 30,700 2,853,166
Rubber and Miscellaneous Plastics Products - 0.82%
Goodyear Tire & Rubber Company (The) ... 81,600 5,191,800
Transportation By Air - 1.28%
AMR Corporation* ....................... 32,600 4,189,100
Delta Air Lines, Inc. .................. 33,500 3,988,577
Total ................................. 8,177,677
Transportation Equipment - 7.36%
AlliedSignal Inc. ...................... 123,800 4,820,401
Boeing Company (The) ................... 103,600 5,069,873
Chrysler Corporation ................... 263,700 9,278,812
Dana Corporation ....................... 62,000 2,945,000
Ford Motor Company ..................... 142,000 6,913,554
General Motors Corporation ............. 111,300 6,747,563
Northrop Grumman Corporation ........... 78,300 9,004,500
Sundstrand Corporation ................. 42,000 2,115,750
Total ................................. 46,895,453
Wholesale Trade -- Durable Goods - 0.68%
Motorola, Inc. ......................... 76,100 4,342,418
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Wholesale Trade -- Nondurable Goods - 0.49%
Safeway Inc.* .......................... 49,700 $ 3,137,313
TOTAL COMMON STOCKS - 89.38% $569,276,255
(Cost: $344,668,244)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Chemicals and Allied Products - 1.33%
Abbott Laboratories,
5.77%, 1-14-98 ........................ $ 8,490 8,472,310
Communication - 0.75%
BellSouth Telecommunications, Inc.,
5.95%, 1-7-98 ......................... 4,790 4,785,250
Electric, Gas and Sanitary Services - 2.19%
Bay State Gas Co.,
5.85%, 1-15-98 ........................ 3,900 3,891,127
Western Resources Inc.,
6.0%, 1-14-98 ......................... 10,050 10,028,225
Total ................................. 13,919,352
Fabricated Metal Products - 0.02%
Danaher Corporation,
5.7227%, Master Note .................. 145 145,000
Food and Kindred Products - 0.99%
ConAgra, Inc.,
6.0%, 1-15-98 ......................... 5,470 5,457,237
General Mills, Inc.,
5.5777%, Master Note .................. 830 830,000
Total ................................. 6,287,237
General Merchandise Stores - 0.47%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 2,990 2,984,756
Insurance Agents, Brokers and Service - 1.23%
Aon Corp.,
5.9%, 1-30-98 ......................... 7,905 7,867,429
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Insurance Carriers - 1.64%
USAA Capital Corp.:
5.8%, 1-29-98 ......................... $ 2,770 $ 2,757,504
5.72%, 2-3-98 ......................... 7,740 7,699,417
Total ................................. 10,456,921
Nondepository Institutions - 0.96%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 6,125 6,102,804
Textile Mill Products - 0.01%
Sara Lee Corporation,
5.5727%, Master Note .................. 60 60,000
Transportation Equipment - 0.50%
Dana Credit Corp.,
6.08%, 2-5-98 ......................... 3,205 3,186,055
TOTAL SHORT-TERM SECURITIES - 10.09% $ 64,267,114
(Cost: $64,267,114)
TOTAL INVESTMENT SECURITIES - 99.47% $633,543,369
(Cost: $408,935,358)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.53% 3,360,950
NET ASSETS - 100.00% $636,904,319
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Building Materials and Garden Supplies - 1.13%
Fastenal Company ....................... 3,000 $ 115,311
Business Services - 39.48%
America Online, Inc.* .................. 3,000 267,561
At Home Corporation, Series A* ......... 5,500 137,841
Autodesk, Inc. ......................... 3,000 110,625
CKS Group, Inc.* ....................... 3,000 42,468
Cendant Corporation* ................... 6,000 206,250
Checkfree Corporation* ................ 4,000 108,748
E*TRADE Group, Inc.* ................... 5,000 115,155
HBO & Company .......................... 2,280 109,367
HCIA Inc.* ............................. 4,200 50,925
HNC Software Inc.* ..................... 4,000 172,748
i2 Technologies, Inc.* ................. 3,000 158,343
IDX Systems Corporation* ............... 2,500 92,655
Intuit Inc.* ........................... 6,000 247,872
J. D. Edwards* ......................... 7,000 207,809
Networks Associates, Inc.* ............. 4,000 211,124
Parametric Technology Corporation* ..... 4,000 189,248
Primark Corporation* ................... 6,900 280,740
Security Dynamics Technologies, Inc.* .. 3,000 107,436
Simulation Sciences, Inc.* ............. 6,300 101,588
TMP Worldwide Inc.* .................... 10,000 228,750
Transaction Systems Architects, Inc.* .. 5,000 189,685
Vantive Corporation (The)* ............. 5,000 125,625
Visio Corporation* ..................... 6,000 231,372
Wind River Systems, Inc.* .............. 5,000 197,500
Yahoo! Inc.* ........................... 2,000 138,686
Total ................................. 4,030,121
Communication - 7.12%
ACC Corp.* ............................. 3,000 151,875
AirTouch Communications* ............... 3,000 124,686
Intermedia Communications of Florida,
Inc.* ................................. 4,000 242,748
Paging Network, Inc.* .................. 8,000 86,248
WorldCom Inc.* ......................... 4,000 121,124
Total ................................. 726,681
Electronic and Other Electric Equipment - 16.92%
ADC Telecommunications, Inc.* .......... 2,000 83,624
ADE Corporation* ....................... 3,000 52,500
Advanced Fibre Communications, Inc.* ... 6,000 175,500
ANADIGICS, Inc.* ....................... 2,000 60,750
Ascend Communications, Inc.* ........... 2,500 61,482
Ciena Corp.* ........................... 3,000 183,750
Concord Communications, Inc.* .......... 8,000 164,496
Excel Switching Corporation* ........... 6,000 107,622
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment (Continued)
Linear Technology Corporation .......... 3,000 $ 172,686
Newbridge Networks Corporation* ........ 5,000 174,375
Nokia Corporation, Series A, ADR ....... 2,000 140,000
Novellus Systems, Inc.* ................ 3,000 97,029
Silicon Valley Group, Inc.* ............ 3,000 68,250
Tellabs* ............................... 3,500 184,734
Total ................................. 1,726,798
Engineering and Management Services - 5.12%
Incyte Pharmaceuticals, Inc.* .......... 4,000 178,500
Paychex, Inc. .......................... 3,000 152,436
Quintiles Transnational Corp.* ......... 5,000 191,875
Total ................................. 522,811
Food and Kindred Products - 0.93%
J. M. Smucker Company (The) ............ 4,000 94,500
Furniture and Fixtures - 1.63%
Lear Corporation* ...................... 3,500 166,250
Health Services - 2.78%
American Healthcorp, Inc.* ............. 14,000 98,868
Amsurg Corp., Class A* ................. 1,290 9,755
Amsurg Corp., Class B* ................. 8,313 64,941
Vencor, Incorporated* .................. 4,500 109,966
Total ................................. 283,530
Industrial Machinery and Equipment - 3.27%
Culligan Water Technologies, Inc.* ..... 3,000 150,750
Kulicke & Soffa Industries, Inc.* ...... 3,500 65,405
Lam Research Corporation* .............. 4,000 117,248
Total ................................. 333,403
Instruments and Related Products - 2.59%
STERIS Corporation* .................... 2,900 140,650
Uniphase Corporation* .................. 3,000 123,561
Total ................................. 264,211
Miscellaneous Repair Services - 0.94%
World Access, Inc.* .................... 4,000 96,500
Wholesale Trade -- Durable Goods - 2.15%
OmniCare, Inc. ......................... 5,000 155,000
Peerless Systems Corporation* .......... 5,000 64,685
Total ................................. 219,685
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Wholesale Trade -- Nondurable Goods - 2.71%
Cardinal Health, Inc. .................. 2,000 $ 150,250
800-JR. CIGAR Inc.* .................... 5,000 126,250
Total ................................. 276,500
TOTAL COMMON STOCKS - 86.77% $ 8,856,301
(Cost: $8,614,356)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES - 12.78%
Repurchase Agreement
J. P. Morgan Securities, 5.9%
Repurchase Agreement dated
12-31-97 to be repurchased
at $1,305,428 on 1-2-98 (C)............ $1,305 $ 1,305,000
(Cost: $1,305,000)
TOTAL INVESTMENT SECURITIES - 99.55% $10,161,301
(Cost: $9,919,356)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.45% 45,876
NET ASSETS - 100.00% $10,207,177
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND RIGHTS
Argentina - 0.29%
Capex S.A., Class A (A) ................ 50,000 $ 332,500
Australia - 0.91%
Reinsurance Australia Corporation
Limited (A) ........................... 400,000 1,042,720
Brazil - 0.62%
CompanLia de Saneamento Desico do
Estado De Sao Paulo (A) ............... 3,000,000 712,366
Denmark - 2.09%
Neurosearch A/S (A)* ................... 20,000 1,340,029
Sydbank A/S (A) ........................ 18,500 1,053,192
Total ................................. 2,393,221
Finland - 0.94%
Nokia Corporation, Series K (A) ........ 15,000 1,073,749
France - 7.03%
Accor S.A. (A) ......................... 5,500 1,022,648
Atos SA (A)* ........................... 5,044 650,385
Business Objects S.A., ADR* ............ 31,000 319,672
Coflexip Stena Offshore SA, ADR ........ 25,000 1,399,200
GEA Grenobloise d'Electronique et
d'Automatismes (A) .................... 6,000 171,480
Generale de Geophysique S.A. (A)* ...... 8,000 1,023,562
Societe Generale (A) .................... 10,000 1,362,534
Societe Industrielle de Transports
Automobiles S.A. (A) .................. 3,500 668,805
Suez Lyonnaise des Eaux (A) ............ 13,000 1,438,636
Total ................................. 8,056,922
Germany - 6.71%
Altana AG (A) .......................... 9,000 617,946
Bayer Group (A) ........................ 29,000 1,083,449
Depfa Bank (A) ......................... 19,500 1,155,668
Hoechst AG (A) ......................... 53,100 1,859,843
Schering AG (A) ........................ 8,500 819,898
Siemens AG (A) ......................... 20,000 1,184,189
VEBA AG (A) ............................ 14,300 973,898
Total ................................. 7,694,891
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND RIGHTS (Continued)
Italy - 5.75%
Alleanza Assicurazioni (A) ............. 114,000 $ 1,134,843
CSP International Industria
Calze S.p.A. (A)* ..................... 50,000 564,037
Credito Italiano S.p.A. (A) ............ 412,000 1,270,828
Instituto Nazionale delle
Assicurazioni (A) ..................... 630,000 1,312,723
Istituto Bancario San Paolo di
Torino S.p.A. (A) ..................... 126,000 1,204,071
Telecom Italia Mobile S.p.A., Risp (A) . 250,000 1,102,629
Total ................................. 6,589,131
Mexico - 1.59%
Empresas ICA Sociedad Controladora,
S.A. de C.V., ADS ..................... 50,000 821,850
Gruma, S.A., Class B (A)* .............. 71,400 283,193
Grupo Financiero Inbursa, S.A. de
C.V., Class B (A) ..................... 175,234 714,576
Total ................................. 1,819,619
Netherlands - 9.38%
Akzo Nobel N.V. (A) .................... 8,000 1,379,569
Benckiser N.V., B Shares (A)* ........... 30,000 1,241,553
Fugro N.V. (A) ......................... 43,355 1,321,629
Internatio-Muller N.V. (A) ............. 30,750 967,716
Koninklijke Boskalis
Westminster N.V. (A) .................. 47,900 850,589
Ordina N.V. (A)* ....................... 81,000 1,114,734
Smit Internationale N.V. (A) ........... 42,000 1,139,447
Stork N.V. (A) ......................... 10,000 345,287
Verenigd Bezit VNU (A) ................. 85,000 2,398,264
Total ................................. 10,758,788
Norway - 2.43%
Merkantildata A/S (A) .................. 61,000 2,101,309
Schibsted AS (A) ....................... 40,000 686,241
Total ................................. 2,787,550
Portugal - 2.06%
Portugal Telecom, S.A., ADS ............ 27,500 1,292,500
Telecel-Comunicacaoes Pessoais, SA (A)* 10,000 1,065,703
Total ................................. 2,358,203
Russian Federation - 1.30%
Open Joint Stock Company
Vimpel-Communications, ADR* ........... 41,805 1,489,303
Spain - 0.88%
Aldeasa, S.A. (A)* ..................... 47,500 1,006,858
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND RIGHTS (Continued)
Sweden - 4.46%
Biacore International AB, ADR* ......... 25,000 $ 217,175
Biora AB, ADR* ......................... 20,000 421,240
Bure Investment AB (A) ................. 65,000 856,439
Frontec AB, Class B (A)* ............... 54,900 481,087
Munters AB (A)* ........................ 89,000 768,683
Skandia Group Insurance Company Ltd. (A) 50,200 2,370,403
Total ................................. 5,115,027
Switzerland - 11.40%
AFG Arbonia-Forster Holding AG (A)* .... 975 480,460
Brauerei Eichhof AG (A) ................ 280 843,200
Choco Lindt & Spru AG, Registered (A) .. 50 965,026
Credit Suisse Group, Registered Shares (A) 26,000 4,021,628
Julius Baer Holding AG (A) ............. 500 927,383
Novartis AG (A) ........................ 1,500 2,433,098
SWISS BANK CORPORATION, BASLE (A) ...... 5,200 1,615,769
Swisslog Holding AG (A)* ............... 24,250 1,784,187
Total ................................. 13,070,751
Thailand - 0.02%
Srithai Superware Public Company
Limited, F (A) ........................ 130,000 19,187
United Kingdom - 20.03%
British Petroleum Company
p.l.c. (The) (A) ...................... 85,000 1,124,163
COLT Telecom Group plc, ADR* ........... 40,800 1,726,330
Corporate Services Group plc (A) ....... 575,000 2,011,407
Freepages Group plc (A)* ............... 2,000,000 1,075,707
General Electric Company plc (A) ........ 350,000 2,267,606
Hays plc (A) ........................... 100,000 1,331,084
Imperial Tobacco (A) ................... 250,000 1,572,503
Ionica Group plc (A)* .................. 184,000 420,035
Johnson Matthey plc (A) ................ 140,000 1,253,075
Misys plc (A) .......................... 94,545 2,856,992
Newsquest plc (A)* ..................... 230,000 1,004,759
Rentokil Initial plc (A) ............... 254,500 1,126,124
Royal and Sun Alliance Insurance
Group plc (A).......................... 112,500 1,141,809
Siebe plc (A) .......................... 63,000 1,240,544
Vodafone Group Plc (A) ................. 250,000 1,806,533
Williams plc (A) ....................... 185,000 1,002,624
Total ................................. 22,961,292
United States - 1.17%
ESG Re Limited* ........................ 31,000 724,625
Rofin-Sinar Technologies Inc.* ......... 51,000 618,375
Total ................................. 1,343,000
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Shares Value
TOTAL COMMON STOCKS AND RIGHTS - 79.06% $ 90,625,078
(Cost: $79,621,262)
PREFERRED STOCKS
Brazil - 1.16%
Telebras S.A., ADR, Convertible ........ 11,400 1,327,382
Germany - 4.10%
Marschollek, Lautenschlager und
Partner AG, Convertible (A) ........... 12,890 $ 3,260,660
Moebel Walther AG, Convertible (A) ..... 10,000 274,643
Porsche AG, Convertible (A) ............ 700 1,167,510
Total ................................. 4,702,813
Portugal - 1.20%
Lusomundo-SGPS, S.A., Convertible (A) .. 150,000 1,373,567
TOTAL PREFERRED STOCKS - 6.46% $ 7,403,762
(Cost: $4,974,111)
Face
Amount in
Thousands
UNREALIZED GAIN ON OPEN FORWARD CURRENCY CONTRACTS - 0.33%
Deutsche Marks, 6-4-98 (D) ............. DM3,293 142,270
Deutsche Marks, 7-29-98 (D) ............ DM5,105 33,460
French Francs, 6-4-98 (D) .............. F19,522 206,149
Total ................................. $ 381,879
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Electric, Gas and Sanitary Services - 2.38%
Northern Illinois Gas Co.,
5.75%, 1-21-98 ........................ $2,740 2,731,247
Fabricated Metal Products - 0.76%
Danaher Corporation,
5.7227%, Master Note .................. 865 865,000
Food and Kindred Products - 2.83%
ConAgra, Inc.,
6.0%, 1-15-98 ......................... 3,175 3,167,592
General Mills, Inc.,
5.5777%, Master Note .................. 80 80,000
Total ................................. 3,247,592
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Petroleum and Coal Products - 4.89%
BP America Inc.,
5.9%, 1-21-98 ......................... $5,625 $ 5,606,562
Textile Mill Products - 0.73%
Sara Lee Corporation,
5.5727%, Master Note .................. 836 836,000
Transportation Equipment - 2.35%
Dana Credit Corp.,
6.08%, 2-5-98 ......................... 2,715 2,698,951
TOTAL SHORT-TERM SECURITIES - 13.94% $ 15,985,352
(Cost: $15,985,352)
TOTAL INVESTMENT SECURITIES - 99.79% $114,396,071
(Cost: $100,580,725)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.21% 235,234
NET ASSETS - 100.00% $114,631,305
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Amusement and Recreation Services - 1.26%
American Skiing Company* ............... 126,000 $ 1,874,250
Auto Repair, Services and Parking - 2.69%
Avis Rent A Car, Inc.* ................. 125,000 3,992,125
Business Services - 10.51%
Cerner Corporation* .................... 140,000 2,983,680
FORE Systems, Inc.* .................... 100,000 1,525,000
Freepages Group plc (A)* ............... 4,500,000 2,420,340
Intuit Inc.* ........................... 125,000 5,164,000
PMT Services, Inc.* .................... 250,000 3,492,000
Total ................................. 15,585,020
Chemicals and Allied Products - 5.71%
Carson, Inc. ........................... 84,500 565,051
Genzyme Corporation - General Division* 125,000 3,460,875
OSI Pharmaceuticals, Inc.* ............. 150,000 1,003,050
Spiros Development Corporation II,
Inc., Dura Pharmaceuticals,
Inc., Units (E)* ...................... 200,000 3,437,400
Total ................................. 8,466,376
Communication - 3.71%
COLT Telecom Group plc, ADR* ........... 130,000 5,500,560
Eating and Drinking Places - 2.17%
G B Foods Corp.* ....................... 114,000 1,246,818
WSMP Inc.* ............................. 72,000 1,971,000
Total ................................. 3,217,818
Electric, Gas and Sanitary Services - 6.19%
Allied Waste Industries, Inc., New* .... 200,000 4,668,600
Casella Waste Systems, Inc., Class A* .. 120,000 3,127,440
Waste Industries, Inc.* ................ 75,000 1,373,400
Total ................................. 9,169,440
Electronic and Other Electric Equipment - 0.50%
Tegal Corp.* ........................... 150,600 748,181
Engineering and Management Services - 4.61%
AHL Services* .......................... 134,000 3,299,750
Cornell Corrections, Inc.* ............. 170,000 3,527,500
Total ................................. 6,827,250
Health Services - 7.80%
Alternative Living Services, Inc.* ..... 68,900 2,032,550
American Retirement Corporation* ....... 115,000 2,300,000
Centennial HealthCare Corporation* ..... 146,000 3,294,052
Quorum Health Group, Inc.* ............. 150,000 3,937,500
Total ................................. 11,564,102
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Industrial Machinery and Equipment - 2.92%
RADCOM LTD.* ........................... 150,000 $ 1,031,250
Waterlink, Inc.* ....................... 200,000 3,300,000
Total ................................. 4,331,250
Instruments and Related Products - 6.87%
ESC Medical Systems Ltd.* .............. 130,000 5,029,310
Maxxim Medical, Inc.* .................. 125,000 2,718,750
St. Jude Medical, Inc.* ................ 80,000 2,440,000
Total ................................. 10,188,060
Insurance Carriers - 1.58%
ESG Re Limited* ........................ 100,000 2,337,500
Paper and Allied Products - 2.10%
IVEX Packaging Corporation* ............ 129,500 3,108,000
Personal Services - 6.13%
Carriage Services, Inc.* ............... 125,000 2,351,500
Equity Corporation International* ...... 135,000 3,121,875
Loewen Group Inc. (The) ................ 140,000 3,613,680
Total ................................. 9,087,055
Social Services - 0.57%
Capital Senior Living Corporation* ..... 80,400 839,135
Transportation Services - 1.15%
C. H. Robinson Worldwide, Inc. ......... 75,300 1,698,919
TOTAL COMMON STOCKS - 66.47% $ 98,535,041
(Cost: $87,270,641)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Health Services - 2.07%
Alternative Living Services, Inc., Convertible,
5.25%, 12-15-2002 ..................... $2,650 3,060,750
Holding and Other Investment Offices - 0.82%
LTC Properties, Inc., Convertible,
8.25%, 7-1-2001 ....................... 1,000 1,221,250
TOTAL CORPORATE DEBT SECURITIES - 2.89% $4,282,000
(Cost: $3,650,000)
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Commercial Paper
Communication - 4.64%
BellSouth Telecommunications, Inc.,
5.92%, 1-13-98 ........................ $6,890 $ 6,876,404
Depository Institutions - 1.08%
J.P. Morgan & Co. Incorporated,
5.8%, 2-5-98 .......................... 1,615 1,605,893
Electric, Gas and Sanitary Services - 9.96%
Northern Illinois Gas Co.,
5.75%, 1-21-98 ........................ 2,930 2,920,640
Western Resources Inc.,
6.0%, 1-14-98 ......................... 6,590 6,575,722
Wisconsin Electric Power Co.,
5.77%, 2-10-98 ........................ 5,310 5,275,957
Total ................................. 14,772,319
Fabricated Metal Products - 0.93%
Danaher Corporation,
5.7227%, Master Note .................. 1,379 1,379,000
Food and Kindred Products - 0.99%
ConAgra, Inc.,
6.0%, 1-15-98 ......................... 1,000 997,667
General Mills, Inc.,
5.5777%, Master Note .................. 468 468,000
Total ................................. 1,465,667
Insurance Carriers - 2.99%
USAA Capital Corp.,
5.72%, 2-3-98 ......................... 4,450 4,426,667
Nondepository Institutions - 7.10%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 4,930 4,912,134
General Motors Acceptance Corporation,
6.25%, 1-14-98 ........................ 5,625 5,612,305
Total ................................. 10,524,439
Petroleum and Coal Products - 1.12%
BP America Inc.,
5.9%, 1-21-98 ......................... 1,665 1,659,542
Security and Commodity Brokers - 1.08%
Merrill Lynch & Co. Inc.,
5.82%, 1-16-98 ........................ 1,605 1,601,108
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Textile Mill Products - 0.73%
Sara Lee Corporation,
5.5727%, Master Note .................. $1,089$ 1,089,000
Transportation Equipment - 0.96%
Dana Credit Corp.,
6.08%, 2-5-98 ......................... 1,430 1,421,547
TOTAL SHORT-TERM SECURITIES - 31.58% $ 46,821,586
(Cost: $46,821,586)
TOTAL INVESTMENT SECURITIES - 100.94% $149,638,627
(Cost: $137,742,227)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.94%) (1,400,369)
NET ASSETS - 100.00% $148,238,258
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Agricultural Production -- Crops - 0.81%
Dole Food Company, Inc. ................ 12,000 $ 549,000
Apparel And Accessory Stores - 1.80%
Kohl's Corporation* .................... 8,000 545,000
Payless ShoeSource, Inc.* .............. 10,000 671,250
Total ................................. 1,216,250
Building Materials and Garden Supplies - 0.82%
Sherwin-Williams Company (The) ......... 20,000 555,000
Chemicals and Allied Products - 7.69%
A. Schulman, Inc. ...................... 25,000 631,250
American Home Products Corporation ..... 4,000 306,000
Avon Products, Inc. .................... 4,300 263,913
Crompton & Knowles Corporation ......... 14,300 378,950
Dow Chemical Company (The) ............. 3,500 355,250
du Pont (E.I.) de Nemours and Company .. 4,800 288,298
Hoechst AG (A) ......................... 16,100 563,907
International Flavors & Fragrances Inc. 6,000 309,000
Monsanto Company ....................... 14,800 621,600
Pfizer Inc. ............................ 11,000 820,182
Warner-Lambert Company ................. 5,400 669,600
Total ................................. 5,207,950
Communication - 2.47%
AT&T Corporation ....................... 15,000 918,750
SBC Communications Inc. ................ 10,300 754,475
Total ................................. 1,673,225
Depository Institutions - 2.07%
BankAmerica Corporation* ............... 9,000 657,000
Wells Fargo & Company .................. 2,200 746,761
Total ................................. 1,403,761
Electric, Gas and Sanitary Services - 2.94%
Baltimore Gas and Electric Company ..... 7,600 258,400
Houston Industries Incorporated ........ 12,000 320,244
PECO Energy Company .................... 14,000 339,500
Southern Company (The) ................. 13,000 336,375
Unicom Corporation ..................... 24,000 738,000
Total ................................. 1,992,519
Electronic and Other Electric Equipment - 2.50%
Emerson Electric Co. ................... 12,500 705,463
Intel Corporation ...................... 4,000 280,872
U. S. Industries, Inc. ................. 23,500 707,937
Total ................................. 1,694,272
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Food and Kindred Products - 5.53%
Beringer Wine Estates
Holdings, Inc.,........................ 12,500 $ 476,562
CPC International Inc. ................. 4,500 486,000
ConAgra, Inc. .......................... 11,800 387,182
General Mills, Inc. .................... 8,000 573,000
Heinz (H. J.) Company .................. 12,000 609,744
Hormel Foods Corporation ............... 20,000 655,000
Ralston Purina Co. ..................... 6,000 557,622
Total ................................. 3,745,110
General Merchandise Stores - 2.07%
Penney (J.C.) Company, Inc. ............ 13,500 814,212
Wal-Mart Stores, Inc. .................. 15,000 591,555
Total ................................. 1,405,767
Health Services - 0.96%
Tenet Healthcare Corporation* .......... 19,600 649,250
Holding and Other Investment Offices - 2.22%
Equity Office Properties Trust ......... 20,000 631,240
LTC Properties, Inc. ................... 18,000 373,500
National Health Investors, Inc. ........ 12,000 502,500
Total ................................. 1,507,240
Industrial Machinery and Equipment - 1.02%
Deere & Company ........................ 6,000 349,872
Parker Hannifin Corporation ............ 7,400 339,475
Total ................................. 689,347
Instruments and Related Products - 0.64%
St. Jude Medical, Inc.* ................ 14,200 433,100
Insurance Carriers - 1.59%
Chubb Corporation (The) ................ 9,200 695,750
Hartford Financial Services Group Inc. (The) 4,100 383,604
Total ................................. 1,079,354
Metal Mining - 0.45%
Homestake Mining Company ............... 34,000 301,750
Miscellaneous Retail - 1.56%
Costco Companies, Inc.* ................ 15,000 668,895
Paper Warehouse, Inc.* ................. 50,000 390,600
Total ................................. 1,059,495
Nondepository Institutions - 0.89%
Freddie Mac ............................ 14,400 603,893
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Oil and Gas Extraction - 2.48%
Anadarko Petroleum Corporation ......... 9,300 $ 564,389
Noble Affiliates, Inc. ................. 8,500 299,625
Santa Fe International Corp. ........... 9,000 365,625
Schlumberger Limited ................... 5,600 450,800
Total ................................. 1,680,439
Paper and Allied Products - 1.42%
Champion International Corporation ..... 10,800 489,370
Union Camp Corporation ................. 8,800 472,445
Total ................................. 961,815
Petroleum and Coal Products - 3.62%
British Petroleum Company p.l.c.
(The), ADR ............................ 5,000 398,435
Mobil Corporation ...................... 9,600 692,995
Royal Dutch Petroleum Company .......... 15,400 834,480
Tosco Corporation ...................... 14,000 529,368
Total ................................. 2,455,278
Primary Metal Industries - 0.54%
British Steel plc, ADR ................. 17,000 364,429
Printing and Publishing - 4.23%
Gannett Co., Inc. ...................... 12,000 741,744
McGraw-Hill Companies, Inc. (The) ...... 5,200 384,800
Meredith Corporation ................... 20,000 713,740
New York Times Company (The), Class A .. 9,200 608,350
Viacom Inc., Class B* .................. 10,000 414,370
Total ................................. 2,863,004
Railroad Transportation - 1.60%
Burlington Northern Santa Fe Corporation 6,300 585,503
Union Pacific Corporation .............. 8,000 499,496
Total ................................. 1,084,999
Stone, Clay, and Glass Products - 1.08%
USG Corporation* ....................... 15,000 735,000
Transportation Equipment - 2.75%
Chrysler Corporation ................... 15,700 552,436
Echlin Inc. ............................ 17,000 615,179
TRW Inc. ............................... 13,000 693,875
Total ................................. 1,861,490
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Transportation Services - 1.08%
Dial Corporation (The) ................. 35,000 $ 729,505
Wholesale Trade -- Durable Goods - 0.84%
Motorola, Inc. ......................... 10,000 570,620
TOTAL COMMON STOCKS - 57.67% $39,072,862
(Cost: $32,729,412)
PREFERRED STOCK - 0.89%
Communication
Telebras S.A., ADR, Convertible ........ 5,200 $ 605,473
(Cost: $494,927)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Building Materials and Garden Supplies - 0.78%
Home Depot, Inc. (The), Convertible,
3.25%, 10-1-2001 ...................... $ 400 525,500
Electronic and Other Electric Equipment - 0.51%
Cooper Industries, Inc.,
6.0%, 1-1-99 (Exchangeable) ........... 257 346,750
Nondepository Institutions - 1.48%
National Rural Utilities Cooperative Finance Corp.,
6.1%, 12-22-2000 ...................... 1,000 1,001,250
Oil and Gas Extraction - 0.37%
Enron Corp.,
6.25%, 12-13-98 (Exchangeable) ........ 261 247,500
Security and Commodity Brokers - 0.60%
Salomon Inc.,
7.625%, 5-15-99 (Exchangeable) ........ 266 410,000
TOTAL CORPORATE DEBT SECURITIES - 3.74% $ 2,531,000
(Cost: $2,183,750)
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association,
7.0%, 9-1-2025 ........................ $4,033 $ 4,061,977
United States Treasury:
5.5%, 2-28-99 ......................... 1,000 998,440
6.875%, 8-31-99 ....................... 250 254,687
7.75%, 11-30-99 ....................... 1,500 1,555,545
7.125%, 2-29-2000 ..................... 500 514,455
5.25%, 1-31-2001 ...................... 2,000 1,975,620
6.375%, 8-15-2002 ..................... 1,100 1,128,358
7.5%, 2-15-2005 ....................... 2,250 2,472,885
6.25%, 8-15-2023 ...................... 250 257,500
6.75%, 8-15-2026 ...................... 3,000 3,302,820
TOTAL UNITED STATES GOVERNMENT SECURITIES - 24.38% $16,522,287
(Cost: $15,970,311)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 0.32%
Danaher Corporation,
5.7227%, Master Note .................. 216 216,000
Food and Kindred Products - 1.93%
General Mills, Inc.,
5.5777%, Master Note .................. 1,311 1,311,000
General Merchandise Stores - 3.78%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 2,565 2,560,501
Petroleum and Coal Products - 6.44%
BP America Inc.,
5.9%, 1-21-98 ......................... 4,375 4,360,660
Textile Mill Products - 1.19%
Sara Lee Corporation,
5.5727%, Master Note .................. 810 810,000
TOTAL SHORT-TERM SECURITIES - 13.66% $ 9,258,161
(Cost: $9,258,161)
TOTAL INVESTMENT SECURITIES - 100.34% $67,989,783
(Cost: $60,636,561)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.34%) (231,047)
NET ASSETS - 100.00% $67,758,736
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS
Agricultural Production -- Crops - 1.03%
Dole Food Company, Inc. ................ 2,200 $ 100,650
Apparel and Accessory Stores - 1.71%
Payless ShoeSource, Inc.* .............. 2,500 167,813
Business Services - 3.90%
BISYS Group, Inc. (The)* ............... 2,200 73,425
BMC Software, Inc.* .................... 2,700 177,017
Intuit Inc.* ........................... 3,200 132,199
Total ................................. 382,641
Chemicals and Allied Products - 2.65%
Warner-Lambert Company ................. 2,100 260,400
Depository Institutions - 6.40%
BankAmerica Corporation* ............... 2,000 146,000
Norwest Corporation .................... 4,600 177,675
U. S. Bancorp .......................... 900 100,744
Wells Fargo & Company .................. 600 203,662
Total ................................. 628,081
Electric, Gas and Sanitary Services - 1.64%
Duke Energy Corp. ...................... 2,900 160,587
Food and Kindred Products - 0.55%
CPC International Inc. ................. 500 54,000
General Merchandise Stores - 1.17%
Wal-Mart Stores, Inc. .................. 2,900 114,367
Health Services - 0.80%
Centennial HealthCare Corporation* ..... 3,500 78,967
Miscellaneous Retail - 1.41%
Costco Companies, Inc.* ................ 3,100 138,238
Oil and Gas Extraction - 1.28%
Tom Brown, Inc.* ....................... 6,500 125,937
Personal Services - 1.70%
Equity Corporation International* ...... 7,200 166,500
Petroleum and Coal Products - 4.19%
British Petroleum Company p.l.c.
(The), ADR ............................ 2,500 199,218
Royal Dutch Petroleum Company .......... 3,900 211,329
Total ................................. 410,547
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS (Continued)
Transportation Equipment - 0.86%
Chrysler Corporation .................. 2,400 $ 84,449
Wholesale Trade - Nondurable Goods - 1.07%
Fresh Del Monte Produce N.V.* .......... 7,200 105,300
TOTAL COMMON STOCKS - 30.36% $2,978,477
(Cost: $2,704,013)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 2.02%
BOC Group, Inc., (The)
5.875%, 1-29-2001 ..................... $200 197,800
Communication - 0.99%
Comtel Brasileira Ltd.,
10.75%, 9-26-2004 (B) ................. 100 97,000
Depository Institutions - 4.06%
Banco de Inversion y Comercio
Exterior S.A.,
9.375%, 12-27-2000 (B) ................ 200 199,000
Banco Nacional de Comercio Exterior, S.N.C.,
7.5%, 7-1-2000 ........................ 200 199,500
Total ................................. 398,500
Electric, Gas and Sanitary Services - 1.95%
Companhia Paranaense de Energia-COPEL,
9.75%, 5-2-2005 (B).................... 200 191,500
Food and Kindred Products - 3.48%
JG Summit Holdings, Inc.,
8.0%, 5-6-2002 (B) .................... 200 159,000
Cervejarias Kaiser S.A.,
8.875%, 9-26-2005 (B) ................. 200 182,000
Total ................................. 341,000
Industrial Machinery and Equipment - 2.05%
Tyco International Ltd.,
6.5%, 11-1-2001 ....................... 200 201,106
Textile Mill Products - 0.46%
Polysindo International Finance Company B.V.,
13.0%, 6-15-2001 ...................... 50 45,500
TOTAL CORPORATE DEBT SECURITIES - 15.01% $1,472,406
(Cost: $1,531,334)
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
OTHER GOVERNMENT SECURITY - 2.07%
Argentina
Republic of Argentina (The),
9.25%, 2-23-2001 ...................... $ 200 $ 203,300
(Cost: $201,617)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Banks:
7.0%, 6-30-2005 ....................... 200 199,656
7.275%, 3-20-2006 ..................... 250 250,077
7.17%, 8-20-2007 ...................... 200 200,000
6.5%, 2-15-2023 ....................... 1,873 372,784
United States Treasury:
7.25%, 2-15-98 ........................ 60 60,103
7.125%, 2-29-2000 ..................... 60 61,735
7.5%, 2-15-2005 ....................... 130 142,878
6.25%, 2-15-2007 ...................... 400 412,748
TOTAL UNITED STATES GOVERNMENT SECURITIES - 17.33% $1,699,981
(Cost: $1,728,492)
SHORT-TERM SECURITIES
Commercial Paper
Depository Institutions - 5.07%
J.P. Morgan & Co. Incorporated,
5.8%, 2-5-98 ........................... 500 497,181
Electric, Gas and Sanitary Services - 5.68%
Companhia Paranaense de Energia- COPEL,
0.0%, 3-24-98 ......................... 100 98,003
Northern Illinois Gas Co.,
5.75%, 1-21-98 ........................ 460 458,530
Total ................................. 556,533
Fabricated Metal Products - 4.78%
Danaher Corporation,
5.7227%, Master Note .................. 469 469,000
Food and Kindred Products - 3.29%
General Mills, Inc.,
5.5777%, Master Note .................. 323 323,000
General Merchandise Stores - 4.58%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 450 449,211
Insurance Carriers - 4.06%
USAA Capital Corp.,
5.8%, 1-29-98 ......................... 400 398,195
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Security and Commodity Brokers - 4.07%
Merrill Lynch & Co. Inc.,
5.84%, 1-16-98 ........................ $400 $ 399,027
Textile Mill Products - 2.79%
Sara Lee Corporation,
5.5727%, Master Note .................. 274 274,000
TOTAL SHORT-TERM SECURITIES - 34.32% $3,366,147
(Cost: $3,366,147)
TOTAL INVESTMENT SECURITIES - 99.09% $9,720,311
(Cost: $9,531,603)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.91% 89,189
NET ASSETS - 100.00% $9,809,500
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
BANK OBLIGATIONS
Certificates of Deposit
Domestic - 2.31%
Morgan Guaranty Trust Company of New York,
5.8%, 7-28-98 ......................... $1,000 $ 998,973
Yankee - 4.61%
Canadian Imperial Bank of Commerce,
5.95%, 6-29-98 ........................ 1,000 998,809
Societe Generale - New York,
5.85%, 3-3-98 ......................... 1,000 999,458
Total ................................. 1,998,267
Total Certificates of Deposit - 6.92% 2,997,240
Commercial Paper - 3.23%
Deutsche Bank Financial Inc.,
5.84%, 1-6-98 ......................... 1,400 1,398,864
TOTAL BANK OBLIGATIONS - 10.15% $ 4,396,104
(Cost: $4,396,104)
CORPORATE OBLIGATIONS
Commercial Paper
Chemicals and Allied Products - 9.97%
Abbott Laboratories,
5.77%, 1-14-98 ........................ 1,500 1,496,875
BOC Group Inc.,
5.6%, 2-13-98 ......................... 1,335 1,326,070
PPG Industries, Inc.,
5.63%, 1-29-98 ........................ 1,500 1,493,432
Total ................................. 4,316,377
Communication - 4.15%
BellSouth Telecommunications Inc.,
5.95%, 1-7-98 ......................... 1,800 1,798,215
Electric, Gas and Sanitary Services - 12.11%
Bay State Gas Co.,
5.62%, 1-5-98 ......................... 1,555 1,554,029
Florida Power Corp.,
5.8%, 1-6-98 .......................... 1,360 1,358,904
Northern Illinois Gas Co.,
5.52%, 1-9-98 ......................... 1,400 1,398,283
Questar Corp.,
5.72%, 1-20-98 ........................ 935 932,177
Total ................................. 5,243,393
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
Fabricated Metal Products - 3.75%
Danaher Corporation,
5.7227%, Master Note .................. $1,625 $ 1,625,000
Food and Kindred Products - 7.01%
General Mills, Inc.,
5.5777%, Master Note .................. 1,542 1,542,000
Seagram (Joseph E.) & Sons Inc.,
5.9%, 1-20-98 ......................... 1,500 1,495,329
Total ................................. 3,037,329
General Merchandise Stores - 1.27%
Dillard Investment Co. Inc.,
5.7%, 1-27-98 ......................... 550 547,736
Industrial Machinery and Equipment - 6.74%
Hewlett-Packard Co.,
5.95%, 1-21-98 ........................ 1,500 1,495,042
Minnesota Mining and Manufacturing Co.,
5.8%, 1-9-98 .......................... 1,425 1,423,163
Total ................................. 2,918,205
Insurance Carriers - 2.39%
USAA Capital Corp.,
5.72%, 2-3-98 ......................... 1,040 1,034,547
Metal Mining - 3.45%
BHP Finance (USA) Inc.,
5.71%, 2-4-98 ......................... 1,500 1,491,911
Nondepository Institutions - 3.45%
Caterpillar Financial Services Corp.,
5.93%, 1-23-98 ........................ 1,500 1,494,564
Personal Services - 3.69%
Block Financial Corp.,
5.82%, 2-19-98 ........................ 1,610 1,597,246
Textile Mill Products - 4.15%
Sara Lee Corp.,
5.5727%, Master Note .................. 1,797 1,797,000
Total Commercial Paper - 62.13% 26,901,523
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Notes
Auto Repair, Services and Parking - 2.31%
PHH Corporation,
5.9314%, 6-24-98 ...................... $ 1,000 $ 1,000,000
Electric, Gas and Sanitary Services - 4.63%
Baltimore Gas and Electric Company,
5.8089%, 3-2-98 ....................... 1,000 1,000,000
PacifiCorp,
8.75%, 2-12-98 ........................ 1,000 1,003,319
Total ................................. 2,003,319
Food and Kindred Products - 2.31%
PepsiCo Inc.,
6.125%, 1-15-98 ....................... 1,000 1,000,180
Security and Commodity Brokers - 3.46%
Merrill Lynch & Co., Inc.,
5.9288%, 2-27-98 ...................... 1,500 1,500,011
Total Notes - 12.71% 5,503,510
TOTAL CORPORATE OBLIGATIONS - 74.84% $32,405,033
(Cost: $32,405,033)
MUNICIPAL OBLIGATIONS
New Jersey - 0.61%
New Jersey Economic Development Authority,
Federally Taxable Variable Rate Demand/
Fixed Rate Revenue Bonds (The Morey
Organization, Inc. Project), Series of 1997
(CoreStates Bank, N.A.),(#)
5.9%, 1-7-98 .......................... 265 265,000
Pennsylvania - 4.13%
Schuylkill County Industrial Development
Authority, Commercial Development Revenue
Bonds (Midway Supermarket, Inc. Project),
Taxable Series of 1995 (CoreStates Bank, N.A.),
5.9%, 1-7-98 .......................... 1,590 1,590,000
Montgomery County Industrial Development
Authority, Taxable Fixed Rate/Variable
Rate Demand Revenue Bonds (410 Horsham
Associates Project), Series of 1995
(CoreStates Bank, N.A.),
5.9%, 1-7-98 .......................... 200 200,000
Total ................................. 1,790,000
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
Texas - 4.61%
Gulf Coast Waste Disposal Authority, Pollution
Control Revenue Bonds (Amoco Oil Company
Project), Taxable Series 1995,
5.64%, 1-12-98 ........................ $ 1,000 $ 1,000,000
Metrocrest Hospital Authority, Series 1989A
(The Bank of New York),
5.6376%, 2-3-98........................ 1,000 994,832
Total ................................. 1,994,832
TOTAL MUNICIPAL OBLIGATIONS - 9.35% $ 4,049,832
(Cost: $4,049,832)
UNITED STATES GOVERNMENT OBLIGATION - 2.31%
Student Loan Marketing Association,
5.729%, 2-17-98........................ 1,000 $ 1,000,000
(Cost: $1,000,000)
TOTAL INVESTMENT SECURITIES - 96.65% $41,850,969
(Cost: $41,850,969)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 3.35% 1,449,180
NET ASSETS - 100.00% $43,300,149
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 6.71%
American Home Products Corporation,
7.7%, 2-15-2000 ....................... $100 $ 102,937
ICI Wilmington, Inc.,
9.5%, 11-15-2000 ...................... 75 81,187
Praxair, Inc.,
6.7%, 4-15-2001 ....................... 100 101,322
Total ................................. 285,446
Depository Institutions - 9.77%
Ahmanson (H.F.),
6.35%, 9-1-98 ......................... 100 100,177
BankAmerica Corporation,
9.7%, 8-1-2000 ........................ 100 108,078
NationsBank Corporation,
5.125%, 9-15-98 ....................... 100 99,442
Wells Fargo & Company,
8.375%, 5-15-2002 ..................... 100 107,764
Total ................................. 415,461
Electric, Gas and Sanitary Services - 2.38%
UtiliCorp United,
6.875%, 10-1-2004 ..................... 100 101,391
Electronic and Other Electric Equipment - 2.46%
Black & Decker Corp.,
7.5%, 4-1-2003 ........................ 100 104,416
Furniture and Fixtures - 2.37%
Masco Corporation,
6.625%, 9-15-99 ....................... 100 100,648
General Merchandise Stores - 2.37%
Sears, Roebuck and Co.,
9.25%, 4-15-98 ........................ 100 100,838
Instruments and Related Products - 4.52%
Baxter International Inc.,
7.625%, 11-15-2002 .................... 100 105,497
Polaroid Corporation,
8.0%, 3-15-99 ......................... 85 86,591
Total ................................. 192,088
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 8.46%
Associates Corporation of North America,
7.875%, 9-30-2001 ..................... $100 $ 105,415
Ford Motor Credit Company,
8.0%, 1-15-99 ......................... 150 152,753
General Motors Acceptance Corporation,
7.75%, 1-15-99 ........................ 100 101,570
Total ................................. 359,738
Paper and Allied Products - 2.39%
International Paper Company,
6.875%, 7-10-2000 ..................... 100 101,461
Petroleum and Coal Products - 3.75%
Chevron Corporation,
8.11%, 12-1-2004 ...................... 100 106,717
Texaco Capital Inc.,
9.0%, 12-15-99 ........................ 50 52,540
Total ................................. 159,257
Railroad Transportation - 2.48%
Union Pacific Corporation,
7.875%, 2-15-2002 ..................... 100 105,295
Security and Commodity Brokers - 2.43%
Salomon Inc.,
7.75%, 5-15-2000 ...................... 100 103,197
Textile Mill Products - 2.40%
Fruit of the Loom, Inc.,
7.875%, 10-15-99 ...................... 100 102,242
Transportation by Air - 2.41%
Federal Express Corporation,
10.0%, 9-1-98 ......................... 100 102,576
Wholesale Trade -- Durable Goods - 2.46%
Westinghouse Electric Corporation,
8.875%, 6-1-2001 ...................... 100 104,772
TOTAL CORPORATE DEBT SECURITIES - 57.36% $2,438,826
(Cost: $2,408,058)
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation,
7.0%, 5-15-2005 ....................... $100 $ 101,343
Federal National Mortgage Association:
6.0%, 11-1-2000 ....................... 61 60,067
7.27%, 4-24-2003 ...................... 100 100,187
7.95%, 3-7-2005 ....................... 100 103,828
7.15%, 9-21-2005 ...................... 100 100,281
7.5%, 11-15-2006 ...................... 100 101,969
6.5%, 12-1-2010 ....................... 89 89,483
6.0%, 1-1-2011 ........................ 82 81,006
6.5%, 2-1-2011 ........................ 85 85,048
7.0%, 5-1-2011 ........................ 86 87,267
7.0%, 7-1-2011 ........................ 87 88,332
7.0%, 9-1-2012 ........................ 98 99,755
6.0%, 9-25-2014 ....................... 79 78,399
11.0%, 10-1-2020 ...................... 26 30,085
7.0%, 4-1-2026 ........................ 93 93,476
Government National Mortgage Association,
7.0%, 9-15-2008 ....................... 61 61,572
TOTAL UNITED STATES GOVERNMENT SECURITIES - 32.03% $1,362,098
(Cost: $1,350,153)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 3.03%
Danaher Corporation,
5.7227%, Master Note .................. 129 129,000
Food and Kindred Products - 1.91%
General Mills, Inc.,
5.5777%, Master Note .................. 81 81,000
Textile Mill Products - 3.95%
Sara Lee Corporation,
5.5727%, Master Note .................. 168 168,000
TOTAL SHORT-TERM SECURITIES - 8.89% $ 378,000
(Cost: $378,000)
TOTAL INVESTMENT SECURITIES - 98.28% $4,178,924
(Cost: $4,136,211)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.72% 73,183
NET ASSETS - 100.00% $4,252,107
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 4.99%
Dow Capital BV,
9.0%, 5-15-2010 ....................... $ 500 $ 591,195
Dow Chemical Company (The),
8.55%, 10-15-2009 ..................... 1,000 1,153,860
Procter & Gamble Company (The),
8.0%, 9-1-2024 ........................ 2,000 2,401,740
Rohm & Haas,
9.375%, 11-15-2019 .................... 750 818,437
Total ................................. 4,965,232
Communication - 6.97%
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-2030 ..................... 1,000 1,245,710
BellSouth Telecommunications, Inc.,
5.85%, 11-15-2045 ..................... 1,000 1,006,450
Brooks Fiber Properties, Inc.,
0.0%, 3-1-2006 (F) .................... 250 207,500
Centel Capital Corporation,
9.0%, 10-15-2019 ...................... 1,000 1,231,260
Jones Intercable, Inc.,
9.625%, 3-15-2002 ..................... 500 536,250
Tele-Communications, Inc.,
6.58%, 2-15-2005 ...................... 1,000 1,065,050
Turner Broadcasting System, Inc.,
8.375%, 7-1-2013 ...................... 1,000 1,122,020
U S WEST, Inc.,
8.4%, 9-15-99 ......................... 500 518,555
Total ................................. 6,932,795
Depository Institutions - 10.42%
AmSouth Bancorporation,
6.75%, 11-1-2025 ...................... 1,500 1,536,945
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-2005 ...................... 500 515,000
Citicorp,
9.5%, 2-1-2002 ........................ 500 556,870
J.P. Morgan & Co. Incorporated,
7.54%, 1-15-2027 ...................... 1,500 1,523,790
Kansallis-Osake-Pankki,
10.0%, 5-1-2002 ....................... 1,000 1,136,390
NBD Bank, National Association,
8.25%, 11-1-2024 ...................... 1,000 1,213,900
NationsBank Corporation,
8.57%, 11-15-2024 ..................... 1,000 1,242,290
Riggs National Corporation,
8.5%, 2-1-2006 ........................ 1,500 1,573,290
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions (Continued)
SouthTrust Bank of Alabama, N.A.:
5.58%, 2-6-2006 ....................... $ 500 $ 493,130
7.69%, 5-15-2025 ...................... 500 575,850
Total ................................. 10,367,455
Electric, Gas and Sanitary Services - 6.95%
Cajun Electric Power Cooperative, Inc.,
8.92%, 3-15-2019 ...................... 1,000 1,077,510
California Infrastructure and Economic
Development Bank, Special Purpose
Trust:
PG&E-1,
6.42%, 9-25-2008 ...................... 500 505,080
SCE-1,
6.38%, 9-25-2008 ...................... 750 756,952
Cleveland Electric Illuminating Co. (The),
9.5%, 5-15-2005 ....................... 678 751,916
Consolidated Edison Company of New York, Inc.,
8.05%, 12-15-2027 ..................... 500 526,790
El Paso Electric Company,
7.25%, 2-1-99 ......................... 500 502,345
Kansas Gas and Electric Company,
7.6%, 12-15-2003 ...................... 1,000 1,056,370
Niagara Mohawk Power,
9.5%, 6-1-2000 ........................ 500 529,020
Pacific Gas & Electric Co.,
6.875%, 12-1-99 ....................... 500 501,390
Pennsylvania Power & Light Co.,
9.25%, 10-1-2019 ...................... 656 709,536
Total ................................. 6,916,909
Food and Kindred Products - 3.14%
Anheuser-Busch,
7.0%, 9-1-2005 ........................ 500 508,970
Coca-Cola Enterprises Inc.,
0.0%, 6-20-2020 ....................... 10,000 2,266,800
Nabisco, Inc.,
6.8%, 9-1-2001 ........................ 345 351,669
Total ................................. 3,127,439
Food Stores - 0.54%
Kroger Co. (The),
7.65%, 4-15-2007 ...................... 500 534,355
Health Services - 1.03%
Tenet Healthcare Corporation:
7.875%, 1-15-2003 ..................... 500 506,250
8.625%, 12-1-2003 ..................... 500 521,250
Total ................................. 1,027,500
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places - 1.67%
Marriott International, Inc.,
7.875%, 4-15-2005 ..................... $1,000 $ 1,087,990
RHG Finance Corporation,
8.875%, 10-1-2005 ..................... 500 568,175
Total ................................. 1,656,165
Instruments and Related Products - 0.76%
Raytheon Company,
6.45%, 8-15-2002 ...................... 750 753,683
Insurance Carriers - 0.53%
Reliance Group Holdings, Inc.,
9.0%, 11-15-2000 ...................... 500 524,170
Lumber and Wood Products - 0.24%
Doman Industries Limited,
8.75%, 3-15-2004 ...................... 250 238,750
Nondepository Institutions - 10.53%
Associates Corporation of North America,
7.95%, 2-15-2010 ...................... 500 561,255
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-2010 (B) .................. 1,500 1,451,250
CWMBS, Inc.,
6.5%, 4-25-2024 ....................... 2,000 1,993,440
Chrysler Financial Corporation,
12.75%, 11-1-99 ....................... 1,000 1,110,320
General Electric Capital Corporation,
8.3%, 9-20-2009 ....................... 250 289,045
General Motors Acceptance Corporation,
8.875%, 6-1-2010 ...................... 1,000 1,193,970
IMC Home Equity Loan Trust 1997-5 A7,
6.9%, 1-20-2022 ....................... 1,000 1,007,500
National Rural Utilities Cooperative
Finance Corp., Series C,
6.1%, 12-22-2000 ...................... 500 500,625
Residential Asset Securities Corporation,
Mortgage Pass-Through Certificates,
1995-KS3 Class D,
8.0%, 10-25-2024 ...................... 1,000 1,042,890
U S WEST Communications Group, Inc.,
6.95%, 1-15-2037 ...................... 750 772,553
Westinghouse Electric Corporation,
8.875%, 6-14-2014 ..................... 500 555,410
Total ................................. 10,478,258
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Oil and Gas Extraction - 3.17%
Anadarko Petroleum Corporation,
7.25%, 3-15-2025 ...................... $1,000 $ 1,091,440
Louis Dreyfus Natural Gas Corp.,
9.25%, 6-15-2004 ...................... 500 560,000
Mitchell Energy & Development Corp.,
9.25%, 1-15-2002 ...................... 27 29,337
Oryx Energy Company,
10.0%, 4-1-2001 ....................... 400 439,428
YPF Sociedad Anoima,
8.0%, 2-15-2004 ....................... 1,000 1,032,670
Total ................................. 3,152,875
Paper and Allied Products - 1.61%
Boise Cascade Office Products Corporation,
9.875%, 2-15-2001 ..................... 500 518,890
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-2002 ...................... 1,000 1,077,220
Total ................................. 1,596,110
Printing and Publishing - 0.55%
Viacom International Inc.,
10.25%, 9-15-2001 ..................... 500 550,480
Security and Commodity Brokers - 1.00%
Salomon Inc.,
3.65%, 2-14-2002 ...................... 1,000 997,610
Stone, Clay and Glass Products - 1.61%
Owens-Corning Fiberglas Corporation,
8.875%, 6-1-2002 ...................... 500 544,065
Owens-Illinois, Inc.,
7.85%, 5-15-2004 ...................... 500 525,270
USG Corporation,
9.25%, 9-15-2001 ...................... 500 535,000
Total ................................. 1,604,335
United States Postal Service - 0.25%
Postal Square Limited Partnership,
6.5%, 7-15-2022 ....................... 250 250,625
Wholesale Trade -- Durable Goods- 2.72%
Fisher Scientific International Inc.,
7.125%, 12-15-2005 .................... 900 842,103
Motorola, Inc.,
8.4%, 8-15-2031 ....................... 1,500 1,858,905
Total ................................. 2,701,008
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
TOTAL CORPORATE DEBT SECURITIES - 58.68% $58,375,754
(Cost: $55,601,683)
OTHER GOVERNMENT SECURITIES
Canada - 5.15%
Hydro-Quebec:
8.05%, 7-7-2024 ....................... $ 1,000 1,151,270
7.4%, 3-28-2025 ....................... 1,000 1,215,850
Province de Quebec:
5.67%, 2-27-2026 ...................... 500 527,015
6.29%, 3-6-2026 ....................... 1,000 1,031,020
Province of Nova Scotia,
8.25%, 11-15-2019...................... 1,000 1,192,530
Total ................................. 5,117,685
Supranational - 1.19%
Inter-American Development Bank,
8.4%, 9-1-2009 ........................ 1,000 1,187,540
TOTAL OTHER GOVERNMENT SECURITIES - 6.34% $6,305,225
(Cost: $5,729,703)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
7.5%, 2-15-2007 ....................... 2,000 2,053,120
7.5%, 11-15-2017 ...................... 1,538 1,561,547
7.5%, 4-15-2019 ....................... 1,490 1,531,405
7.95%, 12-15-2020 ..................... 3,000 3,082,500
Federal National Mortgage Association:
7.0%, 9-25-2020 ....................... 500 510,000
6.5%, 11-25-2020 ...................... 819 819,400
Government National Mortgage Association:
7.5%, 7-15-2023 ....................... 1,924 1,980,127
7.5%, 12-15-2023 ...................... 2,052 2,111,935
8.0%, 9-15-2025 ....................... 1,727 1,814,573
7.0%, 7-20-2027 ....................... 653 656,325
7.0%, 8-20-2027 ....................... 1,318 1,324,449
7.75%, 10-15-2031 ..................... 319 330,301
United States Treasury:
6.75%, 5-31-99 ........................ 1,000 1,014,690
5.75%, 10-31-2000 ..................... 6,000 6,007,500
5.25%, 1-31-2001 ...................... 1,000 987,810
0.0%, 2-15-2019 ....................... 2,000 561,060
United States Department of Veterans Affairs,
Guaranteed Remic Pass-Through Certificates,
Vendee Mortgage Trust, 1997-2 Class C,
7.5%, 8-15-2017 ....................... 2,000 2,081,860
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
TOTAL UNITED STATES GOVERNMENT SECURITIES - 28.57% $28,428,602
(Cost: $27,828,923)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 2.17%
Danaher Corporation,
5.7227%, Master Note .................. $2,156 2,156,000
Food and Kindred Products - 0.52%
General Mills, Inc.,
5.5777%, Master Note .................. 517 517,000
General Merchandise Stores - 1.08%
May Department Stores Company (The),
5.74%, 1-12-98 ........................ 1,075 1,073,115
Textile Mill Products - 1.42%
Sara Lee Corporation,
5.5727%, Master Note .................. 1,417 1,417,000
TOTAL SHORT-TERM SECURITIES - 5.19% $ 5,163,115
(Cost: $5,163,115)
TOTAL INVESTMENT SECURITIES - 98.78% $98,272,696
(Cost: $94,323,424)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.22% 1,216,573
NET ASSETS - 100.00% $99,489,269
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Shares Value
COMMON STOCKS AND WARRANTS
Communication - 0.28%
Heartland Wireless Communications,
Inc., Warrants (B)* ................... 3,000 $ 30
Iridium LLC, Warrants (B)* ............. 500 61,250
Microcell Telecommunications Inc.,
Conditional Warrants (B)* ............. 5,000 5
Microcell Telecommunications Inc.,
Warrants(B)* .......................... 5,000 69,150
Primus Telecommunications Group,
Incorporated, Warrants* ............... 500 5,000
Young Broadcasting Inc.* ............... 5,000 195,935
Total ................................. 331,370
Electronic and Other Electric Equipment - 0.02%
Electronic Retailing Systems
International, Inc., Warrants* ........ 500 10,000
Powertel, Inc., Warrants* .............. 2,400 17,700
Total ................................ 27,700
Furniture and Fixtures - 0.32%
Lear Corporation* ...................... 8,000 380,000
General Building Contractors - 0.40%
Walter Industries, Inc.* ............... 23,272 479,985
TOTAL COMMON STOCKS AND WARRANTS - 1.02% $ 1,219,055
(Cost: $925,842)
PREFERRED STOCKS
Communication - 0.50%
IXC Communications, Inc., 12.5% (B)* ... 514 601,380
Depository Institutions - 0.73%
California Federal Bank,
F.S.B., 10.625% ....................... 5,000 552,500
California Federal Preferred Capital
Corporation, 9.125% ................... 12,500 325,000
Total ................................. 877,500
Printing and Publishing - 0.44%
PRIMEDIA Inc., 10.0%* .................. 5,000 522,500
TOTAL PREFERRED STOCKS - 1.67% $ 2,001,380
(Cost: $1,827,444)
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Agricultural Production -- Crops - 0.47%
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .................... $ 500 $ 556,875
Agricultural Production -- Livestock - 0.26%
Pilgrim's Pride Corporation,
10.875%, 8-1-2003 ..................... 300 313,500
Amusement and Recreation Services - 2.39%
American Skiing Company,
12.0%, 7-15-2006 ...................... 1,000 1,105,000
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 ...................... 500 602,500
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 ...................... 1,000 1,145,000
Total ................................. 2,852,500
Apparel and Accessory Stores - 0.42%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 (B) ................. 500 498,750
Apparel and Other Textile Products - 3.05%
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 ...................... 1,000 1,040,000
Pillowtex Corporation:
10.0%, 11-15-2006 ..................... 500 532,500
9.0%, 12-15-2007 (B) .................. 1,000 1,023,750
WestPoint Stevens Inc.,
9.375%, 12-15-2005 .................... 1,000 1,050,000
Total ................................. 3,646,250
Automotive Dealers and Service Stations - 0.83%
Chief Auto Parts Inc.,
10.5%, 5-15-2005 ...................... 1,000 990,000
Business Services - 4.32%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ..................... 750 821,250
Coinmach Laundry Corporation,
11.75%, 11-15-2005 (B) ................ 500 553,750
DecisionOne Holdings Corp., Units,
0.0%, 8-1-2008 (F) (G) ................ 1,750 1,137,500
Federal Data Corporation,
10.125%, 8-1-2005 (B) ................. 500 507,500
Lamar Advertising Company,
9.625%, 12-1-2006 ..................... 1,000 1,080,000
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Business Services (Continued)
UNICCO Service Company,
9.875%, 10-15-2007 (B) ................ $ 500 $ 501,875
Universal Outdoor, Inc.,
9.75%, 10-15-2006 ..................... 500 561,250
Total ................................. 5,163,125
Chemicals and Allied Products - 3.32%
Carson, Inc.,
10.375%, 11-01-2007 (B) ............... 500 500,000
Dade International Inc.,
11.125%, 5-1-2006 ..................... 500 556,250
Freedom Chemical Company,
10.625%, 10-15-2006 ................... 1,250 1,375,000
Sovereign Specialty Chemicals, Inc.,
9.5%, 8-1-2007 (B) .................... 500 513,750
Spinnaker Industries, Inc.,
10.75%, 10-15-2006 .................... 1,000 1,026,250
Total ................................. 3,971,250
Coal Mining - 0.52%
AEI Holding Company, Inc.,
10.0%, 11-15-2007 (B) ................. 600 616,500
Communication - 20.18%
Adelphia Communications Corporation:
10.25%, 7-15-2000 ..................... 500 517,500
12.5%, 5-15-2002 ...................... 175 185,500
9.25%, 10-1-2002 ...................... 500 510,000
10.5%, 7-15-2004 ...................... 500 540,000
9.875%, 3-1-2007 ...................... 500 526,250
Allbritton Communications Company,
9.75%, 11-30-2007 ..................... 500 511,250
American Radio Systems Corporation,
9.0%, 2-1-2006 ........................ 750 795,000
Argyle Television Operations, Inc.,
9.75%, 11-1-2005 ...................... 700 784,000
Cablevision Systems Corporation,
9.875%, 2-15-2013 ..................... 1,450 1,598,625
Comcast Corporation,
9.5%, 1-15-2008 ....................... 350 370,986
Concentric Network Corporation,
12.75%, 12-15-2007 (B) ................ 750 770,625
Crown Castle International Corp.,
0.0%, 11-15-2007 (B)(F) ............... 1,000 631,250
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (F) .................. 500 388,750
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
GST Telecommunications,
0.0%, 11-15-2007 (F) .................. $1,000 $ 1,042,500
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (F) ................... 750 596,250
Iridium LLC:
11.25%, 7-15-2005 (B) ................. 500 492,500
13.0%, 7-15-2005 ...................... 1,000 1,050,000
Marcus Cable Co.,
0.0%, 12-15-2005 (F) .................. 500 432,500
Marcus Cable Operating Company, L.P.,
0.0%, 8-1-2004 (F) .................... 1,500 1,387,500
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (F) .................... 1,750 1,181,250
Nextel Communications, Inc.:
0.0%, 8-15-2004 (F) ................... 1,000 890,000
0.0%, 10-31-2007 (B)(F) ............... 1,000 613,750
NEXTLINK Communications, Inc.,
9.625%, 10-1-2007 ..................... 900 929,250
Primus Telecommunications Group, Incorporated,
11.75%, 8-1-2004 ...................... 500 535,000
Rogers Cantel Inc.,
9.375%, 6-1-2008 ...................... 500 527,500
Rogers Communications Inc.,
8.875%, 7-15-2007 ..................... 500 500,000
Salem Communications Corporation,
9.5%, 10-1-2007 (B) ................... 500 511,250
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (F) ................... 1,000 775,000
Teleport Communications Group Inc.,
0.0%, 7-1-2007 (F)..................... 1,250 1,018,750
Vanguard Cellular Systems, Inc.,
9.375%, 4-15-2006 ..................... 500 520,000
Videotron Plc,
0.0%, 8-15-2005 (F) ................... 500 442,245
WinStar Communications, Inc.:
0.0%, 10-15-2005 (Convertible) (B)(F) . 500 523,750
0.0%, 10-15-2005 (F) .................. 500 641,250
Wireless One, Inc., Units,
0.0%, 8-1-2006 (F)(H) ................. 500 125,000
WorldCom, Inc.:
9.375%, 1-15-2004...................... 435 460,565
8.875%, 1-15-2006 ..................... 737 792,953
Total ................................. 24,118,499
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions - 1.34%
First Nationwide Holdings Inc.:
9.125%, 1-15-2003 ..................... $1,000 $ 1,040,000
12.5%, 4-15-2003 ...................... 500 567,500
Total ................................. 1,607,500
Eating and Drinking Places - 0.43%
SC International Services, Inc.,
9.25%, 9-1-2007 (B) ................... 500 516,250
Electric, Gas and Sanitary Services - 1.23%
Allied Waste Industries, Inc.,
0.0%, 6-1-2007 (B)(F) ................. 1,000 702,500
Allied Waste North America, Inc.,
10.25%, 12-1-2006 ..................... 700 768,250
Total ................................. 1,470,750
Electronic and Other Electric Equipment - 1.96%
Communications Instruments, Inc.,
10.0%, 9-15-2004 (B) .................. 450 459,000
Electronic Retailing Systems
International, Inc.,
0.0%, 2-1-2004 (F) .................... 500 340,000
Omnipoint Corporation,
11.625%, 8-15-2006 .................... 500 531,875
Telex Communications, Inc.,
10.5%, 5-1-2007 ....................... 500 493,750
Viasystems, Inc.,
9.75%, 6-1-2007 ....................... 500 516,250
Total ................................. 2,340,875
Engineering and Management Services - 0.68%
United International Holdings, Inc.,
0.0%, 11-15-99 ........................ 1,000 810,000
Fabricated Metal Products - 3.25%
Neenah Corporation:
11.125%, 5-1-2007 ..................... 500 550,000
11.125%, 5-1-2007 ..................... 1,000 1,100,000
Nortek, Inc.,
9.875%, 3-1-2004 ...................... 500 511,250
Safety Components International, Inc.,
10.125%, 7-15-2007 .................... 1,150 1,188,812
U.S. Can Corporation,
10.125%, 10-15-2006 ................... 500 528,750
Total ................................. 3,878,812
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food and Kindred Products - 1.28%
B & G Foods, Inc.,
9.625%, 8-1-2007 (B) .................. $ 500 $ 505,000
Southern Foods Group, L.P.,
9.875%, 9-1-2007 (B) .................. 500 519,375
Tom's Foods Inc.,
10.5%, 11-1-2004 (B) .................. 500 500,000
Total ................................. 1,524,375
Food Stores - 1.78%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ...................... 500 522,500
Pueblo Xtra International, Inc.,
9.5%, 8-1-2003 ........................ 500 476,250
Ralphs Grocery Company,
11.0%, 6-15-2005 ...................... 1,000 1,135,000
Total ................................. 2,133,750
Furniture and Fixtures - 1.27%
Lear Seating Corporation,
8.25%, 2-1-2002 ....................... 1,500 1,518,750
General Building Contractors - 0.91%
NVR L.P.,
11.0%, 4-15-2003 ...................... 1,000 1,085,000
Health Services - 3.62%
Genesis ElderCare Acquisition Corp.,
9.0%, 8-1-2007 (B) .................... 750 735,938
Magellan Health Services, Inc.,
11.25%, 4-15-2004 ..................... 1,500 1,665,000
Paragon Health Network, Inc.,
9.5%, 11-1-2007 (B) ................... 900 902,250
Tenet Healthcare Corporation:
8.0%, 1-15-2005 ....................... 500 508,750
8.625%, 1-15-2007 ..................... 500 516,250
Total ................................. 4,328,188
Holding and Other Investment Offices - 2.11%
Grupo Industrial Durango, S.A. de C.V.,
12.625%, 8-1-2003 ..................... 1,000 1,117,500
LTC Properties, Inc., Convertible,
8.5%, 1-1-2000 ........................ 1,000 1,403,750
Total ................................. 2,521,250
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places - 3.99%
CapStar Hotel Company,
8.75%, 8-15-2007 ...................... $ 500 $ 518,750
HMC Acquisition Properties, Inc.,
9.0%, 12-15-2007 ...................... 500 522,500
Prime Hospitality Corp.:
9.25%, 1-15-2006 ...................... 1,500 1,595,625
9.75%, 4-1-2007 ....................... 500 535,000
Showboat, Inc.,
9.25%, 5-1-2008 ....................... 1,000 1,070,000
Station Casinos, Inc.,
10.125%, 3-15-2006 .................... 500 527,500
Total ................................. 4,769,375
Industrial Machinery and Equipment - 3.02%
American Standard Inc.,
9.875%, 6-1-2001 ...................... 1,000 1,041,250
Falcon Building Products, Inc.,
0.0%, 6-15-2007 (F) ................... 2,000 1,320,000
National Equipment Services, Inc.,
10.0%, 11-30-2004 (B) ................. 750 744,375
Walbro Corporation,
10.125%, 12-15-2007 (B) ............... 500 510,000
Total ................................. 3,615,625
Instruments and Related Products - 2.27%
Cole National Group, Inc.,
9.875%, 12-31-2006 .................... 500 532,500
InterCel, Inc.,
0.0%, 2-1-2006 (F) .................... 750 550,312
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ....................... 1,500 1,627,500
Total ................................. 2,710,312
Lumber and Wood Products - 0.89%
Triangle Pacific Corp.,
10.5%, 8-1-2003 ....................... 1,000 1,070,000
Miscellaneous Manufacturing Industries - 0.85%
Amscan Holdings Inc.,
9.875%, 12-15-2007 (B) ................ 500 511,250
Hedstrom Corporation,
10.0%, 6-1-2007 ....................... 500 505,000
Total ................................. 1,016,250
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Miscellaneous Retail - 0.93%
Michaels Stores, Inc.,
10.875%, 6-15-2006 .................... $1,000 $ 1,107,500
Motion Pictures - 2.29%
AMC Entertainment, Inc.,
9.5%, 3-15-2009 ....................... 500 512,500
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 (B) ................. 1,000 1,065,000
MacAndrews & Forbes Group, Incorporated,
13.0%, 3-1-99 ......................... 81 81,000
Plitt Theatres, Inc.,
10.875%, 6-15-2004 .................... 1,000 1,081,250
Total ................................. 2,739,750
Nondepository Institutions - 0.84%
Delta Financial Corporation,
9.5%, 8-1-2004 ........................ 1,000 1,000,000
Oil and Gas Extraction - 1.79%
Cross Timbers Oil,
8.75%, 11-1-2009 (B) .................. 500 510,000
Flores & Rucks, Inc.,
9.75%, 10-1-2006 ...................... 1,000 1,097,500
Pride Petroleum Services, Inc.,
9.375%, 5-1-2007 ...................... 500 537,500
Total ................................. 2,145,000
Paper and Allied Products - 2.85%
Container Corporation of America,
11.25%, 5-1-2004 ...................... 1,500 1,635,000
Fort Howard Corporation,
11.0%, 1-2-2002 ....................... 436 456,569
Huntsman Packaging Corporation,
9.125%, 10-1-2007 (B) ................. 750 774,375
Mail-Well Corporation,
10.5%, 2-15-2004 ...................... 500 536,250
Total ................................. 3,402,194
Personal Services - 0.46%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 ..................... 500 550,000
Primary Metal Industries - 0.43%
Weirton Steel Corporation,
11.375%, 7-1-2004 ..................... 500 520,000
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Printing and Publishing - 2.67%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................... $1,000 $ 1,085,000
K-III Communications Corporation,
8.5%, 2-1-2006 ........................ 500 508,750
Perry-Judd's Incorporated,
10.625%, 12-15-2007 (B) ............... 650 669,500
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 (B) ................ 900 931,500
Total ................................. 3,194,750
Real Estate - 0.42%
Delco Remy International, Inc.,
8.625%, 12-15-2007 .................... 500 506,250
Rubber and Miscellaneous Plastics Products - 0.89%
Burke Industries, Inc.,
10.0%, 8-15-2007 (B) .................. 500 520,000
LDM Technologies, Inc.,
10.75%, 1-15-2007 ..................... 500 542,500
Total ................................. 1,062,500
Textile Mill Products - 2.44%
Avondale Mills, Inc.,
10.25%, 5-1-2006 ...................... 500 537,500
Collins & Aikman Products Co.,
11.5%, 4-15-2006 ...................... 500 561,875
Delta Mills, Inc.,
9.625%, 9-1-2007 (B) .................. 1,250 1,275,000
Glenoit Corporation,
11.0%, 4-15-2007 (B) .................. 500 538,750
Total ................................. 2,913,125
Transportation Equipment - 1.23%
Advanced Accessory Systems, LLC.,
9.75%, 10-1-2007 (B) .................. 500 493,750
Aetna Industries, Inc.,
11.875%, 10-1-2006 .................... 500 455,000
Westinghouse Air Brake Company,
9.375%, 6-15-2005 ..................... 500 521,250
Total ................................. 1,470,000
Transportation Services - 0.63%
Transportacion Maritima Mexicana,
S.A. de C.V.,
10.0%, 11-15-2006 ..................... 750 755,625
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Trucking and Warehousing - 0.46%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .................... $ 500 $ 550,000
Wholesale Trade -- Durable Goods - 2.67%
Alvey Systems, Inc.,
11.375%, 1-31-2003 .................... 1,000 1,090,000
Exide Corporation,
10.0%, 4-15-2005 ...................... 1,500 1,590,000
Sealy Mattress Company,
9.875%, 12-15-2007 (B) ................ 500 507,500
Total ................................. 3,187,500
Wholesale Trade -- Nondurable Goods - 2.87%
Color Spot Nurseries Inc.,
10.5%, 12-15-2007 ..................... 500 507,500
Corporate Express, Inc.,
9.125%, 3-15-2004 ..................... 1,000 1,017,500
Fleming Companies, Inc.,
10.5%, 12-1-2004 (B) .................. 500 527,500
LaRoche Industries Inc.,
9.5%, 9-15-2007 (B) ................... 500 497,500
Richmont Marketing Specialists Inc.,
10.125%, 12-15-2007 (B) ............... 500 508,750
United Stationers Supply Co.,
12.75%, 5-1-2005 ...................... 333 370,879
Total ................................. 3,429,629
TOTAL CORPORATE DEBT SECURITIES - 90.51% $108,178,134
(Cost: $102,857,217)
TOTAL SHORT-TERM SECURITIES - 4.91% $ 5,871,189
(Cost $5,871,189)
TOTAL INVESTMENT SECURITIES - 98.11% $117,269,758
(Cost: $111,481,692)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.89% 2,253,852
NET ASSETS - 100.00% $119,523,610
See Notes to Schedules of Investments on pages 120 - 123.
<PAGE>
TMK/UNITED FUNDS, INC.
Notes to Schedules of Investments
*No dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside of the United States.
(B) As of December 31, 1997, the following restricted securities were owned:
Shares/
Principal
Acquisition Amount Acquisition Market
Security Date in 000's Cost Value
---------------- --------------------------------------------
Growth Portfolio
Adaptec Inc., Convertible,
4.75%, 2-1-2004 1/28/97 $1,500$1,500,000$1,556,250
2/28/97 1,000 995,000 1,037,500
--------------------
$2,495,000$2,593,750
====================
Asset Strategy Portfolio
Banco de Inversion y Comercio
Exterior S.A.,
9.375%, 12-27-2000 2/18/97 $200$ 208,000 $199,000
Cervejarias Kaiser S.A.,
8.875%, 9-26-2005 9/16/97 200 199,380 182,000
Companhia Paranaense de Energia-COPEL,
9.75%, 5-2-2005 4/22/97 200 199,236 191,500
Comtel Brasileira Ltd.,
10.75%, 9-26-2004 11/12/97 100 89,000 97,000
JG Summit Holdings, Inc.,
8.0%, 5-6-2002 5/19/97 200 197,750 159,000
-------- --------
$893,366 $828,500
======== ========
Bond Portfolio
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-2010 11/25/97 $1,500$1,444,062$1,451,250
====================
High Income Portfolio
Heartland Wireless Communications,
Inc., Warrants 4/20/95 3,000$ 18,500$ 30
IXC Communications, Inc.,
12.5% Preferred Stock 8/15/97 500 500,000 585,000
11/3/97 14 --- 16,380
Iridium LLC, Warrants 7/15/97 500 28,414 61,250
Microcell Telecommunications Inc.,
Conditional Warrants 6/13/96 5,000 --- 5
Microcell Telecommunications Inc.,
Warrants 6/13/96 5,000 61,247 69,150
AEI Holding Company, Inc.,
10.0%, 11-15-2007 11/6/97 $ 600 600,000 616,500
Advanced Accessory Systems, LLC.,
9.75%, 10-1-2007 9/25/97 500 498,115 493,750
Allied Waste Industries, Inc.,
0.0%, 6-1-2007 5/1/97 1,000 574,360 702,500
Amscan Holdings Inc.,
9.875%, 12-15-200712/15/97 500 500,000 511,250
<PAGE>
Principal
Acquisition Amount Acquisition Market
Security Date in 000's Cost Value
---------------- --------------------------------------------
High Income Portfolio (Continued)
B & G Foods, Inc.,
9.625%, 8-1-2007 8/18/97 $ 500$ 499,375$ 505,000
Burke Industries, Inc.,
10.0%, 8-15-2007 8/14/97 500 500,000 520,000
Carson, Inc.,
10.375%, 11-01-2007 10/31/97 500 500,000 500,000
Coinmach Laundry Corporation,
11.75%, 11-15-2005 10/1/97 500 549,375 553,750
Communications Instruments, Inc.,
10.0%, 9-15-2004 9/12/97 450 450,000 459,000
Concentric Network Corporation,
12.75%, 12-15-2007 12/15/97 750 750,000 770,625
Cross Timbers Oil,
8.75%, 11-1-2009 10/21/97 500 500,000 510,000
Crown Castle International Corp.,
0.0%, 11-15-2007 11/20/97 1,000 597,650 631,250
Delta Mills, Inc.,
9.625%, 9-1-2007 8/20/97 to
8/21/97 1,250 1,259,375 1,275,000
Federal Data Corporation,
10.125%, 8-1-2005 7/18/97 500 500,000 507,500
Fleming Companies, Inc.,
10.5%, 12-1-2004 7/18/97 500 497,095 527,500
Genesis ElderCare Acquisition Corp.,
9.0%, 8-1-2007 8/4/97 500 497,225 490,625
9/10/97 250 246,875 245,313
Glenoit Corporation,
11.0%, 4-15-2007 3/26/97 500 499,045 538,750
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 7/31/97 1,000 1,013,750 1,065,000
Huntsman Packaging Corporation,
9.125%, 10-1-2007 9/19/97 750 750,000 774,375
Iridium LLC,
11.25%, 7-15-2005 10/9/97 500 500,000 492,500
LaRoche Industries Inc.,
9.5%, 9-15-2007 9/18/97 500 497,760 497,500
National Equipment Services, Inc.,
10.0%, 11-30-2004 11/20/97 750 740,753 744,375
Nextel Communications, Inc.,
0.0%, 10-31-2007 10/15/97 1,000 619,960 613,750
Paragon Health Network, Inc.,
9.5%, 11-1-2007 10/30/97 900 895,986 902,250
Perry-Judd's Incorporated,
10.625%, 12-15-2007 12/10/97 650 650,000 669,500
Pillowtex Corporation:
9.0%, 12-15-2007 12/15/97 750 750,000 767,813
12/16/97 250 254,375 255,937
Richmont Marketing Specialists Inc.,
10.125%, 12-15-2007 12/16/97 500 500,000 508,750
SC International Services, Inc.,
9.25%, 9-1-2007 8/21/97 500 499,340 516,250
Salem Communications Corporation,
9.5%, 10-1-2007 9/17/97 500 500,000 511,250
<PAGE>
Principal
Acquisition Amount Acquisition Market
Security Date in 000's Cost Value
---------------- --------------------------------------------
High Income Portfolio (Continued)
Sealy Mattress Company,
9.875%, 12-15-2007 12/11/97 $500$ 500,000$ 507,500
Southern Foods Group, L.P.,
9.875%, 9-1-2007 8/27/97 500 500,000 519,375
Sovereign Specialty Chemicals, Inc.,
9.5%, 8-1-2007 7/31/97 500 500,000 513,750
Tom's Foods Inc.,
10.5%, 11-1-2004 10/8/97 500 500,000 500,000
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 11/6/97 900 900,000 931,500
UNICCO Service Company,
9.875%, 10-15-2007 10/14/97 500 497,650 501,875
Walbro Corporation,
10.125%, 12-15-2007 12/11/97 500 500,000 510,000
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 8/14/97 500 500,000 498,750
WinStar Communications, Inc.,
0.0%, 10-15-2005 10/14/97 500 467,500 523,750
----------------------
$23,663,725$24,415,878
======================
The total market value of restricted securities represents approximately
0.41%, 8.45%, 1.46% and 20.43%, respectively, of the total net assets in
the Growth Portfolio, Asset Strategy Portfolio, Bond Portfolio and High
Income Portfolio at December 31, 1997.
(C) Collateralized by $967,000 U.S. Treasury Notes, 8.875% due 2-15-2019,
market value and accrued interest aggregate $1,328,248.
(D) Principal amounts are denominated in the indicated foreign currency where
applicable (DM - Deutsche Mark, F - French Franc).
(E) Each unit consists of one share of callable common stock, par value $0.001
per share, of Spiros Development Corporation II, Inc. and one warrant to
purchase one-fourth of one share of common stock, par value $0.001 per
share, of Dura Pharmaceuticals, Inc.
(F) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(G) Each Unit consists of $1,000 principal amount at maturity of 11.5% senior
discount debentures due 2008 and one warrant to purchase 1.9 shares of
common stock, par value $0.01 per share, of Quaker Holding Co.
(H) 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.
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, 1997
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
Assets ----------- ---------- -----------
Investment securities--at
value (Notes 1 and 3) $648,019,278 $633,543,369 $10,161,301
Cash ................. 7,958 7,831 5,040
Receivables:
Investment securities
sold ............... 2,511,450 2,982,115 ---
Fund shares sold ..... 258,651 176,197 42,185
Dividends and interest 705,270 424,564 310
Prepaid insurance
premium .............. 4,290 3,344 104
------------ ------------ -----------
Total assets ....... 651,506,897 637,137,420 10,208,940
Liabilities ------------ ------------ -----------
Payable for investment
securities purchased . 12,016,701 83,648 ---
Payable to Fund
shareholders ......... 103,916 124,327 322
Accrued accounting
services fee (Note 2). 5,833 5,833 ---
Accrued management
fee (Note 2) ......... 12,150 12,105 193
Due to custodian ...... --- --- ---
Other ................. 8,960 7,188 1,248
------------ ------------ -----------
Total liabilities .. 12,147,560 233,101 1,763
------------ ------------ -----------
Total net assets .. $639,359,337 $636,904,319 $10,207,177
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock ........ $ 844,829 $ 532,462 $ 17,682
Additional paid-in
capital ............ 550,538,635 411,763,927 9,947,550
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... --- --- ---
Net unrealized appreciation
of investments ..... 87,975,873 224,607,930 241,945
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital ........ $639,359,337 $636,904,319 $10,207,177
============ ============ ===========
Net asset value, redemption
and offering price per share $7.5679 $11.9615 $5.7726
======= ======== =======
Capital shares outstanding 84,482,949 53,246,205 1,768,200
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, 1997
International Small Cap Balanced
Portfolio Portfolio Portfolio
Assets ------------ ------------ -----------
Investment securities--at
value (Notes 1 and 3) $114,396,071 $149,638,627 $67,989,783
Cash ................. --- 6,529 4,114
Receivables:
Investment securities
sold ............... --- --- 539,925
Fund shares sold ..... 42,985 317,456 47,187
Dividends and interest 258,081 63,014 382,584
Prepaid insurance
premium .............. 952 1,016 584
------------ ------------ -----------
Total assets ....... 114,698,089 150,026,642 68,964,177
Liabilities ------------ ------------ -----------
Payable for investment
securities purchased . --- 1,740,000 1,190,370
Payable to Fund
shareholders ......... 37,405 39,983 10,375
Accrued accounting
services fee (Note 2). 3,333 3,333 2,500
Accrued management
fee (Note 2) ......... 2,493 3,420 1,102
Due to custodian ...... 1,106 --- ---
Other ................. 22,447 1,648 1,094
------------ ------------ -----------
Total liabilities .. 66,784 1,788,384 1,205,441
------------ ------------ -----------
Total net assets .. $114,631,305 $148,238,258 $67,758,736
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock ........ $ 179,554 $ 177,924 $ 100,107
Additional paid-in
capital ............ 100,642,966 136,163,934 60,305,422
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... --- --- ---
Net unrealized appreciation
of investments ..... 13,808,785 11,896,400 7,353,207
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital ........ $114,631,305 $148,238,258 $67,758,736
============ ============ ===========
Net asset value, redemption
and offering price per share $6.3842 $8.3316 $6.7686
======= ======== =======
Capital shares outstanding 17,955,429 17,792,352 10,010,749
Capital shares authorized 100,000,000 100,000,000 50,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Asset
Strategy Money Market Limited-Term
Portfolio Portfolio Bond Portfolio
Assets ------------- ------------ -----------
Investment securities--at
value (Notes 1 and 3) $9,720,311 $41,850,969 $4,178,924
Cash ................. 2,583 12,242 4,523
Receivables:
Investment securities
sold ............... --- --- ---
Fund shares sold ..... 2,481 1,318,167 3,231
Dividends and interest 85,182 219,912 65,668
Prepaid insurance
premium .............. 224 1,011 168
---------- ----------- ----------
Total assets ....... 9,810,781 43,402,301 4,252,514
Liabilities ---------- ----------- ----------
Payable for investment
securities purchased . --- --- ---
Payable to Fund
shareholders ......... 418 99,137 25
Accrued accounting
services fee (Note 2). --- 1,667 ---
Accrued management
fee (Note 2) ......... 213 569 63
Due to custodian ...... --- --- ---
Other ................. 650 779 319
---------- ----------- ----------
Total liabilities .. 1,281 102,152 407
---------- ----------- ----------
Total net assets .. $9,809,500 $43,300,149 $4,252,107
Net Assets ========== =========== ==========
$0.01 par value capital stock
Capital stock ........ $ 18,876 $ 433,001 $ 8,196
Additional paid-in
capital ............ 9,601,916 42,867,148 4,201,198
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... --- --- ---
Net unrealized appreciation
of investments ..... 188,708 --- 42,713
---------- ----------- ----------
Net assets applicable to
outstanding units
of capital ........ $9,809,500 $43,300,149 $4,252,107
========== =========== ==========
Net asset value, redemption
and offering price per share $5.1969 $1.0000 $5.1882
======= ======== =======
Capital shares outstanding 1,887,561 43,300,149 819,569
Capital shares authorized 100,000,000 100,000,000 50,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Bond High Income
Portfolio Portfolio
Assets ------------- -------------
Investment securities--at
value (Notes 1 and 3) $98,272,696 $117,269,758
Cash ................. 1,553 6,190
Receivables:
Investment securities
sold ............... --- ---
Fund shares sold ..... 2,585 63,019
Dividends and interest 1,257,325 2,272,690
Prepaid insurance
premium .............. 1,265 1,581
----------- ------------
Total assets ....... 99,535,424 119,613,238
Liabilities ----------- ------------
Payable for investment
securities purchased . --- ---
Payable to Fund
shareholders ......... 41,032 82,890
Accrued accounting
services fee (Note 2). 2,500 3,333
Accrued management
fee (Note 2) ......... 1,428 2,109
Due to custodian ...... --- ---
Other ................. 1,195 1,296
----------- ------------
Total liabilities .. 46,155 89,628
----------- ------------
Total net assets .. $99,489,269 $119,523,610
Net Assets =========== ============
$0.01 par value capital stock
Capital stock ........ $ 185,317 $ 252,151
Additional paid-in
capital ............ 97,543,751 113,483,393
Accumulated undistributed gain (loss):
Accumulated undistributed
net investment income --- ---
Accumulated undistributed
net realized gain (loss)
on investment
transactions ....... (2,189,071) ---
Net unrealized appreciation
of investments ..... 3,949,272 5,788,066
----------- ------------
Net assets applicable to
outstanding units
of capital ........ $99,489,269 $119,523,610
=========== ============
Net asset value, redemption
and offering price per share $5.3686 $4.7402
======= ========
Capital shares outstanding 18,531,708 25,215,109
Capital shares authorized 100,000,000 100,000,000
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 1,655,394 $ 1,969,475 $ 59,712
Dividends ............ 7,101,007 6,692,701 3,398
------------ ------------ --------
Total income ....... 8,756,401 8,662,176 63,110
------------ ------------ --------
Expenses (Note 2):
Investment management
fee ................ 4,150,034 3,955,628 27,836
Accounting services
fee ................ 67,500 65,833 ---
Custodian fees ....... 43,358 31,249 4,771
Audit fees ........... 7,510 7,781 5
Legal fees ........... 13,228 12,906 4,832
Other ................ 29,126 26,832 85
------------ ------------ --------
Total expenses ..... 4,310,756 4,100,229 37,529
------------ ------------ --------
Net investment income 4,445,645 4,561,947 25,581
------------ ------------ --------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 48,743,868 36,637,583 42,856
Realized net gain (loss)
on foreign currency
transactions ......... (31,059) (6,197) ---
------------ ------------ --------
Realized net gain
on investments ..... 48,712,809 36,631,386 42,856
Unrealized appreciation
in value of investments
during the period .... 58,033,780 84,101,888 241,945
------------ ------------ --------
Net gain on
investments ....... 106,746,589 120,733,274 284,801
------------ ------------ --------
Net increase
in net assets
resulting from
operations ...... $111,192,234 $125,295,221 $310,382
============ ============ ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
International Small Cap Balanced
Portfolio Portfolio Portfolio
---------- ---------- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 489,202 $ 1,417,093 $1,411,832
Dividends ............ 1,287,808 52,710 619,377
----------- ----------- ----------
Total income ....... 1,777,010 1,469,803 2,031,209
----------- ----------- ----------
Expenses (Note 2):
Investment management
fee ................ 799,824 1,018,984 324,830
Accounting services
fee ................ 35,833 38,333 25,833
Custodian fees ....... 128,317 7,519 5,334
Audit fees ........... 7,443 6,100 6,097
Legal fees ........... 2,230 2,682 1,356
Other ................ 5,486 6,359 3,111
----------- ----------- ----------
Total expenses ..... 979,133 1,079,977 366,561
----------- ----------- ----------
Net investment income 797,877 389,826 1,664,648
----------- ----------- ----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 10,587,500 30,671,427 3,625,975
Realized net gain (loss)
on foreign currency
transactions ......... (39,365) 5,985 367
----------- ----------- ----------
Realized net gain
on investments ..... 10,548,135 30,677,412 3,626,342
Unrealized appreciation
in value of investments
during the period .... 3,438,868 2,772,025 3,878,221
----------- ----------- ----------
Net gain on
investments ....... 13,987,003 33,449,437 7,504,563
----------- ----------- ----------
Net increase
in net assets
resulting from
operations ...... $14,784,880 $33,839,263 $9,169,211
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
Asset Strategy Money Market Limited-Term
Portfolio Portfolio Bond Portfolio
--------------- ---------- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 343,988 $2,177,530 $267,023
Dividends ............ 60,402 --- ---
---------- ---------- --------
Total income ....... 404,390 2,177,530 267,023
---------- ---------- --------
Expenses (Note 2):
Investment management
fee ................ 71,899 192,321 21,919
Accounting services
fee ................ --- 20,000 ---
Custodian fees ....... 4,587 4,472 1,552
Audit fees ........... 5,503 3,604 4,897
Legal fees ........... 689 2,342 305
Other ................ 944 2,531 729
---------- ---------- --------
Total expenses ..... 83,622 225,270 29,402
---------- ---------- --------
Net investment income 320,768 1,952,260 237,621
---------- ---------- --------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 825,129 --- 16,019
Realized net gain (loss)
on foreign currency
transactions 693 --- ---
---------- ---------- --------
Realized net gain
on investments ..... 825,822 --- 16,019
Unrealized appreciation
in value of investments
during the period .... 31,343 --- 17,360
---------- ---------- --------
Net gain on
investments ....... 857,165 --- 33,379
---------- ---------- --------
Net increase
in net assets
resulting from
operations ...... $1,177,933 $1,952,260 $271,000
========== ========== ========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Period Ended DECEMBER 31, 1997
Bond High Income
Portfolio Portfolio
------------- -------------
Income (Note 1B):
Interest and
amortization ........ $6,468,986 $ 9,991,894
Dividends ............ --- 149,013
---------- -----------
Total income ....... 6,468,986 10,140,907
---------- -----------
Expenses (Note 2):
Investment management
fee ................ 491,520 690,862
Accounting services
fee ................ 30,000 38,333
Custodian fees ....... 5,622 6,505
Audit fees ........... 6,276 6,529
Legal fees ........... 2,120 2,472
Other ................ 5,608 5,957
---------- -----------
Total expenses ..... 541,146 750,658
---------- -----------
Net investment income 5,927,840 9,390,249
---------- -----------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain
on securities ........ 430,660 1,776,299
Realized net gain (loss)
on foreign currency
transactions ......... --- ---
---------- -----------
Realized net gain
on investments ..... 430,660 1,776,299
Unrealized appreciation
in value of investments
during the period .... 2,382,091 2,903,364
---------- -----------
Net gain on
investments ....... 2,812,751 4,679,663
---------- -----------
Net increase
in net assets
resulting from
operations ...... $8,740,591 $14,069,912
========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 4,445,645 $ 4,561,947 $ 25,581
Realized net gain
on investments ..... 48,712,809 36,631,386 42,856
Unrealized
appreciation ....... 58,033,780 84,101,888 241,945
------------ ------------ -----------
Net increase
in net assets
resulting from
operations......... 111,192,234 125,295,221 310,382
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (4,414,586) (4,555,750) (25,581)
From realized gains on
security transactions (48,743,868) (36,637,583) (42,856)
------------ ------------ -----------
(53,158,454) (41,193,333) (68,437)
------------ ------------ -----------
Capital share
transactions** ....... 68,162,867 90,411,011 9,965,232
------------ ------------ -----------
Total increase .... 126,196,647 174,512,899 10,207,177
Net Assets
Beginning of period ... 513,162,690 462,391,420 ---
------------ ------------ -----------
End of period ......... $639,359,337 $636,904,319 $10,207,177
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages 139 - 149.
**Shares issued from sale
of shares ............. 8,757,287 8,155,958 1,872,760
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 7,024,201 3,443,827 11,856
Shares redeemed ......... (6,800,077) (3,966,432) (116,416)
--------- --------- ---------
Increase in outstanding
capital shares ......... 8,981,411 7,633,353 1,768,200
========= ========= =========
Value issued from sale
of shares ............. $68,063,304 $96,368,125 $10,541,546
Value issued from reinvest-
ment of dividends and/or
distributions ......... 53,158,454 41,193,333 68,438
Value redeemed .......... (53,058,891) (47,150,447) (644,752)
................. ----------- ----------- ----------
Increase in
outstanding capital ... $68,162,867 $90,411,011 $9,965,232
=========== =========== ==========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
International Small Cap Balanced
Portfolio Portfolio Portfolio
----------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 797,877 $ 389,826 $ 1,664,648
Realized net gain
on investments ..... 10,548,135 30,677,412 3,626,342
Unrealized
appreciation ....... 3,438,868 2,772,025 3,878,221
------------ ------------ -----------
Net increase
in net assets
resulting from
operations......... 14,784,880 33,839,263 9,169,211
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (758,512) (395,811) (1,665,015)
From realized gains on
security transactions (9,339,198) (30,671,427) (3,625,975)
------------ ------------ -----------
(10,097,710) (31,067,238) (5,290,990)
------------ ------------ -----------
Capital share
transactions** ....... 30,094,682 48,057,943 21,453,457
------------ ------------ -----------
Total increase .... 34,781,852 50,829,968 25,331,678
Net Assets
Beginning of period ... 79,849,453 97,408,290 42,427,058
------------ ------------ -----------
End of period ......... $114,631,305 $148,238,258 $67,758,736
============ ============ ===========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages 139 - 149.
**Shares issued from sale
of shares ............. 4,424,820 3,274,112 3,058,976
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,581,672 3,728,844 781,696
Shares redeemed ......... (1,361,494) (1,359,852) (676,618)
----------- ----------- ----------
Increase in outstanding
capital shares ......... 4,644,998 5,643,104 3,164,054
=========== =========== ==========
Value issued from sale
of shares ............. $29,100,530 $29,239,471 $20,762,070
Value issued from reinvest-
ment of dividends and/or
distributions ......... 10,097,710 31,067,237 5,290,991
Value redeemed .......... (9,103,558) (12,248,765) (4,599,604)
................. ----------- ----------- -----------
Increase in
outstanding capital ... $30,094,682 $48,057,943 $21,453,457
=========== =========== ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
Asset Strategy Money Market Limited-Term
Portfolio Portfolio Bond Portfolio
-------------- ----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 320,768 $ 1,952,260 $ 237,621
Realized net gain
on investments ..... 825,822 --- 16,019
Unrealized
appreciation ....... 31,343 --- 17,360
---------- ----------- ----------
Net increase
in net assets
resulting from
operations......... 1,177,933 1,952,260 271,000
---------- ----------- ----------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (321,461) (1,952,260) (237,621)
From realized gains on
security transactions (778,557) --- (16,019)
---------- ----------- ----------
(1,100,018) (1,952,260) (253,640)
---------- ----------- ----------
Capital share
transactions** ....... 1,257,387 6,042,547 519,323
---------- ----------- ----------
Total increase ... 1,335,302 6,042,547 536,683
Net Assets
Beginning of period ... 8,474,198 37,257,602 3,715,424
---------- ----------- ----------
End of period ......... $9,809,500 $43,300,149 $4,252,107
========== =========== ==========
Undistributed net
investment income .. $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages 139 - 149.
**Shares issued from sale
of shares ............. 282,151 208,969,939 161,256
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 211,668 1,952,260 48,888
Shares redeemed ......... (256,770) (204,879,652) (110,075)
--------- ------------ --------
Increase in outstanding
capital shares ......... 237,049 6,042,547 100,069
========= ============ ========
Value issued from sale
of shares ............. $1,516,838 $208,969,939 $856,618
Value issued from reinvest-
ment of dividends and/or
distributions ......... 1,100,019 1,952,260 253,640
Value redeemed .......... (1,359,470) (204,879,652) (590,935)
................. ----------- ------------ -----------
Increase in
outstanding capital ... $1,257,387 $ 6,042,547 $519,323
=========== ============ ===========
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
Bond High Income
Portfolio Portfolio
----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 5,927,840 $ 9,390,249
Realized net gain
on investments ..... 430,660 1,776,299
Unrealized
appreciation ....... 2,382,091 2,903,364
------------ ------------
Net increase
in net assets
resulting from
operations......... 8,740,591 14,069,912
------------ ------------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (5,927,840) (9,390,249)
From realized gains on
security transactions --- (1,538,783)
------------ ------------
(5,927,840) (10,929,032)
------------ ------------
Capital share
transactions** ....... 4,309,732 18,976,659
------------ ------------
Total increase .... 7,122,483 22,117,539
Net Assets
Beginning of period ... 92,366,786 97,406,071
------------ ------------
End of period ......... $99,489,269 $119,523,610
============ ============
Undistributed net
investment income .. $--- $---
==== ====
*See "Financial Highlights" on pages 139 - 149.
**Shares issued from sale
of shares ............. 2,087,123 4,093,165
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,104,169 2,305,606
Shares redeemed ......... (2,421,031) (2,474,500)
--------- ---------
Increase in outstanding
capital shares ......... 770,261 3,924,271
========= =========
Value issued from sale
of shares ............. $11,323,689 $20,074,987
Value issued from reinvest-
ment of dividends and/or
distributions ......... 5,927,840 10,929,032
Value redeemed .......... (12,941,797) (12,027,360)
................. ----------- -----------
Increase in
outstanding capital ... $4,309,732 $18,976,659
=========== ===========
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
------------ ------------ -----------
Distributions 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 139 - 149.
**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
----------- ----------- ----------
Distributions 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 139 - 149.
**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
----------- ---------- -----------
Distributions 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 139 - 149.
**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
----------
Distributions 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 139 - 149.
**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>
FINANCIAL HIGHLIGHTS OF
THE GROWTH PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $6.7967 $6.8260 $5.8986 $6.1962 $6.1505
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0574 0.0990 0.0903 0.1211 0.0537
Net realized and
unrealized gain
on investments .. 1.4003 0.7478 2.1842 0.0268 0.8087
------- ------- ------- ------- -------
Total from investment
operations ....... 1.4577 0.8468 2.2745 0.1479 0.8624
------- ------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.0570)(0.0990) (0.0903)(0.1211) (0.0537)
From capital
gains ........... (0.6295)(0.7771) (1.2568)(0.3244) (0.7569)
In excess of
capital gains ... (0.0000)(0.0000) (0.0000)(0.0000) (0.0061)
------- ------- ------- ------- -------
Total distributions. (0.6865)(0.8761) (1.3471)(0.4455) (0.8167)
------- ------- ------- ------- -------
Net asset value,
end of period .... $7.5679 $6.7967 $6.8260 $5.8986 $6.1962
======= ======= ======= ======= =======
Total return ....... 21.45% 12.40% 38.57% 2.39% 14.02%
Net assets, end of
period (000
omitted) ......... $639,359$513,163 $418,826$276,737 $220,590
Ratio of expenses
to average net
assets ............ 0.72% 0.73% 0.75% 0.77% 0.78%
Ratio of net investment
income to average
net assets ....... 0.75% 1.44% 1.35% 2.07% 1.01%
Portfolio turnover
rate ............. 162.41% 243.00% 245.80% 277.36% 297.81%
Average commission
rate paid ........ $0.0592$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,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $10.1373$ 8.6756 $6.7689 $6.9180 $5.9530
---------------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0916 0.0856 0.0839 0.0703 0.0651
Net realized and
unrealized gain (loss)
on investments .. 2.5598 1.6280 2.0525 (0.1491) 0.9650
---------------- ------- ------- -------
Total from investment
operations ....... 2.6514 1.7136 2.1364 (0.0788) 1.0301
---------------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.0915)(0.0856) (0.0839)(0.0703) (0.0651)
From capital
gains............ (0.7357)(0.1663) (0.1457)(0.0000) (0.0000)
In excess of
capital gains ... (0.0000)(0.0000) (0.0001)(0.0000) (0.0000)
---------------- ------- ------- -------
Total distributions. (0.8272)(0.2519) (0.2297)(0.0703) (0.0651)
---------------- ------- ------- -------
Net asset value,
end of period .... $11.9615$10.1373 $8.6756 $6.7689 $6.9180
================ ======= ======= =======
Total return........ 26.16% 19.75% 31.56% -1.14% 17.30%
Net assets, end of
period (000
omitted) ......... $636,904$462,391 $331,194$218,774 $155,092
Ratio of expenses
to average net
assets ............ 0.72% 0.73% 0.77% 0.77% 0.79%
Ratio of net investment
income to average
net assets ....... 0.80% 0.97% 1.13% 1.16% 1.36%
Portfolio turnover
rate ............. 36.61% 22.95% 15.00% 23.32% 18.38%
Average commission
rate paid ........ $0.0602$0.0586
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SCIENCE AND TECHNOLOGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout The Period:
For the
period
ended
12/31/97*
----------
Net asset value,
beginning of
period ........... $5.0000
-------
Income from investment
operations:
Net investment
income .......... 0.0146
Net realized and
unrealized gain
on investments .. 0.7971
-------
Total from investment
operations ....... 0.8117
-------
Less distributions:
From net
investment
income .......... (0.0146)
From capital
gains............ (0.0245)
-------
Total distributions (0.0391)
-------
Net asset value,
end of period .... $5.7726
=======
Total return........ 16.24%
Net assets, end of
period (000
omitted) .........$10,207
Ratio of expenses
to average net
assets ............ 0.94%
Ratio of net investment
income to average
net assets ....... 0.64%
Portfolio turnover
rate ............. 15.63%
Average commission
rate paid ........ $0.0361
*The Science and Technology Portfolio's inception date is March 13, 1997;
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 April 4, 1997 (initial
offering) through December 31, 1997. Ratios have been annualized.
<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
1997 1996 1995 12/31/94*
------ ------- -------- ----------
Net asset value,
beginning of
period ........... $5.9990 $5.2790 $4.9926 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0485 0.0644 0.0846 0.0207
Net realized and
unrealized gain (loss)
on investments... 0.9534 0.7329 0.2790 (0.0074)
------- ------- ------- -------
Total from investment
operations ....... 1.0019 0.7973 0.3636 0.0133
------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.0463)(0.0644) (0.0772) (0.0207)
From capital
gains ........... (0.5704)(0.0129) (0.0000) (0.0000)
------- ------- ------- -------
Total distributions. (0.6167)(0.0773) (0.0772) (0.0207)
------- ------- ------- -------
Net asset value,
end of period .... $6.3842 $5.9990 $5.2790 $4.9926
======= ======= ======= =======
Total return........ 16.70% 15.11% 7.28% 0.26%
Net assets, end of
period (000
omitted) ......... $114,631 $79,849 $50,196 $26,020
Ratio of expenses
to average net
assets ............ 0.98% 1.00% 1.02% 1.26%
Ratio of net investment
income to average
net assets ....... 0.79% 1.42% 1.99% 1.36%
Portfolio turnover
rate ............. 117.37% 75.01% 34.93% 23.23%
Average commission
rate paid ........ $0.0093$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.
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
1997 1996 1995 12/31/94*
------- -------- -------- ----------
Net asset value,
beginning of
period ........... $8.0176 $7.6932 $5.9918 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.0279 0.0170 0.0900 0.0376
Net realized and
unrealized gain
on investments .. 2.5004 0.6367 1.8470 1.0086
------- ------- ------- -------
Total from investment
operations ....... 2.5283 0.6537 1.9370 1.0462
------- ------- ------- -------
Less distributions:
From net
investment income (0.0282)(0.0170) (0.0900) (0.0376)
From capital
gains............ (2.1861)(0.3123) (0.1456) (0.0168)
------- ------- ------- -------
Total distributions (2.2143)(0.3293) (0.2356) (0.0544)
------- ------- ------- -------
Net asset value,
end of period .... $8.3316 $8.0176 $7.6932 $5.9918
======= ======= ======= =======
Total return........ 31.53% 8.50% 32.32% 20.92%
Net assets, end of
period (000
omitted) ......... $148,238 $97,408 $55,591 $16,080
Ratio of expenses
to average net
assets ............ 0.90% 0.91% 0.96% 1.08%
Ratio of net investment
income to average
net assets ....... 0.32% 0.25% 1.77% 2.35%
Portfolio turnover
rate ............. 211.46% 133.77% 43.27% 21.61%
Average commission
rate paid ........ $0.0521$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
1997 1996 1995 12/31/94*
-------- -------- -------- ----------
Net asset value,
beginning of
period ........... $6.1967 $5.9000 $4.9359 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.1805 0.1594 0.1333 0.0460
Net realized and
unrealized gain (loss)
on investments .. 0.9650 0.5003 1.0611 (0.0641)
------- ------- ------- -------
Total from investment
operations ....... 1.1455 0.6597 1.1944 (0.0181)
------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.1805)(0.1594) (0.1333) (0.0460)
From capital
gains............ (0.3931)(0.2036) (0.0970) (0.0000)
------- ------- ------- -------
Total distributions (0.5736)(0.3630) (0.2303) (0.0460)
------- ------- ------- -------
Net asset value,
end of period .... $6.7686 $6.1967 $5.9000 $4.9359
======= ======= ======= =======
Total return........ 18.49% 11.19% 24.19% -0.37%
Net assets, end of period
(000 omitted) .... $67,759 $42,427 $23,603 $8,671
Ratio of expenses
to average net
assets ............ 0.67% 0.70% 0.72% 0.95%
Ratio of net investment
income to average
net assets ....... 3.06% 3.18% 3.22% 3.14%
Portfolio turnover
rate ............. 55.66% 44.23% 62.87% 19.74%
Average commission
rate paid ........ $0.0546$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 fiscal year ended For the
December 31, period
-------------------------- ended
1997 1996 12/31/95*
--------- -------- ---------
Net asset value,
beginning of
period ........... $5.1343 $5.0137 $5.0000
------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.1915 0.1814 0.0717
Net realized and
unrealized gain
on investments .. 0.5277 0.1206 0.0193
------- ------- -------
Total from investment
operations ....... 0.7192 0.3020 0.0910
------- ------- -------
Less distributions:
From net
investment
income .......... (0.1919) (0.1814) (0.0713)
From capital
gains............ (0.4647) (0.0000) (0.0060)
------- ------- -------
Total distributions (0.6566) (0.1814) (0.0773)
------- ------- -------
Net asset value,
end of period .... $5.1969 $5.1343 $5.0137
======= ======= =======
Total return........ 14.01% 6.05% 1.80%
Net assets, end of
period (000
omitted) ......... $9,810 $8,474 $4,344
Ratio of expenses
to average net
assets ............ 0.93% 0.93% 0.91%
Ratio of net investment
income to average
net assets ....... 3.55% 3.92% 4.42%
Portfolio turnover
rate ............. 222.50% 49.92% 149.17%
Average commission
rate paid ........ $0.0400 $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,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Net investment
income ........... 0.0503 0.0486 0.0542 0.0368 0.0260
Less dividends
declared ......... (0.0503)(0.0486) (0.0542)(0.0368) (0.0260)
------- ------- ------- ------- -------
Net asset value,
end of period .... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return ....... 5.13% 5.01% 5.56% 3.72% 2.63%
Net assets, end of
period (000
omitted) ......... $43,300 $37,258 $36,872 $30,812 $26,000
Ratio of expenses
to average net
assets ............ 0.58% 0.61% 0.62% 0.65% 0.65%
Ratio of net investment
income to average
net assets ....... 5.04% 4.87% 5.42% 3.72% 2.61%
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
1997 1996 1995 12/31/94*
------- ------- ------- ----------
Net asset value,
beginning of
period ........... $5.1639 $5.2521 $4.8611 $5.0000
------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.3086 0.2842 0.2841 0.1507
Net realized and
unrealized gain (loss)
on investments .. 0.0451 (0.0870) 0.4122 (0.1375)
------- ------- ------- -------
Total from investment
operations ....... 0.3537 0.1972 0.6963 0.0132
------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.3086)(0.2842) (0.2841) (0.1507)
From capital
gains ........... (0.0208)(0.0012) (0.0212) (0.0014)
------- ------- ------- -------
Total distributions (0.3294)(0.2854) (0.3053) (0.1521)
------- ------- ------- -------
Net asset value,
end of period .... $5.1882 $5.1639 $5.2521 $4.8611
======= ======= ======= =======
Total return........ 6.85% 3.79% 14.29% 0.26%
Net assets, end of
period (000
omitted) ......... $4,252 $3,715 $2,853 $1,645
Ratio of expenses
to average net
assets ............ 0.73% 0.76% 0.71% 0.93%
Ratio of net investment
income to average
net assets ....... 5.93% 5.92% 6.22% 5.89%
Portfolio turnover
rate ............. 35.62% 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,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $5.2004 $5.3592 $4.7393 $5.4045 $5.2626
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.3400 0.3407 0.3556 0.3507 0.3334
Net realized and
unrealized gain
(loss) on
investments ..... 0.1682 (0.1588) 0.6202 (0.6652) 0.3046
------- ------- ------- ------- -------
Total from investment
operations ....... 0.5082 0.1819 0.9758 (0.3145) 0.6380
------- ------- ------- ------- -------
Less distributions:
From net
investment
income .......... (0.3400)(0.3407) (0.3559)(0.3507) (0.3334)
From capital
gains ........... (0.0000)(0.0000) (0.0000)(0.0000) (0.1627)
------- ------- ------- ------- -------
Total distributions. (0.3400)(0.3407) (0.3559)(0.3507) (0.4961)
------- ------- ------- ------- -------
Net asset value,
end of period .... $5.3686 $5.2004 $5.3592 $4.7393 $5.4045
======= ======= ======= ======= =======
Total return ....... 9.77% 3.43% 20.56% -5.90% 12.37%
Net assets, end of
period (000
omitted) ......... $99,489 $92,367 $88,570 $74,017 $81,727
Ratio of expenses
to average net
assets ............ 0.58% 0.59% 0.60% 0.62% 0.62%
Ratio of net investment
income to average
net assets ....... 6.35% 6.39% 6.73% 6.73% 6.01%
Portfolio turnover
rate ............. 36.81% 64.02% 71.17% 135.82% 68.75%
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,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net asset value,
beginning of
period ........... $4.5750 $4.4448 $4.1118 $4.6373 $4.2886
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income .......... 0.4098 0.4216 0.4165 0.4106 0.3899
Net realized and
unrealized gain
(loss) on
investments ..... 0.2324 0.1302 0.3330 (0.5255) 0.3487
------- ------- ------- ------- -------
Total from investment
operations ....... 0.6422 0.5518 0.7495 (0.1149) 0.7386
------- ------- ------- ------- -------
Less distributions:
From net investment
income .......... (0.4098)(0.4216) (0.4165)(0.4106) (0.3899)
From capital
gains............ (0.0672)(0.0000) (0.0000)(0.0000) (0.0000)
------- ------- ------- ------- -------
(0.4770)(0.4216) (0.4165)(0.4106) (0.3899)
------- ------- ------- ------- -------
Net asset value,
end of period .... $4.7402 $4.5750 $4.4448 $4.1118 $4.6373
======= ======= ======= ======= =======
Total return ....... 14.04% 12.46% 18.19% -2.55% 17.90%
Net assets, end of
period (000
omitted) ......... $119,524 $97,406 $86,686 $72,644 $71,265
Ratio of expenses
to average net
assets ............ 0.70% 0.71% 0.72% 0.74% 0.75%
Ratio of net investment
income to average
net assets ....... 8.79% 9.10% 9.25% 9.03% 8.66%
Portfolio turnover
rate ............. 65.28% 58.91% 41.78% 37.86% 54.22%
See notes to financial statements.
<PAGE>
TMK/UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 eleven classes that are designated
the Growth Portfolio, the Income Portfolio, the Science and Technology
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 the Nasdaq Stock Market, 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 $104,902. 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; Science and
Technology 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 $1.9 billion of combined net assets at December 31,
1997) 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 $59,483, which are included in other
expenses.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and Waddell & Reed Financial, Inc., 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, 1997
are summarized as follows:
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $911,403,778 $207,970,111 $ 9,251,523
Purchases of U.S. Government
securities --- --- ---
Purchases of short-term
securities 619,477,625 454,752,009 254,221,781
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 929,787,678 192,303,394 681,399
Proceeds from maturities
and sales of U.S.
Government securities --- --- ---
Proceeds from maturities
and sales of short-term
securities 573,674,979 423,334,448 252,922,000
International Small Cap Balanced
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $120,650,379 $203,114,312 $32,410,931
Purchases of U.S. Government
securities --- --- 6,127,983
Purchases of short-term
securities 164,613,921 365,698,150 75,285,497
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 106,747,225 211,526,393 22,748,054
Proceeds from maturities
and sales of U.S.
Government securities --- --- 3,254,493
Proceeds from maturities
and sales of short-term
securities 158,462,677 339,528,507 69,548,000
Limited-
Asset Strategy Term Bond Bond
Portfolio Portfolio Portfolio
----------- --------- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $14,515,889 $1,054,925 $21,702,984
Purchases of U.S. Government
securities 2,292,787 705,104 14,619,038
Purchases of short-term
securities 20,964,150 2,036,000 37,328,619
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 14,251,720 864,182 19,802,535
Proceeds from maturities
and sales of U.S.
Government securities 3,866,398 449,602 13,143,750
Proceeds from maturities
and sales of short-term
securities 19,172,423 1,959,000 36,168,682
High
Income
Portfolio
-----------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $80,322,299
Purchases of U.S. Government
securities ---
Purchases of short-term
securities 89,125,063
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 65,732,792
Proceeds from maturities
and sales of U.S.
Government securities ---
Proceeds from maturities
and sales of short-term
securities 88,028,637
For Federal income tax purposes, cost of investments owned at December 31,
1997, and the related unrealized appreciation (depreciation) were as follows:
Aggregate
CostAppreciationDepreciationAppreciation
------------------------------------------------
Growth Portfolio $560,205,176 $96,017,694$(8,203,592) $87,814,102
Income Portfolio 408,937,122 227,039,227 (2,432,980) 224,606,247
Science and Technology
Portfolio 9,919,356 1,127,354 (885,409) 241,945
International Portfolio100,580,725 18,586,963 (5,153,496) 13,433,467
Small Cap Portfolio 137,742,227 18,084,082 (6,187,682) 11,896,400
Balanced Portfolio 60,636,561 8,619,367 (1,266,145) 7,353,222
Asset Strategy Portfolio9,531,603 374,370 (185,662) 188,708
Money Market Portfolio 41,850,969 --- --- ---
Limited-Term Bond Portfolio4,136,211 45,172 (2,459) 42,713
Bond Portfolio 94,323,424 3,995,141 (45,869) 3,949,272
High Income Portfolio 111,481,692 6,193,340 (405,274) 5,788,066
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, Science and Technology,
Balanced, and Limited-Term Bond Portfolios realized capital gain net income of
$48,833,675, $36,637,583, $42,856, $3,625,975 and $16,019, respectively, during
the year ended December 31, 1997. For Federal income tax purposes, Small Cap
Portfolio realized capital gain net income of $25,739,086 for the year ended
December 31, 1997, which included the effect of certain losses deferred into the
next fiscal year, as well as the effect of losses recognized from the prior year
(see discussion below). For Federal income tax purposes, International
Portfolio realized capital gain net income of $9,721,076 during the year ended
December 31, 1997, which included utilization of capital loss carryforwards of
$1,248,303. For Federal income tax purposes, Asset Strategy Portfolio realized
capital gain net income of $778,557 during the year ended December 31, 1997,
which included utilization of capital loss carryforwards of $46,572. For
Federal income tax purposes, High Income Portfolio realized capital gain net
income of $1,538,783 for the year ended December 31, 1997, which included
utilization of capital loss carryforwards of $237,516. For Federal income tax
purposes, Bond Portfolio realized capital gains of $430,660 during the year
ended December 31, 1997, which were entirely offset by capital loss
carryforwards. In addition, prior year capital loss carryforwards of Bond
Portfolio aggregated $2,189,071 as of December 31, 1997, and are available to
offset future realized capital gain net income as follows: $2,172,375 through
December 31, 2002, and $16,696 through December 31, 2003. The capital gain net
income of Growth, Income, Science and Technology, International, Small Cap,
Balanced, Asset Strategy, Limited-Term Bond and High Income Portfolios was paid
to shareholders during the year ended December 31, 1997.
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, 1997 through December 31, 1997, Small Cap Portfolio incurred
net capital losses of $352,811, which have been deferred to the fiscal year
ending December 31, 1998. In addition, during the year ended December 31, 1997,
the Portfolio recognized post-October losses of $5,285,152 that had been
deferred from the year ended December 31, 1996.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
TMK/United Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Growth Portfolio, Income Portfolio, Science and
Technology 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, 1997, and the
related statements of operations for the period then ended and changes in net
assets for each of the periods in the two-year period then ended, and the
financial highlights for each of the periods in the five-year period 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.
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, 1997 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, 1997, the
results of their operations, the changes in their net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 6, 1998