TARGET/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
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May 1, 1999
PROSPECTUS
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Target/United Funds, Inc. (the "Fund") is a management
investment company,
commonly known as a mutual fund, that has eleven separate
Portfolios, each with
separate goals and investment policies.
Asset Strategy Portfolio seeks high total return over the
long term.
Balanced Portfolio seeks, as a primary goal, current income,
with a secondary
goal of long-term appreciation of capital.
Bond Portfolio seeks a reasonable return with more emphasis
on preservation of
capital.
Growth Portfolio seeks capital growth, with a secondary goal
of current income.
High Income Portfolio seeks, as a primary goal, high current
income with a
secondary goal of capital growth.
Income Portfolio seeks maintenance of current income,
subject to market
conditions, with a secondary goal of capital growth.
International Portfolio seeks, as a primary goal, long-term
appreciation of
capital, with a secondary goal of current income.
Limited-Term Bond Portfolio seeks a high level of current
income consistent with
preservation of capital.
Money Market Portfolio seeks maximum current income
consistent with stability of
principal.
Science and Technology Portfolio seeks long-term capital
growth.
Small Cap Portfolio seeks growth of capital.
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 contracts ("Policies") offered by
Participating Insurance
Companies. This Prospectus should be read together with the
Prospectus for the
particular policy.
The Securities and Exchange Commission has not approved
or disapproved the
Fund's securities, or determined whether this
Prospectus is accurate or
complete. It is a criminal offense to state otherwise.
<PAGE>
An Overview of the Portfolios
Asset Strategy Portfolio
Goal
Asset Strategy Portfolio seeks high total return over the
long term.
Principal Strategies
The Portfolio seeks to achieve its goal by allocating its
assets among stocks,
bonds of any quality including junk bonds (rated BB and
below by Standard &
Poor's ("S&P") and Ba and below by Moody's Investors
Service, Inc. ("MIS")) and
short-term instruments (debt instruments with remaining
maturities of three
years or less, including high-quality money market
instruments), both in the
United States and abroad. The Portfolio can invest in
securities of companies
of any size. The Portfolio selects a mix which represents
the way the
Portfolio's investments will generally be allocated over the
long term as
indicated in the box below. This mix will vary over shorter
time periods as
Waddell & Reed Investment Management Company (the
"Manager"), the Fund's
investment manager, changes the Portfolio's holdings based
on the Manager's
current outlook for the different markets. These changes
may be based on such
factors as interest rate changes, security valuation levels
and a rise in the
potential for growth stocks.
Mix
_ Stocks 70% _ Bonds 25%
(can range (can range
from from
0-100%) 0-100%)
_ Short-term 5%
(can range from
0-100%)
Principal Risks of Investing in the Portfolio
Because the Portfolio owns different types of investments, a
variety of factors
can affect its investment performance, such as:
. an increase in interest rates, which may cause the value
of the Portfolio's
fixed-income securities to decline;
. prepayment of higher-yielding bonds held by the Portfolio;
. the earnings performance, credit quality and other
conditions of the
companies whose securities the Portfolio holds;
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline; and
. the skill of the Manager in allocating the Portfolio's
assets among different
types of investments.
Market risk for small- or medium-sized companies may be
greater than that for
large companies. Smaller companies are more likely to have
limited financial
resources and inexperienced management. Additionally, stock
of smaller
companies may experience volatile trading and price
fluctuations. Investments
by the Portfolio in "junk bonds" are more susceptible to the
risk of non-payment
or default, and their prices may be more volatile, than
higher-rated bonds.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
Asset allocation funds are designed for investors who want
to diversify among
stocks, bonds and short-term instruments, in one fund. If
you are looking for
an investment that uses this technique in pursuit of high
total return, this
Portfolio may be appropriate for you.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Asset Strategy Portfolio by showing changes in the
Portfolio's performance
from year to year and by showing how the Portfolio's average
annual returns for
1 year and the life of the Portfolio compare with those of a
broad measure of
market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicators listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1996 6.05%
1997 14.01%
1998 9.95%
In the period shown in the chart, the highest quarterly
return was 10.50%
(the third quarter of 1997) and the lowest quarterly
return was -3.71% (the
first quarter of 1997).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year Life of
Portfolio*
Shares of Asset Strategy Portfolio 9.95% 8.59%
S&P 500 Index 28.70% 29.35%
Salomon Brothers Broad Investment
Grade Index 8.71% 9.06%
Salomon Brothers Short-Term Index for
1 Month Certificates of Deposit 5.67% 5.70%
The indexes shown are broad-based, securities market indexes
that are unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the above indexes
(including income) are not available, investment in the
indexes was effected as
of April 30, 1995.
<PAGE>
Balanced Portfolio
Goals
Balanced Portfolio seeks, as a primary goal, to provide
current income to the
extent that, in the Manager's opinion, market and economic
conditions permit.
Secondarily, the Portfolio seeks long-term appreciation of
capital.
Principal Strategies
Balanced Portfolio invests primarily in a mix of stocks,
fixed-income securities
and cash, depending on market conditions. In its equity
investments, the
Portfolio invests primarily in medium to large, well-
established companies. The
majority of the Portfolio's debt holdings are either U.S.
Government securities
or investment grade corporate bonds.
Principal Risks of Investing in the Portfolio
Because Balanced Portfolio owns different types of
investments, a variety of
factors can affect its investment performance, such as:
. an increase in interest rates, which may cause the value
of the Portfolio's
fixed-income securities to decline;
. the credit quality, earnings performance and other
conditions of the issuers
whose securities the Portfolio holds;
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline;
. the Manager's skill in allocating the Portfolio's assets
among different
types of investments.
Also, the Portfolio can invest in foreign securities, which
present additional
risks such as currency fluctuations and political or
economic conditions
affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors seeking current
income and the potential
for long-term appreciation of capital. You should consider
whether the
Portfolio fits your investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Balanced Portfolio by showing changes in the Portfolio's
performance from
year to year and by showing how the Portfolio's average
annual returns for 1
year and the life of the Portfolio compare with those of a
broad measure of
market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicators listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1995 24.19%
1996 11.19%
1997 18.49%
1998 8.67%
In the period shown in the chart, the highest quarterly
return was 9.64%
(the third quarter of 1997) and the lowest quarterly
return was -6.14% (the
third quarter of 1998).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year Life of
Portfolio*
Shares of Balanced Portfolio 8.67% 13.04%
S&P 500 Index 28.70% 26.70%
Salomon Brothers Treasury/Government
Sponsored/Corporate Index 9.45% 8.78%
The indexes shown are broad-based, securities market indexes
that are unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the above indexes
(including income) are not available, investment in the
indexes was effected as
of April 30, 1994.
<PAGE>
Bond Portfolio
Goal
Bond Portfolio seeks a reasonable return with more emphasis
on preservation of
capital.
Principal Strategies
Bond Portfolio seeks to achieve its goal by investing
primarily in domestic debt
securities usually of investment grade (rated BBB and higher
by S&P and Baa and
higher by MIS). The Fund maintains no limitations regarding
the maturity,
duration or dollar weighted average of its holdings. In
selecting the debt
securities for the Portfolio, the Manager considers yield
and relative safety
and, in the case of convertible securities, the possibility
of capital growth.
The Portfolio can invest in securities of companies of any
size.
Principal Risks of Investing in the Portfolio
Because Bond Portfolio primarily owns different types of
debt securities, a
variety of factors can affect its investment performance,
such as:
. an increase in interest rates, which may cause the value
of the Portfolio's
fixed-income securities to decline;
. prepayment of higher-yielding bonds held by the Portfolio;
. the credit quality, earnings performance and other
conditions of the
companies whose securities the Portfolio holds;
. changes in the maturities of bonds owned by the Portfolio;
. adverse bond and stock market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline;
. the Manager's skill in evaluating and managing the
interest rate and credit
risks of the Portfolio.
Market risk for small- or medium-sized companies may be
greater than for large
companies. The Portfolio may invest in "junk bonds" (rated
below BBB by S&P or
below Baa by MIS), which are more susceptible to the risk of
non-payment or
default, and their prices may be more volatile than higher-
rated bonds.
Also, the Portfolio can invest in foreign securities, which
present additional
risks such as currency fluctuations and political or
economic conditions
affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
Bond Portfolio is designed for investors who primarily seek
current income while
also seeking to preserve investment principal. You should
consider whether the
Portfolio fits your particular investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Bond Portfolio by showing changes in the Portfolio's
performance from year
to year and by showing how the Portfolio's average annual
returns for 1, 5 and
10 years compare with those of a broad measure of market
performance.
. The chart presents the annual returns and shows how
performance has varied
from year to year over the past ten years.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1989 11.82%
1990 7.03%
1991 16.19%
1992 7.67%
1993 12.37%
1994 -5.90%
1995 20.56%
1996 3.43%
1997 9.77%
1998 7.35%
In the period shown in the chart, the highest quarterly
return was 8.34%
(the second quarter of 1993) and the lowest quarterly
return was -3.64%
(the first quarter of 1994).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10
Years
Shares of Bond Portfolio 7.35% 6.81%
8.83%
Salomon Brothers Broad Investment
Grade Index 8.71% 7.30%
9.31%
The index shown is a broad-based, securities market index
that is unmanaged.
<PAGE>
Growth Portfolio
Goals
Growth Portfolio seeks capital growth, with current income
as a secondary goal.
Principal Strategies
Growth Portfolio seeks to achieve its goals by investing
primarily in common
stocks of U.S. and foreign companies. The Portfolio
typically invests in
companies having a market capitalization of at least $1
billion, although it may
invest in companies of any size. The Portfolio generally
emphasizes investments
in the faster growing sectors of the economy, such as the
technology, healthcare
and consumer-oriented sectors.
Principal Risks of Investing in the Portfolio
Because Growth Portfolio owns different types of
investments, a variety of
factors can affect its investment performance, such as:
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline;
. the earnings performance, credit quality and other
conditions of the
companies whose securities the Portfolio holds;
. the mix of securities in the Portfolio, particularly the
relative weightings
in (and exposure to) different sectors and industries;
. an increase in interest rates, which may cause the value
of the Portfolio's
fixed-income securities to decline; and
. the Manager's skill in evaluating and selecting securities
for the Portfolio.
Also, the Portfolio may invest, to a lesser degree, in
foreign securities, which
present additional risks such as currency fluctuations and
political or economic
conditions affecting the foreign country.
Market risk for small- and medium-sized companies may be
greater than that for
large companies. Stock of smaller companies, as well as
stock of companies with
high-growth expectations reflected in their stock price, may
experience volatile
trading and price fluctuations.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors seeking long-term
capital appreciation
from investment in fast-growing sectors of the economy. You
should consider
whether the Portfolio fits your particular investment
objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Growth Portfolio by showing changes in the Portfolio's
performance from year
to year and by showing how the Portfolio's average annual
returns for 1, 5 and
10 years compare with those of a broad measure of market
performance.
. The chart presents the annual returns and shows how
performance has varied
from year to year over the past ten years.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1989 27.61%
1990 -5.34%
1991 36.10%
1992 20.84%
1993 14.02%
1994 2.39%
1995 38.57%
1996 12.40%
1997 21.45%
1998 27.31%
In the period shown in the chart, the highest quarterly
return was 20.11%
(the fourth quarter of 1998) and the lowest quarterly
return was -12.63%
(the third quarter of 1990).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10
Years
Shares of Growth Portfolio 27.31% 19.78%
18.77%
S&P 500 Index 28.70% 24.08%
19.21%
The index shown is a broad-based, securities market index
that is unmanaged.
<PAGE>
High Income Portfolio
Goals
High Income Portfolio seeks as its primary goal high current
income with a
secondary goal of capital growth when consistent with its
primary goal.
Principal Strategies
The Portfolio seeks to achieve its goals by investing
primarily in high-yield,
high-risk, fixed-income securities of U.S. and foreign
issuers, the risks of
which are, in the judgment of the Manager, consistent with
the Portfolio's
goals. The Portfolio invests primarily in lower quality
bonds, commonly called
"junk bonds," which are bonds rated BB and below by S&P and
Ba and below by MIS.
The Portfolio may also invest a significant portion of its
assets in common or
preferred stock in order to seek capital growth.
Principal Risks of Investing in the Portfolio
Because the Portfolio owns different types of investments, a
variety of factors
can affect its investment performance, such as:
. the credit quality, earnings performance and other
conditions of the
companies whose securities the Portfolio holds;
. junk bonds are more susceptible to the risk of nonpayment
or default, and
their prices may be more volatile than higher-rated bonds;
. junk bonds may not be as liquid as higher-rated bonds;
. an increase in interest rates, which may cause the value
of a bond held by
the Portfolio to decline;
. changes in the maturities of bonds owned by the Portfolio;
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline; and
. the skill of the Manager in evaluating and managing the
interest rate and
credit risks of the Portfolio.
The Portfolio can invest in companies of any size. Market
risk for small- or
medium-sized companies may be greater than that for large
companies. For
example, smaller companies may have limited financial
resources, limited product
lines or may have inexperienced management.
Investments in foreign securities present additional risks
such as currency
fluctuations and political or economic conditions affecting
the foreign country.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors who primarily seek a
level of current
income that is higher than is normally available with
securities in the higher
rated categories and, secondarily, seek capital growth where
consistent with
this income goal, through a diversified, actively managed
portfolio. The
Portfolio is not suitable for all investors. You should
consider whether the
Portfolio fits with your particular investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the High Income Portfolio by showing changes in the
Portfolio's performance from
year to year and by showing how the Portfolio's average
annual returns for 1, 5
and 10 years compare with those of a broad measure of market
performance.
. The chart presents the annual returns and shows how
performance has varied
from year to year over the past ten years.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1989 -4.19%
1990 -7.44%
1991 34.19%
1992 15.70%
1993 17.90%
1994 -2.55%
1995 18.19%
1996 12.46%
1997 14.04%
1998 1.95%
In the period shown in the chart, the highest quarterly
return was 12.98%
(the third quarter of 1991) and the lowest quarterly
return was -6.38% (the
third quarter of 1998).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10
Years
Shares of High Income Portfolio 1.95% 8.54%
9.35%
Salomon Brothers High Yield
Composite Index 4.04% 9.55%
11.44%
The index shown is a broad-based, securities market index
that is unmanaged.
<PAGE>
Income Portfolio
Goals
Income Portfolio seeks, as a primary goal, the maintenance
of current income,
subject to market conditions. As a secondary goal, the
Portfolio seeks capital
growth.
Principal Strategies
Income Portfolio seeks to achieve its goals by investing
primarily in common
stocks of large U.S. and foreign companies that have a
record of paying regular
dividends on common stock or have the potential for capital
appreciation, or
that the Manager expects to resist market decline. The
Portfolio may invest in
securities of any size company.
Principal Risks of Investing in the Portfolio
Because Income Portfolio owns different types of
investments, a variety of
factors can affect its investment performance, such as:
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline;
. the earnings performance, credit quality and other
conditions of the
companies whose securities the Portfolio holds;
. an increase in interest rates which may cause the value of
the Portfolio's
fixed-income securities to decline; and
. the Manager's skill in evaluating and selecting securities
for the Portfolio.
Market risk for small- to medium-sized companies may be
greater than that for
large companies. Smaller companies are more likely to have
limited financial
resources and inexperienced management. As well, stock of
smaller companies may
experience volatile trading and price fluctuations.
Also, investments in foreign securities present additional
risks such as
currency fluctuations and political or economic conditions
affecting the foreign
country.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
Income Portfolio is designed for investors who seek dividend
income with
potential for capital growth. You should consider whether
the Portfolio fits
your investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Income Portfolio by showing changes in the Portfolio's
performance from year
to year and by showing how the Portfolio's average annual
returns for 1 year, 5
years and the life of the Portfolio compare with those of a
broad measure of
market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1992 13.78%
1993 17.30%
1994 -1.14%
1995 31.56%
1996 19.75%
1997 26.16%
1998 21.14%
In the period shown in the chart, the highest quarterly
return was 16.54%
(the second quarter of 1995) and the lowest quarterly
return was -6.98%
(the second quarter of 1998).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years Life of
Portfolio*
Shares of Income Portfolio 21.14% 18.94%
17.91%
S&P 500 Index 28.70% 24.08%
19.74%
The index shown is a broad-based, securities market index
that is unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the S&P 500 Index
(including income) are not available, investment in the
index was effected as
of July 31, 1991.
<PAGE>
International Portfolio
Goals
International Portfolio seeks, as a primary goal, long-term
appreciation of
capital. As a secondary goal, the Portfolio seeks current
income.
Principal Strategies
International Portfolio seeks to achieve its goals by
investing primarily in
common stocks of foreign companies that the Manager believes
have the potential
for long-term growth. The Portfolio may also invest in
preferred stocks, fixed-
income securities and convertible securities.
Principal Risks of Investing in the Portfolio
Because International Portfolio owns different types of
investments, a variety
of factors can affect its investment performance, such as:
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline;
. changes in foreign exchange rates, which may affect the
value of the
securities the Portfolio holds;
. the earnings performance, credit quality and other
conditions of the issuers
whose securities the Portfolio holds; and
. the Manager's skill in evaluating and selecting securities
for the Portfolio.
Investing in foreign securities presents additional risks,
such as currency
fluctuations and political or economic conditions affecting
the foreign country.
Accounting and disclosure standards also differ from country
to country, which
makes obtaining reliable research information more
difficult. There is the
possibility that, under unusual international monetary or
political conditions,
the Portfolio's assets might be more volatile than would be
the case with other
investments.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors seeking long-term
appreciation of
capital by investing primarily in securities issued by
foreign companies and
governments. You should consider whether the Portfolio fits
your investment
objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the International Portfolio by showing changes in the
Portfolio's performance
from year to year and by showing how the Portfolio's average
annual returns for
1 year and the life of the Portfolio compare with those of a
broad measure of
market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1995 7.28%
1996 15.11%
1997 16.70%
1998 33.89%
In the period shown in the chart, the highest quarterly
return was 26.67%
(the first quarter of 1998) and the lowest quarterly
return was -16.58%
(the third quarter of 1998).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year Life of
Portfolio*
Shares of International Portfolio 33.89% 15.19%
Morgan Stanley E.A.FE. Index 20.00% 8.11%
The index shown is a broad-based, securities market index
that is unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the Morgan Stanley
E.A.FE. Index (including income) are not available,
investment in the index was
effected as of April 30, 1994.
<PAGE>
Limited-Term Bond Portfolio
Goal
Limited-Term Bond Portfolio seeks to provide a high level of
current income
consistent with preservation of capital.
Principal Strategies
Limited-Term Bond Portfolio seeks to achieve its goal by
investing primarily in
investment-grade debt securities of U.S. issuers, including
U.S. Government
securities. The Portfolio maintains a dollar-weighted
average portfolio
maturity of not less than two years and not more than five
years.
Principal Risks of Investing in the Portfolio
Because Limited-Term Bond Portfolio primarily owns different
types of debt
securities, a variety of factors can affect its investment
performance, such as:
. an increase in interest rates, which may cause the value
of the Portfolio's
fixed-income securities to decline;
. the credit quality, earnings performance and other
conditions of the issuers
whose securities the Portfolio holds;
. prepayment of higher-yielding bonds held by the Portfolio;
. adverse bond and stock market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline; and
. the Manager's skill in evaluating and managing the
interest rate and credit
risks of the Portfolio.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors seeking a high level
of current income
consistent with preservation of capital. You should
consider whether the
Portfolio fits your investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Limited-Term Bond Portfolio by showing changes in the
Portfolio's
performance from year to year and by showing how the
Portfolio's average annual
returns for 1 year and the life of the Portfolio compare
with those of a broad
measure of market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1995 14.29%
1996 3.79%
1997 6.85%
1998 6.66%
In the period shown in the chart, the highest quarterly
return was 5.36%
(the second quarter of 1995) and the lowest quarterly
return was -0.45%
(the first quarter of 1997).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year Life of
Portfolio*
Shares of Limited-Term Bond Portfolio 6.66% 6.73%
Salomon Brothers Treasury/Government
Sponsored/Corporate 1-5 Year Index 7.65% 7.09%
The index shown is a broad-based, securities market index
that is unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the above indexes
(including income) are not available, investment in the
indexes was effected as
of April 30, 1994.
<PAGE>
Money Market Portfolio
Goal
Money Market Portfolio seeks maximum current income
consistent with stability of
principal.
Principal Strategies
Money Market Portfolio seeks to achieve its goal by
investing in U.S. dollar-
denominated, high-quality money market obligations and
instruments.
Principal Risks of Investing in the Portfolio
Because Money Market Portfolio owns different types of money
market obligations
and instruments, a variety of factors can affect its
investment performance,
such as:
. an increase in interest rates, which can cause the value
of the Portfolio's
holdings to decline;
. the credit quality and other conditions of the issuers
whose securities the
Portfolio holds;
. adverse bond market conditions, sometimes in response to
general economic or
industry news, that may cause the prices of the
Portfolio's holdings to fall
as part of a broad market decline; and
. the Manager's skill in evaluating and managing the
interest rate and credit
risks of the Portfolio.
An investment in the Portfolio is not insured or guaranteed
by the Federal
Deposit Insurance Corporation or any other government
agency. Although the
Portfolio seeks to preserve the value of your investment at
$1.00 per share, it
is possible to lose money by investing in the Portfolio.
Who May Want to Invest
The Portfolio is designed for investors who are risk-averse
and seek to preserve
principal while earning current income and saving for short-
term needs. You
should consider whether the Portfolio fits your particular
investment
objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Money Market Portfolio by showing changes in the
Portfolio's performance
from year to year and by showing the Portfolio's average
annual returns for 1, 5
and 10 years.
. The chart presents the annual returns and shows how
performance has varied
from year to year over the past ten years.
. The table shows average annual returns.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1989 8.91%
1990 7.82%
1991 5.49%
1992 3.29%
1993 2.63%
1994 3.72%
1995 5.56%
1996 5.01%
1997 5.13%
1998 5.04%
As of December 31, 1998 the 7-day yield was equal to
4.72%. Yields are
computed by annualizing the average daily dividend per
share during the
time period for which the yield is presented.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10
Years
Shares of Money Market Portfolio 5.04% 4.88%
5.23%
<PAGE>
Science and Technology Portfolio
Goal
Science and Technology Portfolio seeks long-term capital
growth.
Principal Strategies
Science and Technology Portfolio seeks to achieve its goal
by concentrating its
investments primarily in science and technology securities
of U.S. and foreign
companies. 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 use or
commercial application of
scientific or technological developments or discoveries.
The Portfolio may
invest in companies of any size.
Principal Risks of Investing in the Portfolio
Because Science and Technology Portfolio owns different
types of investments, a
variety of factors can affect its investment performance,
such as:
. the mix of securities in the Portfolio, particularly the
relative weightings
in, and exposure to, different sectors of the science and
technology
industries;
. rapid obsolescence of products or processes of companies
in which the
Portfolio invests;
. governmental regulation in the science and technology
industry;
. the earnings performance, credit quality and other
conditions of the
companies whose securities the Portfolio holds;
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline; and
. the Manager's skill in evaluating and selecting securities
for the Portfolio.
Market risk for small- to medium-sized companies may be
greater than that for
large companies. Smaller companies are more likely to have
limited financial
resources and inexperienced management. As well, stock of
smaller companies may
experience volatile trading and price fluctuations.
Investments in foreign securities present additional risks
such as currency
fluctuations and political or economic conditions affecting
the foreign country.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
Science and Technology Portfolio is designed for investors
who seek long-term
capital growth by investing in an actively managed portfolio
concentrating in
science and technology securities. This Portfolio is not
suitable for all
investors. You should consider whether the Portfolio fits
with your investment
objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Science and Technology Portfolio by showing changes in
the Portfolio's
performance from year to year and by showing how the
Portfolio's average annual
returns for 1 year and the life of the Portfolio compare
with those of a broad
measure of market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1998 46.05%
In the period shown in the chart, the highest quarterly
return was 19.42%
(the first quarter of 1998) and the lowest quarterly
return was -14.25%
(the third quarter of 1998).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year Life of
Portfolio*
Shares of Science and
Technology Portfolio 46.05% 35.49%
S&P 400 Index 33.85% 35.85%
The index shown is a broad-based, securities market index
that is unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the S&P 400 Index
are not available, investment in the index was effected as
of March 31, 1997.
<PAGE>
Small Cap Portfolio
Goal
Small Cap Portfolio seeks growth of capital.
Principal Strategies
Small Cap Portfolio seeks to achieve its goal by investing
primarily in common
stocks of companies that are relatively new or unseasoned,
companies in their
early stages of development, or smaller companies positioned
in new or in
emerging industries where the opportunity for rapid growth
is above average.
Principal Risks of Investing in the Portfolio
Because Small Cap Portfolio owns different types of
investments, a variety of
factors can affect its investment performance, such as:
. the earnings performance, credit quality and other
conditions of the
companies whose securities the Portfolio holds;
. adverse stock and bond market conditions, sometimes in
response to general
economic or industry news, that may cause the prices of
the Portfolio's
holdings to fall as part of a broad market decline; and
. the Manger's skill in evaluating and selecting securities
for the Portfolio.
Market risk for small-sized companies may be greater than
that for medium-sized
and large companies. Smaller companies are more likely to
have limited
financial resources and inexperienced management. Stock of
smaller companies
may experience volatile trading and price fluctuations.
Also, the Portfolio may invest in foreign securities, which
present additional
risks such as currency fluctuations and political or
economic conditions
affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares
will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors 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. You
should consider
whether the Portfolio fits your investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the
risks of investing in
the Small Cap Portfolio by showing changes in the
Portfolio's performance from
year to year and by showing how the Portfolio's average
annual returns for 1
year and the life of the Portfolio compare with those of a
broad measure of
market performance.
. The chart presents the annual returns since these shares
were first offered
and shows how performance has varied from year to year.
. The table shows average annual returns and compares them
to the market
indicator listed.
. Both the chart and the table assume reinvestment of
dividends and
distributions. As with all mutual funds, the Portfolio's
past performance
does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company
separate accounts that
fund certain variable annuity and variable life contracts.
If these sales
charges and expenses were included, the total returns shown
would be lower.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1995 32.32%
1996 8.50%
1997 31.53%
1998 10.87%
In the period shown in the chart, the highest quarterly
return was 24.46%
(the third quarter of 1997) and the lowest quarterly
return was -13.88%
(the third quarter of 1996).
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year Life of
Portfolio*
Shares of Small Cap Portfolio 10.87% 22.03%
Nasdaq Industrials Index 6.82% 12.12%
The index shown is a broad-based, securities market index
that is unmanaged.
*Because the Portfolio commenced operations on a date other
than at the end of a
month, and partial month calculations of the performance of
the Nasdaq
Industrials Index are not available, investment in the index
was effected as of
April 30, 1994.
<PAGE>
The Investment Principles of the Portfolios
Investment Goals, Principal Strategies and Other Investments
Asset Strategy Portfolio
The goal of Asset Strategy Portfolio is high total return
over the long term.
The Portfolio seeks to achieve its goal by allocating its
assets among a
diversified portfolio of stocks, bonds, and short-term
instruments. There is no
guarantee that the Portfolio will achieve its goal.
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 values of bonds and
short-term instruments
generally fluctuate based on changes in interest rates and
in the credit quality
of the issuer.
The Manager regularly reviews the Portfolio's allocation of
assets and makes
changes to favor investments that it believes provide the
best opportunity to
achieve the Portfolio's goal. Although the Manager uses its
expertise and
resources in choosing investments and in allocating assets,
the Manager's
decisions may not always be beneficial 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
(including preferred
stock), although the Manager typically emphasizes a blend
of value and growth
potential in selecting stocks. Value stocks are those
that the Manager
believes are currently selling below their true worth.
Growth stocks are
those whose earnings the Manager believes are likely to
grow faster than the
economy.
. The bond class includes all varieties of fixed-income
instruments, such as
corporate or U.S. Government debt securities, with
maturities of more than
three years (including adjustable rate preferred stocks).
This asset class
may include a significant amount of junk bonds which are
rated BB and below
by S&P and Ba and below by MIS.
. The short-term class includes all types of short-term
instruments with
remaining maturities of three years or less, including
high-quality money
market instruments.
. Within each of these classes, the Portfolio may invest in
both domestic and
foreign securities.
The Portfolio's mix shows 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 depending on the Manager's
assessment of the market for
each asset class in general. The range and approximate
percentage of the mix
for each asset class are stated 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 tries to balance the Portfolio's investment
risks against
potentially higher total returns by reducing the stock class
allocation during
stock market down cycles and increasing the stock class
allocation during
periods of strongly positive market performance. Typically,
the Manager makes
asset shifts among classes gradually over time. The Manager
considers various
factors when it decides to sell a security, such as an
individual security's
performance and/or if it is an appropriate time to vary the
Portfolio's mix.
As a defensive measure, the Portfolio may increase its
holdings in the bond or
short-term classes when the Manager believes that there is a
potential bear
market, prolonged downturn in stock prices or significant
loss in stock value.
The Manager may also, as a temporary defensive measure,
invest up to all of the
Portfolio's assets in:
. money market instruments rated A-1 by S&P, or Prime 1 by
MIS, or unrated
securities judged by the Manager to be of equivalent
quality; or
. precious metals.
Although the Manager may seek to preserve appreciation in
the Portfolio by
taking a defensive position, doing so likely will reduce the
potential for
further appreciation.
Balanced Portfolio
The primary goal of Balanced Portfolio is current income.
As a secondary goal,
the Portfolio seeks long-term capital appreciation. The
Portfolio seeks to
achieve these goals by investing primarily in a diversified
mix of stocks,
fixed-income securities and cash depending on market
conditions. There is no
guarantee that the Portfolio will achieve its goals.
The Manager usually purchases securities because of the
dividends and interest
paid on them and may also purchase securities because they
may increase in
value. The Portfolio ordinarily invests at least 25% of its
total assets in
fixed-income senior securities.
When the Manager believes that a temporary defensive
position is desirable, the
Portfolio may invest up to all of its assets in common
stocks or other
securities that are not fixed-income senior securities, or
both. Taking a
defensive position may reduce the Portfolio's yield and/or
potential for
appreciation.
Bond Portfolio
The goal of Bond Portfolio is a reasonable return with more
emphasis on
preservation of capital. The Portfolio seeks to achieve
this goal by investing
primarily in a diversified portfolio of debt securities of
any quality,
including non-investment grade securities, convertible
securities and debt
securities with warrants attached. There is no guarantee
that the Portfolio
will achieve its goal.
The Portfolio limits its acquisition of securities so that
at least 90% of its
assets will consist of debt securities. These debt
securities primarily include
corporate bonds, mostly of investment grade, and securities
issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
The Portfolio may
invest in debt securities with varying maturities.
In selecting debt securities for the Portfolio, the Manager
may look at many
factors. These include the issuer's past, present and
estimated future:
. financial strength;
. cash flow;
. management;
. borrowing requirements; and
. responsiveness to changes in interest rates and business
conditions.
The Manager may also consider the maturity of the obligation
and the size or
nature of the bond issue.
When the Manager believes that a defensive position is
desirable, due to present
or anticipated market or economic conditions, the Manager
may take a number of
actions. The Portfolio may:
. sell longer-term bonds and buy shorter-term bonds or money
market instruments
with the sales proceeds;
. buy bonds with put options or exercise put options on
bonds held; and
. buy money market instruments.
By taking a defensive position, the Portfolio's yield may be
reduced.
Growth Portfolio
The primary goal of Growth Portfolio is capital growth. As
a secondary goal,
the Portfolio seeks current income. The Portfolio seeks to
achieve these goals
by investing primarily in a diversified portfolio of common
stocks, or
securities convertible into common stocks, of U.S. and
foreign companies.
Generally, the Portfolio may invest in a wide range of
marketable securities
that, in the Manager's opinion, offer the potential for
growth. There is no
guarantee that the Portfolio will achieve its goals.
The Manager looks for high-quality, industry-leading
companies with superior
long-term growth prospects by considering many factors.
These may include a
company's:
. market position and competitive advantages;
. stability and predictability of earnings growth; and
. management capability and track record.
When the Manager believes that a temporary defensive
position is desirable, 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 may reduce the
potential for
appreciation in the Portfolio.
High Income Portfolio
The primary goal of the Portfolio is to earn a high level of
current income. As
a secondary goal, the Portfolio seeks capital growth when
consistent with its
primary goal. The Portfolio seeks to achieve these goals by
investing primarily
in a diversified portfolio of high-yield, high-risk, fixed-
income securities,
the risks of which are, in the judgment of the Manager,
consistent with the
Portfolio's goals. There is no guarantee that the Portfolio
will achieve its
goals.
There are three main types of securities that the Portfolio
owns: debt
securities, preferred stock and common stock. The Portfolio
may also own
convertible securities. In general, the high income that
the Portfolio seeks is
paid by debt securities rated in the lower rating categories
of the established
rating services or unrated securities that are determined by
the Manager to be
of comparable quality; these are securities rated BBB or
lower by S&P, or Baa or
lower by MIS and unrated securities. Lower-quality debt
securities (which
include "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 higher-quality
securities and may decline significantly in periods of
general economic
difficulty. As well, the Portfolio may own bonds with
varying maturities.
The Portfolio will normally invest at least 80% of its total
assets to seek a
high level of current income. The Portfolio limits its
acquisition of common
stock so that no more than 20% of its assets will consist of
common stock and no
more than 10% of its assets will consist of non-dividend-
paying common stock.
The Manager may look at a number of factors in selecting
securities for the
Portfolio. These include an issuer's past, current and
estimated future:
. financial strength;
. cash flow;
. management;
. borrowing requirements; and
. responsiveness to changes in interest rates and business
conditions.
When the Manager believes that a full or partial temporary
defensive position is
desirable, due to present or anticipated market or economic
conditions, the
Manager may take any one or more of the following steps with
respect to up to
all of the assets in the Portfolio:
. shorten the average maturity of the Portfolio's debt
holdings;
. hold cash or cash equivalents (short-term investments,
such as commercial
paper and certificates of deposit) in varying amounts
designed for defensive
purposes; and
. emphasize high-grade debt securities.
Taking a temporary defensive position in any one or more of
these manners might
reduce the yield on the Portfolio's holdings. As an
alternative to taking a
temporary defensive position or in order to more quickly
participate in
anticipated market changes or market conditions, the
Portfolio may invest in
options and futures.
Income Portfolio
Income Portfolio's primary goal is to maintain current
income subject to market
conditions. As a secondary goal, the Portfolio seeks
capital growth. The
Portfolio seeks to achieve its goals by investing, during
normal market
conditions, primarily in a diversified portfolio of income-
producing securities,
typically the stocks of large, high-quality U.S. companies
that are well known
and have been consistently profitable. There is no
guarantee that the Portfolio
will achieve its goals.
The Manager attempts to select securities with income and
growth possibilities
by looking at many factors, including the company's:
. dividend payment history;
. profitability record;
. history of improving sales and profits;
. management;
. leadership position in its industry; and
. stock price value.
When the Manager views stocks with high yields as less
attractive than other
common stocks, the Portfolio may hold lower-yielding common
stocks because of
their prospects for appreciation. When the Manager believes
that the return on
debt securities and preferred stocks is more attractive than
the return on
common stocks, or that a temporary defensive position is
desirable, the
Portfolio may seek to achieve its goals by investing up to
all of its assets in
debt securities (typically, investment grade) and preferred
stocks. Taking a
defensive position may reduce the Portfolio's yield and/or
the potential for
appreciation in the Portfolio.
International Portfolio
The primary goal of the International Portfolio is long-term
capital
appreciation, with current income as a secondary goal. The
Portfolio seeks to
achieve these goals by investing primarily in a diversified
portfolio of common
stocks, preferred stocks and debt securities (mostly of
investment grade) of
foreign issuers. There is no guarantee that the Portfolio
will achieve its
goals.
Under normal conditions, the Portfolio invests at least 80%
of its assets in
foreign securities and at least 65% of its assets in issuers
of at least three
foreign countries. The Portfolio generally limits its
holdings so that no more
than 75% of its assets are invested in issuers of a single
foreign country and
no more than 25% of its assets are invested in securities
issued by the
government of a foreign country.
The Portfolio only purchases foreign securities that are:
. exchange-traded or quoted on an automated quotations
system (except warrants,
rights or restricted securities which need not be
exchange-traded or quoted);
. represented by U.S.-traded American Depository Receipts;
or
. issued or guaranteed by a foreign government (or any of
its subdivisions,
agencies or instrumentalities).
When the Manager believes that a temporary defensive
position is desirable, the
Portfolio may invest up to all of its assets in debt
securities (including
commercial paper or short-term U.S. Government securities)
or preferred stocks,
or both. Taking a defensive position may reduce the
potential for appreciation
in the Portfolio. As well, the Manager may attempt to
protect the value of the
Portfolio's holdings by hedging the currencies in which the
securities are
denominated.
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. The
Portfolio seeks to achieve
its goal by investing primarily in a diversified portfolio
of investment-grade,
intermediate-term debt securities of U.S. issuers, including
U.S. Government
securities, collateralized mortgage obligations and other
asset-backed
securities. There is no guarantee that the Portfolio will
achieve its goal.
The maturity of an asset-backed security is the estimated
average life of the
security, based on certain prescribed models or formulas
used by the Manager.
The maturity of other types of debt securities is the
earlier of the call date
or the maturity date, as appropriate. The Portfolio may
also own common stocks
and convertible securities, including convertible preferred
stock in certain
circumstances.
When the Manager believes that a temporary defensive
position is desirable, the
Portfolio may, with respect to any or all of its assets:
. shorten the average maturity of its investments;
. hold short-term investments,cash or cash equivalents;
. emphasize debt securities of a higher quality than those
it would ordinarily
hold; or
. invest in convertible preferred stock.
Taking a defensive position may reduce the Portfolio's
yield.
Money Market Portfolio
The goal of Money Market Portfolio is maximum current income
consistent with
stability of principal. The Portfolio seeks to achieve its
goal by investing in
a diversified portfolio of high-quality money market
instruments in accordance
with the requirements of Rule 2a-7 under the Investment
Company Act of 1940, as
amended (the "1940 Act"). There is no guarantee that the
Portfolio will achieve
its goal.
The Portfolio invests 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 only invests in bank obligations if they are
obligations of a bank
subject to regulation by the U.S. Government (including
branches of these banks)
or obligations of a foreign bank having total assets of at
least $500 million,
and instruments secured by any such obligation. The
Portfolio only invests in
securities with a remaining maturity of not more than 397
calendar days.
You will find more information in the Statement of
Additional Information
("SAI") about the Portfolio's valuation.
Science and Technology Portfolio
The goal of Science and Technology Portfolio is long-term
capital growth. The
Portfolio seeks to achieve this goal by investing primarily
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
use or commercial
application of scientific or technological discoveries.
There is no guarantee
that the Portfolio will achieve its goal.
The Portfolio invests in such areas as:
. aerospace and defense electronics;
. cable and broadband access;
. 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; and
. internet and internet-related services.
The Fund primarily owns common stock, however, it may also
invest in preferred
stock, debt securities and convertible securities.
The Manager typically emphasizes growth potential in
selecting stocks. A stock
has growth potential if, in the Manager's opinion, the
earnings of the company
are likely to grow faster than the economy.
Under normal economic and market conditions, the Portfolio
will not invest more
than 20% of its total assets in securities other than
science or technology
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, mostly of investment grade. Taking a defensive
position in any
manner may reduce the potential for appreciation in the
Portfolio.
Small Cap Portfolio
The goal of Small Cap Portfolio is growth of capital. The
Portfolio seeks to
achieve its goal by investing primarily in a diversified
portfolio of common
stocks, or securities convertible into common stocks, of
companies whose market
capitalizations do not exceed $1.5 billion at the time of
purchase by the
Portfolio. There is no guarantee that the Portfolio will
achieve its goal.
In selecting companies, the Manager may look at a number of
factors relating to
a company, such 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 government priorities or
programs.
The Portfolio may occasionally invest in securities of
larger companies that, in
the Manager's opinion, are being fundamentally changed or
revitalized, have a
position that is considered strong relative to the market as
a whole or
otherwise offer unusual opportunities for above average
growth.
In addition to common stocks, the Portfolio may also invest
in preferred stocks
and debt securities (mostly of investment grade). The
Portfolio may buy foreign
securities, but only those that are:
. exchange-traded or quoted on an automated quotations
system (except warrants,
rights or restricted securities which need not be
exchange-traded or quoted);
. represented by U.S.-traded American Depository Receipts;
or
. issued or guaranteed by a foreign government (or any of
its subdivisions,
agencies or instrumentalities).
When the Manager believes that a temporary defensive
position is desirable, the
Portfolio may invest up to all of its assets in debt
securities (including
commercial paper or short-term U.S. Government securities)
or preferred stocks,
or both. Taking a defensive position may reduce the
potential for appreciation
in the Portfolio.
Additional Investment Considerations
The goal(s) and investment policies of each Portfolio may be
changed by the
Directors of the Fund without a vote of the Portfolio's
shareholders, unless a
policy or restriction is otherwise described.
Each Portfolio may also invest in other types of securities
and use certain
other instruments in seeking to achieve its goal(s). For
example, a Portfolio
(other than Money Market Portfolio) may invest in options,
futures contracts,
asset-backed securities and other derivative instruments if
it is permitted to
invest in the type of asset by which the return on, or value
of, the derivative
is measured. You will find more information in the SAI
about each Portfolio's
permitted investments and strategies, as well as the
restrictions that apply to
them.
Risk Considerations of Principal Strategies and Other
Investments
Risks exist in any investment. Each Portfolio is subject to
market risk,
financial risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of
the security
because of market factors, including changes in interest
rates. Bonds with
longer maturities are more interest-rate sensitive. For
example, if interest
rates increase, the value of a bond with a longer maturity
is more likely to
decrease. Because of market risk, the share price of each
Portfolio will
likely change as well.
o Financial risk is based on the financial situation of the
issuer of the
security. To the extent the Portfolio invests in debt
securities, the
Portfolio's financial risk depends on the credit quality
of the securities in
which it invests. For an equity investment, a Portfolio's
financial risk may
depend, for example, on the earnings performance of the
company issuing the
stock.
o Prepayment risk is the possibility that, during periods of
falling interest
rates, a debt security with a high stated interest rate
will be prepaid
before its expected maturity date.
Because the Portfolios own different types of investments,
their performance
will be affected by a variety of factors. In general, the
value of each
Portfolio's investments and the income it may generate will
vary from day to
day, generally due to changes in market conditions, interest
rates and other
company and economic news. Performance will also depend on
the Manager's skill
in selecting investments.
Asset Strategy Portfolio and Science and Technology
Portfolio may actively trade
securities in seeking to achieve its goals. Doing so may
increase transaction
costs, which may reduce performance.
Certain types of each Portfolios' authorized investments and
strategies (such as
foreign securities, "junk bonds" and derivative instruments)
involve special
risks. Depending on how much the Portfolio invests or uses
these strategies,
these special risks may become significant. For example,
foreign investments
may subject a Portfolio to restrictions on receiving the
investment proceeds
from a foreign country, foreign taxes, and potential
difficulties in enforcing
contractual obligations, as well as fluctuations in foreign
currency values and
other developments that may adversely affect a foreign
country. Junk bonds
(bonds rated BB and below by S&P and Ba and below by MIS)
pose a greater risk of
nonpayment of interest or principal than higher-rated bonds.
Derivative
instruments may expose a Portfolio to greater volatility
than an investment in a
more traditional stock, bond or other security.
Year 2000 and Euro Issues
Like other mutual funds, financial institutions, business
organizations and
individuals around the world, each Portfolio 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. The Manager is taking steps that it
believes are
reasonably designed to address year 2000 computer-related
problems 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 that these
steps will be
sufficient to avoid any adverse impact on any of the
Portfolios. Similarly, the
companies and other issuers in which a Portfolio invests,
particularly foreign
companies and issuers, could be adversely affected by year
2000 computer-related
problems, and there can be no assurance that the steps
taken, if any, by these
issuers will be sufficient to avoid any adverse impact on a
Portfolio.
Also, certain of the Portfolios may be adversely affected by
the conversion of
certain European currencies into the Euro. This conversion,
which is under way,
is scheduled to be completed in 2002. However, problems
with the conversion
process and delays could increase volatility in world
capital markets and affect
European capital markets in particular.
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
ASSET STRATEGY PORTFOLIO
For the
For the fiscal year ended December 31, period
ended
------------------------------------ December
31,
1998 1997 1996 1995*
---- ---- ---- --------
- --
Per-Share Data
Net asset value,
beginning of
period ... $5.1969 $5.1343 $5.0137 $5.0000
------ ------ ------ ------
Income from investment
operations:
Net investment
income ... 0.1391 0.1915 0.1814 0.0717
Net realized and
unrealized gain
on investments 0.3779 0.5277 0.1206 0.0193
------ ------ ------ ------
Total from investment
operations 0.5170 0.7192 0.3020 0.0910
------ ------ ------ ------
Less distributions:
From net investment
income ... (0.1391) (0.1919) (0.1814) (0.0713)
From capital
gains .... (0.1880) (0.4647) (0.0000) (0.0060)
------ ------ ------ ------
Total
distributions (0.3271) (0.6566) (0.1814) (0.0773)
------ ------ ------ ------
Net asset value,
end of period $5.3868 $5.1969 $5.1343 $5.0137
====== ====== ====== ======
Total return 9.95% 14.01% 6.05% 1.80%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) $14 $10 $8 $4
Ratio of expenses
to average net
assets ... 1.07% 0.93% 0.93% 0.91%
Ratio of net investment
income to average
net assets 2.97% 3.55% 3.92% 4.42%
Portfolio turnover
rate ..... 189.02% 222.50% 49.92% 149.17%
*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>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
BALANCED PORTFOLIO
For
the
period
For the fiscal year ended December 31,
ended
--------------------------------------
December 31,
1998 1997 1996 1995
1994*
---- ---- ---- -----------
- ---
Per-Share Data
Net asset value,
beginning of
period ...........$6.7686 $6.1967 $5.9000 $4.9359
$5.0000
------ ------ ------ ------ ---
- ---
Income from investment
operations:
Net investment
income .......... 0.1865 0.1805 0.1594 0.1333
0.0460
Net realized and
unrealized gain (loss)
on investments .. 0.4003 0.9650 0.5003 1.0611
(0.0641)
------ ------ ------ ------ ---
- ---
Total from investment
operations ....... 0.5868 1.1455 0.6597 1.1944
(0.0181)
------ ------ ------ ------ ---
- ---
Less distributions:
From net investment
income ..........(0.1865) (0.1805)(0.1594)
(0.1333)(0.0460)
From capital gains (0.0608) (0.3931)(0.2036)
(0.0970)(0.0000)
------ ------ ------ ------ ---
- ---
Total distributions (0.2473) (0.5736)(0.3630)
(0.2303)(0.0460)
------ ------ ------ ------ ---
- ---
Net asset value,
end of period ....$7.1081 $6.7686 $6.1967 $5.9000
$4.9359
====== ====== ====== ======
======
Total return ....... 8.67% 18.49% 11.19% 24.19% -
0.37%
Ratios/Supplemental Data
Net assets, end of period
(in millions) .... $92 $68 $42 $24
$9
Ratio of expenses
to average net
assets ........... 0.74% 0.67% 0.70% 0.72%
0.95%
Ratio of net investment
income to average
net assets ....... 2.92% 3.06% 3.18% 3.22%
3.14%
Portfolio turnover
rate ............. 54.62% 55.66% 44.23% 62.87%
19.74%
*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>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
BOND PORTFOLIO
For the fiscal year ended
December 31,
--------------------------------------
- ----------
1998 1997 1996 1995
1994
---- ---- ---- ----
- ----
Per-Share Data
Net asset value,
beginning of
period ............ $5.3686 $5.2004 $5.3592 $4.7393
$5.4045
------- ------- ------- -------
- -------
Income from investment
operations:
Net investment
income ........... 0.3180 0.3400 0.3407 0.3556
0.3507
Net realized and
unrealized gain
(loss) on
investments ...... 0.0765 0.1682 (0.1588) 0.6202
(0.6652)
------- ------- ------- -------
- -------
Total from investment
operations ........ 0.3945 0.5082 0.1819 0.9758
(0.3145)
------- ------- ------- -------
- -------
Less distributions:
From net investment
income ........... (0.3180) (0.3400) (0.3407)
(0.3559) (0.3507)
From capital gains (0.0000) (0.0000) (0.0000)
(0.0000) (0.0000)
------- ------- ------- -------
- -------
Total distributions (0.3180) (0.3400) (0.3407)
(0.3559) (0.3507)
------- ------- ------- -------
- -------
Net asset value,
end of period ..... $5.4451 $5.3686 $5.2004 $5.3592
$4.7393
======= ======= ======= =======
=======
Total return ....... 7.35% 9.77% 3.43%
20.56% -5.90%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ......... $114 $99 $92 $89
$74
Ratio of expenses
to average net
assets ............ 0.67% 0.58% 0.59%
0.60% 0.62%
Ratio of net investment
income to average
net assets ........ 5.99% 6.35% 6.39%
6.73% 6.73%
Portfolio turnover
rate .............. 32.75% 36.81% 64.02%
71.17% 135.82%
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
GROWTH PORTFOLIO
For the fiscal year ended
December 31,
--------------------------------------
- ----------
1998 1997 1996 1995
1994
---- ---- ---- ----
- ----
Per-Share Data
Net asset value,
beginning of
period ............ $7.5679 $6.7967 $6.8260 $5.8986
$6.1962
------- ------- ------- -------
- -------
Income from investment
operations:
Net investment
income ........... 0.0456 0.0574 0.0990 0.0903
0.1211
Net realized and
unrealized gain
on investments ... 2.0215 1.4003 0.7478 2.1842
0.0268
------- ------- ------- -------
- -------
Total from investment
operations ........ 2.0671 1.4577 0.8468 2.2745
0.1479
------- ------- ------- -------
- -------
Less distributions:
From net investment
income ........... (0.0456) (0.0570) (0.0990)
(0.0903) (0.1211)
From capital gains (0.2905) (0.6295) (0.7771)
(1.2568) (0.3244)
------- ------- ------- -------
- -------
Total distributions (0.3361) (0.6865) (0.8761)
(1.3471) (0.4455)
------- ------- ------- -------
- -------
Net asset value,
end of period ..... $9.2989 $7.5679 $6.7967 $6.8260
$5.8986
======= ======= ======= =======
=======
Total return ....... 27.31% 21.45% 12.40%
38.57% 2.39%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ........ $825 $639 $513 $419
$277
Ratio of expenses
to average net
assets ............ 0.80% 0.72% 0.73%
0.75% 0.77%
Ratio of net investment
income to average
net assets ........ 0.55% 0.75% 1.44%
1.35% 2.07%
Portfolio turnover
rate .............. 75.58% 162.41% 243.00%
245.80% 277.36%
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial performance of
the Portfolio's shares for the fiscal periods shown.
Certain information
reflects financial results for a single Portfolio share.
"Total return" shows
how much your investment would have increased (or decreased)
during each period,
assuming reinvestment of all dividends and distributions.
This information has
been audited by Deloitte & Touche LLP, whose independent
auditors' report, along
with the Portfolio's financial statements for the fiscal
year ended December 31,
1998, is included in the SAI, which is available upon
request.
(For a share outstanding throughout each
period)
HIGH INCOME PORTFOLIO
For the fiscal year ended
December 31,
--------------------------------------
- ----------
1998 1997 1996 1995
1994
---- ---- ---- ----
- ----
Per-Share Data
Net asset value,
beginning of
period ............ $4.7402 $4.5750 $4.4448 $4.1118
$4.6373
------- ------- ------- -------
- -------
Income from investment
operations:
Net investment
income ........... 0.4185 0.4098 0.4216 0.4165
0.4106
Net realized and
unrealized gain
(loss) on
investments ...... (0.3259) 0.2324 0.1302 0.3330
(0.5255)
------- ------- ------- -------
- -------
Total from investment
operations ........ 0.0926 0.6422 0.5518 0.7495
(0.1149)
------- ------- ------- -------
- -------
Less distributions:
From net investment
income ........... (0.4185) (0.4098) (0.4216)
(0.4165) (0.4106)
From capital gains (0.0000) (0.0672) (0.0000)
(0.0000) (0.0000)
------- ------- ------- -------
- -------
Total distributions (0.4185) (0.4770) (0.4216)
(0.4165) (0.4106)
------- ------- ------- -------
- -------
Net asset value,
end of period ..... $4.4143 $4.7402 $4.5750 $4.4448
$4.1118
======= ======= ======= =======
=======
Total return ....... 1.95% 14.04% 12.46%
18.19% -2.55%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ......... $126 $120 $97 $87
$73
Ratio of expenses
to average net
assets ............ 0.77% 0.70% 0.71%
0.72% 0.74%
Ratio of net investment
income to average
net assets ........ 8.76% 8.79% 9.10%
9.25% 9.03%
Portfolio turnover
rate .............. 63.64% 65.28% 58.91%
41.78% 37.86%
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
INCOME PORTFOLIO
For the fiscal year ended
December 31,
--------------------------------------
- ----------
1998 1997 1996 1995
1994
---- ---- ---- ----
- ----
Per-Share Data
Net asset value,
beginning of
period ............ $11.9615 $10.1373 $ 8.6756 $6.7689
$6.9180
------- ------- ------- -------
- -------
Income from investment
operations:
Net investment
income ........... 0.1752 0.0916 0.0856 0.0839
0.0703
Net realized and
unrealized gain
(loss) on
investments ...... 2.3532 2.5598 1.6280 2.0525
(0.1491)
------- ------- ------- -------
- -------
Total from investment
operations ........ 2.5284 2.6514 1.7136 2.1364
(0.0788)
------- ------- ------- -------
- -------
Less distributions:
From net investment
income ........... (0.1752) (0.0915) (0.0856)
(0.0839) (0.0703)
From capital gains (1.9796) (0.7357) (0.1663)
(0.1457) (0.0000)
In excess of
capital gains .... (0.0000) (0.0000) (0.0000)
(0.0001) (0.0000)
------- ------- ------- -------
- -------
Total distributions (2.1548) (0.8272) (0.2519)
(0.2297) (0.0703)
------- ------- ------- -------
- -------
Net asset value,
end of period ..... $12.3351 $11.9615 $10.1373 $8.6756
$6.7689
======== ======== ======== =======
=======
Total return ....... 21.14% 26.16% 19.75%
31.56% -1.14%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ......... $811 $637 $462 $331
$219
Ratio of expenses
to average net
assets ............ 0.80% 0.72% 0.73%
0.77% 0.77%
Ratio of net investment
income to average
net assets ........ 1.35% 0.80% 0.97%
1.13% 1.16%
Portfolio turnover
rate .............. 62.84% 36.61% 22.95%
15.00% 23.32%
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
INTERNATIONAL PORTFOLIO
For
the
period
For the fiscal year ended December
31,ended
------------------------------------
December 31,
1998 1997 1996 1995
1994*
---- ---- ---- ---- -----
- -----
Per-Share Data
Net asset value,
beginning of
period ...........$6.3842 $5.9990 $5.2790 $4.9926
$5.0000
------ ------- ------- ------- -----
- -
Income from investment
operations:
Net investment
income .......... 0.0353 0.0485 0.0644 0.0846
0.0207
Net realized and
unrealized gain (loss)
on investments .. 2.1283 0.9534 0.7329 0.2790
(0.0074)
------ ------- ------- ------- -----
- -
Total from investment
operations ....... 2.1636 1.0019 0.7973 0.3636
0.0133
------ ------- ------- ------- -----
- -
Less distributions:
From net investment
income ..........(0.0353) (0.0463)(0.0644)
(0.0772)(0.0207)
From capital gains (0.6949) (0.5704)(0.0129)
(0.0000)(0.0000)
------ ------- ------- ------- -----
- -
Total distributions (0.7302) (0.6167)(0.0773)
(0.0772)(0.0207)
------ ------- ------- ------- -----
- -
Net asset value,
end of period .... $7.8176 $6.3842 $5.9990 $5.2790
$4.9926
======= ======= ======= =======
======
Total return .......33.89% 16.70% 15.11% 7.28%
0.26%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ........ $169 $115 $80 $50
$26
Ratio of expenses
to average net
assets ........... 1.02% 0.98% 1.00% 1.02%
1.26%
Ratio of net investment
income to average
net assets ....... 0.47% 0.79% 1.42% 1.99%
1.36%
Portfolio turnover
rate .............88.84% 117.37% 75.01% 34.93%
23.23%
*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>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
LIMITED-TERM BOND PORTFOLIO
For
the
period
For the fiscal year ended December
31,ended
------------------------------------
December 31,
1998 1997 1996 1995
1994*
---- ---- ---- -----------
- ---
Per-Share Data
Net asset value,
beginning of
period ...........$5.1882 $5.1639 $5.2521 $4.8611
$5.0000
------ ------ ------ ------ -----
- -
Income from investment
operations:
Net investment
income .......... 0.2935 0.3086 0.2842 0.2841
0.1507
Net realized and
unrealized gain (loss)
on investments .. 0.0522 0.0451 (0.0870) 0.4122
(0.1375)
------ ------ ------ ------ -----
- -
Total from investment
operations ....... 0.3457 0.3537 0.1972 0.6963
0.0132
------ ------ ------ ------ -----
- -
Less distributions:
From net investment
income ..........(0.2935) (0.3086)(0.2842)
(0.2841)(0.1507)
From capital gains (0.0112) (0.0208)(0.0012)
(0.0212)(0.0014)
------ ------ ------ ------ -----
- -
Total distributions (0.3047) (0.3294)(0.2854)
(0.3053)(0.1521)
------ ------ ------ ------ -----
- -
Net asset value,
end of period ....$5.2292 $5.1882 $5.1639 $5.2521
$4.8611
====== ====== ====== ======
======
Total return ....... 6.66% 6.85% 3.79% 14.29%
0.26%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ........ $5 $4 $4 $3
$2
Ratio of expenses
to average net
assets ........... 0.79% 0.73% 0.76% 0.71%
0.93%
Ratio of net investment
income to average
net assets ....... 5.65% 5.93% 5.92% 6.22%
5.89%
Portfolio turnover
rate .............47.11% 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>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
MONEY MARKET PORTFOLIO
For the fiscal year ended
December 31,
--------------------------------------
- ----------
1998 1997 1996 1995
1994
---- ---- ---- ----
- ----
Per-Share Data
Net asset value,
beginning of
period ............ $1.0000 $1.0000 $1.0000 $1.0000
$1.0000
------- ------- ------- -------
- -------
Net investment
income ............ 0.0492 0.0503 0.0486 0.0542
0.0368
Less dividends
declared .......... (0.0492) (0.0503) (0.0486)
(0.0542) (0.0368)
------- ------- ------- -------
- -------
Net asset value,
end of period ..... $1.0000 $1.0000 $1.0000 $1.0000
$1.0000
======= ======= ======= =======
=======
Total return ....... 5.04% 5.13% 5.01%
5.56% 3.72%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ......... $54 $43 $37 $37
$31
Ratio of expenses
to average net
assets ............ 0.68% 0.58% 0.61%
0.62% 0.65%
Ratio of net investment
income to average
net assets ........ 4.90% 5.04% 4.87%
5.42% 3.72%
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
SCIENCE AND TECHNOLOGY PORTFOLIO
For the
fiscal For the
year period ended
ended December 31,
12-31-98 1997*
------ -----------
Per-Share Data
Net asset value,
beginning of
period ... $5.7726 $5.0000
------ ------
Income from investment
operations:
Net investment
income .. 0.0032 0.0146
Net realized and
unrealized gain
on investments 2.6551 0.7971
------ ------
Total from investment
operations 2.6583 0.8117
------ ------
Less distributions:
From net investment
income ..... (0.0032) (0.0146)
From capital
gains ...... (0.1527) (0.0245)
------ ------
Total
distributions (0.1559) (0.0391)
------ ------
Net asset value,
end of period $8.2750 $5.7726
====== ======
Total return 46.05% 16.24%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) $35 $10
Ratio of expenses
to average net
assets .... 0.92% 0.94%
Ratio of net investment
income to average
net assets 0.07% 0.64%
Portfolio turnover
rate ..... 64.72% 15.63%
*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>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the
financial
performance of the Portfolio's shares for the fiscal periods
shown. Certain
information reflects financial results for a single
Portfolio share. "Total
return" shows how much your investment would have increased
(or decreased)
during each period, assuming reinvestment of all dividends
and distributions.
This information has been audited by Deloitte & Touche LLP,
whose independent
auditors' report, along with the Portfolio's financial
statements for the fiscal
year ended December 31, 1998, is included in the SAI, which
is available upon
request.
(For a share outstanding throughout each
period)
SMALL CAP PORTFOLIO
For
the
period
For the fiscal year ended December 31,
ended
--------------------------------
December 31,
1998 1997 1996 1995
1994*
---- ---- ---- -----------
- ---
Per-Share Data
Net asset value,
beginning of
period ........... $8.3316 $8.0176 $7.6932 $5.9918
$5.0000
------ ------ ------ ------ ---
- ---
Income from investment
operations:
Net investment
income .......... 0.0798 0.0279 0.0170 0.0900
0.0376
Net realized and
unrealized gain
on investments .. 0.8255 2.5004 0.6367 1.8470
1.0086
------ ------ ------ ------ ---
- ---
Total from investment
operations ....... 0.9053 2.5283 0.6537 1.9370
1.0462
------ ------ ------ ------ ---
- ---
Less distributions:
From net investment
income .......... (0.0798) (0.0282)(0.0170)
(0.0900)(0.0376)
From capital gains (1.2027) (2.1861)(0.3123)
(0.1456)(0.0168)
In excess of capital
gains ........... (0.0525) (0.0000)(0.0000)
(0.0000)(0.0000)
------ ------ ------ ------ ---
- ---
Total distributions (1.3350) (2.2143)(0.3293)
(0.2356)(0.0544)
------ ------ ------ ------ ---
- ---
Net asset value,
end of period .... $7.9019 $8.3316 $8.0176 $7.6932
$5.9918
====== ===== ===== =====
======
Total return ....... 10.87% 31.53% 8.50% 32.32%
20.92%
Ratios/Supplemental Data
Net assets, end of
period (in
millions) ........ $181 $148 $97 $56
$16
Ratio of expenses
to average net
assets ........... 0.97% 0.90% 0.91% 0.96%
1.08%
Ratio of net investment
income to average
net assets ....... 0.94% 0.32% 0.25% 1.77%
2.35%
Portfolio turnover
rate ............. 177.32% 211.46% 133.77% 43.27%
21.61%
*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.
Information regarding the performance of the Portfolios is
contained in the
Fund's annual report to shareholders which may be obtained
without charge by
request to the Fund at the address and phone number shown on
the cover of this
Prospectus.
<PAGE>
The Management of the Portfolios
Portfolio Management
The Portfolios are managed by the Manager, subject to
the authority of the
Fund's Board of Directors. The Manager provides investment
advice to each of
the Portfolios and supervises each Portfolio's investments.
The Manager 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 and Waddell & Reed Funds, Inc. since 1940 or the
inception of the
investment company, whichever was later.. The Manager is
located at 6300 Lamar
Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Michael L. Avery is primarily responsible for the
management of the equity
portion of the 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, and the Director of Research for, Waddell & Reed Asset
Management Company, a
former 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 the Manager since
August 1987, and has
been an employee of the Manager since June 1981.
Daniel J. Vrabac is primarily responsible for the
management of the fixed-
income portion of the 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, and a portfolio manager for, Waddell & Reed
Asset Management
Company. Mr. Vrabac has been an employee of the Manager and
has served as an
investment analyst with the Manager since May 1994.
Cynthia P. Prince-Fox is primarily responsible for the
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
another investment company for which the Manager serves as
investment manager.
From January 1993 to March 1998, Ms. Prince-Fox was Vice
President of, and a
portfolio manager for, Waddell & Reed Asset Management
Company. Ms. Prince-Fox
has served as the portfolio manager for investment companies
managed by the
Manager since January 1993. She has been an employee of the
Manager and has
served as an investment analyst with the Manager since
February 1983.
James C. Cusser is primarily responsible for the
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.
Philip J. Sanders is primarily responsible for the
management of the
portfolio of Growth Portfolio. Mr. Sanders has held his
Fund
responsibilities since August 1998. He is Vice President of
the Manager
and Vice President of the Fund. Mr. Sanders has been an
employee of the
Manager since August 1998. Mr. Sanders was formerly Lead
Manager with
Tradestreet Investment Associates.
William M. Nelson is primarily responsible for the
management of the
portfolio of High Income Portfolio. Mr. Nelson has held his
responsibilities
for High Income Portfolio since January 1999. He is Vice
President of the
Manager and Vice President of the Fund. Mr. Nelson has been
an employee of the
Manager since January 1995. From January 1988 to December
1994, Mr. Nelson was
an Investment Manager with Xerox Credit Corporation.
Russell E. Thompson and James D. Wineland are primarily
responsible for the
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, and a portfolio manager for,
Waddell & Reed Asset
Management Company. Mr. Thompson has served as the
portfolio manager for
investment companies managed by the Manager since January
1976 and has been an
employee of 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, and a
portfolio manager for, Waddell & Reed Asset Management
Company. Mr. Wineland
has served as the portfolio manager for investment companies
managed by the
Manager since January 1988 and has been an employee of the
Manager since
November 1984.
Thomas A. Mengel is primarily responsible for the
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.
Patrick W. Sterner is primarily responsible for the
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 another investment company
for which the Manager
serves as investment manager. From August 1992 to March
1998, Mr. Sterner was
Vice President of, and a portfolio manager for, Waddell &
Reed Asset Management
Company. 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.
Mira Stevovich is primarily responsible for the
management of the portfolio
of Money Market Portfolio. Ms. Stevovich has held her
responsibilities for
Money Market Portfolio since May 1998. She is Vice
President of the Manager,
Vice President and Assistant Treasurer of the Fund and Vice
President and
Assistant Treasurer of other investment companies for which
the Manager serves
as investment manager. Ms. Stevovich has served as the
Assistant Portfolio
Manager for investment companies managed by the Manager
since January 1989 and
has been an employee of the Manager since March 1987.
Abel Garcia is primarily responsible for the 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, and a
portfolio manager for,
Waddell & Reed Asset Management Company. Mr. Garcia has
served as the portfolio
manager for investment companies managed by the Manager
since January 1984. Mr.
Garcia has been an employee of the Manager since August
1983.
Mark G. Seferovich and Grant P. Sarris are primarily
responsible for the
management of the portfolio of Small Cap Portfolio. Mr.
Seferovich has held his
responsibilities for Small Cap Portfolio since the
portfolio's inception to
January 1, 1996 and from February 1999 to the present. He
is Senior Vice
President of the Manager, Vice President of the Fund and
Vice President of
another investment company for which the Manager serves as
investment manager.
From March 1996 to March 1998, Mr. Seferovich was Vice
President of, and a
portfolio manager for, Waddell & Reed Asset Management
Company. Mr. Seferovich
has served as the portfolio manager for investment companies
managed by the
Manager, and has been an employee of the Manager, since
February 1989.
Mr. Sarris has held his Fund responsibilities since
February 1999. He is
Vice President of the Manager and Vice President of another
investment company
for which the Manager serves as investment manager. Mr.
Sarris has served as an
investment analyst with the Manager, and has been an
employee of the Manager,
since October 1, 1991.
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.
Management and Other Fees
Like all mutual funds, the Portfolios pay fees related
to their daily
operations. Expenses paid out of each Portfolio's assets
are reflected in its
share price or dividends; they are neither billed directly
to shareholders nor
deducted from shareholder accounts.
Each Portfolio pays a management fee to the Manager for
providing
investment advice and supervising its investments. The
management fee of each
Portfolio is calculated by adding a base fee to a specific
fee. It is accrued
and paid to the Manager daily. The 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.
The base fee is
determined on the combined net asset values of all of the
Portfolios at the
annual rates shown in the following table and then allocated
pro rata to the
Portfolio based on its relative net assets.
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%
As of December 31, 1998, the combined net assets of all
of the Portfolios
were approximately $2.4 billion.
For the fiscal year ended December 31, 1998, management
fees for each
Portfolio as a percent of each such Portfolio's average net
assets are as
follows:
Management Fees
Asset Strategy Portfolio 0.79%
Balanced Portfolio 0.59%
Bond Portfolio 0.52%
Growth Portfolio 0.69%
High Income Portfolio 0.64%
Income Portfolio 0.69%
International Portfolio 0.79%
Limited-Term Bond Portfolio 0.54%
Money Market Portfolio 0.49%
Science and Technology Portfolio 0.69%
Small Cap Portfolio 0.84%
The Fund has adopted a Service Plan (the "Plan")
pursuant to Rule 12b-1 of
the 1940 Act. Under the Plan, each Portfolio may pay
monthly a fee to Waddell &
Reed, Inc., an affiliate of the Manager and the distributor
of the Policies for
which the Fund is the underlying investment vehicle, in an
amount not to exceed
0.25% of the Portfolio's average annual net assets. The fee
is to be paid to
compensate Waddell & Reed, Inc. for amounts it expends in
connection with the
provision of personal services to Policyowners and/or
maintenance of Policyowner
accounts.
Each Portfolio also pays other expenses, which are
explained in the SAI.
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 ("NAV") 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 are made at the NAV 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:
. the New York Stock Exchange ("NYSE") is closed other
than customary weekend
and holiday closings or trading on the NYSE is
restricted;
. the Securities and Exchange Commission has determined
that a state of
emergency exists which may make payment or transfer not
reasonably
practicable;
. 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
. 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.
NET ASSET VALUE
In the calculation of the NAV per share of each Portfolio:
. The securities in the Portfolio that are listed or
traded on an exchange
are valued primarily using market prices.
. Bonds are generally valued according to prices quoted
by an independent
pricing service.
. Short-term debt securities are valued at amortized
cost, which
approximates market value.
. Other investment assets for which market prices are
unavailable are
valued at their fair value by or at the direction of
the Board of
Directors.
The net asset value per share of each Portfolio is
computed daily as of the
close of business of the NYSE, normally 4 p.m. Eastern time,
except that an
option or futures contract held by a Portfolio may be priced
at the close of the
regular session of any other securities or commodities
exchange on which that
instrument is traded.
Money Market Portfolio uses the amortized cost method
for valuing its
portfolio securities. You will find more information in the
SAI about this
method.
Certain of the Portfolios may invest in securities
listed on foreign
exchanges which may trade on Saturdays or on U.S. national
business holidays
when the NYSE is closed. Consequently, the NAV of Portfolio
shares may be
significantly affected on days when the Portfolio does not
price its shares and
when you are not able to purchase or redeem the Portfolio's
shares. 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. Similarly, if events materially
affecting the value
of foreign investments or foreign currency exchange rates
occur prior to the
close of the regular session of trading on the NYSE, but
after the time their
values are otherwise determined, such investments or
exchange rates will be
valued at their fair value as determined in good faith by or
under the direction
of the Board of Directors.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially
all the net
investment income, if any, of each Portfolio. Dividends
from Money Market
Portfolio are declared and paid daily in additional full and
fractional shares.
Dividends from Asset Strategy Portfolio, Balanced Portfolio,
Bond Portfolio,
Growth Portfolio, High Income Portfolio, Income Portfolio,
International
Portfolio, Limited-Term Bond Portfolio, Science and
Technology Portfolio and
Small Cap 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 distributions from 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.
You will find information in the SAI about Federal
income tax
considerations generally affecting the Portfolios.
Because the only shareholders of the Portfolios are the
Participating
Insurance Companies and their separate accounts, no
discussion is included here
as to the Federal income tax consequences to the Portfolios'
shareholders. For
information concerning the Federal tax consequences to
Policyowners, see the
applicable prospectus for the Policy. Prospective investors
are urged to
consult with their tax advisers.
<PAGE>
TARGET/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
May 1, 1999
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
An Overview of the Portfolios.................. 2
The Investment Principles of the Portfolios.... 20
Financial Highlights........................... 29
The Management of the Portfolios............... 40
Purchases and Redemptions...................... 43
Net Asset Value................................ 44
Dividends and Distributions.................... 44
<PAGE>
Target/United Funds, Inc.
PROSPECTUS
May 1, 1999
You can get more information about the Portfolios in--
. the Statement of Additional Information (SAI) dated
May 1, 1999, which
contains detailed information about each Portfolio,
particularly its
investment policies and practices. You may not be
aware of important
information about a Portfolio unless you read both
the Prospectus and
the SAI. The current SAI is on file with the
Securities and Exchange
Commission (SEC) and it is incorporated into this
Prospectus by
reference (that is, the SAI is legally part of the
Prospectus).
. the Annual and Semiannual Reports to Shareholders,
which detail each
Portfolio's actual investments and include financial
statements as of
the close of the particular annual or semiannual
period. The annual
report also contains a discussion of the market
conditions and
investment strategies that significantly affected the
Portfolios'
performance during the year covered by the report.
To request a copy of the current SAI or copies of the
Portfolios' most recent
Annual and Semiannual reports, without charge, or for other
inquiries, contact
the Fund or Waddell & Reed, Inc. at the address and
telephone number below.
Copies of the SAI, Annual and/or Semiannual Report may also
be requested at
[email protected].
Information about the Fund (including its current SAI and
most recent Annual and
Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C.
You can find out
about the operation of the Public Reference Room and
applicable copying charges
by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-5017.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
<PAGE>
TARGET/UNITED FUNDS,
INC........................................1
AN OVERVIEW OF THE
PORTFOLIOS...................................2
ASSET STRATEGY
PORTFOLIO........................................2
PERFORMANCE.................................................
....4
BALANCED
PORTFOLIO..............................................5
PERFORMANCE.................................................
....6
BOND
PORTFOLIO..................................................7
PERFORMANCE.................................................
....8
GROWTH
PORTFOLIO................................................9
PERFORMANCE.................................................
...10
HIGH INCOME
PORTFOLIO..........................................11
PERFORMANCE.................................................
...12
INCOME
PORTFOLIO...............................................13
PERFORMANCE.................................................
...14
INTERNATIONAL
PORTFOLIO........................................15
PERFORMANCE.................................................
...16
LIMITED-TERM BOND
PORTFOLIO....................................17
PERFORMANCE.................................................
...18
MONEY MARKET
PORTFOLIO.........................................19
PERFORMANCE.................................................
...20
SCIENCE AND TECHNOLOGY
PORTFOLIO...............................21
PERFORMANCE.................................................
...22
SMALL CAP
PORTFOLIO............................................23
PERFORMANCE.................................................
...24
THE INVESTMENT PRINCIPLES OF THE
PORTFOLIOS....................25
Investment Goals, Principal Strategies and Other
Investments .25
THE MANAGEMENT OF THE
PORTFOLIOS...............................50
Portfolio Management
.........................................50
Management and Other Fees
....................................52
PURCHASES AND
REDEMPTIONS......................................53
NET ASSET
VALUE................................................54
DIVIDENDS AND
DISTRIBUTIONS....................................54
<PAGE>
TARGET/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
May 1, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is
not a prospectus.
Investors should read this SAI in conjunction with the
prospectus (the
"Prospectus") of Target/United Funds, Inc. (the "Fund")
dated May 1, 1999, which
may be obtained by request to the Fund or Waddell & Reed,
Inc. at the address or
telephone number shown above.
TABLE OF CONTENTS
Performance Information .......................... 2
Investment Strategies, Policies and Practices..... 5
Investment Management and Other Services ......... 50
Net Asset Value .................................. 54
Directors and Officers ........................... 57
Purchases and Redemptions ........................ 63
Shareholder Communications ....................... 64
Taxes ............................................ 64
Dividends and Distributions ...................... 70
Portfolio Transactions and Brokerage ............. 70
Other Information ................................ 74
Appendix A ....................................... 77
Financial Statements ............................. 86
<PAGE>
Target/United Funds, Inc. is a mutual fund; an
investment that pools
shareholders' money and invests it toward a specified goal.
In technical terms,
the Fund is an open-end, diversified management company
organized as a Maryland
corporation on December 2, 1986. The Fund sells its shares
only to the separate
accounts of Participating Insurance Companies to fund
certain variable life
insurance policies and variable annuity contracts
("Policies").
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 each Portfolio other than
Money Market Portfolio.
Total return is the overall change in the value of an
investment over a given
period of time. 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, 1998, which
is the most recent balance sheet included in this SAI, for
the periods shown
were as follows:
One-year Five-year Ten-
year
period from period from Period
from
1-1-98 to 1-1-94 to 1-1-
89 to
12-31-98 12-31-98 12-
31-98
----------- ----------- ------
- -----
Asset Strategy Portfolio 9.95% 8.59%*
Balanced Portfolio 8.67% 13.04%**
Bond Portfolio 7.35% 6.81%
8.83%
Growth Portfolio 27.31% 19.78%
18.77%
High Income Portfolio 1.95% 8.54%
9.35%
Income Portfolio 21.14% 18.94%
17.91%***
International Portfolio 33.89% 15.19%**
Limited-Term Bond Portfolio 6.66% 6.73%**
Science and Technology Portfolio 46.05% 35.49%****
Small Cap Portfolio 10.87% 22.03%**
*Period from May 1, 1995, date of initial offering, to
December 31, 1998.
**Period from May 3, 1994, date of initial offering, to
December 31, 1998.
***Period from July 16, 1991, date of initial offering, to
December 31, 1998.
****Period from April 4, 1997, date of initial offering, to
December 31, 1998.
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, 1998, the date of the most recent balance sheet
included in this
SAI, is as follows:
Bond Portfolio 5.56%
High Income Portfolio 9.59%
Limited-Term Bond Portfolio 6.02%
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, 1998, the date of the most
recent balance sheet
included in this SAI, was % and its effective yield
calculated for the same
period was %.
Performance Rankings
The following relates to each of the Portfolios. From
time to time,
advertisements and information furnished to present or
prospective Policyholders
may include performance rankings as published by recognized
independent mutual
fund statistical services such as Lipper Analytical
Services, Inc., or by
publications of general interest such as Forbes, Money, The
Wall Street Journal,
Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. A
Portfolio's performance may also be compared to that of
other selected mutual
funds or recognized market indicators such as the Standard &
Poor's 500
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. In connection with a ranking, the Fund may
provide additional
information, such as the particular category to which it
related, the number of
funds in the category, the criteria upon which the ranking
is based, and the
effect of sales charges, fee waivers and/or expense
reimbursements.
General
Change in yields primarily reflect different interest
rates received by a
Portfolio as its portfolio securities change. Yield is also
affected by
portfolio quality, portfolio maturity, type of securities
held and operating
expense ratio.
All performance information included in advertisements
or sales material is
historical in nature and is not intended to represent or
guarantee future
results. The value of a Portfolio's shares when redeemed
may be more or less
than their original cost.
INVESTMENT STRATEGIES, POLICIES AND
PRACTICES
This SAI supplements the information contained in the
Prospectus and
contains more detailed information about the investment
strategies and policies
the Fund's investment manager, Waddell & Reed Investment
Management Company (the
"Manager"), may employ and the types of instruments in which
a Portfolio may
invest, in pursuit of the Portfolio's goal(s). A summary of
the risks
associated with these instrument types and investment
practices is included as
well.
The Manager might not buy all of these instruments or
use all of these
techniques, or use them to the full extent permitted by a
Portfolio's investment
policies and restrictions. The Manager buys an instrument
or uses a technique
only if it believes that doing so will help a Portfolio
achieve its goal(s).
See "Investment Restrictions" for a listing of the
fundamental and non-
fundamental (e.g., operating) investment restrictions and
policies of the
Portfolios.
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, depository 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.
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"
below.
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"). The
market for such securities may differ from that for
investment grade debt
securities. See the discussion below for information about
the risks associated
with non-investment grade debt securities. See Appendix A
to this SAI for a
description of bond ratings.
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 this SAI for a
description of some of
these ratings. In general, Rule 2a-7 also 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 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 this SAI
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 this SAI 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.
Securities - General
The main types of securities in which the Portfolios
may invest include
common stock, preferred stock, debt securities and
convertible securities.
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
into common stock. Each of the Portfolios (other than Money
Market Portfolio)
may invest in preferred stock that is rated by an
established rating service or,
if unrated, judged by the Manager to be of equivalent
quality. 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 securities fall and, conversely, when
interest rates fall,
the values of fixed-rate debt rise. Similarly, long-term
bonds are generally
more sensitive to interest rate changes than shorter-term
bonds.
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. 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 each portfolio
in an attempt to
determine if the issuers will have sufficient cash flow and
profits to meet
required principal and interest payments. The Fund may
choose, at its expense
or in conjunction with others, to pursue litigation or
otherwise 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 the
shareholders of the
affected Portfolio(s).
Subject to its investment restrictions, a Portfolio
(other than Money
Market Portfolio) may invest in debt securities rated in any
rating category of
the established rating services, including securities rated
in the lowest
category (such as those rated D by Standard & Poor's ("S&P")
and C by Moody's
Investors Service, Inc. ("MIS")). Debt securities rated D
by S&P or C by MIS
are in payment default or are regarded as having extremely
poor prospects of
ever attaining any real investment standing. Debt
securities rated at least BBB
by S&P or Baa by MIS are considered to be investment grade
debt securities.
Securities rated BBB or Baa may have speculative
characteristics. In addition,
a Portfolio will treat unrated securities judged by the
Manager to be of
equivalent quality to a rated security having that rating.
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 ratings for individual
securities may change from
time to time, and a Portfolio may retain a portfolio
security whose rating has
been changed.
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.
Each of the Portfolios (other than Money Market
Portfolio) may invest in
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 different
issuer within a
particular period of time at a specified price or formula.
Convertible
securities generally have higher yields than common stocks
of the same or
similar issuers, but lower yields than comparable
nonconvertible securities, are
less subject to fluctuation in value than the underlying
stock because they have
fixed income characteristics, and provide the potential for
capital appreciation
if the market price of the underlying common stock
increases.
The 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 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 are high quality debt
instruments issued or
guaranteed as to principal or interest by the U.S. Treasury
or an agency or
instrumentality of the U.S. Government. These 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.
Money Market Instruments
Money market instruments are high-quality, short-term
debt instruments that
present minimal credit risk. They may include U.S.
Government securities,
commercial paper and other short-term corporate obligations,
and certificates of
deposit and other financial institution obligations. These
instruments may
carry fixed or variable interest rates.
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
"Investment Restrictions and Limitations" (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.
Zero Coupon Securities
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 price fluctuations in response to changing
interest rates than prices
of comparable maturities that make current distributions of
interest in cash.
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"). 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 and includable in the dividends paid to
its shareholders.
Those dividends will be paid from a Portfolio's cash assets
or by liquidation of
portfolio securities, if necessary, at a time when a
Portfolio otherwise might
not have done so.
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.
Municipal Obligations
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.
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." 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 the
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.
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.
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 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 the investor's 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.
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 certificate holders 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. Changes in the rate or "speed" of
these prepayments
can cause the value of the mortgage-backed securities to
fluctuate rapidly.
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.
The market for privately issued mortgage-backed and
asset-backed securities
is smaller and less liquid than the market for U.S.
Government mortgage-backed
securities. CMO classes may be specifically 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
reduced. These changes can result in volatility in the
market value and, in
some instances, reduced liquidity of the CMO class.
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.
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.
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 investments.
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
All Portfolios, other than Money Market and Limited-
Term Bond, may invest
in the securities of foreign issuers, including depository
receipts.
In general, depository receipts are securities
convertible into and
evidencing ownership of securities of foreign corporate
issuers, although
depository receipts may not necessarily be denominated in
the same currency as
the securities into which they may be converted. American
Depository 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 depository receipts and European depository
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 depository
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. Thus, 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. The Manager believes
that a Portfolio's
ability to invest assets abroad might enable it to take
advantage of these
differences and strengths where they are favorable.
However, foreign securities and foreign currencies
involve additional
significant risks, apart from the risks inherent in U.S.
investments. 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
conditions 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
government 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
greater possibility of
default by foreign governments or 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.
These 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 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.
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 are not usually charged. See "Options, Futures
Contracts and Other
Strategies -- Forward Currency Contracts" below for more
information.
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.
The only foreign securities in which Money Market
Portfolio may invest are
Canadian Government obligations, foreign bank obligations
and obligations of
foreign branches of domestic banks, all of which must be
U.S. dollar-
denominated.
Restricted Securities
Each of the Portfolios may invest in restricted
securities. Restricted
securities are securities that are subject to legal or
contractual restrictions
on resale. However, restricted securities generally can be
sold in privately
negotiated transactions, pursuant to an exemption from
registration under the
Securities Act of 1933, as amended, 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. Certain
restricted securities, for example Rule 144A securities, may
be determined to be
liquid in accordance with guidelines adopted by the Board of
Directors. See
"Illiquid Investments."
Lending Securities
Securities loans may be made on a short-term or long-
term basis for the
purpose of increasing a Portfolio's income. If a Portfolio
lends securities,
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 lent the
securities. The Portfolio also receives additional
compensation. A Portfolio
makes loans of its securities only to parties deemed by the
Manager to be
creditworthy.
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 lent on each day that the loan is
outstanding. If the
market value of the lent 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 lent. 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 "Investment Restrictions and Limitations." 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 in which it may
invest on a when-
issued or delayed-delivery basis or sell them on a delayed-
delivery basis. In
either case, payment and delivery for the securities take
place at a future
date. The securities so purchased or sold by a Portfolio
are subject to market
fluctuation; their value may be less or more when delivered
than the purchase
price paid or received. When purchasing securities on a
when-issued or delayed-
delivery basis, a Portfolio assumes the rights and risks of
ownership, including
the risk of price and yield fluctuations. 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. When a Portfolio
sells a security on
a delayed-delivery basis, the Portfolio does not participate
in further gains or
losses with respect to the security. 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. If the other party
to a delayed-delivery
transaction fails to deliver or pay for the securities, the
Portfolios could
miss a favorable price or yield opportunity, or could suffer
a loss.
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
if the Manager
decided it was advisable to do so for investment reasons.
The Portfolio will
hold aside or segregate cash or other securities other than
those purchased on a
when-issued or delayed-delivery basis at least equal in
value to the amount it
will have to pay on the settlement date; these other
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
Illiquid investments are investments that cannot be
sold or disposed of in
the ordinary course of business within seven days at
approximately the price at
which they are valued. 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.
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.
If through a change in values, net assets, or other
circumstances, a
Portfolio were in a position where more than 10% of its net
assets (15% with
respect to Asset Strategy Portfolio) were invested in
illiquid securities, it
would seek to take appropriate steps to protect liquidity.
Investment Company Securities
Asset Strategy Portfolio, Balanced Portfolio,
International Portfolio,
Science and Technology Portfolio and Small Cap Portfolio may
buy shares of
closed-end investment companies (i.e., those that do not
redeem their shares)
Asset Strategy Portfolio may buy shares of open-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.
Options, Futures Contracts and Other Strategies
General. The Manager may use certain options, futures
contracts (sometimes
referred to as "futures"), options on futures contracts,
forward currency
contracts, swaps, caps, collars, floors, indexed securities
and other derivative
instruments (collectively, "Financial Instruments") to
attempt to enhance a
Portfolio's income or yield or to attempt to hedge a
Portfolio's 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.
Generally, a Portfolio (other than Money Market
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. Since each
Portfolio (other
than Money Market Portfolio and Limited-Term Bond Portfolio)
is authorized to
invest generally in foreign securities, each such Portfolio
may purchase and
sell foreign currency derivatives.
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, 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 might not
use any of these
strategies, and there can be no assurance that any strategy
used will succeed.
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. In general
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. Risks
pertaining to particular Financial Instruments are described
in the sections
that follow and use of Financial Instruments could result in
a loss, regardless
of whether the intent was to reduce risk or increase return.
(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.
(5) 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. A call option gives the purchaser the right
to buy, and obligates
the writer to sell, the underlying investment at the agreed-
upon 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 price
during the option period. Purchasers of options pay an
amount, known as a
premium, to the option writer in exchange for the right
under the option
contract.
The 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. 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 instrument. 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 of 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
(including the
Euro), 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 Euros, it
could enter into a forward currency contract to sell Euros
in return for U.S.
dollars to hedge against possible declines in the Euro'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 Euro.
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.
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 exposure to changes in
currency exchange
rates and could result in losses to a 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 the
Manager will hedge at an appropriate time.
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. Each of the
Portfolios (other than Money
Market Portfolio) may enter into swaps, caps, collars and
floors to preserve a
return or a spread on a particular investment or portion of
its portfolio, to
protect against any increase in the price of securities a
Portfolio anticipates
purchasing at a later date or to attempt to enhance 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 the
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 the floor. A collar combines elements of
buying a cap and
selling a floor.
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 the overall volatility
of a Portfolio's
investments and its share price and yield because, and to
the extent, these
agreements affect 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
firm's
creditworthiness declines, the value of the agreement would
be likely to
decline, potentially resulting in losses. 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. The
position of the SEC
is that assets involved in swap transactions are illiquid
and are, therefore,
subject to the limitations on investing in illiquid
securities.
Borrowing
Each of the Portfolios, other than Small Cap Portfolio,
may borrow money,
but only from banks and for emergency or extraordinary
purposes. Small Cap
Portfolio may borrow money, only from banks, to purchase
securities 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. If a Portfolio does borrow, its share price may
be subject to
greater fluctuation until the borrowing is paid off.
Investment Restrictions and Limitations
Certain of the Portfolios' investment restrictions and
other limitations
are described in this SAI. The following are each
Portfolio's, other than Asset
Strategy Portfolio, fundamental investment limitations set
forth in their
entirety, which cannot be changed without shareholder
approval. For this
purpose, shareholder approval means the approval, at a
meeting of Portfolio
shareholders, by the lesser of (1) the holders of 67% or
more of the Portfolio's
shares represented at the meeting, if more than 50% of the
Portfolio's
outstanding shares are present in person or by proxy or (2)
more than 50% of the
Portfolio's outstanding shares. 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, except for Money
Market Portfolio, 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;
(ii) Pledge, mortgage or hypothecate assets as security
for indebtedness
except to secure permitted borrowings; or
(iii) 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
and bank obligations and instruments are not
included in this
restriction).
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.
The following investment restrictions are not
fundamental and may be
changed by the Fund's Board of Directors without approval of
the shareholders of
the affected Portfolios:
(i) At least 65% of each of Bond Portfolio's and
Limited-Term Bond
Portfolio's total assets will be invested during
normal market
conditions in debt securities, and at least 65% of
High Income
Portfolio's total assets will be invested during
normal market
conditions to seek a high level of current income.
Bond Portfolio may
not purchase any securities other than debt
securities if, as a result
of such purchase, more than 10% of its total
assets would be invested
in non-debt securities. This 10% limit does not
include a non-debt
security held as a result of a conversion of a
debt security or
exercise of a warrant.
(ii) At least 65% of Small Cap Portfolio's total assets
will be invested
during normal market conditions in companies whose
market
capitalizations do not exceed $1.5 billion at the
time their
securities are acquired by the Portfolio.
(iii) At least 25% of Balanced Portfolio's total assets
will be invested
during normal market conditions in fixed-income
senior securities.
(iv) At least 80% of International Portfolio's assets
will be invested
during normal market conditions in foreign
securities. International
Portfolio may not purchase a foreign security if,
as a result of such
purchase, more than 75% of its assets would be
invested in issuers of
that foreign country. International Portfolio
currently intends to
have at least 65% of its assets invested in
issuers of at least three
different foreign countries and may not invest
more than 25% of its
assets in securities issued by the government of
any one foreign
country.
(v) Each of Balanced Portfolio, Growth Portfolio,
Income Portfolio,
International Portfolio, Limited-Term Bond
Portfolio, Science and
Technology Portfolio and Small Cap Portfolio does
not currently intend
to invest in non-investment grade debt securities
if, as a result of
such investment, more than 5% of its assets would
consist of such
investments. Asset Strategy Portfolio may not
invest more than 35% of
its total assets in non-investment grade debt
securities.
(vi) Money Market Portfolio may not purchase the
securities of any one
issuer (other than U.S. Government securities) if,
as a result of such
purchase, more than 5% of its total assets would
be invested in the
securities of any one issuer, as determined in
accordance with Rule
2a-7. Money Market Portfolio may not invest more
than 5% of its total
assets in securities rated in the second highest
rating category by
the requisite rating organization(s) or comparable
unrated securities,
with investments in such securities of any one
issuer (except U.S.
Government securities) limited to the greater of
1% of the Portfolio's
assets or $1,000,000, as determined in accordance
with Rule 2a-7.
(vii) High Income Portfolio may not purchase a common
stock if, as a result,
more than 20% 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 does
not currently intend
to invest more than 10% of its total assets in
non-dividend-paying
common stocks.
(viii) 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. Money Market Portfolio
may not invest more
than 25% of its assets in a combination of
Canadian Government
obligations and foreign bank obligations.
(ix) Asset Strategy Portfolio currently intends to
limit its investments in
foreign securities, under normal market
conditions, to no more than
50% of its total assets and to limit its
investments in obligations of
any single foreign government to less than 25% of
its total assets.
(x) Each of Bond Portfolio, Growth Portfolio, High
Income Portfolio,
Income Portfolio, Science and Technology Portfolio
and Small Cap
Portfolio may not invest more than 20% of its
total assets in foreign
securities.
(xi) Each Portfolio may not purchase a security if, as
a result, more than
10% (15% for Asset Strategy Portfolio) of its net
assets would consist
of illiquid investments.
(xii) Each of Balanced Portfolio, International
Portfolio and Science and
Technology Portfolio may invest up to 10% of its
total assets in
shares of investment companies that do not redeem
their shares if the
Portfolio buys these shares in a regular
transaction in the open
market or acquires them as part of a
reorganization, consolidation or
merger; however, these Portfolios do not currently
intend to invest
more than 5% of their respective assets in such
securities. Asset
Strategy Portfolio does not currently intend to
purchase shares of
investment companies that do not redeem their
shares except in a
regular transaction in the open market and if, as
a result, no more
than 10% of its total assets would be invested in
such shares. Asset
Strategy Portfolio does not currently intend to
purchase shares of
open-end investment companies.
(xiii) Each of Asset Strategy Portfolio, International
Portfolio and Limited-
Term Bond Portfolio does not currently intend to
purchase the
securities of any issuer (other than securities
issued or guaranteed
by domestic or foreign governments or political
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 instrumentalities, or to collateralized
mortgage
obligations, other mortgage-related securities,
asset-backed
securities, indexed securities or OTC derivative
instruments.
(xiv) 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);
(xv) 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;
(xvi) Asset Strategy Portfolio does not currently intend
to invest in oil,
gas, or other mineral exploration or development
programs or leases.
An investment policy or limitation that states a
maximum percentage of a
Portfolio's assets that may be so invested or prescribes
quality standards is
typically applied immediately after, and based on, the
Portfolio's acquisition
of an asset. Accordingly, a subsequent change in the
asset's value, net assets,
or other circumstances will not be considered when
determining whether the
investment complies with the Portfolio's investment policies
and limitations.
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, 1998
and December 31, 1997 for each of the Portfolios then in
existence were as
follows:
1998 1997
---- ----
Asset Strategy Portfolio 189.02% 222.50%
Balanced Portfolio 54.62 55.66
Bond Portfolio 32.75 36.81
Growth Portfolio 75.58 162.41
High Income Portfolio 63.64 65.28
Income Portfolio 62.84 36.61
International Portfolio 88.84 117.37
Limited-Term Bond Portfolio 47.11 35.62
Money Market Portfolio 0.00 0.00
Science and Technology Portfolio 64.72 15.63
Small Cap Portfolio 177.32 211.46
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.
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.
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., a
publicly held company.
The address of these companies is 6300 Lamar Avenue, P.O.
Box 29217, Shawnee
Mission, KS 66201-9217.
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 Policies 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 Manager, during
the last three fiscal years for each Portfolio then in
existence were as
follows:
Periods ended December
31,
--------------------------
- --
1998 1997
1996
---- ---- --
- --
Asset Strategy Portfolio $ 91,048$ 71,899$
59,397
Balanced Portfolio 471,708 324,830
194,884
Bond Portfolio 547,604 491,520
469,708
Growth Portfolio 4,903,762 4,150,034
3,238,802
High Income Portfolio 801,018 690,862
590,009
Income Portfolio 5,015,935 3,955,628
2,772,236
International Portfolio 1,168,796 799,824
513,923
Limited-Term Bond Portfolio 22,936 21,919
18,112
Money Market Portfolio 223,299 192,321
181,734
Science and Technology Portfolio* 126,390 27,836
Small Cap Portfolio 1,395,302 1,018,984
689,578
* 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,
--------------------------
- --
1998 1997
1996
---- ---- --
- --
Asset Strategy Portfolio $ 9,167 $ --- $ -
- --
Balanced Portfolio 30,000 25,833
19,167
Bond Portfolio 40,000 30,000
30,000
Growth Portfolio 72,500 67,500
60,000
High Income Portfolio 40,000 38,333
30,000
Income Portfolio 72,500 65,833
59,167
International Portfolio 40,000 35,833
30,000
Limited-Term Bond Portfolio --- --- -
- --
Money Market Portfolio 23,333 20,000
20,000
Science and Technology Portfolio* 11,667 ---
Small Cap Portfolio 40,000 38,333
30,000
* 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.
Service Plan
Under a Service Plan (the "Plan") adopted by the Fund
pursuant to Rule 12b-
1 under the 1940 Act, each Portfolio may pay Waddell & Reed,
Inc. a fee not to
exceed .25% of the Portfolio's average annual net assets,
paid monthly, to
compensate Waddell & Reed, Inc. for its costs and expenses
in connection with
the provision of personal services to Policyowners and/or
maintenance of
Policyowner accounts.
The Plan permits Waddell & Reed, Inc. to be compensated
for amounts it
expends in compensating, training and supporting registered
account
representatives, sales managers and/or other appropriate
personnel in providing
personal services to Policyowners and/or maintaining
Policyowner accounts;
increasing services provided to Policyowners by office
personnel; engaging in
other activities useful in providing personal service to
Policyowners and/or
maintenance of Policyowner accounts; and in compensating
broker-dealers who may
regularly sell Policies, and other third parties, for
providing shareholder
services and/or maintaining Policyowner accounts.
The only Directors or interested persons, as defined in
the 1940 Act, of
the Fund who have a direct or indirect financial interest in
the operation of
the Plan are the officers and Directors who are also
officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of
Waddell & Reed
Financial, Inc., the indirect parent company of Waddell &
Reed, Inc. The Plan
is anticipated to benefit the Fund and the Policyholders
through Waddell & Reed,
Inc.'s activities to provide personal services to the
Policyholders and thereby
promote the maintenance of their accounts with the Fund.
The Fund anticipates
that Policyholders may benefit to the extent that Waddell &
Reed's activities
are successful in increasing the assets of the Fund through
reduced redemptions
and reducing a Policyholder's share of Fund and Portfolio
expenses. In
addition, the Fund anticipates that the revenues from the
Plan will provide
Waddell & Reed, Inc. with greater resources to make the
financial commitments
necessary to continue to improve the quality and level of
services to the Fund
and Policyholders.
The Plan was approved by the Fund's Board of Directors,
including the
Directors who are not interested persons of the Fund and who
have no direct or
indirect financial interest in the operations of the Plan or
any agreement
referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also
approved as to each Portfolio by the shareholders of the
Portfolio.
Among other things, the Plan provides that (i) Waddell
& Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and
the Directors will
review, a report of amounts expended under the Plan and the
purposes for which
such expenditures were made, (ii) the Plan will continue in
effect only so long
as it is approved at least annually, and any material
amendments thereto will be
effective only if approved, by the Directors including the
Plan Directors acting
in person at a meeting called for that purpose, (iii)
amounts to be paid by a
Portfolio under the Plan may not be materially increased
without the vote of the
holders of a majority of the outstanding shares of the
Portfolio, and (iv) while
the Plan remains in effect, the selection and nomination of
the Directors who
are Plan Directors will be committed to the discretion of
the Plan Directors.
During the fiscal year ended December 31, 1998, each
Portfolio paid the
following amount under the Plan:
Asset Strategy Portfolio $ 10,564
Balanced Portfolio 70,517
Bond Portfolio 91,435
Growth Portfolio 596,938
High Income Portfolio 100,812
Income Portfolio 613,994
International Portfolio 124,954
Limited-Term Bond Portfolio 3,439
Money Market Portfolio 42,893
Science and Technology Portfolio 20,058
Small Cap Portfolio 135,569
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.
NET ASSET VALUE
The net asset value of one of the shares of a Portfolio
is the value of the
Portfolio's assets, less liabilities, divided by the total
number of shares
outstanding. For example, if on a particular day a
Portfolio owned securities
worth $100 and held cash of $15, the total value of the
assets would be $115.
If it had a liability of $5, the net asset value would be
$110 ($115 minus $5).
If it had 11 shares outstanding, the net asset value of one
share would be $10
($110 divided by 11).
The net asset value per share of each Portfolio is
computed on each day
that the New York Stock Exchange ("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 of
Directors 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 of Directors
must promptly consider what action, if any, will be
initiated. When the Board
of Directors 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 majority of the
Directors are not affiliated with Waddell & Reed, Inc.
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. Vogel 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.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each
of the other funds
in the Fund Complex; Chairman of the Board of Directors,
Chief Executive
Officer, Principal Financial Officer and Director of Waddell
& Reed Financial,
Inc.; President, Chairman of the Board of Directors and
Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the
Board of Directors
of Waddell & Reed Investment Management Company ("WRIMCO"),
Waddell & Reed, Inc.
and Waddell & Reed Services Company; formerly, President of
the Fund and each of
the other funds in the Fund Complex; formerly, Chairman of
the Board of
Directors of Waddell & Reed Asset Management Company, a
former affiliate of
Waddell & Reed Financial, Inc. 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
President, JoDill Corp., an agricultural company;
President and Director of
Dillingham Enterprises Inc.; formerly, Director and
consultant, McDougal
Construction Company; formerly, Instructor at Central
Missouri State University;
formerly, Member of the Board of Police Commissioners,
Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney
Companies, Inc., a
specialty utility contractor. Date of birth: January 9,
1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George
S. and Delores Dori
Eccles Foundation. Director of First Security Corp., a bank
holding company,
and Director of Fluor Corp., a company with interests in
coal. Date of birth:
March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a
law firm. Date of
birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct
Professor of Law at the
University of Oklahoma College of Law; formerly, Vice
President for Executive
Affairs of the University of Oklahoma; formerly, an Attorney
with Crowe &
Dunlevy, a law firm. Date of birth: January 17, 1967.
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
of the Board of
Directors, Gilliland & Hayes, P.A., a law firm. Date of
birth: December 11,
1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund
and each of the other
funds in the Fund Complex; Executive Vice President, Chief
Operating Officer and
Director of Waddell & Reed Financial, Inc.; Vice President,
Chief Operating
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; formerly, Vice
President of the
Fund and each of the other funds in the Fund Complex;
formerly, Director and
Treasurer of Waddell & Reed Asset Management Company, a
former affiliate of
Waddell & Reed Financial, Inc. Date of birth: November 12,
1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds
in the Fund Complex;
President, Chief Investment Officer, Treasurer and Director
of Waddell & Reed
Financial, Inc.; 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; formerly, President, Chief Executive Officer, Chief
Investment Officer
and Director of Waddell & Reed Asset Management Company, a
former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8,
1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, 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. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership
School of Kansas
City; Director of Network Rehabilitation Services; formerly,
Employment
Counselor and Director of McCue-Parker Center. Date of
birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a
law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of
Missouri-Kansas City;
formerly, 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.
Helge K. Lee
Vice President, Secretary and General Counsel of the
Fund and each of the
other funds in the Fund Complex; Secretary and General
Counsel of Waddell & Reed
Financial, Inc.; 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;
formerly, Executive Vice President, Secretary and Chief
Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior
Vice President,
General Counsel and Secretary of Strong Capital Management,
Inc. and affiliates.
Date of birth: March 30, 1946.
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.
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, and the
Director of Research for, Waddell & Reed Asset Management
Company. Date of
birth: September 15, 1953.
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,
and a portfolio
manager for, 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.
William M. Nelson
Vice President of the Fund and Vice President of the
Manager. Date of
birth: May 18, 1960.
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, and a
portfolio manager
for, Waddell & Reed Asset Management Company. Date of
birth: January 11, 1959.
Philip J. Sanders
Vice President of the Fund and Vice President of the
Manager; formerly Lead
Manager with Tradestreet Investment Associates. Date of
birth: October 30,
1959.
Grant P. Sarris
Vice President of the Fund and one other Fund in the
Fund Complex and Vice
President of the Manager. Date of birth: September 14,
1966.
Mark G. Seferovich
Vice President of the Fund and one other Fund in the Fund
Complex and Senior
Vice President of the Manager; formerly, Vice President of,
and a portfolio
manager for, Waddell & Reed Asset Management Company. Date
of birth: April 6,
1947.
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, and a
portfolio manager
for, Waddell & Reed Asset Management Company. Date of
birth: January 11, 1949.
Mira Stevovich
Vice President and Assistant Treasurer of the Fund and
other funds in the
Fund Complex; Vice President of the Manager. Date of birth:
July 30, 1953.
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, and a
portfolio manager for, 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, and a
portfolio manager
for, 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,
and a portfolio
manager for, 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.
The Directors who may be deemed to be "interested
persons", as defined in
the 1940 Act, are indicated as such by an asterisk.
As of January 31, 1999, the Directors and officers as a
group owned less
than 1% of the shares of any Portfolio.
The Board of Directors has created an honorary position
of Director
Emeritus, which position a Director may elect after
resignation from the Board
of Directors provided the Director has attained the age of
70 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. Henry L.
Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K.
Richey and Paul S. Wise
retired as Directors of the Fund and of each of the Funds in
the Fund Complex
and 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 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, 1998, 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*
- -------- ------------ ------
- ------
Robert L. Hechler $ 0 $
0
Henry J. Herrmann 0
0
Keith A. Tucker 0
0
James M. Concannon 5,334
57,500
John A. Dillingham 5,334
57,500
David P. Gardner 1,379
14,500
Linda K. Graves 5,334
57,500
Joseph Harroz, Jr. 1,161
12,000
John F. Hayes 5,334
57,500
Glendon E. Johnson 5,244
56,500
William T. Morgan 5,334
57,500
Ronald C. Reimer 1,161
12,000
Frank J. Ross, Jr. 5,334
57,500
Eleanor B. Schwartz 5,334
57,500
Frederick Vogel III 5,334
57,500
*No pension or retirement benefits have been accrued as a
part of Fund expenses.
Mr. Gardner was elected as a Director on August 19,
1998. Messrs. Harroz,
Hechler, Herrmann and Reimer were elected as Directors on
November 18, 1998.
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 of
Directors 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 Policies. See the applicable Policy
prospectus for a
discussion of the special taxation of insurance companies
with respect to such
accounts and of the Policy holders.
Each Portfolio is treated as a separate corporation for
Federal income tax
purposes. Each Portfolio has qualified for treatment as a
regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as
amended (the
"Code"), so that it is relieved of Federal income tax on
that part of its
investment company taxable income (consisting generally of
net taxable
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) that is distributed
to its shareholders.
To continue to qualify as a RIC, a Portfolio must distribute
to its shareholders
for each taxable year at least 90% of the sum of its
investment company taxable
income ("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.
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. If any
Portfolio failed to
qualify for treatment as a regulated investment company for
any taxable year,
(1) it would be taxed at corporate rates on the full amount
of its taxable
income for that year without being able to deduct the
distributions it makes to
its shareholders, (2) the shareholders would treat all those
distributions,
including distributions of net capital gains (the excess of
net long-term
capital gains over net short-term capital losses), as
dividends (that is,
ordinary income) to the extent of the Portfolio's earnings
and profits, and (3)
most importantly, each insurance company separate account
invested therein would
fail to satisfy the diversification requirements of Code
section 817(h), with
the result that the variable annuity contracts supported by
that account would
no longer be eligible for tax deferral. In addition, the
Portfolio could be
required to recognize unrealized gains, pay substantial
taxes and interest and
make substantial distributions before requalifying for
regulated investment
company treatment.
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, and gains realized, 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 ("foreign taxes")
that would reduce the yield and/or total return on its
securities. Tax
conventions between certain countries and the United States
may reduce or
eliminate 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 provided 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, futures contracts and forward currency
contracts 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 contracts subject
to a "mixed straddle" election made by the Portfolio, are
"marked-to-market"
(that is, treated as sold at that time 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. That 60% portion will qualify for the 20% (10% for
taxpayers in the 15%
marginal tax bracket) maximum tax rate on net capital gains
enacted by the
Taxpayer Relief Act of 1997. Section 1256 contracts also
may be marked-to-
market for purposes of the Excise Tax and other purposes. A
Portfolio may need
to distribute any mark-to-market 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. The
regulations under
section 1092 also provide 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.
If a Portfolio has an "appreciated financial position"
- -- generally, an
interest (including an interest through an option, futures
or forward currency
contract or short sale) with respect to any stock, debt
instrument (other than
"straight debt") or partnership interest the fair market
value of which exceeds
its adjusted basis -- and enters into a "constructive sale"
of the same or
substantially similar property, the Portfolio will be
treated as having made an
actual sale thereof, with the result that gain will be
recognized at that time.
A constructive sale generally consists of a short sale, an
offsetting notional
principal contract or futures or forward currency contract
entered into by a
Portfolio or a related person with respect to the same or
substantially similar
property. In addition, if the appreciated financial
position is itself a short
sale or such a contract, acquisition of the underlying
property or substantially
similar property will be deemed a constructive sale.
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. The individual
who manages the Fund 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 or the Manager may otherwise combine orders
for the Fund with
those of other funds in the United Group and Waddell & Reed
Funds, Inc. or other
accounts over which it has investment discretion.
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, except where the combined order is not
filled completely. In
this case, the Manager will ordinarily allocate the
transaction pro rata based
on the orders placed. 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.
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 seek "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 ("research and 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.
Research and 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
research and/or 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 research or brokerage 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, 1998, 1997 and 1996:
Periods ended December
31,
----------------------------
- ---
1998 1997
1996
---- ---- -
- ---
Asset Strategy Portfolio $ 16,848 $16,930
$8,679
Balanced Portfolio 68,705 56,431
36,529
Bond Portfolio --- ---
- ---
Growth Portfolio 1,048,968 1,785,220
2,297,780
High Income Portfolio 5,131 2,998
7,574
Income Portfolio 576,461 421,831
250,273
International Portfolio 632,844 597,704
324,673
Limited-Term Bond Portfolio --- ---
- ---
Money Market Portfolio --- ---
- ---
Science and Technology Portfolio* 19,104 8,143
Small Cap Portfolio 309,983 238,000
117,166
---------- ---------- -------
- ---
$2,678,044 $3,127,257
$3,042,674
========== ==========
==========
* 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, 1998.
These transactions were allocated to these broker-dealers by
the internal
allocation procedures described above.
Amount of Brokerage
Transactions Commissions
------------ -----------
Asset Strategy Portfolio $ 5,249,230 $ 8,546
Balanced Portfolio 41,146,772 52,896
Bond Portfolio --- ---
Growth Portfolio 664,470,101 748,462
High Income Portfolio --- ---
Income Portfolio 418,139,666 475,056
International Portfolio 6,004,661 5,188
Limited-Term Bond Portfolio --- ---
Money Market Portfolio --- ---
Science and Technology Portfolio 2,532,591 4,006
Small Cap Portfolio 73,136,542 184,563
-------------- ----------
$1,210,679,563 $1,478,717
============== ==========
As of December 31, 1998, Bond Portfolio owned Salomon
Inc. securities in
the aggregate amount of $999,660. Salomon Inc. 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.
OTHER INFORMATION
Capital Stock
The Fund was incorporated in Maryland on December 2,
1986. Prior to August
31, 1998, the Fund was known as TMK/United Funds, Inc.
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: Asset Strategy Portfolio, Balanced Portfolio,
Bond Portfolio,
Growth Portfolio, High Income Portfolio, Income Portfolio,
International
Portfolio, Limited-Term Bond Portfolio, Money Market
Portfolio, Science and
Technology Portfolio and Small Cap 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.
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 fundamental investment policy,
which require
shareholder approval will be presented to shareholders at a
meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any
purpose upon receipt
by the Fund of a request in writing signed by shareholders
holding not less than
25% of all shares entitled to vote at such meeting, provided
certain conditions
stated in the bylaws are met. There will normally be no
meeting of the
shareholders for the purpose of electing directors until
such time as less than
a majority of directors holding office have been elected by
shareholders, at
which time the directors then in office will call a
shareholders' meeting for
the election of directors. To the extent that Section 16(c)
of the 1940 Act
applies to the Fund, the directors are required to call a
meeting of
shareholders for the purpose of voting upon the question of
removal of any
director when requested in writing to do so by the
shareholders of record of not
less than 10% of the Fund's outstanding shares.
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>
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 a 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>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Apparel and Accessory Stores - 3.53%
Abercrombie & Fitch Co., Class A* ...... 238,400 $
16,866,800
Kohl's Corporation* .................... 200,000
12,287,500
Total .................................
29,154,300
Building Materials and Garden Supplies - 3.04%
Home Depot, Inc. (The) ................. 410,000
25,086,875
Business Services - 5.48%
BMC Software, Inc.* .................... 323,800
14,439,456
Microsoft Corporation* ................. 222,000
30,753,938
Total .................................
45,193,394
Chemicals and Allied Products - 16.44%
Bristol-Myers Squibb Company ........... 158,600
21,222,663
Colgate-Palmolive Company .............. 97,000
9,008,875
Dial Corporation (The) ................. 290,800
8,396,850
Lilly (Eli) and Company ................ 170,000
15,108,750
Merck & Co., Inc. ...................... 80,000
11,815,000
Monsanto Company ....................... 150,000
7,125,000
Pfizer Inc. ............................ 146,000
18,313,875
Schering-Plough Corporation ............ 374,400
20,685,600
Warner-Lambert Company ................. 318,700
23,962,256
Total .................................
135,638,869
Communication - 5.09%
ALLTEL Corporation ..................... 150,000
8,971,875
GTE Corporation* ....................... 170,000
11,050,000
Infinity Broadcasting Corporation,
Class A* .............................. 352,200
9,641,475
SBC Communications Inc. ................ 230,000
12,333,750
Total .................................
41,997,100
Depository Institutions - 1.81%
Comerica Incorporated .................. 219,450
14,963,747
Electronic and Other Electric Equipment - 6.09%
General Electric Company ............... 174,500
17,809,906
Intel Corporation ...................... 194,300
23,030,622
Texas Instruments Incorporated ......... 110,000
9,411,875
Total .................................
50,252,403
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Food and Kindred Products - 1.42%
Bestfoods .............................. 220,000 $
11,715,000
General Merchandise Stores - 2.38%
Dollar General Corporation ............. 151,562
3,580,652
Wal-Mart Stores, Inc. .................. 197,200
16,059,475
Total .................................
19,640,127
Health Services - 1.10%
Tenet Healthcare Corporation* .......... 345,000
9,056,250
Industrial Machinery and Equipment - 7.82%
Applied Materials, Inc.* ............... 176,500
7,539,859
Cisco Systems, Inc.* ................... 236,425
21,950,584
Cooper Cameron Corporation* ............ 150,000
3,675,000
EMC Corporation* ....................... 324,600
27,591,000
Smith International, Inc.* ............. 150,000
3,778,125
Total .................................
64,534,568
Instruments and Related Products - 5.07%
Baxter International Inc. .............. 140,000
9,003,750
Guidant Corporation .................... 153,000
16,868,250
Medtronic, Inc. ........................ 215,000
15,963,750
Total .................................
41,835,750
Insurance Carriers - 2.22%
American International Group, Inc. ..... 116,700
11,276,137
MGIC Investment Corporation ............ 177,500
7,066,719
Total .................................
18,342,856
Miscellaneous Retail - 3.59%
Costco Companies, Inc.* ................ 200,000
14,468,750
Walgreen Co. ........................... 258,300
15,126,694
Total .................................
29,595,444
Motion Pictures - 2.15%
Time Warner Incorporated ............... 286,000
17,749,875
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Nondepository Institutions - 6.41%
Fannie Mae ............................. 453,600 $
33,566,400
Freddie Mac ............................ 300,000
19,331,250
Total .................................
52,897,650
Oil and Gas Extraction - 0.98%
Schlumberger Limited ................... 175,000
8,071,875
Petroleum and Coal Products - 0.93%
Exxon Corporation ...................... 105,000
7,678,125
Printing and Publishing - 1.00%
Tribune Company ........................ 125,400
8,276,400
Television Broadcasting Stations - 1.89%
Clear Channel Communications, Inc.* .... 286,400
15,608,800
Transportation Equipment - 2.31%
Harley-Davidson, Inc. .................. 401,800
19,035,275
Water Transportation - 2.36%
Carnival Corporation, Class A .......... 405,600
19,468,800
Wholesale Trade -- Durable Goods - 1.65%
Johnson & Johnson ...................... 162,200
13,604,525
TOTAL COMMON STOCKS - 84.76%
$699,398,008
(Cost: $464,143,846)
PREFERRED STOCK - 0.26%
Holding and Other Investment Offices
LTC Properties, Inc., 9.5% ............. 100,000 $
2,175,000
(Cost: $2,500,000)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Communication - 3.39%
GTE Corporation:
5.5%, 1-6-99 .......................... $ 20,000
19,984,722
5.38%, 1-25-99 ........................ 8,000
7,971,307
Total .................................
27,956,029
Electric, Gas and Sanitary Services - 1.85%
Central Illinois Light Co.,
5.22%, 1-12-99 ........................ 2,350 $
2,346,252
PS Colorado Credit Corp.,
6.0%, 1-15-99 ......................... 2,000
1,995,333
Puget Sound Energy Inc.,
5.92%, 1-19-99 ........................ 11,000
10,967,440
Total .................................
15,309,025
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Electronic and Other Electric Equipment - 1.89%
Lucent Technologies Inc.,
5.25%, 1-14-99 ........................ $13,500 $
13,474,406
Sony Capital Corp.,
5.75%, 1-14-99 ........................ 2,165
2,160,505
Total .................................
15,634,911
Fabricated Metal Products - 0.55%
Danaher Corporation,
5.6288%, Master Note .................. 1,579
1,579,000
Snap-On Inc.,
6.1%, 1-4-99 .......................... 3,000
2,998,475
Total .................................
4,577,475
Food and Kindred Products - 1.40%
General Mills, Inc.,
5.4883%, Master Note .................. 6,543
6,543,000
Ralston Purina Co.,
5.5%, 1-4-99 .......................... 5,000
4,997,708
Total .................................
11,540,708
Food Stores - 0.85%
Albertson's Inc.,
5.9%, 1-8-99 .......................... 7,000
6,991,969
Nondepository Institutions - 3.02%
General Electric Capital Corporation,
5.46%, 2-3-99 ......................... 14,000
13,929,930
Island Finance Puerto Rico Inc.,
5.4%, 1-29-99 ......................... 11,000
10,953,800
Total .................................
24,883,730
Paper and Allied Products - 0.80%
Sonoco Products Co.,
5.16%, 1-19-99 ........................ 6,600
6,582,972
Primary Metal Industries - 1.14%
Aluminum Company of America,
5.12%, 1-15-99 ........................ 9,400
9,381,284
Textile Mill Products - 0.01%
Sara Lee Corporation,
5.4788%, Master Note .................. 44
44,000
TOTAL SHORT-TERM SECURITIES - 14.90%
$122,902,103
(Cost: $122,902,103)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
Value
TOTAL INVESTMENT SECURITIES - 99.92%
$824,475,111
(Cost: $589,545,949)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.08%
640,133
NET ASSETS - 100.00%
$825,115,244
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Apparel and Accessory Stores - 0.72%
Gap, Inc. (The) ........................ 103,350 $
5,813,437
Building Materials and Garden Supplies - 0.74%
Home Depot, Inc. (The) ................. 98,600
6,033,087
Business Services - 2.32%
BMC Software, Inc.* .................... 158,300
7,059,191
Microsoft Corporation* ................. 85,100
11,789,009
Total .................................
18,848,200
Chemicals and Allied Products - 12.05%
Air Products and Chemicals, Inc. ....... 101,900
4,076,000
Bristol-Myers Squibb Company ........... 35,300
4,723,581
Colgate-Palmolive Company .............. 57,200
5,312,450
du Pont (E.I.) de Nemours and Company .. 114,300
6,065,044
Gillette Company (The) ................. 125,822
6,078,776
Lilly (Eli) and Company ................ 116,200
10,327,275
Merck & Co., Inc. ...................... 32,000
4,726,000
Monsanto Company ....................... 205,900
9,780,250
Novartis, AG (A) ....................... 3,850
7,568,256
PPG Industries, Inc. ................... 48,300
2,813,475
Pfizer Inc. ............................ 90,300
11,327,006
Procter & Gamble Company (The) ......... 56,500
5,159,156
Warner-Lambert Company ................. 263,400
19,804,388
Total .................................
97,761,657
Communication - 4.73%
AT&T Corporation ....................... 24,800
1,866,200
AirTouch Communications* ............... 86,600
6,246,025
Cox Communications, Inc., Class A* ..... 214,000
14,792,750
MCI WORLDCOM, Inc.* .................... 99,100
7,113,522
SBC Communications Inc. ................ 156,000
8,365,500
Total .................................
38,383,997
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Depository Institutions - 2.57%
BankAmerica Corporation ................ 49,677 $
2,986,830
Chase Manhattan Corporation (The) ...... 96,600
6,574,838
U. S. Bancorp. ......................... 212,000
7,526,000
Wells Fargo & Company .................. 94,600
3,778,087
Total .................................
20,865,755
Electric, Gas and Sanitary Services - 4.06%
Consolidated Edison, Inc. .............. 86,200
4,557,825
Duke Energy Corp. ...................... 120,600
7,725,938
Republic Services, Inc., Class A* ...... 266,700
4,917,281
Texas Utilities Company ................ 338,000
15,780,375
Total .................................
32,981,419
Electronic and Other Electric Equipment - 6.81%
Analog Devices, Inc.* .................. 160,100
5,023,138
General Electric Company ............... 151,800
15,493,088
General Instrument Corporation* ........ 216,200
7,337,287
Intel Corporation ...................... 119,600
14,176,337
Maytag Corporation ..................... 98,000
6,100,500
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 296,600
7,090,594
Total .................................
55,220,944
Fabricated Metal Products - 0.52%
Newell Co. ............................. 101,900
4,203,375
Food and Kindred Products - 1.76%
Bestfoods .............................. 131,800
7,018,350
Coca-Cola Company (The) ................ 68,100
4,554,187
Panamerican Beverages Inc., Class A .... 122,800
2,678,575
Total .................................
14,251,112
Food Stores - 1.26%
Kroger Co. (The)* ...................... 169,300
10,242,650
Furniture and Fixtures - 0.30%
Lear Corporation* ...................... 63,700
2,452,450
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
General Merchandise Stores - 2.96%
Dayton Hudson Corporation .............. 151,800 $
8,235,150
Wal-Mart Stores, Inc. .................. 194,000
15,798,875
Total .................................
24,034,025
Health Services - 1.56%
Tenet Healthcare Corporation* .......... 481,000
12,626,250
Industrial Machinery and Equipment - 3.11%
Case Corporation ....................... 146,200
3,188,988
Cisco Systems, Inc.* ................... 95,850
8,899,073
Deere & Company ........................ 93,200
3,087,250
International Business Machines
Corporation ........................... 54,400
10,050,400
Total .................................
25,225,711
Instruments and Related Products - 2.78%
General Motors Corporation, Class H* ... 73,900
2,932,906
Guidant Corporation .................... 111,600
12,303,900
Medtronic, Inc. ........................ 68,600
5,093,550
Raytheon Company, Class A .............. 42,753
2,209,796
Total .................................
22,540,152
Insurance Carriers - 2.11%
American International Group, Inc. .... 89,700
8,667,263
Chubb Corporation (The) ................ 12,500
810,937
Citigroup Inc. ......................... 155,100
7,677,450
Total ..................................
17,155,650
Miscellaneous Manufacturing Industries - 0.45%
Tyco International Ltd. ................ 48,000
3,621,000
Miscellaneous Retail - 0.66%
Costco Companies, Inc.* ................ 74,400
5,382,375
Motion Pictures - 1.72%
Time Warner Incorporated ............... 190,000
11,791,875
Walt Disney Company (The) .............. 71,700
2,151,000
Total .................................
13,942,875
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Nondepository Institutions - 5.41%
Associates First Capital Corporation,
Class A ............................... 146,220 $
6,196,072
Fannie Mae ............................. 288,900
21,378,600
Freddie Mac ............................ 253,600
16,341,350
Total .................................
43,916,022
Oil and Gas Extraction - 1.22%
Burlington Resources Incorporated ...... 275,600
9,869,925
Paper and Allied Products - 0.64%
International Paper Company ............ 55,600
2,491,575
Willamette Industries, Inc. ............ 81,200
2,720,200
Total .................................
5,211,775
Petroleum and Coal Products - 2.28%
Chevron Corporation .................... 44,000
3,649,250
Exxon Corporation ...................... 48,100
3,517,312
Mobil Corporation ...................... 72,200
6,290,425
Royal Dutch Petroleum Company .......... 104,800
5,017,300
Total .................................
18,474,287
Primary Metal Industries - 0.51%
Aluminum Company of America ............ 56,000
4,175,500
Railroad Transportation - 0.38%
Burlington Northern Santa Fe Corporation 92,100
3,108,375
Rubber and Miscellaneous Plastics Products - 0.15%
Goodyear Tire & Rubber Company (The) ... 23,900
1,205,456
Television Broadcasting Stations - 1.12%
Clear Channel Communications, Inc.* .... 166,700
9,085,150
Transportation By Air - 0.48%
AMR Corporation* ....................... 65,200
3,871,250
Transportation Equipment - 4.25%
DaimlerChrysler AG* .................... 69,894
6,714,192
Dana Corporation ....................... 62,000
2,534,250
Ford Motor Company ..................... 98,100
5,757,244
Lockheed Martin Corporation ............ 162,100
13,737,975
Northrop Grumman Corporation ........... 78,300
5,725,688
Total .................................
34,469,349
Wholesale Trade - Durable Goods - 0.49%
Johnson & Johnson ...................... 47,300
3,967,288
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Wholesale Trade - Nondurable Goods - 1.48%
Safeway Inc.* .......................... 196,400 $
11,968,125
TOTAL COMMON STOCKS - 71.60%
$580,908,623
(Cost: $340,961,656)
Principal
Amount in
Thousands
Value
UNITED STATES GOVERNMENT SECURITY - 17.03%
United States Treasury,
5.5%, 8-15-2028 ....................... $132,000
$138,167,040
(Cost: $136,656,799)
SHORT-TERM SECURITIES
Commercial Paper
Electric, Gas and Sanitary Services - 4.41%
Bay State Gas Co.:
5.32%, 1-13-99 ........................ 9,389
9,372,350
5.45%, 1-19-99 ........................ 8,500
8,476,838
PS Colorado Credit Corp.,
6.0%, 1-15-99 ......................... 2,000
1,995,333
Public Service Co. of Colorado,
5.85%, 1-15-99 ........................ 6,000
5,986,350
Questar Corp.,
5.15%, 1-26-99 ........................ 10,000
9,964,236
Total .................................
35,795,107
Engineering and Management Services - 0.21%
Halliburton Co.,
5.4%, 1-15-99 ......................... 1,700
1,696,430
Fabricated Metal Products - 1.29%
Danaher Corporation,
5.6288%, Master Note .................. 10,482
10,482,000
Food and Kindred Products - 0.07%
General Mills, Inc.,
5.4838%, Master Note .................. 567
567,000
Industrial Machinery and Equipment - 2.46%
Deere & Company,
5.53%, 1-8-99 ......................... 20,000
19,978,494
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Nondepository Institutions - 0.86%
Associates Corporation of North America,
5.35%, 1-20-99 ........................ $ 7,000 $
6,980,235
Petroleum and Coal Products - 0.12%
Kerr-McGee Credit Corp.,
6.05%, 1-19-99 ........................ 1,000
996,975
Textile Mill Products - 0.08%
Sara Lee Corporation,
5.4788%, Master Note .................. 615
615,000
Wholesale Trade -- Nondurable Goods - 0.25%
McKesson Corp.,
6.05%, 1-5-99 ......................... 2,000
1,998,656
Total Commercial Paper - 9.75%
79,109,897
Municipal Obligation - 1.23%
California
California Pollution Control Financing Authority,
Environmental Improvement Revenue Bonds,
(Shell Martinez Refining Company Project),
Series 1996 (Taxable), (Shell Oil Company),
5.25%, 2-8-99 ......................... 10,000
10,000,000
TOTAL SHORT-TERM SECURITIES - 10.98% $
89,109,897
(Cost: $89,109,897)
TOTAL INVESTMENT SECURITIES - 99.61%
$808,185,560
(Cost: $566,728,352)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.39%
3,148,081
NET ASSETS - 100.00%
$811,333,641
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Building Materials and Garden Supplies - 1.53%
Fastenal Company ....................... 12,000 $
527,625
Business Services - 39.42%
Amazon.com, Inc.* ...................... 1,500
481,828
America Online, Inc.* .................. 10,000
1,600,000
BMC Software, Inc.* .................... 12,000
535,125
BroadVision, Inc.* ..................... 13,000
420,469
Cerner Corporation* .................... 24,000
643,500
Citrix Systems, Inc.* .................. 9,000
873,281
eBay Inc.* ............................. 2,000
482,750
Fiserv, Inc.* .......................... 13,000
668,281
HNC Software Inc.* ..................... 15,000
606,563
IDX Systems Corporation* ............... 4,000
176,250
Inktomi Corporation* ................... 4,000
519,875
Intuit Inc.* ........................... 10,000
725,000
Macromedia, Inc.* ...................... 20,000
673,125
MemberWorks Incorporated* .............. 20,000
591,250
Networks Associates, Inc.* ............. 10,000
663,437
Parametric Technology Corporation* ..... 20,000
325,000
TMP Worldwide Inc.* .................... 12,000
510,750
Transaction Systems Architects, Inc.,
Class A* .............................. 10,000
503,125
Visio Corporation* ..................... 20,000
725,625
Wind River Systems, Inc.* .............. 13,000
610,188
Yahoo! Inc.* ........................... 5,500
1,302,984
Total .................................
13,638,406
Communication - 6.45%
AirTouch Communications* ............... 5,000
360,625
COLT Telecom Group plc, ADR* ........... 8,000
480,500
Cox Communications, Inc., Class A* ..... 3,700
255,762
Intermedia Communications of Florida,
Inc.* ................................. 30,000
519,375
MGC Communications, Inc.* .............. 21,000
146,344
MediaOne Group, Inc.* .................. 10,000
470,000
Total .................................
2,232,606
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 11.31%
Advanced Fibre Communications, Inc.* ... 20,000 $
218,750
Ascend Communications, Inc.* ........... 12,000
789,375
Broadcom Corporation, Class A* ......... 7,000
844,375
Concord Communications, Inc.* .......... 10,000
572,500
Gemstar International Group Limited* ... 10,000
572,187
Micron Technology, Inc.* ............... 10,000
505,625
Tellabs* ............................... 6,000
411,375
Total .................................
3,914,187
Engineering and Management Services - 7.85%
Abacus Direct Corporation* ............. 8,000
366,250
Incyte Pharmaceuticals, Inc.* .......... 20,000
746,250
MAXIMUS, Inc.* ......................... 15,000
555,000
Paychex, Inc. .......................... 10,000
514,688
Quintiles Transnational Corp.* ......... 10,000
533,437
Total .................................
2,715,625
Food and Kindred Products - 2.06%
American Italian Pasta Company, Class A* 27,000
712,125
Furniture and Fixtures - 0.78%
Lear Corporation* ...................... 7,000
269,500
Health Services - 0.58%
American Healthcorp, Inc.* ............. 20,000
199,375
Instruments and Related Products - 3.48%
Bionx Implants, Inc.* .................. 20,000
168,125
STERIS Corporation* .................... 12,000
341,250
Uniphase Corporation* .................. 10,000
694,375
Total .................................
1,203,750
Printing and Publishing - 1.33%
IDG Books Worldwide, Inc., Class A* .... 27,000
460,688
Television Broadcasting Stations - 1.58%
Clear Channel Communications, Inc.* .... 10,000
545,000
Wholesale Trade -- Durable Goods - 1.00%
OmniCare, Inc. ......................... 10,000
347,500
Wholesale Trade -- Nondurable Goods - 1.32%
Cardinal Health, Inc. .................. 6,000
455,250
TOTAL COMMON STOCKS - 78.69%
$27,221,637
(Cost: $19,032,900)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
SHORT-TERM SECURITIES
Commercial Paper
Electronic and Other Electric Equipment - 2.89%
Lucent Technologies Inc.,
5.25%, 1-14-99 ........................ $ 1,000 $
998,104
Fabricated Metal Products - 3.99%
Danaher Corporation,
5.6288%, Master Note .................. 1,381
1,381,000
Food and Kindred Products - 2.53%
General Mills, Inc.,
5.4838%, Master Note .................. 877
877,000
Paper and Allied Products - 2.88%
Sonoco Products Co.,
5.16%, 1-19-99 ........................ 1,000
997,420
Textile Mill Products - 4.61%
Sara Lee Corporation,
5.4788%, Master Note .................. 1,594
1,594,000
Wholesale Trade -- Nondurable Goods - 4.33%
McKesson Corp.,
6.05%, 1-5-99 ......................... 1,500
1,498,992
TOTAL SHORT-TERM SECURITIES - 21.23% $
7,346,516
(Cost: $7,346,516)
TOTAL INVESTMENT SECURITIES - 99.92%
$34,568,153
(Cost: $26,379,416)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.08%
27,252
NET ASSETS - 100.00%
$34,595,405
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Brazil - 0.13%
CompanLia de Saneamento Desico do
Estado De Sao Paulo (A)* .............. 3,000,000 $
227,179
China - 0.17%
Jinpan International Limited* .......... 93,000
279,000
Denmark - 0.79%
Neurosearch A/S (A)* ................... 20,000
1,329,029
Finland - 2.07%
Sonera Group plc (A)* .................. 178,000
3,164,945
Sponda Oyj (A)* ........................ 56,600
332,106
Total .................................
3,497,051
France - 9.49%
AXA-UAP (A) ............................ 26,700
3,869,081
Etablissements Economiques du Casino
Guichard-Parrachon SA (A) ............. 16,750
1,744,011
Generale de Geophysique S.A. (A)* ...... 8,000
466,143
Lagardere SCA (A) ...................... 29,000
1,232,177
Societe Industrielle de Transports
Automobiles S.A. (A) .................. 4,375
1,146,640
Suez Lyonnaise des Eaux (A) ............ 23,000
4,723,688
VIVENDI (A) ............................ 11,000
2,853,463
Total .................................
16,035,203
Germany - 9.32%
Altana AG (A) .......................... 9,000
701,986
Bayerische Hypotheken- und
Weschel-Bank AG (A) ................... 21,000
1,644,267
Deutsche Bank AG, Ordinary Shares (A) .. 36,000
2,117,838
Deutsche Prandbrief- und
Hypothekenbank AG (A) ................. 18,725
1,640,277
Mannesmann AG (A) ...................... 37,000
4,240,115
MobilCom AG (A) ........................ 4,255
1,354,339
Rhoen-Klinikum AG (A) .................. 16,600
1,648,347
Volkswagen AG (A) ...................... 30,000
2,393,952
Total .................................
15,741,121
Greece - 0.64%
PANAFON, S.A. (A) ...................... 40,650
1,088,645
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Italy - 4.96%
CSP International Industria
Calze S.p.A. (A) ...................... 50,000 $
334,341
Instituto Nazionale delle
Assicurazioni (A)* .................... 245,000
646,569
Istituto Bancario San Paolo di Torino -
Istituto Mobiliare Italiano S.p.A. (A) 97,500
1,721,282
Olivetti S.p.A. (A)* ................... 1,000,000
3,476,421
Telecom Italia Mobile S.p.A., Risp (A) . 350,000
2,200,725
Total .................................
8,379,338
Japan - 2.76%
Matsushita Communication Industrial
Co., Ltd. (A) ......................... 34,000
1,604,711
Olympus Optical Co., Ltd. (A) .......... 140,000
1,610,378
Sankyo Co., Ltd. (A) ................... 66,000
1,443,549
Total .................................
4,658,638
Mexico - 0.35%
Grupo Financiero Banamex Accival,
S.A. de C.V., B, CPO shares (A)* ...... 450,000
589,702
Netherlands - 5.48%
Athlon Groep N.V. (A) .................. 13,000
386,810
Benckiser N.V., Class B (A) ............. 30,000
1,964,124
Content Beheer N.V. (A) ................ 50,000
854,314
EQUANT N.V. (A)* ....................... 24,750
1,721,966
Ordina N.V. (A)* ....................... 84,240
2,246,460
Smit Internationale N.V. (A) ........... 43,166
948,930
Unique International NV (A) ............ 50,000
1,144,408
Total .................................
9,267,012
Norway - 1.79%
Merkantildata ASA (A) .................. 305,000
3,023,914
Portugal - 2.49%
Banco Portugues do Atlantico, S.A. (A)* 45,900
940,278
Portugal Telecom, S.A., ADS ............ 27,500
1,227,188
Telecel-Comunicacaoes Pessoais, SA (A) . 10,000
2,043,266
Total .................................
4,210,732
Spain - 3.48%
Superdiplo, S.A. (A)* .................. 48,950
1,375,987
Tele Pizza, S.A. (A)* .................. 250,000
2,374,754
Telefonica de Espana, S.A. (A) ......... 47,818
2,123,924
Total .................................
5,874,665
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Sweden - 0.25%
Biacore International AB, ADR* ......... 15,550 $
157,444
Biora AB, ADR* ......................... 20,000
270,000
Total .................................
427,444
Switzerland - 8.22%
Choco Lindt & Spru AG, Registered (A) .. 50
1,310,520
Credit Suisse Group, Registered Shares (A) 9,000
1,408,810
Julius Baer Holding AG (A) ............. 400
1,329,450
Novartis, AG (A) ....................... 3,840
7,548,598
Swisslog Holding AG, Registered Shares (A) 24,250
2,295,231
Total .................................
13,892,609
United Kingdom - 26.79%
Barclays PLC (A) ....................... 36,000
781,042
British Aerospace Public Limited
Company (A) ........................... 180,000
1,535,153
COLT Telecom Group plc, ADR* ........... 150,000
9,009,375
Corporate Services Group plc (A) ....... 575,000
1,455,415
Diageo plc (A) ......................... 136,000
1,544,263
Energis plc (A)* ....................... 216,750
4,828,648
Freepages Group plc (A)* ............... 2,000,000
648,375
General Electric Company plc (A) ........ 183,235
1,660,224
Hays plc (A) ........................... 229,528
2,022,429
Independent Energy Holdings plc, ADS* .. 225,000
2,032,031
Lloyds TSB Group plc (A) ............... 55,000
783,619
Misys plc (A) .......................... 388,470
2,835,200
Newsquest plc (A) ...................... 230,000
934,907
Orange plc (A)* ........................ 150,000
1,745,625
Select Appointments (Holdings)
Public Limited Company (A) ............ 90,000
927,675
Sema Group plc (A) ..................... 180,600
1,774,463
Siebe plc (A) .......................... 450,000
1,773,056
Stagecoach Holdings plc (A) ............ 375,000
1,502,484
Telewest Communications plc (A)* ....... 670,000
1,927,004
Tesco PLC (A) .......................... 493,000
1,434,322
Vodafone Group Plc (A) ................. 252,738
4,109,330
Total .................................
45,264,640
United States - 0.74%
ESG Re Limited ......................... 61,000
1,246,688
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
Shares
Value
TOTAL COMMON STOCKS - 79.92% $
135,032,610
(Cost: $101,422,333)
PREFERRED STOCKS
Germany - 8.04%
Fresenius Medical Care AG (A) .......... 5,000
1,052,979
GEA AG (A) ............................. 50,000
1,199,976
Henkel AG (A) .......................... 40,400
3,611,688
Marschollek, Lautenschlager und
Partner AG (A) ........................ 10,000
5,699,886
Moebel Walther AG (A) .................. 20,000
683,986
ProSieben Media AG (A) ................. 29,000
1,339,773
Total .................................
13,588,288
Portugal - 1.03%
Lusomundo-SGPS, S.A. (A) ............... 150,000
1,738,825
TOTAL PREFERRED STOCKS - 9.07%
$15,327,113
(Cost: $10,015,222)
Principal
Amount in
Thousands
UNITED STATES GOVERNMENT SECURITY - 3.72%
United States Treasury,
7.25%, 8-15-2022 ...................... $5,050 $
6,285,684
(Cost: $6,255,811)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 0.23%
Danaher Corporation,
5.6288%, Master Note .................. 392
392,000
Food and Kindred Products - 3.42%
General Mills, Inc.,
5.4838%, Master Note .................. 5,771
5,771,000
Nondepository Institutions - 3.49%
Textron Inc.,
6.47%, 1-6-99 ......................... 5,900
5,894,698
Textile Mill Products - 1.85%
Sara Lee Corporation,
5.4788%, Master Note .................. 3,127
3,127,000
TOTAL SHORT-TERM SECURITIES - 8.99% $
15,184,698
(Cost: $15,184,698)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
Value
TOTAL INVESTMENT SECURITIES - 101.70%
$171,830,105
(Cost: $132,878,064)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.70%)
(2,868,664)
NET ASSETS - 100.00%
$168,961,441
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Business Services - 17.91%
Cerner Corporation* .................... 215,000 $
5,764,687
Concur Technologies, Inc.* ............. 30,000
906,562
ENVOY Corporation* ..................... 75,000
4,387,500
Freepages Group plc (A)* ............... 4,500,000
1,458,844
Fundtech Ltd.* ......................... 185,000
3,850,313
Inktomi Corporation* ................... 18,000
2,339,437
Lamar Advertising Company* ............. 50,000
1,875,000
National Data Corporation .............. 60,000
2,921,250
Shared Medical Systems Corporation ..... 75,000
3,740,625
Sunquest Information Systems, Inc.* .... 176,100
2,454,394
Verity, Inc.* .......................... 100,000
2,646,875
Total .................................
32,345,487
Chemicals and Allied Products - 5.22%
Genzyme Corporation - General Division* 80,000
3,977,500
PAREXEL International Corporation* ..... 60,000
1,494,375
SangStat Medical Corporation* .......... 100,000
2,137,500
Spiros Development Corporation II,
Inc., Units (B)* ...................... 200,000
1,812,500
Total .................................
9,421,875
Communication - 8.59%
Exodus Communications, Inc.* ........... 100,000
6,456,250
Intermedia Communications of
Florida, Inc.* ........................ 150,000
2,596,875
TCA Cable TV, Inc. ..................... 95,000
3,387,344
Western Wireless Corporation,
Class A* .............................. 140,000
3,075,625
Total .................................
15,516,094
Eating and Drinking Places - 0.84%
Fresh Foods, Inc.* ..................... 316,000
1,520,750
Electric, Gas and Sanitary Services - 4.33%
Allied Waste Industries, Inc., New* .... 185,000
4,370,625
Waste Industries, Inc.* ................ 200,000
3,443,750
Total .................................
7,814,375
Electronic and Other Electric Equipment - 1.52%
Coyote Network Systems, Inc.* .......... 144,000
1,080,000
Terayon Communications Systems* ........ 45,000
1,659,375
Total .................................
2,739,375
Engineering and Management Services - 2.30%
Cornell Corrections, Inc.* ............. 140,000
2,660,000
Incyte Pharmaceuticals, Inc.* .......... 11,600
432,825
Quintiles Transnational Corp.* ......... 20,000
1,066,875
Total .................................
4,159,700
Fabricated Metal Products - 0.72%
Mark IV Industries, Inc. ............... 100,000
1,300,000
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Health Services - 7.31%
American Retirement Corporation* ....... 217,500 $
3,412,031
Centennial HealthCare Corporation* ..... 246,000
3,797,625
Quorum Health Group, Inc.* ............. 220,000
2,839,375
Sierra Health Services, Inc.* .......... 150,000
3,159,375
Total .................................
13,208,406
Industrial Machinery and Equipment - 0.96%
Micron Electronics, Inc.* .............. 100,000
1,728,125
Instruments and Related Products - 8.31%
ADAC Laboratories* ..................... 100,000
1,996,875
Maxxim Medical, Inc.* .................. 175,000
5,206,250
Sabratek Corporation* .................. 100,000
1,631,250
St. Jude Medical, Inc.* ................ 120,000
3,322,500
STERIS Corporation* .................... 100,000
2,843,750
Total .................................
15,000,625
Insurance Carriers - 2.53%
Annuity and Life Re (Holdings) Ltd. .... 75,000
2,006,250
ESG Re Limited ......................... 125,000
2,554,688
Total .................................
4,560,938
Oil and Gas Extraction - 0.92%
Newfield Exploration Company* .......... 80,000
1,670,000
Paper and Allied Products - 2.18%
IVEX Packaging Corporation* ............ 169,000
3,929,250
Personal Services - 1.12%
Loewen Group Inc. (The) ................ 240,000
2,025,000
Real Estate - 1.99%
ElderTrust ............................. 312,000
3,588,000
Social Services - 2.22%
Balanced Care Corporation* ............. 500,000
4,000,000
TOTAL COMMON STOCKS - 68.97%
$124,528,000
(Cost: $120,877,880)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
SHORT-TERM SECURITIES
Commercial Paper
Auto Repair, Services and Parking - 1.78%
PHH Corp.,
6.1%, 1-15-99 ......................... $3,220 $
3,212,361
Chemicals and Allied Products - 4.42%
du Pont (E.I.) de Nemours and Company,
5.13%, 1-12-99 ........................ 8,000
7,987,460
Electric, Gas and Sanitary Services - 4.98%
Public Service Co. of Colorado,
5.9%, 1-15-99 ......................... 4,000
3,990,822
Puget Sound Energy Inc.,
5.9%, 1-13-99 ......................... 5,000
4,990,167
Total .................................
8,980,989
Electronic and Other Electric Equipment - 6.08%
Lucent Technologies Inc.,
5.55%, 1-14-99 ........................ 6,000
5,987,975
Sony Capital Corp.,
5.75%, 1-14-99 ........................ 5,000
4,989,618
Total .................................
10,977,593
Fabricated Metal Products - 1.68%
Danaher Corporation,
5.6288%, Master Note .................. 3,030
3,030,000
Food and Kindred Products - 10.57%
General Mills, Inc.,
5.48838%, Master Note ................. 7,098
7,098,000
Ralston Purina Co.:
5.5%, 1-4-99 .......................... 5,000
4,997,708
6.05%, 1-5-99 ......................... 7,000
6,995,295
Total .................................
19,091,003
Nondepository Institutions - 1.10%
Island Finance Puerto Rico Inc.,
5.38%, 2-5-99 ......................... 2,000
1,989,539
Personal Services - 2.49%
Block Financial Corp.,
5.2%, 1-28-99 ......................... 4,520
4,502,372
Textile Mill Products - 0.27%
Sara Lee Corporation,
5.4788%, Master Note .................. 489
489,000
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
Value
TOTAL SHORT-TERM SECURITIES - 33.37% $
60,260,317
(Cost: $60,260,317)
TOTAL INVESTMENT SECURITIES - 102.34%
$184,788,317
(Cost: $181,138,197)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (2.34%)
(4,219,491)
NET ASSETS - 100.00%
$180,568,826
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Apparel And Accessory Stores - 0.53%
Kohl's Corporation* .................... 8,000 $
491,500
Business Services - 0.95%
BMC Software, Inc.* .................... 19,600
874,037
Chemicals and Allied Products - 6.19%
Crompton & Knowles Corporation ......... 14,300
295,831
Dial Corporation (The) ................. 11,900
343,612
Lilly (Eli) and Company ................ 9,500
844,312
Neutraceutical International
Corporation* .......................... 9,000
53,156
Novartis, AG (A) ....................... 470
923,917
Pfizer Inc. ............................ 11,000
1,379,813
Procter & Gamble Company (The) ......... 7,100
648,319
Warner-Lambert Company ................. 16,200
1,218,037
Total .................................
5,706,997
Communication - 3.73%
AT&T Corporation ....................... 20,000
1,505,000
Cox Communications, Inc., Class A* ..... 12,000
829,500
SBC Communications Inc. ................ 20,600
1,104,675
Total .................................
3,439,175
Depository Institutions - 1.18%
BankAmerica Corporation ................ 6,789
408,189
Comerica Incorporated .................. 10,000
681,875
Total .................................
1,090,064
Electric, Gas and Sanitary Services - 1.83%
Houston Industries Incorporated ........ 12,000
385,500
Southern Company (The) ................. 13,000
377,812
Unicom Corporation ..................... 24,000
925,500
Total .................................
1,688,812
Electronic and Other Electric Equipment - 3.92%
Analog Devices, Inc.* .................. 11,800
370,225
Emerson Electric Co. ................... 10,000
605,000
General Electric Company ............... 7,000
714,438
Intel Corporation ...................... 9,000
1,066,781
Texas Instruments Incorporated ......... 10,000
855,625
Total .................................
3,612,069
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Fabricated Metal Products - 0.54%
Newell Co. ............................. 12,000 $
495,000
Food and Kindred Products - 1.03%
ConAgra, Inc. .......................... 11,800
371,700
Ralston-Ralston Purina Group ........... 18,000
582,750
Total .................................
954,450
General Merchandise Stores - 1.32%
Wal-Mart Stores, Inc. .................. 15,000
1,221,562
Health Services - 1.50%
Columbia/HCA Healthcare Corporation .... 35,000
866,250
Tenet Healthcare Corporation* .......... 19,600
514,500
Total .................................
1,380,750
Holding and Other Investment Offices - 1.10%
LTC Properties, Inc. ................... 43,000
714,875
National Health Investors, Inc. ........ 12,000
296,250
Total .................................
1,011,125
Industrial Machinery and Equipment - 1.83%
Baker Hughes Incorporated .............. 17,500
309,531
EMC Corporation* ....................... 16,200
1,377,000
Total .................................
1,686,531
Instruments and Related Products - 0.81%
Medtronic, Inc. ........................ 10,000
742,500
Insurance Carriers - 2.30%
Chubb Corporation (The) ................ 9,200
596,850
Hartford Financial Services Group Inc. (The) 8,200
449,975
Mercury General Corporation ............ 13,000
569,563
Old Republic International Corporation . 22,500
506,250
Total .................................
2,122,638
Miscellaneous Retail - 1.18%
Costco Companies, Inc.* ................ 15,000
1,085,156
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Nondepository Institutions - 2.06%
Freddie Mac ............................ 18,400 $
1,185,650
Household International, Inc. .......... 18,000
713,250
Total .................................
1,898,900
Oil and Gas Extraction - 1.10%
Burlington Resources Incorporated ...... 22,600
809,363
Enron Oil & Gas Company ................ 12,000
207,000
Total .................................
1,016,363
Paper and Allied Products - 0.47%
Champion International Corporation ..... 10,800
437,400
Petroleum and Coal Products - 2.23%
BP Amoco p.l.c. ........................ 5,080
482,600
Mobil Corporation ...................... 9,600
836,400
Royal Dutch Petroleum Company .......... 15,400
737,275
Total .................................
2,056,275
Primary Metal Industries - 0.27%
British Steel plc, ADR ................. 17,000
248,625
Printing and Publishing - 2.00%
Gannett Co., Inc. ...................... 5,500
354,750
McGraw-Hill Companies, Inc. (The) ...... 5,200
529,750
Meredith Corporation ................... 15,000
568,125
New York Times Company (The), Class A .. 11,400
395,438
Total .................................
1,848,063
Rubber and Miscellaneous Plastics Products - 1.19%
A. Schulman, Inc. ...................... 25,000
564,844
Goodyear Tire & Rubber Company (The) ... 10,500
529,594
Total .................................
1,094,438
Television Broadcasting Stations - 1.00%
Clear Channel Communications, Inc.* .... 17,000
926,500
TOTAL COMMON STOCKS - 40.26%
$37,128,930
(Cost: $28,372,511)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES
Apparel And Accessory Stores - 2.98%
Gap, Inc. (The),
6.9%, 9-15-2007 ....................... $ 2,500 $
2,748,125
Building Materials and Garden Supplies - 1.14%
Home Depot, Inc. (The), Convertible,
3.25%, 10-1-2001 ...................... 400
1,056,500
Chemicals and Allied Products - 0.31%
American Home Products Corporation,
7.9%, 2-15-2005 ....................... 250
282,510
Communication - 0.16%
Southwestern Bell Telephone Company,
5.77%, 10-14-2003 ..................... 150
151,983
Depository Institutions - 0.28%
Wachovia Corporation,
6.25%, 8-4-2008 ....................... 250
260,033
Electronic and Other Electric Equipment - 0.19%
Cooper Industries, Inc.,
6.0%, 1-1-99 (Exchangeable) ........... 243
173,812
Food and Kindred Products - 0.57%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-2036 ...................... 500
529,425
Miscellaneous Manufacturing Industries - 0.28%
Tyco International Group S.A.,
6.375%, 6-15-2005 ..................... 250
254,845
Nondepository Institutions - 1.10%
National Rural Utilities Cooperative
Finance Corp.,
6.1%, 12-22-2000 ...................... 1,000
1,014,900
Television Broadcasting Stations - 0.70%
Clear Channel Communications, Inc., Convertible,
2.625%, 4-1-2003 ...................... 600
642,750
Transportation by Air - 0.44%
Southwest Airlines Co.,
7.875%, 9-1-2007 ...................... 360
402,437
TOTAL CORPORATE DEBT SECURITIES - 8.15% $
7,517,320
(Cost: $6,693,766)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
6.51%, 5-6-2008 ....................... $ 750 $
775,778
6.19%, 7-7-2008 ....................... 500
509,920
7.0%, 9-1-2025 ........................ 2,913
2,971,604
Government National Mortgage Association,
6.5%, 8-15-2028 ....................... 1,505
1,519,894
United States Treasury:
5.5%, 2-28-99 ......................... 1,000
1,001,090
6.875%, 8-31-99 ....................... 250
253,515
7.75%, 11-30-99 ....................... 1,500
1,540,785
7.125%, 2-29-2000 ..................... 500
513,435
5.25%, 1-31-2001 ...................... 2,000
2,024,680
6.375%, 8-15-2002 ..................... 1,100
1,160,324
7.5%, 2-15-2005 ....................... 2,250
2,576,250
7.25%, 8-15-2022 ...................... 4,000
4,978,760
6.25%, 8-15-2023 ...................... 5,250
5,867,715
6.75%, 8-15-2026 ...................... 3,000
3,593,910
TOTAL UNITED STATES GOVERNMENT SECURITIES - 31.76% $
29,287,660
(Cost: $28,077,086)
SHORT-TERM SECURITIES
Commercial Paper
Chemicals and Allied Products - 3.25%
du Pont (E.I.) de Nemours and Company,
5.13%, 1-12-99 ........................ 3,000
2,995,298
Fabricated Metal Products - 2.44%
Danaher Corporation,
5.6288%, Master Note .................. 2,252
2,252,000
Food and Kindred Products - 0.71%
General Mills, Inc.,
5.4838%, Master Note .................. 649
649,000
Food Stores - 4.22%
Albertson's Inc.,
5.45%, 1-12-99 ........................ 3,900
3,893,505
Textile Mill Products - 2.16%
Sara Lee Corporation,
5.4788%, Master Note .................. 1,992
1,992,000
Transportation Equipment - 4.33%
Dana Corporation,
6.5%, 1-6-99 .......................... 4,000
3,996,389
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Wholesale Trade -- Nondurable Goods - 1.63%
McKesson Corp.,
6.05%, 1-5-99 ......................... $1,500 $
1,498,992
TOTAL SHORT-TERM SECURITIES - 18.74%
$17,277,184
(Cost: $17,277,184)
TOTAL INVESTMENT SECURITIES - 98.91%
$91,211,094
(Cost: $80,420,547)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.09%
1,008,994
NET ASSETS - 100.00%
$92,220,088
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS
Business Services - 0.78%
Cerner Corporation* .................... 4,100 $
109,931
Chemicals and Allied Products - 5.05%
Bristol-Myers Squibb Company ........... 1,400
187,338
Merck & Co., Inc. ...................... 1,000
147,687
Pfizer Inc. ............................ 900
112,894
Warner-Lambert Company ................. 3,500
263,156
Total .................................
711,075
Communication - 5.17%
Bell Atlantic Corporation .............. 3,300
174,900
Cox Communications, Inc., Class A* ..... 2,400
165,900
Intermedia Communications of
Florida, Inc.* ........................ 7,900
136,769
SBC Communications Inc. ................ 3,550
190,369
TCA Cable TV, Inc. ..................... 1,700
60,615
Total .................................
728,553
Eating and Drinking Places - 1.18%
Wendy's International, Inc. ............ 7,600
165,775
Electric, Gas and Sanitary Services - 6.28%
Allied Waste Industries, Inc. New* ..... 9,800
231,525
Consolidated Edison, Inc. .............. 2,600
137,475
DQE, Inc. .............................. 3,600
158,175
Montana Power Company (The) ............ 3,600
203,625
Texas Utilities Company ................ 3,300
154,069
Total .................................
884,869
Electronic and Other Electric Equipment - 3.66%
Analog Devices, Inc.* .................. 4,800
150,600
Gemstar International Group Limited* ... 1,100
62,940
Intel Corporation ...................... 1,400
165,944
Micron Technology, Inc.* ............... 2,700
136,519
Total .................................
516,003
Fabricated Metal Products - 0.50%
Newell Co. ............................. 1,700
70,125
Health Services - 0.58%
Tenet Healthcare Corporation* .......... 3,100
81,375
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS (Continued)
Industrial Machinery and Equipment - 1.39%
Baker Hughes Incorporated .............. 3,900 $
68,981
Cooper Cameron Corporation* ............ 2,600
63,700
Smith International, Inc.* ............. 2,500
62,969
Total .................................
195,650
Instruments and Related Products - 2.44%
Baxter International Inc. .............. 2,100
135,056
Guidant Corporation .................... 600
66,150
Medtronic, Inc. ........................ 800
59,400
Uniphase Corporation* .................. 1,200
83,325
Total .................................
343,931
Insurance Carriers - 0.92%
Chubb Corporation (The) ................ 2,000
129,750
Metal Mining - 1.44%
Barrick Gold Corporation ............... 3,550
69,225
Battle Mountain Gold Company ........... 12,300
50,737
Homestake Mining Company ............... 5,325
48,923
Kinross Gold Corporation (A)* ........... 15,000
34,597
Total .................................
203,482
Motion Pictures - 1.45%
Time Warner Incorporated ............... 3,300
204,806
Oil and Gas Extraction - 2.59%
Burlington Resources Incorporated ...... 4,300
153,994
Noble Affiliates, Inc. ................. 6,100
150,212
Schlumberger Limited ................... 1,300
59,963
Total .................................
364,169
Paper and Allied Products - 0.61%
IVEX Packaging Corporation* ............ 3,700
86,025
Real Estate - 0.69%
ElderTrust ............................. 8,500
97,750
Television Broadcasting Stations - 1.01%
Clear Channel Communications, Inc.* .... 2,600
141,700
Transportation Equipment - 1.09%
Newport News Shipbuilding Inc. ......... 4,600
153,813
Wholesale Trade - Durable Goods - 1.01%
Johnson & Johnson ...................... 1,700
142,588
TOTAL COMMON STOCKS - 37.84% $
5,331,370
(Cost: $4,930,233)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Banks:
6.2%, 2-27-2004 ....................... $ 200 $
200,014
6.225%, 2-27-2004 ..................... 200
199,438
6.02%, 3-30-2006 ...................... 200
198,250
Federal Home Loan Mortgage Corporation,
6.5%, 2-15-2023 ....................... 1,873
242,698
United States Treasury:
5.625%, 12-31-2002 .................... 3,350
3,461,488
5.875%, 11-15-2005 .................... 400
426,688
6.125%, 8-15-2007 ..................... 2,450
2,675,866
5.25%, 11-15-2028 ..................... 200
204,750
TOTAL UNITED STATES GOVERNMENT SECURITIES - 54.00% $
7,609,192
(Cost: $7,596,352)
SHORT-TERM SECURITIES
Commercial Paper
Fabricated Metal Products - 3.73%
Danaher Corporation,
5.6288%, Master Note .................. 525
525,000
Food and Kindred Products - 0.96%
General Mills, Inc.,
5.4838%, Master Note .................. 135
135,000
Textile Mill Products - 3.73%
Sara Lee Corporation,
5.4788%, Master Note .................. 526
526,000
TOTAL SHORT-TERM SECURITIES - 8.42% $
1,186,000
(Cost: $1,186,000)
TOTAL INVESTMENT SECURITIES - 100.26%
$14,126,562
(Cost: $13,712,585)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.26%)
(36,964)
NET ASSETS - 100.00%
$14,089,598
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
BANK OBLIGATIONS
Certificates of Deposit - 3.70%
Yankee
Societe Generale - New York,
5.55%, 2-9-99 ......................... $1,000 $
999,654
Svenska Handelsbanken,
5.79%, 5-7-99 ......................... 1,000
999,059
Total .................................
1,998,713
Commercial Paper - 2.77%
ANZ (DE) Inc.,
6.1%, 1-4-99 .......................... 1,500
1,499,237
Notes - 5.08%
Abbey National Treasury Services PLC,
5.64%, 7-15-99 ........................ 1,000
998,887
Shawmut National Corporation,
(Fleet Financial Group Inc.),
8.625%, 12-15-99 ...................... 1,690
1,744,804
Total .................................
2,743,691
TOTAL BANK OBLIGATIONS - 11.55% $
6,241,641
(Cost: $6,241,641)
CORPORATE OBLIGATIONS
Commercial Paper
Chemicals and Allied Products - 5.89%
du Pont (E.I.) de Nemours and Company,
5.13%, 1-12-99 ........................ 1,000
998,433
Monsanto Company,
5.09%, 3-5-99 ......................... 2,200
2,180,404
Total .................................
3,178,837
Electric, Gas and Sanitary Services - 16.51%
Allegheny Energy Inc.,
5.17%, 3-4-99 ......................... 2,000
1,982,192
Bay State Gas Co.,
5.32%, 1-13-99 ........................ 2,200
2,196,099
Central Illinois Light Co.,
5.22%, 1-12-99 ........................ 1,650
1,647,368
PacifiCorp.,
5.07%, 1-19-99 ........................ 800
797,972
Questar Corp.:
5.37%, 1-6-99 ......................... 1,100
1,099,180
5.2%, 1-12-99 ......................... 1,200
1,198,093
Total .................................
8,920,904
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
Engineering and Management Services - 4.25%
Halliburton Co.:
5.2%, 1-13-99 ......................... $1,000 $
998,267
5.4%, 1-15-99 ......................... 1,300
1,297,270
Total .................................
2,295,537
Fabricated Metal Products - 2.73%
Danaher Corporation,
5.6288%, Master Note .................. 1,477
1,477,000
Food and Kindred Products - 2.38%
General Mills, Inc.,
5.4838%, Master Note .................. 135
135,000
McCormick & Co. Inc.,
5.14%, 1-4-99 ......................... 1,150
1,149,507
Total .................................
1,284,507
Insurance Carriers - 3.69%
Transamerica Finance Corp.,
5.47%, 1-26-99 ........................ 2,000
1,992,403
Nondepository Institutions - 12.17%
Avco Financial Services, Inc.,
5.2%, 1-12-99 ......................... 1,000
998,411
General Electric Capital Corporation,
5.07%, 2-18-99 ........................ 1,200
1,191,888
General Motors Acceptance Corporation,
5.35%, 1-4-99 ......................... 2,200
2,199,019
Island Finance Puerto Rico Inc.,
5.1%, 2-16-99 ......................... 2,200
2,185,663
Total .................................
6,574,981
Oil and Gas Extraction - 4.22%
Atlantic Richfield Co.,
5.03%, 3-3-99 ......................... 2,300
2,280,397
Paper and Allied Products - 3.97%
Sonoco Products Co.,
5.16%, 1-19-99 ........................ 2,150
2,144,453
Personal Services - 3.67%
Block Financial Corp.,
5.13%, 2-26-99 ........................ 2,000
1,984,040
Total Commercial Paper - 59.48%
32,133,059
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (backed by irrevocable bank
letter of credit) - 2.77%
Oil and Gas Extraction
Louis Dreyfus Corp. (ABN-AMRO Bank N.V.),
5.8%, 1-15-99 ......................... $1,500 $
1,496,617
Notes
Auto Repair, Services and Parking - 2.78%
PHH Corporation,
4.86%, 3-11-99 ........................ 1,500
1,499,538
Electric, Gas and Sanitary Services - 3.70%
Baltimore Gas and Electric Company,
5.1812%, 3-1-99 ....................... 2,000
1,999,936
Nondepository Institutions - 3.71%
General Electric Capital Corporation,
5.0934%, 3-8-99 ....................... 1,000
999,788
Deere (John) Capital Corp.,
6.43%, 8-9-99 ......................... 1,000
1,004,294
Total .................................
2,004,082
Total Notes - 10.19%
5,503,556
TOTAL CORPORATE OBLIGATIONS - 72.44%
$39,133,232
(Cost: $39,133,232)
MUNICIPAL OBLIGATIONS
California - 4.63%
California Pollution Control Financing Authority,
Environmental Improvement Revenue Bonds
(Shell Martinez Refining Company Project),
Series 1996 (Taxable), (Shell Oil Company),
5.28%, 2-5-99 ......................... 2,000
2,000,000
Oakland-Alameda County Coliseum Authority,
Lease Revenue Bonds (Oakland Coliseum
Arena Project), (Canadian Imperial Bank
of Commerce),
5.35%, 2-5-99 ......................... 500
500,000
Total .................................
2,500,000
Indiana - 3.70%
City of Whiting, Indiana, Industrial Sewage
and Solid Waste Disposal Revenue Bonds, Taxable
Series 1995 (Amoco Oil Company Project),
5.23%, 3-8-99 ......................... 2,000
2,000,000
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
MUNICIPAL OBLIGATIONS (Continued)
New Jersey - 0.38%
New Jersey Economic Development Authority,
Federally Taxable Variable Rate Demand/
Fixed Rate Revenue Bonds (The Morey
Organization, Inc. Project), Series of 1997
(First Union National Bank),
6.05%, 1-6-99 ......................... $ 205 $
205,000
Pennsylvania - 3.13%
Schuylkill County Industrial Development
Authority, Commercial Development Revenue
Bonds (Midway Supermarket, Inc. Project),
Taxable Series of 1995 (First Union National Bank),
6.05%, 1-6-99 ......................... 1,490
1,490,000
Montgomery County Industrial Development
Authority, Taxable Fixed Rate/Variable
Rate Demand Revenue Bonds (410 Horsham
Associates Project), Series of 1995
(First Union National Bank),
6.05%, 1-6-99 ......................... 200
200,000
Total .................................
1,690,000
Texas - 1.84%
Metrocrest Hospital Authority, Series 1989A
(The Bank of New York),
5.2843%, 2-2-99........................ 1,000
995,303
TOTAL MUNICIPAL OBLIGATIONS - 13.68% $
7,390,303
(Cost: $7,390,303)
UNITED STATES GOVERNMENT SECURITY - 2.59%
Federal Farm Credit Bank,
5.24%, 9-29-99 ........................ $1,400 $
1,400,000
(Cost: $1,400,000)
TOTAL INVESTMENT SECURITIES - 100.26%
$54,165,176
(Cost: $54,165,176)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.26%)
(142,430)
NET ASSETS - 100.00%
$54,022,746
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES
Auto Repair, Services and Parking - 2.30%
Hertz Corporation (The),
7.375%, 6-15-2001 ..................... $100 $
103,794
Chemicals and Allied Products - 4.52%
American Home Products Corporation,
7.7%, 2-15-2000 ....................... 100
102,800
Praxair, Inc.,
6.7%, 4-15-2001 ....................... 100
101,514
Total .................................
204,314
Communication - 2.37%
GTE Corporation,
9.375%, 12-1-2000 ..................... 100
107,257
Depository Institutions - 4.76%
BankAmerica Corporation,
9.7%, 8-1-2000 ........................ 100
106,327
Wells Fargo & Company,
8.375%, 5-15-2002 ..................... 100
108,631
Total .................................
214,958
Electric, Gas and Sanitary Services - 7.33%
UtiliCorp United,
6.875%, 10-1-2004 ..................... 100
104,037
WMX Technologies, Inc.,
8.25%, 11-15-99 ....................... 100
102,068
Western Resources, Inc.,
7.25%, 8-15-2002 ...................... 120
125,214
Total .................................
331,319
Electronic and Other Electric Equipment - 2.35%
Black & Decker Corp.,
7.5%, 4-1-2003 ........................ 100
105,972
Furniture and Fixtures - 2.23%
Masco Corporation,
6.625%, 9-15-99 ....................... 100
100,803
Instruments and Related Products - 5.72%
Baxter International Inc.,
7.625%, 11-15-2002 .................... 100
106,811
Raytheon Company,
6.3%, 8-15-2000 ....................... 150
151,853
Total .................................
258,664
Insurance Carriers - 3.38%
American General Finance Corporation,
6.2%, 3-15-2003 ....................... 150
152,812
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 9.96%
Associates Corporation of North America,
8.25%, 12-1-99 ........................ $100 $
102,527
Avco Financial Services, Inc.,
7.375%, 8-15-2001 ..................... 140
146,437
Ford Motor Credit Company,
5.75%, 1-25-2001 ...................... 100
100,866
General Motors Acceptance Corporation,
7.75%, 1-15-99 ........................ 100
100,069
Total .................................
449,899
Oil and Gas Extraction - 2.63%
USX Corporation,
9.8%, 7-1-2001 ........................ 110
118,851
Petroleum and Coal Products - 2.20%
Chevron Corporation Profit Sharing/Savings
Plan Trust Fund,
8.11%, 12-1-2004 ...................... 92
99,630
Railroad Transportation - 2.33%
Union Pacific Corporation,
7.875%, 2-15-2002 ..................... 100
105,481
Security and Commodity Brokers - 2.28%
Salomon Inc.,
7.75%, 5-15-2000 ...................... 100
102,927
Textile Mill Products - 2.22%
Fruit of the Loom, Inc.,
7.875%, 10-15-99 ...................... 100
100,228
Wholesale Trade -- Durable Goods - 2.36%
Westinghouse Electric Corporation,
8.875%, 6-1-2001 ...................... 100
106,497
TOTAL CORPORATE DEBT SECURITIES - 58.94%
$2,663,406
(Cost: $2,618,466)
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
5.33%, 10-8-2002 ...................... $150 $
148,641
7.0%, 5-15-2005 ....................... 86
86,534
6.05%, 9-15-2020 ...................... 151
151,366
Federal National Mortgage Association:
6.0%, 11-1-2000 ....................... 43
42,983
6.4%, 12-27-2004 ...................... 155
157,350
7.95%, 3-7-2005 ....................... 100
103,156
6.21%, 8-15-2005 ...................... 100
100,344
7.5%, 11-15-2006 ...................... 100
101,812
6.5%, 12-1-2010 ....................... 76
76,773
6.0%, 1-1-2011 ........................ 65
65,115
6.5%, 2-1-2011 ........................ 75
75,640
7.0%, 5-1-2011 ........................ 59
60,013
7.0%, 7-1-2011 ........................ 69
70,727
7.0%, 9-1-2012 ........................ 79
81,067
6.0%, 10-1-2013 ....................... 98
98,050
11.0%, 10-1-2020 ...................... 19
21,328
7.0%, 4-1-2026 ........................ 75
77,033
Government National Mortgage Association,
7.0%, 9-15-2008 ....................... 50
51,533
TOTAL UNITED STATES GOVERNMENT SECURITIES - 34.73%
$1,569,465
(Cost: $1,553,515)
TOTAL SHORT-TERM SECURITIES - 4.76% $
215,000
(Cost: $215,000)
TOTAL INVESTMENT SECURITIES - 98.43%
$4,447,871
(Cost: $4,386,981)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.57%
71,072
NET ASSETS - 100.00%
$4,518,943
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 3.79%
Dow Capital BV,
9.0%, 5-15-2010 ....................... $ 500 $
617,530
Dow Chemical Company (The),
8.55%, 10-15-2009 ..................... 1,000
1,195,820
Procter & Gamble Company (The),
8.0%, 9-1-2024 ........................ 2,000
2,513,720
Total .................................
4,327,070
Communication - 3.49%
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-2030 ..................... 1,000
1,301,850
BellSouth Telecommunications, Inc.,
5.85%, 11-15-2045 ..................... 1,000
1,014,850
Jones Intercable, Inc.,
9.625%, 3-15-2002 ..................... 500
538,750
Tele-Communications, Inc.,
6.58%, 2-15-2005 ...................... 1,000
1,135,930
Total .................................
3,991,380
Depository Institutions - 10.46%
AmSouth Bancorporation,
6.75%, 11-1-2025 ...................... 1,500
1,570,005
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-2005 ...................... 500
500,000
Citicorp,
9.5%, 2-1-2002 ........................ 500
554,905
First Union Corporation:
6.824%, 8-1-2026 ...................... 1,132
1,253,984
6.55%, 10-15-2035 ..................... 525
553,030
Kansallis-Osake-Pankki,
10.0%, 5-1-2002 ....................... 1,000
1,124,200
NBD Bank, National Association,
8.25%, 11-1-2024 ...................... 1,000
1,225,900
NationsBank Corporation,
8.57%, 11-15-2024 ..................... 1,000
1,245,290
Riggs National Corporation,
8.5%, 2-1-2006 ........................ 1,500
1,561,260
SouthTrust Bank of Alabama, N.A.:
5.58%, 2-6-2006 ....................... 1,000
994,210
7.69%, 5-15-2025 ...................... 500
589,325
Wachovia Corporation,
6.605%, 10-1-2025 ..................... 750
782,055
Total .................................
11,954,164
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Electric, Gas and Sanitary Services - 9.32%
Cajun Electric Power Cooperative, Inc.,
8.92%, 3-15-2019 ...................... $1,500 $
1,590,660
California Infrastructure and Economic
Development Bank, Special Purpose
Trust:
PG&E-1,
6.42%, 9-25-2008 ...................... 1,000
1,030,420
SCE-1,
6.38%, 9-25-2008 ...................... 1,000
1,037,700
Cleveland Electric Illuminating Co. (The),
9.5%, 5-15-2005 ....................... 678
740,383
El Paso Electric Company,
7.25%, 2-1-99 ......................... 500
500,405
Entergy Arkansas, Inc.,
7.5%, 8-1-2007 ........................ 750
778,320
Kansas Gas and Electric Company,
7.6%, 12-15-2003 ...................... 1,000
1,074,860
Niagara Mohawk Power Corporation:
9.5%, 6-1-2000 ........................ 500
524,455
7.375%, 7-1-2003 ...................... 500
513,215
Pacific Gas & Electric Co.,
6.875%, 12-1-99 ....................... 500
500,605
Pennsylvania Power & Light Co.,
9.25%, 10-1-2019 ...................... 656
701,585
Southern Company Capital Trust I,
8.19%, 2-1-2037 ....................... 1,500
1,658,655
Total .................................
10,651,263
Fabricated Metal Products - 0.42%
Mark IV Industries, Inc.,
7.5%, 9-1-2007 ........................ 500
476,250
Food and Kindred Products - 2.80%
Anheuser-Busch Companies, Inc.,
7.0%, 9-1-2005 ........................ 500
528,225
Coca-Cola Enterprises Inc.,
0.0%, 6-20-2020 ....................... 10,000
2,675,700
Total .................................
3,203,925
Food Stores - 0.48%
Kroger Co. (The),
7.65%, 4-15-2007 ...................... 500
548,015
General Merchandise Stores - 0.23%
Fred Meyer, Inc.,
7.15%, 3-1-2003 ....................... 250
260,095
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Health Services - 0.90%
Tenet Healthcare Corporation:
7.875%, 1-15-2003 ..................... $ 500 $
510,000
8.625%, 12-1-2003 ..................... 500
523,750
Total .................................
1,033,750
Holding and Other Investment Offices - 0.43%
Bay Apartment Communities, Inc.,
6.5%, 1-15-2005 ....................... 500
486,040
Instruments and Related Products - 0.67%
Raytheon Company,
6.45%, 8-15-2002 ...................... 750
769,215
Insurance Carriers - 0.46%
Reliance Group Holdings, Inc.,
9.0%, 11-15-2000 ...................... 500
520,775
Nondepository Institutions - 6.69%
Asset Securitization Corporation,
7.49%, 4-14-2029 ...................... 1,244
1,342,301
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-2010 (C) .................. 1,500
1,507,035
Chrysler Financial Corporation,
12.75%, 11-1-99 ....................... 1,000
1,060,640
General Motors Acceptance Corporation,
8.875%, 6-1-2010 ...................... 500
625,780
IMC Home Equity Loan Trust,
6.9%, 1-20-2022 ....................... 1,000
1,008,120
National Rural Utilities Cooperative
Finance Corp.,
6.1%, 12-22-2000 ...................... 500
507,450
Residential Asset Securities Corporation,
Mortgage Pass-Through Certificates,
8.0%, 10-25-2024 ...................... 1,000
1,019,220
Westinghouse Electric Corporation,
8.875%, 6-14-2014 ..................... 500
580,220
Total .................................
7,650,766
Oil and Gas Extraction - 2.58%
Anadarko Petroleum Corporation,
7.25%, 3-15-2025 ...................... 1,000
1,036,790
Mitchell Energy & Development Corp.,
9.25%, 1-15-2002 ...................... 27
28,738
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Oil and Gas Extraction (Continued)
Oryx Energy Company,
10.0%, 4-1-2001 ....................... $ 400 $
430,768
Pemex Finance Ltd.,
5.72%, 11-15-2003 (C) ................. 500
499,325
YPF Sociedad Anoima,
8.0%, 2-15-2004 ....................... 1,000
950,000
Total .................................
2,945,621
Paper and Allied Products - 1.37%
Boise Cascade Office Products Corporation,
9.875%, 2-15-2001 ..................... 500
501,880
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-2002 ...................... 1,000
1,064,360
Total .................................
1,566,240
Printing and Publishing - 1.31%
News America Holdings Incorporated,
7.45%, 6-1-2000 ....................... 500
511,445
Quebecor Printing Capital Corporation,
6.5%, 8-1-2027 ........................ 1,000
982,460
Total .................................
1,493,905
Railroad Transportation - 0.54%
CSX Corporation,
6.95%, 5-1-2027 ....................... 575
612,737
Security and Commodity Brokers - 0.87%
Salomon Inc.,
3.65%, 2-14-2002 ...................... 1,000
999,660
Stone, Clay and Glass Products - 1.12%
Owens-Illinois, Inc.,
7.15%, 5-15-2005 ...................... 750
751,658
USG Corporation,
9.25%, 9-15-2001 ...................... 500
533,925
Total .................................
1,285,583
Transportation Equipment - 0.46%
Coltec Industries Inc.,
7.5%, 4-15-2008 ....................... 500
529,375
United States Postal Service - 0.22%
Postal Square Limited Partnership,
6.5%, 6-15-2022 ....................... 245
252,002
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Wholesale Trade -- Durable Goods - 1.66%
Motorola, Inc.,
8.4%, 8-15-2031 ....................... $ 1,500 $
1,903,035
TOTAL CORPORATE DEBT SECURITIES - 50.27% $
57,460,866
(Cost: $54,500,916)
OTHER GOVERNMENT SECURITIES
Canada - 4.54%
Hydro-Quebec:
8.05%, 7-7-2024 ....................... 1,000
1,200,050
7.4%, 3-28-2025 ....................... 1,000
1,242,040
Province de Quebec:
5.67%, 2-27-2026 ...................... 1,500
1,642,035
6.29%, 3-6-2026 ....................... 1,000
1,107,010
Total .................................
5,191,135
Supranational - 1.08%
Inter-American Development Bank,
8.4%, 9-1-2009 ........................ 1,000
1,231,370
TOTAL OTHER GOVERNMENT SECURITIES - 5.62% $
6,422,505
(Cost: $5,650,009)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
5.89%, 7-17-2003 ...................... 1,000
1,013,440
7.5%, 2-15-2007 ....................... 1,787
1,813,175
7.5%, 11-15-2017 ...................... 60
60,090
6.5%, 9-25-2018 ....................... 500
517,185
7.5%, 4-15-2019 ....................... 1,606
1,628,712
7.95%, 12-15-2020 ..................... 1,532
1,543,563
6.25%, 1-15-2021 ...................... 4,000
4,035,000
Federal National Mortgage Association:
5.98%, 6-18-2003 ...................... 1,000
1,015,470
5.875%, 7-16-2003 ..................... 2,250
2,279,520
0.0%, 2-12-2018 ....................... 2,500
808,000
0.0%, 10-9-2019 ....................... 6,750
2,014,470
7.0%, 9-25-2020 ....................... 500
508,590
6.5%, 8-25-2021 ....................... 500
503,045
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
UNITED STATES GOVERNMENT SECURITIES (Continued)
Government National Mortgage Association:
7.5%, 7-15-2023 ....................... $1,216 $
1,255,171
7.5%, 12-15-2023 ...................... 1,648
1,700,249
8.0%, 9-15-2025 ....................... 1,190
1,246,648
7.0%, 7-20-2027 ....................... 570
580,732
7.0%, 8-20-2027 ....................... 1,159
1,179,847
7.75%, 10-15-2031 ..................... 317
330,399
United States Treasury:
5.75%, 10-31-2000 ..................... 6,000
6,114,360
5.25%, 1-31-2001 ...................... 1,000
1,012,340
6.5%, 8-15-2005 ....................... 1,500
1,648,590
6.5%, 10-15-2006 ...................... 7,000
7,764,540
0.0%, 2-15-2019 ....................... 1,750
573,388
Miscellaneous United States Government Backed
Securities:
Tennessee Valley Authority,
5.88%, 4-1-2036 ..................... 750
795,855
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
2,037,500
1998-1 Class 2B,
7.0%, 5-15-2005 ..................... 250
256,015
TOTAL UNITED STATES GOVERNMENT SECURITIES - 38.70% $
44,235,894
(Cost: $43,650,442)
TOTAL SHORT-TERM SECURITIES - 3.97% $
4,531,000
(Cost: $4,531,000)
TOTAL INVESTMENT SECURITIES - 98.56%
$112,650,265
(Cost: $108,332,367)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.44%
1,645,786
NET ASSETS - 100.00%
$114,296,051
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
COMMON STOCKS AND WARRANTS
Communication - 0.88%
Allegiance Telecom, Inc., Warrants (C)* 1,000 $
3,000
Concentric Network Corporation,
Warrants (C)* ......................... 750
111,683
Heartland Wireless Communications,
Inc., Warrants (C)* ................... 3,000
30
Infinity Broadcasting Corporation,
Class A* .............................. 31,200
854,100
Iridium LLC, Warrants (C)* ............. 500
62,500
Microcell Telecommunications Inc.,
Warrants (C)* ......................... 5,000
62,500
OnePoint Communications Corp.,
Warrants (C)* ......................... 900
900
Pathnet, Inc., Warrants (C)* ........... 500
5,000
Primus Telecommunications Group,
Incorporated, Warrants* ............... 500
6,250
Total .................................
1,105,963
Electronic and Other Electric Equipment - 0.01%
Powertel, Inc., Warrants* .............. 2,400
6,600
Food and Kindred Products - 1.07%
Keebler Foods Company* ................. 36,000
1,354,500
Furniture and Fixtures - 0.24%
Lear Corporation* ...................... 8,000
308,000
Health Services - 0.01%
LTC Healthcare, Inc.* .................. 6,666
17,915
Holding and Other Investment Offices - 0.42%
LTC Properties, Inc. ................... 31,666
526,447
Instruments and Related Products - 0.94%
Maxxim Medical, Inc.* .................. 40,000
1,190,000
Paper and Allied Products - 0.00%
SF Holdings Group, Inc., Class C (C)* .. 2,000
4,000
TOTAL COMMON STOCKS AND WARRANTS - 3.57% $
4,513,425
(Cost: $3,518,726)
PREFERRED STOCKS
Communication - 0.46%
IXC Communications, Inc., 12.5% ........ 580
585,800
Depository Institutions - 0.25%
California Federal Preferred Capital
Corporation, 9.125% ................... 12,500
314,062
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Shares
Value
PREFERRED STOCKS (CONTINUED)
Printing and Publishing - 0.41%
PRIMEDIA Inc., 10.0% ................... 5,000 $
518,750
TOTAL PREFERRED STOCKS - 1.12% $
1,418,612
(Cost: $1,400,563)
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES
Agricultural Production -- Crops - 0.85%
Frank's Nursery & Crafts, Inc.,
10.25%, 3-1-2008 ...................... $ 750 $
735,000
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .................... 325
344,500
Total .................................
1,079,500
Agricultural Production -- Livestock - 0.24%
Pilgrim's Pride Corporation,
10.875%, 8-1-2003 ..................... 300
309,000
Amusement and Recreation Services - 3.44%
American Skiing Company,
12.0%, 7-15-2006 ...................... 1,000
1,042,500
Premier Parks Inc.,
0.0%, 4-1-2008 (D) .................... 2,500
1,700,000
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 ...................... 500
565,000
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 ...................... 1,000
1,040,000
Total .................................
4,347,500
Apparel and Accessory Stores - 0.39%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 ..................... 500
495,000
Apparel and Other Textile Products - 0.82%
Consoltex Group Inc.,
11.0%, 10-1-2003 ...................... 1,000
1,031,250
Auto Repair, Services and Parking - 0.55%
Safelite Glass Corp.,
9.875%, 12-15-2006 (C) ................ 750
697,500
Building Materials and Garden Supplies - 0.79%
ISG Resources, Inc.,
10.0%, 4-15-2008 ...................... 1,000
1,000,000
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Business Services - 2.49%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ..................... $ 750 $
810,000
DecisionOne Holdings Corp., Units,
0.0%, 8-1-2008 (D)(E) ................. 1,750
367,500
Federal Data Corporation,
10.125%, 8-1-2005 ..................... 500
495,000
Lamar Advertising Company,
9.625%, 12-1-2006 ..................... 1,000
1,080,000
Rental Service Corporation,
9.0%, 5-15-2008 ....................... 400
390,000
Total .................................
3,142,500
Chemicals and Allied Products - 1.69%
Aqua-Chem, Inc.,
11.25%, 7-1-2008 (C) .................. 750
712,500
Dade International Inc.,
11.125%, 5-1-2006 ..................... 500
550,000
Spinnaker Industries, Inc.,
10.75%, 10-15-2006 .................... 1,000
870,000
Total .................................
2,132,500
Communication - 24.26%
Adelphia Communications Corporation:
10.25%, 7-15-2000 ..................... 500
518,750
9.25%, 10-1-2002 ...................... 500
527,500
10.5%, 7-15-2004 ...................... 500
547,500
9.875%, 3-1-2007 ...................... 500
553,125
Allegiance Telecom, Inc.,
0.0%, 2-15-2008 (D) ................... 1,000
470,000
American Radio Systems Corporation,
9.0%, 2-1-2006 ........................ 750
815,625
CSC Holdings, Inc.,
9.875%, 2-15-2013 ..................... 1,450
1,616,750
Chancellor Media Corporation of Los Angeles,
8.0%, 11-1-2008 (C) ................... 750
766,875
Comcast Corporation,
9.5%, 1-15-2008 ....................... 350
366,163
Concentric Network Corporation,
12.75%, 12-15-2007 .................... 750
757,500
Crown Castle International Corp.,
0.0%, 11-15-2007 (D) .................. 500
347,500
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (D) .................. 500
411,250
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
GST Telecommunications,
0.0%, 11-15-2007 (D) .................. $1,000 $
955,000
Hyperion Telecommunications, Inc.,
0.0%, 4-15-2003 (D) ................... 2,000
1,440,000
ICG Services, Inc.,
0.0%, 5-1-2008 (D) .................... 900
450,000
ITC /\ DeltaCom, Inc.:
8.875%, 3-1-2008 ...................... 500
502,500
9.75%, 11-15-2008 (C) ................. 500
517,500
IXC Communications, Inc.,
9.0%, 4-15-2008 ....................... 500
503,750
Intermedia Communications, Inc.,
8.5%, 1-15-2008 ....................... 750
712,500
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (D) ................... 750
585,000
Iridium LLC and Iridium Capital Corporation:
10.875%, 7-15-2005 .................... 650
549,250
11.25%, 7-15-2005 ..................... 500
427,500
13.0%, 7-15-2005 ...................... 1,000
915,000
Marcus Cable Co.,
0.0%, 12-15-2005 (D) .................. 1,000
955,000
Marcus Cable Operating Company, L.P.,
0.0%, 8-1-2004 (D) .................... 1,500
1,503,750
Metromedia Fiber Network, Inc.,
10.0%, 11-15-2008 (C) ................. 500
512,500
MetroNet Communications Corp.,
0.0%, 6-15-2008 (D) ................... 1,000
600,000
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (D) .................... 1,750
1,321,250
Nextel Communications, Inc.:
0.0%, 8-15-2004 (D) ................... 1,500
1,455,000
0.0%, 2-15-2008 (D) ................... 1,000
600,000
NEXTLINK Communications, Inc.,
9.625%, 10-1-2007 ..................... 900
868,500
OnePoint Communications Corp.,
14.5%, 6-1-2008 (C) ................... 900
486,000
Pathnet, Inc.,
12.25%, 4-15-2008 ..................... 500
350,000
Primus Telecommunications Group, Incorporated,
11.75%, 8-1-2004 ...................... 500
525,000
RSL Communications PLC,
10.5%, 11-15-2008 (C) ................. 2,000
1,945,000
Salem Communications Corporation,
9.5%, 10-1-2007 ....................... 500
518,750
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (D) ................... 1,000
910,000
Time Warner Telecom LLC and
Time Warner Telecom Inc.,
9.75%, 7-15-2008 ...................... 500
522,500
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
VersaTel Telecom International N.V., Units,
13.25%, 5-15-2008 (C)(F) .............. $ 500 $
496,250
WinStar Communications, Inc.:
0.0%, 10-15-2005 (Convertible) (C)(D) . 500
700,000
0.0%, 3-15-2008 (D) ................... 1,000
720,000
10.0%, 3-15-2008 ...................... 500
405,000
Total .................................
30,651,038
Eating and Drinking Places - 1.71%
Domino's Pizza, Inc.,
10.375%, 1-15-2009 (C) ................ 400
398,000
Foodmaker, Inc.,
8.375%, 4-15-2008 ..................... 1,000
1,006,250
NE Restaurant Company, Inc.,
10.75%, 7-15-2008 ..................... 750
761,250
Total .................................
2,165,500
Electric, Gas and Sanitary Services - 1.61%
Allied Waste North America, Inc.,
7.875%, 1-1-2009 (C) .................. 2,000
2,032,500
Electronic and Other Electric Equipment - 2.95%
Communications Instruments, Inc.,
10.0%, 9-15-2004 ...................... 450
433,125
Echostar Communications Corporation:
0.0%, 3-15-2004 (D) ................... 500
498,750
0.0%, 6-1-2004 (D) .................... 1,000
1,025,000
Elgar Holdings, Inc.,
9.875%, 2-1-2008 ...................... 500
460,000
Intercel, Inc.,
0.0%, 2-1-2006 (D) .................... 750
566,250
Telex Communications, Inc.,
10.5%, 5-1-2007 ....................... 500
449,375
WESCO International, Inc.,
0.0%, 6-1-2008 (D) .................... 500
300,000
Total .................................
3,732,500
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Engineering and Management Services - 0.42%
United International Holdings, Inc.,
0.0%, 2-15-2008 (D) ................... $1,000 $
530,000
Fabricated Metal Products - 3.44%
AXIA Incorporated,
10.75%, 7-15-2008 ..................... 750
761,250
Neenah Corporation,
11.125%, 5-1-2007 ..................... 1,500
1,552,500
Nortek, Inc.,
9.875%, 3-1-2004 ...................... 500
512,500
Safety Components International, Inc.,
10.125%, 7-15-2007 .................... 1,000
1,008,750
U.S. Can Corporation,
10.125%, 10-15-2006 ................... 500
515,000
Total .................................
4,350,000
Food and Kindred Products - 0.79%
Eagle Family Foods, Inc.,
8.75%, 1-15-2008 ...................... 500
475,000
Southern Foods Group, L.P. and
SFG Capital Corporation,
9.875%, 9-1-2007 ...................... 500
520,625
Total .................................
995,625
Food Stores - 0.77%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ...................... 500
490,000
Pueblo Xtra International, Inc.,
9.5%, 8-1-2003 ........................ 500
480,000
Total .................................
970,000
Health Services - 1.83%
Multicare Companies, Inc. (The),
9.0%, 8-1-2007 ........................ 750
690,000
Paragon Health Network, Inc.:
0.0%, 11-1-2007 (D) ................... 750
363,750
9.5%, 11-1-2007 ....................... 900
733,500
Tenet Healthcare Corporation,
8.625%, 1-15-2007 ..................... 500
522,500
Total .................................
2,309,750
Heavy Construction, Except Building - 1.28%
Level 3 Communications, Inc.:
9.125%, 5-1-2008 ...................... 750
743,438
0.0%, 12-1-2008 (C)(D) ................ 1,500
877,500
Total .................................
1,620,938
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places - 4.63%
CapStar Hotel Company,
8.75%, 8-15-2007 ...................... $ 500 $
490,000
MGM Grand, Inc.,
6.875%, 2-6-2008 ...................... 1,000
916,210
Prime Hospitality Corp.:
9.25%, 1-15-2006 ...................... 1,500
1,558,125
9.75%, 4-1-2007 ....................... 500
502,500
Station Casinos, Inc.:
10.125%, 3-15-2006 .................... 500
523,750
8.875%, 12-1-2008 (C) ................. 1,850
1,863,875
Total .................................
5,854,460
Industrial Machinery and Equipment - 3.65%
Falcon Building Products, Inc.,
0.0%, 6-15-2007 (D) ................... 2,000
1,150,000
Morris Material Handling, Inc.,
9.5%, 4-1-2008 ........................ 1,000
730,000
National Equipment Services, Inc.:
10.0%, 11-30-2004 ..................... 550
544,500
10.0%, 11-30-2004 (C) ................. 700
693,000
Terex Corporation,
8.875%, 4-1-2008 ...................... 1,000
1,001,250
Walbro Corporation,
9.875%, 7-15-2005 ..................... 500
495,000
Total .................................
4,613,750
Instruments and Related Products - 1.69%
Cole National Group, Inc.,
9.875%, 12-31-2006 .................... 500
517,500
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ....................... 1,500
1,616,250
Total .................................
2,133,750
Miscellaneous Manufacturing Industries - 1.06%
AAi.Fostergrant, Inc.,
10.75%, 7-15-2006 ..................... 500
440,000
Amscan Holdings Inc.,
9.875%, 12-15-2007 .................... 500
470,000
Hedstrom Corporation,
10.0%, 6-1-2007 ....................... 500
432,500
Total .................................
1,342,500
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Miscellaneous Retail - 0.84%
Michaels Stores, Inc.,
10.875%, 6-15-2006 .................... $1,000 $
1,062,500
Motion Pictures - 2.11%
AMC Entertainment, Inc.,
9.5%, 3-15-2009 ....................... 500
510,000
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 ..................... 1,500
1,117,500
Regal Cinemas, Inc.:
9.5%, 6-1-2008 ........................ 400
412,000
9.5%, 6-1-2008 (C) .................... 600
625,500
Total .................................
2,665,000
Paper and Allied Products - 4.57%
Buckeye Technologies Inc.,
8.0%, 10-15-2010 ...................... 750
720,000
Container Corporation of America,
11.25%, 5-1-2004 ...................... 1,500
1,560,000
Fort Howard Corporation,
11.0%, 1-2-2002 ....................... 420
419,765
Mail-Well Corporation,
10.5%, 2-15-2004 ...................... 500
525,000
Mail-Well I Corporation,
8.75%, 12-15-2008 (C) ................. 1,000
1,005,000
Outsourcing Services Group, Inc.,
10.875%, 3-1-2006 (C) ................. 500
475,000
Republic Group Incorporated,
9.5%, 7-15-2008 ....................... 750
733,125
SF Holdings Group, Inc.,
0.0%, 3-15-2008 (D) ................... 1,000
330,000
Total .................................
5,767,890
Personal Services - 0.39%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 ..................... 500
490,625
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Petroleum and Coal Products - 0.48%
Building Materials Corporation of America,
8.0%, 12-1-2008 (C) ................... $ 600 $
604,500
Primary Metal Industries - 0.72%
Weirton Steel Corporation,
11.375%, 7-1-2004 ..................... 500
445,000
Wheeling-Pittsburgh Corporation,
9.25%, 11-15-2007 ..................... 500
470,000
Total .................................
915,000
Printing and Publishing - 4.38%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................... 1,000
1,025,000
Big Flower Press Holdings, Inc.,
8.625%, 12-1-2008 (C) ................. 1,000
1,003,750
K-III Communications Corporation,
8.5%, 2-1-2006 ........................ 500
510,000
Perry-Judd's Incorporated,
10.625%, 12-15-2007 ................... 1,000
1,050,000
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 .................... 900
939,375
World Color Press, Inc.,
8.375%, 11-15-2008 (C) ................ 1,000
1,000,000
Total .................................
5,528,125
Real Estate - 0.41%
Delco Remy International, Inc.,
8.625%, 12-15-2007 .................... 500
515,000
Rubber and Miscellaneous Plastics Products - 5.07%
Graham Packaging Holdings Company and
GPC Capital Corp. II,
0.0%, 1-15-2009 (D) ................... 6,000
4,170,000
Home Products International, Inc.,
9.625%, 5-15-2008 ..................... 750
738,750
J.H. Heafner Company, Inc. (The):
10.0%, 5-15-2008 ...................... 500
506,250
10.0%, 5-15-2008 (C) .................. 500
506,250
LDM Technologies, Inc.,
10.75%, 1-15-2007 ..................... 500
490,000
Total .................................
6,411,250
Social Services - 0.59%
La Petite Academy, Inc. and LPA Holding Corp.,
10.0%, 5-15-2008 ...................... 750
742,500
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Principal
Amount in
Thousands
Value
CORPORATE DEBT SECURITIES (Continued)
Stone, Clay and Glass Products - 0.28%
SIMCALA, Inc.,
9.625%, 4-15-2006 ..................... $ 500 $
357,500
Television Broadcasting Stations - 0.83%
Allbritton Communications Company,
9.75%, 11-30-2007 ..................... 500
527,500
LIN Holdings Corp.,
0.0%, 3-1-2008 (D) .................... 750
517,500
Total .................................
1,045,000
Textile Mill Products - 1.82%
Avondale Mills, Inc.,
10.25%, 5-1-2006 ...................... 500
525,000
Galey & Lord, Inc.,
9.125%, 3-1-2008 ...................... 1,500
1,305,000
Glenoit Corporation,
11.0%, 4-15-2007 ...................... 500
468,750
Total .................................
2,298,750
Transportation by Air - 1.21%
Atlas Air, Inc.,
9.375%, 11-15-2006 (C) ................ 1,500
1,528,125
Transportation Equipment - 1.62%
Federal-Mogul Corporation:
7.75%, 7-1-2006 ....................... 1,000
1,015,440
7.875%, 7-1-2010 ...................... 500
518,170
Westinghouse Air Brake Company,
9.375%, 6-15-2005 ..................... 500
515,000
Total .................................
2,048,610
Trucking and Warehousing - 0.43%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .................... 500
542,500
Wholesale Trade -- Durable Goods - 0.93%
Alvey Systems, Inc.,
11.375%, 1-31-2003 .................... 696
702,960
Sealy Mattress Company,
9.875%, 12-15-2007 .................... 500
475,000
Total .................................
1,177,960
Wholesale Trade -- Nondurable Goods - 0.76%
Nebraska Book Company, Inc.,
8.75%, 2-15-2008 ...................... 1,000
953,750
See Notes to Schedules of Investments on page
140.
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
Value
TOTAL CORPORATE DEBT SECURITIES - 88.79%
$112,191,646
(Cost: $115,623,748)
TOTAL SHORT-TERM SECURITIES - 4.79% $
6,046,000
(Cost $6,046,000)
TOTAL INVESTMENT SECURITIES - 98.27%
$124,169,683
(Cost: $126,589,037)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.73%
2,183,767
NET ASSETS - 100.00%
$126,353,450
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) Each unit of Spiros Development Corporation II, Inc.
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.
(C) Security was purchased pursuant to Rule 144a under the
Securities Act of
1933 and may be resold in transactions exempt from
registration, normally
to qualified institutional buyers. At December 31,
1998, the value of
these securities amounted to $2,006,360 and
$19,696,738, respectively, or
1.76% and 15.59%, respectively, of the total net assets
in the Bond
Portfolio and High Income Portfolio.
(D) The security does not bear interest for an initial
period of time and
subsequently becomes interest bearing.
(E) Each Unit of DecisionOne Holdings Corp. 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.
(F) Each Unit of VersaTel Telecom B.V. consists of $1,000
principal amount of
13.25% senior notes due 2008 and one warrant to
purchase 6.667 ordinary
shares of VersaTel, par value NLG 0.10 per share.
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>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(In Thousands,
Except for Per Share Amounts)
Science and
Growth Income
Technology
Portfolio Portfolio
Portfolio
Assets ----------- ---------- -
- ----------
Investment securities--at
value (Notes 1 and 3) $824,475 $808,186
$34,568
Cash ................. 1 2
2
Receivables:
Investment securities
sold ............... 1,379 ---
- ---
Fund shares sold ..... 612 1,186
151
Dividends and interest 389 3,264
18
Prepaid insurance premium 4 3
- ---
-------- --------
- -------
Total assets ....... 826,860 812,641
34,739
Liabilities -------- --------
- -------
Payable for investment
securities purchased . 1,412 812
131
Payable to Fund
shareholders ......... 141 301
3
Accrued service
fee (Note 2) ......... 164 164
6
Accrued accounting
services fee (Note 2). 7 7
2
Accrued management
fee (Note 2) ......... 16 15
1
Other ................. 5 8
1
-------- --------
- -------
Total liabilities .. 1,745 1,307
144
-------- --------
- -------
Total net assets .. $825,115 $811,334
$34,595
Net Assets ======== ========
=======
$0.01 par value capital stock
Capital stock ........ $ 887 $ 658
$ 42
Additional paid-in capital 589,299 569,217
26,364
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income .. --- ---
- ---
Accumulated net realized loss
on investment transactions --- ---
- ---
Distribution in excess of
net realized gains . --- ---
- ---
Net unrealized appreciation
(depreciation) of
investments 234,929 241,459
8,189
-------- --------
- -------
Net assets applicable to
outstanding units
of capital ........ $825,115 $811,334
$34,595
======== ========
=======
Net asset value, redemption
and offering price per share $9.2989 $12.3351
$8.2750
======= ========
=======
Capital shares outstanding 88,733 65,774
4,181
Capital shares authorized 100,000 100,000
100,000
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(In Thousands,
Except for Per Share Amounts)
International Small Cap
Balanced
Portfolio Portfolio
Portfolio
Assets ------------ ------------ -
- ----------
Investment securities--at
value (Notes 1 and 3) $171,830 $184,788
$91,211
Cash ................. 1 1
2
Receivables:
Investment securities
sold ............... --- ---
111
Fund shares sold ..... 134 147
234
Dividends and interest 359 62
755
Prepaid insurance premium 1 1
1
-------- --------
- -------
Total assets ....... 172,325 184,999
92,314
Liabilities -------- --------
- -------
Payable for investment
securities purchased . 3,248 4,367
- ---
Payable to Fund
shareholders ......... 41 18
70
Accrued service
fee (Note 2) ......... 34 36
19
Accrued accounting
services fee (Note 2). 3 3
3
Accrued management
fee (Note 2) ......... 4 4
1
Other ................. 34 2
1
-------- --------
- -------
Total liabilities .. 3,364 4,430
94
-------- --------
- -------
Total net assets .. $168,961 $180,569
$92,220
Net Assets ======== ========
=======
$0.01 par value capital stock
Capital stock ........ $ 216 $ 229
$ 130
Additional paid-in capital 129,805 177,978
81,299
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income .. --- ---
- ---
Accumulated net realized loss
on investment transactions --- ---
- ---
Distribution in excess of
net realized gains . --- (1,288)
- ---
Net unrealized appreciation
(depreciation) of
investments ........ 38,940 3,650
10,791
-------- --------
- -------
Net assets applicable to
outstanding units
of capital ........ $168,961 $180,569
$92,220
======== ========
=======
Net asset value, redemption
and offering price per share $7.8176 $7.9019
$7.1081
======= ========
=======
Capital shares outstanding 21,613 22,851
12,974
Capital shares authorized 100,000 100,000
50,000
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(In Thousands,
Except for Per Share Amounts) Asset
Strategy Money Market
Limited-Term
Portfolio Portfolio Bond
Portfolio
Assets ------------- ------------ -
- ----------
Investment securities--at
value (Notes 1 and 3) $14,127 $54,165
$4,448
Cash ................. 2 1
1
Receivables:
Investment securities
sold ............... --- ---
- ---
Fund shares sold ..... 43 1,746
3
Dividends and interest 94 226
68
Prepaid insurance premium --- 1
- ---
------- -------
- ------
Total assets ....... 14,266 56,139
4,520
Liabilities ------- -------
- ------
Payable for investment
securities purchased . 167 ---
- ---
Payable to Fund
shareholders ......... 4 2,101
- ---
Accrued service
fee (Note 2) ......... 3 11
1
Accrued accounting
services fee (Note 2). 1 3
- ---
Accrued management
fee (Note 2) ......... --- 1
- ---
Other ................. 1 ---
- ---
------- -------
- ------
Total liabilities .. 176 2,116
1
------- -------
- ------
Total net assets .. $14,090 $54,023
$4,519
Net Assets ======= =======
======
$0.01 par value capital stock
Capital stock ........ $ 26 $ 540
$ 9
Additional paid-in capital 13,650 53,483
4,449
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income .. --- ---
- ---
Accumulated net realized loss
on investment transactions --- ---
- ---
Distribution in excess of
net realized gains . --- ---
- ---
Net unrealized appreciation
(depreciation) of
investments ........ 414 ---
61
------- -------
- ------
Net assets applicable to
outstanding units
of capital ........ $14,090 $54,023
$4,519
======= =======
======
Net asset value, redemption
and offering price per share $5.3868 $1.0000
$5.2292
======= ========
=======
Capital shares outstanding 2,616 54,023
864
Capital shares authorized 100,000 100,000
50,000
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(In Thousands,
Except for Per Share Amounts)
Bond High Income
Portfolio Portfolio
Assets ------------- -------------
Investment securities--at
value (Notes 1 and 3) $112,650 $124,170
Cash ................. 2 2
Receivables:
Investment securities
sold ............... --- ---
Fund shares sold ..... 212 56
Dividends and interest 1,537 2,236
Prepaid insurance premium 1 1
-------- --------
Total assets ....... 114,402 126,465
Liabilities -------- --------
Payable for investment
securities purchased . --- ---
Payable to Fund
shareholders ......... 77 79
Accrued service
fee (Note 2) ......... 23 26
Accrued accounting
services fee (Note 2). 3 3
Accrued management
fee (Note 2) ......... 2 2
Other ................. 1 2
-------- --------
Total liabilities .. 106 112
-------- --------
Total net assets .. $114,296 $126,353
Net Assets ======== ========
$0.01 par value capital stock
Capital stock ........ $ 210 $ 286
Additional paid-in capital 111,174 128,824
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income .. --- ---
Accumulated net realized loss
on investment transactions (1,406) (338)
Distribution in excess of
net realized gains . --- ---
Net unrealized appreciation
(depreciation) of
investments ........ 4,318 (2,419)
-------- --------
Net assets applicable to
outstanding units
of capital ........ $114,296 $126,353
======== ========
Net asset value, redemption
and offering price per share $5.4451 $4.4143
======= ========
Capital shares outstanding 20,991 28,624
Capital shares authorized 100,000 100,000
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Science and
Growth Income
Technology
Portfolio Portfolio
Portfolio
---------- ----------
- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 4,271 $ 9,491
$ 174
Dividends ............ 5,261 6,153
7
-------- --------
- ------
Total income ....... 9,532 15,644
181
-------- --------
- ------
Expenses (Note 2):
Investment management
fee ................ 4,904 5,016
126
Service fee .......... 597 614
20
Accounting services
fee ................ 73 74
12
Custodian fees ....... 26 51
5
Audit fees ........... 9 9
4
Legal fees ........... 13 13
- ---
Other ................ 34 35
1
-------- --------
- ------
Total expenses ..... 5,656 5,812
168
-------- --------
- ------
Net investment
income .......... 3,876 9,832
13
-------- --------
- ------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 24,867 110,723
624
Realized net gain (loss)
on foreign currency
transactions ......... 28 (33)
- ---
Realized net gain on forward
currency contracts ... --- ---
- ---
Realized net gain on
options .............. --- ---
- ---
-------- --------
- ------
Realized net gain (loss)
on investments ..... 24,895 110,690
624
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... 146,953 16,851
7,947
-------- --------
- ------
Net gain (loss) on
investments ....... 171,848 127,541
8,571
-------- --------
- ------
Net increase
in net assets
resulting from
operations ...... $175,724 $137,373
$8,584
======== ========
======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
International Small Cap
Balanced
Portfolio Portfolio
Portfolio
---------- ----------
- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 951 $ 2,583
$2,238
Dividends ............ 1,376 578
690
------- -------
- ------
Total income ....... 2,327 3,161
2,928
------- -------
- ------
Expenses (Note 2):
Investment management
fee ................ 1,169 1,395
472
Service fee .......... 125 136
71
Accounting services
fee ................ 40 40
30
Custodian fees ....... 161 14
7
Audit fees ........... 7 6
6
Legal fees ........... 3 3
1
Other ................ 8 9
4
------- -------
- ------
Total expenses ..... 1,513 1,603
591
------- -------
- ------
Net investment
income .......... 814 1,558
2,337
------- -------
- ------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 13,346 23,004
761
Realized net gain (loss)
on foreign currency
transactions ......... (116) ---
(3)
Realized net gain on forward
currency contracts ... 382 ---
- ---
Realized net gain on
options .............. --- 228
- ---
------- -------
- ------
Realized net gain (loss)
on investments ..... 13,612 23,232
758
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... 25,132 (8,246)
3,437
------- -------
- ------
Net gain (loss) on
investments ....... 38,744 14,986
4,195
------- -------
- ------
Net increase
in net assets
resulting from
operations ...... $39,558 $16,544
$6,532
======= =======
======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Asset Strategy Money Market
Limited-Term
Portfolio Portfolio Bond
Portfolio
--------------- ----------
- ----------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $ 420 $2,538
$273
Dividends ............ 47 ---
- ---
------ ------
- ----
Total income ....... 467 2,538
273
------ ------
- ----
Expenses (Note 2):
Investment management
fee ................ 91 223
23
Service fee .......... 11 43
3
Accounting services
fee ................ 9 23
- ---
Custodian fees ....... 6 7
2
Audit fees ........... 5 4
5
Legal fees ........... --- 5
- ---
Other ................ 1 3
- ---
------ ------
- ----
Total expenses ..... 123 308
33
------ ------
- ----
Net investment
income .......... 344 2,230
240
------ ------
- ----
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 462 ---
9
Realized net gain (loss)
on foreign currency
transactions ......... (2) ---
- ---
Realized net gain on forward
currency contracts ... --- ---
- ---
Realized net gain on
options .............. --- ---
- ---
------ ------
- ----
Realized net gain (loss)
on investments ..... 460
9
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... 225 ---
18
------ ------
- ----
Net gain (loss) on
investments ....... 685 ---
27
------ ------
- ----
Net increase
in net assets
resulting from
operations ...... $1,029 $2,230
$267
====== ======
====
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Bond High Income
Portfolio Portfolio
------------- -------------
Investment Income
Income (Note 1B):
Interest and
amortization ........ $7,000 $11,649
Dividends ............ --- 261
------ -------
Total income ....... 7,000 11,910
------ -------
Expenses (Note 2):
Investment management
fee ................ 548 801
Service fee .......... 91 101
Accounting services
fee ................ 40 40
Custodian fees ....... 7 8
Audit fees ........... 6 7
Legal fees ........... 2 2
Other ................ 6 7
------ -------
Total expenses ..... 700 966
------ -------
Net investment
income .......... 6,300 10,944
------ -------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........ 783 (338)
Realized net gain (loss)
on foreign currency
transactions ......... --- ---
Realized net gain on forward
currency contracts ... --- ---
Realized net gain on
options .............. --- ---
------ -------
Realized net gain (loss)
on investments ..... 783 (338)
Unrealized appreciation
(depreciation) in value
of investments during
the period ........... 369 (8,207)
------ -------
Net gain (loss) on
investments ....... 1,152 (8,545)
------ -------
Net increase
in net assets
resulting from
operations ...... $7,452 $ 2,399
====== =======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(Dollars In Thousands)
Science and
Growth Income
Technology
Portfolio Portfolio
Portfolio
----------- ----------- -
- ----------
Increase in Net Assets
Operations:
Net investment
income ............ $ 3,876 $ 9,832
$ 13
Realized net gain (loss)
on investments ..... 24,895 110,690
624
Unrealized appreciation
(depreciation) ..... 146,953 16,851
7,947
-------- --------
- -------
Net increase
in net assets
resulting from
operations......... 175,724 137,373
8,584
-------- --------
- -------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (3,904) (9,799)
(13)
From realized gains on
security transactions (24,867) (110,723)
(624)
In excess of realized
capital gains ...... --- ---
- ---
-------- --------
- -------
(28,771) (120,522)
(637)
-------- --------
- -------
Capital share
transactions** ....... 38,803 157,579
16,441
-------- --------
- -------
Total increase .... 185,756 174,430
24,388
Net Assets
Beginning of period ... 639,359 636,904
10,207
-------- --------
- -------
End of period ......... $825,115 $811,334
$34,595
======== ========
=======
Undistributed net investment
income ............. $--- $---
$---
==== ====
====
*See "Financial Highlights" on pages 157 -
167.
**Shares issued from sale
of shares ............. 10,496,688 9,126,482
2,834,669
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 3,093,937 9,770,626
76,928
Shares redeemed ......... (9,340,560) (6,368,869)
(499,069)
--------- ---------
- ---------
Increase in
outstanding capital
shares ................. 4,250,065 12,528,239
2,412,528
========= ==========
=========
Value issued from sale
of shares ............. $88,088 $122,003
$19,146
Value issued from reinvest-
ment of dividends and/or
distributions ......... 28,771 120,522
637
Value redeemed .......... (78,056) (84,946)
(3,342)
------- --------
- -------
Increase in
outstanding capital ... $38,803 $157,579
$16,441
======= ========
=======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(Dollars In Thousands)
International Small Cap
Balanced
Portfolio Portfolio
Portfolio
----------- ----------- -
- ----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 814 $ 1,558
$ 2,337
Realized net gain (loss)
on investments ..... 13,612 23,232
758
Unrealized appreciation
(depreciation) ..... 25,132 (8,246)
3,437
-------- --------
- -------
Net increase
in net assets
resulting from
operations......... 39,558 16,544
6,532
-------- --------
- -------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (698) (1,558)
(2,334)
From realized gains on
security transactions (13,728) (23,232)
(761)
In excess of realized
capital gains ...... --- (1,288)
- ---
-------- --------
- -------
(14,426) (26,078)
(3,095)
-------- --------
- -------
Capital share
transactions** ....... 29,198 41,865
21,024
-------- --------
- -------
Total increase .... 54,330 32,331
24,461
Net Assets
Beginning of period ... 114,631 148,238
67,759
-------- --------
- -------
End of period ......... $168,961 $180,569
$92,220
======== ========
=======
Undistributed net investment
income ............. $--- $---
$---
==== ====
====
*See "Financial Highlights" on pages 157 -
167.
**Shares issued from sale
of shares ............. 3,799,283 3,802,845
3,612,259
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,845,305 3,300,299
435,475
Shares redeemed ......... (1,986,996) (2,044,217)
(1,084,517)
--------- ---------
- ---------
Increase in
outstanding capital
shares ................. 3,657,592 5,058,927
2,963,217
========= =========
=========
Value issued from sale
of shares ............. $30,196 $33,860
$25,583
Value issued from reinvest-
ment of dividends and/or
distributions ......... 14,426 26,079
3,095
Value redeemed .......... (15,424) (18,074)
(7,654)
------- -------
- ------
Increase in
outstanding capital ... $29,198 $41,865
$21,024
======= =======
=======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(Dollars In Thousands)
Asset Strategy Money Market
Limited-Term
Portfolio Portfolio Bond
Portfolio
-------------- ----------- -
- ----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 344 $ 2,230
$ 240
Realized net gain (loss)
on investments ..... 460 ---
9
Unrealized appreciation
(depreciation) ..... 225 ---
18
------- -------
- ------
Net increase
in net assets
resulting from
operations......... 1,029 2,230
267
------- -------
- ------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (342) (2,230)
(240)
From realized gains on
security transactions (462) ---
(9)
In excess of realized
capital gains ...... --- ---
- ---
------- -------
- ------
(804) (2,230)
(249)
------- -------
- ------
Capital share
transactions** ....... 4,055 10,723
249
------- -------
- ------
Total increase .... 4,280 10,723
267
Net Assets
Beginning of period ... 9,810 43,300
4,252
------- -------
- ------
End of period ......... $14,090 $54,023
$4,519
======= =======
======
Undistributed net investment
income ............. $--- $---
$---
==== ====
====
*See "Financial Highlights" on pages 157 -
167.
**Shares issued from sale
of shares ............. 782,664 261,149,946
376,497
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 149,309 2,230,118
47,562
Shares redeemed ......... (203,962) (252,657,467)
(379,449)
------- -----------
- -------
Increase in
outstanding capital
shares ................. 728,011 10,722,597
44,610
======= ===========
=======
Value issued from sale
of shares ............. $4,385 $261,150
$2,035
Value issued from reinvest-
ment of dividends and/or
distributions ......... 804 2,230
249
Value redeemed .......... (1,134) (252,657)
(2,035)
------ --------
- ------
Increase in
outstanding capital ... $4,055 $ 10,723
$ 249
====== ========
======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(Dollars In Thousands)
Bond High Income
Portfolio Portfolio
----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $6,300 $10,944
Realized net gain (loss)
on investments ..... 783 (338)
Unrealized appreciation
(depreciation) ..... 369 (8,207)
-------- --------
Net increase
in net assets
resulting from
operations......... 7,452 2,399
-------- --------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (6,300) (10,944)
From realized gains on
security transactions --- ---
In excess of realized
capital gains ...... --- ---
-------- --------
(6,300) (10,944)
-------- --------
Capital share
transactions** ....... 13,655 15,374
-------- --------
Total increase .... 14,807 6,829
Net Assets
Beginning of period ... 99,489 119,524
-------- --------
End of period ......... $114,296 $126,353
======== ========
Undistributed net investment
income ............. $--- $---
==== ====
*See "Financial Highlights" on pages 157 -
167.
**Shares issued from sale
of shares ............. 4,065,889 4,966,466
Shares issued from reinvest-
ment of dividends and/or
distributions ......... 1,156,993 2,479,124
Shares redeemed ......... (2,764,025) (4,037,179)
--------- ---------
Increase in
outstanding capital
shares ................. 2,458,857 3,408,411
========= =========
Value issued from sale
of shares ............. $22,739 $24,022
Value issued from reinvest-
ment of dividends and/or
distributions ......... 6,300 10,944
Value redeemed .......... (15,384) (19,592)
------- -------
Increase in
outstanding capital ... $13,655 $15,374
======= =======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
(Dollars In Thousands)
Science and
Growth Income
Technology
Portfolio Portfolio
Portfolio
----------- ----------- -
- ----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 4,445 $ 4,562
$ 25
Realized net gain
on investments ..... 48,713 36,631
43
Unrealized
appreciation ....... 58,034 84,102
242
-------- --------
- -------
Net increase
in net assets
resulting from
operations......... 111,192 125,295
310
-------- --------
- -------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (4,415) (4,556)
(25)
From realized gains on
security transactions (48,744) (36,637)
(43)
-------- --------
- -------
(53,159) (41,193)
(68)
-------- --------
- -------
Capital share
transactions** ....... 68,163 90,411
9,965
-------- --------
- -------
Total increase .... 126,196 174,513
10,207
Net Assets
Beginning of period ... 513,163 462,391
- ---
-------- --------
- -------
End of period ......... $639,359 $636,904
$10,207
======== ========
=======
Undistributed net
investment income .. $--- $---
$---
==== ====
====
*See "Financial Highlights" on pages 157 -
167.
**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 $96,368
$10,542
Value issued from reinvest-
ment of dividends and/or
distributions ......... 53,159 41,193
68
Value redeemed .......... (53,059) (47,150)
(645)
------- -------
- ------
Increase in
outstanding capital ... $68,163 $90,411
$9,965
======= =======
======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
(Dollars In Thousands)
International Small Cap
Balanced
Portfolio Portfolio
Portfolio
----------- ----------- -
- ----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 798 $ 390
$ 1,665
Realized net gain
on investments ..... 10,548 30,677
3,626
Unrealized
appreciation ....... 3,439 2,772
3,878
-------- --------
- -------
Net increase
in net assets
resulting from
operations......... 14,785 33,839
9,169
-------- --------
- -------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (759) (396)
(1,665)
From realized gains on
security transactions (9,339) (30,671)
(3,626)
-------- --------
- -------
(10,098) (31,067)
(5,291)
-------- --------
- -------
Capital share
transactions** ....... 30,095 48,058
21,454
-------- --------
- -------
Total increase .... 34,782 50,830
25,332
Net Assets
Beginning of period ... 79,849 97,408
42,427
-------- --------
- -------
End of period ......... $114,631 $148,238
$67,759
======== ========
=======
Undistributed net
investment income .. $--- $---
$---
==== ====
====
*See "Financial Highlights" on pages 157 -
167.
**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 ............. $29,101 $29,240
$20,762
Value issued from reinvest-
ment of dividends and/or
distributions ......... 10,098 31,067
5,291
Value redeemed .......... (9,104) (12,249)
(4,599)
------- -------
- -------
Increase in
outstanding capital ... $30,095 $48,058
$21,454
======= =======
=======
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
(Dollars In Thousands)
Asset Strategy Money Market
Limited-Term
Portfolio Portfolio Bond
Portfolio
-------------- ----------- -
- ----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 321 $ 1,952
$ 238
Realized net gain
on investments ..... 826 ---
16
Unrealized
appreciation ....... 31 ---
17
------ -------
- ------
Net increase
in net assets
resulting from
operations......... 1,178 1,952
271
------ -------
- ------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (321) (1,952)
(238)
From realized gains on
security transactions (779) ---
(16)
------ -------
- ------
(1,100) (1,952)
(254)
------ -------
- ------
Capital share
transactions** ....... 1,258 6,042
520
------ -------
- ------
Total increase ... 1,336 6,042
537
Net Assets
Beginning of period ... 8,474 37,258
3,715
------ -------
- ------
End of period ......... $9,810 $43,300
$4,252
====== =======
======
Undistributed net
investment income .. $--- $---
$---
==== ====
====
*See "Financial Highlights" on pages 157 -
167.
**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 ............. $1,517 $208,970
$857
Value issued from reinvest-
ment of dividends and/or
distributions ......... 1,100 1,952
254
Value redeemed .......... (1,359) (204,880)
(591)
------- --------
- ----
Increase in
outstanding capital ... $1,258 $ 6,042
$520
======= ========
====
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended DECEMBER 31, 1997
(Dollars In Thousands)
Bond High Income
Portfolio Portfolio
----------- -----------
Increase in Net Assets
Operations:
Net investment
income ............. $ 5,928 $ 9,390
Realized net gain
on investments ..... 431 1,777
Unrealized
appreciation ....... 2,382 2,903
-------- --------
Net increase
in net assets
resulting from
operations......... 8,741 14,070
-------- --------
Dividends to shareholders (Note 1E):*
From net investment
income ............. (5,928) (9,390)
From realized gains on
security transactions --- (1,539)
-------- --------
(5,928) (10,929)
-------- --------
Capital share
transactions** ....... 4,309 18,977
-------- --------
Total increase .... 7,122 22,118
Net Assets
Beginning of period ... 92,367 97,406
-------- --------
End of period ......... $99,489 $119,524
======== ========
Undistributed net
investment income .. $--- $---
==== ====
*See "Financial Highlights" on pages 157 -
167.
**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 $20,075
Value issued from reinvest-
ment of dividends and/or
distributions ......... 5,928 10,929
Value redeemed .......... (12,942) (12,027)
---a---- -------
Increase in
outstanding capital ... $ 4,309 $18,977
======= =======
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,
-----------------------------
- ------------
1998 1997 1996
1995 1994
------- ------- ------- ----
- --- -------
Net asset value,
beginning of
period ........... $7.5679 $6.7967 $6.8260
$5.8986 $6.1962
------- ------- ------- ----
- --- -------
Income from investment
operations:
Net investment
income .......... 0.0456 0.0574 0.0990
0.0903 0.1211
Net realized and
unrealized gain
on investments .. 2.0215 1.4003 0.7478
2.1842 0.0268
------- ------- ------- ----
- --- -------
Total from investment
operations ....... 2.0671 1.4577 0.8468
2.2745 0.1479
------- ------- ------- ----
- --- -------
Less distributions:
From net
investment
income .......... (0.0456)(0.0570)
(0.0990)(0.0903) (0.1211)
From capital
gains ........... (0.2905)(0.6295)
(0.7771)(1.2568) (0.3244)
------- ------- ------- ----
- --- -------
Total distributions. (0.3361)(0.6865)
(0.8761)(1.3471) (0.4455)
------- ------- ------- ----
- --- -------
Net asset value,
end of period .... $9.2989 $7.5679 $6.7967
$6.8260 $5.8986
======= ======= =======
======= =======
Total return ....... 27.31% 21.45% 12.40%
38.57% 2.39%
Net assets, end of
period (in
millions) ........ $825 $639 $513
$419 $277
Ratio of expenses
to average net
assets ............ 0.80% 0.72% 0.73%
0.75% 0.77%
Ratio of net investment
income to average
net assets ....... 0.55% 0.75% 1.44%
1.35% 2.07%
Portfolio turnover
rate ............. 75.58% 162.41% 243.00%
245.80% 277.36%
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,
-----------------------------
- ------------
1998 1997 1996
1995 1994
------- ------- ------- ----
- --- -------
Net asset value,
beginning of
period ........... $11.9615$10.1373 $ 8.6756
$6.7689 $6.9180
---------------- -------- ----
- --- -------
Income from investment
operations:
Net investment
income .......... 0.1752 0.0916 0.0856
0.0839 0.0703
Net realized and
unrealized gain (loss)
on investments .. 2.3532 2.5598 1.6280
2.0525 (0.1491)
---------------- -------- ----
- --- -------
Total from investment
operations ....... 2.5284 2.6514 1.7136
2.1364 (0.0788)
---------------- -------- ----
- --- -------
Less distributions:
From net investment
income .......... (0.1752)(0.0915)
(0.0856)(0.0839) (0.0703)
From capital gains (1.9796)(0.7357)
(0.1663)(0.1457) (0.0000)
In excess of
capital gains ... (0.0000)(0.0000)
(0.0000)(0.0001) (0.0000)
---------------- -------- ----
- --- -------
Total distributions. (2.1548)(0.8272)
(0.2519)(0.2297) (0.0703)
---------------- -------- ----
- --- -------
Net asset value,
end of period .... $12.3351$11.9615 $10.1373
$8.6756 $6.7689
================ ========
======= =======
Total return........ 21.14% 26.16% 19.75%
31.56% -1.14%
Net assets, end of
period (in
millions) ........ $811 $637 $462
$331 $219
Ratio of expenses
to average net
assets ............ 0.80% 0.72% 0.73%
0.77% 0.77%
Ratio of net investment
income to average
net assets ....... 1.35% 0.80% 0.97%
1.13% 1.16%
Portfolio turnover
rate ............. 62.84% 36.61% 22.95%
15.00% 23.32%
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SCIENCE AND TECHNOLOGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each
Period:
For the
fiscal For the
year period
ended ended
12/31/98 12/31/97*
---------- ----------
Net asset value,
beginning of
period ........... $5.7726 $5.0000
------- -------
Income from investment operations:
Net investment
income .......... 0.0032 0.0146
Net realized and
unrealized gain
on investments .. 2.6551 0.7971
------- -------
Total from investment
operations ....... 2.6583 0.8117
------- -------
Less distributions:
From net investment
income .......... (0.0032) (0.0146)
From capital gains (0.1527) (0.0245)
------- -------
Total distributions (0.1559) (0.0391)
------- -------
Net asset value,
end of period .... $8.2750 $5.7726
======= =======
Total return........ 46.05% 16.24%
Net assets, end of
period (in
millions) ........ $35 $10
Ratio of expenses
to average net
assets ............ 0.92% 0.94%
Ratio of net investment
income to average
net assets ....... 0.07% 0.64%
Portfolio turnover
rate ............. 64.72% 15.63%
*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.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INTERNATIONAL PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each
Period:
For the fiscal year ended
For the
December 31,
period
---------------------------------
ended
1998 1997 1996 1995
12/31/94*
------ ------ ------- --------
- ----------
Net asset value,
beginning of
period ........... $6.3842 $5.9990 $5.2790 $4.9926
$5.0000
------- ------- ------- -------
- -------
Income from investment operations:
Net investment
income .......... 0.0353 0.0485 0.0644 0.0846
0.0207
Net realized and
unrealized gain (loss)
on investments... 2.1283 0.9534 0.7329 0.2790
(0.0074)
------- ------- ------- -------
- -------
Total from investment
operations ....... 2.1636 1.0019 0.7973 0.3636
0.0133
------- ------- ------- -------
- -------
Less distributions:
From net investment
income .......... (0.0353) (0.0463)(0.0644) (0.0772)
(0.0207)
From capital gains (0.6949) (0.5704)(0.0129) (0.0000)
(0.0000)
------- ------- ------- -------
- -------
Total distributions. (0.7302) (0.6167)(0.0773) (0.0772)
(0.0207)
------- ------- ------- -------
- -------
Net asset value,
end of period .... $7.8176 $6.3842 $5.9990 $5.2790
$4.9926
======= ======= ======= =======
=======
Total return........ 33.89% 16.70% 15.11% 7.28%
0.26%
Net assets, end of
period (in
millions) ........ $169 $115 $80 $50
$26
Ratio of expenses
to average net
assets ............ 1.02% 0.98% 1.00% 1.02%
1.26%
Ratio of net investment
income to average
net assets ....... 0.47% 0.79% 1.42% 1.99%
1.36%
Portfolio turnover
rate ............. 88.84% 117.37% 75.01% 34.93%
23.23%
*The International Portfolio's inception date is April 28,
1994; however,
since this Portfolio did not have any investment activity
or incur expenses
prior to the date of initial offering, the per share
information is for a
capital share outstanding for the period from May 3, 1994
(initial offering)
through December 31, 1994. Ratios and the portfolio
turnover rate have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SMALL CAP PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each
Period:
For the fiscal year ended
For the
December 31,
period
----------------------------------
ended
1998 1997 1996 1995
12/31/94*
------- ------- -------- --------
- ----------
Net asset value,
beginning of
period ........... $8.3316 $8.0176 $7.6932 $5.9918
$5.0000
------- ------- ------- -------
- -------
Income from investment
operations:
Net investment
income .......... 0.0798 0.0279 0.0170 0.0900
0.0376
Net realized and
unrealized gain
on investments .. 0.8255 2.5004 0.6367 1.8470
1.0086
------- ------- ------- -------
- -------
Total from investment
operations ....... 0.9053 2.5283 0.6537 1.9370
1.0462
------- ------- ------- -------
- -------
Less distributions:
From net investment
income .......... (0.0798) (0.0282)(0.0170) (0.0900)
(0.0376)
From capital gains (1.2027) (2.1861)(0.3123) (0.1456)
(0.0168)
In excess of realized
capital gains ... (0.0525) (0.0000)(0.0000) (0.0000)
(0.0000)
------- ------- ------- -------
- -------
Total distributions (1.3350) (2.2143)(0.3293) (0.2356)
(0.0544)
------- ------- ------- -------
- -------
Net asset value,
end of period .... $7.9019 $8.3316 $8.0176 $7.6932
$5.9918
======= ======= ======= =======
=======
Total return........ 10.87% 31.53% 8.50% 32.32%
20.92%
Net assets, end of
period (in
millions) ........ $181 $148 $97 $56
$16
Ratio of expenses
to average net
assets ............ 0.97% 0.90% 0.91% 0.96%
1.08%
Ratio of net investment
income to average
net assets ....... 0.94% 0.32% 0.25% 1.77%
2.35%
Portfolio turnover
rate ............. 177.32% 211.46% 133.77% 43.27%
21.61%
*The Small Cap Portfolio's inception date is April 28,
1994; however, since
this Portfolio did not have any investment activity or
incur expenses prior
to the date of initial offering, the per share information
is for a capital
share outstanding for the period from May 3, 1994 (initial
offering) through
December 31, 1994. Ratios and the portfolio turnover rate
have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BALANCED PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each
Period:
For the fiscal year ended
For the
December 31,
period
-----------------------------------
ended
1998 1997 1996 1995
12/31/94*
-------- -------- -------- --------
- ----------
Net asset value,
beginning of
period ........... $6.7686 $6.1967 $5.9000 $4.9359
$5.0000
------- ------- ------- -------
- -------
Income from investment operations:
Net investment
income .......... 0.1865 0.1805 0.1594 0.1333
0.0460
Net realized and
unrealized gain (loss)
on investments .. 0.4003 0.9650 0.5003 1.0611
(0.0641)
------- ------- ------- -------
- -------
Total from investment
operations ....... 0.5868 1.1455 0.6597 1.1944
(0.0181)
------- ------- ------- -------
- -------
Less distributions:
From net investment
income .......... (0.1865) (0.1805)(0.1594) (0.1333)
(0.0460)
From capital gains (0.0608) (0.3931)(0.2036) (0.0970)
(0.0000)
------- ------- ------- -------
- -------
Total distributions (0.2473) (0.5736)(0.3630) (0.2303)
(0.0460)
------- ------- ------- -------
- -------
Net asset value,
end of period .... $7.1081 $6.7686 $6.1967 $5.9000
$4.9359
======= ======= ======= =======
=======
Total return........ 8.67% 18.49% 11.19% 24.19%
- -0.37%
Net assets, end of period
(in millions) .... $92 $68 $42 $24
$9
Ratio of expenses
to average net
assets ............ 0.74% 0.67% 0.70% 0.72%
0.95%
Ratio of net investment
income to average
net assets ....... 2.92% 3.06% 3.18% 3.22%
3.14%
Portfolio turnover
rate ............. 54.62% 55.66% 44.23% 62.87%
19.74%
*The Balanced Portfolio's inception date is April 28, 1994;
however, since
this Portfolio did not have any investment activity or
incur expenses prior
to the date of initial offering, the per share information
is for a capital
share outstanding for the period from May 3, 1994 (initial
offering) through
December 31, 1994. Ratios and the portfolio turnover rate
have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE ASSET STRATEGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each
Period:
For the fiscal year For
the
ended December 31,
period
-------------------------
ended
1998 1997 1996
12/31/95*
------- ------- -------- -----
- ----
Net asset value,
beginning of
period ........... $5.1969 $5.1343 $5.0137
$5.0000
------- ------- ------- ----
- ---
Income from investment operations:
Net investment
income .......... 0.1391 0.1915 0.1814
0.0717
Net realized and
unrealized gain
on investments .. 0.3779 0.5277 0.1206
0.0193
------- ------- ------- ----
- ---
Total from investment
operations ....... 0.5170 0.7192 0.3020
0.0910
------- ------- ------- ----
- ---
Less distributions:
From net investment
income .......... (0.1391) (0.1919)(0.1814)
(0.0713)
From capital gains (0.1880) (0.4647)(0.0000)
(0.0060)
------- ------- ------- ----
- ---
Total distributions (0.3271) (0.6566)(0.1814)
(0.0773)
------- ------- ------- ----
- ---
Net asset value,
end of period .... $5.3868 $5.1969 $5.1343
$5.0137
======= ======= =======
=======
Total return........ 9.95% 14.01% 6.05%
1.80%
Net assets, end of
period (in
millions) ........ $14 $10 $8
$4
Ratio of expenses
to average net
assets ............ 1.07% 0.93% 0.93%
0.91%
Ratio of net investment
income to average
net assets ....... 2.97% 3.55% 3.92%
4.42%
Portfolio turnover
rate ............. 189.02% 222.50% 49.92%
149.17%
*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,
-----------------------------
- ------------
1998 1997 1996
1995 1994
------- ------- ------- ----
- --- -------
Net asset value,
beginning of
period ........... $1.000 $1.0000 $1.0000
$1.0000 $1.0000
------- ------- ------- ----
- --- -------
Net investment
income ........... 0.0492 0.0503 0.0486
0.0542 0.0368
Less dividends
declared ......... (0.0492)(0.0503)
(0.0486)(0.0542) (0.0368)
------- ------- ------- ----
- --- -------
Net asset value,
end of period .... $1.0000 $1.0000 $1.0000
$1.0000 $1.0000
======= ======= =======
======= =======
Total return ....... 5.04% 5.13% 5.01%
5.56% 3.72%
Net assets, end of
period (in
millions) ........ $54 $43 $37
$37 $31
Ratio of expenses
to average net
assets ............ 0.68% 0.58% 0.61%
0.62% 0.65%
Ratio of net investment
income to average
net assets ....... 4.90% 5.04% 4.87%
5.42% 3.72%
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
1998 1997 1996 1995
12/31/94*
------- ------- ------- -------
- ----------
Net asset value,
beginning of
period ........... $5.1882 $5.1639 $5.2521 $4.8611
$5.0000
------- ------- ------- -------
- -------
Income from investment
operations:
Net investment
income .......... 0.2935 0.3086 0.2842 0.2841
0.1507
Net realized and
unrealized gain (loss)
on investments .. 0.0522 0.0451 (0.0870) 0.4122
(0.1375)
------- ------- ------- -------
- -------
Total from investment
operations ....... 0.3457 0.3537 0.1972 0.6963
0.0132
------- ------- ------- -------
- -------
Less distributions:
From net investment
income .......... (0.2935) (0.3086)(0.2842) (0.2841)
(0.1507)
From capital gains (0.0112) (0.0208)(0.0012) (0.0212)
(0.0014)
------- ------- ------- -------
- -------
Total distributions (0.3047) (0.3294)(0.2854) (0.3053)
(0.1521)
------- ------- ------- -------
- -------
Net asset value,
end of period .... $5.2292 $5.1882 $5.1639 $5.2521
$4.8611
======= ======= ======= =======
=======
Total return........ 6.66% 6.85% 3.79% 14.29%
0.26%
Net assets, end of
period (in
millions) ........ $5 $4 $4 $3
$2
Ratio of expenses
to average net
assets ............ 0.79% 0.73% 0.76% 0.71%
0.93%
Ratio of net investment
income to average
net assets ....... 5.65% 5.93% 5.92% 6.22%
5.89%
Portfolio turnover
rate ............. 47.11% 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,
-----------------------------
- ------------
1998 1997 1996
1995 1994
------- ------- ------- ----
- --- -------
Net asset value,
beginning of
period ........... $5.3686 $5.2004 $5.3592
$4.7393 $5.4045
------- ------- ------- ----
- --- -------
Income from investment
operations:
Net investment
income .......... 0.3180 0.3400 0.3407
0.3556 0.3507
Net realized and
unrealized gain
(loss) on
investments ..... 0.0765 0.1682 (0.1588)
0.6202 (0.6652)
------- ------- ------- ----
- --- -------
Total from investment
operations ....... 0.3945 0.5082 0.1819
0.9758 (0.3145)
------- ------- ------- ----
- --- -------
Less distributions:
From net investment
income .......... (0.3180)(0.3400)
(0.3407)(0.3559) (0.3507)
From capital gains (0.0000)(0.0000)
(0.0000)(0.0000) (0.0000)
------- ------- ------- ----
- --- -------
Total distributions. (0.3180)(0.3400)
(0.3407)(0.3559) (0.3507)
------- ------- ------- ----
- --- -------
Net asset value,
end of period .... $5.4451 $5.3686 $5.2004
$5.3592 $4.7393
======= ======= =======
======= =======
Total return ....... 7.35% 9.77% 3.43%
20.56% -5.90%
Net assets, end of
period (in
millions) ........ $114 $99 $92
$89 $74
Ratio of expenses
to average net
assets ............ 0.67% 0.58% 0.59%
0.60% 0.62%
Ratio of net investment
income to average
net assets ....... 5.99% 6.35% 6.39%
6.73% 6.73%
Portfolio turnover
rate ............. 32.75% 36.81% 64.02%
71.17% 135.82%
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,
-----------------------------
- ------------
1998 1997 1996
1995 1994
------- ------- ------- ----
- --- -------
Net asset value,
beginning of
period ........... $4.7402 $4.5750 $4.4448
$4.1118 $4.6373
------- ------- ------- ----
- --- -------
Income from investment
operations:
Net investment
income .......... 0.4185 0.4098 0.4216
0.4165 0.4106
Net realized and
unrealized gain
(loss) on
investments ..... (0.3259) 0.2324 0.1302
0.3330 (0.5255)
------- ------- ------- ----
- --- -------
Total from investment
operations ....... 0.0926 0.6422 0.5518
0.7495 (0.1149)
------- ------- ------- ----
- --- -------
Less distributions:
From net investment
income .......... (0.4185)(0.4098)
(0.4216)(0.4165) (0.4106)
From capital gains (0.0000)(0.0672)
(0.0000)(0.0000) (0.0000)
------- ------- ------- ----
- --- -------
Total distributions (0.4185)(0.4770)
(0.4216)(0.4165) (0.4106)
------- ------- ------- ----
- --- -------
Net asset value,
end of period .... $4.4143 $4.7402 $4.5750
$4.4448 $4.1118
======= ======= =======
======= =======
Total return ....... 1.95% 14.04% 12.46%
18.19% -2.55%
Net assets, end of
period (in
millions) ........ $126 $120 $97
$87 $73
Ratio of expenses
to average net
assets ............ 0.77% 0.70% 0.71%
0.72% 0.74%
Ratio of net investment
income to average
net assets ....... 8.76% 8.79% 9.10%
9.25% 9.03%
Portfolio turnover
rate ............. 63.64% 65.28% 58.91%
41.78% 37.86%
See notes to financial statements.
<PAGE>
TARGET/UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- Significant Accounting Policies
Target/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 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.
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 $175,930. 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.
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
carryovers. At December 31, 1998 the following amounts
were reclassified:
Increase/(Decrease) Increase/(Decrease)
(Decrease)
Accumulated Accumulated
Distributions
Undistributed Undistributed
in Excess of
Net Investment Net Realized
Net Realized
Fund Income Capital Gains
Gains
- ---- ------------------- ------------------- -
- ------------
Growth Portfolio $ 27,648 $(27,648)
- ---
Income Portfolio (33,184) 33,184
- ---
International Portfolio (115,574) 115,574
- ---
Small Cap Portfolio --- 1,287,773
(1,287,773)
Balanced Portfolio (3,126) 3,126
- ---
Asset Strategy Portfolio (1,470) 1,470
- ---
Net investment income, net realized gains and net
assets were not affected
by these changes.
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 $2.4 billion of combined net
assets at December 31,
1998) 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 has adopted a Service Plan pursuant to Rule
12b-1 of the 1940 Act.
Under the Plan, each Portfolio may pay monthly a fee to W&R
in an amount not to
exceed 0.25% of the Portfolio's average annual net assets.
The fee is to be
paid to compensate W&R for amounts it expends in connection
with the provision
of personal services to Policyowners and/or maintenance of
Policyowner accounts.
The Fund paid Directors' fees of $72,525, which are
included in other
expenses.
W&R is a subsidiary of 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 fiscal year
ended December 31,
1998 are summarized as follows:
Science and
Growth Income
Technology
Portfolio Portfolio
Portfolio
----------- ---------
- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $476,791,185 $237,925,019
$19,808,170
Purchases of U.S. Government
securities --- 136,656,960
- ---
Purchases of short-term
securities 1,250,645,360 2,276,250,365
228,136,999
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 530,010,418 352,273,957
10,013,335
Proceeds from maturities
and sales of U.S.
Government securities --- ---
- ---
Proceeds from maturities
and sales of short-term
securities 1,196,672,399 2,259,978,909
222,154,000
International Small Cap
Balanced
Portfolio Portfolio
Portfolio
----------- ---------
- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $130,746,866 $220,538,891
$34,427,720
Purchases of U.S. Government
securities 6,261,211 ---
13,231,252
Purchases of short-term
securities 262,482,238 644,702,927
153,011,780
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 117,226,815 213,364,417
35,531,137
Proceeds from maturities
and sales of U.S.
Government securities --- ---
1,129,836
Proceeds from maturities
and sales of short-term
securities 263,991,674 633,481,935
145,464,288
Limited-
Asset Strategy Term Bond
Bond
Portfolio Portfolio
Portfolio
----------- ---------
- ---------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $13,929,296 $1,534,073
$21,548,650
Purchases of U.S. Government
securities 10,099,320 755,690
24,955,370
Purchases of short-term
securities 23,580,639 3,542,835
53,371,763
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 13,995,144 1,307,435
23,201,659
Proceeds from maturities
and sales of U.S.
Government securities 4,128,600 551,557
9,721,511
Proceeds from maturities
and sales of short-term
securities 25,708,753 3,706,000
54,062,594
High
Income
Portfolio
-----------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $ 85,236,731
Purchases of U.S. Government
securities 1,587,188
Purchases of short-term
securities 139,622,352
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 72,365,479
Proceeds from maturities
and sales of U.S.
Government securities 1,620,000
Proceeds from maturities
and sales of short-term
securities 139,611,655
For Federal income tax purposes, cost of investments
owned at December 31,
1998, and the related unrealized appreciation (depreciation)
were as follows:
Aggregate
Appreciation
CostAppreciationDepreciation(Depreciation)
---------------------------------------
- ---------
Growth Portfolio
$589,582,053$238,711,983$(3,818,925)$234,893,058
Income Portfolio 566,730,116 249,812,805 (8,357,361)
241,455,444
Science and Technology
Portfolio 26,379,416 9,210,580 (1,021,843)
8,188,737
International Portfolio132,878,064 46,648,783 (7,696,742)
38,952,041
Small Cap Portfolio 181,143,212 23,176,328(19,531,223)
3,645,105
Balanced Portfolio 80,420,547 12,635,895 (1,845,348)
10,790,547
Asset Strategy Portfolio13,724,620 668,732 (266,790)
401,942
Money Market Portfolio 54,165,176 --- ---
- ---
Limited-Term Bond Portfolio4,386,981 64,100 (3,210)
60,890
Bond Portfolio 108,332,367 4,547,166 (229,268)
4,317,898
High Income Portfolio 126,589,037 3,794,911 (6,214,265)
(2,419,354)
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,
International, Balanced and Asset Strategy Portfolios
realized capital gain net
income of $24,740,928, $110,722,842, $623,709, $13,346,041,
$761,232 and
$474,359, respectively, during the year ended December 31,
1998. For Federal
income tax purposes, Small Cap Portfolio realized capital
gain net income of
$24,172,355 for the year ended December 31, 1998, 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, Limited-Term Bond Portfolio realized
capital gain net
income of $9,156 during the year ended December 31, 1998,
which included the
effect of certain losses deferred into the next fiscal year
(see discussion
below). For Federal income tax purposes, High Income
Portfolio realized capital
losses of $65,442 for the year ended December 31, 1998,
which included the
effect of certain losses deferred into the next fiscal year
(see discussion
below). For Federal income tax purposes, Bond Portfolio
realized capital gains
of $783,100 during the year ended December 31, 1998, which
were entirely offset
by capital loss carryovers. In addition, prior year capital
loss carryovers of
Bond Portfolio aggregated $1,405,971 as of December 31,
1998, and are available
to offset future realized capital gain net income as
follows: $1,389,275
through December 31, 2002, and $16,696 through December 31,
2004. The capital
gain net income of Growth, Income, Science and Technology,
International, Small
Cap, Balanced, Asset Strategy and Limited-Term Bond
Portfolios was paid to
shareholders during the year ended December 31, 1998.
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, 1998 through December 31, 1998, Small Cap,
Limited-Term Bond
and High Income Portfolios incurred net capital losses of
$1,287,773, $211 and
$273,055, respectively, which have been deferred to the
fiscal year ending
December 31, 1999. In addition, during the year ended
December 31, 1998, Small
Cap Portfolio recognized post-October losses of $352,811
that had been deferred
from the year ended December 31, 1997.
NOTE 5 -- Name Change
On August 21, 1998, a meeting of shareholders was held
at which the name of
the Fund was changed to Target/United Funds, Inc. effective
August 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Target/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") comprising Target/United Funds, Inc. (formerly
known as TMK/United
Funds, Inc.), as of December 31, 1998, and the related
statements of operations
for the fiscal year then ended, the statements of changes in
net assets for each
of the two fiscal years in the period then ended, and the
financial highlights
for each of the five fiscal years in the period then ended.
These financial
statements and the financial highlights are the
responsibility of the Funds'
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 as of
December 31, 1998, by correspondence with the custodian and
brokers. An audit
also includes assessing the accounting principles used and
significant estimates
made by management, as well as evaluating the overall
financial statement
presentation. We believe that our audits provide a
reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to
above present fairly, in all material respects, the
financial positions of each
of the respective Portfolios of Target/United Funds, Inc. as
of December 31,
1998, the results of their operations for the fiscal year
then ended, the
changes in their net assets for each of the two fiscal years
in the period then
ended and the financial highlights for each of the five
fiscal years in the
period then ended, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
