File No. 811-5017
File No. 33-11466
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 22
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 22
TARGET/UNITED FUNDS, INC.
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
__X__ on May 1, 1999 pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
==================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the Registrant's
fiscal year ended December 31, 1998 will be filed on or about March 26, 1999.
<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
PROSPECTUS
- --------------------------------------------------------------------------------
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.
<PAGE>
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.
2
<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, 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:
o an increase in interest rates, which may cause the value of the Portfolio's
fixed-income securities to decline;
o prepayment of higher-yielding bonds held by the Portfolio;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Portfolio holds;
o 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
o the skill of the Manager in allocating the Portfolio's assets among
different types of investments.
3
<PAGE>
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.
4
<PAGE>
Performance
The chart and table below show the past performance of Asset Strategy
Portfolio's shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicators listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1995* 1.80%
1996 6.05%
1997 14.01%
1998 9.95%
*For the period May 1, 1995 through December 31, 1995.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Portfolio*
------ ------------------
<S> <C> <C>
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%
</TABLE>
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.
5
<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:
o an increase in interest rates, which may cause the value of the Portfolio's
fixed-income securities to decline;
o the credit quality, earnings performance and other conditions of the
issuers whose securities the Portfolio holds;
o 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;
o 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 those relating to 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.
6
<PAGE>
Performance
The chart and table below show the past performance of Balanced Portfolio's
shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicators listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1994* -0.37%
1995 24.19%
1996 11.19%
1997 18.49%
1998 8.67%
*For the period May 3, 1994 through December 31, 1994.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Portfolio*
------ ------------------
<S> <C> <C>
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%
</TABLE>
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.
7
<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 debt
securities, which may include convertible securities and debt securities with
warrants attached. In selecting the debt securities for the Portfolio's
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:
o an increase in interest rates, which may cause the value of the Portfolio's
fixed-income securities to decline;
o prepayment of higher-yielding bonds held by the Portfolio;
o the credit quality, earnings performance and other conditions of the
companies whose securities the Portfolio holds;
o changes in the maturities of bonds owned by the Portfolio;
o 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;
o 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 those relating to 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.
8
<PAGE>
Performance
The chart and table below show the past performance of Bond Portfolio's shares:
o The chart presents the annual returns and shows how performance has varied
from year to year over the past ten years.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
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 ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------
<S> <C> <C> <C>
Shares of Bond Portfolio 7.35% 6.81% 8.83%
Salomon Brothers Broad Investment
Grade Index 8.71% 7.30% 9.31%
</TABLE>
The index shown is a broad-based, securities market index that is unmanaged.
9
<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, or securities convertible into 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:
o 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;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Portfolio holds;
o the mix of securities in the Portfolio, particularly the relative
weightings in (and exposure to) different sectors and industries;
o an increase in interest rates, which may cause the value of the Portfolio's
fixed-income securities to decline; and
o 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 those relating to 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
10
<PAGE>
economy. You should consider whether the Portfolio fits your particular
investment objectives.
11
<PAGE>
Performance
The chart and table below show the past performance of Growth Portfolio's
shares:
o The chart presents the annual returns and shows how performance has varied
from year to year over the past ten years.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
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 ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------
<S> <C> <C> <C>
Shares of Growth Portfolio 27.31% 19.78% 18.77%
S&P 500 Index 28.70% 24.08% 19.21%
</TABLE>
The index shown is a broad-based, securities market index that is unmanaged.
12
<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:
o the credit quality, earnings performance and other conditions of the
companies whose securities the Portfolio holds;
o junk bonds are more susceptible to the risk of nonpayment or default and
their prices may be more volatile than higher-rated bonds;
o junk bonds may not be as liquid as higher-rated bonds;
o an increase in interest rates, which may cause the value of a bond held by
the Portfolio to decline;
o changes in the maturities of bonds owned by the Portfolio;
o 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
o 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 those
relating to 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.
13
<PAGE>
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.
14
<PAGE>
Performance
The chart and table below show the past performance of High Income Portfolio's
shares:
o The chart presents the annual returns and shows how performance has varied
from year to year over the past ten years.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
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 ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------
<S> <C> <C> <C>
Shares of High Income Portfolio 1.95% 8.54% 9.35%
Salomon Brothers High Yield
Composite Index 4.04% 9.55% 11.44%
</TABLE>
The index shown is a broad-based, securities market index that is unmanaged.
15
<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, or securities convertible into common stocks, of 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:
o 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;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Portfolio holds;
o an increase in interest rates which may cause the value of the Portfolio's
fixed-income securities to decline; and
o 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 those
relating to 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.
16
<PAGE>
Performance
The chart and table below show the past performance of Income Portfolio's
shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1991* 17.43%
1992 13.78%
1993 17.30%
1994 -1.14%
1995 31.56%
1996 19.75%
1997 26.16%
1998 21.14%
*For the period July 16, 1991 through December 31, 1991.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years Life of Portfolio*
----------------------------------------------------
<S> <C> <C> <C>
Shares of Income Portfolio 21.14% 18.94% 17.91%
S&P 500 Index 28.70% 24.08% 19.74%
</TABLE>
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.
17
<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, or securities convertible into or exchangeable for common stocks,
of foreign companies that the Manager believes have the potential for long-term
growth. The Portfolio may also invest in preferred stocks and in fixed-income
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:
o 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;
o changes in foreign exchange rates, which may affect the value of the
securities the Portfolio holds;
o the earnings performance, credit quality and other conditions of the
issuers whose securities the Portfolio holds; and
o the Manager's skill in evaluating and selecting securities for the
Portfolio.
Investing in foreign securities presents additional risks, such as those
relating to 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.
18
<PAGE>
Performance
The chart and table below show the past performance of International Portfolio's
shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1994* 0.26%
1995 7.28%
1996 15.11%
1997 16.70%
1998 33.89%
*For the period May 3, 1994 through December 31, 1994.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Portfolio*
------ ------------------
<S> <C> <C>
Shares of International Portfolio 33.89% 15.19%
Morgan Stanley E.A.FE. Index 20.00% 8.11%
</TABLE>
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.
19
<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:
o an increase in interest rates, which may cause the value of the Portfolio's
fixed-income securities to decline;
o the credit quality, earnings performance and other conditions of the
issuers whose securities the Portfolio holds;
o prepayment of higher-yielding bonds held by the Portfolio;
o 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
o 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.
20
<PAGE>
Performance
The chart and table below show the past performance of Limited-Term Bond
Portfolio's shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1994* 0.26%
1995 14.29%
1996 3.79%
1997 6.85%
1998 6.66%
*For the period May 3, 1994 through December 31, 1994.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Portfolio*
------ ------------------
<S> <C> <C>
Shares of Limited-Term Bond Portfolio 6.66% 6.73%
Salomon Brothers Treasury/Government
Sponsored/Corporate 1-5 Year Index 7.65% 7.09%
</TABLE>
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.
21
<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:
o an increase in interest rates, which can cause the value of the Portfolio's
holdings to decline;
o the credit quality and other conditions of the issuers whose securities the
Portfolio holds;
o 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
o 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.
22
<PAGE>
Performance
The chart and table below show the past performance of the Money Market
Portfolio's shares:
o The chart presents the annual returns and shows how performance has varied
from year to year over the past ten years.
o The table shows average annual returns.
o 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.
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%
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------
<S> <C> <C> <C>
Shares of Money Market Portfolio % % %
</TABLE>
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:
o the mix of securities in the Portfolio, particularly the relative
weightings in (and exposure to) different sectors of the science and
technology industries;
o rapid obsolescence of products or processes of companies in which the
Portfolio invests;
o governmental regulation in the science and technology industry;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Portfolio holds;
o 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
o 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 those
relating to 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.
24
<PAGE>
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.
25
<PAGE>
Performance
The chart and table below show the past performance of Science and Technology
Portfolio's shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1997* 16.24%
1998 46.05%
*For the period April 4, 1997 through December 31, 1997.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Portfolio*
------ ------------------
<S> <C> <C>
Shares of Science and
Technology Portfolio 46.05% 35.49%
S&P 400 Index 33.85% 35.85%
</TABLE>
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.
26
<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, or securities convertible into the 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:
o the earnings performance, credit quality and other conditions of the
companies whose securities the Portfolio holds;
o 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
o 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 those relating to 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.
27
<PAGE>
Performance
The chart and table below show the past performance of the Small Cap Portfolio's
shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows average annual returns and compares them to the market
indicator listed.
o 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.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1994* 20.92%
1995 32.32%
1996 8.50%
1997 31.53%
1998 10.87%
*For the period May 3, 1994 through December 31, 1994.
In the period shown in the chart, the highest quarterly return was ____%
(the _______ quarter of 199_) and the lowest quarterly return was _____%
(the ______ quarter of 199_).
Average Annual Total Returns
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Portfolio*
------ ------------------
<S> <C> <C>
Shares of Small Cap Portfolio 10.87% 22.03%
Nasdaq Industrials Index 6.82% 12.12%
</TABLE>
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.
28
<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 fluctuates 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.
o 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.
o 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.
o 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.
o Within each of these classes, the Portfolio may invest in both domestic and
foreign securities.
29
<PAGE>
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:
o 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
o 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
30
<PAGE>
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.
In selecting debt securities for the Portfolio, the Manager may look at many
factors. These include the issuer's past, present and estimated future:
o financial strength;
o cash flow;
o management;
o borrowing requirements; and
o 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:
o sell longer-term bonds and buy shorter-term bonds or money market
instruments with the sales proceeds;
o buy bonds with put options or exercise put options on bonds held; and
31
<PAGE>
o 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:
o market position and competitive advantages;
o stability and predictability of earnings growth; and
o 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 (commonly
called "junk bonds") are considered to be speculative and involve greater risk
of default
32
<PAGE>
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.
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:
o financial strength;
o cash flow;
o management;
o borrowing requirements; and
o 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:
o shorten the average maturity of the Portfolio's debt holdings;
o hold cash or cash equivalents (short-term investments, such as commercial
paper and certificates of deposit) in varying amounts designed for
defensive purposes; and
o 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.
33
<PAGE>
The Manager attempts to select securities with income and growth possibilities
by looking at many factors, including the company's:
o dividend payment history;
o profitability record;
o history of improving sales and profits;
o management;
o leadership position in its industry; and
o 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:
o exchange-traded or quoted on an automated quotations system (except
warrants, rights or restricted securities which need not be
exchange-traded or quoted);
o represented by U.S.-traded American Depository Receipts; or
o 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
34
<PAGE>
defensive position may reduce the potential for appreciation in the Portfolio.
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:
o shorten the average maturity of its investments;
o hold short-term investments, cash or cash equivalents;
o emphasize debt securities of a higher quality than those it would
ordinarily hold; or
o 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:
o U.S. government obligations (including obligations of U.S. government
agencies and instrumentalities);
o bank obligations and instruments secured by bank obligations, such as
letters of credit;
o commercial paper;
35
<PAGE>
o corporate debt obligations, including variable amount master demand notes;
o Canadian government obligations; and
o 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:
o aerospace;
o communications and electronic equipment;
o computer systems;
o computer software and services;
o electronics;
o electronic media;
o business machines;
o office equipment and supplies;
o biotechnology;
o medical and hospital supplies and services; and
o medical devices and drugs.
The four main kinds of securities that the Portfolio may own are:
o common stock;
o preferred stock;
o debt securities; and
o convertible securities.
36
<PAGE>
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:
o aggressive or creative management;
o technological or specialized expertise;
o new or unique products or services;
o entry into new or emerging industries; and
o 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:
o exchange-traded or quoted on an automated quotations system (except
warrants, rights or restricted securities which need not be exchange-traded
or quoted);
o represented by U.S.-traded American Depository Receipts; or
o issued or guaranteed by a foreign government (or any of its subdivisions,
agencies or instrumentalities).
37
<PAGE>
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.
38
<PAGE>
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 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.
39
<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
<TABLE>
<CAPTION>
For the
For the fiscal year ended December 31, period ended
-------------------------------------- December 31,
1998 1997 1996 1995*
---- ---- ---- ----------
<S> <C> <C> <C> <C>
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%
</TABLE>
*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.
40
<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
<TABLE>
<CAPTION>
For the
period
For the fiscal year ended December 31, ended
----------------------------------------------- December 31,
1998 1997 1996 1995 1994*
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
*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.
41
<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
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
42
<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
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
43
<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
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
44
<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
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
45
<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
<TABLE>
<CAPTION>
For the
period
For the fiscal year ended December 31, ended
----------------------------------------- December 31,
1998 1997 1996 1995 1994*
---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
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 $114,631 $79,849 $50,196 $26,020
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%
</TABLE>
*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.
46
<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
<TABLE>
<CAPTION>
For the
period
For the fiscal year ended December 31, ended
----------------------------------------- December 31,
1998 1997 1996 1995 1994*
---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
*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.
47
<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
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
48
<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
<TABLE>
<CAPTION>
For the
fiscal For the
year period ended
ended December 31,
12-31-98 1997*
-------- -----
<S> <C> <C>
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 $10,207
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%
</TABLE>
*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.
49
<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
<TABLE>
<CAPTION>
For the
period
For the fiscal year ended December 31, ended
-------------------------------------- December 31,
1998 1997 1996 1995 1994*
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
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 ............................ 77.32% 211.46% 133.77% 43.27% 21.61%
</TABLE>
*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.
50
<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.
Portfolio Management
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 other investment companies 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
51
<PAGE>
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.
52
<PAGE>
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.
53
<PAGE>
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.
54
<PAGE>
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 0.94%
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.
55
<PAGE>
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:
o the New York Stock Exchange ("NYSE") is closed other than customary weekend
and holiday closings or trading on the NYSE is restricted;
o the Securities and Exchange Commission has determined that a state of
emergency exists which may make payment or transfer not reasonably
practicable;
o 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
o 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:
o The securities in the Portfolio that are listed or traded on an exchange
are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
56
<PAGE>
o 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--
57
<PAGE>
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.
58
<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
Prospectus Summary .................................................... 2
Financial Highlights .................................................. 4
The Fund .............................................................. 15
Goals and Investment Policies
of the Portfolios ................................................. 16
Management ............................................................ 36
Net Asset Value ....................................................... 40
Purchases and Redemptions ............................................. 40
Dividends and Distributions ........................................... 41
Taxes ................................................................. 41
Other Information ..................................................... 42
59
<PAGE>
Target/United Funds, Inc.
PROSPECTUS
May 1, 1999
You can get more information about the Portfolios in--
o 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).
o 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.
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
60
<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
<TABLE>
<S> <C>
Performance Information .................................. 2
Investment Strategies, Policies and Practices............. 5
Investment Management and Other Services ................. 41
Net Asset Value .......................................... 45
Directors and Officers ................................... 48
Purchases and Redemptions ................................ 55
Shareholder Communications ............................... 55
Taxes .................................................... 56
Dividends and Distributions .............................. 60
Portfolio Transactions and Brokerage ..................... 61
Other Information ........................................ 64
Financial Statements ..................................... 66
Appendix A ...............................................
</TABLE>
<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:
<TABLE>
<CAPTION>
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
----------- ----------- -----------
<S> <C> <C> <C>
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%**
</TABLE>
*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:
<TABLE>
<S> <C>
Bond Portfolio 5.56%
High Income Portfolio 9.59%
Limited-Term Bond Portfolio 6.02%
</TABLE>
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 restriction, 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, as described above,
and forward currency contracts, as described below, to attempt to hedge against
movements in the values of the foreign currencies in which the Portfolio's
securities are denominated or to attempt to enhance income or yield. Currency
hedges can protect against price movements in a security that a Portfolio owns
or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other causes.
Each of these Portfolios might seek to hedge against changes in the
value of a particular currency when no Financial Instruments on that currency
are available or such Financial Instruments are more expensive than certain
other Financial Instruments. In such cases, a Portfolio may seek to hedge
against price movements in that currency by entering into transactions using
Financial Instruments on another currency or a basket of currencies, the values
of which the Manager believes will have a high degree of positive correlation to
the value of the currency being hedged. The risk that movements in the price of
the Financial Instrument will not correlate perfectly with movements in the
price of the currency subject to the hedging transaction is magnified when this
strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, a Portfolio could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
a Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. Each Portfolio (other than Money Market
Portfolio and Limited-Term Bond Portfolio) may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, a Portfolio
may purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Portfolio intends to
acquire. Forward currency contract transactions may also serve as short hedges;
for example, a Portfolio may sell a forward currency contract to lock in the
U.S. dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
Each of these Portfolios may also use forward currency contracts to
hedge against a decline in the value of existing investments denominated in
foreign currency. For example, if a Portfolio owned securities denominated in
pounds sterling, it could enter into a forward currency contract to sell pounds
sterling in return for U.S. dollars to hedge against possible declines in the
pound's value. Such a hedge, sometimes referred to as a "position hedge," would
tend to offset both positive and negative currency fluctuations, but would not
offset changes in security values caused by other factors. Each of these
Portfolios could also hedge the position by selling another currency expected to
perform similarly to the pound sterling, for example, by entering into a forward
currency contract to sell Deutsche Marks or European Currency Units in return
for U.S. dollars. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but generally
would not hedge currency exposure as effectively as a simple hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to hedge does
not perform similarly to the currency in which the hedged securities are
denominated.
Each of these Portfolios also may use forward currency contracts to
attempt to enhance income or yield. A Portfolio could use forward currency
contracts to increase its exposure to foreign currencies that the Manager
believes might rise in value relative to the U.S. dollar, or shift its exposure
to foreign currency fluctuations from one country to another. For example, if a
Portfolio owned securities denominated in a foreign currency and the Manager
believed that currency would decline relative to another currency, it might
enter into a forward currency contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
The cost to a Portfolio of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved. When a Portfolio enters into a forward currency contract, it
relies on the counterparty to make or take delivery of the underlying currency
at the maturity of the contract. Failure by the counterparty to do so would
result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a Portfolio will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counterparty, a Portfolio might be unable to close
out a forward currency contract at any time prior to maturity. In either event,
the Portfolio would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or liquid assets in an
account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a Portfolio might need to purchase
or sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Manager believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of a Portfolio will be served.
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 Portfolio (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:
(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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Periods ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
* 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:
<TABLE>
<CAPTION>
Periods ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
* 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
Balanced Portfolio
Bond Portfolio
Growth Portfolio
High Income Portfolio
Income Portfolio
International Portfolio
Limited-Term Bond Portfolio
Money Market Portfolio
Science and Technology Portfolio'
Small Cap Portfolio
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
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon
John A. Dillingham
David P. Gardner
Linda K. Graves
Joseph Harroz, Jr.
John F. Hayes
Glendon E. Johnson
William T. Morgan
Ronald C. Reimer
Frank J. Ross, Jr.
Eleanor B. Schwartz
Frederick Vogel III
</TABLE>
*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:
<TABLE>
<CAPTION>
Periods ended December 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Asset Strategy Portfolio $16,930 $8,679
Balanced Portfolio 56,431 36,529
Bond Portfolio --- ---
Growth Portfolio 1,785,220 2,297,780
High Income Portfolio 2,998 7,574
Income Portfolio 421,831 250,273
International Portfolio 597,704 324,673
Limited-Term Bond Portfolio --- ---
Money Market Portfolio --- ---
Science and Technology Portfolio* 8,143
Small Cap Portfolio 238,000 117,166
---------- ---------- ----------
$3,127,257 $3,042,674
========== ========== ==========
</TABLE>
* 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.
<TABLE>
<CAPTION>
Amount of Brokerage
Transactions Commissions
------------ -----------
<S> <C> <C>
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
============== ==========
</TABLE>
As of December 31, 1997, Money Market Portfolio owned Merrill Lynch &
Co., Inc. securities in the aggregate amount of $1,500,011. Merrill Lynch & Co.,
Inc. is a regular broker of the Portfolio. As of December 31, 1997, Bond
Portfolio owned J.P. Morgan & Co. Incorporated securities in the aggregate
amount of $1,523,790. J.P. Morgan & Co. Incorporated is a regular broker of the
Portfolio. As of December 31, 1997, Income Portfolio owned Credit Suisse Group
securities in the aggregate amount of $3,201,834. Credit Suisse Group is a
regular broker of the Portfolio. As of December 31, 1997, International
Portfolio owned Credit Suisse Group securities in the aggregate amount of
$4,021,628. Credit Suisse Group is a regular broker of the Portfolio. As of
December 31, 1997, Small Cap Portfolio owned Merrill Lynch & Co. Inc. and J.P.
Morgan & Co. Incorporated securities in the aggregate amounts of $1,601,108 and
$1,605,893, respectively. Merrill Lynch & Co. Inc. and J.P. Morgan & Co.
Incorporated are each a regular broker of the Portfolio. As of December 31,
1997, Asset Strategy Portfolio owned Merrill Lynch & Co. Inc. and J.P. Morgan &
Co. Incorporated securities in the aggregate amounts of $399,027 and $497,181,
respectively. Merrill Lynch & Co. Inc. and J.P. Morgan & Co. Incorporated are
each a regular broker of the Portfolio. As of December 31, 1997, Science and
Technology Portfolio owned J.P. Morgan & Co. Incorporated securities in the
aggregate amount of $1,305,000. J.P. Morgan & Co. Incorporated is a regular
broker of the Portfolio.
The Fund, the Manager and Waddell & Reed, Inc. have adopted a Code of
Ethics which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
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
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
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 .
1
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
<S> <C> <C>
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 .
2
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
<S> <C> <C>
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)
<CAPTION>
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Communication - 3.39%
<S> <C> <C>
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 .
3
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Electronic and Other Electric Equipment - 1.89%
<S> <C> <C>
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 .
4
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Value
<S> <C>
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 .
5
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS
<S> <C> <C>
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 .
6
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
7
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
<S> <C> <C>
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 .
8
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
9
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
<S> <C> <C>
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)
<CAPTION>
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITY - 17.03%
<S> <C> <C>
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 .
10
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
<S> <C> <C>
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 .
11
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS
<S> <C> <C>
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 .
12
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
13
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
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 .
14
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS
<S> <C> <C>
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 .
15
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
16
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
17
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
<S> <C> <C>
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)
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
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 .
18
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Value
<S> <C> <C>
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 .
19
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
<S> <C> <C>
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 .
20
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
21
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
<S> <C> <C>
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 .
22
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Value
<S> <C>
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 .
23
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS
<S> <C> <C>
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 .
24
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
25
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
26
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
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 .
27
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
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 .
28
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
<S> <C> <C>
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 .
29
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS
<S> <C> <C>
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 .
30
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS (Continued)
<S> <C> <C>
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 .
31
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
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 .
32
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
BANK OBLIGATIONS
Certificates of Deposit - 3.70%
<S> <C> <C>
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 .
33
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
<S> <C> <C>
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 .
34
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
<S> <C> <C>
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 .
35
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
New Jersey - 0.38%
<S> <C> <C>
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 .
36
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
<S> <C> <C>
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 .
37
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 9.96%
<S> <C> <C>
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 .
38
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
<S> <C> <C>
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 .
39
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
<S> <C> <C>
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 .
40
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
41
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
42
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Oil and Gas Extraction (Continued)
<S> <C> <C>
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 .
43
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
44
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES (Continued)
<S> <C> <C>
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 .
45
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
COMMON STOCKS AND WARRANTS
Communication - 0.88%
<S> <C> <C>
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 .
46
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Shares Value
PREFERRED STOCKS (CONTINUED)
<S> <C> <C>
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)
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
<S> <C> <C>
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 .
47
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Business Services - 2.49%
<S> <C> <C>
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 .
48
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
<S> <C> <C>
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 .
49
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
<S> <C> <C>
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 .
50
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Engineering and Management Services - 0.42%
<S> <C> <C>
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 .
51
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
52
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
53
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
54
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
<S> <C> <C>
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 .
55
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1998
<CAPTION>
Value
<S> <C>
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
</TABLE>
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.
56
<PAGE>
<TABLE>
<CAPTION>
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 ----------- ---------- -----------
<S> <C> <C> <C>
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.
57
<PAGE>
<CAPTION>
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 ------------ ------------ -----------
<S> <C> <C> <C>
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.
58
<PAGE>
<CAPTION>
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 ------------- ------------ -----------
<S> <C> <C> <C>
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.
59
<PAGE>
<CAPTION>
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 ------------- -------------
<S> <C> <C>
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.
60
<PAGE>
<CAPTION>
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
---------- ---------- ----------
<S> <C> <C> <C>
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.
61
<PAGE>
<CAPTION>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
International Small Cap Balanced
Portfolio Portfolio Portfolio
---------- ---------- ----------
<S> <C> <C> <C>
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.
62
<PAGE>
<CAPTION>
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
--------------- ---------- ----------
<S> <C> <C> <C>
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.
63
<PAGE>
<CAPTION>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Bond High Income
Portfolio Portfolio
------------- -------------
<S> <C> <C>
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.
64
<PAGE>
<CAPTION>
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
----------- ----------- -----------
<S> <C> <C> <C>
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 - .
**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.
65
<PAGE>
<CAPTION>
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
----------- ----------- -----------
<S> <C> <C> <C>
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 - .
**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.
66
<PAGE>
<CAPTION>
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
-------------- ----------- -----------
<S> <C> <C> <C>
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 - .
**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.
67
<PAGE>
<CAPTION>
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
----------- -----------
<S> <C> <C>
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 - .
**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.
68
<PAGE>
<CAPTION>
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
----------- ----------- -----------
<S> <C> <C> <C>
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 - .
**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.
69
<PAGE>
<CAPTION>
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
----------- ----------- -----------
<S> <C> <C> <C>
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 - 98.
**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.
70
<PAGE>
<CAPTION>
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
-------------- ----------- -----------
<S> <C> <C> <C>
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 - .
**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.
71
<PAGE>
<CAPTION>
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
----------- -----------
<S> <C> <C>
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 - .
**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)
-------- -------
Increase in
outstanding capital ............. $ 4,309 $18,977
======= =======
See notes to financial statements.
72
<PAGE>
<CAPTION>
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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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.
73
<PAGE>
<CAPTION>
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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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.
74
<PAGE>
<CAPTION>
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*
---------- ----------
<S> <C> <C>
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.
75
<PAGE>
<CAPTION>
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*
------ ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C>
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.
76
<PAGE>
<CAPTION>
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*
------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
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.
77
<PAGE>
<CAPTION>
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*
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
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.
78
<PAGE>
<CAPTION>
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*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
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 nothave 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.
79
<PAGE>
<CAPTION>
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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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.
80
<PAGE>
<CAPTION>
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*
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
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.
81
<PAGE>
<CAPTION>
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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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.
82
<PAGE>
<CAPTION>
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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
See notes to financial statements.
83
<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
84
<PAGE>
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:
<TABLE>
<CAPTION>
Increase/(Decrease) Increase/(Decrease) (Decrease)
Accumulated Accumulated Distributions
Undistributed Undistributed in Excess of
Net Investment Net Realized Net Realized
Fund Income Capital Gains Gains
- ---- ------------------- ------------------- -------------
<S> <C> <C> <C>
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 ---
</TABLE>
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.
85
<PAGE>
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:
86
<PAGE>
<TABLE>
<CAPTION>
Science and
Growth Income Technology
Portfolio Portfolio Portfolio
----------- --------- ---------
<S> <C> <C> <C>
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
<CAPTION>
International Small Cap Balanced
Portfolio Portfolio Portfolio
----------- --------- ---------
<S> <C> <C> <C>
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
87
<PAGE>
<CAPTION>
Limited-
Asset Strategy Term Bond Bond
Portfolio Portfolio Portfolio
----------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
For Federal income tax purposes, cost of investments owned at December
31, 1998, and the related unrealized appreciation (depreciation) were as
follows:
88
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Appreciation
Cost Appreciation Depreciation (Depreciation)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 Portfolio 132,878,064 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 Portfolio 13,724,620 668,732 (266,790) 401,942
Money Market Portfolio 54,165,176 --- --- ---
Limited-Term Bond Portfolio 4,386,981 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)
</TABLE>
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.
89
<PAGE>
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.
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
90
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
(a) Articles of Incorporation, as amended, filed July 1, 1998 as
EX-99.B1-charter to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A*
Articles Supplementary filed July 1, 1998 as EX-99.B1-tkartsup to
Post-Effective Amendment No. 21 to the Registration Statement on
Form N-1A*
(b) Bylaws filed April 29, 1996 as EX-99.B2-tmkbylaw to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A*
Amendment to Bylaws attached hereto as EX-99.B(b)-bylaw2
(c) Not applicable
(d) Investment Management Agreement with fee schedule amended to reflect
the addition of Science and Technology Portfolio filed October 31,
1996 as EX-99.B5-tmkima to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A*
Assignment of Investment Management Agreement filed April 1, 1997
as EX-99.B5-tkassign to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A*
(e) Form of Distribution Contract reflecting addition of Asset Strategy
Portfolio filed February 15, 1995 as EX-99.B6-tmkdisco to
Post-Effective Amendment No. 11 to the Registration Statement on
Form N-1A*
Form of Distribution Contract reflecting addition of Science and
Technology Portfolio filed October 31, 1996 as EX-99.B6-variable to
Post-Effective Amendment No. 14 to the Registration Statement on
Form N-1A*
Agreement Amending Distribution Contract to rescind the provisions
to terminate the agreement attached hereto as EX-99.B(e)amnddist
Principal Underwriting Agreement between Waddell & Reed, Inc. and
United Investors Life Insurance Company filed October 3, 1995 as
EX-99.B6-tmkpua to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A*
Agreement Amending Principal Underwriting Agreement reflecting
termination of the agreement as of December 31, 1998 filed April 29,
1998 as EX-99.B6-tmkterm2 to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Agreement Amending Distribution Contract reflecting termination of
the agreement as of December 31, 1998 filed April 29, 1998 as
EX-99.B6-tmkterm1 to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Agreement Amending Principal Underwriting Agreement to rescind the
provisions to terminate the agreement attached hereto as
EX-99.B(e)amendpua
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as EX-99.B(g)-tgtca
(h) Accounting Services Agreement filed October 3, 1995 as
EX-99.B9-tmkasa to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A*
(i) Opinion and Consent of Counsel filed March 18, 1987 as Exhibit
(b)(10) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A*
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)-tkconsnt
(k) Not applicable
(l) Agreement between United Investors Life Insurance Company and
Income Portfolio filed April 21, 1992 as Exhibit No. 13 to
Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A*
Agreement between United Investors Life Insurance Company and
International Portfolio, Small Cap Portfolio, Balanced Portfolio and
Limited-Term Bond Portfolio filed February 15, 1995 as
EX-99.B13-tmkuil to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A*
Agreement between United Investors Life Insurance Company and Asset
Strategy Portfolio filed October 3, 1995 as EX-99.B13-tmkuilasp to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A*
Agreement between United Investors Life Insurance Company and
Science and Technology Portfolio filed October 31, 1996 as
EX-B.13-tmkuilst to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A*
(m) Service Plan attached hereto as EX-99.B(m)-tmksp
(n) Financial Data Schedules, attached hereto as EX-27.B(n)-tgtfds1,
EX-27.B(n)-tgtfds2, EX-27.B(n)-tgtfds3, EX-27.B(n)-tgtfds4,
EX-27.B(n)-tgtfds5, EX-27.B(n)-tgtfds6, EX-27.B(n)-tgtfds7,
EX-27.B(n)-tgtfds8, EX-27.B(n)-tgtfds9, EX-27.B(n)-tgtfds10,
EX-27.B(n)-tgtfds11
(o) Not applicable
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Section 7 of Article SEVENTH of the Articles of
Incorporation of Registrant, as amended, filed July 1, 1998 as
EX-99.B1-charter to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A*, and to Paragraph 7 of the Distribution Agreement
between United Investors Life Insurance Company and the Registrant, filed
October 31, 1996 as EX-99.B6-tmkdisco to Post-Effective Amendment No. 14
to the Registration Statement on Form N-1A*, each of which provides for
indemnification. Also refer to Section 2-418 of the Maryland General
Corporation Law regarding indemnification of directors, officers,
employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is
to provide investment management services to the Registrant. Waddell &
Reed, Inc. assigned its investment management duties under this agreement
to Waddell & Reed Investment Management Company on January 8, 1992.
Waddell & Reed Investment Management Company is not engaged in any
business other than the provision of investment management services to
those registered investment companies as described in Part A and Part B of
this Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment
Management Company or its predecessors, has had as his sole business,
profession, vocation or employment during the past two years only his
duties as an executive officer and/or employee of Waddell & Reed
Investment Management Company or its predecessors, except as to persons
who are directors and/or officers of the Registrant and have served in the
capacities shown in the Statement of Additional Information of the
Registrant. The address of such officers is 6300 Lamar Avenue, Shawnee
Mission, Kansas 66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter and Distributor
-------------------------------------
(a) Waddell & Reed, Inc. is the Principal Underwriter and Distributor
of the Registrant's shares. It is the principal underwriter to the
following investment companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on form
BD, under the Securities Exchange Act of 1934, is herein
incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Ms. Kristen A.
Richards and Mr. Robert L. Hechler, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
29. Management Services
-------------------
There are no service contracts other than as discussed in Part A and B of
this Post-Effective Amendment and as listed in response to Item (b)(9)
hereof.
30. Undertakings
------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, and KRISTEN A. RICHARDS, and each of them individually, their true and
lawful attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable to
enable each Corporation to comply with the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and any rules, regulations, orders
or other requirements of the United States Securities and Exchange Commission
thereunder, in connection with the registration under the Securities Act of 1933
and/or the Investment Company Act of 1940, as amended, including specifically,
but without limitation of the foregoing, power and authority to sign the names
of each of such directors and officers in his/her behalf as such director or
officer as indicated below opposite his/her signature hereto, to any
Registration Statement and to any amendment or supplement to the Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any
instruments or documents filed or to be filed as a part of or in connection with
such Registration Statement or amendment or supplement thereto; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Date: November 18, 1998 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board November 18, 1998
- ------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 18, 1998
- -------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and November 18, 1998
- -------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 18, 1998
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon Director November 18, 1998
- -------------------- ----------------
James M. Concannon
/s/John A. Dillingham Director November 18, 1998
- -------------------- ----------------
John A. Dillingham
/s/David P. Gardner Director November 18, 1998
- ------------------- ----------------
David P. Gardner
/s/Linda K. Graves Director November 18, 1998
- -------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 18, 1998
- -------------------- ----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 18, 1998
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director November 18, 1998
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director November 18, 1998
- -------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer Director November 18, 1998
- -------------------- ----------------
Ronald C. Reimer
/s/Frank J. Ross Director November 18, 1998
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 18, 1998
- -------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director November 18, 1998
- -------------------- ----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- --------------------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(a) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 1st day of
March, 1999.
TARGET/UNITED FUNDS, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board March 1, 1999
- ---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal March 1, 1999
- ---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and March 1, 1999
- ---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer March 1, 1999
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director March 1, 1999
- ------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director March 1, 1999
- ------------------ ----------------
John A. Dillingham
/s/David P. Gardner* Director March 1, 1999
- ------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director March 1, 1999
- ------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director March 1, 1999
- ------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director March 1, 1999
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director March 1, 1999
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director March 1, 1999
- ------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director March 1, 1999
- ------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director March 1, 1999
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director March 1, 1999
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director March 1, 1999
- ------------------- ----------------
Frederick Vogel III
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
David R. Burford
Assistant Secretary
EX-99.B(b)-bylaw2
AMENDMENT TO BYLAWS
RESOLVED, That the Bylaws of each of United Funds, Inc., United Asset
Strategy Fund, Inc., United Cash Management, Inc., United Continental Income
Fund, Inc., United Gold & Government Fund, Inc., United Government Securities
Fund, Inc., United High Income Fund, Inc., United High Income Fund II, Inc.,
United International Growth Fund, Inc., United Municipal Bond Fund, Inc., United
Municipal High Income Fund, Inc., United New Concepts Fund, Inc., United
Retirement Shares, Inc., United Vanguard Fund, Inc., Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. are amended by substitution of the following for
the initial paragraph of Article I, Section 7, regarding voting and inspectors;
and, with respect to United Asset Strategy Fund, Inc., United Retirement Shares,
Inc. and Waddell & Reed Funds, Inc., for Article II, Section 2, regarding voting
and proxies:
At all meetings of the stockholders, every stockholder of record entitled
to vote thereat shall be entitled to vote either in person or by proxy,
which term shall include proxies provided by such stockholder, or his duly
authorized attorney, through written, electronic, telephonic,
computerized, facsimile, telecommunications, telex or oral communication
or by any other form of communication, each pursuant to such voting
procedures and through such systems as are authorized by the Board of
Directors or one or more executive officers of the Corporation. No proxy
which is dated or, if otherwise provided as permitted by these Bylaws and
applicable Maryland law, provided more than three months before the
meeting at which it is offered shall be accepted, unless such proxy shall,
on its face, name or, if otherwise provided as permitted by these Bylaws
and applicable Maryland law, provide a longer period for which it is to
remain in force.
I certify that I am Assistant Secretary of each of the following
Corporations, and as such officer, have custody of the minute books of the
Corporations, and that the foregoing resolutions are true and correct
resolutions duly passed by the Board of Directors of each of the following
Corporations at a meeting held on February 10, 1999.
United Funds, Inc.
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
Target/United Funds, Inc.
Waddell & Reed Funds, Inc.
/s/Kristen A. Richards
----------------------
Kristen A. Richards, Assistant Secretary
Dated this 10th day of February, 1999.
EX-99.B(e)amnddist
SECOND AMENDMENT OF
DISTRIBUTION CONTRACT
This amendment ("Second Amendment") to the Distribution Contract, dated
April 4, 1997 ("Distribution Contract"), by and between United Investors Life
Insurance Company ("UILIC") and Target/United Funds, Inc. f/k/a TMK/United
Funds, Inc. (the "Fund")(a copy of which is attached hereto as Exhibit "A"), as
amended by the Agreement Amending Distribution Contract ("First Amendment"),
dated the March 3, 1998 (a copy of which is attached hereto as Exhibit "B") is
made effective as of the 31st day of December, 1998, except as otherwise
provided herein.
1. The parties hereby agree as follows:
a. To rescind the provision for termination of the Distribution
Contract contained in the First Amendment and extend the Distribution Contract
for the term provided in Section 8 thereof.
b. The second full paragraph of the Distribution Contract shall
be amended, retroactively to April 18, 1997, by deleting the word "two" in the
first sentence and replacing it with the word "three" and by inserting ", United
Investors Universal Life Variable Account" after the phrase "United Investors
Life Variable Account" in the first sentence.
c. Section 1 of the Distribution Contract shall be amended,
retroactively to April 18, 1997, by deleting the word "two" and replacing it
with the word "three" in the third line.
2. In all other respects, the Distribution Contract is unchanged, and
the parties ratify and confirm the Distribution Contract, as amended by this
Second Amendment.
IN WITNESS WHEREOF, the parties have executed this Second Amendment by
their duly authorized representatives to become effective as provided herein.
UNITED INVESTORS LIFE INSURANCE
COMPANY
By: /s/Anthony L. McWhorter
--------------------------
Anthony L. McWhorter
Its: President
TARGET/UNITED FUNDS, INC.
By: /s/Robert L. Hechler
-------------------------
Robert L. Hechler
Its: President
EX-99.B(e)amendpua
SECOND AMENDMENT OF
PRINCIPAL UNDERWRITING AGREEMENT
This amendment ("Second Amendment") to the Principal Underwriting
Agreement, dated May 1, 1990 ("Principal Underwriting Agreement") by and between
United Investors Life Insurance Company ("United Investors"), on its own behalf
and on behalf of United Investors Life Variable Account ("Variable Account"),
and Waddell & Reed, Inc. ("W&R")(a copy of which is attached hereto as Exhibit
"A"), as amended by the Agreement Amending Principal Underwriting Agreement
("First Amendment"), dated the March 3, 1998 (a copy of which is attached hereto
as Exhibit "B") is made effective as of the 31st day of December, 1998, except
as otherwise provided herein.
1. The parties hereunto agree as follows:
a. To rescind the provision for termination of the Principal
Underwriting Agreement contained in the First Amendment and extend the Principal
Underwriting Agreement for the term provided in Section 16 thereof.
b. The preamble of the Principal Underwriting Agreement shall be
amended by inserting ", United Investors Annuity Variable Account and United
Investors Universal Life Variable Account" after the phrase "United Investors
Life Variable Account" in line four.
c. The preamble of the Principal Underwriting Agreement shall be
further amended by inserting "collectively referred to herein as the" before the
phrase "Variable Account" in line four.
d. The first recital shall be amended by inserting ", deferred
variable annuity policies and flexible premium variable life insurance policies"
after the phrase "flexible premium variable life insurance policies" in line
four.
2. The amendments to the Principal Underwriting Agreement adding "United
Investors Annuity Variable Account" and ", deferred variable annuity policies"
shall be effective retroactively to May 1, 1990. The amendments to the Principal
Underwriting Agreement adding "United Investors Universal Life Variable Account"
and "and flexible premium variable life insurance policies" shall be effective
retroactively to April 18, 1997.
3. In all other respects, the Principal Underwriting Agreement is
unchanged, and the parties ratify and confirm the Principal Underwriting
Agreement, as amended by this Second Amendment.
IN WITNESS WHEREOF, the parties have executed this Second Amendment by
their duly authorized representatives to become effective as provided herein.
UNITED INVESTORS LIFE INSURANCE
COMPANY
By: /s/Anthony L. McWhorter
--------------------------
Anthony L. McWhorter
Its: President
TARGET/UNITED FUNDS, INC.
By: /s/Robert L. Hechler
-------------------------
Robert L. Hechler
Its: President
EX-99.B(g)-tgtca
CUSTODIAN AGREEMENT
Dated as of April 4, 1997
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
TARGET/UNITED FUNDS, INC. SCIENCE AND TECHNOLOGY PORTFOLIO
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "B"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 4th day of April, 1997, between Target/United
Funds, Inc. Science and Technology Portfolio (the "Fund") and UMB Bank, n.a.
(the "Custodian") and as amended and restated as of May 13, 1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on
behalf of the Fund in accordance with the provisions of the Investment Company
Act of 1940, as amended (the "1940 Act") and the rules and regulations
thereunder, under the terms and conditions set forth in this Agreement, and the
Custodian has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of
and keep safely the Assets in accordance with the terms and conditions hereof
on behalf of the Fund.
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the
Fund in the name of the Fund or the Fund's nominee, or in the nominee name of
the Custodian unless specifically directed by Proper Instructions (as
hereinafter defined) to hold such registered securities in so-called street
name; provided that, in any event, all Assets shall be held in an account of the
Custodian containing only assets of the Fund. Notwithstanding the foregoing,
unless it receives Proper Instructions to the contrary, the Custodian shall
register all securities in the name of the Custodian's nominee as authorized by
the Fund. All securities held directly or indirectly by the Custodian hereunder
shall at all times be identifiable on the records of the Custodian. Except as
otherwise provided herein, the Custodian shall keep the Assets physically
segregated from those of other persons or entities. The Custodian shall execute
and deliver all certificates and documents in connection with registration of
securities as may be required by the applicable provisions of the Internal
Revenue Code, the laws of any State or territory of the United States and the
laws of any jurisdiction in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the
Custodian shall pay for and receive securities purchased for the account of the
Fund, provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and
except as otherwise provided herein, the Custodian shall pay for and receive
other Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , as "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depository to
deliver the securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the sufficiency of assets
held in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option (including stock index options), then as
part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and (b)
the Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt
of Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no duty
with respect to the selection of the currency brokers or Banking Institutions
with which the Fund deals or, so long as the Custodian acts in accordance with
Proper Instructions, for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due
and payable to the Fund with respect to portfolio securities and other Assets;
(b) promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the
Fund to pay dividends or other distributions to shareholders of the Fund and to
make payment to shareholders who have requested repurchase or redemption of
their shares of the Fund (collectively, the "Shares"), the Custodian shall
promptly release cash or securities (a) in the case of cash, upon receipt of
Proper Instructions, to one or more Distribution Accounts (as hereinafter
defined) designated by the Fund in such Proper Instructions; or (b) in the case
of securities, upon the receipt of Special Instructions (as hereinafter defined)
to such entity or account designated by the Fund in such Special Instructions.
For purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive
funds representing cash payments received for Shares issued or sold from time to
time by the Fund, and shall promptly credit such funds to the account of the
Fund. The Custodian shall promptly notify the Fund of Custodian's receipt of
cash in payment for Shares issued by the Fund by facsimile transmission or in
such other manner as the Fund and Custodian may agree in writing. Upon receipt
of Proper Instructions, the Custodian shall: (a) deliver all federal funds
received by the Custodian in payment for Shares in payment for such investments
as may be set forth in such Proper Instructions and at a time agreed upon
between the Custodian and the Fund; and (b) make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian, in the amount of checks received in payment for Shares which are
deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or
cause to be delivered to the Fund, in the most expeditious manner practicable,
all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the
Custodian shall take such action as the Fund deems necessary or appropriate to
cause each deposit account established by the Custodian pursuant to this Section
2.21 to be insured to the maximum extent possible by all applicable deposit
insurers, including, without limitation, the Federal Deposit Insurance
Corporation.
Section 2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by the Fund in:
(a) The Depository Trust Company; (b) the Participants Trust Company; (c) any
book-entry system as provided in (i) Subpart O of Treasury Circular No. 300, 31
CFR 306.115 (ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31
CFR 350.2, or (iii) the book-entry regulations of federal agencies substantially
in the form of 31 CFR 306.115; or (d) any other domestic clearing agency
registered with the Securities and Exchange Commission ("SEC") under Section 17A
of the Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of
the Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System (except the federal book-entry system) on
behalf of the Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the securities of the Fund maintained with
such Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature. The Custodian shall maintain complete and accurate records with
respect to securities and other Assets held for the accounts of the Fund as
required by the rules and regulations of the SEC applicable to investment
companies registered under the 1940 Act, including, but not limited to: (a)
journals or other records of original entry containing a detailed and itemized
daily record of all receipts and deliveries of securities (including certificate
and transaction identification numbers, if any), and all receipts and
disbursements of cash; (b) ledgers or other records reflecting (i) securities in
transfer, (ii) securities in physical possession, (iii) securities borrowed,
loaned or collateralizing obligations of the Fund, (iv) monies borrowed and
monies loaned (together with a record of the collateral therefor and
substitutions of such collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records relating thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC, including, but not limited to, books and records required to be
maintained by Section 31(a) of the 1940 Act and the rules and regulations from
time to time adopted thereunder. All books and records maintained by the
Custodian pursuant to this Agreement shall at all times be the property of the
Fund and shall be available during normal business hours for inspection and use
by the Fund and its agents, including without limitation, its independent
certified public accountants. Notwithstanding the preceding sentence, the Funds
shall not take any actions or cause the Custodian to take any actions which
would knowingly cause, either directly or indirectly, the Custodian to violate
any applicable laws, regulations or orders. Notwithstanding the provisions of
this Section 2.25, in the event the Fund purchases cash, securities and other
Assets requiring the use of a Domestic Subcustodian or Foreign Sub-Subcustodian,
the Custodian shall be entitled to rely upon and use the books, records and
accountings of the Domestic Subcustodian as its means of accounting to the Fund
for all cash, securities and other Assets deposited with such entities; provided
however, that such books, records and accountings on which the Bank may rely
must be maintained in the United States by such Domestic Subcustodian and,
provided further, that any agreement between the Custodian and such Domestic
Subcustodian must state that the Domestic Subcustodian agrees to make any
records available upon request and preserve, for the periods described in Rule
31a-2 of the 1940 Act, the records required to be maintained by Rule 31a-1 of
the 1940 Act. In no event shall the Custodian be entitled to rely upon and use
books, records and accountings which are maintained outside of the United
States.
Section 2.26. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Fund's Form N-1A
and the Fund's Form N-SAR or other periodic reports to the SEC and with respect
to any other requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At
the request of the Fund, the Custodian shall deliver to the Fund a written
report prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
("Overdraft Notice") of any Overdraft by facsimile transmission or in such other
manner as the Fund and the Custodian may agree in writing. The Custodian shall
have a right of set-off against all Assets (except for Assets held in a
segregated margin account or otherwise pledged in connection with options or
futures contracts held for the benefit of the Fund and for Assets allocated to
any other Overdraft or loan made hereunder); provided, however, the Custodian
shall promptly notify the Fund in writing of any intent to exercise a right of
set-off against Assets hereunder and shall not exercise any such right of
set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial Code, the only rights or remedies
which the Custodian is entitled to with respect to Overdrafts is the right of
set-off granted herein.
<PAGE>
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special
Instructions" shall mean Proper Instructions countersigned or confirmed in
writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the same instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, by facsimile transmission or in such other manner as
the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-Subcustodian or Interim
Sub-Subcustodian (as each are hereinafter defined) in accordance with this
Article IV; provided that the Fund's board also has approved the agreement
between the Custodian and the Foreign Custody Manager specifying the Foreign
Custody Manager's duties ("Delegation Agreement"). For purposes of this
Agreement, all Domestic Subcustodians, Special Subcustodians, Foreign
Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time and
from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940
Act or any trust company or other entity any of which meet requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon by the parties
hereto in writing, from time to time, in accordance with the provisions of
Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim
Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. Provided that the Custodian of a Domestic
Subcustodian is an Approved Foreign Custody Manager, the Custodian or any such
Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified Foreign
Bank" (as such term is defined in Rule 17f-5) meeting the requirements of an
"Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by SEC
order exempt therefrom; (b) majority-owned direct or indirect subsidiary of a
"U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company
meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order
therefrom; or (c) any bank (as such term is defined in Section 2(a)(5) of the
1940 Act) meeting the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder (each a "Foreign
Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined
in Rule 17f-5) or clearing agency meeting the requirements of an Eligible
Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and
Clearing Agencies"), provided that the Foreign Custody Manager's appointments of
such Eligible Foreign Custodians shall at all times be governed by the
Delegation Agreement.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the
event that the Fund shall invest in a security or other Asset to be held in a
country in which the Foreign Custody Manager has not appointed an Eligible
Foreign Custodian, the Custodian shall, or shall cause the Domestic Subcustodian
to, promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and Custodian shall agree in writing of the
unavailability of an approved Foreign Sub-Subcustodian in such country; and upon
the receipt of Special Instructions, the Custodian shall, or shall cause the
Domestic Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special
Instructions, the Custodian shall, on behalf of the Fund, appoint one or more
banks, trust companies or other entities designated in such Special Instructions
to act as a subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i)
cause each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause the appointment of a
replacement Subcustodian or Sub-Subcustodian in accordance with the provisions
of this Article IV. In addition to the foregoing, the Custodian (A) may, at any
time in its discretion, upon written notification to the Fund, terminate any
Domestic Subcustodian which is not an approved Foreign Custody Manager, and (B)
shall, upon receipt of Special Instructions, terminate any Special Subcustodian
or Domestic Subcustodian which is an Approved Foreign Custody Manager with
respect to the Fund, in accordance with the termination provisions under the
applicable subcustodian agreement, and (C) shall, upon receipt of Special
Instructions, cause the Domestic Subcustodian to terminate any Foreign
Sub-Subcustodian or Interim Sub-Subcustodian as to its use of such entities with
respect to the Fund, in accordance with the termination provisions under the
applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on behalf
of the Custodian; (ii) the countries in which and the Securities Depositories
and Clearing Agents through which each such Foreign Sub-Subcustodian is then
holding cash, securities and other Assets of the Fund; and (iii) such other
information as may be requested by the Fund to ensure compliance with rules and
regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable
care and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
(c) Mitigation by Custodian. Upon the occurrence of any event which
causes or may cause any loss, damage or expense to the Fund, (i) the Custodian
shall, (ii) the Custodian shall cause any applicable Domestic Subcustodian or
Foreign Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts
to cause any applicable Interim Sub-Subcustodian or Special Subcustodian to, use
all commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other
Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (as hereinafter defined) or where any Person maintaining
securities, currencies, deposits or other Assets of the Fund in connection with
any such transactions has exercised reasonable care maintaining such property or
in connection with any such transaction involving such Assets. A "Sovereign
Risk" shall mean nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not be
liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall
not be liable for indemnification under this Section 5.06 unless the Fund shall
have promptly notified the Custodian in writing of the commencement of any
litigation or proceeding brought against the Fund in respect of which indemnity
may be sought under this Section 5.06. With respect to claims in such litigation
or proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided, however, the Fund shall be entitled to participate in (but
not control) at its own cost and expense, the defense of any such litigation or
proceeding if the Custodian has not acknowledged in writing its obligation to
indemnify the Fund with respect to such litigation or proceeding. If the
Custodian is not permitted to participate or control such litigation or
proceeding under applicable law or by a ruling of a court of competent
jurisdiction, or if the Custodian chooses not to so participate, the Fund shall
not consent to the entry of any judgement or enter into any settlement in any
such litigation or proceeding without providing the Custodian with adequate
notice of any such settlement or judgement, and without the Custodian's prior
written consent which consent shall not be unreasonably withheld or delayed. The
Fund shall submit written evidence to the Custodian with respect to any cost or
expense for which it is seeking indemnification in such form and detail as the
Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to
the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of
this Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first
to occur of: (a) termination by the Custodian by an instrument in writing
delivered or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement, provided that the
exercise by the Custodian or any Subcustodian of any such rights shall in all
events be in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Fund to the Custodian, at all times during the term
of this Agreement: (i) the Fund is duly organized under the laws of its
jurisdiction of organization and is registered as an open-end management
investment company under the 1940 Act or is a series of portfolio of such
entity; and (ii) the execution, delivery and performance by the Fund of this
Agreement are (w) within its power, (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Fund's corporate charter or other organizational document, or bylaws, or
any amendment thereof or any provision of its most recent Prospectus or
Statement of Additional Information.
(b) Representations and Warranties of the Custodian. The Custodian
hereby represents and warrants that each of the following shall be true, correct
and complete as of the date of execution of this Agreement and, unless notice to
the contrary is provided by the Custodian to the Fund, at all times during the
term of this Agreement: (i) the Custodian is duly organized under the laws of
its jurisdiction of organization and qualifies to serve as a custodian to
open-end management investment companies under the provisions of the 1940 Act;
and (ii) the execution, delivery and performance by the Custodian of this
Agreement are (w) within its power (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Custodian's corporate charter, or other organizational document, or
bylaws, or any amendment thereof. The Custodian acknowledges receipt of a copy
of the Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement
may be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
Target/United Funds, Inc. Science and Technology Portfolio
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7772
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties
hereto agree that each shall treat confidentially the terms and conditions of
this Agreement and all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party without
the prior consent of such providing party. The foregoing shall not be applicable
to any information that is publicly available when provided or thereafter
becomes publicly available other than through a breach of this Agreement, or
that is required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation. The
provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section
3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other
rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
TARGET/UNITED FUNDS, INC. UMB BANK, n.a.
SCIENCE AND TECHNOLOGY PORTFOLIO
By: /s/Sharon K. Pappas By: /s/Ralph Santoro
Name: Sharon K. Pappas Name: Ralph R. Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
TARGET/UNITED FUNDS, INC. SCIENCE AND TECHNOLOGY PORTFOLIO
AND
UMB BANK, N.A.
Dated as of May 1, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "B", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to each Fund
based upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and
cash management balances of each Fund at the Custodian to earn the
Custodian's daily repurchase agreement rate less reserve requirements
and FDIC premiums. Negative earnings credits will be charged on all
uncollected custody and cash management balances of each Fund at the
Custodian's prime rate less 150 basis points on each day a negative
balance occurs. Positive and/or negative earnings credits will be
monitored daily for each Fund and the net positive or negative amount
for each Fund will be included in the monthly statements. Excess
positive credits for each Fund will be carried forward indefinitely.
<PAGE>
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
Market: Annual Asset Fees Transaction Fees
------ ----------------- ----------------
Argentina .0037 $ 85
Australia .0009 $ 85
Austria .0011 $ 70
Belgium .0011 $ 60
Brazil .0035 $ 60
Canada .0008 $ 35
Chile .0045 $ 85
China .0045 $ 75
Czech Republic .0055 $135
Denmark .0011 $ 60
Finland .0011 $ 85
France .0011 $ 85
Germany .0008 $ 60
Hong Kong .0009 $ 85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $ 85
Ireland .0011 $ 60
Israel .0035 $160
Italy .0011 $ 70
Japan .0008 $ 40
Korea .0035 $ 60
Malaysia .0009 $ 85
Mexico .0016 $ 60
Netherlands .0011 $ 35
New Zealand .0009 $ 85
Norway .0011 $ 85
Peru .0070 $160
Phillippines .0035 $ 95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $ 85
Spain .0009 $ 85
Sweden .0011 $ 70
Switzerland .0009 $ 85
Taiwan .0035 $ 85
Thailand .0009 $ 85
Turkey .0045 $110
U.K. .0011 $ 60
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses
(i.e. Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
<PAGE>
C. Short-term Dollar Denominated Global Assets
Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each
month of the Fund's fiscal year (after receipt of the bill issued
to the Fund based upon its portion of short-term dollar
denominated assets), at the annual rate of:
.0004 on all short-term dollar denominated assets of the United
Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each
month of the Fund's fiscal year (after receipt of the bill issued
to the Fund based upon its portion of Euroclear issues), at the
annual rate of:
2.5 basis points on all United Funds Euroclear assets held in
account at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
TARGET/UNITED FUNDS, INC. SCIENCE AND TECHNOLOGY PORTFOLIO
AND
UMB BANK, n.a.
Dated as of August 31, 1998
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
Fund Date
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
<TABLE>
<CAPTION>
Country Sub-Custodian Depository
<S> <C> <C>
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company
India Citibank, N.A., Mumbai National Securities Depository Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
</TABLE>
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
EX-99.B(j)-tgtenst
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 22 to Registration Statement No. 33-11466 of Target/United Funds, Inc. on
Form N-1A of our report dated February 5, 1999, appearing in the Annual Report
of the eleven Portfolios comprising Target/United Funds, Inc. for the year
ended December 31, 1998, and to the reference to us under the caption
"Financial Highlights" in the Prospectus, which is part of such Registration
Statement.
Deloitte & Touche LLP
Kansas City, Missouri
February 24, 1999
EX-99.B(m)-tgtsp
SERVICE PLAN
Adopted August 21, 1998
This Plan is adopted by Target/United Funds, Inc. (the "Fund"), pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended (the "Act"), to
provide for payment by each series ("Portfolio") of the Fund of certain expenses
in connection with the provision of personal services to the owners of variable
life insurance policies or variable annuity contracts funded by Portfolio shares
("Policies") and/or maintenance of the accounts of such Policies
("Policyowners"). Payments under the Plan are to be made to Waddell & Reed, Inc.
("W&R").
Service Fee
Each Portfolio is authorized to pay to W&R an amount not to exceed on an annual
basis .25 of 1% of the Portfolio's average net assets as a "service fee" to
finance Policyowner servicing by W&R, its affiliated companies, broker-dealers
who may sell the Portfolio's shares and other third parties and to encourage and
foster the maintenance of Policyowner accounts. The amounts shall be payable to
W&R monthly or at such other intervals as the board of directors may determine.
NASD Definition
The "service fee" shall be considered a payment made by the Portfolio for
personal service and/or maintenance of Policyowner accounts, as such is now
defined by the National Association of Securities Dealers, Inc. ("NASD"),
provided, however, if the NASD adopts a definition of "service fee" for purposes
of Rule 2830 and the NASD Conduct Rules that differs from the definition of
"service fee" as presently used, or if the NASD adopts a related definition
intended to define the same concept, the definition of "service fee" as used
herein shall be automatically amended to conform to the NASD definition.
Quarterly Reports
W&R shall provide to the board of directors of the Fund, and the board of
directors shall review, at least quarterly a written report of the amounts so
expended of the service fee paid or payable to it under this Plan and the
purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective as to a Portfolio when it has been approved by
a vote of at least a majority of that Portfolio's outstanding voting securities
(as defined in the Act) and by a vote of the board of directors of the Fund and
of the directors who are not interested persons of the Fund and have no direct
or indirect financial interest in the operation of the Plan or any agreement
related to this Plan (other than as directors of the Fund or as Policyowners)
("independent directors") cast in person at a meeting called for the purposes of
voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or, as to a Portfolio, by a vote of the
majority of the outstanding voting securities of that Portfolio without penalty.
On termination, the payment of all service fees shall cease, and the Fund shall
have no obligation to W&R to reimburse it for any cost or expenditure it has
made or may make to service Policyowner accounts.
Amendments
This Plan may not be amended to increase materially the amount to be spent by a
Portfolio for personal service and/or maintenance of Policyowner accounts
without approval of the shareholders of that Portfolio, and all material
amendments of this Plan must be approved in the manner prescribed for the
adoption of the Plan as provided hereinabove.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan and reports made pursuant to this Plan shall be preserved as
provided in Rule 12b-1(f) under the Act.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 11
<NAME> SCIENCE AND TECHNOLOGY PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 26,379
<INVESTMENTS-AT-VALUE> 34,568
<RECEIVABLES> 169
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 34,739
<PAYABLE-FOR-SECURITIES> 131
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13
<TOTAL-LIABILITIES> 144
<SENIOR-EQUITY> 42
<PAID-IN-CAPITAL-COMMON> 26,364
<SHARES-COMMON-STOCK> 4,181
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,189
<NET-ASSETS> 34,595
<DIVIDEND-INCOME> 7
<INTEREST-INCOME> 174
<OTHER-INCOME> 0
<EXPENSES-NET> (168)
<NET-INVESTMENT-INCOME> 13
<REALIZED-GAINS-CURRENT> 624
<APPREC-INCREASE-CURRENT> 7,947
<NET-CHANGE-FROM-OPS> 8,584
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13)
<DISTRIBUTIONS-OF-GAINS> (624)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,835
<NUMBER-OF-SHARES-REDEEMED> (499)
<SHARES-REINVESTED> 77
<NET-CHANGE-IN-ASSETS> 24,388
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 126
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 168
<AVERAGE-NET-ASSETS> 18,300
<PER-SHARE-NAV-BEGIN> 5.77
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 2.66
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.28
<EXPENSE-RATIO> .92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 10
<NAME> ASSET STRATEGY PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 13,713
<INVESTMENTS-AT-VALUE> 14,127
<RECEIVABLES> 137
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 14,266
<PAYABLE-FOR-SECURITIES> 167
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9
<TOTAL-LIABILITIES> 176
<SENIOR-EQUITY> 26
<PAID-IN-CAPITAL-COMMON> 13,650
<SHARES-COMMON-STOCK> 2,616
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 414
<NET-ASSETS> 14,090
<DIVIDEND-INCOME> 47
<INTEREST-INCOME> 420
<OTHER-INCOME> 0
<EXPENSES-NET> (123)
<NET-INVESTMENT-INCOME> 344
<REALIZED-GAINS-CURRENT> 460
<APPREC-INCREASE-CURRENT> 225
<NET-CHANGE-FROM-OPS> 1,029
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (342)
<DISTRIBUTIONS-OF-GAINS> (462)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 783
<NUMBER-OF-SHARES-REDEEMED> (204)
<SHARES-REINVESTED> 149
<NET-CHANGE-IN-ASSETS> 4,280
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 91
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 123
<AVERAGE-NET-ASSETS> 11,512
<PER-SHARE-NAV-BEGIN> 5.20
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> .38
<PER-SHARE-DIVIDEND> (.14)
<PER-SHARE-DISTRIBUTIONS> (.19)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.39
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 54,165
<INVESTMENTS-AT-VALUE> 54,165
<RECEIVABLES> 1,972
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 56,139
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,116
<TOTAL-LIABILITIES> 2,116
<SENIOR-EQUITY> 540
<PAID-IN-CAPITAL-COMMON> 53,483
<SHARES-COMMON-STOCK> 54,023
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 54,023
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,538
<OTHER-INCOME> 0
<EXPENSES-NET> (308)
<NET-INVESTMENT-INCOME> 2,230
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,230
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,230)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 261,150
<NUMBER-OF-SHARES-REDEEMED> (252,657)
<SHARES-REINVESTED> 2,230
<NET-CHANGE-IN-ASSETS> 10,723
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 223
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 308
<AVERAGE-NET-ASSETS> 45,487
<PER-SHARE-NAV-BEGIN> 1
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1
<EXPENSE-RATIO> .68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> BOND PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 108,332
<INVESTMENTS-AT-VALUE> 112,650
<RECEIVABLES> 1,749
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 114,402
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106
<TOTAL-LIABILITIES> 106
<SENIOR-EQUITY> 210
<PAID-IN-CAPITAL-COMMON> 111,174
<SHARES-COMMON-STOCK> 20,991
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,406)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,318
<NET-ASSETS> 114,296
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,000
<OTHER-INCOME> 0
<EXPENSES-NET> (700)
<NET-INVESTMENT-INCOME> 6,300
<REALIZED-GAINS-CURRENT> 783
<APPREC-INCREASE-CURRENT> 369
<NET-CHANGE-FROM-OPS> 7,452
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,300)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,066
<NUMBER-OF-SHARES-REDEEMED> (2,764)
<SHARES-REINVESTED> 1,157
<NET-CHANGE-IN-ASSETS> 14,807
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 548
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 700
<AVERAGE-NET-ASSETS> 105,116
<PER-SHARE-NAV-BEGIN> 5.37
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .08
<PER-SHARE-DIVIDEND> (.32)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.45
<EXPENSE-RATIO> .67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 3
<NAME> HIGH INCOME PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 126,589
<INVESTMENTS-AT-VALUE> 124,170
<RECEIVABLES> 2,292
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 126,465
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 112
<TOTAL-LIABILITIES> 112
<SENIOR-EQUITY> 286
<PAID-IN-CAPITAL-COMMON> 128,824
<SHARES-COMMON-STOCK> 28,624
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (338)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,419)
<NET-ASSETS> 126,353
<DIVIDEND-INCOME> 261
<INTEREST-INCOME> 11,649
<OTHER-INCOME> 0
<EXPENSES-NET> (966)
<NET-INVESTMENT-INCOME> 10,944
<REALIZED-GAINS-CURRENT> (338)
<APPREC-INCREASE-CURRENT> (8,207)
<NET-CHANGE-FROM-OPS> 2,399
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,944)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,966
<NUMBER-OF-SHARES-REDEEMED> (4,037)
<SHARES-REINVESTED> 2,479
<NET-CHANGE-IN-ASSETS> 6,829
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 801
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 966
<AVERAGE-NET-ASSETS> 124,974
<PER-SHARE-NAV-BEGIN> 4.74
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> (.33)
<PER-SHARE-DIVIDEND> (.42)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.41
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 4
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 589,546
<INVESTMENTS-AT-VALUE> 824,475
<RECEIVABLES> 2,380
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 826,860
<PAYABLE-FOR-SECURITIES> 1,412
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 333
<TOTAL-LIABILITIES> 1,745
<SENIOR-EQUITY> 887
<PAID-IN-CAPITAL-COMMON> 589,299
<SHARES-COMMON-STOCK> 88,733
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 234,929
<NET-ASSETS> 825,115
<DIVIDEND-INCOME> 5,261
<INTEREST-INCOME> 4,271
<OTHER-INCOME> 0
<EXPENSES-NET> (5,656)
<NET-INVESTMENT-INCOME> 3,876
<REALIZED-GAINS-CURRENT> 24,895
<APPREC-INCREASE-CURRENT> 146,953
<NET-CHANGE-FROM-OPS> 175,724
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,904)
<DISTRIBUTIONS-OF-GAINS> (24,867)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,497
<NUMBER-OF-SHARES-REDEEMED> (9,341)
<SHARES-REINVESTED> 3,094
<NET-CHANGE-IN-ASSETS> 185,756
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,904
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,656
<AVERAGE-NET-ASSETS> 709,732
<PER-SHARE-NAV-BEGIN> 7.57
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 2.02
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> (.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.30
<EXPENSE-RATIO> .8
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 5
<NAME> INCOME PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 566,728
<INVESTMENTS-AT-VALUE> 808,186
<RECEIVABLES> 4,450
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 812,641
<PAYABLE-FOR-SECURITIES> 812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 495
<TOTAL-LIABILITIES> 1,307
<SENIOR-EQUITY> 658
<PAID-IN-CAPITAL-COMMON> 569,217
<SHARES-COMMON-STOCK> 65,774
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 241,459
<NET-ASSETS> 811,334
<DIVIDEND-INCOME> 6,153
<INTEREST-INCOME> 9,491
<OTHER-INCOME> 0
<EXPENSES-NET> (5,812)
<NET-INVESTMENT-INCOME> 9,832
<REALIZED-GAINS-CURRENT> 110,690
<APPREC-INCREASE-CURRENT> 16,581
<NET-CHANGE-FROM-OPS> 137,373
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,799)
<DISTRIBUTIONS-OF-GAINS> (110,723)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,126
<NUMBER-OF-SHARES-REDEEMED> (6,369)
<SHARES-REINVESTED> 9,771
<NET-CHANGE-IN-ASSETS> 174,430
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,016
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,812
<AVERAGE-NET-ASSETS> 725,962
<PER-SHARE-NAV-BEGIN> 11.96
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> 2.35
<PER-SHARE-DIVIDEND> (.17)
<PER-SHARE-DISTRIBUTIONS> (1.98)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.34
<EXPENSE-RATIO> .8
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 6
<NAME> INTERNATIONAL PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 132,878
<INVESTMENTS-AT-VALUE> 171,830
<RECEIVABLES> 493
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 172,325
<PAYABLE-FOR-SECURITIES> 3,248
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 116
<TOTAL-LIABILITIES> 3,364
<SENIOR-EQUITY> 216
<PAID-IN-CAPITAL-COMMON> 129,805
<SHARES-COMMON-STOCK> 21,613
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,940
<NET-ASSETS> 168,961
<DIVIDEND-INCOME> 1,376
<INTEREST-INCOME> 951
<OTHER-INCOME> 0
<EXPENSES-NET> (1,513)
<NET-INVESTMENT-INCOME> 814
<REALIZED-GAINS-CURRENT> 13,612
<APPREC-INCREASE-CURRENT> 25,132
<NET-CHANGE-FROM-OPS> 39,558
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (698)
<DISTRIBUTIONS-OF-GAINS> (13,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,799
<NUMBER-OF-SHARES-REDEEMED> (1,987)
<SHARES-REINVESTED> 1,845
<NET-CHANGE-IN-ASSETS> 54,330
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,169
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,513
<AVERAGE-NET-ASSETS> 147,784
<PER-SHARE-NAV-BEGIN> 6.38
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 2.13
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> (.69)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.82
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810016
<NAME> TARGET/UNITED FUNDS, INC.
<SERIES>
<NUMBER> 7
<NAME> SMALL CAP PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 181,138
<INVESTMENTS-AT-VALUE> 184,788
<RECEIVABLES> 209
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 184,999
<PAYABLE-FOR-SECURITIES> 4,367
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63
<TOTAL-LIABILITIES> 4,430
<SENIOR-EQUITY> 229
<PAID-IN-CAPITAL-COMMON> 177,978
<SHARES-COMMON-STOCK> 22,851
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,650
<NET-ASSETS> 180,569
<DIVIDEND-INCOME> 578
<INTEREST-INCOME> 2,583
<OTHER-INCOME> 0
<EXPENSES-NET> (1,603)
<NET-INVESTMENT-INCOME> 1,558
<REALIZED-GAINS-CURRENT> 23,232
<APPREC-INCREASE-CURRENT> (8,246)
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THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM ANNUAL REPORT TO
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THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM ANNUAL REPORT TO
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