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. 23
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 23
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)
|X| on May 1, 2000 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the Registrant's
fiscal year ended December 31, 1999 was filed on March 28, 2000.
<PAGE>
TARGET/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
- --------------------------------------------------------------------------------
May 1, 2000
PROSPECTUS
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Target/United Funds, Inc. (the "Fund") is a management investment company,
commonly known as a mutual fund, that has eleven separate Portfolios, each with
separate goals and investment policies.
Asset Strategy Portfolio seeks high total return over the long term.
Balanced Portfolio seeks, as a primary goal, current income, with a secondary
goal of long-term appreciation of capital.
Bond Portfolio seeks a reasonable return with 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
Asset Strategy Portfolio seeks to achieve its goal by allocating its assets
among stocks, bonds and short-term instruments.
o The stock class includes equity securities of all types, although Waddell &
Reed Investment Management Company (the "Manager"), the Fund's investment
manager, typically emphasizes a blend of value and growth potential in
selecting stocks. Value stocks are those that the Manager believes are
currently selling below their true worth. Growth stocks are those whose
earnings the Manager believes are likely to grow faster than the economy. The
Portfolio may invest in the securities of any size company.
o The bond class includes all varieties of fixed-income instruments, such as
corporate or U.S. Government debt securities, with remaining maturities of
more than three years. This asset class may include a significant amount of
junk bonds, up to 35% of the Portfolio's total assets, which are bonds rated
BB and below by Standard & Poor's ("S&P") and Ba and below by Moody's
Investors Service, Inc. ("MIS") or unrated bonds deemed by the Manager to be
of comparable quality.
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.
3
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Mix
- ---
o Stocks 70% o Bonds 25%
(can range (can range
from from
0-100%) 0-100%)
o 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 the skill of the Manager in allocating the Portfolio's assets among
different types of investments;
o the mix of securities in the Portfolio, particularly the relative
weightings in, and exposure to, different sectors of the economy;
o an increase in interest rates, which may cause the value of the
Portfolio's fixed-income securities, especially bonds with longer
maturities, 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; and
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.
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 well, the Portfolio may invest a significant portion of its assets in foreign
securities. Foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign
countries.
4
<PAGE>
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.
5
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Asset Strategy Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual total returns for the periods shown compare with those of a broad
measure of market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicators listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1996 6.05%
1997 14.01%
1998 9.95%
1999 22.96%
----------------------------------
In the period shown in the chart, the highest quarterly return was 16.01%
(the fourth quarter of 1999) and the lowest quarterly return was -3.71%
(the first quarter of 1997).
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year Portfolio*
------ ----------
Shares of Asset Strategy
Portfolio 22.96% 11.52%
S&P 500 Index 21.09% 27.53%
Salomon Brothers Broad
Investment Grade Index -0.83% 6.86%
Salomon Brothers Short-Term
Index for 1 Month Certificates
of Deposit 5.32% 5.62%
6
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The indexes shown are broad-based, securities market indexes that are unmanaged.
* Since May 1, 1995, the date on which the Portfolio commenced operations.
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, index performance is
calculated from April 30, 1995.
7
<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,
which are usually dividend-producing securities. The majority of the Portfolio's
debt holdings are either U.S. Government securities or investment grade
corporate bonds. The Portfolio has no limitations on the range of maturities of
the debt securities in which it may invest.
The Manager may look at a number of factors in selecting securities for the
Portfolio. For equity investments, the Manager may emphasize a blend of value
and growth potential. For value securities, the Manager looks for undervalued
companies whose asset value or earnings power is not reflected in the price of
their stock. In selecting growth securities, the Manager seeks to identify
securities whose earnings are likely to grow faster than the economy. In
selecting debt securities for the Portfolio, the Manager seeks high-quality
securities with minimal credit risk.
Generally, in determining whether to sell an equity security, the Manager uses
the same analysis that it uses in order to determine if the equity security is
still undervalued or has ceased to offer the desired growth potential. In
determining whether to sell a debt security, the Manager will consider whether
the debt security continues to maintain its minimal credit risk. The Manager may
also sell a security if the security ceases to produce income or otherwise to
take advantage of more attractive investment opportunities and/or to raise cash.
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 the Manager's skill in allocating the Portfolio's assets among different
types of investments;
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; and
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause
8
<PAGE>
the prices of the Portfolio's holdings to fall as part of a broad market
decline.
Also, the Portfolio can invest in foreign securities, which present additional
risks such as currency fluctuations and political or economic conditions
affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors seeking current income and the potential
for long-term appreciation of capital. You should consider whether the Portfolio
fits your investment objectives.
9
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Balanced Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average annual
total returns for the periods shown compare with those of a broad measure of
market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicators listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1995 24.19%
1996 11.19%
1997 18.49%
1998 8.67%
1999 10.14%
----------------------------------
In the period shown in the chart, the highest quarterly return was 9.64%
(the third quarter of 1997) and the lowest quarterly return was -6.14%
(the third quarter of 1998).
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year 5 Years Portfolio*
---------------------------------
Shares of Balanced Portfolio 10.14% 14.39% 12.52%
S&P 500 Index 21.09% 28.59% 25.69%
Salomon Brothers Treasury/Government
Sponsored/Corporate Index -2.03% 7.64% 6.79%
The indexes shown are broad-based, securities market indexes that are unmanaged.
* Since May 3, 1994, the date on which the Portfolio commenced operations.
Because the Portfolio commenced operations on a
10
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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,
index performance is calculated from April 30, 1994.
11
<PAGE>
Bond Portfolio
Goal
Bond Portfolio seeks a reasonable return with emphasis on preservation of
capital.
Principal Strategies
Bond Portfolio seeks to achieve its goal by investing primarily in domestic debt
securities usually of investment grade (rated BBB and higher by S&P and Baa and
higher by MIS). The Fund maintains no limitations regarding the maturity,
duration or dollar weighted average of its holdings. The Portfolio can invest in
securities of companies of any size.
In selecting the debt securities for the Portfolio, the Manager considers yield
and relative safety and, in the case of convertible securities, the possibility
of capital growth. As well, 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.
As well, the Manager considers the maturity of the obligation and the size or
nature of the bond issue.
In general, in determining whether to sell a security, the Manager uses the same
type of analysis that it uses in buying securities. For example, the Manager may
sell a holding if the issuer's financial strength weakens and/or the yield and
relative safety of the security declines. The Manager may also sell a security
to take advantage of more attractive investment opportunities or to raise cash.
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, especially bonds with longer
maturities, 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;
12
<PAGE>
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.
Market risk for small or medium sized companies may be greater than 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.
The Portfolio may also 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.
As well, the Portfolio can invest in foreign securities, which present
additional risks such as currency fluctuations and political or economic
conditions affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares will change and you
could lose money on your investment.
Who May Want to Invest
Bond Portfolio is designed for investors who primarily seek current income while
also seeking to preserve investment principal. You should consider whether the
Portfolio fits your particular investment objectives.
13
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Bond Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average annual
total returns for the periods shown compare with those of a broad measure of
market performance.
o The bar chart presents the average annual total returns and shows how
performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicator listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales
charges and expenses charged by these contract were included, the total returns
shown would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
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%
1999 -1.44%
----------------------------------
In the period shown in the chart, the highest quarterly return was 8.34%
(the second quarter of 1993) and the lowest quarterly return was -3.64%
(the first quarter of 1994).
Average Annual Total Returns
as of December 31, 1999 (%)
1 Year 5 Years 10 Years
-------------------------------
Shares of Bond Portfolio -1.44% 7.69% 7.45%
Salomon Brothers Broad Investment
Grade Index -0.83% 7.74% 7.75%
14
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The index shown is a broad-based, securities market index that is unmanaged.
15
<PAGE>
Growth Portfolio
Goals
Growth Portfolio seeks capital growth, with current income as a secondary goal.
Principal Strategies
Growth Portfolio seeks to achieve its goals by investing primarily in common
stocks of U.S. and foreign companies. The Portfolio typically invests in
companies having a market capitalization of at least $1 billion, although it may
invest in companies of any size. The Portfolio generally emphasizes investments
in the faster growing sectors of the economy, such as the technology, healthcare
and consumer-oriented sectors.
Principal Risks of Investing in the Portfolio
Because Growth Portfolio owns different types of investments, a variety of
factors can affect its investment performance, such as:
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 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
16
<PAGE>
economy. You should consider whether the Portfolio fits your particular
investment objectives.
17
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Growth Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average annual
total returns for the periods shown compare with those of a broad measure of
market performance.
o The bar chart presents the average annual total returns and shows how
performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicator listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
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%
1999 34.35%
----------------------------------
In the period shown in the chart, the highest quarterly return was 22.48%
(the fourth quarter of 1999) and the lowest quarterly return was -12.63%
(the third quarter of 1990).
Average Annual Total Returns
as of December 31, 1999 (%)
1 Year 5 Years 10 Years
-------------------------------
Shares of Growth Portfolio 34.35% 26.47% 19.38%
S&P 500 Index 21.09% 28.59% 18.23%
18
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The index shown is a broad-based, securities market index that is unmanaged.
19
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High Income Portfolio
Goals
High Income Portfolio seeks, as its primary goal, a high level of current
income. As a secondary goal, the Portfolio seeks 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 invest an unlimited amount of its total assets in junk bonds.
As well, the Portfolio may invest in bonds of any maturity. The Portfolio may
also invest up to 20% of its total assets in common stock in order to seek
capital growth. The Portfolio will emphasize a blend of value and growth in its
selection of common stock.
The Manager may look at a number of factors in selecting securities for the
Portfolio. It typically selects securities of companies in which the value of
the company is not reflected in the security. As well, the Manager will consider
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.
Generally, in determining whether to sell a debt security, the Manager will use
the same type of analysis that it uses in buying debt securities. For example,
the Manager may sell a holding if the issuer's financial strength declines, or
is anticipated to decline, to an unacceptable level, or if management of the
company weakens. The Manager may sell a security if the competitive conditions
of a particular industry have increased and the Manager believes the Portfolio
should, therefore, reduce its exposure to such industry. The Manager may also
sell a security if, in its opinion, the price of the security has risen to fully
reflect the issuer's improved creditworthiness and other investments with
greater potential exist. The Manager may choose to sell an equity security if
the issuer's growth potential has diminished. As well, the Manager may also sell
a security to take advantage of more attractive investment opportunities or to
raise cash.
20
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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 the susceptibility of junk bonds to the risk of nonpayment or default, to
price volatility, and to less liquidity than higher-rated bonds;
o an increase in interest rates, which may cause the value of a bond held by
the Portfolio to decline;
o the mix of securities in the Portfolio, particularly the relative
weightings in, and exposure to, different sectors and industries;
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 also present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares will change and you
could lose money on your investment.
Who May Want to Invest
The Portfolio is designed for investors who primarily seek a level of current
income that is higher than is normally available with securities in the higher
rated categories and, secondarily, seek capital growth where consistent with the
goal of income, through a diversified portfolio. The Portfolio is not suitable
for all investors. You should consider whether the Portfolio fits your
particular investment objectives.
21
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the High Income Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average annual
total returns for the periods shown compare with those of a broad measure of
market performance.
o The bar chart presents the average annual total returns and shows how
performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicators listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
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%
1999 4.22%
----------------------------------
In the period shown in the chart, the highest quarterly return was 12.98%
(the first quarter of 1991) and the lowest quarterly return was -6.38%
(the third quarter of 1998).
22
<PAGE>
Average Annual Total Returns
as of December 31, 1999 (%)
1 Year 5 Years 10 Years
-------------------------------
Shares of High Income Portfolio 4.22% 10.00% 10.29%
Salomon Brothers High Yield
Composite Index 1.24% 10.39% 11.35%
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Salomon Brothers High Yield Market Index will replace the Salomon Brothers
High Yield Composite Index. The Manager believes that the Salomon Brothers High
Yield Market Index provides a more accurate basis for comparing the Portfolio's
performance to the performance of the types of fixed income securities in which
the Portfolio invests. Both indexes are presented for comparison purposes.
23
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Income Portfolio
Goals
Income Portfolio seeks, as a primary goal, the maintenance of current income,
subject to market conditions. As a secondary goal, the Portfolio seeks capital
growth.
Principal Strategies
Income Portfolio seeks to achieve its goals by investing primarily in common
stocks of large U.S. and foreign companies that have a record of paying regular
dividends on common stock or have the potential for capital appreciation, or
that the Manager expects to resist market decline. Although the Portfolio
typically invests in large companies, it may invest in securities of any size
company.
The Manager attempts to select securities with income and growth possibilities
by looking at many factors including a 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.
Generally, in determining whether to sell a security, the Manager will use the
same type of analysis that it uses in buying securities in order to determine
whether the security has ceased to offer the prospect of continued dividend
payment and/or significant growth potential. The Manager may also sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
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; 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
24
<PAGE>
to have limited financial resources and inexperienced management. As
well, stock of smaller companies may experience volatile trading and price
fluctuations.
Also, investments in foreign securities present additional risks such as
currency fluctuations and political or economic conditions affecting the foreign
country.
As with any mutual fund, the value of the Portfolio's shares will change and you
could lose money on your investment.
Who May Want to Invest
Income Portfolio is designed for investors who seek dividend income with
potential for capital growth. You should consider whether the Portfolio fits
your investment objectives.
25
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Income Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average annual
total returns for the periods shown compare with those of a broad measure of
market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicator listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1992 13.78%
1993 17.30%
1994 -1.14%
1995 31.56%
1996 19.75%
1997 26.16%
1998 21.14%
1999 12.52%
----------------------------------
In the period shown in the chart, the highest quarterly return was 16.54%
(the second quarter of 1995) and the lowest quarterly return was -6.98%
(the third quarter of 1998).
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year 5 Years Portfolio*
--------------------------------
Shares of Income Portfolio 12.52% 22.06% 17.26%
S&P 500 Index 21.09% 28.59% 19.89%
The index shown is a broad-based, securities market index that is unmanaged.
26
<PAGE>
* Since July 16, 1991, the date on which the Portfolio commenced operations.
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
index (including income) are not available, index performance is
calculated from July 31, 1991.
27
<PAGE>
International Portfolio
Goals
International Portfolio seeks, as a primary goal, long-term appreciation of
capital. As a secondary goal, the Portfolio seeks current income.
Principal Strategies
International Portfolio seeks to achieve its goals by investing primarily in
common stocks of foreign companies that the Manager believes have the potential
for long-term growth represented by economic expansion within a country or
region or represented by the restructuring and/or privatization of particular
industries. The Portfolio emphasizes growth stocks which are securities of
companies whose earnings the Manager believes are likely to grow faster than the
economy. The Portfolio primarily invests in issuers of developed countries. The
Portfolio may invest in companies of any size.
The Manager may look at a number of factors in selecting securities for the
Portfolio. These include the issuer's:
o growth potential;
o earnings potential;
o management;
o industry position; and
o applicable economic and market conditions.
Generally, in determining whether to sell a security, the Manager will use the
same type of analysis that it uses in buying securities of that type. For
example, the Manager may sell a security if it believes the security no longer
offers significant growth potential. As well, the Manager may sell a security to
take advantage of more attractive investment opportunities or to raise cash.
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 changes in foreign exchange rates, which may affect the value of the
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;
28
<PAGE>
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 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.
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 inexperienced management.
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.
29
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the International Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual total returns for the periods shown compare with those of a broad
measure of market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicator listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1995 7.28%
1996 15.11%
1997 16.70%
1998 33.89%
1999 65.58%
----------------------------------
In the period shown in the chart, the highest quarterly return was 48.41%
(the fourth quarter of 1999) and the lowest quarterly return was -16.58%
(the third quarter of 1998).
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year 5 Years Portfolio*
--------------------------------
Shares of International
Portfolio 65.58% 26.15% 22.81%
Morgan Stanley E.A.FE. Index 26.96% 12.83% 11.22%
The index shown is a broad-based, securities market index that is unmanaged.
* Since May 3, 1994, the date on which the Portfolio commenced operations.
Because the Portfolio commenced operations on a
30
<PAGE>
date other than at the end of a month, and partial month calculations of
the performance of the above index (including income) are not available,
index performance is calculated from April 30, 1994.
31
<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. The Portfolio may
invest in companies of any size.
The Manager may look at a number of factors in selecting securities for the
Portfolio. These include:
o the security's current coupon;
o the maturity of the security;
o the relative value of the security;
o the creditworthiness of the particular issuer (if not backed by the full
faith and credit of the U.S. Treasury); and
o the structure of the security, such as whether it has a put or a call
feature.
Generally, in determining whether to sell a security, the Manager may use the
same type of analysis that it uses in buying securities. The Manager may also
sell a security to take advantage of more attractive investment opportunities or
to raise cash.
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 and mortgage-backed securities 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.
32
<PAGE>
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.
33
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Limited-Term Bond Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual total returns for the periods shown compare with those of a broad
measure of market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicator listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1995 14.29%
1996 3.79%
1997 6.85%
1998 6.66%
1999 1.74%
----------------------------------
In the period shown in the chart, the highest quarterly return was 5.36%
(the second quarter of 1995) and the lowest quarterly return was -0.45%
(the first quarter of 1997).
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year 5 Years Portfolio*
--------------------------------
Shares of Limited-Term
Bond Portfolio 1.74% 6.58% 5.84%
Salomon Brothers Treasury/Government
Sponsored/Corporate 1-5
Year Index 2.15% 6.84% 6.20%
The index shown is a broad-based, securities market index that is unmanaged.
34
<PAGE>
* Since May 3, 1994, the date on which the Portfolio commenced operations.
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
index (including income) are not available, index performance is
calculated from April 30, 1994.
35
<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. High
quality indicates that the securities will be rated A-1 or A-2 by S&P or Prime-1
or Prime-2 by MIS, or if unrated, will be of comparable quality as determined by
the Manager. The Portfolio seeks, as well, to maintain a net asset value ("NAV")
of $1.00 per share. The Portfolio maintains a dollar-weighted average maturity
of 90 days or less, and the Portfolio invests only in securities with a
remaining maturity of not more than 397 calendar days.
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.
36
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Money Market Portfolio by showing changes in the Portfolio's
performance from year to year and by showing the Portfolio's average annual
total returns for the periods shown.
o The bar chart presents the average annual total returns and shows how
performance has varied from year to year.
o The performance table shows average annual total returns.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
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%
1999 4.62%
----------------------------------
Average Annual Total Returns
as of December 31, 1999 (%)
1 Year 5 Years 10 Years
-------------------------------
Shares of Money
Market Portfolio 4.62% 5.06% 4.83%
As of December 31, 1999 the 7-day yield was equal to 6.03%. Yields are
computed by annualizing the average daily
37
<PAGE>
dividend per share during the time period for which the yield is
presented.
38
<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 equity 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. The Portfolio emphasizes growth potential in
selecting stocks; that is, the Manager seeks companies in which earnings are
likely to grow faster than the economy.
The Manager may look at a number of factors in selecting securities for the
Portfolio. These include the issuer's:
o growth potential;
o earnings potential;
o management;
o industry position; and
o applicable economic and market conditions.
Generally, in determining whether to sell a security, the Manager uses the same
type of analysis that it uses in buying securities in order to determine whether
the security continues to offer growth potential. The Manager may also sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
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
39
<PAGE>
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 currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Portfolio's shares will change and you
could lose money on your investment.
Who May Want to Invest
Science and Technology Portfolio is designed for investors who seek long-term
capital growth by investing in an actively managed portfolio concentrating in
science and technology securities. This Portfolio is not suitable for all
investors. You should consider whether the Portfolio fits your investment
objectives.
40
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Science and Technology Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual total returns for the periods shown compare with those of a broad
measure of market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicators listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1998 46.05%
1999 174.66%*
----------------------------------
In the period shown in the chart, the highest quarterly return was 83.08%
(the fourth quarter of 1999) and the lowest quarterly return was -14.25%
(the third quarter of 1998).
* A substantial portion of the Portfolio's returns during the period is
attributable to investments in initial public offerings (IPOs). No
assurance can be given that the Portfolio will continue to be able to
invest in IPOs to the same extent as it increases in size or that future
IPOs in which the Portfolio invests will have an equally an beneficial
impact on performance.
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year Portfolio*
----------------------
Shares of Science and
Technology Portfolio 174.66% 75.31%
Goldman Sachs Technology
Industry Composite Index 88.86% 66.35%
S&P 400 Industrials Index 26.05% 32.20%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Goldman Sachs Technology Industry Composite Index will replace the S&P 400
Industrials Index. The Manager believes that the Goldman Sachs Technology
Industry Composite Index provides a more accurate basis for comparing the
Portfolio's performance to the performance of the types of
41
<PAGE>
securities in which the Portfolio typically invests. Both indexes are presented
for comparison purposes.
* Since April 4, 1997, the date on which the Portfolio commenced operations.
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 are not available, index performance is calculated from March 31,
1997.
42
<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 a
diversified portfolio of common stocks of domestic companies whose market
capitalizations are within the range of capitalizations of companies included in
the Lipper Inc. Small Cap Category ("small cap stocks"). The Portfolio
emphasizes 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.
In selecting securities, the Manager seeks companies whose earnings, it
believes, are likely to grow faster than the economy. 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; and
o entry into new or emerging industries.
Generally, in determining whether to sell a security, the Manager uses the same
type of analysis that it uses in buying securities, For example, the Manager may
sell a security if it determines that the stock no longer offers significant
growth potential, which may be due to a change in the business or management of
the company or a change in the industry of the company. The Manager may also
sell a security to take advantage of more attractive investment opportunities or
to raise cash.
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 the mix of securities in the Portfolio, particularly the relative
weightings in, and exposure to, different sectors and industries;
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.
43
<PAGE>
Market risk for small companies may be greater than that for medium and large
companies. Smaller companies are more likely to have limited financial resources
and inexperienced management. Stock of smaller companies may also experience
volatile trading and price fluctuations.
Also, the Portfolio may invest in foreign securities, which present additional
risks such as currency fluctuations and political or economic conditions
affecting the foreign country.
Due to the nature of the Portfolio's permitted investments, primarily the small
cap stocks of new and/or unseasoned companies, companies in their early stages
of development or smaller companies in new or emerging industries, the Portfolio
may be subject to the following additional risks:
o products offered may fail to sell as anticipated;
o a period of unprofitability may be experienced before a company develops
the expertise and clientele to succeed in an industry;
o the company may never achieve profitability; and
o economic, market and technological factors may cause the new industry to
lose favor with the public.
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.
44
<PAGE>
Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Small Cap Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average annual
total returns for the periods shown compare with those of a broad measure of
market performance.
o The bar chart presents the average annual total returns since these shares
were first offered and shows how performance has varied from year to year.
o The performance table shows average annual total returns and compares them
to the market indicators listed.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
The Portfolio shares are sold only to insurance company separate accounts that
fund certain variable annuity and variable life contracts. If the sales charges
and expenses charged by these contracts were included, the total returns shown
would be lower.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1995 32.32%
1996 8.50%
1997 31.53%
1998 10.87%
1999 52.23%
----------------------------------
In the period shown in the chart, the highest quarterly return was 38.46%
(the fourth quarter of 1999) and the lowest quarterly return was -13.88%
(the third quarter of 1996).
Average Annual Total Returns
as of December 31, 1999 (%)
Life of
1 Year 5 Years Portfolio*
--------------------------------
Shares of Small Cap Portfolio 52.23% 26.09% 26.88%
Russell 2000 Growth Index 43.08% 18.95% 16.81%
Nasdaq Industrials Index 71.67% 24.33% 20.87%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Russell 2000 Growth Index will replace the Nasdaq Industrials Index. The
Manager believes that the Russell 2000 Growth Index provides a more accurate
basis for
45
<PAGE>
comparing the Portfolio's performance to the performance of the types of
securities in which the Portfolio typically invests. Both indexes are presented
for comparison purposes.
* Since May 3, 1994, the date on which the Portfolio commenced operations.
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
index are not available, index performance is calculated from April 30,
1994.
46
<PAGE>
The Investment Principles of the Portfolios
Investment Goals, Principal Strategies and Other Investments
Asset Strategy Portfolio
The goal of Asset Strategy Portfolio is to seek high total return over the long
term. The Portfolio seeks to achieve its goal by allocating its assets among a
diversified portfolio of stocks, bonds, and short-term instruments. There is no
guarantee that the Portfolio will achieve its goal.
Allocating assets among different types of investments allows the Portfolio to
take advantage of opportunities wherever they may occur, but also subjects the
Portfolio to the risks of a given investment type. Stock values generally
fluctuate in response to the activities of individual companies and general
market and economic conditions. The values of bonds and short-term instruments
generally fluctuate based on changes in interest rates and in the credit quality
of the issuer.
The Manager regularly reviews the Portfolio's allocation of assets and makes
changes to favor investments that it believes provide the best opportunity to
achieve the Portfolio's goal. Although the Manager uses its expertise and
resources in choosing investments and in allocating assets, the Manager's
decisions may not always be beneficial to the Portfolio.
The Portfolio's mix shows the benchmark for its combination of investments in
each class over time. The Manager may change the
47
<PAGE>
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, as a percentage of total
assets of the Portfolio, are listed 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 may prevent the Portfolio from achieving
its investment objective.
Balanced Portfolio
The primary goal of Balanced Portfolio is current income to the extent that, in
the Manager's opinion, market and economic conditions permit. 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
48
<PAGE>
stocks, fixed-income securities and cash, depending on market conditions. There
is no guarantee that the Portfolio will achieve its goals.
The Manager usually purchases securities because of the dividends and interest
paid on them and may also purchase securities because they may increase in
value. The Portfolio ordinarily invests at least 25% of its total assets in
fixed-income senior securities.
When the Manager believes that a temporary defensive position is desirable, the
Portfolio may invest up to all of its assets in debt securities that may be
considered equivalent to owning cash because of their safety and liquidity. By
taking a temporary defensive position, the Portfolio may not achieve its
investment objectives.
Bond Portfolio
The goal of Bond Portfolio is a reasonable return with 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. The Portfolio may use various techniques (e.g., investing in
put bonds) to manage the duration of its holdings. As a result, as interest
rates rise the duration, or price sensitivity to rising interest rates, of the
Portfolio's holdings will typically decline. 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
total assets will consist of debt securities. These debt securities primarily
include corporate bonds, mostly of investment grade, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. The
Portfolio may invest in debt securities with varying maturities.
49
<PAGE>
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
o buy money market instruments.
By taking a defensive position, the Portfolio may not ahcieve its investment
objective.
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.
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 their
growth potential. By taking a defensive position,the Portfolio may not achieve
its investment objective.
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.
50
<PAGE>
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 comparable unrated securities. Lower-quality debt securities
(which include "junk bonds") are considered to be speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness. The market prices of these securities may fluctuate more than
higher-quality securities and may decline significantly in periods of general
economic difficulty. As well, the Portfolio may own bonds with varying
maturities.
The Portfolio normally invests at least 65% of its total assets in order to seek
a high level of current income. The Portfolio limits its acquisition of common
stock so that no more than 20% of its total assets will consist of common stock
and no more than 10% of its total assets will consist of non-dividend paying
common stock.
When the Manager believes that a full or partial temporary defensive position is
desirable, due to present or anticipated market or economic conditions, it may
take any one or more of the following steps with respect to 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/or
o emphasize high-grade debt securities.
By taking a temporary defensive position in any one or more of these manners,
the Portfolio may not achieve its investment objectives.
51
<PAGE>
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.
When the Manager believes that a temporary defensive position is desirable, the
Manager may take certain steps with respect to all of the Portfolio's assets,
including any one or more of the following:
o hold cash, commercial paper, certificates of deposit or other short-term
investments;
o invest in debt securities (including short-term U.S. Government
securities); or
o invest in convertible preferred stock.
By taking a temporary defensive position the Portfolio may not achieve its
investment objectives.
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
52
<PAGE>
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 total assets
in foreign securities and at least 65% of its total assets in issuers of at
least three foreign countries. The Portfolio generally limits its holdings so
that no more than 75% of its total assets are invested in issuers of a single
foreign country.
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. As well, the Manager may attempt to protect the value of the
Portfolio's holdings by hedging the currencies in which the securities are
denominated. By taking a defensive position, the Portfolio may not achieve its
investment objectives.
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,
limited-term debt securities (securities with a dollar-weighted average maturity
of two to five years) of U.S. issuers, including U.S. Government securities
(securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities), collateralized mortgage obligations and other asset-backed
securities. The Portfolio will invest at least 65% of its total assets in bonds.
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, to a lesser
extent, common stocks and convertible securities, including convertible
preferred stock in certain circumstances.
53
<PAGE>
When the Manager believes that a temporary defensive position is desirable, the
Portfolio may take certain steps with respect to any or all of its assets,
including any one or more of the following:
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.
By taking a temporary defensive position, the Portfolio may not achieve its
investment objective.
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;
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.
54
<PAGE>
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 and defense electronics;
o cable and broadband access;
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;
o medical devices and drugs; and
o internet and internet-related services.
The Portfolio primarily owns common stock; however, it may also invest, to a
lesser extent, in preferred stock, debt securities and convertible securities.
The Portfolio may invest a limited amount of its assets in foreign securities.
Under normal economic and market conditions, the Portfolio will not invest more
than 20% of its total assets in securities other than those of science or
technology companies. 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. By taking a temporary defensive
position, the Portfolio may not achieve its investment objective.
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 small cap
common stocks.
55
<PAGE>
There is no guarantee that the Portfolio will achieve its goal.
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, to a lesser extent,
in preferred stocks and debt securities (mostly of investment grade).
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. By taking a temporary defensive position, the Portfolio may not achieve
its investment objective.
Additional Investment Considerations
The goal(s) and investment policies of each Portfolio may be changed by the
Directors of the Corporation 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
56
<PAGE>
type of asset by which the return on, or value of, the derivative is measured.
You will find more information in the Statement of Additional Information
("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 equity risk and
other 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. The prices
of common stocks and other equity securities generally fluctuate more than
those of other investments. A Portfolio may lose a substantial part, or
even all, of its investment in a company's stock. Growth stocks may
experience greater price volatility than value stocks. 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 a 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.
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 a 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.
Because the Portfolios own different types of investments, their performance
will be affected by a variety of factors. In
57
<PAGE>
general, the value of each Portfolio's investments and the income it may
generate will vary from day to day, generally due to changes in market
conditions, interest rates and other company and economic news. Performance will
also depend on the Manager's skill in selecting investments.
Asset Strategy Portfolio, International Portfolio and Small Cap Portfolio may
each actively trade securities in seeking to achieve its goals. Doing so may
increase transaction costs (which may reduce performance) and increase
distributions paid by the Portfolios.
58
<PAGE>
Target/United Funds, Inc.
Financial Highlights
The following information is to help you understand the financial
performance of each 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, 1999, is included in the SAI, which is available upon
request.
(For a share outstanding throughout each period)
ASSET STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year For the
ended December 31, period
------------------------------------------------------- ended
1999 1998 1997 1996 12/31/95*
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ......................... $5.3868 $5.1969 $5.1343 $5.0137 $5.0000
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment
income ....................... 0.1138 0.1391 0.1915 0.1814 0.0717
Net realized and
unrealized gain
on investments ............... 1.1232 0.3779 0.5277 0.1206 0.0193
---------- ---------- ---------- ---------- ----------
Total from investment
operations ..................... 1.2370 0.5170 0.7192 0.3020 0.0910
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ....................... (0.1136) (0.1391) (0.1919) (0.1814) (0.0713)
From capital gains ............. (0.2477) (0.1880) (0.4647) (0.0000) (0.0060)
---------- ---------- ---------- ---------- ----------
Total distributions .............. (0.3613) (0.3271) (0.6566) (0.1814) (0.0773)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period .................. $6.2625 $5.3868 $5.1969 $5.1343 $5.0137
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ..................... 22.96% 9.95% 14.01% 6.05% 1.80%
Net assets, end of
period (in
millions) ...................... $22 $14 $10 $8 $4
Ratio of expenses
to average net
assets ......................... 0.73% 1.07% 0.93% 0.93% 0.91%
Ratio of net investment
income to average
net assets ..................... 2.18% 2.97% 3.55% 3.92% 4.42%
Portfolio turnover
rate ........................... 179.63% 189.02% 222.50% 49.92% 149.17%
</TABLE>
* The Asset Strategy Portfolio's inception date is February 14, 1995;
however, since this Portfolio did not have any investment activity or
incur expenses prior to the date of initial
59
<PAGE>
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.
60
<PAGE>
(For a share outstanding throughout each period)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ......................... $7.1081 6.7686 $6.1967 $5.9000 $4.9359
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment
income ....................... 0.1760 0.1865 0.1805 0.1594 0.1333
Net realized and
unrealized gain
on investments ............... 0.5446 0.4003 0.9650 0.5003 1.0611
---------- ---------- ---------- ---------- ----------
Total from investment
operations ..................... 0.7206 0.5868 1.1455 0.6597 1.1944
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ....................... (0.1759) (0.1865) (0.1805) (0.1594) (0.1333)
From capital gains ............. (0.3408) (0.0608) (0.3931) (0.2036) (0.0970)
---------- ---------- ---------- ---------- ----------
Total distributions .............. (0.5167) (0.2473) (0.5736) (0.3630) (0.2303)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period .................. $7.3120 $7.1081 $6.7686 $6.1967 $5.9000
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ..................... 10.14% 8.67% 18.49% 11.19% 24.19%
Net assets, end of period
(in millions) .................. $117 $92 $68 $42 $24
Ratio of expenses
to average net
assets ......................... 0.95% 0.74% 0.67% 0.70% 0.72%
Ratio of net investment
income to average
net assets ..................... 2.56% 2.92% 3.06% 3.18% 3.22%
Portfolio turnover
rate ........................... 62.90% 54.62% 55.66% 44.23% 62.87%
</TABLE>
61
<PAGE>
(For a share outstanding throughout each period)
BOND PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ............... $5.4451 $5.3686 $5.2004 $5.3592 $4.7393
---------- ---------- ---------- ---------- ----------
Income from investment
operations:
Net investment
income ............. 0.3173 0.3180 0.3400 0.3407 0.3556
Net realized and
unrealized gain
(loss) on
investments ........ (0.3954) 0.0765 0.1682 (0.1588) 0.6202
---------- ---------- ---------- ---------- ----------
Total from investment
operations ........... (0.0781) 0.3945 0.5082 0.1819 0.9758
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ............. (0.3173) (0.3180) (0.3400) (0.3407) (0.3559)
From capital gains ... (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
---------- ---------- ---------- ---------- ----------
Total distributions .... (0.3173) (0.3180) (0.3400) (0.3407) (0.3559)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period ........ $5.0497 $5.4451 $5.3686 $5.2004 $5.3592
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ........... -1.44% 7.35% 9.77% 3.43% 20.56%
Net assets, end of
period (in
millions) ............ $111 $114 $99 $92 $89
Ratio of expenses
to average net
assets ............... 0.81% 0.67% 0.58% 0.59% 0.60%
Ratio of net investment
income to average
net assets ........... 5.73% 5.99% 6.35% 6.39% 6.73%
Portfolio turnover
rate ................. 47.27% 32.75% 36.81% 64.02% 71.17%
</TABLE>
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<PAGE>
(For a share outstanding throughout each period)
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ............... $9.2989 $7.5679 $6.7967 $6.8260 $5.8986
----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ............. 0.0056 0.0456 0.0574 0.0990 0.0903
Net realized and
unrealized gain
on
investments ........ 3.1886 2.0215 1.4003 0.7478 2.1842
----------- ----------- ----------- ----------- -----------
Total from investment
operations ........... 3.1942 2.0671 1.4577 0.8468 2.2745
----------- ----------- ----------- ----------- -----------
Less distributions:
From net investment
income ............. (0.0056) (0.0456) (0.0570) (0.0990) (0.0903)
From capital gains ... (1.6124) (0.2905) (0.6295) (0.7771) (1.2568)
----------- ----------- ----------- ----------- -----------
Total distributions .... (1.6180) (0.3361) (0.6865) (0.8761) (1.3471)
----------- ----------- ----------- ----------- -----------
Net asset value,
end of period ........ $10.8751 $9.2989 $7.5679 $6.7967 $6.8260
=========== =========== =========== =========== ===========
Ratios/Supplemental Data
Total return ........... 34.35% 27.31% 21.45% 12.40% 38.57%
Net assets, end of
period (in
millions) ............ $1,163 $825 $639 $513 $419
Ratio of expenses
to average net
assets ............... 0.96% 0.80% 0.72% 0.73% 0.75%
Ratio of net investment
income to average
net assets ........... 0.06% 0.55% 0.75% 1.44% 1.35%
Portfolio turnover
rate ................. 65.82% 75.58% 162.41% 243.00% 245.80%
</TABLE>
63
<PAGE>
(For a share outstanding throughout each period)
HIGH INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ................... $4.4143 $4.7402 $4.5750 $4.4448 $4.1118
--------- --------- --------- --------- ---------
Income from investment
operations:
Net investment
income ................. 0.4313 0.4185 0.4098 0.4216 0.4165
Net realized and
unrealized gain
(loss) on
investments ............ (0.2452) (0.3259) 0.2324 0.1302 0.3330
--------- --------- --------- --------- ---------
Total from investment
operations ............... 0.1861 0.0926 0.6422 0.5518 0.7495
--------- --------- --------- --------- ---------
Less distributions:
From net investment
income ................. (0.4313) (0.4185) (0.4098) (0.4216) (0.4165)
From capital gains ....... (0.0000) (0.0000) (0.0672) (0.0000) (0.0000)
--------- --------- --------- --------- ---------
Total distributions ........ (0.4313) (0.4185) (0.4770) (0.4216) (0.4165)
--------- --------- --------- --------- ---------
Net asset value,
end of period ............ $4.1691 $4.4143 $4.7402 $4.5750 $4.4448
========= ========= ========= ========= =========
Ratios/Supplemental Data
Total return ............... 4.22% 1.95% 14.04% 12.46% 18.19%
Net assets, end of
period (in
millions) ................ $121 $126 $120 $97 $87
Ratio of expenses
to average net
assets ................... 0.92% 0.77% 0.70% 0.71% 0.72%
Ratio of net investment
income to average
net assets ............... 9.17% 8.76% 8.79% 9.10% 9.25%
Portfolio turnover
rate ..................... 87.84% 63.64% 65.28% 58.91% 41.78%
</TABLE>
64
<PAGE>
(For a share outstanding throughout each period)
INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ................... $12.3351 $11.9615 $10.1373 $8.6756 $6.7689
---------- ---------- ---------- ---------- ----------
Income from investment
operations:
Net investment
income ................. 0.1571 0.1752 0.0916 0.0856 0.0839
Net realized and
unrealized gain
on investments ......... 1.3879 2.3532 2.5598 1.6280 2.0525
---------- ---------- ---------- ---------- ----------
Total from investment
operations ............... 1.5450 2.5284 2.6514 1.7136 2.1364
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ................. (0.1570) (0.1752) (0.0915) (0.0856) (0.0839)
From capital gains ....... (0.7622) (1.9796) (0.7357) (0.1663) (0.1457)
In excess of
capital gains .......... (0.0000) (0.0000) (0.0000) (0.0000) (0.0001)
---------- ---------- ---------- ---------- ----------
Total distributions ........ (0.9192) (2.1548) (0.8272) (0.2519) (0.2297)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period ............ $12.9609 $12.3351 $11.9615 $10.1373 $8.6756
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ............... 12.52% 21.14% 26.16% 19.75% 31.56%
Net assets, end of
period (in
millions) ................ $941 $811 $637 $462 $331
Ratio of expenses
to average net
assets ................... 0.96% 0.80% 0.72% 0.73% 0.77%
Ratio of net investment
income to average
net assets ............... 1.23% 1.35% 0.80% 0.97% 1.13%
Portfolio turnover
rate ..................... 70.20% 62.84% 36.61% 22.95% 15.00%
</TABLE>
65
<PAGE>
(For a share outstanding throughout each period)
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ............................. $7.8176 $6.3842 $5.9990 $5.2790 $4.9926
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment
income ........................... 0.0032 0.0353 0.0485 0.0644 0.0846
Net realized and
unrealized gain
on investments ................... 5.1235 2.1283 0.9534 0.7329 0.2790
--------- --------- --------- --------- ---------
Total from investment
operations ......................... 5.1267 2.1636 1.0019 0.7973 0.3636
--------- --------- --------- --------- ---------
Less distributions:
From net investment
income ........................... (0.0000) (0.0353) (0.0463) (0.0644) (0.0772)
From capital gains ................. (1.0089) (0.6949) (0.5704) (0.0129) (0.0000)
--------- --------- --------- --------- ---------
Total distributions .................. (1.0089) (0.7302) (0.6167) (0.0773) (0.0772)
--------- --------- --------- --------- ---------
Net asset value,
end of period ...................... $11.9354 $7.8176 $6.3842 $5.9990 $5.2790
========= ========= ========= ========= =========
Ratios/Supplemental Data
Total return ......................... 65.58% 33.89% 16.70% 15.11% 7.28%
Net assets, end of
period (in
millions) .......................... $300 $169 $115 $80 $50
Ratio of expenses
to average net
assets ............................. 1.21% 1.02% 0.98% 1.00% 1.02%
Ratio of net investment
income to average
net assets ......................... 0.04% 0.47% 0.79% 1.42% 1.99%
Portfolio turnover
rate ............................... 118.71% 88.84% 117.37% 75.01% 34.93%
</TABLE>
66
<PAGE>
(For a share outstanding throughout each period)
LIMITED-TERM BOND PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ..................... $5.2292 $5.1882 $5.1639 $5.2521 $4.8611
---------- ---------- ---------- ---------- ----------
Income from investment
operations:
Net investment
income ................... 0.2799 0.2935 0.3086 0.2842 0.2841
Net realized and
unrealized gain (loss)
on investments ........... (0.1887) 0.0522 0.0451 (0.0870) 0.4122
---------- ---------- ---------- ---------- ----------
Total from investment
operations ................. 0.0912 0.3457 0.3537 0.1972 0.6963
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ................... (0.2799) (0.2935) (0.3086) (0.2842) (0.2841)
From capital gains ......... (0.0000) (0.0112) (0.0208) (0.0012) (0.0212)
---------- ---------- ---------- ---------- ----------
Total distributions .......... (0.2799) (0.3047) (0.3294) (0.2854) (0.3053)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period .............. $5.0405 $5.2292 $5.1882 $5.1639 $5.2521
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ................. 1.74% 6.66% 6.85% 3.79% 14.29%
Net assets, end of
period (in
millions) .................. $6 $5 $4 $4 $3
Ratio of expenses to
average net assets ......... 0.64% 0.79% 0.73% 0.76% 0.71%
Ratio of net investment
income to average
net assets ................. 5.63% 5.65% 5.93% 5.92% 6.22%
Portfolio turnover
rate ....................... 22.81% 47.11% 35.62% 15.81% 18.16%
</TABLE>
67
<PAGE>
(For a share outstanding throughout each period)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<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 ................... 0.0450 0.0492 0.0503 0.0486 0.0542
Less dividends
declared ................. (0.0450) (0.0492) (0.0503) (0.0486) (0.0542)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period ............ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ............... 4.62% 5.04% 5.13% 5.01% 5.56%
Net assets, end of
period (in
millions) ................ $64 $54 $43 $37 $37
Ratio of expenses
to average net
assets ................... 0.77% 0.68% 0.58% 0.61% 0.62%
Ratio of net investment
income to average
net assets ............... 4.51% 4.90% 5.04% 4.87% 5.42%
</TABLE>
68
<PAGE>
(For a share outstanding throughout each period)
SCIENCE AND TECHNOLOGY PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal
year ended For the
December 31, period
------------------------- ended
1999 1998 12/31/97*
---------- ---------- ----------
<S> <C> <C> <C>
Per-Share Data
Net asset value,
beginning of
period ............................. $8.2750 $5.7726 $5.0000
---------- ---------- ----------
Income from investment operations:
Net investment
income (loss) .................... (0.0309) 0.0032 0.0146
Net realized and
unrealized gain
on investments ................... 14.4840 2.6551 0.7971
---------- ---------- ----------
Total from investment
operations ......................... 14.4531 2.6583 0.8117
---------- ---------- ----------
Less distributions:
From net investment
income ........................... (0.0000) (0.0032) (0.0146)
From capital gains ................. (0.3194) (0.1527) (0.0245)
---------- ---------- ----------
Total distributions .................. (0.3194) (0.1559) (0.0391)
---------- ---------- ----------
Net asset value,
end of period ...................... $22.4087 $8.2750 $5.7726
========== ========== ==========
Ratios/Supplemental Data
Total return ......................... 174.66% 46.05% 16.24%
Net assets, end of
period (in
millions) .......................... $253 $35 $10
Ratio of expenses
to average net
assets ............................. 1.10% 0.92% 0.94%
Ratio of net investment
income (loss) to average
net assets ......................... -0.38% 0.07% 0.64%
Portfolio turnover
rate ............................... 47.36% 64.72% 15.63%
</TABLE>
* 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.
69
<PAGE>
(For a share outstanding throughout each period)
SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per-Share Data
Net asset value, beginning
of period .................. $7.9019 $8.3316 $8.0176 $7.6932 $5.9918
---------- ---------- ---------- ---------- ----------
Income from investment
operations:
Net investment
income ................... 0.0423 0.0798 0.0279 0.0170 0.0900
Net realized and
unrealized gain
on investments ........... 4.0847 0.8255 2.5004 0.6367 1.8470
---------- ---------- ---------- ---------- ----------
Total from investment
operations ................. 4.1270 0.9053 2.5283 0.6537 1.9370
---------- ---------- ---------- ---------- ----------
Less distributions:
From net ...investment
income ................... (0.0421) (0.0798) (0.0282) (0.0170) (0.0900)
From capital gains ......... (0.3738) (1.2027) (2.1861) (0.3123) (0.1456)
In excess of realized
capital gains ............ (0.0000) (0.0525) (0.0000) (0.0000) (0.0000)
---------- ---------- ---------- ---------- ----------
Total distributions .......... (0.4159) (1.3350) (2.2143) (0.3293) (0.2356)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period .............. $11.6130 $7.9019 $8.3316 $8.0176 $7.6932
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Total return ................. 52.23% 10.87% 31.53% 8.50% 32.32%
Net assets, end of period
(in millions) .............. $318 $181 $148 $97 $56
Ratio of expenses
to average net
assets ..................... 1.12% 0.97% 0.90% 0.91% 0.96%
Ratio of net investment
income to average
net assets ................. 0.53% 0.94% 0.32% 0.25% 1.77%
Portfolio turnover
rate ....................... 130.99% 177.32% 211.46% 133.77% 43.27%
</TABLE>
70
<PAGE>
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 back cover of
this Prospectus.
71
<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/or 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 their inception. The Manager is
located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
Michael L. Avery is primarily responsible for the management of the equity
portion of the Asset Strategy Portfolio. Mr. Avery has held his responsibilities
for the Asset Strategy Portfolio since January 1997. He is Senior Vice President
of the Manager, Vice President of the Fund and Vice President of other
investment companies for which the Manager serves as investment manager. From
March 1995 to March 1998, Mr. Avery was Vice President of, and the Director of
Research for, Waddell & Reed Asset Management Company, a former affiliate of the
Manager. Mr. Avery has served as the portfolio manager for investment companies
managed by the Manager since February 1, 1994, has served as the Director of
Research for 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
is a Vice President and Portfolio Manager for Austin, Calvert & Flavin, Inc., an
affiliate of the Manager. Ms. Prince-Fox has served as a portfolio manager for
investment companies managed by the Manager since January 1993.
72
<PAGE>
From February 1983 to January 1993 Ms. Prince-Fox served as an investment
analyst for the Manager and its predecessors.
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 a 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.
James D. Wineland is primarily responsible for the management of the
portfolio of Income Portfolio.
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 a portfolio manager for investment companies managed by the Manager
since January 1988 and has been an employee of the Manager since November 1984.
73
<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 a 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 been an employee of the Manager since
March 1987.
Henry J. Herrmann is primarily responsible for the management of the
portfolio of Science and Technology Portfolio. Mr. Herrmann has held his
responsibilities for Science and Technology Portfolio since April 17, 2000. He
is Vice President and Director of the Portfolio and Vice President and Director
of each investment company managed by the Manager. He is President, Chief
Investment Officer, 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.; and President, Chief Executive
Officer, Chief Investment Officer and Director of the Manager. Mr. Herrmann has
been an employee of the Manager since March 15, 1971.
74
<PAGE>
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 other
investment companies for which the Manager serves as investment manager. From
March 1996 to March 1998, Mr. Seferovich was Vice President of, and a portfolio
manager for, Waddell & Reed Asset Management Company. Mr. Seferovich has served
as a 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 other investment companies
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 is payable at the annual rates of:
for Asset Strategy Portfolio, 0.70% of net assets up to $1 billion, 0.65%
of net assets over $1 billion and up to $2 billion, 0.60% of net assets over $2
billion and up to $3 billion, and 0.55% of net assets over $3 billion;
for Balanced Portfolio, 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion
and up to $3 billion, and 0.55% of net assets over $3 billion;
for Bond Portfolio, 0.525% of net assets up to $500 million, 0.50% of net
assets over $500 million and up to $1 billion, 0.45% of net assets over $1
billion and up to $1.5 billion, and 0.40% of net assets over $1.5 billion;
75
<PAGE>
for Growth Portfolio, 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion
and up to $3 billion, and 0.55% of net assets over $3 billion;
for High Income Portfolio, 0.625% of net assets up to $500 million, 0.60%
of net assets over $500 million and up to $1 billion, 0.55% of net assets over
$1 billion and up to $1.5 billion, and 0.50% of net assets over $1.5 billion;
for Income Portfolio, 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion
and up to $3 billion, and 0.55% of net assets over $3 billion;
for International Portfolio, 0.85% of net assets up to $1 billion, 0.83%
of net assets over $1 billion and up to $2 billion, 0.80% of net assets over $2
billion and up to $3 billion, and 0.76% of net assets over $3 billion;
for Limited-Term Bond Portfolio, 0.50% of net assets up to $500 million,
0.45% of net assets over $500 million and up to $1 billion, 0.40% of net assets
over $1 billion and up to $1.5 billion, and 0.35% of net assets over $1.5
billion;
for Money Market Portfolio, 0.40% of net assets;
for Science & Technology Portfolio, 0.85% of net assets up to $1 billion,
0.83% of net assets over $1 billion and up to $2 billion, 0.80% of net assets
over $2 billion and up to $3 billion, and 0.76% of net assets over $3 billion;
and
for Small Cap Portfolio, 0.85% of net assets up to $1 billion, 0.83% of
net assets over $1 billion and up to $2 billion, 0.80% of net assets over $2
billion and up to $3 billion, and 0.76% of net assets over $3 billion.
Prior to June 30, 1999, the management fee of each Portfolio was
calculated by adding a base fee to a specific fee. It was accrued and paid to
the Manager daily. The specific fee was computed on each Portfolio's net asset
value ("NAV") 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 was
determined on the combined NAVs of all of the Portfolios and then allocated pro
rata to the Portfolio based on its relative net assets at the annual
76
<PAGE>
rates shown in the following table:
Base Fee Rate
Group Net Asset Level Annual Base Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 750 .51 of 1%
From $ 750 to $1,500 .49 of 1%
From $1,500 to $2,250 .47 of 1%
Over $2,250 .45 of 1%
For the fiscal year ended December 31, 1999, management fees for each
Portfolio as a percent of each such Portfolio's average net assets are as
follows:
Management Fees
Asset Strategy Portfolio 0.74%
Balanced Portfolio 0.65%
Bond Portfolio 0.52%
Growth Portfolio 0.69%
High Income Portfolio 0.63%
Income Portfolio 0.69%
International Portfolio 0.82%
Limited-Term Bond Portfolio 0.52%
Money Market Portfolio 0.44%
Science and Technology Portfolio 0.80%
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.
77
<PAGE>
Each Portfolio also pays other expenses, which are explained in the SAI.
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of each Portfolio based on, among other
things, the amount of premium payments to be invested and the number of
surrender and transfer requests to be effected on any day according to the terms
of the Policies. Shares of a Portfolio are sold at their 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.
78
<PAGE>
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.
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 NAV 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.
79
<PAGE>
All distributions from net realized long-term or short-term capital gains
of each Portfolio, if any, other than Money Market Portfolio, are declared and
paid annually in December in additional full and fractional shares of the
respective Portfolio. Short-term capital gains of Money Market Portfolio--it
does not anticipate realizing any long-term capital gains--are declared and paid
daily in additional full and fractional shares of that Portfolio.
You will find information in the SAI about Federal income tax
considerations generally affecting the Portfolios.
Because the only shareholders of the Portfolios are the Participating
Insurance Companies and their separate accounts, no discussion is included here
as to the Federal income tax consequences to the Portfolios' shareholders. For
information concerning the Federal tax consequences to Policyowners, see the
applicable prospectus for the Policy. Prospective investors are urged to consult
with their tax advisers.
80
<PAGE>
TARGET/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
Custodian
UMB Bank, n. a.
928 Grand Boulevard
Kansas City, Missouri 64106
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue NW
Washington, D. C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Boulevard
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
888-WADDELL
Accounting Services Agent
Waddell & Reed Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
Our INTERNET address is:
http://www.waddell.com
TABLE OF CONTENTS
An Overview of the Portfolios.................. 2
The Investment Principles of the Portfolios.... 26
Financial Highlights........................... 33
The Management of the Portfolios............... 44
Purchases and Redemptions...................... 47
Net Asset Value................................ 48
Dividends and Distributions.................... 49
81
<PAGE>
Target/United Funds, Inc.
PROSPECTUS
You can get more information about the Portfolios in--
o the Statement of Additional Information (SAI), 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.
Copies of the SAI, Annual and/or Semiannual Report may also be requested at
[email protected].
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and may also be obtained, after paying a duplicating fee, by electronic request
at [email protected] or 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 202-942-8090.
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
888-WADDELL
82
<PAGE>
TARGET/UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
May 1, 2000
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, 2000, which
may be obtained by request to the Fund or Waddell & Reed, Inc. at the address or
telephone number shown above.
TABLE OF CONTENTS
Performance Information ..................................... 2
Investment Strategies, Policies and Practices................ 5
Investment Management and Other Services .................... 50
Net Asset Value ............................................. 54
Directors and Officers ...................................... 57
Purchases and Redemptions ................................... 63
Shareholder Communications .................................. 64
Taxes ....................................................... 64
Dividends and Distributions ................................. 70
Portfolio Transactions and Brokerage ........................ 70
Other Information ........................................... 74
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Appendix A .................................................. 76
Financial Statements ........................................ 85
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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 paid in
shares at their at net asset value ("NAV") as of the day the dividend or
distribution is paid. The formula used to calculate the total return is:
P(1 + T)^n = 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, 1999, which
is the most recent balance sheet included in this SAI, for the periods shown
were as follows:
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One-year Five-year Ten-year
period from period from Period from
1-1-99 to 1-1-95 to 1-1-90 to
12-31-99 12-31-99 12-31-99
----------- ----------- -----------
Asset Strategy Portfolio 22.96% 11.52%*
Balanced Portfolio 10.14% 14.39% 12.52%**
Bond Portfolio -1.44% 7.69% 7.45%
Growth Portfolio 34.35% 26.47% 19.38%
High Income Portfolio 4.22% 10.00% 10.29%
Income Portfolio 12.52% 22.06% 17.26%***
International Portfolio 65.58% 26.15% 22.81%**
Limited-Term Bond Portfolio 1.74% 6.58% 5.84%**
Science and Technology Portfolio 174.66% 75.31%****
Small Cap Portfolio 52.23% 26.09% 26.88%**
*Period from May 1, 1995, commencement of operations, to December 31, 1999.
**Period from May 3, 1994, commencement of operations, to December 31, 1999.
***Period from July 16, 1991, commencement of operations, to December 31,
1999.
****Period from April 4, 1997, commencement of operations, to December 31,
1999.
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:
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Yield = 2((((a-b)/cd)+1)^6 -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, 1999, the date of the most recent balance sheet included in this
SAI, is as follows:
Bond Portfolio 6.54%
High Income Portfolio 8.49%
Limited-Term Bond Portfolio 7.66%
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 NAV 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.
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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:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)]^365/7 -1
The Money Market Portfolio's current yield as calculated above for the
seven days ended December 31, 1999, the date of the most recent balance sheet
included in this SAI, was 6.03% and its effective yield calculated for the same
period was 6.21%.
Performance Rankings and Other Information
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.
Performance information for a Portfolio may be accompanied by information
about market conditions and other factors that affected the Portfolio's
performance for the period(s) shown.
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.
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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 a 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
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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 and/or value 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.
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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 total 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 total 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 total
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.
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$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
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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 rated in any
rating category of the established rating services 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 securities rise. Similarly, long-term bonds are generally more
sensitive to interest rate changes than short-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, the Manager's research and credit analysis are an especially
important part of managing securities of this type held by a Portfolio. The
Manager continuously monitors the issuers of lower-rated debt securities in each
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the shareholders of the affected Portfolio(s).
Subject to its investment restrictions, a Portfolio (other than Money
Market Portfolio) may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (securities rated D by Standard & Poor's ("S&P") and C by Moody's
Investors Service, Inc. ("MIS")). Debt securities rated D
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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 as 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
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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.
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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 (also known as 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
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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
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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
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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
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some instances, an investor in an IO may fail to recoup all of the investor's
initial investment, even if the security is guaranteed by the government 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
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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
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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 (other than Money Market 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.
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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 Currencies
All Portfolios, other than 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,
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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
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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.
Certain of the Portfolios could also be adversely affected by the
conversion of certain European currencies into the euro. This conversion, which
is underway, 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.
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."
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
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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."
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.
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. 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.
Any securities loans that a Portfolio makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, a Portfolio must receive collateral equal to no less than
100% of the market value of the securities loaned. 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
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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.
The Portfolios will make loans only under rules of the New York Stock
Exchange ("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.
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.
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There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, as well as
risks of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower fail financially.
Repurchase Agreements
Each of the Portfolios may purchase securities subject to repurchase
agreements, subject to its limitation on investment in illiquid investments. See
"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 will 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. The return on such collateral may be more or
less than that from the repurchase agreement. A Portfolio's repurchase
agreements 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.
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Repurchase agreements are entered into only with those entities approved by the
Manager.
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 may invest in direct
debt instruments, 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.
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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.
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.
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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 NAV 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 NAV 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
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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.
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.
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) securities for which market quotations are not readily available;
(iii) over-the-counter ("OTC") options and their underlying collateral;
(iv) bank deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand;
(v) restricted securities not determined to be liquid pursuant to
guidelines established by or under the direction of the Funds' Board
of Directors;
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(vi) non-government stripped fixed-rate mortgage-backed securities;
(vii) securities involved in swap, cap, floor and collar transactions; 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.
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, floors, collars, 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
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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 NAV.
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.
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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
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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.
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(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
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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
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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 NAV 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
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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
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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
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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
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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,
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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.
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Foreign Currency Hedging Strategies--Special Considerations. Each
Portfolio (other than Money Market Portfolio and Limited-Term Bond Portfolio)
may use options and futures contracts on foreign currencies (including the
Euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies in
which the Portfolio's securities are denominated or to attempt to enhance income
or yield. Currency hedges can protect against price movements in a security that
a Portfolio owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to other
causes.
Each of these Portfolios might seek to hedge against changes in the value
of a particular currency when no Financial Instruments on that currency are
available or such Financial Instruments are more expensive than certain other
Financial Instruments. In such cases, a Portfolio may seek to hedge against
price movements in that currency by entering into transactions using Financial
Instruments on another currency or a basket of currencies, the values of which
the Manager believes will have a high degree of positive correlation to the
value of the currency being hedged. The risk that movements in the price of the
Financial Instrument will not correlate perfectly with movements in the price of
the currency subject to the hedging transaction is magnified when this strategy
is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, a Portfolio could be disadvantaged by having to deal in the odd lot
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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
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investments denominated in foreign currency. For example, if a Portfolio owned
securities denominated in euros, it could enter into a forward currency contract
to sell euros in return for U.S. dollars to hedge against possible declines in
the euro's value. Such a hedge, sometimes referred to as a "position hedge,"
would tend to offset both positive and negative currency fluctuations, but would
not offset changes in security values caused by other factors. Each of these
Portfolios could also hedge the position by selling another currency expected to
perform similarly to the euro. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
Each of these Portfolios also may use forward currency contracts to
attempt to enhance income or yield. A Portfolio could use forward currency
contracts to increase its exposure to foreign currencies that the Manager
believes might rise in value relative to the U.S. dollar, or shift its exposure
to foreign currency fluctuations from one country to another. For example, if a
Portfolio owned securities denominated in a foreign currency and the Manager
believed that currency would decline relative to another currency, it might
enter into a forward currency contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
The cost to a Portfolio of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Portfolio enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a Portfolio will in fact be able to close out a forward
currency contract at a
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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.
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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, Floors and Collars. Each of the Portfolios (other than Money
Market Portfolio) may enter into swaps, caps, floors and collars 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 on a notional principal amount, 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, floors and collars, 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
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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, floors or collars 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 NAV 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
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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, floors, collars 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 to the extent
allowed, and in accordance with the requirements, under the 1940
Act, 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, floors,
collars 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, floors, collars and other financial instruments;
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(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
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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, floors, collars 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, floors, collars 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
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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, floors, collars and other
financial instruments; or
(ix) Make loans, except (a) by lending portfolio securities to the
extent allowed, and in accordance with the requirements, under the
1940 Act; (b) through the purchase of debt securities and other
obligations consistent with its goal and other investment policies
and restrictions; and (c) by engaging in repurchase agreements with
respect to portfolio securities.
The following investment restrictions are not fundamental and may be
changed by the Fund's Board of Directors without approval of the shareholders of
the affected Portfolios:
(i) At least 65% of each of Bond Portfolio's and Limited-Term Bond
Portfolio's total assets will be invested during normal market
conditions in bonds, 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;
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(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 total 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 total assets would be
invested in issuers of that foreign country. International Portfolio
currently intends to have at least 65% of its total assets invested
in issuers of at least three different foreign countries;
(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 total 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 total 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
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<PAGE>
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 total 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;
(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. Balanced Portfolio may purchase an unlimited
amount of foreign securities; however, the Portfolio intends to
have less than 10% of its total assets invested 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, Small Cap
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
total 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;
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(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;
(xvii) Asset Strategy Portfolio will not purchase any security while
borrowings representing more than 5% of its total assets are
outstanding;
(xviii) Asset Strategy Portfolio does not currently intend to invest in
money-market instruments rated below the highest rating category
by S&P or MIS, or judged by the Manager to be of equivalent
quality; provided, however, that the Portfolio may invest in
money-market instruments rated below the highest rating category
by S&P or MIS if such instrument is subject to a letter of credit
or similar unconditional credit enhancement which is rated A-1 by
S&P or Prime 1 by MIS;
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(xix) Other than Asset Strategy Portfolio and Money Market Portfolio,
none of the other Portfolios may pledge its assets in connection
with any permitted borrowings; however, this policy does not
prevent a Portfolio from pledging its assets in connection with
its purchase and sale of futures contracts, options, forward
contracts, swaps, caps, floors, collars and other financial
instruments;
(xx) Money Market Portfolio will not invest in any security whose
interest rate or principal amount to be repaid, or timing of
payments, varies or floats with the value of a foreign currency,
the rate of interest payable on foreign currency borrowings, or
with any interest rate or index expressed in a currency other than
U.S. dollars;
(xxi) For Limited-Term Bond Portfolio, the maturity of collateralized
mortgage obligations and other asset-backed securities will be
deemed to be the estimated average life of such securities, as
determined in accordance with certain prescribed models or
formulas. The maturity of other debt securities will be deemed to
be the earlier of the call date or the maturity date, whichever is
appropriate;
(xxii) Limited-Term Bond Portfolio may only invest in U.S. dollar
denominated securities; and
(xxiii) 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, 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 is exceeded by the
strike price of the put.) This policy does not limit to 5% the
percentage of a Portfolio's total assets that are at risk in
futures contracts, options on futures contracts and currency
options.
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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,
1999 and December 31, 1998 for each of the Portfolios then in existence were as
follows:
1999 1998
---- ----
Asset Strategy Portfolio 179.63% 189.02%
Balanced Portfolio 62.90 54.62
Bond Portfolio 47.27 32.75
Growth Portfolio 65.82 75.58
High Income Portfolio 87.84 63.64
Income Portfolio 70.20 62.84
International Portfolio 118.71 88.84
Limited-Term Bond Portfolio 22.81 47.11
Money Market Portfolio 0.00 0.00
Science and Technology Portfolio 47.36 64.72
Small Cap Portfolio 130.99 177.32
The high portfolio turnover rate for Asset Strategy Portfolio,
International 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 Portfolio and may generate taxable income or loss. Because
short-term securities are generally excluded from
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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 the Manager or an affiliate of the
Manager 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 which 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,
United Asset Strategy Fund, Inc. since it commenced operations in March 1995,
United Small Cap Fund, Inc. since it commenced operations in
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October 1999 and United Tax-Managed Equity Fund, Inc. since it commenced
operations in March 2000. 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, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder 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:
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Periods ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Asset Strategy Portfolio $ 125,314 $ 91,048 $ 71,899
Balanced Portfolio 664,392 471,708 324,830
Bond Portfolio 593,016 547,604 491,520
Growth Portfolio 6,468,574 4,903,762 4,150,034
High Income Portfolio 778,077 801,018 690,862
Income Portfolio 5,983,548 5,015,935 3,955,628
International Portfolio 1,606,571 1,168,796 799,824
Limited-Term Bond Portfolio 29,161 22,936 21,919
Money Market Portfolio 254,538 223,299 192,321
Science and Technology Portfolio* 738,631 126,390 27,836
Small Cap Portfolio 1,771,481 1,395,302 1,018,984
*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:
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Periods ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Asset Strategy Portfolio $10,000 $ 9,167 $ --
Balanced Portfolio 36,667 30,000 25,833
Bond Portfolio 40,000 40,000 30,000
Growth Portfolio 87,500 72,500 67,500
High Income Portfolio 40,000 40,000 38,333
Income Portfolio 85,000 72,500 65,833
International Portfolio 42,500 40,000 35,833
Limited-Term Bond Portfolio -- -- --
Money Market Portfolio 30,000 23,333 20,000
Science and Technology Portfolio* 31,667 11,667 --
Small Cap Portfolio 46,667 40,000 38,333
*Science and Technology Portfolio began operations April 4, 1997.
Pursuant to its voluntary waiver of fees for a Portfolio with assets under
$25 million on any fee accrual and payment date, the manager waived management
fees in the amounts of $65,722 and $14,949 for Asset Strategy Portfolio and
Limited-Term Bond Portfolio for 1999.
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
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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 financial advisors,
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 each Portfolio and the Policyholders through Waddell &
Reed, Inc.'s activities to provide directly or indirectly, 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.
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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, 1999, each Portfolio paid the
following amount under the Plan:
Asset Strategy Portfolio $ 40,884
Balanced Portfolio 246,777
Bond Portfolio 272,450
Growth Portfolio 2,250,583
High Income Portfolio 294,959
Income Portfolio 2,070,886
International Portfolio 467,843
Limited-Term Bond Portfolio 13,593
Money Market Portfolio 138,656
Science and Technology Portfolio 220,622
Small Cap Portfolio 505,758
Custodial and Auditing Services
The Custodian for each Portfolio is UMB Bank, n.a., 928 Grand Boulevard,
Kansas City, Missouri. In general, the Custodian is responsible for holding the
Portfolios' cash and securities. Deloitte & Touche LLP, 1010 Grand Boulevard,
Kansas City, Missouri, the Fund's independent auditors, audits the Fund's annual
financial statements.
NET ASSET VALUE
The NAV of one of the shares of a Portfolio is the value of the
Portfolio's assets, less liabilities, divided by
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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 NAV would be $110
($115 minus $5). If it had 11 shares outstanding, the NAV of one share would be
$10 ($110 divided by 11).
The NAV per share of each Portfolio is computed on each day that the NYSE
is open for trading as of the later of the close of the regular session of the
NYSE or the close of the regular session of any other securities or commodities
exchange on which an option or future held by a Portfolio is traded. The NYSE
ordinarily closes at 4:00 p.m. Eastern time. The NYSE annually announces the
days on which it will not be open for trading. The most recent announcement
indicates that it will not be open on the following days: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. However, it is possible that
the NYSE may close on other days. The NAV 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
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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 NAV 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 NAV per share
based upon available market quotations and the NAV per share based on amortized
cost exceeds one-half of 1%, the Board of Directors must promptly
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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 NAV
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,
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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 NAV. 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 during the past five years of each Director and
officer is stated 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 of the Fund but are not members of the Board of Directors. 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.
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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
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 WRIMCO, Waddell & Reed, Inc. and
Waddell & Reed Services Company; formerly, President of each of the 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 of 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 of Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e Eccles
Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner of Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
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JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, 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; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. 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.; Director and Treasurer
of Waddell & Reed Services Company; Chairman, Chief Executive Officer, President
and Director of Fiduciary Trust Company of New Hampshire, an affiliate of
Waddell & Reed, Inc.; formerly, Vice President of each of the funds in the Fund
Complex; formerly, Director and Treasurer of Waddell & Reed Asset Management
Company; formerly, President of Waddell & Reed Services Company. Date of birth:
November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer 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; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
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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 its 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
each of the funds 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 and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; 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; Director
of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
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.
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Daniel C. Schulte
Vice President, Assistant Secretary and General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President, Secretary and
General Counsel of Waddell & Reed Financial, Inc., Waddell & Reed Financial
Services Company, Waddell & Reed, Inc., WRIMCO and Waddell & Reed Services
Company; formerly, Assistant Secretary of Waddell & Reed Financial, Inc.;
formerly, an attorney with Klenda, Mitchell, Austerman & Zuercher, L.L.C. Date
of birth: December 8, 1965.
Kristen A. Richards
Vice President, Secretary and Associate General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President and Associate
General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund and each of
the other funds in the Fund Complex; formerly, Compliance Officer of WRIMCO.
Date of birth: December 2, 1967.
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.
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Michael L. Avery
Vice President of the Fund and two 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. Date of birth: May 30, 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; Vice President and Portfolio Manager for Austin,
Calvert & Flavin, Inc., an affiliate 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 two other funds 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 two other funds 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.
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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 two other funds in
the Fund Complex and Assistant Treasurer of all funds in the Fund Complex; Vice
President of the Manager. Date of birth: July 30, 1953.
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, 2000, 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, whereby, an incumbent Director who has attained the age of 70 may, or
if elected on or after May 31, 1993 and has attained the age of 75 must, resign
his or her position as Director and, unless he or she elects otherwise, will
serve as Director Emeritus provided the Director has served as a
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Director of the Fund for at least five years which need not have been
consecutive. 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 he or she has no authority or responsibility with respect to the
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 each serves as Director
Emeritus.
The Fund, the funds in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc. pay to each Director, effective October 1, 1999, an annual base fee
of $50,000, plus $3,000 for each meeting of the Board of Directors attended and
effective January 1, 2000, an annual base fee of $52,000 plus $3,250 for each
meeting of the Board of Directors attended, plus reimbursement of expenses for
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. (Prior to October 1, 1999, the funds in the
United Group, Target/United Funds, Inc. and Waddell & Reed Funds, Inc. paid to
each Director an annual base fee of $48,000 plus $2,500 for each meeting of the
Board of Directors attended.) The fees to the Directors are divided among the
Portfolios, the funds in the United Group and the series of Waddell & Reed
Funds, Inc. based on the Portfolios' relative size.
During the Fund's fiscal year ended December 31, 1999, the Fund's
Directors received the following fees for service as a director:
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COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 5,987 59,500
John A. Dillingham 5,987 59,500
David P. Gardner 5,735 57,000
Linda K. Graves 5,987 59,500
Joseph Harroz, Jr. 5,987 59,500
John F. Hayes 5,987 59,500
Glendon E. Johnson 6,036 60,000
William T. Morgan 5,987 59,500
Ronald C. Reimer 6,001 59,500
Frank J. Ross, Jr. 5,987 59,500
Eleanor B. Schwartz 6,036 60,000
Frederick Vogel III 6,036 60,000
*No pension or retirement benefits have been accrued as a part of Fund expenses.
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 NAV per share. No sales
charge is paid by the Participating Insurance Company for purchase of shares.
Redemptions will be made at the NAV 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
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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 NAV 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 since inception 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
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each Portfolio other than Money Market Portfolio and Limited-Term Bond
Portfolio, net gains from certain foreign currency transactions) that it
distributes to its shareholders. To continue to qualify for treatment as a RIC,
a Portfolio must distribute to its shareholders for each taxable year at least
90% 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
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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 December of any
year and payable to shareholders of record on a date in that month 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. Each Portfolio may defer into the next calendar year net capital
losses incurred between November 1 and the end of the current calendar year. It
is the Portfolio's policy to make sufficient distributions each year to avoid
imposition of the Excise Tax.
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
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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 any foreign corporation that, in general, meets either of
the following tests: (i) at least 75% of its gross income is passive or (ii) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a Portfolio will be subject to
Federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of the stock (collectively "PFIC
income"), plus interest thereon, even if the Portfolio distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Portfolio's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
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 may deduct (as an ordinary, not
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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 under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock of
certain PFICs). 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.
Foreign Currency Gains and Losses
Gains or losses (i) from the disposition of foreign currencies, including
forward currency contracts, (ii) on the disposition of each debt security
denominated in a foreign currency that are attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition, and (iii) that are attributable to fluctuations in
exchange rates that occur between the time a Portfolio accrues interest,
dividends or other receivables, or 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 as ordinary income, rather than
affecting the amount of its net capital gain.
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
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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. 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, futures contracts and forward currency 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.
In addition, these rules may postpone the recognition of loss that would
otherwise be recognized under the mark-to-market rules discussed above. The
regulations under section 1092 also provide certain "wash sale" rules, which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If a Portfolio makes certain elections, the amount,
character and timing of the recognition of gains and losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. Because only a few of the regulations implementing the straddle
rules have been promulgated,
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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 position, 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 identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract,
acquisition of the underlying property or substantially identical property will
be deemed a constructive sale. The foregoing will not apply, however, to any
transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of
that year and a Portfolio holds the appreciated financial position unhedged for
60 days after that closing (i.e., at no time during that 60-day period is a
Portfolio's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale, or granting an option to buy substantially identical
stock or securities).
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,
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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 paid 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 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 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
to arrange for the purchase and sale of securities for the Portfolios. With
respect to Limited-Term Bond Portfolio, Money Market Portfolio and High Income
Portfolio, many purchases are made directly from issuers or from underwriters,
dealers or banks. Purchases from underwriters
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include a commission or concession paid by the issuer to the underwriter.
Purchases from dealers will include the spread between the bid and the asked
prices. Otherwise, transactions in securities other than those for which an
exchange is the primary market are generally effected with dealers acting as
principals or market makers. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only if
it appears likely that a better price or execution can be obtained. The
individuals who manage the Portfolios may manage other advisory accounts with
similar investment objectives. It can be anticipated that the manager will
frequently, yet not always, place concurrent orders for all or most accounts for
which the manager has responsibility or the Manager may otherwise combine orders
for a Portfolio with those of other Portfolios, funds in the United Group and
Waddell & Reed Funds, Inc. and/or other accounts for which it has investment
discretion, including accounts affiliated with the Manager. Under current
written procedures, 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, subject
to certain variances provided for in the written procedures. Sharing in large
transactions could affect the price a Portfolio pays or receives or the amount
it buys or sells. As well, a better negotiated commission may be available
through combined orders.
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.
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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 the commission 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, 1999, 1998 and 1997:
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Periods ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Asset Strategy Portfolio $ 38,386 $ 16,848 $ 16,930
Balanced Portfolio 128,278 68,705 56,431
Bond Portfolio -- -- --
Growth Portfolio 1,122,733 1,048,968 1,785,220
High Income Portfolio 17,842 5,131 2,998
Income Portfolio 716,229 576,461 421,831
International Portfolio 1,002,125 632,844 597,704
Limited-Term Bond Portfolio -- -- --
Money Market Portfolio -- -- --
Science and Technology Portfolio* 52,993 19,104 8,143
Small Cap Portfolio 275,977 309,983 238,000
---------- ---------- ----------
$3,354,563 $2,678,044 $3,127,257
========== ========== ==========
*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 services as well as
execution and the brokerage commissions paid for the fiscal year ended December
31, 1999. These transactions were allocated to these broker-dealers by the
internal allocation procedures described above.
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Amount of Brokerage
Transactions Commissions
-------------- --------------
Asset Strategy Portfolio $ 11,398,375 $ 22,361
Balanced Portfolio 68,989,394 103,186
Bond Portfolio -- --
Growth Portfolio 890,003,135 985,610
High Income Portfolio 5,980,162 8,818
Income Portfolio 462,010,618 544,031
International Portfolio 11,717,695 10,819
Limited-Term Bond Portfolio -- --
Money Market Portfolio -- --
Science and Technology Portfolio 13,054,361 15,524
Small Cap Portfolio 46,650,245 124,546
-------------- --------------
$1,509,803,985 $ 1,814,895
============== ==============
As of December 31, 1999, each of the following Portfolios held securities
issued by their respective regular broker-dealers, as follows: Asset Strategy
Portfolio owned Bank of America Corporation securities in the aggregate amount
of $170,637; Balanced Portfolio owned Bank of America Corporation securities in
the aggregate amount of $1,008,217; Bond Portfolio owned Salomon Inc. securities
in the aggregate amount of $1,032,340; Growth Portfolio owned Citigroup Inc.
securities in the aggregate amount of $9,862,344; Growth Portfolio owned Bank of
America Corporation securities in the aggregate amount of $9,033,750; Growth
Portfolio owned Morgan Stanley, Dean Witter, Discover & Co. securities in the
aggregate amount of $9,992,500; Income Portfolio owned Citigroup Inc. securities
in the aggregate amount of $12,926,616; Income Portfolio owned Bank of America
Corporation securities in the aggregate amount of $7,819,212; Limited-Term Bond
Portfolio owned Bank of America Corporation securities in the aggregate amount
of $101,749; and Limited-Term Bond Portfolio owned Salomon Inc. securities in
the aggregate amount of $100,482.
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The Fund, the Manager and Waddell & Reed, Inc. have adopted a Code of
Ethics under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may be
purchased or held by a Fund. The Code of Ethics subjects covered personnel to
certain restrictions that include prohibited activities, pre-clearance
requirements and reporting obligations.
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 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 a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
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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 NAV 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.
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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.
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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.
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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.
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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:
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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.
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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
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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
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<PAGE>
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
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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
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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
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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.
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THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Business Services - 6.66%
America Online, Inc.* ........................... 3,000 $ 226,313
Clear Channel Communications, Inc.* ............. 2,600 232,050
Critical Path, Inc.* ............................ 1,700 160,544
DoubleClick Inc.* ............................... 2,000 506,562
TMP Worldwide Inc.* ............................. 2,200 311,712
Total ......................................... 1,437,181
Cable and Other Pay Television Services - 4.73%
AT&T Corp. - Liberty Media Group,
Class A* ...................................... 8,600 488,050
Cox Communications, Inc., Class A* .............. 4,693 241,690
EchoStar Communications Corporation,
Class A* ...................................... 3,000 292,125
Total ......................................... 1,021,865
Chemicals and Allied Products - 11.58%
American Home Products Corporation .............. 3,600 141,975
Forest Laboratories, Inc.* ...................... 8,600 528,363
Lilly (Eli) and Company ......................... 4,900 325,850
Merck & Co., Inc. ............................... 3,400 228,012
Monsanto Company ................................ 5,100 181,688
Pharmacia & Upjohn, Inc. ........................ 4,100 184,500
Pharmacyclics, Inc.* ............................ 5,200 215,150
Schering-Plough Corporation ..................... 6,800 286,875
Smith International, Inc.* ...................... 2,100 104,344
Warner-Lambert Company .......................... 3,700 303,169
Total ......................................... 2,499,926
Communication - 0.50%
Tritel, Inc.* ................................... 3,400 107,737
Computer Integrated Systems Design - 1.30%
Yahoo! Inc.* .................................... 650 281,267
Depository Institutions - 1.71%
Bank of America Corporation ..................... 3,400 170,637
U. S. Bancorp. .................................. 8,300 197,644
Total ......................................... 368,281
Eating and Drinking Places - 3.73%
McDonald's Corporation .......................... 6,400 258,000
Papa John's International, Inc.* ................ 8,300 216,578
Wendy's International, Inc. ..................... 16,000 330,000
Total ......................................... 804,578
Electronic and Other Electric Equipment - 11.66%
Analog Devices, Inc.* ........................... 5,000 465,000
Eaton Corporation ............................... 3,900 283,238
Intel Corporation ............................... 4,300 353,809
JDS Uniphase Corporation* ....................... 2,400 387,150
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment (Continued)
Maxim Integrated Products, Inc.* ................ 4,800 $ 226,350
Nortel Networks Corporation ..................... 2,700 272,700
Rambus Inc.* .................................... 2,900 195,478
STMicroelectronics N.V., NY Shares .............. 2,200 333,163
Total ......................................... 2,516,888
Fabricated Metal Products - 1.62%
Parker Hannifin Corporation ..................... 6,800 348,925
General Merchandise Stores - 3.56%
BJ's Wholesale Club, Inc.* ...................... 10,000 365,000
Dayton Hudson Corporation ....................... 5,500 403,906
Total ......................................... 768,906
Holding and Other Investment Offices - 1.50%
ABB Ltd. [Sweden] (A)* .......................... 1,400 170,800
"Shell" Transport and Trading Company,
p.l.c. (The), ADR ............................. 3,100 152,675
Total ......................................... 323,475
Industrial Machinery and Equipment - 2.70%
Applied Materials, Inc.* ........................ 2,000 253,313
Cooper Cameron Corporation* ..................... 2,600 127,237
SPX Corporation* ................................ 2,500 202,031
Total ......................................... 582,581
Instruments and Related Products - 4.02%
Beckman Coulter, Inc. ........................... 5,100 259,462
CONMED Corporation* ............................. 10,000 259,375
Teradyne, Inc.* ................................. 5,300 349,800
Total ......................................... 868,637
Insurance Carriers - 3.56%
American International Group, Inc. .............. 2,775 300,047
Aon Corporation ................................. 2,500 100,000
Lincoln National Corporation .................... 4,400 176,000
ReliaStar Financial Corp. ....................... 4,900 192,019
Total ......................................... 768,066
Metal Mining - 1.26%
Newmont Mining Corporation ...................... 11,100 271,950
Oil and Gas Extraction - 2.67%
Burlington Resources Incorporated ............... 5,400 178,537
Schlumberger Limited ............................ 2,600 146,250
Transocean Sedco Forex Inc. ..................... 3,603 121,388
USX Corporation - Marathon Group ................ 5,300 130,844
Total ......................................... 577,019
Petroleum and Coal Products - 0.33%
Texaco Inc. ..................................... 1,300 70,606
See Notes to Schedules of Investments on page .
2
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Prepackaged Software - 3.50%
Microsoft Corporation* .......................... 3,500 $ 408,516
Oracle Corporation* ............................. 3,100 347,297
Total ......................................... 755,813
Primary Metal Industries - 2.17%
Nucor Corporation ............................... 3,900 213,769
USX Corporation - U.S. Steel Group .............. 7,700 254,100
Total ......................................... 467,869
Transportation by Air - 1.01%
Southwest Airlines Co. .......................... 13,500 218,531
Transportation Equipment - 5.64%
Ford Motor Company .............................. 4,900 261,844
General Motors Corporation ...................... 5,700 414,319
Gentex Corporation* ............................. 19,400 540,775
Total ......................................... 1,216,938
Transportation Services - 1.51%
Expeditors International of Washington, Inc. .... 7,500 327,187
Wholesale Trade -- Nondurable Goods - 2.94%
Cardinal Health, Inc. ........................... 7,800 373,425
U.S. Foodservice* ............................... 15,600 261,300
Total ......................................... 634,725
TOTAL COMMON STOCKS - 79.86% $17,238,951
(Cost: $14,131,866)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Fabricated Metal Products - 0.91%
Crown Cork & Seal Company, Inc.,
7.125%, 9-1-02 ................................ $200 197,452
Finance, Taxation and Monetary Policy - 0.87%
Banco Nacional de Comercio Exterior, S.N.C.,
7.25%, 2-2-04 ................................. 200 187,250
Petroleum and Coal Products - 0.92%
Petroleos Mexicanos (Daily Adjusted Yield
Securities (DAYS)),
8.799%, 7-15-05 ............................... 200 196,750
Radio and Television Broadcasting Stations - 0.99%
Grupo Televisa, S.A.,
11.375%, 5-15-03 .............................. 200 213,500
See Notes to Schedules of Investments on page .
3
<PAGE>
THE INVESTMENTS OF THE ASSET STRATEGY PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Stone, Clay and Glass Products - 0.89%
Vicap, S.A. de C.V.,
10.25%, 5-15-02 ............................... $ 200 $ 193,000
TOTAL CORPORATE DEBT SECURITIES - 4.58% $ 987,952
(Cost: $963,278)
OTHER GOVERNMENT SECURITY - 0.78%
Argentina
Republic of Argentina,
0.0%, 10-15-01 ................................ 200 $ 168,500
(Cost: $170,118)
UNITED STATES GOVERNMENT SECURITY - 6.59%
United States Treasury,
5.625%, 12-31-02 .............................. 1,450 $ 1,423,262
(Cost: $1,443,980)
SHORT-TERM SECURITIES
Fabricated Metal Products - 2.03%
Danaher Corporation,
6.49%, Master Note ............................ 438 438,000
Food and Kindred Products - 3.24%
General Mills, Inc.,
6.345%, Master Note ........................... 700 700,000
Nondepository Institutions - 2.84%
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 612 612,000
TOTAL SHORT-TERM SECURITIES - 8.11% $ 1,750,000
(Cost: $1,750,000)
TOTAL INVESTMENT SECURITIES - 99.92% $21,568,665
(Cost: $18,459,242)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.08% 17,888
NET ASSETS - 100.00% $21,586,553
See Notes to Schedules of Investments on page .
4
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Amusement and Recreation Services - 0.62%
Walt Disney Company (The) ....................... 25,000 $ 731,250
Building Materials and Garden Supplies - 0.91%
Home Depot, Inc. (The) .......................... 15,538 1,065,358
Business Services - 1.77%
Clear Channel Communications, Inc.* ............. 9,000 803,250
Young & Rubicam Inc. ............................ 18,000 1,273,500
Total ......................................... 2,076,750
Cable and Other Pay Television Services - 0.88%
Cox Communications, Inc., Class A* .............. 20,000 1,030,000
Chemicals and Allied Products - 4.45%
Air Products and Chemicals, Inc. ................ 29,700 996,806
Lilly (Eli) and Company ......................... 5,500 365,750
Merck & Co., Inc. ............................... 12,000 804,750
Pfizer Inc. ..................................... 26,000 843,375
Pharmacia & Upjohn, Inc. ........................ 12,000 540,000
Procter & Gamble Company (The) .................. 6,100 668,331
Warner-Lambert Company .......................... 12,200 999,638
Total ......................................... 5,218,650
Communication - 1.88%
Bell Atlantic Corporation ....................... 7,500 461,719
Nextel Communications, Inc.* .................... 9,000 927,844
SBC Communications Inc. ......................... 16,600 809,250
Total ......................................... 2,198,813
Depository Institutions - 1.70%
Bank of America Corporation ..................... 20,089 1,008,217
Comerica Incorporated ........................... 10,000 466,875
U. S. Bancorp. .................................. 21,700 516,731
Total ......................................... 1,991,823
Eating and Drinking Places - 0.34%
Wendy's International, Inc. ..................... 19,200 396,000
Electric, Gas and Sanitary Services - 0.92%
Reliant Energy .................................. 12,000 274,500
Unicom Corporation .............................. 24,000 804,000
Total ......................................... 1,078,500
See Notes to Schedules of Investments on page .
5
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 8.10%
Analog Devices, Inc.* ........................... 20,000 $ 1,860,000
Eaton Corporation ............................... 12,000 871,500
General Electric Company ........................ 7,000 1,083,250
Intel Corporation ............................... 12,000 987,375
Koninklijke Philips Electronics N.V.,
NY Shares ..................................... 10,000 1,350,000
Maxim Integrated Products, Inc.* ................ 17,000 801,656
Motorola, Inc. .................................. 11,300 1,663,925
Texas Instruments Incorporated .................. 9,100 881,563
Total ......................................... 9,499,269
Fabricated Metal Products - 1.02%
Parker Hannifin Corporation ..................... 23,400 1,200,713
Food and Kindred Products - 1.46%
PepsiCo, Inc. ................................... 29,500 1,039,875
Seagram Company Ltd. (The) ...................... 15,000 674,063
Total ......................................... 1,713,938
Food Stores - 0.72%
Kroger Co. (The)* ............................... 45,000 849,375
General Merchandise Stores - 2.16%
BJ's Wholesale Club, Inc.* ...................... 20,000 730,000
Dayton Hudson Corporation ....................... 9,500 697,656
Wal-Mart Stores, Inc. ........................... 16,000 1,106,000
Total ......................................... 2,533,656
Holding and Other Investment Offices - 0.41%
Plum Creek Timber Company, Inc. ................. 19,200 480,000
Industrial Machinery and Equipment - 3.94%
Apple Computer, Inc.* ........................... 9,200 945,587
Applied Materials, Inc.* ........................ 8,900 1,127,241
EMC Corporation* ................................ 14,500 1,584,125
Hewlett-Packard Company ......................... 8,400 957,075
Total ......................................... 4,614,028
Instruments and Related Products - 0.49%
Emerson Electric Co. ............................ 10,000 573,750
Insurance Agents, Brokers and Service - 0.74%
Hartford Financial Services Group Inc. (The) .... 18,200 862,225
Insurance Carriers - 1.01%
Lincoln National Corporation .................... 15,000 600,000
ReliaStar Financial Corp. ....................... 15,000 587,812
Total ......................................... 1,187,812
See Notes to Schedules of Investments on page .
6
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Motion Pictures - 1.39%
News Corporation Limited (The), ADR ............. 20,000 $ 765,000
Time Warner Incorporated ........................ 12,000 869,250
Total ......................................... 1,634,250
Nondepository Institutions - 1.38%
Fannie Mae ...................................... 12,000 749,250
Freddie Mac ..................................... 18,400 865,950
Total ......................................... 1,615,200
Oil and Gas Extraction - 1.73%
Burlington Resources Incorporated ............... 32,600 1,077,837
Schlumberger Limited ............................ 15,200 855,000
Transocean Sedco Forex Inc. ..................... 2,943 99,133
Total ......................................... 2,031,970
Paper and Allied Products - 2.03%
Champion International Corporation .............. 10,800 668,925
Consolidated Papers, Inc. ....................... 31,500 1,002,094
International Paper Company ..................... 12,500 705,469
Total ......................................... 2,376,488
Petroleum and Coal Products - 1.39%
BP Amoco p.l.c., ADR ............................ 10,160 602,615
Exxon Mobil Corporation ......................... 12,673 1,020,969
Total ......................................... 1,623,584
Prepackaged Software - 4.89%
BMC Software, Inc.* ............................. 15,900 1,270,509
Citrix Systems, Inc.* ........................... 10,000 1,229,688
Intuit Inc.* .................................... 12,000 718,875
Microsoft Corporation* .......................... 11,900 1,388,953
Oracle Corporation* ............................. 10,000 1,120,312
Total ......................................... 5,728,337
Primary Metal Industries - 0.38%
Corus Group plc, ADR ............................ 17,000 439,875
Printing and Publishing - 1.28%
Belo (A. H.) Corporation, Class A ............... 23,800 453,687
Meredith Corporation ............................ 25,000 1,042,188
Total ......................................... 1,495,875
Radio and Television Broadcasting Stations - 1.10%
Hearst-Argyle Television, Inc.* ................. 21,000 559,125
Sinclair Broadcast Group, Inc.* ................. 60,000 733,125
Total ......................................... 1,292,250
Stone, Clay and Glass Products - 0.93%
Corning Incorporated ............................ 8,500 1,095,969
See Notes to Schedules of Investments on page .
7
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Transportation by Air - 0.99%
UAL Corporation* ................................ 15,000 $ 1,163,437
Transportation Equipment - 1.63%
Boeing Company (The) ............................ 25,000 1,039,062
General Motors Corporation ...................... 12,000 872,250
Total ......................................... 1,911,312
Trucking and Warehousing - 0.82%
CNF Transportation Inc. ......................... 28,000 966,000
Water Transportation - 0.82%
Carnival Corporation, Class A ................... 20,000 956,250
TOTAL COMMON STOCKS - 54.28% $63,632,707
(Cost: $48,622,947)
PREFERRED STOCK - 0.81%
Cable and Other Pay Television Services
Cox Communications, Inc., 7.0% (Convertible) .... 14,000 $ 952,000
(Cost: $ 700,000)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Apparel and Accessory Stores - 2.06%
Gap, Inc. (The),
6.9%, 9-15-07 ................................. $ 2,500 2,414,675
Business Services - 0.76%
Clear Channel Communications, Inc.,
2.625%, 4-1-03 (Convertible) .................. 600 888,000
Chemicals and Allied Products - 0.22%
American Home Products Corporation,
7.9%, 2-15-05 ................................. 250 254,700
Communication - 0.12%
Southwestern Bell Telephone Company,
5.77%, 10-14-03 ............................... 150 143,910
Depository Institutions - 0.20%
Wachovia Corporation,
6.25%, 8-4-08 ................................. 250 230,185
Electronic and Other Electric Equipment - 0.23%
STMicroelectronics N.V.,
0.0%, 9-22-09 (Convertible) ................... 200 274,500
See Notes to Schedules of Investments on page .
8
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food and Kindred Products - 0.42%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-36 ................................ $ 500 $ 493,950
Industrial Machinery and Equipment - 0.20%
Tyco International Group S.A.,
6.375%, 6-15-05 ............................... 250 234,195
Nondepository Institutions - 0.85%
National Rural Utilities Cooperative
Finance Corp.,
6.1%, 12-22-00 ................................ 1,000 995,790
Transportation by Air - 0.31%
Southwest Airlines Co.,
7.875%, 9-1-07 ................................ 360 359,593
TOTAL CORPORATE DEBT SECURITIES - 5.37% $ 6,289,498
(Cost: $6,192,392)
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
6.51%, 5-6-08 ................................. 750 706,642
6.19%, 7-7-08 ................................. 500 460,390
7.0%, 9-1-25 .................................. 2,170 2,097,884
Government National Mortgage Association,
6.5%, 8-15-28 ................................. 1,428 1,340,366
United States Treasury:
7.125%, 2-29-00 ............................... 500 501,405
5.25%, 1-31-01 ................................ 2,000 1,981,880
6.375%, 8-15-02 ............................... 1,100 1,102,409
7.5%, 2-15-05 ................................. 2,250 2,346,683
6.5%, 8-15-05 ................................. 4,000 4,000,000
7.25%, 8-15-22 ................................ 4,000 4,216,880
6.25%, 8-15-23 ................................ 5,250 4,949,752
6.75%, 8-15-26 ................................ 3,000 3,014,070
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 22.79% 26,718,361
(Cost: $28,595,107)
SHORT-TERM SECURITIES
Commercial Paper
Depository Institutions - 2.56%
Deutsche Bank Financial Inc.,
6.75%, 1-6-00 ................................. 3,000 2,997,188
See Notes to Schedules of Investments on page .
9
<PAGE>
THE INVESTMENTS OF THE BALANCED PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Electric, Gas and Sanitary Services - 1.70%
Bay State Gas Co.,
6.15%, 1-12-00 ................................ $2,000 $ 1,996,242
Fabricated Metal Products - 4.27%
Danaher Corporation,
6.49%, Master Note ............................ 5,009 5,009,000
Food and Kindred Products - 1.47%
General Mills, Inc.,
6.345%, Master Note ........................... 1,717 1,717,000
Nondepository Institutions - 2.60%
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 3,052 3,052,000
Total Commercial Paper - 12.60% 14,771,430
Commercial Paper (backed by irrevocable bank
letter of credit) - 4.09%
Nondepository Institutions
Agway Financial Corp. (Rabobank Nederland),
5.0%, 1-5-00 .................................. 4,800 4,797,333
TOTAL SHORT-TERM SECURITIES - 16.69% $ 19,568,763
(Cost: $19,568,763)
TOTAL INVESTMENT SECURITIES - 99.94% $117,161,329
(Cost: $103,679,209)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.06% 71,637
NET ASSETS - 100.00% $117,232,966
See Notes to Schedules of Investments on page .
10
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Cable and Other Pay Television Services - 1.86%
Cox Trust II,
7.0%, 8-16-04 ................................. $ 500 $ 486,105
Jones Intercable, Inc.,
9.625%, 3-15-02 ............................... 500 519,640
Tele-Communications, Inc.,
8.35%, 2-15-05 ................................ 1,000 1,050,740
Total ......................................... 2,056,485
Chemicals and Allied Products - 1.94%
Procter & Gamble Company (The),
8.0%, 9-1-24 .................................. 2,000 2,148,160
Communication - 0.90% BellSouth Telecommunications, Inc.,
5.85%, 11-15-45 ............................... 1,000 994,250
Depository Institutions - 9.10%
AmSouth Bancorporation,
6.75%, 11-1-25 ................................ 2,000 1,912,700
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-05 ................................ 500 477,500
First Union Corporation:
6.824%, 8-1-26 ................................ 1,132 1,111,658
6.55%, 10-15-35 ............................... 525 502,068
Kansallis-Osake-Pankki,
10.0%, 5-1-02 ................................. 1,000 1,055,910
National Westminster Bank plc,
7.375%, 10-1-09 ............................... 750 732,922
NationsBank Corporation,
8.57%, 11-15-24 ............................... 1,000 1,072,760
SouthTrust Bank of Alabama, National
Association:
5.58%, 2-6-06 ................................. 2,000 1,975,400
7.69%, 5-15-25 ................................ 500 500,460
Wachovia Corporation,
6.605%, 10-1-25 ............................... 750 718,065
Total ......................................... 10,059,443
See Notes to Schedules of Investments on page .
11
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Electric, Gas and Sanitary Services - 7.95%
California Infrastructure and Economic
Development Bank, Special Purpose
Trust:
PG&E-1,
6.42%, 9-25-08 ................................ $ 1,000 $ 967,920
SCE-1,
6.38%, 9-25-08 ................................ 1,000 964,060
Cleveland Electric Illuminating Co. (The),
9.5%, 5-15-05 ................................. 678 705,988
Entergy Arkansas, Inc.,
7.5%, 8-1-07 .................................. 750 760,178
Kansas Gas and Electric Company,
7.6%, 12-15-03 ................................ 1,000 1,011,040
Korea Electric Power Corporation,
6.375%, 12-1-03 ............................... 500 474,195
Niagara Mohawk Power Corporation,
7.375%, 7-1-03 ................................ 756 752,801
TXU Eastern Funding Company,
6.45%, 5-15-05 ................................ 1,750 1,649,375
Union Electric Co.,
8.25%, 10-15-22 ............................... 1,500 1,500,615
Total ......................................... 8,786,172
Electronic and Other Electric Equipment - 1.45%
Motorola, Inc.,
8.4%, 8-15-31 ................................. 1,500 1,606,020
Food and Kindred Products - 2.55%
Anheuser-Busch Companies, Inc.,
7.0%, 9-1-05 .................................. 500 491,430
Coca-Cola Enterprises Inc.,
0.0%, 6-20-20 ................................. 9,000 1,828,800
Coca-Cola FEMSA, S.A. de C.V.,
8.95%, 11-1-06 ................................ 500 500,000
Total ......................................... 2,820,230
General Merchandise Stores - 0.66%
Fred Meyer, Inc.:
7.15%, 3-1-03 ................................. 250 246,825
7.45%, 3-1-08 ................................. 500 486,900
Total ......................................... 733,725
Health Services - 0.44%
Tenet Healthcare Corporation,
7.875%, 1-15-03 ............................... 500 485,000
See Notes to Schedules of Investments on page .
12
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Holding and Other Investment Offices - 1.77%
Bay Apartment Communities, Inc.,
6.5%, 1-15-05 ................................. $ 500 $ 462,520
GRUMA, S.A. de C.V.,
7.625%, 10-15-07 .............................. 500 436,250
NBD Bank, National Association,
8.25%, 11-1-24 ................................ 1,000 1,051,830
Total ......................................... 1,950,600
Industrial Machinery and Equipment - 0.44%
Coltec Industries Inc.,
7.5%, 4-15-08 ................................. 500 482,675
Insurance Carriers - 0.41%
Reliance Group Holdings, Inc.,
9.0%, 11-15-00 ................................ 500 450,000
Nondepository Institutions - 6.04%
Asset Securitization Corporation,
7.49%, 4-14-29 ................................ 1,244 1,238,240
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-10 (B) ............................ 1,500 1,380,000
General Motors Acceptance Corporation,
8.875%, 6-1-10 ................................ 500 547,520
IMC Home Equity Loan Trust,
6.9%, 1-20-22 ................................. 1,000 987,810
Norse CBO, Ltd. and Norse CBO, Inc.,
6.515%, 8-13-10 (B) ........................... 1,250 1,167,975
Residential Asset Securities Corporation,
Mortgage Pass-Through Certificates,
8.0%, 10-25-24 ................................ 816 820,900
Westinghouse Electric Corporation,
8.875%, 6-14-14 ............................... 500 537,515
Total ......................................... 6,679,960
Oil and Gas Extraction - 1.74%
Anadarko Petroleum Corporation,
7.25%, 3-15-25 ................................ 1,000 1,000,180
Mitchell Energy & Development Corp.,
9.25%, 1-15-02 ................................ 27 27,625
Oryx Energy Company,
10.0%, 4-1-01 ................................. 400 412,252
Pemex Finance Ltd.,
5.72%, 11-15-03 ............................... 500 486,250
Total ......................................... 1,926,307
See Notes to Schedules of Investments on page .
13
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Paper and Allied Products - 2.20%
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-02 ................................ $ 1,000 $ 1,030,930
Champion International Corporation,
6.4%, 2-15-26 ................................. 1,500 1,403,265
Total ......................................... 2,434,195
Petroleum and Coal Products - 1.33%
Conoco Inc.,
5.9%, 4-15-04 ................................. 500 477,335
YPF Sociedad Anoima,
8.0%, 2-15-04 ................................. 1,000 990,120
Total ......................................... 1,467,455
Printing and Publishing - 1.48%
Quebecor Printing Capital Corporation,
6.5%, 8-1-27 .................................. 1,750 1,629,250
Railroad Transportation - 0.52%
CSX Corporation,
6.95%, 5-1-27 ................................. 575 571,056
Security and Commodity Brokers - 0.93%
Salomon Inc.,
3.65%, 2-14-02 ................................ 1,000 1,032,340
Stone, Clay and Glass Products - 1.55%
Cemex, S.A. de C.V.,
9.5%, 9-20-01 ................................. 500 511,250
Owens-Illinois, Inc.,
7.15%, 5-15-05 ................................ 750 693,442
USG Corporation,
9.25%, 9-15-01 ................................ 500 511,600
Total ......................................... 1,716,292
Transportation Equipment - 0.42%
Federal-Mogul Corporation,
7.75%, 7-1-06 ................................. 500 462,965
See Notes to Schedules of Investments on page .
14
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
United States Postal Service - 0.20%
Postal Square Limited Partnership,
6.5%, 6-15-22 ................................. $ 241 $ 217,033
TOTAL CORPORATE DEBT SECURITIES - 45.88% $50,709,613
(Cost: $52,406,184)
OTHER GOVERNMENT SECURITIES
Canada - 4.16%
Hydro-Quebec:
8.05%, 7-7-24 ................................. 1,000 1,056,140
7.4%, 3-28-25 ................................. 1,000 1,075,630
Province de Quebec:
5.67%, 2-27-26 ................................ 1,500 1,484,175
6.29%, 3-6-26 ................................. 1,000 979,230
Total ......................................... 4,595,175
Korea - 0.45%
Korea Development Bank (The),
7.9%, 2-1-02 .................................. 500 501,040
Supranational - 0.98%
Inter-American Development Bank,
8.4%, 9-1-09 .................................. 1,000 1,086,190
TOTAL OTHER GOVERNMENT SECURITIES - 5.59% $ 6,182,405
(Cost: $6,145,540)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
7.5%, 2-15-07 ................................. 1,008 1,013,484
6.5%, 9-25-18 ................................. 500 480,310
7.5%, 4-15-19 ................................. 1,455 1,460,041
6.25%, 1-15-21 ................................ 4,000 3,877,480
Federal National Mortgage Association:
6.09%, 4-1-09 ................................. 1,988 1,815,996
0.0%, 2-12-18 ................................. 2,500 682,450
7.0%, 9-25-20 ................................. 500 493,280
6.5%, 8-25-21 ................................. 500 482,340
7.0%, 6-1-24 .................................. 2,353 2,274,695
6.0%, 12-1-28 ................................. 2,615 2,391,517
See Notes to Schedules of Investments on page .
15
<PAGE>
THE INVESTMENTS OF THE BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES (Continued)
Government National Mortgage Association:
7.5%, 7-15-23 ................................. $ 943 $ 937,466
7.5%, 12-15-23 ................................ 1,316 1,308,257
8.0%, 9-15-25 ................................. 850 864,081
7.0%, 7-20-27 ................................. 453 435,326
7.0%, 8-20-27 ................................. 949 911,883
7.5%, 7-15-29 ................................. 1,991 1,969,076
7.75%, 10-15-31 ............................... 315 315,069
United States Treasury:
6.625%, 3-31-02 ............................... 2,000 2,013,740
5.5%, 3-31-03 ................................. 2,000 1,950,320
7.5%, 2-15-05 ................................. 500 521,485
6.5%, 8-15-05 ................................. 1,500 1,500,000
6.5%, 10-15-06 ................................ 4,000 3,989,360
11.25%, 2-15-15 ............................... 500 706,795
6.125%, 11-15-27 .............................. 14,750 13,726,645
Miscellaneous United States Government Backed
Securities:
Tennessee Valley Authority,
5.88%, 4-1-36 ............................... 750 702,773
United States Department of Veterans Affairs,
Guaranteed Remic Pass-Through Certificates,
Vendee Mortgage Trust:
1997-2 Class C,
7.5%, 8-15-17 ............................... 2,000 2,005,620
1998-1 Class 2-B,
7.0%, 6-15-19 ............................... 250 248,045
1999-2 Class 1-B,
6.5%, 7-15-19 ............................... 1,000 971,560
1999 Class 3-B,
6.5%, 2-15-20 ............................... 500 475,780
TOTAL UNITED STATES GOVERNMENT SECURITIES - 45.71% $ 50,524,874
(Cost: $52,292,360)
TOTAL SHORT-TERM SECURITIES - 1.49% $ 1,649,000
(Cost: $1,649,000)
TOTAL INVESTMENT SECURITIES - 98.67% $109,065,892
(Cost: $112,493,084)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.33% 1,470,264
NET ASSETS - 100.00% $110,536,156
See Notes to Schedules of Investments on page .
16
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Amusement and Recreation Services - 0.54%
Walt Disney Company (The) ....................... 215,000 $ 6,288,750
Building Materials and Garden Supplies - 2.40%
Home Depot, Inc. (The) .......................... 225,000 15,426,563
Lowe's Companies, Inc. .......................... 210,000 12,547,500
Total ......................................... 27,974,063
Business Services - 2.53%
America Online, Inc.* ........................... 145,000 10,938,437
CheckFree Holdings Corporation* ................. 30,000 3,157,500
Clear Channel Communications, Inc.* ............. 171,400 15,297,450
Total ......................................... 29,393,387
Cable and Other Pay Television Services - 2.88%
Comcast Corporation, Class A .................... 200,000 10,106,250
Cox Communications, Inc., Class A* .............. 115,000 5,922,500
Viacom Inc., Class B* ........................... 290,000 17,526,875
Total ......................................... 33,555,625
Chemicals and Allied Products - 13.47%
Bristol-Myers Squibb Company .................... 172,200 11,053,087
Forest Laboratories, Inc.* ...................... 140,000 8,601,250
Johnson & Johnson ............................... 197,200 18,364,250
Lilly (Eli) and Company ......................... 150,000 9,975,000
Merck & Co., Inc. ............................... 295,000 19,783,438
Monsanto Company ................................ 140,000 4,987,500
Pfizer Inc. ..................................... 355,000 11,515,312
Pharmacia & Upjohn, Inc. ........................ 250,000 11,250,000
Procter & Gamble Company (The) .................. 100,000 10,956,250
Schering-Plough Corporation ..................... 389,400 16,427,813
Smith International, Inc.* ...................... 210,000 10,434,375
Warner-Lambert Company .......................... 283,700 23,245,669
Total ......................................... 156,593,944
Communication - 1.51%
Lucent Technologies Inc. ........................ 110,000 8,229,375
Nextel Communications, Inc.* .................... 90,000 9,278,437
Total ......................................... 17,507,812
Computer Integrated Systems Design - 1.12%
Yahoo! Inc.* .................................... 30,000 12,981,562
Depository Institutions - 2.39%
Bank of America Corporation ..................... 180,000 9,033,750
Chase Manhattan Corporation (The) ............... 115,000 8,934,062
Citigroup Inc. .................................. 177,500 9,862,344
Total ......................................... 27,830,156
Eating and Drinking Places - 1.17%
McDonald's Corporation .......................... 170,000 6,853,125
Wendy's International, Inc. ..................... 325,000 6,703,125
Total ......................................... 13,556,250
See Notes to Schedules of Investments on page .
17
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 17.11%
ADC Telecommunications, Inc.* ................... 75,000 $ 5,439,844
Analog Devices, Inc.* ........................... 215,000 19,995,000
General Electric Company ........................ 179,500 27,777,625
Intel Corporation ............................... 348,600 28,683,244
JDS Uniphase Corporation* ....................... 90,000 14,518,125
Motorola, Inc. .................................. 170,000 25,032,500
Nokia Corporation, Series A, ADR ................ 105,000 19,950,000
Nortel Networks Corporation ..................... 215,000 21,715,000
Rambus Inc.* .................................... 70,000 4,718,438
Tellabs* ........................................ 85,000 5,453,281
Texas Instruments Incorporated .................. 110,000 10,656,250
Xilinx, Inc.* ................................... 330,000 15,004,688
Total ......................................... 198,943,995
Fabricated Metal Products - 0.99%
Parker Hannifin Corporation ..................... 225,000 11,545,313
Food and Kindred Products - 3.72%
Anheuser-Busch Companies, Inc. .................. 210,000 14,883,750
Pepsi Bottling Group, Inc. ...................... 350,000 5,796,875
PepsiCo, Inc. ................................... 400,000 14,100,000
Ralston-Ralston Purina Group .................... 305,000 8,501,875
Total ......................................... 43,282,500
Furniture and Home Furnishings Stores - 0.98%
Best Buy Co., Inc.* ............................. 105,000 5,269,688
Circuit City Stores, Inc. -
Circuit City Group ............................ 135,000 6,083,437
Total ......................................... 11,353,125
General Merchandise Stores - 3.17%
BJ's Wholesale Club, Inc.* ...................... 335,000 12,227,500
Dayton Hudson Corporation ....................... 335,000 24,601,562
Total ......................................... 36,829,062
Industrial Machinery and Equipment - 10.03%
Applied Materials, Inc.* ........................ 113,000 14,312,156
Cisco Systems, Inc.* ............................ 377,850 40,465,373
Cooper Cameron Corporation* ..................... 210,000 10,276,875
Dell Computer Corporation* ...................... 165,000 8,409,844
Dover Corporation ............................... 325,000 14,746,875
EMC Corporation* ............................... 179,200 19,577,600
SPX Corporation* ................................ 110,000 8,889,375
Total ......................................... 116,678,098
Instruments and Related Products - 2.62%
Guidant Corporation* ............................ 161,000 7,567,000
Medtronic, Inc. ................................. 230,000 8,380,625
Teradyne, Inc.* ................................. 220,000 14,520,000
Total ......................................... 30,467,62
See Notes to Schedules of Investments on page .
18
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Insurance Carriers - 1.36%
American International Group, Inc. .............. 145,875 $ 15,772,734
Miscellaneous Retail - 0.61%
Walgreen Co. .................................... 241,600 7,066,800
Motion Pictures - 1.53%
Time Warner Incorporated ........................ 246,000 17,819,625
Nondepository Institutions - 2.46%
Fannie Mae ...................................... 318,600 19,892,587
Freddie Mac ..................................... 185,000 8,706,563
Total ......................................... 28,599,150
Oil and Gas Extraction - 2.86%
Burlington Resources Incorporated ............... 350,000 11,571,875
Schlumberger Limited ............................ 345,100 19,411,875
Transocean Sedco Forex Inc. ..................... 66,811 2,250,708
Total ......................................... 33,234,458
Petroleum and Coal Products - 1.45%
Exxon Mobil Corporation ......................... 210,000 16,918,125
Prepackaged Software - 11.98%
BMC Software, Inc.* ............................. 140,000 11,186,875
Citrix Systems, Inc.* ........................... 45,000 5,533,594
Computer Associates International, Inc. ......... 255,000 17,834,062
Compuware Corporation* .......................... 325,000 12,096,094
Intuit Inc.* .................................... 160,000 9,585,000
Microsoft Corporation* .......................... 429,000 50,072,344
Oracle Corporation* ............................. 295,000 33,049,219
Total ......................................... 139,357,188
Printing and Publishing - 1.02%
Gannett Co., Inc. ............................... 145,000 11,826,563
Radio and Television Broadcasting Stations - 1.30%
Infinity Broadcasting Corporation,
Class A* ...................................... 417,200 15,097,425
Security and Commodity Brokers - 0.86%
Morgan Stanley, Dean Witter, Discover & Co. ..... 70,000 9,992,500
Transportation Equipment - 1.30%
Harley-Davidson, Inc. ........................... 235,300 15,073,906
Water Transportation - 1.50%
Carnival Corporation, Class A ................... 203,000 9,705,937
Royal Caribbean Cruises Ltd. .................... 158,000 7,791,375
Total ......................................... 17,497,312
See Notes to Schedules of Investments on page .
19
<PAGE>
THE INVESTMENTS OF THE GROWTH PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Wholesale Trade -- Nondurable Goods - 0.55%
U.S. Foodservice* ............................... 380,000 $ 6,365,000
TOTAL COMMON STOCKS - 95.41% $1,109,402,053
(Cost: $732,453,656)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Depository Institutions - 2.24%
Dresdner U.S. Finance Inc.,
6.23%, 1-10-00 ................................ $10,000 9,984,425
Toronto-Dominion Holdings USA Inc.,
6.9%, 1-10-00 ................................. 5,000 4,991,375
UBS Finance (DE) Inc.,
4.4%, 1-5-00 .................................. 11,000 10,994,622
Total ......................................... 25,970,422
Fabricated Metal Products - 0.12%
Danaher Corporation,
6.49%, Master Note ............................ 1,409 1,409,000
Food and Kindred Products - 1.59%
Conagra Inc.,
5.95%, 1-13-00 ................................ 5,000 4,990,083
General Mills, Inc.,
6.345%, Master Note ........................... 541 541,000
Ralston Purina Co.:
6.6%, 1-19-00 ................................. 10,000 9,967,000
6.62%, 1-24-00 ................................ 3,000 2,987,312
Total ......................................... 18,485,395
Nondepository Institutions - 1.16%
Associates First Capital Corp.,
4.0%, 1-3-00 .................................. 5,500 5,498,778
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 5,005 5,005,000
Textron Financial Corp.,
8.3%, 1-5-00 .................................. 3,000 2,997,233
Total ......................................... 13,501,011
TOTAL SHORT-TERM SECURITIES - 5.11% $ 59,365,828
(Cost: $59,365,828)
TOTAL INVESTMENT SECURITIES - 100.52% $1,168,767,881
(Cost: $791,819,484)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.52%) $ (6,019,976)
NET ASSETS - 100.00% $1,162,747,905
See Notes to Schedules of Investments on page .
20
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS, RIGHTS AND WARRANTS
Business Services - 0.60%
Cybernet Internet Services International,
Inc., Warrants (B)* ........................... 1,000 $ 80,000
deltathree.com, Inc.* ........................... 25,000 642,187
Total ......................................... 722,187
Cable and Other Pay Television Services - 1.00%
Classic Communications, Inc., Class A* .......... 22,500 825,469
Cox Communications, Inc., Class A* .............. 7,500 386,250
Total ......................................... 1,211,719
Chemicals and Allied Products - 0.41%
Smith International, Inc.* ...................... 10,000 496,875
Communication - 1.86%
Allegiance Telecom, Inc., Warrants (B)* ......... 1,250 144,375
Iridium LLC, Warrants (B)* ...................... 500 1
Metromedia Fiber Network, Inc.* ................. 5,000 239,531
Microcell Telecommunications Inc.,
Warrants (B)* ................................. 5,000 346,205
Nextel Communications, Inc.* .................... 5,000 515,469
OnePoint Communications Corp., Warrants (B)* .... 900 9,000
Powertel, Inc., Warrants* ....................... 2,400 216,000
Primus Telecommunications Group,
Incorporated* ................................. 14,500 554,625
Primus Telecommunications Group,
Incorporated, Warrants* ....................... 500 25,000
VersaTel Telecom International N.V.,
Warrants (B)* ................................. 500 200,000
Total ......................................... 2,250,206
Communication Services - 0.53%
Crown Castle International Corp.* ............... 20,000 641,250
Electronic and Other Electric Equipment - 0.16%
TeleCorp PCS, Inc.* ............................. 5,000 190,937
Engineering and Management Services - 0.22%
Harris Interactive Inc.* ........................ 20,000 261,875
Food and Kindred Products - 0.42%
Keebler Foods Company* .......................... 18,000 506,250
Holding and Other Investment Offices - 0.20%
"Shell" Transport and Trading Company,
p.l.c. (The), ADR ............................. 5,000 246,250
Industrial Machinery and Equipment - 0.41%
Cooper Cameron Corporation* ..................... 10,000 489,375
See Notes to Schedules of Investments on page .
21
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS, RIGHTS AND WARRANTS
Nondepository Institutions - 0.02%
ONO Finance Plc, Rights (B)* .................... 250 $ 22,500
Oil and Gas Extraction - 0.68%
Transocean Sedco Forex Inc. ..................... 20,000 673,750
USX Corporation - Marathon Group ................ 6,000 148,125
Total ......................................... 821,875
Paper and Allied Products - 0.00%
SF Holdings Group, Inc., Class C (B)* ........... 1,500 15
Petroleum and Coal Products - 0.38%
Royal Dutch Petroleum Company, NY Shares ........ 7,500 453,281
Radio and Television Broadcasting Stations - 1.19%
Infinity Broadcasting Corporation,
Class A* ...................................... 31,200 1,129,050
Spanish Broadcasting System, Inc.* .............. 7,500 300,469
Total ......................................... 1,429,519
Water Transportation - 0.20%
Royal Caribbean Cruises Ltd. .................... 5,000 246,563
Wholesale Trade -- Durable Goods - 0.18%
WESCO International, Inc.* ...................... 25,000 221,875
Wholesale Trade -- Nondurable Goods - 0.34%
Cardinal Health, Inc. ........................... 5,000 239,375
U.S. Foodservice* ............................... 10,000 167,500
Total ......................................... 406,875
TOTAL COMMON STOCKS, RIGHTS AND WARRANTS - 8.80% $ 10,619,427
(Cost: $7,658,594)
PREFERRED STOCKS
Communication - 0.17%
IXC Communications, Inc., 12.5%* ................ 182 201,110
Nondepository Institutions - 0.23%
California Federal Preferred Capital
Corporation, 9.125% ........................... 12,500 282,031
Printing and Publishing - 0.41%
PRIMEDIA Inc., 10.0% ............................ 5,000 490,000
TOTAL PREFERRED STOCKS - 0.81% $ 973,141
(Cost: $992,040)
See Notes to Schedules of Investments on page .
22
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Agricultural Production -- Crops - 1.42%
Hines Horticulture, Inc.,
11.75%, 10-15-05 .............................. $ 1,661 $ 1,719,135
Amusement and Recreation Services - 4.66%
Hollywood Park, Inc.,
9.25%, 2-15-07 ................................ 500 495,000
MGM Grand, Inc.,
6.875%, 2-6-08 ................................ 1,000 885,190
Premier Parks Inc.:
9.75%, 6-15-07 ................................ 1,000 1,005,000
0.0%, 4-1-08 (C) .............................. 2,500 1,712,500
Station Casinos, Inc.:
10.125%, 3-15-06 .............................. 500 510,000
8.875%, 12-1-08 ............................... 850 811,750
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-05 ................................ 250 206,875
Total ......................................... 5,626,315
Apparel and Accessory Stores - 0.41%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-04 ............................... 500 500,000
Business Services - 5.22%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-06 ............................... 2,030 2,123,887
Coinmach Corporation,
11.75%, 11-15-05 .............................. 1,000 1,032,500
Cybernet Internet Services
International, Inc.,
14.0%, 7-1-09 (B) ............................. 1,000 870,000
Lamar Advertising Company,
9.625%, 12-1-06 ............................... 1,000 1,032,500
National Equipment Services, Inc.,
10.0%, 11-30-04 ............................... 1,250 1,235,250
Total ......................................... 6,294,137
Cable and Other Pay Television Services - 8.32%
Adelphia Communications Corporation:
10.25%, 7-15-00 ............................... 500 502,500
10.5%, 7-15-04 ................................ 500 521,250
9.875%, 3-1-07 ................................ 500 507,500
Bresnan Communications Group LLC and Bresnan
Capital Corporation:
0.0%, 2-1-09 (C) ............................. 250 172,500
8.0%, 2-1-09 ................................. 250 249,688
CSC Holdings, Inc.,
9.875%, 2-15-13 ............................... 1,450 1,529,750
See Notes to Schedules of Investments on page .
23
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Cable and Other Pay Television Services (Continued)
Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation:
8.625%, 4-1-09 ............................... $1,500 $ 1,396,875
0.0%, 4-1-11 (C) ............................. 1,500 918,750
Classic Cable, Inc.,
9.375%, 8-1-09 ................................ 500 491,250
Comcast Corporation,
9.5%, 1-15-08 ................................. 350 361,056
Concentric Network Corporation,
12.75%, 12-15-07 .............................. 750 795,000
Diamond Cable Communications Plc,
0.0%, 12-15-05 (C) ........................... 500 472,500
FrontierVision Holdings, L.P.,
11.0%, 10-15-06 ............................... 500 531,250
Telewest Communications plc,
0.0%, 4-15-09 (B) (C).......................... 500 322,500
United International Holdings, Inc.,
0.0%, 2-15-08 (C) ............................. 2,000 1,265,000
Total ......................................... 10,037,369
Chemicals and Allied Products - 0.18%
Outsourcing Services Group, Inc.,
10.875%, 3-1-06 ............................... 250 220,000
Communication - 22.96%
AirGate PCS, Inc.,
13.5%, 10-1-09, Units (D) ..................... 2,000 1,300,000
Alestra, S.A. de C.V.,
12.625%, 5-15-09 (B) .......................... 1,000 1,007,500
Allegiance Telecom, Inc.,
0.0%, 2-15-08 (C) ............................. 1,250 892,187
GST Telecommunications,
0.0%, 11-15-07 (C) ............................ 1,000 940,000
Hyperion Telecommunications, Inc.:
0.0%, 4-15-03 (C) ............................. 2,000 1,780,000
12.0%, 11-1-07 ................................ 500 527,500
ITC /\ DeltaCom, Inc.:
8.875%, 3-1-08 ................................ 250 240,000
9.75%, 11-15-08 ............................... 750 757,500
Intercel, Inc.,
0.0%, 2-1-06 (C) .............................. 750 668,438
Intermedia Communications Inc.,
8.5%, 1-15-08 ................................. 750 682,500
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-06 (C) ............................. 750 656,250
Metromedia Fiber Network, Inc.,
10.0%, 12-15-09 ............................... 250 255,625
See Notes to Schedules of Investments on page .
24
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
Microcell Telecommunications Inc.,
0.0%, 6-1-06 (C) ............................. $ 750 $ 660,000
Nextel Communications, Inc.:
0.0%, 2-15-08 (C) ............................ 1,000 702,500
9.375%, 11-15-09 (B) .......................... 1,000 982,500
Nextel Partners, Inc.,
0.0%, 2-1-09 (C) ............................. 2,000 1,310,000
NEXTLINK Communications, Inc.,
10.75%, 6-1-09 ................................ 500 515,000
Nuevo Grupo Iusacell, S.A. de C.V.,
14.25%, 12-1-06 (B) ........................... 850 881,875
OnePoint Communications Corp.,
14.5%, 6-1-08 ................................ 900 578,250
Primus Telecommunications Group, Incorporated:
11.75%, 8-1-04 ................................ 500 495,000
12.75%, 10-15-09 .............................. 750 778,125
RSL Communications, Ltd.,
10.5%, 11-15-08 ............................... 1,750 1,662,500
Rhythms NetConnections Inc.,
0.0%, 5-15-08 (C) ............................. 2,000 1,080,000
Time Warner Telecom LLC and
Time Warner Telecom Inc.,
9.75%, 7-15-08 ................................ 500 512,500
Tritel PCS, Inc.,
0.0%, 5-15-09 (B) (C) ......................... 2,000 1,260,000
Triton PCS, Inc.,
0.0%, 5-1-08 (C) ............................. 2,000 1,415,000
VersaTel Telecom B.V.,
11.875%, 7-15-09 .............................. 250 255,625
VersaTel Telecom International N.V.,
13.25%, 5-15-08 ............................... 500 535,000
Viatel Inc.,
11.5%, 3-15-09 ................................ 500 500,000
VoiceStream Wireless Corporation:
0.0%, 11-15-09 (B) (C) ........................ 1,500 907,500
10.375%, 11-15-09 (B) ......................... 500 515,000
WinStar Communications, Inc.:
0.0%, 10-15-05 (C) ............................ 1,000 970,000
0.0%, 3-15-08 (C) ............................ 1,000 1,020,000
10.0%, 3-15-08 ................................ 500 472,500
Total ......................................... 27,716,375
See Notes to Schedules of Investments on page .
25
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication Services - 2.45%
EchoStar DBS Corporation,
9.375%, 2-1-09 ................................ $2,500 $ 2,506,250
ICG Services, Inc.,
0.0%, 5-1-08 (C) .............................. 900 454,500
Total ......................................... 2,960,750
Depository Institutions - 2.54%
Sovereign Bancorp, Inc.,
10.5%, 11-15-06 ............................... 3,000 3,060,000
Eating and Drinking Places - 2.27%
Avado Brands, Inc.,
11.75%, 6-15-09 ............................... 1,000 755,000
Domino's, Inc.,
10.375%, 1-15-09 .............................. 400 384,000
Foodmaker, Inc.,
8.375%, 4-15-08 ............................... 1,000 935,000
NE Restaurant Company, Inc.,
10.75%, 7-15-08 ............................... 750 668,438
Total ......................................... 2,742,438
Electronic and Other Electric Equipment - 1.92%
ASAT (Finance) LLC,
12.5%, 11-1-06 (B) ............................ 1,000 1,080,000
Elgar Holdings, Inc.,
9.875%, 2-1-08 ................................ 500 327,500
Level 3 Communications, Inc.,
0.0%, 12-1-08 (C) ............................. 1,500 907,500
Total ......................................... 2,315,000
Fabricated Metal Products - 1.34%
AXIA Incorporated,
10.75%, 7-15-08 ............................... 500 457,500
Neenah Corporation,
11.125%, 5-1-07 ............................... 1,250 1,162,500
Total ......................................... 1,620,000
Food and Kindred Products - 0.67%
Pilgrim's Pride Corporation,
10.875%, 8-1-03 ............................... 300 302,250
Southern Foods Group, L.P. and
SFG Capital Corporation,
9.875%, 9-1-07 ................................ 500 505,000
Total ......................................... 807,250
See Notes to Schedules of Investments on page .
26
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food Stores - 0.66%
Big V Supermarkets, Inc.,
11.0%, 2-15-04 ................................ $ 500 $ 485,000
Pueblo Xtra International, Inc.,
9.5%, 8-1-03 .................................. 500 310,000
Total ......................................... 795,000
Health Services - 2.27%
Abbey Healthcare Group Incorporated,
9.5%, 11-1-02 ................................. 1,745 1,710,100
IASIS Healthcare Corporation,
13.0%, 10-15-09 (B) ........................... 1,000 1,025,000
Total ......................................... 2,735,100
Hotels and Other Lodging Places - 3.04%
CapStar Hotel Company,
8.75%, 8-15-07 ................................ 500 462,500
Coast Hotels and Casinos, Inc.,
9.5%, 4-1-09 .................................. 500 480,000
Lodgian Financing Corp.,
12.25%, 7-15-09 ............................... 750 744,375
Prime Hospitality Corp.:
9.25%, 1-15-06 ................................ 1,500 1,500,000
9.75%, 4-1-07 ................................. 500 483,750
Total ......................................... 3,670,625
Industrial Machinery and Equipment - 1.54%
Terex Corporation,
8.875%, 4-1-08 ................................ 1,000 940,000
WEC Company,
12.0%, 7-15-09 ................................ 1,000 920,000
Total ......................................... 1,860,000
Miscellaneous Retail - 3.09%
Amazon.com, Inc.,
0.0%, 5-1-08 (C) .............................. 1,000 630,000
Frank's Nursery & Crafts, Inc.,
10.25%, 3-1-08 ................................ 750 510,000
Michaels Stores, Inc.:
6.75%, 1-15-03 (Convertible) .................. 500 470,000
10.875%, 6-15-06 .............................. 2,000 2,115,000
Total ......................................... 3,725,000
Motion Pictures - 1.94%
AMC Entertainment Inc.,
9.5%, 3-15-09 ................................. 500 441,250
Regal Cinemas, Inc.,
9.5%, 6-1-08 .................................. 2,500 1,900,000
Total ......................................... 2,341,250
See Notes to Schedules of Investments on page .
27
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 0.21%
ONO Finance plc,
13.0%, 5-1-09 ................................. $ 250 $ 257,500
Paper and Allied Products - 5.60%
Container Corporation of America,
11.25%, 5-1-04 ................................ 1,500 1,552,500
Mail-Well I Corporation,
8.75%, 12-15-08 ............................... 1,000 950,000
SF Holdings Group, Inc.,
0.0%, 3-15-08 (C) ............................ 7,500 4,256,250
Total ......................................... 6,758,750
Petroleum and Coal Products - 0.46%
Building Materials Corporation of America,
8.0%, 12-1-08 ................................. 600 549,000
Primary Metal Industries - 1.33%
ISG Resources, Inc.,
10.0%, 4-15-08 ................................ 1,000 850,000
SIMCALA, Inc.,
9.625%, 4-15-06 ............................... 500 290,000
Wheeling-Pittsburgh Corporation,
9.25%, 11-15-07 ............................... 500 470,000
Total ......................................... 1,610,000
Printing and Publishing - 1.95%
K-III Communications Corporation,
8.5%, 2-1-06 .................................. 500 490,000
Perry-Judd's Incorporated,
10.625%, 12-15-07 ............................. 1,000 880,000
World Color Press, Inc.,
8.375%, 11-15-08 .............................. 1,000 983,750
Total ......................................... 2,353,750
Radio and Television Broadcasting Stations - 2.78%
Chancellor Media Corporation of Los Angeles,
8.0%, 11-1-08 ................................. 750 750,000
LIN Holdings Corp.,
0.0%, 3-1-08 (C) ............................. 750 502,500
Salem Communications Corporation,
9.5%, 10-1-07 ................................. 500 500,000
Spanish Broadcasting System, Inc.,
9.625%, 11-1-09 ............................... 1,000 1,007,500
Susquehanna Media Co.,
8.5%, 5-15-09 ................................ 610 594,750
Total ......................................... 3,354,750
See Notes to Schedules of Investments on page .
28
<PAGE>
THE INVESTMENTS OF THE HIGH INCOME PORTFOLIO
DECEMBER 31, 1999 Principal
Amount in
CORPORATE DEBT SECURITIES (Continued) Thousands Value
Rubber and Miscellaneous Plastics Products - 2.87%
Globe Manufacturing Corp.,
10.0%, 8-1-08 ................................. $1,000 $ 480,000
Graham Packaging Holdings Company,
0.0%, 1-15-09 (C) ............................ 2,750 1,870,000
Home Products International, Inc.,
9.625%, 5-15-08 ............................... 750 684,375
LDM Technologies, Inc.,
10.75%, 1-15-07 ............................... 500 425,000
Total ......................................... 3,459,375
Textile Mill Products - 1.55%
Anvil Knitwear, Inc.,
10.875%, 3-15-07 .............................. 1,000 825,000
Consoltex Group Inc.,
11.0%, 10-1-03 ................................ 1,000 995,000
Glenoit Corporation,
11.0%, 4-15-07 ................................ 200 52,000
Total ......................................... 1,872,000
Transportation by Air - 1.22%
Atlas Air, Inc.,
9.375%, 11-15-06 .............................. 1,500 1,470,000
Transportation Equipment - 0.39%
Delco Remy International, Inc.,
8.625%, 12-15-07 .............................. 500 472,500
Wholesale Trade -- Durable Goods - 1.19%
AAi.Fostergrant, Inc.,
10.75%, 7-15-06 ............................... 500 165,000
Federal Data Corporation,
10.125%, 8-1-05 ............................... 500 360,000
Heafner (J. H.) Company, Inc. (The),
10.0%, 5-15-08 ................................ 1,000 915,000
Total ......................................... 1,440,000
Wholesale Trade -- Nondurable Goods - 0.35%
Amscan Holdings, Inc.,
9.875%, 12-15-07 .............................. 500 422,500
TOTAL CORPORATE DEBT SECURITIES - 86.80% $104,765,869
(Cost: $108,469,826)
TOTAL SHORT-TERM SECURITIES - 2.11% $ 2,552,000
(Cost $2,552,000)
TOTAL INVESTMENT SECURITIES - 98.52% $118,910,437
(Cost: $119,672,460)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.48% 1,788,486
NET ASSETS - 100.00% $120,698,923
See Notes to Schedules of Investments on page .
29
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Amusement and Recreation Services - 1.52%
Walt Disney Company (The) ....................... 489,700 $ 14,323,725
Building Materials and Garden Supplies - 0.72%
Home Depot, Inc. (The) .......................... 99,300 6,808,256
Business Services - 2.38%
America Online, Inc.* ........................... 109,200 8,237,775
Clear Channel Communications, Inc.* ............. 158,700 14,163,975
Total ......................................... 22,401,750
Cable and Other Pay Television Services - 1.83%
Cox Communications, Inc., Class A* .............. 333,200 17,159,800
Chemicals and Allied Products - 16.19%
Air Products and Chemicals, Inc. ................ 227,700 7,642,181
American Home Products Corporation .............. 216,800 8,550,050
Biogen, Inc.* ................................... 59,600 5,034,338
Bristol-Myers Squibb Company .................... 56,100 3,600,919
Dow Chemical Company (The) ...................... 75,200 10,048,600
du Pont (E.I.) de Nemours and Company ........... 274,300 18,069,512
Forest Laboratories, Inc.* ...................... 76,900 4,724,544
Johnson & Johnson ............................... 99,100 9,228,688
Lilly (Eli) and Company ......................... 166,700 11,085,550
Merck & Co., Inc. ............................... 205,500 13,781,344
Monsanto Company ................................ 323,700 11,531,812
Pfizer Inc. ..................................... 194,100 6,296,119
Pharmacia & Upjohn, Inc. ........................ 102,100 4,594,500
Procter & Gamble Company (The) .................. 56,500 6,190,281
Schering-Plough Corporation ..................... 193,500 8,163,281
Warner-Lambert Company .......................... 289,100 23,688,131
Total ......................................... 152,229,850
Communication - 6.44%
MCI WORLDCOM, Inc.* ............................. 172,650 9,155,845
Nippon Telegraph and
Telephone Corporation (A) ..................... 450 7,710,761
SBC Communications Inc. ......................... 156,000 7,605,000
Telefonaktiebolaget LM Ericsson, ADR,
Class B ....................................... 361,400 23,728,169
Vodafone Airtouch Public Limited
Company, ADR .................................. 249,700 12,360,150
Total ......................................... 60,559,925
Communication Services - 0.75%
General Motors Corporation, Class H* ............ 73,900 7,094,400
See Notes to Schedules of Investments on page .
30
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Depository Institutions - 3.17%
Bank of America Corporation ..................... 155,800 $ 7,819,212
Chase Manhattan Corporation (The) ............... 116,500 9,050,594
Citigroup Inc. .................................. 232,650 12,926,616
Total ......................................... 29,796,422
Electric, Gas and Sanitary Services - 0.75%
Duke Energy Corp. ............................... 141,500 7,092,688
Electronic and Other Electric Equipment - 7.83%
Analog Devices, Inc.* ........................... 160,100 14,889,300
General Electric Company ........................ 184,000 28,474,000
Intel Corporation ............................... 311,200 25,605,925
Rambus Inc.* .................................... 68,700 4,630,809
Total ......................................... 73,600,034
Fabricated Metal Products - 0.76%
Gillette Company (The) .......................... 174,222 7,175,769
Food and Kindred Products - 0.52%
PepsiCo, Inc. ................................... 140,000 4,935,000
Food Stores - 1.41%
Kroger Co. (The)* ............................... 704,800 13,303,100
Furniture and Home Furnishings Stores - 1.54%
Circuit City Stores, Inc. -
Circuit City Group ............................ 321,200 14,474,075
General Merchandise Stores - 2.42%
Dayton Hudson Corporation ....................... 106,400 7,813,750
Wal-Mart Stores, Inc. ........................... 216,300 14,951,737
Total ......................................... 22,765,487
Holding and Other Investment Offices - 2.11%
ABB Ltd. [Switzerland] (A)* ..................... 162,100 19,816,066
Industrial Machinery and Equipment - 7.86%
Baker Hughes Incorporated ....................... 205,600 4,330,450
Cisco Systems, Inc.* ............................ 181,500 19,437,516
Deere & Company ................................. 116,800 5,066,200
Dell Computer Corporation* ...................... 215,400 10,978,669
EMC Corporation* ................................ 150,000 16,387,500
International Business Machines
Corporation ................................... 133,200 14,385,600
Sun Microsystems, Inc.* ......................... 43,200 3,343,950
Total ......................................... 73,929,885
See Notes to Schedules of Investments on page .
31
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Instruments and Related Products - 2.67%
Guidant Corporation* ............................ 266,400 $ 12,520,800
Medtronic, Inc. ................................. 215,800 7,863,212
Raytheon Company, Class A ....................... 190,353 4,723,134
Total ......................................... 25,107,146
Insurance Carriers - 3.12%
American International Group, Inc. ............. 127,225 13,756,203
Aon Corporation ................................. 119,300 4,772,000
Chubb Corporation (The) ......................... 192,600 10,845,788
Total ......................................... 29,373,991
Motion Pictures - 1.46%
Time Warner Incorporated ........................ 190,000 13,763,125
Nondepository Institutions - 3.90%
Associates First Capital Corporation,
Class A ....................................... 367,220 10,075,599
Fannie Mae ...................................... 252,700 15,777,956
Freddie Mac ..................................... 230,300 10,838,494
Total ......................................... 36,692,049
Oil and Gas Extraction - 4.04%
Anadarko Petroleum Corporation .................. 147,800 5,043,675
Burlington Resources Incorporated ............... 412,100 13,625,056
Schlumberger Limited ............................ 251,400 14,141,250
Transocean Sedco Forex Inc. ..................... 48,671 1,639,606
USX Corporation - Marathon Group ................ 142,100 3,508,094
Total ......................................... 37,957,681
Petroleum and Coal Products - 3.01%
Chevron Corporation ............................. 44,000 3,811,500
Exxon Mobil Corporation ......................... 178,229 14,358,574
Royal Dutch Petroleum Company ................... 167,700 10,135,369
Total ......................................... 28,305,443
Prepackaged Software - 4.08%
Microsoft Corporation* .......................... 226,300 26,413,453
Oracle Corporation* ............................. 106,500 11,931,328
Total ......................................... 38,344,781
Primary Metal Industries - 0.79%
Alcoa Incorporated .............................. 89,200 7,403,600
Security and Commodity Brokers - 0.43%
Charles Schwab Corporation (The) ................ 104,200 3,998,675
Transportation By Air - 0.63%
AMR Corporation* ................................ 88,800 5,949,600
See Notes to Schedules of Investments on page .
32
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Transportation Equipment - 3.42%
Boeing Company (The) ............................ 94,500 $ 3,927,656
DaimlerChrysler AG .............................. 69,894 5,469,205
Ford Motor Company .............................. 329,600 17,613,000
Lockheed Martin Corporation ..................... 236,500 5,173,437
Total ......................................... 32,183,298
Trucking and Warehousing - 0.25%
United Parcel Service, Inc. ..................... 33,800 2,332,200
Wholesale Trade -- Nondurable Goods - 3.34%
Cardinal Health, Inc. ........................... 271,800 13,012,425
Enron Corp. ..................................... 119,700 5,311,688
Safeway Inc.* ................................... 367,000 13,051,437
Total ......................................... 31,375,550
TOTAL COMMON STOCKS - 89.34% $840,253,371
(Cost: $557,569,368)
PREFERRED STOCK - 0.39%
Cable and Other Pay Television Services
Cox Communications, Inc., 7.0% (Convertible) 53,500 $ 3,638,000
(Cost: $2,675,000)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Auto Repair, Services and Parking - 1.06%
PHH Corp.,
6.75%, 1-11-00 ................................ $10,000 9,981,250
Depository Institutions - 1.63%
Dresdner U.S. Finance Inc.,
6.23%, 1-10-00 ................................ 5,000 4,992,213
UBS Finance (DE) Inc.:
5.0%, 1-4-00 .................................. 2,860 2,858,808
4.4%, 1-5-00 .................................. 7,500 7,496,333
Total ......................................... 15,347,354
Electric, Gas and Sanitary Services - 2.76%
Detriot Edison Co.,
6.75%, 1-13-00 ................................ 16,000 15,964,000
PS Colorado Credit Corp.,
6.3%, 1-20-00 ................................. 10,000 9,966,750
Total ......................................... 25,930,750
Fabricated Metal Products - 0.09%
Danaher Corporation,
6.49%, Master Note ............................ 827 827,000
See Notes to Schedules of Investments on page .
33
<PAGE>
THE INVESTMENTS OF THE INCOME PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Food and Kindred Products - 0.11%
General Mills, Inc.,
6.345%, Master Note ........................... $ 1,063 $ 1,063,000
Instruments and Related Products - 1.06%
Snap-On Inc.,
6.375%, 1-14-00 ............................... 10,000 9,976,979
Insurance Carriers - 0.53%
SAFECO Credit Co. Inc.,
6.53%, 1-13-00 ................................ 5,000 4,989,117
Nondepository Institutions - 0.58%
Associates First Capital B.V.
(Associates First Capital
Corporation):
5.95%, 1-10-00 ................................ 2,000 1,997,025
6.0%, 1-10-00 ................................. 1,315 1,313,028
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 2,106 2,106,000
Total ......................................... 5,416,053
Petroleum and Coal Products - 1.69%
Kerr-McGee Credit LLC,
6.85%, 1-27-00 ................................ 16,000 15,920,844
Total Commercial Paper - 9.51% 89,452,347
Municipal Obligation - 0.53%
California
California Pollution Control Financing
Authority, Environmental Improvement
Revenue Bonds (Shell Martinez Refining
Company Project), Series 1996 (Taxable),
6.55%, 1-20-00 ................................ 5,000 5,000,000
TOTAL SHORT-TERM SECURITIES - 10.04% $ 94,452,347
(Cost: $94,452,347)
TOTAL INVESTMENT SECURITIES - 99.77% $938,343,718
(Cost: $654,696,715)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.23% 2,191,204
NET ASSETS - 100.00% $940,534,922
See Notes to Schedules of Investments on page .
34
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Australia - 0.54%
Solution 6 Holdings Limited (A)* ................ 148,829 $ 1,621,429
Canada - 5.02%
AT&T Canada Inc., Class B (A)* .................. 80,000 3,213,741
BCE Inc. (A) .................................... 38,000 3,451,794
Nortel Networks Corporation ..................... 54,000 5,454,000
Rogers Communications Inc.,
Class B (A)* .................................. 120,000 2,933,924
Total ......................................... 15,053,459
China - 0.06%
Jinpan International Limited* ................... 85,300 191,925
Finland - 5.64%
Perlos Oy (A) (B)*............................... 61,600 2,171,739
Sonera Group plc (A) (B) ........................ 178,000 12,201,324
UPM-Kymmene Corporation (A) ..................... 63,300 2,550,484
Total ......................................... 16,923,547
France - 9.57%
AXA-UAP (A) ..................................... 26,700 3,722,256
Alcatel Alsthom CGE, SA, ADR .................... 90,000 4,050,000
CANAL+ (A) ...................................... 19,500 2,838,320
Carrefour, S.A. (A) ............................. 11,850 2,185,574
France Telecom (A) .............................. 20,000 2,645,170
Havas Advertising (A)............................ 8,350 3,557,834
Suez Lyonnaise des Eaux (A) ..................... 23,000 3,686,013
Transiciel S.A. (A) (B) ......................... 27,500 3,321,320
Vivendi (A) ..................................... 30,000 2,709,133
Total ......................................... 28,715,620
Germany - 10.99%
Bayerische Hypo- und Vereinsbank AG (A) ......... 15,000 1,024,424
Deutsche Bank AG, Registered Shares (A) ......... 35,000 2,956,174
Deutsche Prandbrief- und
Hypothekenbank AG (A) ......................... 18,725 1,399,538
Dresdner Bank AG (A) ............................ 15,000 815,913
ELMOS Semiconductor AG (A) (B)* ................. 50,000 2,064,965
EM.TV & Merchandising AG (A) .................... 45,000 2,901,024
Kamps AG (A)* ................................... 25,000 1,667,081
Mannesmann AG, Registered Shares (A) ............ 40,000 9,649,934
QIAGEN N.V. (A)* ................................ 45,300 3,422,302
R.T. - SET Real Time Synthesized
Entertainment Technology Ltd. (A) (B)* ........ 60,000 1,057,665
Rhoen-Klinikum AG (A) ........................... 49,800 1,830,969
Siemens AG (A) .................................. 33,000 4,198,326
Total ......................................... 32,988,315
See Notes to Schedules of Investments on page .
35
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Hong Kong - 1.25%
China Telecom (Hong Kong) Limited (A)* .......... 600,000 $ 3,743,487
Ireland - 0.51%
Bank of Ireland (The) (A) ....................... 191,182 1,521,363
Israel - 0.82%
Partner Communications, ADR* .................... 95,000 2,464,062
Japan - 25.14%
Alpha Systems, Inc. (A) ......................... 6,000 1,263,096
Benesse Corporation (A) ......................... 10,000 2,408,695
FUJITSU LIMITED (A) ............................. 160,000 7,300,499
Fujitsu Support and Service Inc. (A) ............ 6,000 2,943,308
Hikari Tsushin, Inc. (A) ........................ 1,800 3,613,042
Hitachi Software Engineering Co.,
Ltd. (A) ...................................... 20,700 3,019,975
Keyence Corporation (A) ......................... 13,000 5,282,483
Matsushita Communication Industrial
Co., Ltd. (A) ................................. 25,000 6,609,223
NTT Mobile Communications Network, Inc. (A) ..... 210 8,080,877
Nippon Telegraph and
Telephone Corporation (A) ..................... 350 5,997,258
Oracle Corporation Japan (A) .................... 3,000 1,395,280
ROHM CO., LTD. (A) .............................. 10,000 4,112,406
Ryohin Keikaku Co., Ltd. (A) .................... 11,000 2,209,047
SECOM Co., Ltd. (A) ............................. 30,000 3,304,612
SOFTBANK CORP. (A) .............................. 5,000 4,788,015
Sony Corporation (A) ............................ 14,000 4,153,530
TransCosmos Inc. (A) ............................ 16,500 7,043,964
Trend Micro, Incorporated (A) ................... 7,500 1,894,644
Total ......................................... 75,419,954
Netherlands - 6.77%
EQUANT N.V. (A)* ................................ 37,850 4,296,835
Fox Kids Europe NV (A) (B)* ..................... 100,000 1,279,271
Getronics N.V. (A) .............................. 50,000 3,988,908
Koninklijke Philips Electronics N.V.,
Ordinary Shares (A) ........................... 29,200 3,970,777
Ordina N.V. (A)* ................................ 87,609 2,753,355
United Pan-Europe Communications
N.V. (A)* ..................................... 31,350 4,010,515
Total ......................................... 20,299,661
See Notes to Schedules of Investments on page .
36
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Portugal - 0.31%
Banco Portugues do Atlantico, S.A. (A) (B)* ..... 229,500 $ 940,884
Spain - 0.35%
Tele Pizza, S.A. (A)* ........................... 250,000 1,057,665
Sweden - 2.26%
Entra Data AB (A) ............................... 80,000 2,051,765
NetCom Systems AB, Class B (A)* ................. 26,000 1,829,176
Telefonaktiebolaget LM Ericsson,
Class B (A) ................................... 45,100 2,902,318
Total ......................................... 6,783,259
Switzerland - 3.33%
Clariant Limited, Registered Shares (A) ......... 3,700 1,762,789
4M Technologies Holding (A)* .................... 9,300 2,796,246
Julius Baer Holding AG (A) ...................... 400 1,207,708
PubliGroupe SA (A) .............................. 1,340 1,324,776
Roche Holdings AG (A) ........................... 245 2,906,597
Total ......................................... 9,998,116
United Kingdom - 15.62%
Allied Zurich p.l.c. (A) ........................ 200,000 2,358,338
Barclays PLC (A) ................................ 36,000 1,034,503
British Telecommunications plc (A) .............. 141,757 3,434,701
COLT Telecom Group plc, ADR* .................... 65,000 13,260,000
Energis plc (A)* ................................ 79,250 3,808,373
Independent Energy Holdings plc, ADS* ........... 225,000 7,446,094
Invensys plc (A) ................................ 429,500 2,320,665
Kingfisher plc (A) .............................. 148,475 1,647,644
Lloyds TSB Group plc (A) ........................ 55,564 691,094
Misys plc (A) ................................... 255,896 3,988,816
Reckitt Benckiser plc (A) ....................... 150,980 1,419,370
Sema Group plc (A) .............................. 184,500 3,308,054
Telewest Communications plc (A)* ................ 400,000 2,132,196
Total ......................................... 46,849,848
United States - 2.13%
Global TeleSystems Group, Inc.* ................. 126,500 4,380,062
Infonet Services Corporation* ................... 76,200 2,000,250
Total ......................................... 6,380,312
TOTAL COMMON STOCKS - 90.31% $270,952,906
(Cost: $148,219,653)
See Notes to Schedules of Investments on page .
37
<PAGE>
THE INVESTMENTS OF THE INTERNATIONAL PORTFOLIO
DECEMBER 31, 1999
Shares Value
PREFERRED STOCKS
Brazil - 0.66%
Petroleo Brasileiro S.A. -
Petrobras (A) ................................. 7,800,000 $ 1,994,441
Germany - 4.08%
Fresenius Medical Care AG (A) ................... 5,000 916,643
MLP AG (A) ...................................... 30,000 9,065,700
SAP AG (A) ...................................... 3,750 2,258,870
Total ......................................... 12,241,213
Spain - 0.81%
Telebras S.A., ADR .............................. 18,900 2,428,650
TOTAL PREFERRED STOCKS - 5.55% $ 16,664,304
(Cost: $6,376,345)
TOTAL SHORT-TERM SECURITIES - 4.03% $ 12,076,817
(Cost: $12,076,817)
TOTAL INVESTMENT SECURITIES - 99.89% $299,694,027
(Cost: $166,672,815)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.11% 335,336
NET ASSETS - 100.00% $300,029,363
See Notes to Schedules of Investments on page .
38
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Auto Repair, Services and Parking - 2.50%
Hertz Corporation (The),
7.375%, 6-15-01 ............................... $150 $ 150,873
Chemicals and Allied Products - 3.30%
American Home Products Corporation,
7.7%, 2-15-00 ................................. 100 100,192
Praxair, Inc.,
6.7%, 4-15-01 ................................. 100 99,189
Total ......................................... 199,381
Communication - 1.70%
GTE Corporation,
9.375%, 12-1-00 ............................... 100 102,407
Depository Institutions - 10.69%
BankAmerica Corporation,
9.7%, 8-1-00 .................................. 100 101,749
Mercantile Bancorporation Inc.,
7.625%, 10-15-02 .............................. 217 219,335
Society National Bank,
6.75%, 6-15-03 ................................ 200 195,690
Wells Fargo & Company,
8.375%, 5-15-02 ............................... 125 128,587
Total ......................................... 645,361
Electric, Gas and Sanitary Services - 5.96%
NorAm Energy Corp.,
6.375%, 11-1-03 ............................... 150 144,384
UtiliCorp United,
6.875%, 10-1-04 ............................... 100 96,354
Western Resources, Inc.,
7.25%, 8-15-02 ................................ 120 118,892
Total ......................................... 359,630
Food and Kindred Products - 3.30%
Grand Metropolitan Investment Corp.,
7.125%, 9-15-04 ............................... 200 199,558
General Merchandise Stores - 2.31%
Penney (J.C.) Company, Inc.,
7.6%, 4-1-07 .................................. 150 139,431
Industrial Machinery and Equipment - 1.64%
Black & Decker Corp.,
7.5%, 4-1-03 .................................. 100 98,945
See Notes to Schedules of Investments on page .
39
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Instruments and Related Products - 3.99%
Baxter International Inc.,
7.625%, 11-15-02 .............................. $100 $ 100,922
Raytheon Company,
6.75%, 8-15-07 ................................ 150 139,940
Total ......................................... 240,862
Nondepository Institutions - 10.42%
American General Finance Corporation,
6.2%, 3-15-03 ................................. 150 145,206
Aristar, Inc.,
5.85%, 1-27-04 ................................ 150 140,570
Avco Financial Services, Inc.,
7.375%, 8-15-01 ............................... 140 140,900
General Motors Acceptance Corporation,
7.0%, 9-15-02 ................................. 203 202,572
Total ......................................... 629,248
Petroleum and Coal Products - 3.29%
Chevron Corporation Profit Sharing/Savings
Plan Trust Fund,
8.11%, 12-1-04 ................................ 83 84,949
USX Corporation,
9.8%, 7-1-01 .................................. 110 113,764
Total ......................................... 198,713
Radio and Television Broadcasting Stations - 1.69%
Westinghouse Electric Corporation,
8.875%, 6-1-01 ................................ 100 102,258
Railroad Transportation - 6.10%
Norfolk Southern Corporation,
7.35%, 5-15-07 ................................ 200 196,290
Union Pacific Corporation,
7.875%, 2-15-02 ............................... 170 172,222
Total ......................................... 368,512
Security and Commodity Brokers - 1.66%
Salomon Inc.,
7.75%, 5-15-00 ................................ 100 100,482
Transportation Equipment - 2.53%
Lockheed Martin Corporation,
7.25%, 5-15-06 ................................ 160 152,618
TOTAL CORPORATE DEBT SECURITIES - 61.08% $3,688,279
(Cost: $3,777,266)
See Notes to Schedules of Investments on page .
40
<PAGE>
THE INVESTMENTS OF THE LIMITED-TERM BOND PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
5.33%, 10-8-02 ................................ $150 $ 144,468
7.0%, 5-15-05 ................................. 9 8,821
6.05%, 9-15-20 ................................ 101 99,618
Federal National Mortgage Association:
6.0%, 11-1-00 ................................. 27 26,593
6.4%, 12-27-04 ................................ 155 149,575
7.95%, 3-7-05 ................................. 100 99,609
6.21%, 8-15-05 ................................ 100 95,219
7.5%, 11-15-06 ................................ 100 98,016
6.5%, 12-1-10 ................................. 55 53,745
6.0%, 1-1-11 .................................. 52 49,235
6.5%, 2-1-11 .................................. 61 59,245
7.0%, 5-1-11 .................................. 48 47,595
7.0%, 7-1-11 .................................. 51 50,106
7.0%, 9-1-12 .................................. 62 60,976
6.0%, 11-1-13 ................................. 228 215,942
7.0%, 9-1-14 .................................. 148 146,324
11.0%, 10-1-20 ................................ 13 14,754
7.0%, 4-1-26 .................................. 61 58,677
Government National Mortgage Association:
7.0%, 9-15-08 ................................. 41 40,542
6.5%, 1-15-14 ................................. 121 116,956
7.0%, 7-15-29 ................................. 200 193,124
United States Treasury,
6.25%, 2-15-07 ................................ 150 147,587
TOTAL UNITED STATES GOVERNMENT SECURITIES - 32.73% $1,976,727
(Cost: $2,043,501)
TOTAL SHORT-TERM SECURITIES - 4.72% $ 285,000
(Cost: $285,000)
TOTAL INVESTMENT SECURITIES - 98.53% $5,950,006
(Cost: $6,105,767)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.47% 88,935
NET ASSETS - 100.00% $6,038,941
See Notes to Schedules of Investments on page .
41
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
BANK OBLIGATIONS
Certificates of Deposit - 3.10%
Yankee
Bank Austria - New York,
5.11%, 4-25-00 ................................ $2,000 $ 1,998,261
Commercial Paper - 6.20%
Abbey National North America,
6.055%, 1-18-00 ............................... 2,500 2,492,852
Toronto-Dominion Holdings USA Inc.,
6.9%, 1-10-00 ................................. 1,500 1,497,412
Total ......................................... 3,990,264
Notes - 4.66%
Banc One Corp.,
6.5188%, 1-10-00 .............................. 1,000 1,000,000
Harris Trust and Savings Bank,
5.05%, 2-17-2000 .............................. 2,000 1,999,865
Total ......................................... 2,999,865
TOTAL BANK OBLIGATIONS - 13.96% $ 8,988,390
(Cost: $8,988,390)
CORPORATE OBLIGATIONS
Commercial Paper
Communication - 2.63%
U S WEST Communications Inc.,
7.1%, 1-13-00 ................................. 1,700 1,695,977
Electric, Gas and Sanitary Services - 6.96%
Bay State Gas Co.,
6.75%, 1-28-00 ................................ 3,000 2,984,812
Questar Corp.,
5.9%, 1-19-00 ................................. 1,000 997,050
Southern California Edison Co.,
7.0%, 1-24-00 ................................. 500 497,764
Total ......................................... 4,479,626
Fabricated Metal Products - 5.00%
Danaher Corporation,
6.49%, Master Note ............................ 3,219 3,219,000
Food and Kindred Products - 8.07%
General Mills, Inc.,
6.345%, Master Note ........................... 3,215 3,215,000
Golden Peanut Co.,
5.93%, 2-29-00 ................................ 2,000 1,980,563
Total ......................................... 5,195,563
See Notes to Schedules of Investments on page .
42
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Commercial Paper (Continued)
Nondepository Institutions - 5.08%
Associates First Capital B.V. (Associates
First Capital Corporation),
5.8%, 1-10-00 ................................. $ 1,000 $ 998,550
General Electric Capital Corporation,
5.93%, 3-7-00 ................................. 1,000 989,128
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 1,283 1,283,000
Total ......................................... 3,270,678
Oil and Gas Extraction - 3.87%
Arco British Ltd. (Atlantic Richfield Co.),
6.05%, 1-21-00 ................................ 2,500 2,491,597
Personal Services - 4.02%
Block Financial Corp.:
6.15%, 1-12-00 ................................ 1,600 1,596,993
6.2%, 1-28-00 ................................. 1,000 995,350
Total ......................................... 2,592,343
Total Commercial Paper - 35.63% 22,944,784
Notes
Amusement and Recreation Services - 3.33%
Walt Disney Company (The),
5.6%, 4-17-00 ................................. 2,145 2,147,092
Communication - 3.10% AT&T Corp.,
6.1363%, 1-13-00 .............................. 2,000 1,999,576
Electric, Gas and Sanitary Services - 3.11%
Baltimore Gas and Electric Company,
6.11%, 3-1-00 ................................. 2,000 1,999,945
Food Stores - 3.10%
Albertson's Inc.,
6.4425%, 1-14-00 .............................. 2,000 1,999,574
General Merchandise Stores - 3.11%
Wal-Mart Stores, Inc.,
5.65%, 2-1-00 ................................. 2,000 2,000,701
Insurance Carriers - 2.33%
Atlantic American Corporation (Wachovia
Bank, N.A.),
6.49%, 1-5-00 ................................. 1,500 1,500,000
See Notes to Schedules of Investments on page .
43
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
CORPORATE OBLIGATIONS (Continued)
Notes (Continued)
Miscellaneous Retail - 2.33%
Todd Shopping Center, L.L.C., Taxable
Variable Rate Demand Bonds, Series 1999
(Wachovia Bank, N.A.),
6.49%, 1-5-00 ................................. $ 1,500 $ 1,500,000
Nondepository Institutions - 8.55%
Associates Corp. of North America,
6.4103%, 1-31-00 .............................. 1,500 1,499,557
Caterpillar Financial Services Corp.,
5.93%, 6-1-00 ................................. 1,000 998,960
Ford Motor Credit Company,
6.375%, 10-6-00 ............................... 1,000 1,001,548
General Motors Acceptance Corporation,
7.875%, 3-15-00 ............................... 1,000 1,005,350
Transamerica Finance Corporation,
6.215%, 3-2-00 ................................ 1,000 1,000,000
Total ......................................... 5,505,415
Total Notes - 28.96% 18,652,303
TOTAL CORPORATE OBLIGATIONS - 64.59% $41,597,087
(Cost: $41,597,087)
MUNICIPAL OBLIGATIONS
California - 3.88%
City of Anaheim, California, Certificates
of Participation (1993 Arena Financing
Project), Municipal Adjustable Rate
Taxable Securities (Credit Suisse),
6.20%, 1-19-00 ................................ 2,000 2,000,000
Oakland-Alameda County Coliseum Authority,
Lease Revenue Bonds (Oakland Coliseum
Arena Project), 1996 Series A-1 Variable Rate
Lease Revenue Bonds (Taxable),(Canadian
Imperial Bank of Commerce),
6.3%, 1-18-00 ................................. 500 500,000
Total ......................................... 2,500,000
Indiana - 1.24%
City of Whiting, Indiana, Industrial Sewage
and Solid Waste Disposal Revenue Bonds, Taxable
Series 1995 (Amoco Oil Company Project),
6.2%, 1-11-00 ................................. 800 800,000
See Notes to Schedules of Investments on page .
44
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
Louisiana - 6.36%
Industrial Development Board of the Parish
Of Calcasieu, Inc., Environmental Revenue
Bonds (CITGO Petroleum Corporation Project),
Series 1996 (Taxable), (Westdeutsche
Landesbank Girozentrale),
6.0%, 1-20-00 ................................. $ 2,500 $ 2,500,000
Industrial District No. 3 of the Parish of West
Baton Rouge, State of Louisiana, Variable Rate
Demand Revenue Bonds, Series 1995 (Taxable),
(The Dow Chemical Company Project),
6.25%, 1-26-00 ................................ 800 800,000
Gulf Coast Industrial Development Authority,
Environmental Facilities Revenue Bonds
(CITGO Petroleum Corporation Project), Taxable
Series 1998 (Royal Bank of Canada),
6.25%, 1-26-00 ................................ 800 800,000
Total ......................................... 4,100,000
Mississippi - 0.78%
Mississippi Business Finance Corporation,
Taxable Adjustable Mode, Industrial Development
Revenue Bonds (BenchCraft Project), Series 1999
(Wachovia Bank, N.A.),
6.49%, 1-5-00 ................................. 500 500,000
New Jersey - 0.22%
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),
6.71%, 1-5-00 ................................. 140 140,000
New York - 1.55%
Putnam Hospital Center, Multi-Mode Revenue Bonds,
Series 1999 (The Bank of New York),
6.5%, 1-5-00 .................................. 1,000 1,000,000
Pennsylvania - 2.47%
Schuylkill County Industrial Development
Authority, Commercial Development Revenue
Bonds (Midway Supermarket, Inc. Project),
Taxable Series of 1995 (First Union National Bank),
6.8%, 1-5-00 .................................. 1,390 1,390,000
See Notes to Schedules of Investments on page .
45
<PAGE>
THE INVESTMENTS OF THE MONEY MARKET PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
MUNICIPAL OBLIGATIONS (Continued)
Pennsylvania (Continued)
Montgomery County Industrial Development
Authority, Taxable Fixed Rate/Variable
Rate Demand Revenue Bonds (410 Horsham
Associates Project), Series of 1995
(First Union National Bank),
6.8%, 1-5-00 .................................. $ 200 $ 200,000
Total ......................................... 1,590,000
Texas - 0.77%
Metrocrest Hospital Authority, Series 1989A
(The Bank of New York),
5.635%, 3-7-00 ................................ 500 494,838
TOTAL MUNICIPAL OBLIGATIONS - 17.27% $11,124,838
(Cost: $11,124,838)
OTHER GOVERNMENT SECURITY - 3.86%
Commercial Paper (backed by irrevocable bank
letter of credit)
Mexico
United Mexican States (Barclays Bank PLC),
6.08%, 2-1-00 ................................. 2,500 $ 2,486,911
(Cost: $2,486,911)
UNITED STATES GOVERNMENT SECURITY - 1.55%
Federal Home Loan Bank,
6.163%, 1-5-00 ................................ 1,000 $ 1,000,000
(Cost: $1,000,000)
TOTAL INVESTMENT SECURITIES - 101.23% $65,197,226
(Cost: $65,197,226)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.23%) (795,135)
NET ASSETS - 100.00% $64,402,091
See Notes to Schedules of Investments on page .
46
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Business Services - 20.48%
Acxiom Corporation* ............................. 60,000 $ 1,441,875
America Online, Inc.* ........................... 40,000 3,017,500
Broadbase Software, Inc.* ....................... 45,000 5,034,375
Clear Channel Communications, Inc.* ............. 18,000 1,606,500
Critical Path, Inc.* ............................ 28,000 2,644,250
Cysive, Inc.* ................................... 25,975 1,885,623
DoubleClick Inc.* ............................... 26,500 6,711,953
eBay Inc.* ...................................... 15,000 1,878,281
Gerald Stevens, Inc.* ........................... 100,000 834,375
Getty Images, Inc.* ............................. 35,000 1,715,000
InterNAP Network Services Corporation* .......... 25,000 4,321,875
Lycos, Inc.* .................................... 30,000 2,387,813
MemberWorks Incorporated* ....................... 31,000 1,027,844
Netcentives Inc.* ............................... 33,600 2,095,800
Portal Software, Inc.* .......................... 38,500 3,953,469
Redback Networks* ............................... 20,000 3,543,125
S1 Corporation* ................................. 45,000 3,510,000
SunGard Data Systems, Inc.* ..................... 55,000 1,306,250
TMP Worldwide Inc.* ............................. 20,000 2,833,750
Total ......................................... 51,749,658
Cable and Other Pay Television Services - 1.23%
EchoStar Communications Corporation,
Class A* ...................................... 32,000 3,116,000
Chemicals and Allied Products - 1.19%
Albany Molecular Research, Inc.* ................ 55,000 1,708,438
Gilead Sciences* ................................ 24,000 1,297,500
Total ......................................... 3,005,938
Communication - 4.00%
COLT Telecom Group plc, ADR* .................... 10,000 2,040,000
Illuminet Holdings, Inc.* ....................... 40,000 2,198,750
Next Level Communications, Inc.* ................ 30,250 2,267,805
Nextel Communications, Inc.* .................... 35,000 3,608,281
Total ......................................... 10,114,836
Communication Services - 0.39%
Metro One Telecommunications, Inc.* ............. 75,000 979,687
Computer Integrated Systems Design - 6.26%
CacheFlow Inc.* ................................. 10,000 1,306,562
Inktomi Corporation* ............................ 26,000 2,305,875
Netopia, Inc.* .................................. 30,000 1,637,812
Sanchez Computer Associates, Inc.* .............. 88,000 3,652,000
Yahoo! Inc.* .................................... 16,000 6,923,500
Total ......................................... 15,825,749
Depository Institutions - 0.81%
Concord EFS, Inc.* .............................. 80,000 2,057,500
See Notes to Schedules of Investments on page .
47
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 16.00%
Broadcom Corporation, Class A* .................. 17,000 $ 4,629,844
Data Critical Corporation* ...................... 50,000 746,875
Finisar Corporation* ............................ 9,500 850,250
Gemstar International Group Limited* ............ 60,000 4,271,250
Inet Technologies, Inc.* ........................ 50,000 3,509,375
JDS Uniphase Corporation* ....................... 52,000 8,388,250
Nokia Corporation, Series A, ADR ................ 18,000 3,420,000
Nortel Networks Corporation ..................... 25,000 2,525,000
Rambus Inc.* .................................... 40,000 2,696,250
STMicroelectronics N.V., NY Shares .............. 20,000 3,028,750
Sycamore Networks, Inc.* ........................ 10,000 3,048,125
Wink Communications, Inc.* ...................... 55,000 3,301,719
Total ......................................... 40,415,688
Engineering and Management Services - 2.70%
Incyte Pharmaceuticals, Inc.* ................... 37,000 2,188,781
MAXIMUS, Inc.* .................................. 30,000 1,018,125
Paychex, Inc. ................................... 50,000 1,998,437
Whittman-Hart, Inc.* ............................ 30,000 1,609,688
Total ......................................... 6,815,031
Industrial Machinery and Equipment - 4.13%
Apple Computer, Inc.* ........................... 30,900 3,175,941
Crossroads Systems, Inc.* ....................... 10,000 843,125
Foundry Networks, Inc.* ......................... 10,000 3,016,250
Juniper Networks, Inc.* ......................... 10,000 3,396,562
Total ......................................... 10,431,878
Instruments and Related Products - 0.64%
VISX, Incorporated* ............................. 31,000 1,605,219
Miscellaneous Retail - 0.90%
Amazon.com, Inc.* ............................... 30,000 2,284,688
Prepackaged Software - 27.63%
Allaire Corporation* ............................ 24,500 3,592,313
Ariba, Inc.* .................................... 32,000 5,670,000
BroadVision, Inc.* .............................. 90,000 15,305,625
Citrix Systems, Inc.* ........................... 30,000 3,689,063
E.piphany, Inc.* ................................ 11,100 2,483,625
eGain Communications Corporation* ............... 40,000 1,500,000
HNC Software Inc.* .............................. 25,000 2,649,219
iManage, Inc.* .................................. 51,400 1,678,531
Intuit Inc.* .................................... 70,000 4,193,437
Macromedia, Inc.* ............................... 35,100 2,566,687
NetIQ Corporation* .............................. 56,500 2,983,906
Phone.com, Inc.* ................................ 41,500 4,821,781
Transaction Systems Architects, Inc.,
Class A* ...................................... 30,000 840,938
See Notes to Schedules of Investments on page .
48
<PAGE>
THE INVESTMENTS OF THE SCIENCE AND TECHNOLOGY PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Prepackaged Software (Continued)
Veritas Software Corp.* ......................... 45,000 $ 6,439,219
Vignette Corporation* ........................... 70,000 11,407,812
Total ......................................... 69,822,156
Wholesale Trade -- Durable Goods - 1.23%
Latitude Communications, Inc.* .................. 60,000 1,565,625
Somera Communications, Inc.* .................... 125,000 1,550,781
Total ......................................... 3,116,406
Wholesale Trade -- Nondurable Goods - 1.75%
Chemdex Corporation* ............................ 40,000 4,420,000
TOTAL COMMON STOCKS - 89.34% $225,760,434
(Cost: $89,710,739)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Depository Institutions - 1.19%
Deutsche Bank Financial Inc.,
6.75%, 1-6-00 ................................. $3,000 2,997,187
Electric, Gas and Sanitary Services - 3.16%
Bay State Gas Co.,
6.15%, 1-12-00 ................................ 8,000 7,984,967
Fabricated Metal Products - 1.73%
Danaher Corporation,
6.49%, Master Note ............................ 4,377 4,377,000
Food and Kindred Products - 1.89%
General Mills, Inc.,
6.345%, Master Note ........................... 4,779 4,779,000
Nondepository Institutions - 2.47%
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 6,239 6,239,000
TOTAL SHORT-TERM SECURITIES - 10.44% $ 26,377,154
(Cost: $26,377,154)
TOTAL INVESTMENT SECURITIES - 99.78% $252,137,588
(Cost: $116,087,893)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.22% 546,203
NET ASSETS - 100.00% $252,683,791
See Notes to Schedules of Investments on page .
49
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Automotive Dealers and Service Stations - 1.37%
O'Reilly Automotive, Inc.* ...................... 200,000 $ 4,356,250
Business Services - 22.51%
Acxiom Corporation* ............................. 386,900 9,297,691
CheckFree Holdings Corporation* ................. 155,000 16,313,750
FactSet Research Systems, Inc. .................. 67,000 5,334,875
Getty Images, Inc.* ............................. 238,300 11,676,700
MemberWorks Incorporated* ....................... 196,700 6,521,834
Primark Corporation* ............................ 152,900 4,252,531
S1 Corporation* ................................. 85,000 6,630,000
USINTERNETWORKING, Inc.* ........................ 165,300 11,540,006
Total ......................................... 71,567,387
Chemicals and Allied Products - 1.89%
Pharmacyclics, Inc.* ............................ 145,500 6,020,062
Communication - 12.01%
Illuminet Holdings, Inc.* ....................... 29,100 1,599,591
Intermedia Communications Inc.* ................. 180,000 6,975,000
RCN Corporation* ................................ 125,000 6,058,594
VoiceStream Wireless Corporation* ............... 100,000 14,209,375
Western Wireless Corporation,
Class A* ...................................... 140,000 9,336,250
Total ......................................... 38,178,810
Computer Integrated Systems Design - 4.55%
Cerner Corporation* ............................. 260,200 5,114,556
Sanchez Computer Associates, Inc.* .............. 90,000 3,735,000
Shared Medical Systems Corporation .............. 110,000 5,603,125
Total ......................................... 14,452,681
Eating and Drinking Places - 1.64%
Papa John's International, Inc.* ................ 200,000 5,218,750
Electronic and Other Electric Equipment - 5.83%
Advanced Fibre Communications, Inc.* ............ 271,900 12,184,519
Rambus Inc.* .................................... 94,000 6,336,187
Total ......................................... 18,520,706
Engineering and Management Services - 6.65%
Incyte Pharmaceuticals, Inc.* ................... 240,000 14,197,500
MAXIMUS, Inc.* .................................. 205,000 6,957,187
Total ......................................... 21,154,687
Food and Kindred Products - 2.05%
American Italian Pasta Company, Class A* ........ 211,500 6,503,625
Health Services - 0.90%
American Healthcorp, Inc.* ...................... 210,000 997,500
Amsurg Corp., Class A* .......................... 282,000 1,850,625
Total ......................................... 2,848,125
See Notes to Schedules of Investments on page .
50
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Instruments and Related Products - 2.88%
Lunar Corporation* .............................. 200,000 $ 1,400,000
VISX, Incorporated* ............................. 150,000 7,767,188
Total ......................................... 9,167,188
Personal Services - 0.45%
Stewart Enterprises, Inc., Class A .............. 300,000 1,434,375
Prepackaged Software - 9.44%
Best Software, Inc.* ............................ 125,500 3,698,328
Citrix Systems, Inc.* ........................... 79,500 9,776,016
Dendrite International, Inc.* ................... 225,000 7,579,688
NEON Systems, Inc.* ............................. 100,000 3,887,500
Transaction Systems Architects, Inc.,
Class A* ...................................... 180,600 5,062,444
Total ......................................... 30,003,976
Radio and Television Broadcasting Stations - 3.92%
Emmis Communications Corporation* ............... 100,000 12,465,625
Stone, Clay and Glass Products - 0.71%
Department 56, Inc.* ............................ 100,000 2,262,500
Transportation by Air - 1.73%
Midwest Express Holdings, Inc.* ................. 172,300 5,492,062
Transportation Equipment - 2.39%
Gentex Corporation* ............................. 272,500 7,595,938
Wholesale Trade -- Durable Goods - 1.25%
MSC Industrial Direct Co., Inc.,
Class A* ...................................... 300,000 3,975,000
TOTAL COMMON STOCKS - 82.17% $261,217,747
(Cost: $164,168,540)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Depository Institutions - 5.34%
Deutsche Bank Financial Inc.,
6.75%, 1-6-00 ................................. $ 5,000 4,995,312
Dresdner U.S. Finance Inc.,
6.23%, 1-10-00 ................................ 5,000 4,992,213
Westpac Capital Corp.,
5.5%, 1-10-00 ................................. 7,000 6,990,375
Total ......................................... 16,977,900
See Notes to Schedules of Investments on page .
51
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Electric, Gas and Sanitary Services - 2.54%
Detroit Edison Co.,
6.75%, 1-13-00 ................................ $ 4,000 $ 3,991,000
Public Service Electric & Gas Co.,
7.5%, 1-14-00 ................................. 4,100 4,088,896
Total ......................................... 8,079,896
Fabricated Metal Products - 1.97%
Danaher Corporation,
6.49%, Master Note ............................ 6,251 6,251,000
Food and Kindred Products - 0.04%
General Mills, Inc.,
6.345%, Master Note ........................... 117 117,000
Nondepository Institutions - 2.68%
Associates First Capital B.V. (Associates
First Capital Corporation),
6.0%, 1-10-00 ................................. 1,685 1,682,472
PACCAR Financial Corp.,
5.2757%, Master Note .......................... 6,856 6,856,000
Total ......................................... 8,538,472
Transportation Equipment - 3.14%
Dana Corp.,
6.75%, 1-12-00 ................................ 10,000 9,979,375
Total Commercial Paper - 15.71% 49,943,643
Commercial Paper (backed by irrevocable bank letter
of credit) - 1.35%
Nondepository Institutions
Agway Financial Corp. (Rabobank Nederland N.V.),
5.0%, 1-5-00 .................................. 4,300 4,297,611
Municipal Obligation - 1.42%
Michigan
Michigan Strategic Fund, Variable Rate
Demand Limited Obligation Revenue Bonds,
Series 1998 (Bosal Industries Project),
5.55%, 1-5-00 ................................. 4,500 4,500,000
See Notes to Schedules of Investments on page .
52
<PAGE>
THE INVESTMENTS OF THE SMALL CAP PORTFOLIO
DECEMBER 31, 1999
Value
TOTAL SHORT-TERM SECURITIES - 18.48% $ 58,741,254
(Cost: $58,741,254)
TOTAL INVESTMENT SECURITIES - 100.65% $319,959,001
(Cost: $222,909,794)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.65%) (2,058,820)
NET ASSETS - 100.00% $317,900,181
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) 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, 1999, the value of
these securities amounted to $2,547,975, $9,653,971 and $23,037,168,
respectively, or 2.31%, 8.00% and 7.68%, respectively, of the total net
assets in the Bond Portfolio, High Income Portfolio and International
Portfolio, respectively.
(C) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(D) Each unit of AirGate PCS, Inc. consists of $1,000 principal amount of
13.5% senior subordinated discount notes due 2009 and one warrant to
purchase 2.148 shares of common stock, par value $0.01 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.
53
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
Asset
Strategy Balanced Bond
Portfolio Portfolio Portfolio
Assets --------- --------- ---------
<S> <C> <C> <C>
Investment securities--at
value (Notes 1 and 3) ..................... $21,569 $117,161 $109,066
Cash ........................................ 1 2 --
Receivables:
Investment securities sold ................ -- 88 --
Fund shares sold .......................... -- 32 31
Dividends and interest .................... 25 809 1,512
Prepaid insurance premium ................... -- 1 1
------- -------- --------
Total assets ............................ 21,595 118,093 110,610
Liabilities ................................... ------- -------- --------
Payable for investment
securities purchased ...................... -- 805 --
Payable to Fund
shareholders .............................. 1 24 37
Accrued service fee (Note 2) ................ 4 23 22
Accrued accounting
services fee (Note 2) ..................... 1 3 3
Accrued management fee (Note 2) ............. -- 2 2
Due to custodian ............................ -- -- 8
Other ....................................... 2 3 2
------- -------- --------
Total liabilities ....................... 8 860 74
------- -------- --------
Total net assets ...................... $21,587 $117,233 $110,536
Net Assets .................................... ======= ======== ========
$0.001 par value capital stock (Note 6):
Capital stock ............................. $ 3 $ 16 $ 22
Additional paid-in
capital ................................. 18,475 103,735 115,799
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income ....................... -- -- --
Accumulated net realized gain
(loss) on investment
transactions ............................ -- -- (1,858)
Net unrealized appreciation
(depreciation) of
investments ............................. 3,109 13,482 (3,427)
------- -------- --------
Net assets applicable to
outstanding units
of capital ............................ $21,587 $117,233 $110,536
======= ======== ========
Net asset value, redemption
and offering price per share ................ $6.2625 $7.3120 $5.0497
======= ======== ========
Capital shares outstanding .................... 3,447 16,033 21,890
Capital shares authorized ..................... 50,000 50,000 100,000
</TABLE>
See notes to financial statements.
54
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
Growth High Income Income
Portfolio Portfolio Portfolio
Assets ---------- ----------- ---------
<S> <C> <C> <C>
Investment securities--at
value (Notes 1 and 3) .................. $1,168,768 $118,910 $938,344
Cash ..................................... 12 1 3
Receivables:
Investment securities sold ............. 6,998 -- 1,711
Fund shares sold ....................... 639 9 342
Dividends and interest ................. 395 1,884 642
Prepaid insurance remium ................. 5 1 4
---------- -------- --------
Total assets ......................... 1,176,817 120,805 941,046
Liabilities ................................ ---------- -------- --------
Payable for investment
securities purchased ................... 13,666 -- --
Payable to Fund
shareholders ........................... 132 74 291
Accrued service fee (Note 2) ............. 231 24 186
Accrued accounting
services fee (Note 2) .................. 8 3 7
Accrued management fee (Note 2) .......... 22 2 18
Due to custodian ......................... -- -- --
Other .................................... 10 3 9
---------- -------- --------
Total liabilities .................... 14,069 106 511
---------- -------- --------
Total net assets ................... $1,162,748 $120,699 $940,535
Net Assets ................................. ========== ======== ========
$0.001 par value capital stock (Note 6):
Capital stock .......................... $ 107 $ 29 $ 73
Additional paid-in
capital .............................. 785,693 129,746 656,818
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income .................... -- -- --
Accumulated net realized gain
(loss) on investment
transactions ......................... -- (8,314) --
Net unrealized appreciation
(depreciation) of
investments .......................... 376,948 (762) 283,644
---------- -------- --------
Net assets applicable to
outstanding units
of capital ......................... $1,162,748 $120,699 $940,535
========== ======== ========
Net asset value, redemption
and offering price per share ............. $10.8751 $4.1691 $12.9609
========== ======== ========
Capital shares outstanding ................. 106,918 28,951 72,567
Capital shares authorized .................. 150,000 100,000 100,000
</TABLE>
See notes to financial statements.
55
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
International Limited-Term Money Market
Portfolio Bond Portfolio Portfolio
Assets ------------ -------------- ------------
<S> <C> <C> <C>
Investment securities--at
value (Notes 1 and 3) .................... $299,694 $ 5,950 $ 65,197
Cash ....................................... 2 1 3
Receivables:
Investment securities sold ............... 8 -- --
Fund shares sold ......................... 199 -- 203
Dividends and interest ................... 269 90 490
Prepaid insurance premium .................. 1 -- 1
-------- ------- --------
Total assets ........................... 300,173 6,041 65,894
Liabilities .................................. -------- ------- --------
Payable for investment
securities purchased ..................... -- -- --
Payable to Fund
shareholders ............................. 27 -- 1,474
Accrued service fee (Note 2) ............... 53 1 13
Accrued accounting
services fee (Note 2) .................... 4 -- 3
Accrued management fee (Note 2) ............ 7 -- 1
Due to custodian ........................... -- -- --
Other ...................................... 53 1 1
-------- ------- --------
Total liabilities ...................... 144 2 1,492
-------- ------- --------
Total net assets ..................... $300,029 $ 6,039 $ 64,402
Net Assets ................................... ======== ====== =======
$0.001 par value capital stock (Note 6):
Capital stock ............................ $ 25 $ 1 $ 64
Additional paid-in
capital ................................ 167,194 6,201 64,338
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income ...................... -- -- --
Accumulated net realized gain
(loss) on investment
transactions ........................... (212) (7) --
Net unrealized appreciation
(depreciation) of
investments ............................ 133,022 (156) --
-------- ------- --------
Net assets applicable to
outstanding units
of capital ........................... $300,029 $ 6,039 $ 64,402
======== ======= ========
Net asset value, redemption
and offering price per share ............... $11.9354 $5.0405 $1.0000
======== ======= ========
Capital shares outstanding ................... 25,138 1,198 64,402
Capital shares authorized .................... 100,000 50,000 100,000
</TABLE>
See notes to financial statements.
56
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In Thousands, Except for Per Share Amounts)
Science and
Technology Small Cap
Portfolio Portfolio
Assets ----------- ---------
Investment securities--at
value (Notes 1 and 3) .......................... $252,138 $319,959
Cash ............................................. 2 2
Receivables:
Investment securities
sold ......................................... -- --
Fund shares sold ............................... 566 324
Dividends and interest ......................... 58 98
Prepaid insurance
premium ........................................ 1 1
-------- --------
Total assets ................................. 252,765 320,384
Liabilities ........................................ -------- --------
Payable for investment
securities purchased ........................... -- 2,394
Payable to Fund
shareholders ................................... 26 16
Accrued service
fee (Note 2) ................................... 43 59
Accrued accounting
services fee (Note 2) .......................... 4 4
Accrued management
fee (Note 2) ................................... 6 7
Due to custodian ................................. -- --
Other ............................................ 2 4
-------- --------
Total liabilities ............................ 81 2,484
-------- --------
Total net assets ........................... $252,684 $317,900
Net Assets ......................................... ======== ========
$0.001 par value capital stock (Note 6):
Capital stock .................................. $ 11 $ 27
Additional paid-in
capital ...................................... 116,622 220,824
Accumulated undistributed gain (loss):
Accumulated undistributed net
investment income ............................ -- --
Accumulated net realized gain
(loss) on investment
transactions ................................. 1 --
Net unrealized appreciation
(depreciation) of
investments .................................. 136,050 97,049
-------- --------
Net assets applicable to
outstanding units
of capital ................................. $252,684 $317,900
======== ========
Net asset value, redemption
and offering price per share ..................... $22.4087 $11.6130
======== ========
Capital shares outstanding ......................... 11,276 27,374
Capital shares authorized .......................... 100,000 100,000
See notes to financial statements.
57
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
Asset
Strategy Balanced Bond
Portfolio Portfolio Portfolio
--------- --------- ---------
Investment Income (Loss)
Income (Note 1B):
Interest and
amortization ........................ $ 425 $ 2,897 $ 7,464
Dividends ............................. 70 711 --
------- -------- -------
Total income ........................ 495 3,608 7,464
------- -------- -------
Expenses (Note 2):
Investment management fee ............. 126 664 593
Service fee ........................... 41 247 272
Accounting services fee ............... 10 37 40
Custodian fees ........................ 7 12 9
Audit fees ............................ 6 7 7
Legal fees ............................ -- 2 2
Other ................................. 1 5 6
------- -------- -------
Total ............................... 191 974 929
Less expenses in
excess of voluntary
waiver of management
fee (Note 2) ...................... (66) -- --
------- -------- -------
Total expenses .................... 125 974 929
------- -------- -------
Net investment
income (loss) ................... 370 2,634 6,535
------- -------- -------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ......................... 807 5,102 (452)
Realized net loss
on foreign currency
transactions .......................... -- (1) --
------- -------- -------
Realized net gain (loss)
on investments ...................... 807 5,101 (452)
Unrealized appreciation
(depreciation) in value
of investments during
the period ............................ 2,695 2,691 (7,745)
------- -------- -------
Net gain (loss) on
investments ....................... 3,502 7,792 (8,197)
------- -------- -------
Net increase (decrease)
in net assets
resulting from
operations ...................... $ 3,872 $ 10,426 $(1,662)
======= ======== =======
See notes to financial statements.
58
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
Growth High Income Income
Portfolio Portfolio Portfolio
--------- ----------- ---------
Investment Income (Loss)
Income (Note 1B):
Interest and
amortization ...................... $ 3,531 $ 12,313 $ 12,199
Dividends ........................... 5,913 145 6,701
-------- -------- ---------
Total income ...................... 9,444 12,458 18,900
-------- -------- ---------
Expenses (Note 2):
Investment management fee ........... 6,469 778 5,984
Service fee ......................... 2,251 295 2,071
Accounting services fee ............. 87 40 85
Custodian fees ...................... 46 7 55
Audit fees .......................... 8 7 8
Legal fees .......................... 17 3 16
Other ............................... 44 7 42
-------- -------- ---------
Total ............................. 8,922 1,137 8,261
Less expenses in
excess of voluntary
waiver of management
fee (Note 2) .................... -- -- --
-------- -------- ---------
Total expenses .................... 8,922 1,137 8,261
-------- -------- ---------
Net investment
income (loss) ................. 522 11,321 10,639
-------- -------- ---------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ....................... 150,006 (7,976) 51,643
Realized net loss
on foreign currency
transactions ........................ -- -- (4)
-------- -------- ---------
Realized net gain (loss)
on investments .................... 150,006 (7,976) 51,639
Unrealized appreciation
(depreciation) in value
of investments during
the period .......................... 142,019 1,657 42,185
-------- -------- ---------
Net gain (loss) on
investments ..................... 292,025 (6,319) 93,824
-------- -------- ---------
Net increase (decrease)
in net assets
resulting from
operations .................... $292,547 $ 5,002 $ 104,463
======== ======== =========
See notes to financial statements.
59
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
International Limited-Term Money Market
Portfolio Bond Portfolio Portfolio
------------- -------------- ------------
<S> <C> <C> <C>
Investment Income (Loss)
Income (Note 1B):
Interest and
amortization ........................ $ 687 $ 354 $3,043
Dividends ............................. 1,765 -- --
--------- ----- ------
Total income ........................ 2,452 354 3,043
--------- ----- ------
Expenses (Note 2):
Investment management fee ............. 1,607 29 254
Service fee ........................... 468 14 139
Accounting services fee ............... 42 -- 30
Custodian fees ........................ 235 2 8
Audit fees ............................ 8 5 4
Legal fees ............................ 3 -- 4
Other ................................. 9 1 3
--------- ----- ------
Total ............................... 2,372 51 442
Less expenses in
excess of voluntary
waiver of management
fee (Note 2) ...................... -- (15) --
--------- ----- ------
Total expenses ...................... 2,372 36 442
--------- ----- ------
Net investment
income (loss) ................... 80 318 2,601
--------- ----- ------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ......................... 23,371 (7) --
Realized net loss
on foreign currency
transactions .......................... (292) -- --
--------- ----- ------
Realized net gain (loss)
on investments ...................... 23,079 (7) --
Unrealized appreciation
(depreciation) in value
of investments during
the period ............................ 94,082 (217) --
--------- ----- ------
Net gain (loss) on
investments ....................... 117,161 (224) --
--------- ----- ------
Net increase (decrease)
in net assets
resulting from
operations ...................... $ 117,241 $ 94 $2,601
========= ===== ======
</TABLE>
See notes to financial statements.
60
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
Science and
Technology Small Cap
Portfolio Portfolio
----------- ---------
Investment Income (Loss)
Income (Note 1B):
Interest and
amortization ........................... $ 650 $ 3,323
Dividends ................................ 14 158
--------- ---------
Total income ........................... 664 3,481
--------- ---------
Expenses (Note 2):
Investment management fee ................ 739 1,771
Service fee .............................. 221 506
Accounting services fee .................. 32 47
Custodian fees ........................... 9 18
Audit fees ............................... 6 7
Legal fees ............................... 1 4
Other .................................... 5 10
--------- ---------
Total .................................. 1,013 2,363
Less expenses in
excess of voluntary
waiver of management
fee (Note 2) ......................... -- --
--------- ---------
Total expenses ......................... 1,013 2,363
--------- ---------
Net investment
income (loss) ...................... (349) 1,118
--------- ---------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ............................ 3,893 11,157
Realized net loss
on foreign currency
transactions ............................. -- (7)
--------- ---------
Realized net gain (loss)
on investments ......................... 3,893 11,150
Unrealized appreciation
(depreciation) in value
of investments during
the period ............................... 127,861 93,399
--------- ---------
Net gain (loss) on
investments .......................... 131,754 104,549
--------- ---------
Net increase
in net assets
resulting from
operations ......................... $ 131,405 $ 105,667
========= =========
See notes to financial statements.
61
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
Asset
Strategy Balanced Bond
Portfolio Portfolio Portfolio
--------- --------- ---------
Increase (Decrease) in Net Assets
Operations:
Net investment
income (loss) ...................... $ 370 $ 2,634 $ 6,535
Realized net gain (loss)
on investments ..................... 807 5,101 (452)
Unrealized appreciation
(depreciation) ..................... 2,695 2,691 (7,745)
-------- --------- ---------
Net increase (decrease) in
net assets resulting from
operations ....................... 3,872 10,426 (1,662)
-------- --------- ---------
Dividends to shareholders (Note 1E):*
From net investment income ........... (370) (2,633) (6,535)
From realized gains on
security transactions ................ (807) (5,102) --
-------- --------- ---------
(1,177) (7,735) (6,535)
-------- --------- ---------
Capital share transactions** ........... 4,802 22,322 4,437
-------- --------- ---------
Total increase (decrease) ........ 7,497 25,013 (3,760)
Net Assets
Beginning of period .................... 14,090 92,220 114,296
-------- --------- ---------
End of period .......................... $ 21,587 $ 117,233 $ 110,536
======== ========= =========
Undistributed net investment
income ............................. $-- $-- $--
======== ========= =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares .............................. 979 3,789 3,554
Shares issued from reinvest-
ment of dividends and/or
capital gains distribution ............. 188 1,058 1,294
Shares redeemed .......................... (336) (1,788) (3,949)
-------- --------- ---------
Increase in outstanding
capital shares ......................... 831 3,059 899
======== ========= =========
Value issued from sale
of shares .............................. $ 5,534 $ 27,717 $ 19,146
Value issued from reinvest-
ment of dividends and/or
capital gains distribution ............. 1,177 7,735 6,535
Value redeemed ........................... (1,909) (13,130) (21,244)
-------- --------- ---------
Increase in outstanding
capital ................................ $ 4,802 $ 22,322 $ 4,437
======== ========= =========
See notes to financial statements.
62
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
Growth High Income Income
Portfolio Portfolio Portfolio
----------- ----------- ---------
Increase (Decrease) in Net Assets
Operations:
Net investment
income (loss) .................... $ 522 $ 11,321 $ 10,639
Realized net gain (loss)
on investments ................... 150,006 (7,976) 51,639
Unrealized appreciation
(depreciation) ................... 142,019 1,657 42,185
----------- --------- ---------
Net increase (decrease) in
net assets resulting from
operations ..................... 292,547 5,002 104,463
----------- --------- ---------
Dividends to shareholders (Note 1E):*
From net investment income ......... (522) (11,321) (10,635)
From realized gains on
security transactions .............. (150,006) -- (51,643)
----------- --------- ---------
(150,528) (11,321) (62,278)
----------- --------- ---------
Capital share transactions** ......... 195,614 665 87,016
----------- --------- ---------
Total increase (decrease) ...... 337,633 (5,654) 129,201
Net Assets
Beginning of period .................. 825,115 126,353 811,334
----------- --------- ---------
End of period ........................ $ 1,162,748 $ 120,699 $ 940,535
=========== ========= =========
Undistributed net investment
income ........................... $-- $-- $--
=========== ========= =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............................ 12,932 3,202 9,942
Shares issued from reinvest-
ment of dividends and/or
capital gains distribution ........... 13,841 2,715 4,805
Shares redeemed ........................ (8,588) (5,590) (7,954)
----------- --------- ---------
Increase in outstanding
capital shares ....................... 18,185 327 6,793
=========== ========= =========
Value issued from sale
of shares ............................ $ 133,490 $ 14,259 $ 126,991
Value issued from reinvest-
ment of dividends and/or
capital gains distribution ........... 150,528 11,321 62,278
Value redeemed ......................... (88,404) (24,915) (102,253)
----------- --------- ---------
Increase in outstanding
capital .............................. $ 195,614 $ 665 $ 87,016
=========== ========= =========
See notes to financial statements.
63
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
International Limited-Term Money Market
Portfolio Bond Portfolio Portfolio
------------- -------------- ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment
income (loss) .................... $ 80 $ 318 $ 2,601
Realized net gain (loss)
on investments ................... 23,079 (7) --
Unrealized appreciation
(depreciation) ................... 94,082 (217) --
--------- ------- ---------
Net increase (decrease) in
net assets resulting from
operations ..................... 117,241 94 2,601
--------- ------- ---------
Dividends to shareholders (Note 1E):*
From net investment income ......... -- (318) (2,601)
From realized gains on
security transactions .............. (23,371) -- --
--------- ------- ---------
(23,371) (318) (2,601)
--------- ------- ---------
Capital share transactions** ......... 37,198 1,744 10,379
--------- ------- ---------
Total increase (decrease) ...... 131,068 1,520 10,379
Net Assets
Beginning of period .................. 168,961 4,519 54,023
--------- ------- ---------
End of period ........................ $ 300,029 $ 6,039 $ 64,402
========= ======= =========
Undistributed net investment
income ........................... $-- $-- $--
========= ======= =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............................ 3,867 554 322,588
Shares issued from reinvest-
ment of dividends and/or
capital gains distribution ........... 1,958 63 2,601
Shares redeemed ........................ (2,300) (283) (314,810)
--------- ------- ---------
Increase in outstanding
capital shares ....................... 3,525 334 10,379
========= ======= =========
Value issued from sale
of shares ............................ $ 33,901 $ 2,914 $ 322,588
Value issued from reinvest-
ment of dividends and/or
capital gains distribution ........... 23,371 318 2,601
Value redeemed ......................... (20,074) (1,488) (314,810)
--------- ------- ---------
Increase in outstanding
capital .............................. $ 37,198 $ 1,744 $ 10,379
========= ======= =========
</TABLE>
See notes to financial statements.
64
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
Science and
Technology Small Cap
Portfolio Portfolio
----------- ---------
Increase (Decrease) in Net Assets
Operations:
Net investment
income (loss) .............................. $ (349) $ 1,118
Realized net gain (loss)
on investments ............................. 3,893 11,150
Unrealized appreciation
(depreciation) ............................. 127,861 93,399
--------- ---------
Net increase (decrease) in
net assets resulting from
operations ............................... 131,405 105,667
--------- ---------
Dividends to shareholders (Note 1E):*
From net investment income ................... -- (1,111)
From realized gains on
security transactions ...................... (3,543) (9,869)
--------- ---------
(3,543) (10,980)
--------- ---------
Capital share transactions** ................... 90,227 42,644
--------- ---------
Total increase (decrease) ................ 218,089 137,331
Net Assets
Beginning of period ............................ 34,595 180,569
--------- ---------
End of period .................................. $ 252,684 $ 317,900
========= =========
Undistributed net investment
income ..................................... $-- $--
========= =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ...................................... 7,622 6,127
Shares issued from reinvest-
ment of dividends and/or
capital gains distribution ..................... 158 945
Shares redeemed .................................. (685) (2,549)
--------- ---------
Increase in outstanding
capital shares ................................. 7,095 4,523
========= =========
Value issued from sale
of shares ...................................... $ 95,174 53,564
Value issued from reinvest-
ment of dividends and/or
capital gains distribution ..................... 3,543 10,980
Value redeemed ................................... (8,490) (21,900)
--------- ---------
Increase in outstanding
capital ........................................ $ 90,227 $ 42,644
========= =========
See notes to financial statements.
65
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Asset
Strategy Balanced Bond
Portfolio Portfolio Portfolio
--------- --------- ---------
Increase in Net Assets
Operations:
Net investment income ................. $ 344 $ 2,337 $ 6,300
Realized net gain (loss)
on investments ...................... 460 758 783
Unrealized appreciation
(depreciation) ...................... 225 3,437 369
-------- -------- ---------
Net increase in net
assets resulting from
operations ........................ 1,029 6,532 7,452
-------- -------- ---------
Dividends to shareholders (Note 1E):*
From net investment income ............ (342) (2,334) (6,300)
From realized gains on
security transactions ............... (462) (761) --
In excess of realized
capital gains ....................... -- -- --
-------- -------- ---------
(804) (3,095) (6,300)
-------- -------- ---------
Capital share transactions** ............ 4,055 21,024 13,655
-------- -------- ---------
Total increase .................... 4,280 24,461 14,807
Net Assets
Beginning of period ..................... 9,810 67,759 99,489
-------- -------- ---------
End of period ........................... $ 14,090 $ 92,220 $ 114,296
======== ======== =========
Undistributed net investment
income .............................. $-- $-- $--
======== ======== =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............................... 783 3,612 4,066
Shares issued from reinvest-
ment of dividends and/or
distributions ........................... 149 436 1,157
Shares redeemed ........................... (204) (1,085) (2,764)
-------- -------- ---------
Increase in outstanding
capital hares ........................... 728 2,963 2,459
======== ======== =========
Value issued from sale
of shares ............................... $ 4,385 $ 25,583 $ 22,739
Value issued from reinvest-
ment of dividends and/or
distributions ........................... 804 3,095 6,300
Value redeemed ............................ (1,134) (7,654) (15,384)
-------- -------- ---------
Increase in
outstanding capital ..................... $ 4,055 $ 21,024 $ 13,655
======== ======== =========
See notes to financial statements.
66
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
High
Growth Income Income
Portfolio Portfolio Portfolio
--------- --------- ---------
Increase in Net Assets
Operations:
Net investment income ............... $ 3,876 $ 10,944 $ 9,832
Realized net gain (loss)
on investments .................... 24,895 (338) 110,690
Unrealized appreciation
(depreciation) .................... 146,953 (8,207) 16,851
--------- --------- ---------
Net increase in net
assets resulting from
operations ...................... 175,724 2,399 137,373
--------- --------- ---------
Dividends to shareholders (Note 1E):*
From net investment income .......... (3,904) (10,944) (9,799)
From realized gains on
security transactions ............. (24,867) -- (110,723)
In excess of realized
capital gains ..................... -- -- --
--------- --------- ---------
(28,771) (10,944) (120,522)
--------- --------- ---------
Capital share transactions** .......... 38,803 15,374 157,579
--------- --------- ---------
Total increase .................. 185,756 6,829 174,430
Net Assets
Beginning of period ................... 639,359 119,524 636,904
--------- --------- ---------
End of period ......................... $ 825,115 $ 126,353 $ 811,334
========= ========= =========
Undistributed net investment
income ............................ $-- $-- $--
========= ========= =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............................. 10,497 4,966 9,126
Shares issued from reinvest-
ment of dividends and/or
distributions ......................... 3,094 2,479 9,771
Shares redeemed ......................... (9,341) (4,037) (6,369)
--------- --------- ---------
Increase in outstanding
capital shares ........................ 4,250 3,408 12,528
========= ========= =========
Value issued from sale
of shares ............................. $ 88,088 $ 24,022 $ 122,003
Value issued from reinvest-
ment of dividends and/or
distributions ......................... 28,771 10,944 120,522
Value redeemed .......................... (78,056) (19,592) (84,946)
--------- --------- ---------
Increase in
outstanding capital ................... $ 38,803 $ 15,374 $ 157,579
========= ========= =========
See notes to financial statements.
67
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
International Limited-Term Money Market
Portfolio Portfolio Portfolio
------------- ------------ ------------
<S> <C> <C> <C>
Increase in Net Assets
Operations:
Net investment income ................. $ 814 $ 240 $ 2,230
Realized net gain (loss)
on investments ...................... 13,612 9 --
Unrealized appreciation
(depreciation) ...................... 25,132 18 --
--------- ------- ---------
Net increase in net
assets resulting from
operations ........................ 39,558 267 2,230
--------- ------- ---------
Dividends to shareholders (Note 1E):*
From net investment income ............ (698) (240) (2,230)
From realized gains on
security transactions ............... (13,728) (9) --
In excess of realized
capital gains ....................... -- -- --
--------- ------- ---------
(14,426) (249) (2,230)
--------- ------- ---------
Capital share transactions** ............ 29,198 249 10,723
--------- ------- ---------
Total increase .................... 54,330 267 10,723
Net Assets
Beginning of period ..................... 114,631 4,252 43,300
--------- ------- ---------
End of period ........................... $ 168,961 $ 4,519 $ 54,023
========= ======= =========
Undistributed net investment
income .............................. $-- $-- $--
========= ======= =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ............................... 3,799 376 261,150
Shares issued from reinvest-
ment of dividends and/or
distributions ........................... 1,846 48 2,230
Shares redeemed ........................... (1,987) (379) (252,657)
--------- ------- ---------
Increase in
outstanding capital
shares .................................. 3,658 45 10,723
========= ======= =========
Value issued from sale
of shares ............................... $ 30,196 $ 2,035 $ 261,150
Value issued from reinvest-
ment of dividends and/or
distributions ........................... 14,426 249 2,230
Value redeemed ............................ (15,424) (2,035) (252,657)
--------- ------- ---------
Increase in outstanding capital ........... $ 29,198 $ 249 $ 10,723
========= ======= =========
</TABLE>
See notes to financial statements.
68
<PAGE>
TARGET/UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Science and
Technology Small Cap
Portfolio Portfolio
--------- ---------
Increase in Net Assets
Operations:
Net investment income ....................... $ 13 $ 1,558
Realized net gain (loss)
on investments ............................ 624 23,232
Unrealized appreciation
(depreciation) ............................ 7,947 (8,246)
-------- ---------
Net increase in net
assets resulting from
operations .............................. 8,584 16,544
-------- ---------
Dividends to shareholders (Note 1E):*
From net investment income .................. (13) (1,558)
From realized gains on
security transactions ..................... (624) (23,232)
In excess of realized
capital gains ............................. -- (1,288)
-------- ---------
(637) (26,078)
-------- ---------
Capital share transactions** .................. 16,441 41,865
-------- ---------
Total increase .......................... 24,388 32,331
Net Assets
Beginning of period ........................... 10,207 148,238
-------- ---------
End of period ................................. $ 34,595 $ 180,569
======== =========
Undistributed net investment
income .................................... $-- $--
======== =========
*See "Financial Highlights" on pages - .
**Shares issued from sale
of shares ..................................... 2,835 3,803
Shares issued from reinvest-
ment of dividends and/or
distributions ................................. 77 3,300
Shares redeemed ................................. (499) (2,044)
-------- ---------
Increase in outstanding
capital shares ............................... 2,413 5,059
======== =========
Value issued from sale
of shares ..................................... $ 19,146 $ 33,860
Value issued from reinvest-
ment of dividends and/or
distributions ................................. 637 26,079
Value redeemed .................................. (3,342) (18,074)
-------- ---------
Increase in outstanding capital ................. $ 16,441 41,865
======== =========
See notes to financial statements.
69
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE ASSET STRATEGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year For the
ended December 31, period
------------------------------------------- ended
1999 1998 1997 1996 12/31/95*
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ......................... $5.3868 $5.1969 $5.1343 $5.0137 $5.0000
------- ------- ------- ------- -------
Income from investment operations:
Net investment
income ....................... 0.1138 0.1391 0.1915 0.1814 0.0717
Net realized and
unrealized gain
on investments ............... 1.1232 0.3779 0.5277 0.1206 0.0193
------- ------- ------- ------- -------
Total from investment
operations ..................... 1.2370 0.5170 0.7192 0.3020 0.0910
------- ------- ------- ------- -------
Less distributions:
From net investment
income ....................... (0.1136) (0.1391) (0.1919) (0.1814) (0.0713)
From capital gains ............. (0.2477) (0.1880) (0.4647) (0.0000) (0.0060)
------- ------- ------- ------- -------
Total distributions .............. (0.3613) (0.3271) (0.6566) (0.1814) (0.0773)
------- ------- ------- ------- -------
Net asset value,
end of period .................. $6.2625 $5.3868 $5.1969 $5.1343 $5.0137
======= ======= ======= ======= =======
Total return ..................... 22.96% 9.95% 14.01% 6.05% 1.80%
Net assets, end of
period (in
millions) ...................... $22 $14 $10 $8 $4
Ratio of expenses
to average net
assets ......................... 0.73% 1.07% 0.93% 0.93% 0.91%
Ratio of net investment
income to average
net assets ..................... 2.18% 2.97% 3.55% 3.92% 4.42%
Portfolio turnover
rate ........................... 179.63% 189.02% 222.50% 49.92% 149.17%
</TABLE>
*The Asset Strategy Portfolio's inception date is February 14, 1995; however,
since this Portfolio did not have any investment activity or incur expenses
prior to the date of initial offering, the per share information is for a
capital share outstanding for the period from May 1, 1995 (initial offering)
through December 31, 1995. Ratios have been annualized.
See notes to financial statements.
70
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BALANCED PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ......................... $7.1081 6.7686 $6.1967 $5.9000 $4.9359
------- ------- ------- ------- -------
Income from investment operations:
Net investment
income ....................... 0.1760 0.1865 0.1805 0.1594 0.1333
Net realized and
unrealized gain
on investments ............... 0.5446 0.4003 0.9650 0.5003 1.0611
------- ------- ------- ------- -------
Total from investment
operations ..................... 0.7206 0.5868 1.1455 0.6597 1.1944
------- ------- ------- ------- -------
Less distributions:
From net investment
income ....................... (0.1759) (0.1865) (0.1805) (0.1594) (0.1333)
From capital gains ............. (0.3408) (0.0608) (0.3931) (0.2036) (0.0970)
------- ------- ------- ------- -------
Total distributions .............. (0.5167) (0.2473) (0.5736) (0.3630) (0.2303)
------- ------- ------- ------- -------
Net asset value,
end of period .................. $7.3120 $7.1081 $6.7686 $6.1967 $5.9000
======= ======= ======= ======= =======
Total return ..................... 10.14% 8.67% 18.49% 11.19% 24.19%
Net assets, end of period
(in millions) .................. $117 $92 $68 $42 $24
Ratio of expenses
to average net
assets ......................... 0.95% 0.74% 0.67% 0.70% 0.72%
Ratio of net investment
income to average
net assets ..................... 2.56% 2.92% 3.06% 3.18% 3.22%
Portfolio turnover
rate ........................... 62.90% 54.62% 55.66% 44.23% 62.87%
</TABLE>
See notes to financial statements.
71
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE BOND PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .............. $5.4451 $5.3686 $5.2004 $5.3592 $4.7393
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ............ 0.3173 0.3180 0.3400 0.3407 0.3556
Net realized and
unrealized gain
(loss) on
investments ....... (0.3954) 0.0765 0.1682 (0.1588) 0.6202
------- ------- ------- ------- -------
Total from investment
operations .......... (0.0781) 0.3945 0.5082 0.1819 0.9758
------- ------- ------- ------- -------
Less distributions:
From net investment
income ............ (0.3173) (0.3180) (0.3400) (0.3407) (0.3559)
From capital gains .. (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
------- ------- ------- ------- -------
Total distributions ... (0.3173) (0.3180) (0.3400) (0.3407) (0.3559)
------- ------- ------- ------- -------
Net asset value,
end of period ....... $5.0497 $5.4451 $5.3686 $5.2004 $5.3592
======= ======= ======= ======= =======
Total return .......... -1.44% 7.35% 9.77% 3.43% 20.56%
Net assets, end of
period (in
millions) ........... $111 $114 $99 $92 $89
Ratio of expenses
to average net
assets .............. 0.81% 0.67% 0.58% 0.59% 0.60%
Ratio of net investment
income to average
net assets .......... 5.73% 5.99% 6.35% 6.39% 6.73%
Portfolio turnover
rate ................ 47.27% 32.75% 36.81% 64.02% 71.17%
</TABLE>
See notes to financial statements.
72
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE GROWTH PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .............. $9.2989 $7.5679 $6.7967 $6.8260 $5.8986
-------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ............ 0.0056 0.0456 0.0574 0.0990 0.0903
Net realized and
unrealized gain
on investments .... 3.1886 2.0215 1.4003 0.7478 2.1842
-------- ------- ------- ------- -------
Total from investment
operations .......... 3.1942 2.0671 1.4577 0.8468 2.2745
-------- ------- ------- ------- -------
Less distributions:
From net investment
income ............ (0.0056) (0.0456) (0.0570) (0.0990) (0.0903)
From capital gains .. (1.6124) (0.2905) (0.6295) (0.7771) (1.2568)
-------- ------- ------- ------- -------
Total distributions ... (1.6180) (0.3361) (0.6865) (0.8761) (1.3471)
-------- ------- ------- ------- -------
Net asset value,
end of period ....... $10.8751 $9.2989 $7.5679 $6.7967 $6.8260
======== ======= ======= ======= =======
Total return .......... 34.35% 27.31% 21.45% 12.40% 38.57%
Net assets, end of
period (in
millions) ........... $1,163 $825 $639 $513 $419
Ratio of expenses
to average net
assets .............. 0.96% 0.80% 0.72% 0.73% 0.75%
Ratio of net investment
income to average
net assets .......... 0.06% 0.55% 0.75% 1.44% 1.35%
Portfolio turnover
rate ................ 65.82% 75.58% 162.41% 243.00% 245.80%
</TABLE>
See notes to financial statements.
73
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE HIGH INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .............. $4.4143 $4.7402 $4.5750 $4.4448 $4.1118
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ............ 0.4313 0.4185 0.4098 0.4216 0.4165
Net realized and
unrealized gain
(loss) on
investments ....... (0.2452) (0.3259) 0.2324 0.1302 0.3330
------- ------- ------- ------- -------
Total from investment
operations .......... 0.1861 0.0926 0.6422 0.5518 0.7495
------- ------- ------- ------- -------
Less distributions:
From net investment
income ............ (0.4313) (0.4185) (0.4098) (0.4216) (0.4165)
From capital gains .. (0.0000) (0.0000) (0.0672) (0.0000) (0.0000)
------- ------- ------- ------- -------
Total distributions ... (0.4313) (0.4185) (0.4770) (0.4216) (0.4165)
------- ------- ------- ------- -------
Net asset value,
end of period ....... $4.1691 $4.4143 $4.7402 $4.5750 $4.4448
======= ======= ======= ======= =======
Total return .......... 4.22% 1.95% 14.04% 12.46% 18.19%
Net assets, end of
period (in
millions) ........... $121 $126 $120 $97 $87
Ratio of expenses
to average net
assets .............. 0.92% 0.77% 0.70% 0.71% 0.72%
Ratio of net investment
income to average
net assets .......... 9.17% 8.76% 8.79% 9.10% 9.25%
Portfolio turnover
rate ................ 87.84% 63.64% 65.28% 58.91% 41.78%
</TABLE>
See notes to financial statements.
74
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INCOME PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .............. $12.3351 $11.9615 $10.1373 $8.6756 $6.7689
-------- -------- -------- -------- -------
Income from investment
operations:
Net investment
income ............ 0.1571 0.1752 0.0916 0.0856 0.0839
Net realized and
unrealized gain
on investments .... 1.3879 2.3532 2.5598 1.6280 2.0525
-------- -------- -------- -------- -------
Total from investment
operations .......... 1.5450 2.5284 2.6514 1.7136 2.1364
-------- -------- -------- -------- -------
Less distributions:
From net investment
income ............ (0.1570) (0.1752) (0.0915) (0.0856) (0.0839)
From capital gains .. (0.7622) (1.9796) (0.7357) (0.1663) (0.1457)
In excess of
capital gains ..... (0.0000) (0.0000) (0.0000) (0.0000) (0.0001)
-------- -------- -------- -------- -------
Total distributions ... (0.9192) (2.1548) (0.8272) (0.2519) (0.2297)
-------- -------- -------- -------- -------
Net asset value,
end of period ....... $12.9609 $12.3351 $11.9615 $10.1373 $8.6756
======== ======== ======== ======== =======
Total return .......... 12.52% 21.14% 26.16% 19.75% 31.56%
Net assets, end of
period (in
millions) ........... $941 $811 $637 $462 $331
Ratio of expenses
to average net
assets .............. 0.96% 0.80% 0.72% 0.73% 0.77%
Ratio of net investment
income to average
net assets .......... 1.23% 1.35% 0.80% 0.97% 1.13%
Portfolio turnover
rate ................ 70.20% 62.84% 36.61% 22.95% 15.00%
</TABLE>
See notes to financial statements.
75
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE INTERNATIONAL PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ......................... $7.8176 $6.3842 $5.9990 $5.2790 $4.9926
-------- ------- ------- ------- -------
Income from investment operations:
Net investment
income ....................... 0.0032 0.0353 0.0485 0.0644 0.0846
Net realized and
unrealized gain
on investments ............... 5.1235 2.1283 0.9534 0.7329 0.2790
-------- ------- ------- ------- -------
Total from investment
operations ..................... 5.1267 2.1636 1.0019 0.7973 0.3636
-------- ------- ------- ------- -------
Less distributions:
From net investment
income ....................... (0.0000) (0.0353) (0.0463) (0.0644) (0.0772)
From capital gains ............. (1.0089) (0.6949) (0.5704) (0.0129) (0.0000)
-------- ------- ------- ------- -------
Total distributions .............. (1.0089) (0.7302) (0.6167) (0.0773) (0.0772)
-------- ------- ------- ------- -------
Net asset value,
end of period .................. $11.9354 $7.8176 $6.3842 $5.9990 $5.2790
======== ======= ======= ======= =======
Total return ..................... 65.58% 33.89% 16.70% 15.11% 7.28%
Net assets, end of
period (in
millions) ...................... $300 $169 $115 $80 $50
Ratio of expenses
to average net
assets ......................... 1.21% 1.02% 0.98% 1.00% 1.02%
Ratio of net investment
income to average
net assets ..................... 0.04% 0.47% 0.79% 1.42% 1.99%
Portfolio turnover
rate ........................... 118.71% 88.84% 117.37% 75.01% 34.93%
</TABLE>
See notes to financial statements.
76
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE LIMITED-TERM BOND PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ................. $5.2292 $5.1882 $5.1639 $5.2521 $4.8611
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ............... 0.2799 0.2935 0.3086 0.2842 0.2841
Net realized and
unrealized gain (loss)
on investments ....... (0.1887) 0.0522 0.0451 (0.0870) 0.4122
------- ------- ------- ------- -------
Total from investment
operations ............. 0.0912 0.3457 0.3537 0.1972 0.6963
------- ------- ------- ------- -------
Less distributions:
From net investment
income ............... (0.2799) (0.2935) (0.3086) (0.2842) (0.2841)
From capital gains ..... (0.0000) (0.0112) (0.0208) (0.0012) (0.0212)
------- ------- ------- ------- -------
Total distributions ...... (0.2799) (0.3047) (0.3294) (0.2854) (0.3053)
------- ------- ------- ------- -------
Net asset value,
end of period .......... $5.0405 $5.2292 $5.1882 $5.1639 $5.2521
======= ======= ======= ======= =======
Total return ............. 1.74% 6.66% 6.85% 3.79% 14.29%
Net assets, end of
period (in
millions) .............. $6 $5 $4 $4 $3
Ratio of expenses to
average net assets ..... 0.64% 0.79% 0.73% 0.76% 0.71%
Ratio of net investment
income to average
net assets ............. 5.63% 5.65% 5.93% 5.92% 6.22%
Portfolio turnover
rate ................... 22.81% 47.11% 35.62% 15.81% 18.16%
</TABLE>
See notes to financial statements.
77
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE MONEY MARKET PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .............. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Net investment
income .............. 0.0450 0.0492 0.0503 0.0486 0.0542
Less dividends
declared ............ (0.0450) (0.0492) (0.0503) (0.0486) (0.0542)
------- ------- ------- ------- -------
Net asset value,
end of period ....... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return .......... 4.62% 5.04% 5.13% 5.01% 5.56%
Net assets, end of
period (in
millions) ........... $64 $54 $43 $37 $37
Ratio of expenses
to average net
assets .............. 0.77% 0.68% 0.58% 0.61% 0.62%
Ratio of net investment
income to average
net assets .......... 4.51% 4.90% 5.04% 4.87% 5.42%
</TABLE>
See notes to financial statements.
78
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SCIENCE AND TECHNOLOGY PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
For the fiscal
year ended For the
December 31, period
-------------------- ended
1999 1998 12/31/97*
-------- ------- ---------
Net asset value,
beginning of
period .................................. $8.2750 $5.7726 $5.0000
-------- ------- -------
Income from investment operations:
Net investment
income (loss) ......................... (0.0309) 0.0032 0.0146
Net realized and
unrealized gain
on investments ........................ 14.4840 2.6551 0.7971
-------- ------- -------
Total from investment
operations .............................. 14.4531 2.6583 0.8117
-------- ------- -------
Less distributions:
From net investment
income ................................ (0.0000) (0.0032) (0.0146)
From capital gains ...................... (0.3194) (0.1527) (0.0245)
-------- ------- -------
Total distributions ....................... (0.3194) (0.1559) (0.0391)
-------- ------- -------
Net asset value,
end of period ........................... $22.4087 $8.2750 $5.7726
======== ======= =======
Total return .............................. 174.66% 46.05% 16.24%
Net assets, end of
period (in
millions) ............................... $253 $35 $10
Ratio of expenses
to average net
assets .................................. 1.10% 0.92% 0.94%
Ratio of net investment
income (loss) to average
net assets .............................. -0.38% 0.07% 0.64%
Portfolio turnover
rate .................................... 47.36% 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.
79
<PAGE>
FINANCIAL HIGHLIGHTS OF
THE SMALL CAP PORTFOLIO
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period .............. $7.9019 $8.3316 $8.0176 $7.6932 $5.9918
-------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income ............... 0.0423 0.0798 0.0279 0.0170 0.0900
Net realized and
unrealized gain
on investments ....... 4.0847 0.8255 2.5004 0.6367 1.8470
-------- ------- ------- ------- -------
Total from investment
operations ............. 4.1270 0.9053 2.5283 0.6537 1.9370
-------- ------- ------- ------- -------
Less distributions:
From net investment
income ............... (0.0421) (0.0798) (0.0282) (0.0170) (0.0900)
From capital gains ..... (0.3738) (1.2027) (2.1861) (0.3123) (0.1456)
In excess of realized
capital gains ........ (0.0000) (0.0525) (0.0000) (0.0000) (0.0000)
-------- ------- ------- ------- -------
Total distributions ...... (0.4159) (1.3350) (2.2143) (0.3293) (0.2356)
-------- ------- ------- ------- -------
Net asset value,
end of period .......... $11.6130 $7.9019 $8.3316 $8.0176 $7.6932
======== ======= ======= ======= =======
Total return ............. 52.23% 10.87% 31.53% 8.50% 32.32%
Net assets, end of period
(in millions) .......... $318 $181 $148 $97 $56
Ratio of expenses
to average net
assets ................. 1.12% 0.97% 0.90% 0.91% 0.96%
Ratio of net investment
income to average
net assets ............. 0.53% 0.94% 0.32% 0.25% 1.77%
Portfolio turnover
rate ................... 130.99% 177.32% 211.46% 133.77% 43.27%
</TABLE>
See notes to financial statements.
80
<PAGE>
TARGET/UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 Asset Strategy Portfolio, the Balanced Portfolio, the Bond Portfolio, the
Growth Portfolio, the High Income Portfolio, the Income Portfolio, the
International Portfolio, the Limited-Term Bond Portfolio, the Money Market
Portfolio, the Science and Technology Portfolio and the Small Cap 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 (loss), 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 $85,487. 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
81
<PAGE>
liabilities other than investments in securities, net realized and
unrealized gains and losses from foreign currency translations arise from
changes in currency exchange rates. The Fund combines fluctuations from
currency exchange rates and fluctuations in market value when computing
net realized and unrealized gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code.
Accordingly, provision has not been made for Federal income taxes. See
Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by each Portfolio on the record date. Net investment income
distributions and capital gains distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are due to differing treatments
for items such as deferral of wash sales and post-October losses, foreign
currency transactions, net operating losses and expiring capital loss
carryovers. At December 31, 1999, International Growth Portfolio and
Science and Technology Portfolio reclassified $212,039 and 348,762,
respectively, between accumulated undistributed net investment income and
accumulated undistributed net realized gain on investment transactions.
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 is
payable by each Portfolio at the following annual rates:
Annual
Fund Net Asset Breakpoints Rate
--------------------------------------------------------------------------
Asset Strategy Portfolio Up to $1 Billion .700%
Over $1 Billion up to $2 Billion .650%
Over $2 Billion up to $3 Billion .600%
Over $3 Billion .550%
Balanced Portfolio Up to $1 Billion .700%
Over $1 Billion up to $2 Billion .650%
Over $2 Billion up to $3 Billion .600%
Over $3 Billion .550%
Bond Portfolio Up to $500 Million .525%
Over $500 Million up to $1 Billion .500%
82
<PAGE>
Over $1 Billion up to $1.5 Billion .450%
Over $1.5 Billion .400%
Growth Portfolio Up to $1 Billion .700%
Over $1 Billion up to $2 Billion .650%
Over $2 Billion up to $3 Billion .600%
Over $3 Billion .550%
High Income Portfolio Up to $500 Million .625%
Over $500 Million up to $1 Billion .600%
Over $1 Billion up to $1.5 Billion .550%
Over $1.5 Billion .500%
Income Portfolio Up to $1 Billion .700%
Over $1 Billion up to $2 Billion .650%
Over $2 Billion up to $3 Billion .600%
Over $3 Billion .550%
International Portfolio Up to $1 Billion .850%
Over $1 Billion up to $2 Billion .830%
Over $2 Billion up to $3 Billion .800%
Over $3 Billion .760%
Limited-Term Bond Up to $500 Million .500%
Portfolio Over $500 Million up to $1 Billion .450%
Over $1 Billion up to $1.5 Billion .400%
Over $1.5 Billion .350%
Money Market Portfolio All Net Assets .400%
Science and Technology Up to $1 Billion .850%
Portfolio Over $1 Billion up to $2 Billion .830%
Over $2 Billion up to $3 Billion .800%
Over $3 Billion .760%
Small Cap Portfolio Up to $1 Billion .850%
Over $1 Billion up to $2 Billion .830%
Over $2 Billion up to $3 Billion .800%
Over $3 Billion .760%
However, Waddell & Reed Investment Company ("WRIMCO"), the Fund's
investment manager, has agreed to waive a Portfolio's management fee on any day
that the Portfolio's net assets are less than $25 million, subject to its right
to change or modify this waiver.
Prior to June 30, 1999, the fee consisted 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: Asset Strategy Portfolio - .30% of net assets;
Balanced Portfolio - .10% of net assets; Bond Portfolio - .03% of net assets;
Growth Portfolio - .20% of net assets; High Income Portfolio - .15% of net
assets; Income Portfolio - .20% of net assets; International Portfolio - .30% of
net assets; Limited-Term Bond Portfolio - .05% of net assets; Money Market
Portfolio - none; Science and Technology Portfolio - .20% of net assets; Small
Cap Portfolio - .35% of net assets and (ii) a base fee computed each day on the
combined net asset values of all of the Portfolios and allocated among the
Portfolios based on their relative net asset size at the annual rates of .51% of
the first $750 million of combined net assets, .49% on that
83
<PAGE>
amount between $750 million and $1.5 billion, .47% between $1.5 billion and
$2.25 billion, and .45% of that amount over $2.25 billion. The Fund accrues and
pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), 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 $89,385, 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,
1999 are summarized as follows:
84
<PAGE>
<TABLE>
<CAPTION>
Asset Strategy Balanced Bond
Portfolio Portfolio Portfolio
-------------- ------------ ------------
<S> <C> <C> <C>
Purchases of investment
securities, excluding short-
term and U.S. Government
obligations $25,806,243 $ 66,463,487 $ 20,807,660
Purchases of U.S. Government
obligations 6,013,906 4,129,375 37,428,183
Purchases of short-term
securities 27,207,584 413,844,337 254,402,854
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government obligations 16,555,287 51,079,103 22,622,336
Proceeds from maturities
and sales of U.S.
Government obligations 11,774,115 3,570,109 28,085,525
Proceeds from maturities
and sales of short-term
securities 26,661,712 411,993,689 257,435,324
<CAPTION>
High
Growth Income Income
Portfolio Portfolio Portfolio
------------- ------------ -------------
<S> <C> <C> <C>
Purchases of investment
securities, excluding short-
term and U.S. Government
obligations $687,993,523 $103,540,844 $439,652,972
Purchases of U.S. Government
obligations -- -- 129,121,067
Purchases of short-term
securities 1,877,295,055 215,465,170 2,527,272,290
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government obligations 572,175,503 102,128,778 290,475,382
Proceeds from maturities
and sales of U.S.
Government obligations -- -- 246,548,458
Proceeds from maturities
and sales of short-term
securities 1,944,071,948 219,070,921 2,526,722,461
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Limited- Science and
International Term Bond Technology
Portfolio Portfolio Portfolio
------------- ---------- ------------
<S> <C> <C> <C>
Purchases of investment
securities, excluding short-
term and U.S. Government
obligations $233,850,471 $2,087,187 $106,163,538
Purchases of U.S. Government
obligations -- 800,874 --
Purchases of short-term
securities 518,597,127 4,516,168 327,820,146
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government obligations 213,016,412 892,308 39,378,062
Proceeds from maturities
and sales of U.S.
Government obligations 6,281,727 308,213 --
Proceeds from maturities
and sales of short-term
securities 522,177,072 4,444,822 309,135,000
<CAPTION>
Small Cap
Portfolio
--------------
<S> <C>
Purchases of investment
securities, excluding short-
term and U.S. Government
obligations $ 229,791,759
Purchases of U.S. Government
obligations --
Purchases of short-term
securities 1,538,285,019
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government obligations 197,519,284
Proceeds from maturities
and sales of U.S.
Government obligations --
Proceeds from maturities
and sales of short-term
securities 1,542,683,333
</TABLE>
For Federal income tax purposes, cost of investments owned at December 31,
1999, and the related unrealized appreciation (depreciation) were as follows:
86
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Appreciation
Cost Appreciation Depreciation (Depreciation)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Asset Strategy Portfolio $ 18,499,341 $ 3,859,054 $ (789,730) $ 3,069,324
Balanced Portfolio 103,836,767 16,746,814 (3,422,252) 13,324,562
Bond Portfolio 112,859,698 424,408 (4,218,214) (3,793,806)
Growth Portfolio 791,987,587 395,272,754 (18,492,460) 376,780,294
High Income Portfolio 119,674,781 5,928,487 (6,692,831) (764,344)
Income Portfolio 654,698,479 312,446,884 (28,801,645) 283,645,239
International Portfolio 166,689,421 136,627,016 (3,622,410) 133,004,606
Limited-Term Bond Portfolio 6,105,767 2,431 (158,192) (155,761)
Money Market Portfolio 65,197,226 -- -- --
Science and Technology
Portfolio 116,087,893 138,792,748 (2,743,053) 136,049,695
Small Cap Portfolio 222,909,794 108,421,681 (11,372,474) 97,049,207
</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, Balanced, Growth and Income Portfolios realized
capital gain net income of $5,259,986, $150,137,791 and $51,642,656,
respectively, during the year ended December 31, 1999. For Federal income tax
purposes, Asset Strategy, International and Science and Technology Portfolios
realized capital gain net income of $854,740, $23,584,801, and $3,955,213,
respectively, during the year ended December 31, 1999, which included the effect
of certain losses deferred into the next fiscal year (see discussion below). For
Federal income tax purposes, Small Cap Portfolio realized capital gain net
income of $9,864,410 during the year ended December 31, 1999, which included the
effect of certain losses recognized from the prior year (see discussion below).
For Federal income tax purposes, Bond Portfolio realized capital gains of
$51,938 during the year ended December 31, 1999, which included the effect of
certain losses deferred into the next fiscal year (see discussion below). This
capital gain net income was entirely offset by capital loss carryovers.
Remaining capital loss carryovers of Bond Portfolio aggregated $1,354,032 as of
December 31, 1999, and are available to offset future realized capital gain net
income for Federal income tax purposes but, if not utilized, will expire as
follows: $1,337,336 by December 31, 2002 and $16,696 by December 31, 2004. For
Federal income tax purposes, High Income Portfolio realized capital losses of
$6,542,253 for the year ended December 31, 1999, 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). Capital loss
carryovers aggregated $6,607,695 at December 31, 1999, and are available to
offset future realized capital gain net income for Federal income tax purposes
but, if not utilized, will expire as follows: $65,442 by December 31, 2006 and
$6,542,253 by December 31, 2007. For Federal income tax purposes, Limited-Term
Bond Portfolio realized capital losses of $649 for the year ended December 31,
1999, 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). These losses are available to offset future realized capital
gain net income for Federal income tax purposes but, if not utilized, will
expire at December 31, 2007. A portion of capital
87
<PAGE>
gain net income on Balanced, Growth, Income, Asset Strategy, International and
Science and Technology Portfolios was paid to shareholders during the year ended
December 31, 1999. Remaining capital gain net income will be distributed to each
Portfolio's shareholders. The capital gain net income on Small Cap Portfolio was
paid to shareholders during the year ended December 31, 1999.
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, 1999 through December 31, 1999, Asset Strategy, International,
Science and Technology, Bond, High Income and Limited-Term Bond Portfolios
incurred net capital losses of $19,493, $196,730, $62,851, $137,277, $1,703,678
and $5,884, respectively, which have been deferred to the fiscal year ending
December 31, 2000. In addition, during the year ended December 31, 1999, Small
Cap, High Income and Limited-Term Bond Portfolios recognized post-October losses
of $1,287,773, $273,055 and $211, respectively, that had been deferred from the
year ended December 31, 1998.
Note 5 -- Securities Loaned
On December 31, 1999, there were no securities outstanding on loan. If
securities were on loan, however, the aggregate amount of such loans must be
secured by 100% of the market value of the securities loaned. The Portfolio
derives income from its securities lending activities. These agreements may be
terminated by the borrower or the Portfolio upon proper notice. In the event the
borrower fails to deliver the securities within five business days, the
Portfolio has the right to use the collateral to purchase similar or other
securities. During the period ended December 31, 1999, the Income Portfolio
derived approximately $94,702 of income, net of related expenses, from its
securities lending activities.
Note 6 -- Change in Par Value of Common Stock
At a special meeting of shareholders of the fund held on June 22, 1999,
the Articles of Incorporation of the Fund were amended to change the par value
of the Fund's common stock from $0.01 to $0.001. This change became effective
June 30, 1999.
88
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Target/United Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of 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, (collectively the
"Portfolios") comprising Target/United Funds, Inc. as of December 31, 1999, 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 Portfolios' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, 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,
1999, 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.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Kansas City, Missouri
February 4, 2000
89
<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*
Articles Supplementary attached hereto as EX-99.B(a)tgtsupp
(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 filed by EDGAR on March 1, 1999 as
EX-99.B(b)-bylaw2 to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
(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*
Fee Schedule (Exhibit A) to the Investment Management Agreement, as
amended, attached hereto as EX-99.B(d)tgtimafee
(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 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*
<PAGE>
Agreement Amending Distribution Contract to rescind the provision to
terminate the agreement filed by EDGAR on March 1, 1999 as
EX-99.B(e)amnddist to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Principal Underwriting Agreement between Waddell & Reed, Inc. and
United Investors Life Insurance Company filed October 3, 1995 as
EX-99.B6-tmkpua to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A*
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 Principal Underwriting Agreement to rescind the
provision to terminate the agreement filed by EDGAR on March 1, 1999
as EX-99.B(e)amendpua to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Letter Amending Principal Underwriting Agreement attached hereto as
EX-99.B(e)amendpua
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on March 1, 1999 to
Post-Effective Amendment No. 22 to the Registration Statement on
Form N-1A*
Custodian Agreement, as amended, attached hereto as EX-99.B(g)tgtca.
The Custodian Agreement for Target/United Funds, Inc. Asset Strategy
Portfolio is attached and being filed as a representative copy. The
Custodian Agreements for all eleven portfolios of Target/United
Funds, Inc. are identical with the exception of their respective
effective dates.
(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 attached hereto as
EX-99.B(i)tgtlegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)tgtconst
(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-
<PAGE>
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 filed by EDGAR as EX-99.B(m)-tmksp to Post-Effective
Amendment No. 22 to the Registration Statement on Form N-1A*
(n) Not applicable
(o) Not applicable
(p) Code of Ethics attached hereto as EX-99.B(p)tgtcode
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.
Registrant undertakes to carry out all indemnification provisions of its
Articles of Incorporation, Bylaws, and the above-described contracts in
accordance with the Investment Company Act Release No. 11330 (September 4,
1980) and successor releases.
Insofar as indemnification for liability arising under the 1933 Act, as
amended, may be provided to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
of the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by
<PAGE>
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
26. Business and Other Connections of Investment Manager
Waddell & Reed Investment Management Company ("WRIMCO")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 WRIMCO on January 8, 1992. WRIMCO 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 WRIMCO 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
WRIMCO 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 WRIMCO, 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 Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Waddell & Reed Funds, Inc.
United Small Cap Fund, Inc.
<PAGE>
United Tax-Managed Equity Fund, Inc.
(b) The information contained in the underwriter's application on Form
BD, as filed on April 24, 2000 SEC No. 8-27030 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 Items 23(h) and
23(m) 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., UNITED
SMALL CAP FUND, INC., UNITED TAX-MANAGED EQUITY 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, DANIEL C. SCHULTE 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: February 9, 2000 /s/ Robert L. Hechler
----------------------------
Robert L. Hechler, President
/s/ Keith A. Tucker Chairman of the Board February 9, 2000
- ------------------- ----------------
Keith A. Tucker
/s/ Robert L. Hechler President, Principal February 9, 2000
- -------------------- Financial Officer and ----------------
Robert L. Hechler Director
<PAGE>
/s/ Henry J. Herrmann Vice President and February 9, 2000
- ----------------------- ----------------
Henry J. Herrmann
/s/ Theodore W. Howard Vice President, Treasurer February 9, 2000
- ----------------------- ----------------
Theodore W. Howard Officer
/s/ James M. Concannon Director February 9, 2000
- ----------------------- ----------------
James M. Concannon
/s/ John A. Dillingham Director February 9, 2000
- ----------------------- ----------------
John A. Dillingham
/s/ David P. Gardner Director February 9, 2000
- ----------------------- ----------------
David P. Gardner
/s/ Linda K. Graves Director February 9, 2000
- ----------------------- ----------------
Linda K. Graves
/s/ Joseph Harroz, Jr. Director February 9, 2000
- ----------------------- ----------------
Joseph Harroz, Jr.
/s/ John F. Hayes Director February 9, 2000
- ----------------------- ----------------
John F. Hayes
/s/ Glendon E. Johnson Director February 9, 2000
- ----------------------- ----------------
Glendon E. Johnson
/s/ William T. Morgan Director February 9, 2000
- ----------------------- ----------------
William T. Morgan
<PAGE>
/s/ Ronald C. Reimer Director February 9, 2000
- ----------------------- ----------------
Ronald C. Reimer
/s/ Frank J. Ross, Jr. Director February 9, 2000
- ----------------------- ----------------
Frank J. Ross, Jr.
/s/ Eleanor B. Schwartz Director February 9, 2000
- ----------------------- ----------------
Eleanor B. Schwartz
/s/ Frederick Vogel III Director February 9, 2000
- ----------------------- ----------------
Frederick Vogel III
Attest:
/s/ Kristen A. Richards
- --------------------------------
Kristen A. Richards
Vice President and 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(b) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 27th day
of April, 2000.
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 April 27, 2000
- ---------------------- --------------
Keith A. Tucker
/s/ Robert L. Hechler* President, Principal April 27, 2000
- ---------------------- Financial Officer and --------------
Robert L. Hechler Director
/s/ Henry J. Herrmann* Vice President and April 27, 2000
- ---------------------- Director --------------
Henry J. Herrmann
/s/ Theodore W. Howard* Vice President, Treasurer April 27, 2000
- ---------------------- and Principal Accounting --------------
Theodore W. Howard Officer
/s/ James M. Concannon* Director April 27, 2000
- ----------------------- --------------
James M. Concannon
/s/ John A. Dillingham* Director April 27, 2000
- ----------------------- --------------
John A. Dillingham
<PAGE>
/s/ David P. Gardner* Director April 27, 2000
- ----------------------- --------------
David P. Gardner
/s/ Linda K. Graves* Director April 27, 2000
- ----------------------- --------------
Linda K. Graves
/s/ Joseph Harroz, Jr.* Director April 27, 2000
- ----------------------- --------------
Joseph Harroz, Jr.
/s/ John F. Hayes* Director April 27, 2000
- ----------------------- --------------
John F. Hayes
/s/ Glendon E. Johnson* Director April 27, 2000
- ----------------------- --------------
Glendon E. Johnson
/s/ William T. Morgan* Director April 27, 2000
- ----------------------- --------------
William T. Morgan
/s/ Ronald C. Reimer* Director April 27, 2000
- ----------------------- --------------
Ronald C. Reimer
/s/ Frank J. Ross, Jr.* Director April 27, 2000
- ----------------------- --------------
Frank J. Ross, Jr.
/s/ Eleanor B Schwartz* Director April 27, 2000
- ----------------------- --------------
Eleanor B. Schwartz
/s/ Frederick Vogel III* Director April 27, 2000
- ----------------------- --------------
Frederick Vogel III
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
Daniel C. Schulte
Assistant Secretary
<PAGE>
EX-99.B(a)tgtsupp
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
TARGET/UNITED FUNDS, INC.
TARGET/UNITED FUNDS, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Maryland, having its
principal office in the State of Maryland in Baltimore, Maryland (hereinafter
referred to as the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting held
on February 9, 2000, adopted resolutions authorizing the reallocation of shares
of the capital stock of the Corporation.
SECOND: That there are no changes in the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the Corporation's
capital stock, as set forth in the Corporation's Articles of Incorporation.
THIRD: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors has heretofore duly designated, in
accordance with Maryland General Corporation Law, the aggregate number of shares
of capital stock which the Corporation is authorized to issue at One Billion
(1,000,000,000) shares of capital stock, (par value $0.001 per share), amounting
in the aggregate to a par value of One Million Dollars ($1,000,000.00). Such
shares have heretofore been classified by the Board of Directors among the
series of the Corporation as follows:
50,000,000 shares Asset Strategy Portfolio
50,000,000 shares Balanced Portfolio
100,000,000 shares Bond Portfolio
150,000,000 shares Growth Portfolio
100,000,000 shares High Income Portfolio
100,000,000 shares Income Portfolio
100,000,000 shares International Portfolio
50,000,000 shares Limited-Term Bond Portfolio
100,000,000 shares Money Market Portfolio
100,000,000 shares Science and Technology Portfolio
100,000,000 shares Small Cap Portfolio
The aggregate number of shares of stock of the Corporation remains at One
Billion (1,000,000,000) shares of capital stock, the par value remains $0.001
per share,
<PAGE>
and the aggregate value of all authorized stock remains One Million Dollars
($1,000,000.00).
FOURTH: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors, in accordance with Maryland General
Corporation Law, now duly redesignates and reclassifies the capital stock of the
Corporation among the series of the Corporation as follows:
30,000,000 shares Asset Strategy Portfolio
40,000,000 shares Balanced Portfolio
100,000,000 shares Bond Portfolio
200,000,000 shares Growth Portfolio
100,000,000 shares High Income Portfolio
150,000,000 shares Income Portfolio
80,000,000 shares International Portfolio
30,000,000 shares Limited-Term Bond Portfolio
120,000,000 shares Money Market Portfolio
70,000,000 shares Science and Technology Portfolio
80,000,000 shares Small Cap Portfolio
FIFTH: The Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles Supplementary on behalf of the Corporation this
18th day of February, 2000.
TARGET/UNITED FUNDS, INC.
By: /s/ Kristen A. Richards
-----------------------------------
Kristen A. Richards, Vice President
ATTEST:
/s/ Daniel C. Schulte
- --------------------------------------
Daniel C. Schulte, Assistant Secretary
<PAGE>
The undersigned, Vice President of Target/United Funds, Inc. who executed
on behalf of said Corporation the foregoing Articles Supplementary, of which
this certificate is made a part, hereby acknowledges, in the name and on behalf
of said Corporation, the foregoing Articles Supplementary to be the act of said
Corporation and further certifies that, to the best of her knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
TARGET/UNITED FUNDS, INC.
By: /s/ Kristen A. Richards
-----------------------------------
Kristen A. Richards, Vice President
<PAGE>
EX-99.B(d)tgtimafee
EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT
TARGET/UNITED FUNDS, INC.
FEE SCHEDULE
A cash fee computed each day on net asset value for each Portfolio at the annual
rates listed below*:
Asset Strategy Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.70%
Over $1 billion and up to $2 billion 0.65%
Over $2 billion and up to $3 billion 0.60%
Over $3 billion 0.55%
Balanced Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.70%
Over $1 billion and up to $2 billion 0.65%
Over $2 billion and up to $3 billion 0.60%
Over $3 billion 0.55%
Bond Portfolio
Net Assets Fee
- ---------- ---
Up to $500 million 0.525%
Over $500 million and up to $1 billion 0.50%
Over $1 billion and up to $1.5 billion 0.45%
Over $1.5 billion 0.40%
<PAGE>
Growth Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.70%
Over $1 billion and up to $2 billion 0.65%
Over $2 billion and up to $3 billion 0.60%
Over $3 billion 0.55%
High Income Portfolio
Net Assets Fee
- ---------- ---
Up to $500 million 0.625%
Over $500 million and up to $1 billion 0.60%
Over $1 billion and up to $1.5 billion 0.55%
Over $1.5 billion 0.50%
Income Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.70%
Over $1 billion and up to $2 billion 0.65%
Over $2 billion and up to $3 billion 0.60%
Over $3 billion 0.55%
International Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.85%
Over $1 billion and up to $2 billion 0.83%
Over $2 billion and up to $3 billion 0.80%
Over $3 billion 0.76%
<PAGE>
Limited-Term Bond Portfolio
Net Assets Fee
- ---------- ---
Up to $500 million 0.50%
Over $500 million and up to $1 billion 0.45%
Over $1 billion and up to $1.5 billion 0.40%
Over $1.5 billion 0.35%
Money Market Portfolio
A cash fee computed each day on net asset values for the Portfolio at the annual
rate of 0.40% of net assets.
Science & Technology Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.85%
Over $1 billion and up to $2 billion 0.83%
Over $2 billion and up to $3 billion O.80%
Over $3 billion 0.76%
Small Cap Portfolio
Net Assets Fee
- ---------- ---
Up to $1 billion 0.85%
Over $1 billion and up to $2 billion 0.83%
Over $2 billion and up to $3 billion 0.80%
Over $3 billion 0.76%
* If a Portfolio's net assets are less than $25 million, Waddell & Reed
Investment Management Company has agreed to voluntarily waive the
management fee, subject to its right to change or modify this waiver.
As Amended and Effective June 30, 1999.
<PAGE>
EX-99.B(e)amendpua
July 8, 1999
Mr. Robert L. Hechler
President
Waddell & Reed, Inc.
6300 Lamar
Shawnee Mission, KS 66202
Dear Bob:
As you requested, this letter will set forth some details of the agreement that
we reached over the telephone on Wednesday, July 7.
Compensation payable to Waddell & Reed beginning 1/1/2000
For variable annuity contracts issued beginning 1/1/2000:
7.75% of premiums received, plus
.25% annually of variable assets, paid monthly beginning the first month
For the in force block of variable annuity business (i.e., issues of 1999 and
earlier):
.20% annually of variable assets, paid monthly
Certain variable annuity product features
In addition to product features previously proposed, we agree to the following:
o 1.25% mortality & expense charge
o .15% admin. charge
o 7 year surrender charge period, with surrender charge pattern of 7%,
6, 5, 4, 3, 2, 1, 0%
o $25 contract maintenance fee, waived for accounts >$25,000
By agreeing to the foregoing arrangements, we acknowledge that Waddell & Reed
has withdrawn its consideration of possible relationships on attractive terms
with other third party insurance companies in order to establish a long-term
relationship with us. In doing so, Waddell & Reed has relied on our
representations with respect to our commitment to provide, jointly with Waddell
& Reed, a first-class, competitive product that is fully supported and serviced
by sufficient resources, including personnel, systems and technology. We
acknowledge that Waddell & Reed will commit substantial resources to market and
provide a first-class, competitive product to its customers, and we agree that
we will work cooperatively with Waddell & Reed towards this end. Among other
things, we will cooperate with Waddell & Reed and commit the reasonable
resources necessary (a) to design, create, implement and introduce products and
product features that will be first-class and competitive and (b) to enhance and
improve such products and product features as the market for insurance products
and variable insurance products evolves. In addition, we acknowledge that the
breadth and quality of client service is an
<PAGE>
integral component of providing a first-class, competitive product. Accordingly,
we also agree to commit the reasonable resources necessary, including, but not
limited to, personnel, systems and technology, to develop and/or acquire and
implement the services necessary to support and service clients who purchase the
products jointly offered by Waddell & Reed and us, and to enhance and improve
such services in order to remain fully competitive.
Bob, I believe this fully describes the items that we discussed regarding
compensation and product features. If you are in agreement with the foregoing
terms and conditions, please sign this letter below and return a copy to me as
soon as possible.
Sincerely,
/s/ Tony McWhorter
- --------------------
Anthony L. McWhorter
Accepted and agreed to this 12th day of July, 1999.
Waddell & Reed, Inc.
By: /s/ Robert L. Hechler
Its: President
<PAGE>
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. ASSET STRATEGY 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
<PAGE>
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
<PAGE>
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Persons
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 "A"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 4th day of April, 1997, between Target/United
Funds, Inc. Asset Strategy 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
Assets held in a segregated margin account or otherwise pledged in connection
with options or futures contracts held for the benefit of the Fund and for
Assets allocated to any other Overdraft or loan made hereunder); provided,
however, the Custodian shall promptly notify the Fund in writing of any intent
to exercise a right of set-off against Assets hereunder and shall not exercise
any such right of set-off against Assets hereunder unless and until the Fund has
failed to pay (within ten (10) days after the Fund's receipt of such notice of
intent to exercise a right of set-off), any Overdraft, together with all accrued
interest thereon. Notwithstanding the provisions of any applicable law,
including, without limitation, the Uniform Commercial Code, the only rights or
remedies which the Custodian is entitled to with respect to Overdrafts is the
right of set-off granted herein.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument
<PAGE>
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
<PAGE>
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.
<PAGE>
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. A Domestic Subcustodian which is an
Approved Foreign Custody Manager, or the Domestic Subcustodian, 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
<PAGE>
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, except
that the Fund's investment adviser, Waddell & Reed Investment Management
Company, shall be responsible for the appointment of a compulsory depository, as
applicable.
(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
<PAGE>
subcustodian agreement between the Custodian and such Domestic Subcustodian and
Special Subcustodian or between the Domestic Subcustodian and an 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, or cause any Domestic
Subcustodian that has been approved as a Foreign Custody Manager to 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.
Upon request of the Fund, the Custodian also shall deliver, or cause any
Domestic Subcustodian that has been approved as a Foreign Custody Manager to
deliver, to the Fund: (i) legal opinions relating to whether local law restricts
with respect to U.S.-registered mutual funds (a) access of a fund's independent
public accountants to books and records of a Foreign Sub-Subcustodian, foreign
Securities Depository or foreign Clearing Agent, (b) a fund's ability to recover
in the event of bankruptcy or insolvency of a Foreign Sub-Subcustodian, foreign
Securities Depository or foreign Clearing Agent, (c) a fund's ability to recover
in the event of a loss by a Foreign Sub-Subcustodian, foreign Securities
Depository or foreign Clearing Agent, and (d) the ability of a foreign investor
(such as a fund) to convert cash and cash equivalents to U.S. dollars; (ii) a
summary of information regarding foreign Securities Depositories and foreign
Clearing Agents; and (iii) country profile information containing market
practice for (a) delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits and (f) unique
market arrangements.
ARTICLE V
<PAGE>
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); (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; or (iii)
any "Sovereign Risk", which for the purpose of this Agreement 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, civil commotion, nuclear fission or
fusion or radioactivity.
(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).
<PAGE>
(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
<PAGE>
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 (defined in Section 5.01(b)) 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
<PAGE>
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
<PAGE>
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
<PAGE>
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 "A" 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
<PAGE>
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
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 Instructions 3.01(a)
SEC 2.22
<PAGE>
Securities Depositories and Clearing Agencies 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.01(b)
Special Instructions 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,
<PAGE>
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.
<PAGE>
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. Asset Strategy 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
<PAGE>
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.
ASSET STRATEGY PORTFOLIO
By: /s/Kristen A. Richards By: /s/Ralph R. Santoro
---------------------- -------------------
Name: Kristen A. Richards Name: Ralph R. Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "A"
TO
CUSTODIAN AGREEMENT
BETWEEN
TARGET/UNITED FUNDS, INC. ASSET STRATEGY PORTFOLIO
AND
UMB BANK, N.A.
Dated as of May 13, 1998
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 "A", "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.
<PAGE>
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
Segregated Account Fee: $175 monthly charge per fund holding foreign
assets.
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. ASSET STRATEGY PORTFOLIO
AND
UMB BANK, n.a.
Dated as of February 25, 2000
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
United Small Cap Fund, Inc. August 18, 1999
United Tax-Managed Equity Fund, Inc. February 25, 2000
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:
Republic National Bank of New York
The Bank of New York, n.a.
<PAGE>
EX-99.B(i)tgtlegopn
April 27, 2000
Target/United Funds, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
Re: Target/United Funds, Inc.
Post-Effective Amendment No. 23
Dear Sir or Madam:
In connection with the public offering of shares of Capital Stock of
Target/United Funds, Inc. (the "Fund"), I have examined such corporate records
and documents and have made such further investigation and examination as I
deemed necessary for the purpose of this opinion.
It is my opinion that the indefinite number of shares of such Capital Stock
covered by the Fund's Registration Statement on Form N-1A, when issued and paid
for in accordance with the terms of the offering, as set forth in the Prospectus
and Statement of Additional Information forming a part of the Registration
Statement, will be, when such Registration shall have become effective, legally
issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an Exhibit to the said
Registration Statement and to the reference to me in such Statement of
Additional Information.
Yours truly,
/s/Kristen A. Richards
- ----------------------
Kristen A. Richards
Vice President, Associate General Counsel
and Secretary
KAR/sw
<PAGE>
EX-99.B(j)tgtconst
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amemdment No. 23 to Registration
Statement No. 33-11466 of Target/United Funds, Inc. of our report dated February
4, 2000, appearing in the Statement of Additional Information, and to the
reference to us under the heading "Financial Highlights" in the Prospectus,
which is part of such Registratiion Statement.
/s/ Deloitte & Touche LLP
---------------------
Deloitte & Touche LLP
Kansas City, Missouri
April 23, 2000
<PAGE>
EX-99.B(p)tgtcode
CODE OF ETHICS
Waddell & Reed Financial, Inc.
Waddell & Reed, Inc.
Waddell & Reed Investment Management Company
Austin, Calvert & Flavin, Inc.
Fiduciary Trust Company of New Hampshire
United Group of Mutual Funds
Waddell & Reed Funds, Inc.
Target/United Funds, Inc.
As Revised: February 9, 2000
<PAGE>
1. Preface
Rule 17j-1 of the Investment Company Act of 1940 (the "Act") requires
registered investment companies and their investment advisers and
principal underwriters to adopt codes of ethics and certain other
requirements to prevent fraudulent, deceptive and manipulative practices.
Each investment company in the United Group of Mutual Funds, Waddell &
Reed Funds, Inc. and Target/United Funds, Inc. (each a "Fund," and
collectively the "Funds") is registered as an open-end management
investment company under the Act. Waddell & Reed, Inc. ("W&R") is the
principal underwriter of each of the Funds. Waddell & Reed Investment
Management Company ("WRIMCO") is the investment adviser of the Funds and
may also serve as investment adviser to institutional clients other than
the Funds. Austin, Calvert & Flavin, Inc. ("ACF") is a subsidiary of
WRIMCO and serves as investment adviser to individuals and institutional
clients other than the Funds. Fiduciary Trust Company of New Hampshire
("FTC"), is a trust company and a subsidiary of W&R; Waddell & Reed
Financial, Inc. ("WDR") is the public holding company. Except as otherwise
specified herein, this Code applies to all employees, officers and
directors of W&R, WRIMCO, ACF and the Funds, (collectively, the
"Companies").
This Code of Ethics (the "Code") is based on the principle that the
officers, directors and employees of the Companies have a fiduciary duty
to place the interests of their respective advisory clients first, to
conduct all personal securities transactions consistently with this Code
and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of their position of trust and responsibility, and
to conduct their personal securities transactions in a manner which does
not interfere with the portfolio transactions of any advisory client or
otherwise take unfair advantage of their relationship to any advisory
client. Persons covered by this Code must adhere to this general principle
as well as comply with the specific provisions of this Code. Technical
compliance with this Code will not insulate from scrutiny trades which
indicate an abuse of an individual's fiduciary duties to any advisory
client.
This Code has been approved, and any material change to it must be
approved, by each Fund's board of directors, including a majority of the
Fund's Disinterested directors.
1
<PAGE>
2. Definitions
"Access Person" means (i) any employee, director, officer or general
partner of a Fund, WRIMCO or ACF, (ii) any director or officer of W&R, FTC
or WDR or any employee of any company in a control relationship to the
Companies who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or sale of
securities for an advisory client or whose principal function or duties
relate to the making of any recommendation to an advisory client regarding
the purchase or sale of securities and (iii) any natural person in a
control relationship to the Companies who obtains information concerning
recommendations made to an advisory client with regard to the purchase or
sale of a security. A natural person in a control relationship or an
employee of a company in a control relationship does not become an "Access
Person" simply by virtue of the following: normally assisting in the
preparation of public reports, but not receiving information about current
recommendations or trading; or a single instance of obtaining knowledge of
current recommendations or trading activity, or infrequently and
inadvertently obtaining such knowledge. The Legal Department, in
cooperation with department heads, is responsible for determining who are
Access Persons.
"Advisory Client" means any client (including both investment companies
and managed accounts) for which WRIMCO or ACF serves as an investment
adviser, renders investment advice or makes investment decisions.
A security is "being considered for purchase or sale" when the order to
purchase or sell such security has been given to the trading room, or
prior thereto when, in the opinion of the portfolio manager or division
head, a decision, whether or not conditional, has been made (even though
not yet implemented) to make the purchase or sale, or when the
decision-making process has reached a point where such a decision is
imminent.
"Beneficial Ownership" shall be interpreted in the same manner as it would
be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 in
determining whether a person is the beneficial owner of a security for
purposes of Section 16 of the Securities Exchange Act of 1934. (See
Appendix A for a more complete description.)
"Control" shall have the same meaning as that set forth in Section 2(a)(9)
of the Act.
2
<PAGE>
"De Minimis Transaction" means a transaction in an equity security (or an
equivalent security) which is equal to or less than 300 shares, or is a
fixed-income security (or an equivalent security) which is equal to or
less than $15,000 principal amount. Purchases and sales, as the case may
be, in the same security or an equivalent security within 30 days will be
aggregated for purposes of determining if the transaction meets the
definition of a De Minimis Transaction.
"Disinterested Director" means a director who is not an "interested
person" within the meaning of Section 2(a)(19) of the Act.
"Equivalent Security" means any security issued by the same entity as the
issuer of a subject security, including options, rights, warrants,
preferred stock, restricted stock, phantom stock, bonds and other
obligations of that company, or security convertible into another
security.
"Immediate Family" of an individual means any of the following persons who
reside in the same household as the individual:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other
relationship (whether or not recognized by law) which the Legal Department
determines could lead to possible conflicts of interest, diversions of
corporate opportunity, or appearances of impropriety which this Code is
intended to prevent.
"Investment Personnel" means those employees who provide information and
advice to a portfolio manager or who help execute the portfolio manager's
decisions.
"Large Cap Transaction" means a purchase or sale of securities issued by
(or equivalent securities with respect to) companies with market
capitalization of at least $2.5 billion.
3
<PAGE>
"Non-Affiliated Director" is a Director that is not an affiliated person
of W&R.
"Portfolio Manager" means those employees entrusted with the direct
responsibility and authority to make investment decisions affecting an
Advisory Client.
"Purchase or sale of a security" includes, without limitation, the
writing, purchase or exercise of an option to purchase or sell a security,
conversions of convertible securities and short sales.
"Security" shall have the meaning set forth in Section 2(a)(36) of the
Act, except that it shall not include shares of registered open-end
investment companies, securities issued by the Government of the United
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper, high quality short-term
debt instruments, including repurchase agreements, and such other money
market instruments as are designated by the boards of directors of the
Companies.
Security does not include futures contracts or options on futures
contracts (provided these instruments are not used to indirectly acquire
an interest which would be prohibited under this Code), but the purchase
and sale of such instruments are nevertheless subject to the reporting
requirements of this Code.
"Security held or to be acquired" by an Advisory Client means (a) any
security which, within the most recent 15 days, (i) is or has been held by
an Advisory Client or (ii) is being or has been considered for purchase by
an Advisory Client, and (b) any option to purchase or sell, and any
security convertible into or exchangeable into, a security described in
the preceding clause (a).
3. Pre-Clearance Requirements
Except as otherwise specified in this Code, all Access Persons, except a
Non-Affiliated Director or a member of his or her Immediate Family, shall
clear in advance through the Legal Department any purchase or sale, direct
or indirect, of any Security in which such Access Person has, or by reason
of such transaction acquires, any direct or indirect Beneficial Ownership;
provided, however, that an Access Person shall not be required to clear
transactions effected for or securities held in any account over which
such Access
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Person does not have any direct or indirect influence or control. The
Legal Department shall retain written records of such clearance requests.
For accounts affiliated with Waddell & Reed, Inc. or any of its affiliates
or related companies ("affiliated accounts"), WRIMCO must clear in advance
purchases of equity securities in initial public offerings only.
Except as otherwise provided in Section 5, the Legal Department will not
grant clearance for any purchase by an Access Person if the Security is
currently being considered for purchase or being purchased by any Advisory
Client or for sale by an Access Person if currently being considered for
sale or being sold by any Advisory Client. If the Security proposed to be
purchased or sold by the Access Person is an option, clearance will not be
granted if the securities subject to the option are being considered for
purchase or sale as indicated above. If the Security proposed to be
purchased or sold is a convertible security, clearance will not be granted
if either that security or the securities into which it is convertible are
being considered for purchase or sale as indicated above. The Legal
Department will not grant clearance for any purchase by an affiliated
account of any security in an initial public offering if an Advisory
Client is considering the purchase or has submitted an indication of
interest in purchasing shares in such initial public offering. For all
other purchases and sales of securities for affiliated accounts, no
clearance is necessary, but such transactions are subject to WRIMCO's
Procedures for Aggregation of Orders for Advisory Clients, as amended from
time to time.
The Legal Department may refuse to preclear a transaction if it deems the
transaction to involve a conflict of interest, possible diversion of
corporate opportunity, or an appearance of impropriety.
Clearance is effective, unless earlier revoked, until the earlier of (1)
the close of business on the fifth trading day, beginning on and including
the day on which such clearance was granted, or (2) such time as the
Access Person learns that the information provided to the Legal Department
in such Access Person's request for clearance is not accurate. If an
Access Person places an order for a transaction within the five trading
days but such order is not executed within the five trading days (e.g., a
limit order), clearance need not be reobtained unless the person who
placed the original order amends such order in any way. Clearance may be
revoked at any time and is deemed revoked if, subsequent to receipt of
clearance, the Access Person has knowledge that a Security to which the
clearance relates is being considered for purchase or sale by an Advisory
Client.
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4. Exempted Transactions
The pre-clearance requirements in Section 3 and the prohibited actions and
transactions in Section 5 of this Code shall not apply to:
(a) Purchases or sales which are non-volitional on the part of either
the Access Person or the Advisory Client.
(b) Purchases which are part of an automatic dividend reinvestment plan.
(c) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights
so acquired.
(d) Transactions in securities of WDR; however, individuals subject to
the Insider Trading Policy remain subject to such policy. (See
Appendix B).
(e) Purchases or sales by a Non-Affiliated Director or a member of his
or her Immediate Family.
5. Prohibited Actions and Transactions
Clearance will not be granted under Section 3 hereof with respect to the
following prohibited actions and transactions. Engaging in any such
actions or transactions by Access Persons will result in sanctions,
including, but not limited to, the sanctions expressly provided for in
this Section.
(a) Except with respect to Large Cap Transactions, Investment Personnel
and Portfolio Managers shall not acquire any security for any
account in which such Investment Personnel or Portfolio Manager has
a beneficial interest, excluding the Funds, in an initial public
offering of that security.
(b) Except with respect to Large Cap Transactions, Access Persons shall
not execute a securities transaction on a day during which an
Advisory Client has a pending buy or sell order in that same
security or an equivalent security until that order is
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executed or withdrawn. An Access Person shall disgorge any profits
realized on trades within such period.
(c) Except for De Minimis Transactions and Large Cap Transactions, a
Portfolio Manager shall not buy or sell a Security within seven (7)
trading days before or after an Advisory Client that the Portfolio
Manager manages trades in that Security or an equivalent security. A
Portfolio Manager shall disgorge any profits realized on such trades
within such period.
(d) Except for De Minimis Transactions and Large Cap Transactions,
Investment Personnel and Portfolio Managers shall not profit in the
purchase or sale, or sale and purchase, of the same (or equivalent)
securities within sixty (60) calendar days. The Legal Department
will review all such short-term trading by Investment Personnel and
Portfolio Managers and may, in its sole discretion, allow exceptions
when it has determined that an exception would be equitable and that
no abuse is involved. Investment Personnel and Portfolio Managers
profiting from a transaction shall disgorge any profits realized on
such transaction. This section shall not apply to options on
securities used for hedging purposes for securities held longer than
sixty (60) days.
(e) Investment Personnel and Portfolio Managers shall not accept from
any person or entity that does or proposes to do business with or on
behalf of an Advisory Client a gift or other thing of more than de
minimis value or any other form of advantage. The solicitation or
giving of such gifts by Investment Personnel and Portfolio Managers
is also prohibited. For purposes of this subparagraph, "de minimis"
means $75 or less if received in the ordinary course of business.
(f) Investment Personnel and Portfolio Managers shall not serve on the
board of directors of publicly traded companies, absent prior
authorization from the Legal Department. The Legal Department will
grant authorization only if it is determined that the board service
would be consistent with the interests of any Advisory Client. In
the event board service is authorized, such individuals serving as
directors shall be isolated from those making investment decisions
through procedures designed to safeguard against potential conflicts
of interest, such as a Chinese Wall policy or investment
restrictions.
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(g) Except with respect to Large Cap Transactions, Investment Personnel
and Portfolio Managers shall not acquire a security in a private
placement, absent prior authorization from the Legal Department. The
Legal Department will not grant clearance for the acquisition of a
security in a private placement if it is determined that the
investment opportunity should be reserved for an Advisory Client or
that the opportunity to acquire the security is being offered to the
individual requesting clearance by virtue of such individual's
position with the Companies. An individual who has been granted
clearance to acquire securities in a private placement shall
disclose such investment when participating in an Advisory Client's
subsequent consideration of an investment in the issuer. A
subsequent decision by an Advisory Client to purchase such a
security shall be subject to independent review by Investment
Personnel with no personal interest in the issuer.
(h) An Access Person shall not execute a securities transaction while in
possession of material non-public information regarding the security
or its issuer.
(i) An Access Person shall not execute a securities transaction which is
intended to result in market manipulation, including but not limited
to, a transaction intended to raise, lower, or maintain the price of
any security or to create a false appearance(s) of active trading.
(j) Except with respect to Large Cap Transactions, an Access Person
shall not execute a securities transaction involving the purchase or
sale of a security at a time when such Access Person intends, or
knows of another's intention, to purchase or sell that security (or
an equivalent security) on behalf of an Advisory Client. This
prohibition would apply whether the transaction is in the same
(e.g., two purchases) or the opposite (a purchase and sale)
direction as the transaction of the Advisory Client.
(k) An Access Person shall not cause or attempt to cause any Advisory
Client to purchase, sell, or hold any security in a manner
calculated to create any personal benefit to such Access Person or
his or her Immediate Family. If an Access Person or his or her
Immediate Family stands to materially benefit from an investment
decision for an Advisory Client that the Access Person is
recommending or in which the Access Person is participating, the
Access Person
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shall disclose to the persons with authority to make investment
decisions for the Advisory Client, any beneficial interest that the
Access Person or his or her Immediate Family has in such security or
an equivalent security, or in the issuer thereof, where the decision
could create a material benefit to the Access Person or his or her
Immediate Family or result in the appearance of impropriety.
6. Reporting by Access Persons
(a) Each Access Person, except a Non-Affiliated Director or a member of
his or her Immediate Family, shall require a broker-dealer or bank
effecting a transaction in any security in which such Access Person
has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the security to timely send
duplicate copies of each confirmation for each securities
transaction and periodic account statement for each brokerage
account in which such Access Person has a beneficial interest to
Waddell & Reed, Inc., Attention: Legal Department.
(b) Each Access Person, except a Non-Affiliated Director or a member of
his or her Immediate Family, shall report to the Legal Department no
later than 10 days after the end of each calendar quarter the
information described below with respect to transactions during the
quarter in any security in which such Access Person has, or by
reason of such transaction acquired, any direct or indirect
Beneficial Ownership in the security and with respect to any account
established by the Access Person in which securities were held
during the quarter for the direct or indirect benefit of the Access
Person; provided, however, that an Access Person shall not be
required to make a report with respect to transactions effected for
or securities held in any account over which such Access Person does
not have any direct or indirect influence or control:
(i) The date of the transaction, the name, the interest rate and
maturity date (if applicable), the number of shares and the
principal amount of the security;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
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(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected and, with respect to an account
described above in this paragraph, with whom the Access Person
established the account;
(v) The date the account was established; and
(vi) The date the report is submitted.
(c) Upon commencement of employment, or, if later, at the time he or she
becomes an Access Person each such Access Person, except a
Non-Affiliated Director or a member of his or her Immediate Family,
shall provide the Legal Department with a report that discloses:
(i) The name, number of shares and principal amount of each
security in which the Access Person had any direct or indirect
Beneficial Ownership when he or she became an Access Person;
(ii) The name of any broker, dealer or bank with which the Access
Person maintained an account in which securities were held for
the direct or indirect benefit of the Access Person as of the
date he or she became an Access Person; and
(iii) The date of the report.
Annually thereafter, each Access Person, except a Non-Affiliated
Director or a member of his or her Immediate Family, shall provide
the Legal Department with a report that discloses the following
information (current as of a date no more than 30 days before the
report is submitted):
(i) The name, number of shares and principal amount of each
security in which the Access Person had any direct or indirect
Beneficial Ownership;
(ii) The name of any broker, dealer or bank with which the Access
Person maintains an account in which securities were held for
the direct or indirect benefit of the Access Person; and
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(iii) The date the report is submitted.
However, an Access Person shall not be required to make a report
with respect to securities held in any account over which such
Access Person does not have any direct or indirect influence or
control.
In addition, each Access Person, except a Non-Affiliated Director or
a member of his or her Immediate Family, shall annually certify in
writing that all transactions in any security in which such Access
Person has, or by reason of such transaction has acquired, any
direct or indirect Beneficial Ownership have been reported to the
Legal Department. If an Access Person had no transactions during the
year, such Access Person shall so advise the Legal Department.
(d) A Non-Affiliated Director or a member of his or her Immediate Family
need only report a transaction in a security if such director, at
the time of that transaction, knew or, in the ordinary course of
fulfilling his or her official duties as a director, should have
known that, during the 15-day period immediately preceding the date
of the transaction by the director, such security was purchased or
sold by an Advisory Client or was being considered for purchase or
sale by an Advisory Client.
(e) In connection with a report, recommendation or decision of an Access
Person to purchase or sell a security, the Companies may, in their
discretion, require such Access Person to disclose his or her direct
or indirect Beneficial Ownership of such security. Any such report
may contain a statement that the report shall not be construed as an
admission by the person making such report that he or she has any
direct or indirect Beneficial Ownership in the security to which the
report relates.
(f) The Legal Department shall identify all Access Persons who are
required to make reports under this section and shall notify those
persons of their reporting obligations hereunder. The Legal
Department shall review, or determine other appropriate personnel to
review, the reports submitted under this section.
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7. Reports to Board
At least annually, each Fund, WRIMCO and W&R shall provide the Fund's
board of directors, and the board of directors shall consider, a written
report that:
(a) Describes any issues arising under this Code or the related
procedures instituted to prevent violation of this Code since the
last report to the board of directors, including, but not limited
to, information about material violations of this Code or such
procedures and sanctions imposed in response to such violations; and
(b) Certifies that the Fund, WRIMCO and W&R, as applicable, has adopted
procedures reasonably necessary to prevent Access Persons from
violating this Code.
In addition to the written report otherwise required by this
section, all material violations of this Code and any sanctions
imposed with respect thereto shall be periodically reported to the
board of directors of the Fund with respect to whose securities the
violation occurred.
8. Confidentiality of Transactions and Information
Every Access Person shall treat as confidential information the fact that
a security is being considered for purchase or sale by an Advisory Client,
the contents of any research report, recommendation or decision, whether
at the preliminary or final level, and the holdings of an Advisory Client
and shall not disclose any such confidential information without prior
consent from the Legal Department. Notwithstanding the foregoing, with
respect to a Fund, the holdings of the Fund shall not be considered
confidential after such holdings by the Fund have been disclosed in a
public report to shareholders or to the Securities and Exchange
Commission.
Access Persons shall not disclose any such confidential information to any
person except those employees and directors who need such information to
carry out the duties of their position with the Companies.
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9. Sanctions
Upon discovering a violation of this Code, the Companies may impose such
sanctions as it deems appropriate, including, without limitation, a letter
of censure or suspension or termination of the employment of the violator.
10. Certification of Compliance
Each Access Person, except a Non-Affiliated Director and members of his or
her Immediate Family, shall annually certify that he or she has read and
understands this Code and recognizes that he or she is subject hereto.
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Appendix A to the Code of Ethics
"Beneficial Ownership"
For purposes of this Code, "Beneficial Ownership" is interpreted in the same
manner as it would be under Rule 16a-1(a)(2) of the Securities Exchange Act of
1934 in determining whether a person is the beneficial owner of a security for
purposes of Section 16 of the Securities Exchange Act of 1934. In general, a
"beneficial owner" of a security is any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares any direct or indirect pecuniary interest in the security. The
Companies will interpret Beneficial Ownership in a broad sense.
The existence of Beneficial Ownership is clear in certain situations, such as:
securities held in street name by brokers for an Access Person's account, bearer
securities held by an Access Person, securities held by custodians, pledged
securities, and securities held by relatives or others for an Access Person. An
Access Person is also considered the beneficial owner of securities held by
certain family members. The SEC has indicated that an individual is considered
the beneficial owner of securities owned by such individual's Immediate Family.
The relative's ownership of the securities may be direct (i.e., in the name of
the relative) or indirect.
An Access Person is deemed to have Beneficial Ownership of securities owned by a
trust of which the Access Person is the settlor, trustee or beneficiary,
securities owned by an estate of which the Access Person is the executor or
administrator, legatee or beneficiary, securities owned by a partnership of
which the Access Person is a partner, and securities of a corporation of which
the Access Person is a director, officer or shareholder.
An Access Person must comply with the provisions of this Code with respect to
all securities in which such Access Person has a Beneficial Ownership. If an
Access Person is in doubt as to whether she or he has a Beneficial Ownership
interest in a security, the Access Person should report the ownership interest
to the Legal Department. An Access Person may disclaim Beneficial Ownership as
to any security on required reports.
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APPENDIX B
POLICY STATEMENT ON INSIDER TRADING
December 8, 1994
I. Prohibition on Insider Trading
All employees, officers, directors and other persons associated with the
Companies as a term of their employment or association are forbidden to misuse
in violation of Federal securities laws or other applicable laws material
nonpublic information.
This prohibition covers transactions for one's own benefit and also for
the benefit of or on behalf of others, including the investment companies
in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. (the "Funds") or other investment
Advisory Clients. The prohibition also covers the unlawful dissemination
of such information to others. Such conduct is frequently referred to as
"insider trading". The policy of the Companies applies to every officer,
director, employee and associated person of the Companies and extends to
activities within and outside their duties at the Companies. The
prohibition is in addition to the other policies and requirements under
the Companies' Code of Ethics and other policies issued from time to time.
It applies to transactions in any securities, including publicly traded
securities of affiliated companies (e.g., Waddell & Reed Financial, Inc.
(1))
This Policy Statement is intended to inform personnel of the issues so as
to enable them to avoid taking action that may be unlawful or to seek
clearance and guidance from the Legal Department when in doubt. It is not
the purpose of this Policy Statement to give precise and definitive rules
which will relate to every situation, but rather to furnish enough
information so that subject persons may avoid unintentional violations and
seek guidance when necessary.
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(1)Reporting transactions in affiliated corporation securities is in addition to
and does not replace the obligation of certain senior officers to file reports
with the Securities and Exchange Commission.
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All employees, officers and directors of the Companies will be furnished
with or have access to a copy of this Policy Statement. Any questions
regarding the policies or procedures described herein should be referred
to the Legal Department. To the extent that inquiry of employees reveals
that this Policy Statement is not self-explanatory or is likely to be
substantively misunderstood, appropriate personnel will conduct individual
or group meetings from time to time to assure that policies and procedures
described herein are understood.
The term "insider trading" is not defined in the Federal securities laws,
but generally is used to refer to the use of material nonpublic
information to trade in securities (whether or not one is an "insider") or
to communications of material nonpublic information to others. In
addition, there is no definitive and precise law as to what constitutes
material nonpublic information or its unlawful use. The law in these areas
has been developed through court decisions primarily interpreting basic
anti-fraud provisions of the Federal securities laws. There is no
statutory definition, only statutory sanctions and procedural
requirements.
While the law concerning insider trading is not static, it is generally
understood that the law is as follows:
(a) It is unlawful for any person, directly or indirectly, to purchase,
sell or cause the purchase or sale of any security, either
personally or on behalf of or for the benefit of others, while in
the possession of material, nonpublic information relating thereto,
if such person knows or recklessly disregards that such information
has been obtained wrongfully, or that such purchase or sale would
constitute a wrongful use of such information. The law relates to
trading by an insider while in possession of material nonpublic
information or trading by a non-insider while in possession of
material nonpublic information, where the information either was
disclosed to the non-insider in violation of an insider's duty to
keep it confidential or was misappropriated.
(b) It is unlawful for any person involved in any transaction which
would violate the foregoing to communicate material nonpublic
information to others (or initiate a chain of communication to
others) who purchase or sell the subject security if such sale or
purchase is reasonably foreseeable.
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The major elements of insider trading and the penalties for such unlawful
conduct are discussed below. If, after reviewing this Policy Statement,
you have any questions, you should consult the Legal Department.
1. Who is an Insider? The concept of "insider" is broad. It includes
officers, directors and employees of the company in possession of
nonpublic information. In addition, a person can be a "temporary
insider" if he or she enters into a special confidential
relationship in the conduct of the company's affairs and as a result
is given access to information solely for the company's purposes. A
temporary insider can include, among others, a company's attorneys,
accountants, consultants, bank lending officers, and certain of the
employees of such organizations. In addition, the Companies may
become a temporary insider of a company it advises or for which it
performs services.
2. What is Material Information? Trading on inside information is not a
basis for liability unless the information is material. "Material
information" includes information that a reasonable investor would
be likely to consider important in making an investment decision,
information that is reasonably certain to have a substantial effect
on the price of a company's securities if publicly known, or
information which would significantly alter the total mix of
information available to shareholders of a company. Information that
one may consider material includes information regarding dividends,
earnings, estimates of earnings, changes in previously released
earnings estimates, merger or acquisition proposals or agreements,
major litigation, liquidation problems, new products or discoveries
and extraordinary management developments. Material information is
not just information that emanates from the issuer of the security,
but includes market information such as the intent of someone to
commence a tender offer for the securities, a favorable or critical
article in an important financial publication or information
relating to a Fund's buying program.
3. What is Nonpublic Information? Information is nonpublic until it has
been effectively communicated to the marketplace and is available to
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investors generally. One must be able to point to some fact to show
that the information is generally public. For example, information
found in a report filed with the SEC, or appearing in The Wall
Street Journal or other publications of general circulation would be
considered public.
4. When is a Person in Possession of Information? Once a person has
possession of material nonpublic information, he or she may not buy
or sell the subject security, even though the person is prompted by
entirely different reasons to make the transaction, if such person
knows or recklessly disregards that such information was wrongfully
obtained or will be wrongfully used. Advisory personnel's normal
analytical conclusions, no matter how thorough and convincing, can
temporarily be of no use if the analyst has material nonpublic
information, which he knows or recklessly disregards is information
which was wrongfully obtained or would be wrongfully used.
5. When Is Information Wrongfully Obtained or Wrongfully Used?
Wrongfully obtained connotes the idea of gaining the information
from some unlawful activity such as theft, bribery or industrial
espionage. It is not necessary that the subject person gained the
information through his or her own actions. Wrongfully obtained
includes information gained from another person with knowledge that
the information was so obtained or with reckless disregard that the
information was so obtained. Wrongful use of information concerns
circumstances where the person gained the information properly,
often to be used properly, but instead using it in violation of some
express or implied duty of confidentiality. An example would be the
personal use of information concerning Funds' trades. The employee
may need to know a Fund's pending transaction and may even have
directed it, but it would be unlawful to use this information in his
or her own transaction or to reveal it to someone he or she believes
may personally use it.
6. When Is Communicating Information (Tipping) Unlawful? It is unlawful
for a person who, although not trading himself or herself,
communicates material nonpublic information to those who make an
unlawful transaction if the transaction is reasonably foreseeable.
The reason for tipping the
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information is not relevant. The tipper's motivation is not of
concern, but it is relevant whether the tipper knew the information
was unlawfully obtained or was being unlawfully used. For example,
if an employee tips a friend about a large pending trade of a Fund,
why he or she did so is not relevant, but it is relevant that he or
she had a duty not to communicate such information. It is unlawful
for a tippee to trade while in possession of material nonpublic
information if he or she knew or recklessly ignored that the
information was wrongfully obtained or wrongfully communicated to
him or her directly or through a chain of communicators.
II. Penalties for Insider Trading
Penalties for unlawful trading or communication of material nonpublic
information are severe, both for individuals involved in such unlawful
conduct and their employers. A person can be subject to some or all the
penalties below even if he or she does not personally benefit from the
violation. Penalties include civil injunctions, treble damages,
disgorgement of profits, jail sentences, fines for the person who
committed the violation and fines for the employer or other controlling
person. In addition, any violation of this Policy Statement can be
expected to result in serious sanctions by any or all of the Companies,
including, but not limited to, dismissal of the persons involved.
III. Monitoring of Insider Trading
The following are some of the procedures which have been established to
aid the officers, directors and employees of the Companies in avoiding
insider trading, and to aid the Companies in preventing, detecting and
imposing sanctions against insider trading. Every officer, director and
employee of the Companies must follow these procedures or risk serious
sanctions, including dismissal, substantial liability and criminal
penalties. If you have any questions about these procedures, you should
consult the Legal Department.
A. Identifying Inside Information
Before trading for yourself or others in the securities of a company
about which you may have potential inside information, ask yourself
the following questions:
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(1) Is the information material? Is this information that an
investor would consider important in making his or her
investment decisions? Is this information that would
substantially affect the market price of securities if
generally disclosed?
(2) Is the information nonpublic? To whom has this information
been provided? Has the information been effectively
communicated to the marketplace by being published in a
publication of general circulation?
(3) Do you know or have any reason to believe the information was
wrongfully obtained or may be wrongfully used?
If after consideration of the above, you believe that the
information is material and nonpublic and may have been wrongfully
obtained or may be wrongfully used, or if you have questions as to
whether the information is material or nonpublic or may have been
wrongfully obtained or may be wrongfully used, you should take the
following steps:
(1) Report the matter immediately to the Legal Department.
(2) Do not purchase or sell the securities on behalf of yourself
or others.
As Revised September 1, 1999, and
As Revised February 9, 2000
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