<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NOS. 33-12791
811-05069
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 17 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 18 /X/
------------------------
EQUITRUST VARIABLE INSURANCE SERIES FUND
(Exact name of Registrant as Specified in Charter)
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
(Address of Principal Executive Offices)(Zip Code)
(515)225-5586
(Registrant's Telephone Number, Including Area Code)
STEPHEN M. MORAIN, ESQUIRE
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
(Name and Address of Agent for Service)
------------------------
COPY TO:
STEPHEN E. ROTH
SUTHERLAND ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
------------------------
It is proposed that this filing become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on May 1, 1998 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a) of Rule 485
/ / on (date) pursuant to paragraph (a) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2) of Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
------------------------
Title of Securities Being Registered: Shares of Beneficial Interest
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
EQUITRUST VARIABLE INSURANCE SERIES FUND
--------------------------------------------
MONEY MARKET PORTFOLIO
HIGH GRADE BOND PORTFOLIO
MANAGED PORTFOLIO
HIGH YIELD BOND PORTFOLIO
VALUE GROWTH PORTFOLIO
BLUE CHIP PORTFOLIO
------------------------------------------------------------------------
PROSPECTUS
May 1, 1999
Welcome to EquiTrust Variable Insurance Series Fund, an open-end diversified
management investment company consisting of six Portfolios. Each Portfolio has
its own investment objective(s), investment policies, restrictions and attendant
risks. This prospectus describes each Portfolio in some detail -- please read it
and retain it for future reference.
Shares of each Portfolio are offered exclusively to certain registered separate
accounts of Farm Bureau Life Insurance Company and other affiliated and
non-affiliated companies as funding vehicles for certain variable annuity and
variable life insurance contracts issued by Farm Bureau Life Insurance Company
and other affiliated and non-affiliated companies and are not offered directly
to the public.
An investment in a Portfolio of the Fund is not a bank deposit and is not
insured, guaranteed, or endorsed by the Federal Deposit Insurance Corporation,
or any other government agency. An investment in a Portfolio of the Fund
involves investment risks, including possible loss of principal.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED SHARES
OF THE FUND OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EquiTrust Mutual Funds
5400 University Avenue
West Des Moines, Iowa 50266
800-247-4170
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
DEFINITIONS....................................... 2
Money Market Portfolio............................ 3
High Grade Bond Portfolio......................... 5
Managed Portfolio................................. 7
High Yield Bond Portfolio......................... 9
Value Growth Portfolio............................ 11
Blue Chip Portfolio............................... 13
HIGH YIELD BOND PORTFOLIO STRATEGY................ 15
PRINCIPAL RISK FACTORS............................ 15
General Discussion of Risks................. 15
Types of Investment Risk.................... 17
Higher Risk Securities and Practices........ 18
Higher Risk Securities and Practices
Table...................................... 20
HIGHER RISK SECURITIES AND INVESTMENT
STRATEGIES...................................... 21
Securities of Foreign Issuers............... 21
Lower-Rated Debt Securities................. 21
When-Issued and Delayed Delivery
Transactions............................... 22
Covered Call Options........................ 23
Capital Securities.......................... 23
PORTFOLIO MANAGEMENT.............................. 24
OTHER INFORMATION................................. 25
Year 2000................................... 25
Distributor................................. 25
Net Asset Value............................. 25
Shareholders................................ 26
Distributions and Taxes..................... 27
FINANCIAL HIGHLIGHTS.............................. 28
ADDITIONAL INFORMATION............................ 31
Annual/Semi-Annual Reports to
Shareholders............................... 31
Statement of Additional Information......... 31
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
ADVISER: The Fund's investment adviser, EquiTrust Investment Management
Services, Inc.
EQUITY SECURITIES: Common stock, preferred stock, securities convertible or
exchangeable into common stock, including convertible debt securities,
convertible preferred stock and warrants or rights to acquire common stock.
FOREIGN ISSUERS: Companies organized outside the United States whose
securities are traded on U.S. exchanges and payable or denominated in U.S.
dollars.
HIGH GRADE: Securities rated, at the time of purchase, in the three highest
categories by a nationally-recognized statistical rating organization ("NRSRO")
(E.G., A or higher by either Moody's Investors Service ("Moody's") or
Standard & Poor's ("S&P")) or unrated securities that the Adviser determines
are of comparable quality. (See Appendix A to the Statement of Additional
Information for an explanation of ratings.)
INVESTMENT GRADE: Securities rated, at the time of purchase, in the four
highest categories by an NRSRO (E.G., Baa or higher by Moody's or BBB or higher
by S&P) or unrated securities that the Adviser determines are of comparable
quality. (See Appendix A to the Statement of Additional Information for an
explanation of ratings.)
PRIMARILY: Where the description of a Portfolio indicates that it invests
primarily in certain types of securities, this means that, under normal
circumstances, it invests at least 65% of its total assets in such
securities.
SAI: The Fund's Statement of Additional Information, or SAI, contains
additional information about the Fund and the Portfolios. Investors may obtain a
free copy of the SAI by contacting the Fund at the toll-free number or
address shown on the back cover page of this prospectus.
2
<PAGE>
MONEY MARKET PORTFOLIO
- ----------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - require stability of principal
- - are seeking a mutual fund for the cash portion of an asset allocation program
- - need to "park" your money temporarily
or
- - consider yourself a saver rather than an investor
You may want to invest fewer of your assets in this Portfolio if you:
- - are seeking an investment that is likely to outpace inflation
- - are investing for retirement or other goals that are many years in the future
or
- - are investing for growth or maximum current income
(End Sidebar)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The MONEY MARKET PORTFOLIO seeks maximum current income consistent with
liquidity and stability of principal. The Portfolio intends to maintain a stable
value of $1.00 per share.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any money market fund, the yield paid by the Portfolio will vary with
changes in interest rates. Also, there is a possibility that the Portfolio's
share value could fall below $1.00, which could reduce the value of your
investment.
To the extent that it invests in certain securities, the Portfolio may be
affected by additional risks relating to REPURCHASE AGREEMENTS (credit risk),
SHORT-TERM TRADING (market risk, as well as potentially higher transaction
costs), and WHEN-ISSUED SECURITIES (market, opportunity and leverage risks).
However, these risks are lessened by the high quality of the securities in which
the Portfolio invests.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus. SHARES OF THIS PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION ACCOUNT AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER FINANCIAL INSTITUTION OR GOVERNMENT BODY. Before you invest, please
carefully read the section on "Risks."
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
This Portfolio invests exclusively in U.S. dollar-denominated money market
securities maturing in thirteen months or less from the date of purchase,
including those issued by U.S. financial institutions, corporate issuers, the
U.S. Government and its agencies, instrumentalities and municipalities. At least
95% of the Portfolio's assets must be rated in the highest short-term category
(or its unrated equivalent), and 100% of the Portfolio's assets must be invested
in securities rated in the two highest rating categories. A more detailed
description of the rating categories and the types of permissible issuers is
contained in the SAI. The Portfolio maintains a dollar-weighted average
portfolio maturity of 90 days or less. The Portfolio may also:
- - Lend securities to financial institutions, enter into repurchase agreements,
engage in short-term trading and purchase securities on a when-issued or
forward commitment basis;
- - Invest up to 10% of its assets in illiquid securities, although it will not
generally invest in such securities.
3
<PAGE>
PERFORMANCE RECORD
- ----------------------------------------------------
The following bar chart provides an illustration of the performance of the Money
Market Portfolio each year since its inception. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Money Market Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
<S> <C>
Since Inception*
90(1) 7.50%
91 5.77%
92 3.28%
93 2.68%
94 3.68%
95 5.47%
96 4.90%
97 5.07%
98 5.00%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
BEST QUARTER: 1.87%
- --------------------------------
WORST QUARTER: 0.65%
- --------------------------------
</TABLE>
The following table compares the average annual total returns of the Money
Market Portfolio to those of the 90-day T-Bill Index over the periods shown. The
90-day T-Bill Index is a widely recognized index of three-month Treasury bills.
The 90-day T-Bill Index figures do not reflect any fees or expenses and one
cannot invest directly in the Index.
<TABLE>
<CAPTION>
LIFE OF
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS PORTFOLIO*
--------- ----------- ----------
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO 5.00% 4.82% 4.77%
--------- ----- -----
90-DAY T-BILL INDEX 5.01% 5.16% 5.07%
--------- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Money Market Portfolio. During certain periods shown,
the Adviser waived portions of its advisory fee thereby lowering expenses for
the Portfolio. Also, the performance figures do not reflect the fees and charges
of the underlying variable annuity contracts and variable life insurance
policies. If these fees and charges had been reflected, the performance shown
would have been less favorable.
* The Portfolio commenced operations February 20, 1990.
(1) Annualized.
4
<PAGE>
HIGH GRADE BOND PORTFOLIO
- ----------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are seeking an investment that generates a regular stream of income
- - are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- - want to diversify your investments
- - are seeking a mutual fund for the income portion of an asset allocation
program
or
- - are retired or nearing retirement
You may want to invest fewer of your assets in this Portfolio if you:
- - are investing for maximum return over a long time horizon
or
- - require absolute stability of your principal
(End Sidebar)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks to generate as high a level of current income as is
consistent with investment in a diversified portfolio of high grade income
bearing debt securities.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with most income mutual funds, the Portfolio is subject to INTEREST RATE
RISK, the risk that the value of an investment will fluctuate with changes in
interest rates. Typically, a rise in interest rates causes a decline in the
market value of income bearing securities. Other factors may affect the market
price and yield of the Portfolio's securities, including investor demand and
domestic and worldwide economic conditions. In addition, the Portfolio is
subject to CREDIT RISK, the risk that issuers of debt securities may not be able
to meet their interest or principal payment obligations when due. The ability of
the Portfolio to realize interest under repurchase agreements and pursuant to
loans of the Portfolio's securities is dependent on the ability of the seller or
borrower, as the case may be, to perform its obligation to the Portfolio. To the
extent that the Portfolio invests in NON-HIGH GRADE SECURITIES, it is also
subject to above-average credit, market and other risks. Loss of money is a risk
of investing in this Portfolio.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the SAI. Before you invest, please carefully read the
section on "Risks."
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
To keep current income relatively stable and to limit share price volatility,
the Portfolio invests primarily in high grade securities and maintains an
intermediate (typically 3-6 year) average portfolio duration. Under normal
circumstances, the Portfolio invests at least 80% of its assets in high grade
securities. The Portfolio may invest the rest of its assets in securities that
are not high grade. The Portfolio may invest in the following instruments:
- - CORPORATE DEBT SECURITIES: securities issued by domestic and foreign
corporations
- - U.S. GOVERNMENT DEBT SECURITIES: securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
- - OTHER DEBT SECURITIES: securities issued or guaranteed by corporations,
financial institutions, and others which, although not rated by a national
rating service, are considered by the Portfolio's investment adviser to have
an investment quality equivalent to the three highest categories; and
- - OTHER SECURITIES: convertible debt securities and convertible and
nonconvertible preferred stocks rated in the three highest categories by an
NRSRO.
A detailed description of the rating categories is contained in the SAI. To the
extent permitted by law and available in the market, the Portfolio may also
invest in mortgage-backed securities and up to 25% of its net assets in debt
securities of foreign issuers.
5
<PAGE>
PERFORMANCE RECORD
- ----------------------------------------------------
The following bar chart provides an illustration of the performance of the High
Grade Bond Portfolio during each of the last ten years. The bar chart indicates
the degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the High Grade Bond Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
<S> <C>
Last Ten Years
89 12.74%
90 8.85%
91 16.42%
92 8.40%
93 8.74%
94 -0.26%
95 14.26%
96 5.94%
97 10.24%
98 7.51%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
BEST QUARTER: 6.32%
- --------------------------------
WORST QUARTER: (1.13)%
- --------------------------------
</TABLE>
The following table compares the average annual total returns of the High Grade
Bond Portfolio to those of the Lehman Brothers Mutual Fund Aggregate Index
("Lehman Index") over the periods shown. The Lehman Index is a widely
recognized, unmanaged index of fixed income performance. The Lehman Index
figures do not reflect any fees or expenses and one cannot invest directly in
the Lehman Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
--------- ----------- ----------
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
HIGH GRADE BOND PORTFOLIO 7.51% 7.43% 9.19%
--------- ----------- ----------
LEHMAN BROTHERS MUTUAL FUND
AGGREGATE INDEX 8.69% 7.13% 9.07%
--------- ----------- ----------
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the High Grade Bond Portfolio. During certain periods
shown, the Adviser waived portions of its advisory fee thereby lowering expenses
for the Portfolio. Also, the performance figures do not reflect the fees and
charges of the underlying variable annuity contracts and variable life insurance
policies. If these fees and charges had been reflected, the performance shown
would have been less favorable.
6
<PAGE>
MANAGED PORTFOLIO
- ----------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are looking for a more conservative alternative to a growth-oriented mutual
fund
- - want a well-diversified and relatively stable investment allocation
- - need a core investment
- - seek above-average total return over the long term irrespective of its source
or
- - are retired or nearing retirement
You may want to invest fewer of your assets in this Portfolio if you:
- - are investing for maximum return over a long time horizon
or
- - require a high degree of stability of your principal
(End Sidebar)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Managed Portfolio seeks the highest level of total return through income and
capital appreciation.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any mutual fund that invests in stocks and bonds, the Portfolio is
subject to MARKET and INTEREST RATE RISKS, the risks that the value of an
investment will fluctuate in response to stock and bond market movements and
changes in interest rates. Loss of money is a risk of investing in this
Portfolio.
To the extent that it invests in certain securities, the Portfolio may be
affected by additional risks relating to NON-INVESTMENT GRADE SECURITIES
(above-average credit, market and other risks), securities of FOREIGN ISSUERS
(currency, information, natural event and political risks), and MORTGAGE-BACKED
SECURITIES (credit, extension, prepayment and interest rate risks). These risks,
and the risks associated with other higher-risk securities and practices that
the Portfolio may utilize, are described in more detail later in this prospectus
and in the SAI. Before you invest, please carefully read the section on "Risks."
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Managed Portfolio pursues its objective through a fully managed investment
policy consisting of investment in the following three market sectors: (1)
growth common stocks and other equity securities, (2) high grade debt securities
and preferred stocks of the types in which the High Grade Bond Portfolio may
invest, and (3) money market instruments of the types in which the Money Market
Portfolio may invest.
The Managed Portfolio's investment policy for the equity sector is to invest in
both value-oriented securities of the type in which the Value Growth Portfolio
invests as well as those that display more traditional growth characteristics
such as established records of growth in sales and earnings. The Portfolio's
policies for the debt and money market sectors are substantially identical to
those of the High Grade Bond Portfolio and Money Market Portfolio, respectively.
There are no restrictions as to the proportions of one or another type of
security which the Portfolio may hold. Accordingly, the Portfolio may be
substantially invested in equity securities, debt securities or money market
instruments. The Portfolio may invest up to 25% of its net assets in securities
of foreign issuers.
7
<PAGE>
PERFORMANCE RECORD
- ----------------------------------------------------
The following bar chart provides an illustration of the performance of the
Managed Portfolio during each of the last ten years. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Managed Portfolio may achieve in the future. Future annual
returns may be greater or less than the returns shown in the chart.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
<S> <C>
Last Ten Years
89 8.86%
90 8.15%
91 12.69%
92 15.72%
93 22.71%
94 -4.96%
95 25.69%
96 17.39%
97 10.67%
98 -8.71%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
BEST QUARTER: 11.53%
- --------------------------------
WORST QUARTER: (8.03)%
- --------------------------------
</TABLE>
The following table compares the average annual total returns of the Managed
Portfolio to those of the Standard & Poor Corporation's Composite Index of 500
Common Stocks ("S&P 500 Index") over the periods shown. The S&P 500 Index is a
widely recognized, unmanaged market capitalization-weighted index of 500
widely-held common stocks. The S&P 500 Index figures do not reflect any fees or
expenses and one cannot invest directly in the Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
--------- ----------- ----------
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
MANAGED PORTFOLIO (8.71)% 7.22% 10.32%
--------- ----- -----
S&P 500 INDEX 28.59% 24.13% 18.77%
--------- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Managed Portfolio. During certain periods shown, the
Adviser waived portions of its advisory fee thereby lowering expenses for the
Portfolio. Also, the performance figures do not reflect the fees and charges of
the underlying variable annuity contracts and variable life insurance policies.
If these fees and charges had been reflected, the performance shown would have
been less favorable.
8
<PAGE>
HIGH YIELD BOND PORTFOLIO
- ----------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are seeking higher potential returns than most bond mutual funds and are
willing to accept significant risk of volatility
- - want to diversify your investments
- - are seeking a mutual fund for the income portion of an asset allocation
program
or
- - are retired or nearing retirement
You may want to invest fewer of your assets in this Portfolio if you:
- - desire relative stability of your principal
or
- - are investing for maximum return over a long time horizon
(End Sidebar)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks as high a level of current income as is consistent with
investment in a diversified portfolio of lower-rated, higher-yielding income
bearing securities. The Portfolio also seeks capital appreciation, but only when
consistent with its primary goal.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
This Portfolio is subject to above-average INTEREST RATE and CREDIT RISKS.
Investors should expect greater fluctuations in share price, yield and total
return compared to mutual funds holding bonds and other income bearing
securities with higher credit ratings and/or shorter maturities. These
fluctuations, whether positive or negative, may be sharp and unanticipated. Loss
of money is a significant risk of investing in this Portfolio.
Issuers of NON-INVESTMENT GRADE SECURITIES (I.E., "junk" bonds) are typically in
weak financial health and their ability to pay interest and principal is
uncertain. Compared to issuers of investment-grade bonds, they are more likely
to encounter financial difficulties and to be materially affected by these
difficulties when they do encounter them. "Junk" bond markets may react strongly
to adverse news about an issuer or the economy, or to the perception or
expectation of adverse news.
The fund may also invest in MORTGAGE-BACKED SECURITIES that are subject to
extension and prepayment risks.
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. Before you invest, please carefully read the section on "Risks."
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Portfolio invests primarily in lower-rated, higher-yielding income bearing
debt securities, such as "junk" bonds. Under normal market conditions, the
Portfolio invests more than 80% of its assets in debt and other income bearing
securities rated lower than investment grade (and their unrated equivalents) or
other high-yielding securities. The Portfolio generally does not invest in bonds
rated CC/Ca or lower unless the Adviser believes that the financial condition of
the issuer or the protection afforded to the security is stronger than the
rating would otherwise indicate. Types of debt and other income bearing
securities include, but are not limited to, domestic and foreign corporate
bonds, debentures, notes, convertible securities, preferred stocks, municipal
obligations and government obligations. The Portfolio may invest in
mortgage-backed securities.
The Portfolio also may invest up to 25% of its net assets in debt securities of
foreign issuers.
9
<PAGE>
PERFORMANCE RECORD
- ----------------------------------------------------
The following bar chart provides an illustration of the performance of the High
Yield Bond Portfolio during each of the last ten years. The bar chart indicates
the degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the High Yield Bond Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
<S> <C>
Last Ten Years
89 8.08%
90 0.67%
91 27.49%
92 13.39%
93 15.05%
94 -1.01%
95 15.15%
96 12.65%
97 12.07%
98 6.88%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
BEST QUARTER: 9.82%
- --------------------------------
WORST QUARTER: (2.41)%
- --------------------------------
</TABLE>
The following table compares the average annual total returns of the High Yield
Bond Portfolio to those of the Lehman Brothers Mutual Fund Corporate/High Yield
Index ("Lehman Index") over the periods shown. The Lehman Index is a widely
recognized, unmanaged index of corporate and high yield bond market performance.
The Lehman Index figures do not reflect any fees or expenses and one cannot
invest directly in the Lehman Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
--------- ----------- ----------
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
HIGH YIELD BOND PORTFOLIO 6.88% 8.99% 10.87%
--------- ----- -----
LEHMAN BROTHERS MUTUAL FUND
CORPORATE/HIGH YIELD INDEX 6.98% 7.83% N/A%*
--------- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the High Yield Bond Portfolio. During certain periods
shown, the Adviser waived portions of its advisory fee thereby lowering expenses
for the Portfolio. Also, the performance figures do not reflect the fees and
charges of the underlying variable annuity contracts and variable life insurance
policies. If these fees and charges had been reflected, the performance shown
would have been less favorable.
* The Lehman Brothers Mutual Fund Corporate/High Yield Index commenced
operations November 30, 1992.
10
<PAGE>
VALUE GROWTH PORTFOLIO
- ----------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - have longer investment time horizons
- - are willing to accept higher on-going short-term risk for the potential of
higher long-term returns
- - want to diversify your investments
- - are seeking mutual funds for the growth portion of an asset allocation
program
or
- - are investing for retirement or other goals that are many years in the future
You may want to invest fewer of your assets in this Portfolio if you:
- - are investing with a shorter investment time horizon in mind
or
- - are uncomfortable with an investment whose value may vary substantially
(End Sidebar)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks long-term capital appreciation.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any mutual fund that invests in equity securities, this Portfolio is
subject to MARKET RISK, the risk that the value of your investment will
fluctuate in response to stock market movements. Loss of money is a significant
risk of investing in this Portfolio. Due to its focus on equity securities that
may appreciate in value and lack of emphasis on those that provide income, this
Portfolio will typically experience greater volatility over time than the other
Portfolios.
To the extent that the Portfolio invests in higher-risk securities, it takes on
additional risks that could adversely affect its performance. For example, to
the extent that the Portfolio invests in SECURITIES OF FOREIGN ISSUERS, it will
be subject to the risks related to such securities.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the SAI. Before you invest, please carefully read the
section on "Risks."
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Portfolio pursues its investment objective by investing primarily in equity
securities of companies that the Adviser believes have a potential to earn a
high return on capital and/or are undervalued by the market. The Portfolio may
invest in securities of companies in cyclical industries during periods when
such securities appear to the Adviser to have strong potential for capital
appreciation. It also may invest in "special situation" companies. Special
situation companies are ones that, in the Adviser's opinion, have potential for
significant future earnings growth but have not performed well in the recent
past. These companies may include ones with management changes, corporate or
asset restructuring or significantly undervalued assets.
The Adviser's strategy with the Portfolio is based on a value-oriented analysis
of equity securities. Such an analysis focuses upon evaluations of key financial
ratios such as stock price-to-book value, stock price-to-earnings, stock
price-to-cash flow and debt-to-total capital. The Adviser attempts to determine
the fundamental value of an enterprise using the foregoing ratios and by
evaluating the enterprise's balance sheet (E.G., comparing the enterprise's
assets with the purchase price of similar recently acquired assets) as well as
by using dividend discounting models. The Adviser's use of a value-oriented
analysis may often result in the acquisition of equity securities of medium- and
smaller-size companies or in securities of companies that are out of favor in
the market.
The Portfolio also may invest up to 25% of its net assets in securities of
foreign issuers.
11
<PAGE>
PERFORMANCE RECORD
- ----------------------------------------------------
The following bar chart provides an illustration of the performance of the Value
Growth Portfolio during each of the last ten years. The bar chart indicates the
degree of variability that the Portfolio experienced in its performance from
year to year. This reflects the degree of risk of an investment in the
Portfolio. Please remember that past performance is no indicator or guarantee of
the results that the Value Growth Portfolio may achieve in the future. Future
annual returns may be greater or less than the returns shown in the chart.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
<S> <C>
Last Ten Years
89 11.13%
90 4.65%
91 14.53%
92 10.46%
93 27.20%
94 -4.43%
95 25.87%
96 17.65%
97 6.30%
98 -24.43%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
BEST QUARTER: 10.75%
- --------------------------------
WORST QUARTER: (20.09)%
- --------------------------------
</TABLE>
The following table compares the average annual total returns of the Value
Growth Portfolio to those of the S&P 500 Index over the periods shown. The S&P
500 Index is a widely recognized, unmanaged market capitalization-weighted index
of 500 widely-held common stocks. The S&P 500 Index figures do not reflect any
fees or expenses and one cannot invest directly in the Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS
--------- ----------- ----------
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
VALUE GROWTH PORTFOLIO (24.43)% 2.60% 7.84%
--------- ----- -----
S&P 500 INDEX 28.59% 24.13% 18.77%
--------- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Value Growth Portfolio. During certain periods shown,
the Adviser waived portions of its advisory fee thereby lowering expenses for
the Portfolio. Also, the performance figures do not reflect the fees and charges
of the underlying variable annuity contracts and variable life insurance
policies. If these fees and charges had been reflected, the performance shown
would have been less favorable.
12
<PAGE>
BLUE CHIP PORTFOLIO
- ----------------------------------------------------
(SIDEBAR)
INVESTOR PROFILE
WHO SHOULD CONSIDER INVESTING IN THIS PORTFOLIO?
You may want to invest more of your assets in this Portfolio if you:
- - are looking for a stock fund that has both growth and income components
- - are looking for a more conservative alternative to a growth-oriented fund
- - need a core investment
- - seek above-average long-term total return
- - are investing for a higher return over a long time horizon
or
- - are retired or nearing retirement
You may want to invest fewer of your assets in this Portfolio if you:
- - are investing with a shorter time horizon in mind
or
- - require a high degree of stability of your principal
(End Sidebar)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
WHAT IS THIS PORTFOLIO'S GOAL?
The Portfolio seeks long-term growth of capital and income.
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS PORTFOLIO?
As with any mutual fund that invests in stocks and also seeks income, this
Portfolio is subject to MARKET and INTEREST RATE RISKS, therefore, the value of
an investment will fluctuate in response to stock market and interest rate
movements. Loss of money is a risk of investing in this Portfolio.
To the extent that it invests in certain securities, the Portfolio may be
affected by additional risks relating to SECURITIES OF FOREIGN ISSUERS
(currency, information, natural event and political risks) and NON-INVESTMENT
GRADE SECURITIES (credit, market, interest rate, liquidity, valuation and
information risks).
The Portfolio may also be subject to NON-DIVERSIFICATION RISK, the risk that a
concentration of the Portfolio's investment in a limited number of companies
will expose the Portfolio, to a greater extent than if investments were less
concentrated, to losses arising from adverse developments affecting those
companies.
These risks, and the risks associated with other higher-risk securities and
practices that the Portfolio may utilize, are described in more detail later in
this prospectus and in the SAI. Before you invest, please carefully read the
section on "Risks."
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
HOW DOES THIS PORTFOLIO PURSUE ITS OBJECTIVE?
The Portfolio pursues its objective by investing primarily in equity securities
of well-capitalized, established companies. The Portfolio focuses on common
stocks of approximately 50 large, well-known companies that the Adviser believes
to collectively comprise a representative cross-section of major industries.
Companies of this type are commonly referred to as "blue chip". Blue chip
companies are generally identified by their substantial capitalization,
established history of earnings and superior management structure. The Adviser
selects particular issuers on the basis of whether they, taken together,
reasonably represent a cross-section of major industries and not on the basis of
any analysis of their economic or financial strength or the relative value of
the securities. Within the limits of its investment restrictions (found in the
SAI), the Portfolio may, from time to time, hold more than 5% of its assets in
one or more such companies.
The Portfolio also may invest in other equity securities and debt or other
income bearing securities.
13
<PAGE>
PERFORMANCE RECORD
- ----------------------------------------------------
The following bar chart provides an illustration of the performance of the Blue
Chip Portfolio each year since its inception. The bar chart indicates the degree
of variability that the Portfolio experienced in its performance from year to
year. This reflects the degree of risk of an investment in the Portfolio. Please
remember that past performance is no indicator or guarantee of the results that
the Blue Chip Portfolio may achieve in the future. Future annual returns may be
greater or less than the returns shown in the chart.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL RETURNS
<S> <C>
Since Inception*
90(1) 56.93%
91 28.20%
92 10.38%
93 14.36%
94 2.65%
95 32.81%
96 21.43%
97 27.41%
98 18.91%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
<S> <C>
BEST QUARTER: 18.14%
- --------------------------------
WORST QUARTER: (13.80)%
- --------------------------------
</TABLE>
The following table compares the average annual total returns of the Blue Chip
Portfolio to those of the S&P 500 Index over the periods shown. The S&P 500
Index is a widely recognized, unmanaged market capitalization-weighted index of
500 widely-held common stocks. The S&P 500 Index figures do not reflect any fees
or expenses and one cannot invest directly in the Index.
<TABLE>
<CAPTION>
LIFE OF
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS PORTFOLIO*
--------- ----------- ----------
(for periods ending
December 31, 1998)
<S> <C> <C> <C>
BLUE CHIP PORTFOLIO 18.91% 20.19% 19.45%
--------- ----- -----
S&P 500 INDEX 28.59% 24.13% 19.50%
--------- ----- -----
</TABLE>
The performance data was calculated after deducting all fees and charges
actually incurred by the Blue Chip Portfolio. During certain periods shown, the
Adviser waived portions of its advisory fee thereby lowering expenses for the
Portfolio. Also, the performance figures do not reflect the fees and charges of
the underlying variable annuity contracts and variable life insurance policies.
If these fees and charges had been reflected, the performance shown would have
been less favorable.
* The Portfolio commenced operations October 15, 1990.
(1) Annualized.
14
<PAGE>
- --------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO STRATEGY
- --------------------------------------------------------------------------------
The premise of the High Yield Bond Portfolio is that over long periods of
time, a broadly diversified portfolio of lower-rated, higher-yielding debt
securities should, net of capital losses, provide a higher net return than a
similarly diversified portfolio of higher-rated lower-yielding debt
securities. The Adviser attempts to minimize the risks of lower rated debt
securities by:
- constructing a portfolio of such securities diversified by industry,
geography, maturity, duration and credit quality
- performing credit analysis independent of rating agencies and
attempting to acquire securities of issuers whose financial position
is more sound than ratings would indicate
- acquiring or disposing of particular securities to take advantage of
anticipated changes and trends in the economy and financial markets
The Adviser's judgment of the risk of any particular security is a function
of its experience with lower-rated debt securities, its evaluation of
general economic and securities market conditions, and the financial
position of a security's issuer. Under certain market conditions, the
Adviser may sacrifice yield in order to adopt a defensive posture designed
to preserve capital. A defensive posture could include, among other
strategies, acquiring discount securities.
- --------------------------------------------------------------------------------
PRINCIPAL RISK FACTORS
- --------------------------------------------------------------------------------
GENERAL DISCUSSION OF RISKS
EQUITY SECURITIES. To the extent that a Portfolio invests in equity
securities, it is subject to market risk. In general, stock values fluctuate
in response to the fortunes of individual companies and in response to
general market and economic conditions. Accordingly, the value of the equity
securities that a Portfolio holds may decline over short or extended
periods. The risk of such a decline is known as market risk. The U.S. equity
markets tend to be cyclical, with periods when prices generally rise and
periods when prices generally decline. Therefore, the value of an investment
in those Portfolios that hold equity securities may increase or decrease. As
of the date of this Prospectus, domestic stock markets were at, or close to,
record high levels and no one can guarantee that such levels will continue.
Equity securities are also subject to financial risk, which is the risk that
the issuer's earnings prospects and overall financial position will
deteriorate causing a decline in the security's value.
INCOME BEARING SECURITIES. To the extent that a Portfolio invests in income
bearing securities, it is subject to the risk of income volatility, market
risk (interest rate risk), financial risk (credit risk) and, as to some
portfolio holdings, prepayment/extension risk. Income volatility refers to
the degree and rapidity with which changes in overall market interest rates
diminish the level of current income from a portfolio of income bearing
securities. Financial risk relates to the ability of an issuer of a debt
security to pay principal and interest on such security on a timely basis
and is the risk that the issuer could default on its obligations and a
Portfolio will lose its investment. In general, interest rate risk is the
risk that when prevailing interest rates decline, the market value of income
bearing securities (particularly fixed-income securities) tends to increase.
Conversely, when interest rates increase, the market value of income bearing
securities (particularly fixed-income securities) tends to decline.
Prepayment risk and extension risk are normally present in adjustable rate
mortgage loans, mortgage-backed securities and other asset-backed
securities. For example, homeowners have the option to prepay their
mortgages. Therefore, the duration of a security backed by home mortgages
can either shorten (prepayment risk) or lengthen (extension risk).
In general, if interest rates on new mortgage loans fall sufficiently below
the interest rates on existing outstanding mortgage loans, the rate of
prepayment would be expected to increase. Conversely, if mortgage loan
interest rates rise above the interest rates on existing outstanding
mortgage loans, the
15
<PAGE>
rate of prepayment would be expected to decrease. In either case, a change
in the prepayment rate can result in losses to investors.
The risk/return curve below demonstrates that for diversified portfolios of
securities of the various types, as short-term risk increases, the potential
for long-term gains also increases. "Short-term risk" refers to the likely
volatility of a portfolio's total return and its potential for gain or loss
over a relatively short time period. "Long-term potential gains" means the
expected average annual total return over a relatively long time period,
such as 20 years.
[CHART]
THIS CURVE DOES NOT INDICATE FUTURE VOLATILITY OR PERFORMANCE. It merely
demonstrates the relationship between the on-going short-term risk and the
long-term potential for gain of each Portfolio relative to the other
Portfolios and other types of investments.
Each Portfolio has its own investment objective, investment policies,
restrictions and attendant risks. An investor should consider each Portfolio
separately to determine if it is an appropriate investment. NO ONE CAN
ASSURE THAT A PORTFOLIO WILL ACHIEVE ITS INVESTMENT OBJECTIVE(S) AND
INVESTORS SHOULD NOT CONSIDER ANY ONE PORTFOLIO ALONE TO BE A COMPLETE
INVESTMENT PROGRAM. AS WITH ALL MUTUAL FUNDS, THERE IS A RISK THAT AN
INVESTOR COULD LOSE MONEY BY INVESTING IN A PORTFOLIO. The investment
objective(s) of each Portfolio and those investment restrictions of a
Portfolio that are designated as fundamental cannot be changed without
approval of a majority of the outstanding shares of that Portfolio as
defined in the Statement of Additional Information. However, each
Portfolio's investment policies and the strategies by which it seeks its
objective(s), and those investment restrictions not specifically designated
as fundamental, are nonfundamental and may be changed by the Fund's Board of
Trustees without shareholder approval.
Notwithstanding their investment objective(s), each Portfolio may, for
temporary defensive purposes, invest all (15% for the Blue Chip Portfolio)
of its assets in cash and/or money market instruments of the type in which
the Money Market Portfolio invests.
The VALUE GROWTH PORTFOLIO and BLUE CHIP PORTFOLIO are subject to moderate
levels of both market and financial risk.
16
<PAGE>
The HIGH GRADE BOND PORTFOLIO is subject to moderate levels of market risk
and relatively low levels of financial risk and current income volatility.
The HIGH YIELD BOND PORTFOLIO is subject to relatively high levels of
financial risk, moderate levels of market risk and relatively low levels of
current income volatility.
The MANAGED PORTFOLIO is subject to moderate levels of market and financial
risk and relatively low levels of current income volatility, although
current income volatility could be higher if the Portfolio is heavily
invested in short-term money market instruments.
The MONEY MARKET PORTFOLIO is subject to little market or financial risk
because it invests in high quality short-term investments that reflect
current market interest rates. The Portfolio could experience a high level
of current income volatility because the level of its current income
directly reflects short-term interest rates.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
CORRELATION RISK. The risk that changes in the value of a hedging instrument
or hedging technique will not match those of the asset being hedged (hedging
is the use of one investment to offset the possible adverse effects of
another investment).
CREDIT RISK. The risk that the issuer of a security, or the counterparty to
a contract, will default or otherwise not honor a financial obligation.
CURRENCY RISK. The risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect the U.S. dollar
value of an investment.
EXTENSION RISK. The risk that a rise in prevailing interest rates will
extend the life of an outstanding mortgage-backed security by reducing the
expected number of mortgage prepayments, typically reducing the security's
value.
FINANCIAL RISK. For income bearing securities, credit risk. For equity
securities, the risk that the issuer's earning prospects and overall
financial position will deteriorate causing a decline in the security's
value.
INFORMATION RISK. The risk that key information about a security or market
is inaccurate or unavailable.
INTEREST RATE RISK. The risk of declines in market value of an income
bearing investment due to changes in prevailing interest rates. With
fixed-rate securities, a rise in interest rates typically causes a decline
in market values, while a fall in interest rates typically causes an
increase in market values.
LEVERAGE RISK. The risks associated with securities or investment practices
that enhance return (or loss) without increasing the amount of investment,
such as buying securities on margin or using certain derivative contracts or
derivative securities. A Portfolio's gain or loss on a leveraged position
may be greater than the actual market gain or loss in the underlying
security or instrument. A Portfolio may also incur additional costs in
taking a leveraged position (such as interest on borrowings) that may not be
incurred in taking a non-leveraged position.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the Portfolio would like to sell
them or at the price the Portfolio values them.
MARKET RISK. The risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably, due to factors that have nothing
to do with the issuer. This risk is common to all income bearing and equity
securities and mutual funds that invest in them.
17
<PAGE>
NATURAL EVENT RISK. The risk of losses attributable to natural disasters,
crop failures and similar events.
OPPORTUNITY RISK. The risk of missing out on an investment opportunity
because the assets necessary to take advantage of it are tied up in less
advantageous investments.
POLITICAL RISK. The risk of losses directly attributable to government
actions or political events of any sort.
PREPAYMENT RISK. The risk that a decline in prevailing interest rates will
shorten the life of an outstanding mortgage-backed security by increasing
the expected number of mortgage prepayments, thereby reducing the security's
return.
VALUATION RISK. The risk that the market value of an investment falls
substantially below the Portfolio's valuation of the investment.
- --------------------------------------------------------------------------------
HIGHER RISK SECURITIES AND PRACTICES
<TABLE>
<CAPTION>
SECURITY OR PRACTICE DESCRIPTION RELATED RISKS
<S> <C> <C>
American Depository ADRs are receipts typically issued by a Market, currency,
Receipts (ADRs) U.S. financial institution which evidence information, natural
ownership of underlying securities of event and political
foreign corporate issuers. Generally, risks (I.E., the risks
ADRs are in registered form and are of foreign securities).
designed for trading in U.S. markets.
Capital Securities Securities issued by trusts or other Credit, liquidity and
special purpose entities created to interest rate risks.
invest in junior subordinated debt
securities. Junior subordinated debt
ranks before equity securities, but after
more senior debt in the event of the
issuer's liquidation and usually pays a
fixed rate of interest.
Illiquid Securities Any investment that may be difficult or Liquidity, valuation and
impossible to sell at the time the market risks.
Portfolio would like to sell it for the
price at which the Portfolio values it.
Mortgage-Backed Securities backed by pools of mortgages, Credit, extension,
Securities including passthrough certificates, PACs, prepayment and interest
TACs, collateralized mortgage obligations rate risks.
(CMOs), and when available, pools of
mortgage loans generated by credit
unions.
Non-Investment Grade Investing in debt securities rated below Credit, market, interest
Securities BBB/ Baa (I.E., "junk" bonds). rate, liquidity,
valuation and
information risks.
Repurchase Agreements The purchase of a security that the Credit risk.
issuer agrees to buy back later at the
same price plus interest.
Restricted Securities Securities originally issued in a private Liquidity, valuation and
placement rather than a public offering. market risks.
These securities often cannot be freely
traded on the open market.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SECURITY OR PRACTICE DESCRIPTION RELATED RISKS
<S> <C> <C>
Reverse Repurchase The lending of short-term debt Leverage and credit
Agreements securities; often used to facilitate risks.
borrowing.
Securities Lending The lending of securities to financial Credit risk.
institutions, which provide cash or
government securities as collateral.
Shares of Other The purchase of shares issued by other Market risks and the
Investment Companies investment companies. These investments layering of fees and
are subject to the fees and expenses of expenses.
both the Portfolio and the other
investment company.
Short-Term Trading Selling a security soon after purchase or Market risk.
purchasing it soon after it was sold (a
Portfolio engaging in short-term trading
will have higher turnover and transaction
expenses).
Smaller Capitalization The purchase of securities issued by a Market risk.
Companies company with a market capitalization
(I.E., the price per share of its common
stock multiplied by the number of shares
of common stock outstanding) of less than
$1 billion.
When-Issued and Delayed The purchase or sale of securities for Market, opportunity and
Delivery Securities delivery at a future date; market value leverage risks.
may change before delivery.
Writing Covered Call A call option is the right to purchase a Interest rate, market,
Option Contracts on security for an agreed-upon price at any correlation, liquidity,
Securities time prior to an expiration date. By credit and opportunity
writing (selling) a call option, a risks.
Portfolio gives this right to a buyer for
a fee. A "covered" call option contract
is one where the Portfolio owns the
security subject to the option for as
long as the option remains outstanding.
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
HIGHER RISK SECURITIES AND PRACTICES TABLE
The following table shows each Portfolio's investment limitations with
respect to certain higher risk securities and practices as a percentage of
Portfolio assets.
<TABLE>
<CAPTION>
HIGH HIGH
MONEY GRADE YIELD VALUE
MARKET BOND MANAGED BOND GROWTH BLUE CHIP
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT PRACTICES
Reverse Repurchase Agreements [C] [C] [C] [C] [C] [C]
Repurchase Agreements [C] [C] [C] [C] [C] [C]
Securities Lending 20 20 20 20 20 20
Short-term Trading [C] [C] [C] [C] [C] [C]
When-Issued and Delayed Delivery
Securities X X X X X X
CONVENTIONAL SECURITIES
Shares of Other Investment
Companies 5 5 5 5 5 5
Non-Investment Grade Securities x [C] [C] X x x
Securities of Foreign Issuers(1) x 25 25 25 25 x
Illiquid Securities(2) 10 15 15 15 15 10
Restricted Securities X X X X X X
Capital Securities x X X X X x
Mortgage-backed Securities x X X X x x
OPTION CONTRACTS
Writing Covered Call Options on
Securities x [C] [C] [C] [C] [C]
</TABLE>
(1) U.S. dollar-denominated securities only.
(2) Percentages refer to net, rather than total, assets.
LEGEND
30 A number indicates the maximum percentage of total assets that the
Portfolio is permitted to invest in that practice or type of security.
Numbers in this table show allowable usage only; for actual usage,
consult the Portfolio's annual and semi-annual reports.
X A solid check mark means that there is no policy limitation on the
Portfolio's usage of that practice or type of security, and that the
Portfolio may be currently using that practice or investing in that type
of security.
[C] A hollow check mark means that the Portfolio is permitted to use that
practice or invest in that type of security, but is not expected to
do so on a regular basis.
x An "x" mark means that the Portfolio is not permitted to use that
practice or invest in that type of security.
20
<PAGE>
- --------------------------------------------------------------------------------
HIGHER RISK SECURITIES AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
SECURITIES OF FOREIGN ISSUERS
The Value Growth Portfolio and Managed Portfolio each may invest up to 25%
of its net assets in equity and debt securities of foreign issuers, and the
High Grade Bond Portfolio and High Yield Bond Portfolio each may invest up
to 25% of its net assets in debt securities of foreign issuers, to the
extent the purchase of such foreign securities is otherwise consistent with
the Portfolio's investment objectives. Investments are made only in
securities of foreign issuers that are traded on U.S. exchanges and payable
or denominated in U.S. dollars.
Investments in securities of foreign issuers (including ADRs) may offer
potential benefits not available from investments solely in securities of
domestic issuers. Investing in securities of foreign issuers involves
significant risks that are not typically associated with investing in
domestic securities. Such investments may be affected by changes in currency
rates, changes in foreign or U.S. laws, or restrictions applicable to such
investments and in exchange control regulations.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies, and there may be less publicly available information about a
foreign issuer than about a domestic one. In addition, there is generally
less government regulation of stock exchanges, brokers, and listed and
unlisted issuers in foreign countries than in the U.S. Furthermore, with
respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, limitations on the removal of cash or other
assets of a Portfolio, or political or social instability or diplomatic
developments which could affect investments in those countries. Individual
foreign economies also may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
Although ADRs acquired by the Portfolios are traded on domestic exchanges,
their values largely reflect the value(s) of the underlying security on
foreign securities markets. The values of such underlying securities are a
function of a number of factors, including the following. Some foreign stock
markets (and other securities markets) may have substantially less volume
than, for example, the New York Stock Exchange (or other domestic markets)
and securities of some foreign issuers may be less liquid than securities of
comparable domestic issuers. Commissions and dealer mark-ups on transactions
in foreign investments may be higher than for similar transactions in the
U.S. In addition, clearance and settlement procedures may be different in
foreign countries and, in certain markets, on certain occasions, such
procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
- --------------------------------------------------------------------------------
LOWER-RATED DEBT SECURITIES
The High Yield Bond Portfolio invests a substantial portion of its assets in
income bearing securities offering high current income. Additionally, the
High Grade Bond Portfolio may invest a portion of its assets in such
securities. Such high yielding income bearing securities often do not meet
the High Grade or Investment Grade quality level. Securities falling short
of Investment Grade are commonly known as "junk bonds." These lower-rated
securities are, on balance, predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with their terms
and generally entail more credit risk than higher-rated securities. The
market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher-rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than higher-rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower-rated
securities may depress prices and diminish liquidity for such securities.
Factors adversely affecting the market value of lower-rated securities
adversely affects a Portfolio's net asset value. In addition, a Portfolio
may incur additional expenses to the extent it were required to seek
recovery upon a default in the payment of principal or interest on its
income bearing securities. Although some risk is inherent in all
21
<PAGE>
securities, holders of income bearing debt securities have a claim on the
assets of the issuer prior to the holders of common stock. Therefore, an
investment in such securities generally entails less financial risk than an
investment in equity securities of the same issuer.
Lower-rated securities may be issued by corporations in the early stages of
their development. They may also be issued in connection with a corporate
reorganization or as part of a corporate takeover. Companies that issue such
high-yielding lower-rated securities are often highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with Investment Grade securities. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of lower-rated securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss
due to default by the issuer is significantly greater for the holders of
lower-rated income bearing securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer.
Lower-rated income bearing securities frequently have call or buy-back
features that would permit an issuer to call or repurchase the security from
the Portfolio. If a call were exercised by the issuer during a period of
declining interest rates, a Portfolio would likely have to replace such
called security with a lower-yielding security, thus decreasing the net
investment income to the Portfolio. The premature disposition of a
lower-rated high-yielding security because of a call or buy-back feature,
the deterioration of the issuer's creditworthiness or a default may also
make it more difficult for a Portfolio to time its receipt of income, which
may have tax implications.
A Portfolio may have difficulty disposing of certain lower-rated securities
for which there is a thin trading market. Because not all dealers maintain
markets in all lower-rated securities, there is no established retail
secondary market for many of these securities, and the Fund anticipates that
they could be sold only to a limited number of dealers or institutional
investors. To the extent there is a secondary trading market for lower-rated
securities, it is generally not so liquid as that for Investment Grade
securities. The lack of a liquid secondary market may have an adverse impact
on market value of such securities and a Portfolio's ability to dispose of
them when necessary to meet the Portfolio's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness
of the issuer. The lack of a liquid secondary market for certain securities
may also make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing a Portfolio's assets. Market quotations
are generally available on many high yield issues only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
It is likely that a major economic recession could severely affect the
market for and the values of lower-rated securities, as well as the ability
of the issuers of such securities to repay principal and pay interest
thereon.
A Portfolio may acquire lower-rated securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. The SAI contains more information about the risks of
restricted securities. A Portfolio may acquire lower-rated securities during
an initial offering. Such securities involve special risks because they are
new issues.
Additional information regarding the rating categories for income bearing
debt securities appears in the appendices of the SAI.
- --------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Any of the Portfolios may purchase newly-issued securities on a
"when-issued" basis and may purchase or sell securities on a "delayed
delivery" basis. When-issued or delayed delivery transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery to take place at a future date. These transactions
allow the Portfolio to lock in an attractive purchase price or yield on a
security the Portfolio intends to purchase or an attractive sale price on a
security the Portfolio intends to sell. Normally, settlement occurs within
one month of the purchase
22
<PAGE>
or sale. During the period between purchase or sale and settlement, no
payment is made or received by a Portfolio and, for delayed delivery
purchases, no interest accrues to the Portfolio. A Portfolio will only make
commitments to purchase securities on a when-issued or delayed delivery
basis with the intention of actually acquiring the securities, but each
Portfolio reserves the right to sell such securities before the settlement
date if deemed advisable.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will segregate the security on the
Fund's accounting records, record the transaction and reflect the amount due
and the market value of the security in determining its net asset value.
Likewise, at the time a Portfolio makes the commitment to sell a security on
a delayed delivery basis, it will segregate the security on the Fund's
accounting records, record the transaction and include the proceeds to be
received in determining its net asset value. Accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment
are not reflected in the net asset value so long as the commitment remains
in effect.
- --------------------------------------------------------------------------------
COVERED CALL OPTIONS
Each Portfolio (other than the Money Market Portfolio) may write (sell)
covered call options on portfolio securities representing up to 100% of its
net assets in an attempt to enhance investment performance or to reduce the
risks associated with investments. A call option gives the purchaser the
right to buy, and the writer the obligation to sell, an underlying security
at a particular exercise price during the option period. A Portfolio will
write call options only on a covered basis, which means that the Portfolio
will own the underlying security subject to the call option at all times
during the option period. Options written by a Portfolio will normally have
expiration dates between three and nine months from the date written. Such
options and the securities underlying the option will both be listed on
national securities exchanges, except for certain transactions in debt
securities and related options need not be so listed.
The advantage to a Portfolio of writing covered call options is that the
Portfolio receives a premium which constitutes additional income, which
would serve both to enhance investment performance and to offset in whole or
in part any decline in value of the underlying security. However, the
disadvantage is that during the option period the Portfolio would give up
the potential for capital appreciation above the exercise price if the
underlying security were to rise in value; and that, unless a closing
purchase transaction is effected, the Portfolio will be required to continue
to hold the underlying security for the entire option period, and would bear
the risk of loss if the price of the security were to decline.
- --------------------------------------------------------------------------------
CAPITAL SECURITIES
Each Portfolio (other than the Money Market and Blue Chip Portfolios) may
invest in capital (trust-preferred) securities. Capital securities are
issued by trusts or other special purpose entities created to invest in (or
pool) junior subordinated debentures. Capital securities pay interest on a
fixed schedule (although issuers often may defer interest payments for up to
five years) and have a maturity date. Capital securities have no voting
rights and have a preference over common and preferred stock, but stand
behind senior debt securities in the event of the issuer's liquidation. The
trust or other special purpose entity may terminate and distribute the
debentures to holders of the capital securities. Generally, capital
securities exhibit characteristics, and entail associated risks, of both
debt securities and preferred stock. For purposes of investment limits
applicable to a Portfolio, the Fund treats capital securities as debt. For
tax purposes, the Internal Revenue Service currently treats them as debt
securities as well. In the past, legislation has been proposed that would
have change the tax treatment of capital securities and if this treatment
changes in the future, the Adviser would reconsider the appropriateness of
continued investment in them.
23
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
EquiTrust Investment Management Services, Inc. (formerly known as FBL
Investment Advisory Services, Inc.), 5400 University Avenue, West Des
Moines, Iowa 50266, serves as the Fund's investment adviser and manager
pursuant to an Investment Advisory and Management Services Agreement. This
relationship has existed since the Fund commenced operations in 1987.
The Adviser is an indirect subsidiary of FBL Financial Group, Inc., an Iowa
corporation. At December 31, 1998, 54.30% of the outstanding voting shares
of FBL Financial Group, Inc. was owned by Iowa Farm Bureau Federation. The
following individuals are officers and/or directors of the Adviser and are
officers and/or trustees of the Fund: Stephen M. Morain, Thomas R. Gibson,
William J. Oddy, Timothy J. Hoffman, Dennis M. Marker, James W. Noyce, Lou
Ann Sandburg, Sue A. Cornick, Kristi Rojohn and Elaine A. Followwill. The
Adviser also acts as the investment adviser to individuals, institutions and
two other investment companies: EquiTrust Money Market Fund, Inc. and
EquiTrust Series Fund, Inc. Personnel of the Adviser also manage investments
for the portfolios of insurance companies.
The Adviser handles the investment and reinvestment of the Fund's assets,
and is responsible for the overall management of the Fund's business
affairs, subject to the review of the Board of Trustees.
Roger F. Grefe and Robert J. Rummelhart serve as managers for various
portfolios of the Fund. Mr. Grefe joined EquiTrust in 1986 and has managed
the Value Growth and Managed Portfolios since their inception in 1987. Mr.
Grefe is a graduate of Coe College in Cedar Rapids, Iowa and is a Chartered
Financial Analyst and NASD Registered Principal.
Mr. Rummelhart has managed both the High Grade Bond and High Yield Bond
Portfolios since their inception in 1987. He received his BA and MBA degrees
from the University of Iowa and is a Chartered Financial Analyst and NASD
Registered Representative.
The Adviser provides investment supervision to the Blue Chip Portfolio
through the use of a team approach. As cash accumulates for investment,
trading personnel are notified to execute the necessary transactions in
order to maintain the relative weights of the equity securities in this
Portfolio.
As compensation for the advisory and management services provided by the
Adviser, the Fund has agreed to pay the Adviser an annual management fee,
accrued daily and payable monthly, based on the average daily net assets of
each Portfolio as follows:
<TABLE>
<CAPTION>
AGGREGATE MANAGEMENT FEES
PAID TO THE ADVISER DURING
MAXIMUM THE FISCAL YEAR ENDED
PORTFOLIO MANAGEMENT FEE DECEMBER 31, 1998
<S> <C> <C>
Money Market 0.25% $ 14,320
High Grade Bond 0.30% $ 22,977
Managed 0.45% $ 239,288
High Yield Bond 0.45% $ 55,831
Value Growth 0.45% $ 203,671
Blue Chip 0.20% $ 95,465
</TABLE>
The Adviser, at its expense, furnishes the Fund with office space and
facilities, equipment, advisory, research and statistical facilities, and
clerical services and personnel to administer the business affairs of the
Fund. The Fund pays its other expenses which include, but are not limited
to, the following: net asset value calculations; portfolio transaction
costs; interest on Fund obligations; miscellaneous
24
<PAGE>
reports; membership dues; reports and notices to Shareholders; all expenses
of registration of its shares under federal and state securities laws;
investor services (including allocable telephone and personnel expenses);
all taxes and fees payable to federal, state or other governmental
authorities; fees of Trustees who are not affiliated with the Adviser; and
the fees and expenses of independent public auditors, legal counsel,
custodian, and transfer and dividend disbursing agents.
The Adviser has agreed to reimburse any Portfolio to the extent that the
annual operating expenses (including the investment advisory fee but
excluding brokerage, interest, taxes and extraordinary expenses) of that
Portfolio exceed 1.50% of the average daily net assets of that Portfolio for
any fiscal year of the Portfolio. However, the amount reimbursed shall not
exceed the amount of the advisory fee paid by the Portfolio for such period.
This reimbursement agreement will remain in effect as long as the Investment
Advisory Agreement remains in effect and cannot be changed without
shareholder approval. Additionally, the Adviser has voluntarily agreed to
reimburse any Portfolio to the extent that annual operating expenses,
including the investment advisory fee, exceed .65%. However, the Adviser is
not obligated to continue to reimburse the Portfolios for such expenses
beyond December 31, 1999.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
YEAR 2000
Many data processing systems were designed using only two digits to signify
the year (for example, "99" for "1999"). On January 1, 2000, if these data
processing systems are not corrected, they may incorrectly interpret "00" as
the year "1900" rather than the year "2000", leading to computer shutdowns
and errors (commonly known as "year 2000 problems"). To the extent that
these systems conduct forward-looking calculations, such problems may occur
prior to January 1, 2000. In providing investment advisory services to the
Portfolios and other services to the Fund, the Adviser utilizes data
processing systems that may be affected by year 2000 problems. The Adviser
and the Fund also rely on service providers, including banks, custodians and
transfer agents that also may be affected. Like other mutual funds and
financial and business organizations, the Adviser and other service
providers could be adversely affected in their ability to process securities
trades, price securities, provide shareholder account services and otherwise
conduct the Fund's normal business operations if data processing systems
that they use experience year 2000 problems. The Adviser has developed, and
is in the process of implementing, a Year 2000 transition plan with respect
to systems that it operates, and is confirming that the Fund's other service
providers are also so engaged. The resources that are being devoted to this
effort are substantial. It is difficult to predict with precision whether
the amount of resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on the Adviser and the Fund. As of the date of
this prospectus, the Adviser does not anticipate that Shareholders will
experience negative effects on investments in the Portfolios, or on the
services provided to them on behalf of the Fund, as a result of year 2000
problems. However, there can be no assurance that the Adviser will be
successful, or that interaction with other service proviers will not impair
the Adviser's and the Fund's services on or before January 1, 2000.
- --------------------------------------------------------------------------------
DISTRIBUTOR
The Adviser also is the distributor and principal underwriter of the Fund's
shares.
- --------------------------------------------------------------------------------
NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of the
earlier of 3:00 p.m. (Central Time) or the close of the New York Stock
Exchange, on each day that (i) the New York Stock Exchange is open for
business (except the day after Thanksgiving, the weekdays before and after
25
<PAGE>
Christmas (in 1999), the weekday after New Year's Day (in 2000) and any day
on which the Fund offices are closed because of a weather-related or
comparable type of emergency); and (ii) an order for purchase or redemption
of shares of the Portfolio is received. The net asset value per share of
each Portfolio is computed by dividing the total value of the Portfolio's
securities and other assets, less liabilities, by the total number of
outstanding shares of such Portfolio.
The Fund reserves the right to calculate or estimate the net asset value of
a Portfolio more frequently than once daily if deemed desirable. If the Fund
offices should be closed because of a weather-related or comparable type of
emergency and the Fund is unable to segregate orders and redemption requests
received on that day, the Fund will price those orders and redemptions at
the net asset value next determined for each Portfolio.
MONEY MARKET PORTFOLIO. The Money Market Portfolio's securities are valued
using the amortized cost method of valuation. This involves valuing a
security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity.
For a further discussion of the manner in which such values are determined,
see the Statement of Additional Information under the heading "Net Asset
Value."
OTHER PORTFOLIOS. Portfolio securities that are traded on a national
exchange are valued at the last sale price as of the close of business on
the day the securities are being valued, or, lacking any sales, at the mean
between the closing bid and asked prices. Securities, other than money
market instruments, traded in the over-the-counter market are valued at the
mean between the bid and asked prices or yield equivalent as obtained from
one or more dealers that make markets in the securities. Portfolio
securities that are traded both in the over-the-counter market and on a
national exchange are valued according to the broadest and most
representative market; and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Values of securities and
assets for which market quotations are not readily available are determined
in good faith by, or under the direction of, the Board of Trustees.
Money market instruments are valued at market value, except that debt
instruments maturing in 60 days or less are valued using the amortized cost
method of valuation described above with respect to the Money Market
Portfolio.
- --------------------------------------------------------------------------------
SHAREHOLDERS
Other than shares sold to Farm Bureau Life Insurance Company to seed the
Fund, shares of the Fund are offered only to separate accounts of certain
life insurance companies ("Participating Insurance Companies") to fund
variable annuity contracts ("VA contracts") and variable life insurance
policies ("VLI policies") issued by such life insurance companies. The Fund
currently does not foresee any disadvantages to the holders of VA contracts
and VLI policies arising from the fact that the interests of the holders of
such contracts and policies may differ. Nevertheless, the Board of Trustees
intends to monitor events in order to identify any material irreconcilable
conflicts that possibly may arise and to determine what action, if any,
should be taken in response to those events or conflicts. Farm Bureau Life
Insurance Company will purchase shares of the Fund to serve as the
underlying investment for VLI policies and VA contracts. The VA contracts
and VLI policies are described in the separate prospectuses for the
contracts and policies issued by the Participating Insurance Companies. The
Fund assumes no responsibility for such prospectuses.
Individual VA contract holders and VLI policyowners are not "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their
separate accounts are the shareholders (the "Shareholders"), although such
companies pass through voting rights to their VA contract holders and VLI
policyowners. The interest of a contract holder or policyowner in the Fund
is described in his or her VA contract or VLI policy and in the current
prospectus for such contract or policy.
26
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
VALUE GROWTH, BLUE CHIP AND MANAGED PORTFOLIO DISTRIBUTIONS: Each Portfolio
normally follows the practice of distributing substantially all net
investment income and substantially all net short-term and long-term capital
gains, if any, during the Fund's fiscal year.
HIGH GRADE BOND AND HIGH YIELD BOND PORTFOLIO DISTRIBUTIONS: On each day
that a Portfolio's net asset value per share is calculated, that Portfolio's
net investment income will be declared, as of the close of the New York
Stock Exchange, as a dividend to Shareholders of record prior to the
declaration. Any net short-term and long-term gains will be declared and
distributed periodically, but in no event less frequently than annually.
MONEY MARKET PORTFOLIO DISTRIBUTIONS: On each day that the net asset value
per share of the Money Market Portfolio is determined, the Money Market
Portfolio's net investment income will be declared, as of the close of the
New York Stock Exchange, as a dividend to Shareholders of record prior to
the declaration.
It is the Fund's intention to distribute substantially all its net
investment income, if any, and any net realized capital gains of each
Portfolio. All distributions are reinvested in additional shares of the
respective Portfolio at net asset value.
TAXES
For federal income tax purposes, each Portfolio will be treated as a
separate entity. Each Portfolio intends to qualify each year as a "regulated
investment company" under the Internal Revenue Code as amended ("Code"). By
so qualifying, a Portfolio will not be subject to federal income taxes to
the extent that its net investment income and net realized capital gains are
distributed to the separate accounts of insurance companies. Further, each
Portfolio intends to meet certain diversification requirements applicable to
mutual funds underlying variable life insurance policies and variable
annuity contracts.
The Shareholders of the Portfolios are the separate accounts of
Participating Insurance Companies. Under current law, owners of variable
life insurance policies and variable annuity contracts which have invested
in a Portfolio are not subject to federal income tax on Portfolio
distribution or on gains realized upon the sale or redemption of Portfolio
shares until they are withdrawn from the policies or contracts. For
information concerning the federal tax consequences to the purchasers of the
VLI policies and VA contracts, see the attached prospectus for such policy
or contract.
For more information about the tax status of the Portfolios, see "Taxes" in
the SAI.
27
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand each
Portfolio's financial performance for the past five years. Certain
information reflects financial results for a single share of a Portfolio.
The total returns in the table represent the rate that an investment in the
Portfolio would have earned assuming reinvestment of all dividends and
distributions. This information has been audited by Ernst & Young LLP,
independent auditors, whose report, along with the Fund's financial
statements, are included in the SAI.
<TABLE>
<CAPTION>
VALUE GROWTH PORTFOLIO
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net asset value, beginning of year......... $ 12.58 $ 13.13 $ 12.31 $ 10.39 $ 11.52
<S> <C> <C> <C> <C> <C>
Income from Investment Operations
Net investment income.................. 0.22 0.28 0.35 0.55 0.48
Net gains or losses on securities (both
realized and unrealized)............. (3.29) 0.55 1.82 2.13 (0.99)
-------- -------- -------- -------- --------
Total from investment operations......... (3.07) 0.83 2.17 2.68 (0.51)
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income).............................. (0.01) (0.28) (0.30) (0.50) (0.36)
Distributions (from capital gains)..... (0.95) (1.05) (0.26) (0.11)
Distributions in excess of net realized
gains................................ (0.15) (0.15)
-------- -------- -------- -------- --------
Total distributions...................... (0.01) (1.38) (1.35) (0.76) (0.62)
-------- -------- -------- -------- --------
Net asset value, end of year............... $ 9.50 $ 12.58 $ 13.13 $ 12.31 $ 10.39
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return:
Total investment return based on net
asset value (1)........................ (24.43)% 6.30% 17.65% 25.87% (4.43)%
Ratios/Supplemental Data:
Net assets, end of year (000's
omitted)............................... $42,664 $43,466 $27,188 $16,295 $10,603
Ratio of total expenses to average net
assets................................. 0.56% 0.55% 0.55% 0.55% 0.55%
Ratio of net expenses to average net
assets................................. 0.55%
Ratio of net income to average net
assets................................. 2.17% 2.43% 2.68% 4.78% 4.35%
Portfolio turnover rate.................. 230% 118% 72% 98% 78%
Information assuming no voluntary
reimbursement or waiver by EquiTrust
Investment Management Services, Inc. of
excess operating expenses:
Per share net investment income.......... $ 0.27 $ 0.33 $ 0.53 $ 0.46
Ratio of expenses to average net
assets................................. 0.58% 0.69% 0.72% 0.77%
Amount reimbursed........................ $14,093 $29,686 $22,306 $16,706
<CAPTION>
HIGH GRADE BOND PORTFOLIO
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net asset value, beginning of year......... $ 10.11 $ 9.83 $ 9.98 $ 9.44 $ 10.23
<S> <C> <C> <C> <C> <C>
Income from Investment Operations
Net investment income.................. 0.66 0.69 0.72 0.77 0.76
Net gains or losses on securities (both
realized and unrealized)............. 0.08 0.28 (0.15) 0.54 (0.79)
-------- -------- -------- -------- --------
Total from investment operations......... 0.74 0.97 0.57 1.31 (0.03)
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income).............................. (0.66) (0.69) (0.72) (0.77) (0.76)
Distributions (from capital gains).....
Distributions in excess of net realized
gains................................
-------- -------- -------- -------- --------
Total distributions...................... (0.66) (0.69) (0.72) (0.77) (0.76)
-------- -------- -------- -------- --------
Net asset value, end of year............... $ 10.19 $ 10.11 $ 9.83 $ 9.98 $ 9.44
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return:
Total investment return based on net
asset value (1)........................ 7.51% 10.24% 5.94% 14.26% (0.26)%
Ratios/Supplemental Data:
Net assets, end of year (000's
omitted)............................... $10,255 $ 5,374 $ 3,535 $ 3,208 $ 2,452
Ratio of total expenses to average net
assets................................. 0.50% 0.52% 0.55% 0.55% 0.55%
Ratio of net expenses to average net
assets................................. 0.46%
Ratio of net income to average net
assets................................. 6.44% 6.94% 7.22% 7.81% 7.76%
Portfolio turnover rate.................. 46% 31% 32% 14% 15%
Information assuming no voluntary
reimbursement or waiver by EquiTrust
Investment Management Services, Inc. of
excess operating expenses:
Per share net investment income.......... $ 0.68 $ 0.70 $ 0.74 $ 0.73
Ratio of expenses to average net
assets................................. 0.57% 0.80% 0.84% 0.80%
Amount reimbursed........................ $ 2,294 $ 8,233 $ 8,255 $ 6,207
</TABLE>
Note: Per share amounts have been calculated on the basis of monthly per share
amounts (using average monthly outstanding shares) accumulated for the
period.
(1) Total investment return is calculated assuming an initial investment made at
the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period.
28
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND PORTFOLIO
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net asset value, beginning of
year.............................. $ 10.21 $ 9.91 $ 9.69 $ 9.32 $ 10.44
<S> <C> <C> <C> <C> <C>
Income from Investment Operations
Net investment income.......... 0.71 0.79 0.84 0.87 0.91
Net gains or losses on
securities (both realized and
unrealized).................. (0.03) 0.36 0.33 0.49 (1.01)
-------- -------- -------- -------- --------
Total from investment
operations..................... 0.68 1.15 1.17 1.36 (0.10)
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income)...................... (0.71) (0.79) (0.84) (0.87) (0.91)
Distributions (from capital
gains)....................... (0.01) (0.06) (0.11) (0.12) (0.11)
Distributions in excess of net
realized gains...............
-------- -------- -------- -------- --------
Total distributions.............. (0.72) (0.85) (0.95) (0.99) (1.02)
-------- -------- -------- -------- --------
Net asset value, end of year....... $ 10.17 $ 10.21 $ 9.91 $ 9.69 $ 9.32
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return:
Total investment return based on
net asset
value (1)...................... 6.88% 12.07% 12.65% 15.15% (1.01)%
Ratios/Supplemental Data:
Net assets, end of year (000's
omitted)....................... $15,680 $ 8,623 $ 5,929 $ 4,810 $ 4,172
Ratio of total expenses to
average net assets............. 0.61% 0.57% 0.55% 0.55% 0.55%
Ratio of net expenses to average
net assets..................... 0.58%
Ratio of net income to average
net assets..................... 6.92% 7.74% 8.47% 8.96% 9.17%
Portfolio turnover rate.......... 43% 35% 30% 32% 10%
Information assuming no voluntary
reimbursement or waiver by
EquiTrust Investment Management
Services, Inc. of excess operating
expenses:
Per share net investment
income......................... $ 0.78 $ 0.81 $ 0.84 $ 0.88
Ratio of expenses to average net
assets......................... 0.65% 0.87% 0.88% 0.84%
Amount reimbursed................ $ 5,819 $17,094 $15,105 $12,667
<CAPTION>
MANAGED PORTFOLIO
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net asset value, beginning of
year.............................. $ 12.55 $ 12.40 $ 11.71 $ 9.93 $ 11.33
<S> <C> <C> <C> <C> <C>
Income from Investment Operations
Net investment income.......... 0.53 0.53 0.60 0.65 0.66
Net gains or losses on
securities (both realized and
unrealized).................. (1.63) 0.79 1.44 1.90 (1.22)
-------- -------- -------- -------- --------
Total from investment
operations..................... (1.10) 1.32 2.04 2.55 (0.56)
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income)...................... (0.52) (0.50) (0.59) (0.54)
Distributions (from capital
gains)....................... (0.65) (0.85) (0.18) (0.23)
Distributions in excess of net
realized gains............... (0.07)
-------- -------- -------- -------- --------
Total distributions.............. (1.17) (1.35) (0.77) (0.84)
-------- -------- -------- -------- --------
Net asset value, end of year....... $ 11.45 $ 12.55 $ 12.40 $ 11.71 $ 9.93
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return:
Total investment return based on
net asset
value (1)...................... (8.71)% 10.67% 17.39% 25.69% (4.96)%
Ratios/Supplemental Data:
Net assets, end of year (000's
omitted)....................... $56,434 $44,949 $26,022 $14,487 $ 9,758
Ratio of total expenses to
average net assets............. 0.55% 0.54% 0.55% 0.55% 0.55%
Ratio of net expenses to average
net assets..................... 0.54%
Ratio of net income to average
net assets..................... 4.97% 4.94% 4.73% 5.80% 6.23%
Portfolio turnover rate.......... 74% 52% 82% 48% 59%
Information assuming no voluntary
reimbursement or waiver by
EquiTrust Investment Management
Services, Inc. of excess operating
expenses:
Per share net investment
income......................... $ 0.52 $ 0.57 $ 0.62 $ 0.63
Ratio of expenses to average net
assets......................... 0.60% 0.75% 0.77% 0.80%
Amount reimbursed................ $17,771 $38,874 $26,008 $19,147
</TABLE>
Note: Per share amounts have been calculated on the basis of monthly per share
amounts (using average monthly outstanding shares) accumulated for the
period.
(1) Total investment return is calculated assuming an initial investment made at
the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period.
29
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net asset value, beginning of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
<S> <C> <C> <C> <C> <C>
Income from Investment Operations
Net investment income................ 0.05 0.05 0.05 0.05 0.04
Net gains or losses on securities
(both realized and unrealized).....
-------- -------- -------- -------- --------
Total from investment operations....... 0.05 0.05 0.05 0.05 0.04
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income)............................ (0.05) (0.05) (0.05) (0.05) (0.04)
Distributions (from capital gains)...
Distributions in excess of net
realized
gains..............................
-------- -------- -------- -------- --------
Total distributions.................... (0.05) (0.05) (0.05) (0.05) (0.04)
-------- -------- -------- -------- --------
Net asset value, end of year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return:
Total investment return based on net
asset value (1)...................... 5.00% 5.07% 4.90% 5.47% 3.68%
Ratios/Supplemental Data:
Net assets, end of year (000's
omitted)............................. $ 6,042 $ 6,078 $ 3,819 $ 3,159 $ 2,658
Ratio of total expenses to average net
assets............................... 0.52% 0.48% 0.55% 0.55% 0.55%
Ratio of net expenses to average net
assets............................... 0.45%
Ratio of net income to average net
assets............................... 4.67% 4.65% 4.58% 5.27% 3.63%
Portfolio turnover rate................ 0% 0% 0% 0% 0%
Information assuming no voluntary
reimbursement or waiver by EquiTrust
Investment Management Services, Inc. of
excess operating expenses:
Per share net investment income........ $ 0.05 $ 0.04 $ 0.05 $ 0.04
Ratio of expenses to average net
assets............................... 0.55% 0.82% 0.90% 0.82%
Amount reimbursed...................... $ 2,912 $ 9,569 $ 9,816 $ 7,157
<CAPTION>
BLUE CHIP PORTFOLIO
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net asset value, beginning of year....... $ 31.01 $ 24.68 $ 20.70 $ 15.82 $ 15.67
<S> <C> <C> <C> <C> <C>
Income from Investment Operations
Net investment income................ 0.49 0.42 0.45 0.39 0.34
Net gains or losses on securities
(both realized and unrealized)..... 5.37 6.34 3.99 4.80 0.07
-------- -------- -------- -------- --------
Total from investment operations....... 5.86 6.76 4.44 5.19 0.41
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income)............................ (0.42) (0.34) (0.31) (0.26)
Distributions (from capital gains)... (0.01) (0.12)
Distributions in excess of net
realized
gains..............................
-------- -------- -------- -------- --------
Total distributions.................... (0.43) (0.46) (0.31) (0.26)
-------- -------- -------- -------- --------
Net asset value, end of year............. $ 36.87 $ 31.01 $ 24.68 $ 20.70 $ 15.82
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return:
Total investment return based on net
asset value (1)...................... 18.91% 27.41% 21.43% 32.81% 2.65%
Ratios/Supplemental Data:
Net assets, end of year (000's
omitted)............................. $60,850 $31,865 $14,493 $ 6,665 $ 3,262
Ratio of total expenses to average net
assets............................... 0.30% 0.33% 0.48% 0.55% 0.55%
Ratio of net expenses to average net
assets............................... 0.29%
Ratio of net income to average net
assets............................... 1.72% 1.83% 1.92% 2.07% 2.19%
Portfolio turnover rate................ 12% 3% 2% 1% 0%
Information assuming no voluntary
reimbursement or waiver by EquiTrust
Investment Management Services, Inc. of
excess operating expenses:
Per share net investment income........ $ 0.38 $ 0.30
Ratio of expenses to average net
assets............................... 0.59% 0.81%
Amount reimbursed...................... $ 1,952 $ 6,360
</TABLE>
Note: Per share amounts have been calculated on the basis of monthly per share
amounts (using average monthly outstanding shares) accumulated for the
period.
(1) Total investment return is calculated assuming an initial investment made at
the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period.
30
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS:
Additional information about each Portfolio's investments is available in
the Fund's annual and semi-annual reports to shareholders. The Fund's annual
report to shareholders contains a discussion of the market conditions and
investment strategies that significantly affected each Portfolio's
performance during the fiscal year covered by the report.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION:
The SAI, which contains additional information about the Fund, has been
filed with the SEC and is incorporated herein by reference. Information
about the Fund (including the SAI) can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information about the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Reports
and other information about the Fund are available on the SEC's Internet
site at http://www.sec.gov. and copies of this information is available,
upon paying a duplication fee, by writing the Public Reference Section of
the SEC, Washington, D.C. 20549-6009.
A free copy of the Fund's SAI and annual report may be obtained and further
inquiries may be made by calling the Fund at 1-800-247-4170 or by writing
the Fund at 5400 University Avenue, West Des Moines, Iowa 50266.
31
<PAGE>
- --------------------------------------------------------------------------------
EQUITRUST VARIABLE INSURANCE SERIES FUND
- --------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
EquiTrust Variable Insurance Series Fund (the "Fund") is an open-end diversified
management investment company which consists of six Portfolios: Money Market
Portfolio, High Grade Bond Portfolio, Managed Portfolio, High Yield Bond
Portfolio, Value Growth Portfolio and Blue Chip Portfolio. Each Portfolio has
distinct investment objectives and policies and each is in effect a separate
fund issuing its own shares.
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Prospectus of the Fund dated May 1, 1999. The
audited financial statements of the Fund, including the notes thereto, contained
in the Annual Report to Shareholders of EquiTrust Variable Insurance Series Fund
for the fiscal year ended December 31, 1998 were filed with the Securities and
Exchange Commission (the "Commission") on February 23, 1999 and are incorporated
by reference.
A copy of the Prospectus or Annual Report may be obtained without charge by
calling the Participating Insurance Companies or by writing or calling the Fund
at the address and telephone number shown above. Terms not defined herein shall
have the meanings given them in the Prospectus.
EquiTrust Mutual Funds
5400 University Avenue
West Des Moines, Iowa 50266
800-247-4170
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND TECHNIQUES.... 1
The Fund.................................... 1
Investment Objectives....................... 1
Investment Strategies and Techniques........ 2
INVESTMENT RESTRICTIONS........................... 9
Fundamental Policies........................ 9
Non-Fundamental (Operating) Policies........ 11
OFFICERS AND TRUSTEES............................. 11
INVESTMENT ADVISER................................ 15
UNDERWRITING AND DISTRIBUTION EXPENSES............ 18
PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS..................................... 18
PORTFOLIO TURNOVER................................ 20
PURCHASES AND REDEMPTIONS......................... 20
Purchase of Shares.......................... 20
Redemption of Shares........................ 20
NET ASSET VALUE................................... 21
Money Market Portfolio...................... 21
Other Portfolios............................ 22
TAXES............................................. 22
DIVIDENDS AND DISTRIBUTIONS....................... 23
Money Market Portfolio...................... 23
High Grade Bond and High Yield Bond
Portfolios................................. 24
Other Portfolios............................ 24
PERFORMANCE INFORMATION........................... 24
Performance Calculation..................... 25
ORGANIZATION OF THE FUND.......................... 28
SHAREHOLDER VOTING RIGHTS......................... 29
CONTROL PERSONS................................... 30
OTHER INFORMATION................................. 30
Custodian................................... 30
Independent Auditors........................ 30
Accounting Services......................... 30
Dividend Disbursing and Transfer Agent...... 31
Legal Matters............................... 31
Registration Statement...................... 31
FINANCIAL STATEMENTS.............................. 31
APPENDIX A........................................ A-1
APPENDIX B........................................ B-1
APPENDIX C........................................ C-1
</TABLE>
i
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND TECHNIQUES
- --------------------------------------------------------------------------------
THE FUND
EquiTrust Variable Insurance Series Fund (the "Fund") was established as a
Massachusetts Business Trust under a Declaration of Trust dated November 3,
1986. The Fund is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). It is a series-type investment company consisting
of the Money Market Portfolio, High Grade Bond Portfolio, Managed Portfolio,
High Yield Bond Portfolio, Value Growth Portfolio and Blue Chip Portfolio
(individually, a "Portfolio"; collectively, the "Portfolios"). The Board of
Trustees of the Fund (the "Board of Trustees") may provide for additional
portfolios at any time.
Other than shares sold to Farm Bureau Life Insurance Company to seed the
Fund, shares of the Fund are offered only to separate accounts of certain
life insurance companies ("Participating Insurance Companies") to fund
variable annuity contracts ("VA contracts") and variable life insurance
policies ("VLI policies") issued by such life insurance companies. The Fund
currently does not foresee any disadvantage to the holders of VA contracts
and VLI policies arising from the fact that the interests of the holders of
such contracts and policies may differ. Nevertheless, the Board of Trustees
intends to monitor events in order to identify any material irreconcilable
conflicts that possibly may arise and to determine what action, if any,
should be taken in response to those events or conflicts.
Farm Bureau Life Insurance Company will purchase shares of the Fund to serve
as the underlying investment for VLI policies and VA contracts. The VA
contracts and VLI policies are described in the separate prospectuses for
the contracts and policies issued by the Participating Insurance Companies.
The Fund assumes no responsibility for such prospectuses.
Individual VA contract holders and VLI policyowners are not "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their
separate accounts are the shareholders (the "Shareholders"), although such
companies pass through voting rights to their VA contract holders and VLI
policyowners. The interest of a contract holder or policyowner in the Fund
is described in his or her VA contract or VLI policy and in the current
prospectus for such contract or policy.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
<TABLE>
<CAPTION>
The investment objective(s) of each Portfolio is set forth below.
<S> <C>
Money Market Portfolio Seeks maximum current income consistent with liquidity and
stability of principal.
High Grade Bond Portfolio Seeks to generate as high a level of current income as is
consistent with investment in a diversified portfolio of
high grade income bearing debt securities.
Managed Portfolio Seeks the highest total return through income and capital
appreciation.
High Yield Bond Portfolio Seeks as high a level of current income as is consistent
with investment in a diversified portfolio of lower-rated,
higher-yielding income bearing securities. The Portfolio
also seeks capital appreciation, but only when consistent
with its primary goal.
Value Growth Portfolio Seeks long-term capital appreciation.
Blue Chip Portfolio Seeks growth of capital and income.
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES AND TECHNIQUES
A description of certain investment strategies and techniques applicable to
some or all of the Portfolios is set forth in the Prospectus under the
headings "Principal Risk Factors" and "Higher Risk Securities and Investment
Strategies." A description of the money market instruments in which the
Money Market Portfolio may invest is contained in Appendix A to this SAI. A
description of the corporate bond and commercial paper ratings of Moody's
Investors Services, Inc. ("Moody's") and Standard Poor's Corporation ("S&P")
is contained in Appendix C to this SAI.
The following is intended to augment the explanation in the Prospectus of
certain strategies and techniques that are applicable to one or more of the
Portfolios.
- --------------------------------------------------------------------------------
LOANS OF PORTFOLIO SECURITIES
Each Portfolio may from time to time lend securities (but not in excess of
20% of its assets) from its portfolio to brokers, dealers and financial
institutions, provided that: (i) the loan is secured continuously by
collateral consisting of U.S. Government securities, government agency
securities, or cash or cash equivalents adjusted daily to have a market
value at least equal to the current market value of the securities loaned
plus accrued interest; (ii) the Portfolio may at any time call the loan and
regain the securities loaned; and (iii) the investment adviser (under the
review of the Board of Trustees) has reviewed the creditworthiness of the
borrower and found such creditworthiness satisfactory. The collateral will
be invested in short-term securities, the income from which will increase
the return to the Portfolio.
The Portfolio will retain all rights of beneficial ownership in the loaned
securities, including voting rights and rights to interest or other
distributions, and will have the right to regain record ownership of loaned
securities to exercise such beneficial rights. The Portfolio may pay
reasonable finders', administrative and custodial fees to persons
unaffiliated with the Fund in connection with the arranging of such loans.
Unless certain requirements contained in the Internal Revenue Code of 1986,
as amended (the "Code") are satisfied, the dividends, interest and other
distributions received by the Portfolio on loaned securities may not be
treated, for tax purposes, as qualified income for the purposes of the 90%
test discussed under "Taxes." Each Portfolio intends to loan portfolio
securities only to the extent that such activity does not jeopardize such
Portfolio's qualification as a regulated investment company under Subchapter
M of the Code.
- --------------------------------------------------------------------------------
WRITING COVERED CALL OPTIONS
Each Portfolio (other than the Money Market Portfolio) may write (sell)
covered call options on portfolio securities representing up to 100% of its
net assets in an attempt to enhance investment performance or to reduce
risks associated with investments. A call option is a short-term contract,
ordinarily having a duration of nine months or less, which gives the
purchaser of the option, in return for a premium paid, the right to buy, and
the writer of the option the obligation to sell, the underlying security at
the exercise price at any time prior to the expiration of the option period.
One way for an option to be "covered" is for the writer to own the optioned
security.
A Portfolio may write covered call options on debt securities that are
traded over-the-counter. When a Portfolio writes an over-the-counter option,
there is no assurance that the Portfolio will be able to enter into a
closing purchase transaction. It may not always be possible for the
Portfolio to negotiate a closing purchase transaction with the same dealer
for the same exercise price and expiration date as the option which the
Portfolio previously had written. Although the Portfolio may choose to
purchase an option from a different dealer, the Portfolio would then be
subject to the additional credit risk of such dealer. If the Portfolio is
unable to effect a closing purchase transaction, it will not be able to sell
the underlying security until the option expires or until it delivers the
underlying security upon exercise.
2
<PAGE>
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return. In return for the premium income, the Portfolio will forgo the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price so long as its obligations under the
contract continue, except insofar as the premium represents a profit.
Moreover, in writing the option, the Portfolio will retain the risk of loss
should the price of the security decline, which loss the premium is intended
to offset in whole or in part. A Portfolio, in writing call options, must
assume that the call may be exercised at any time prior to the expiration of
its obligations as a writer and, that in such circumstances, the net
proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. Covered call
options and the securities underlying options will be listed on national
securities exchanges, except that certain transactions in debt securities
and related options need not be so listed.
A Portfolio may write options that are traded on U.S. and foreign exchanges
and options traded over-the-counter with broker-dealers who make markets in
these options. The ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the Commission changes its
position, the Portfolios will treat purchased over-the-counter options and
all assets used to cover written over-the-counter options as illiquid
securities, except that with respect to options written with primary dealers
in U.S. Government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid securities
may be calculated with reference to the formula.
Transactions by a Portfolio in options on securities is subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Portfolio may write
may be affected by options written or purchased by other investment advisory
clients of the investment adviser. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in
excess of these limits, and it may impose certain other sanctions.
The writing of options is a highly specialized activity which involves
investment techniques and risks different from those associated with
ordinary portfolio securities transactions.
- --------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
From time to time, in the ordinary course of business, any of the Portfolios
may purchase newly-issued securities appropriate for the Portfolio on a
"when-issued" basis and may purchase or sell securities appropriate for the
Portfolio on a "delayed delivery" basis. When-issued or delayed delivery
transactions involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery to take place at a future
date. These transactions allow the Portfolio to lock in an attractive
purchase price or yield on a security the Portfolio intends to purchase or
an attractive sale price on a security the Portfolio intends to sell.
Normally, settlement occurs within one month of the purchase or sale. During
the period between purchase or sale and settlement, no payment is made or
received by a Portfolio and, for delayed delivery purchases, no interest
accrues to the Portfolio. A Portfolio will only make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities, but each Portfolio reserves the right to
sell such securities before the settlement date if deemed advisable.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will segregate the security on the
Fund's accounting records, record the transaction and reflect the amount due
and the market value of the security in determining its net asset value.
Likewise, at the time a Portfolio makes the commitment to sell a security on
a delayed delivery basis, it will segregate the security on the Fund's
accounting records, record the transaction and include the proceeds to be
received in determining its net asset value. Accordingly, any fluctuations
in the value
3
<PAGE>
of the security sold pursuant to a delayed delivery commitment are ignored
in calculating net asset value so long as the commitment remains in effect.
The market value of the when-issued or delayed delivery securities at any
time may be more or less than the purchase price to be paid or the sale
price to be received at the settlement date. To the extent that a Portfolio
engages in when-issued or delayed delivery transactions, it will do so for
the purpose of acquiring or selling Portfolio securities consistent with the
Portfolio's investment objectives and policies and not for the purpose of
investment leverage or to speculate on interest rate changes. The investment
adviser does not believe that a Portfolio's net asset value or income will
be adversely affected by the purchase of securities on a when-issued or
delayed delivery basis or the sale of securities on a delayed delivery
basis.
Each Portfolio will establish a segregated account with the Fund's custodian
bank in which it will maintain cash or U.S. Government securities or other
high-grade debt obligations at least equal in value to commitments to
purchase securities on a when-issued or delayed delivery basis; subject to
this requirement, a Portfolio may purchase securities on a when-issued or
delayed delivery basis without limit. To the extent that assets of a
Portfolio are held in cash pending the settlement of a purchase of
securities, that Portfolio would earn no income; however, it is the
investment adviser's intention that each Portfolio will be fully invested to
the extent practicable and subject to the policies stated above. In the case
of a commitment to sell portfolio securities on a delayed delivery basis,
each Portfolio will instruct the custodian to hold the portfolio securities
themselves in a segregated account while the commitment is outstanding.
- --------------------------------------------------------------------------------
GINNIE MAE CERTIFICATES
The Managed Portfolio, High Grade Bond Portfolio and High Yield Bond
Portfolio each may invest in debt securities ("Ginnie Maes") of the
Government National Mortgage Association ("GNMA"), a government corporation
within the U.S. Department of Housing and Urban Development. Ginnie Mae
certificates are securities representing part ownership in a pool of
mortgage loans. These loans, which are issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations, either are
insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. A pool of these
mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers.
The Ginnie Maes in which these Portfolios may invest are of the "modified
pass-through" type, which means that GNMA guarantees the timely payment of
principal and interest installments (whether or not the amounts are
collected by the issuer of the Ginnie Maes). The National Housing Act
provides that the full faith and credit of the United States is pledged to
the timely payment of principal and interest by GNMA of amounts due on these
Ginnie Maes, and an assistant attorney general of the United States has
rendered an opinion that this guarantee by GNMA is a general obligation of
the United States backed by its full faith and credit. Under the other
general type of Ginnie Maes, referred to as "straight pass-through" Ginnie
Maes, the payment of principal and interest on a timely basis is not
guaranteed.
The average life of Ginnie Maes varies with the maturities of the underlying
mortgage instruments with maximum maturities of 30 years. The average life
is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as the result of prepayments or
refinancing of such mortgages or foreclosure. Such prepayments are passed
through to the registered holder with the regular monthly payments of
principal and interest and have the effect of reducing future payments. Due
to GNMA's guarantee of Ginnie Maes, foreclosures impose no risk to the
principal invested.
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the
location and
4
<PAGE>
age of the mortgage and other social and demographic conditions. As
prepayment rates vary widely, it is not possible to accurately predict the
average life of a particular pool. However, statistics indicate that the
average life of the type of mortgages backing the majority of Ginnie Maes is
approximately 12 years. For this reason, it is standard practice to treat
Ginnie Maes as 30-year mortgage-backed securities that prepay fully in the
twelfth year. Pools of mortgages with other maturities or different
characteristics will have varying assumptions for average life. The assumed
average life of pools of mortgages having terms of less than 30 years is
less than 12 years, but typically not less than 5 years.
The coupon rate of interest on Ginnie Maes is lower than the interest rate
paid on the VA-guaranteed or FHA-insured mortgages underlying the
certificates, but only by the amount of the fees paid to GNMA and the
issuer. Such fees in the aggregate usually amount to approximately 1/2 of
1%.
Yields on pass-through securities typically are quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average-life assumption. In periods of falling 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 rates, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. Prepayments generally occur
when interest rates have fallen. Reinvestment of prepayments at such times
will be at lower rates, which would lower the return to the Portfolios. The
actual yield of each Ginnie Mae is influenced by the prepayment experience
of the mortgage pool underlying the certificates and may differ from the
yield based on the assumed average life. Interest on Ginnie Maes is paid
monthly rather than semi-annually as for traditional bonds.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements as a means of earning
income for periods as short as overnight. A repurchase agreement is an
agreement under which the Portfolio purchases a security and the seller
agrees, at the time of sale, to repurchase the security at a specified time
and price, thereby determining the yield during the Portfolio's holding
period.
That yield is determined by current short-term rates and may be more or less
than the interest rate on the underlying security. The value of the
underlying securities is marked to market daily. Should the value of the
underlying securities decline, the seller would be required to provide the
Portfolio with additional securities so that the aggregate value of the
underlying securities was at least equal to the repurchase price. The
Portfolios also may enter into a special type of repurchase agreement known
as an "open repurchase agreement." An open repurchase agreement varies from
the typical repurchase agreement in the following respects: (i) the
agreement has no set maturity, but instead matures upon 24 hours' notice to
the seller; and (ii) the repurchase price is not determined at the time the
agreement is entered into, but instead is based on a variable interest rate
and the duration of the agreement.
The Portfolios may enter into repurchase agreements only with banks or
securities dealers and the underlying securities will consist of securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. If a seller of a repurchase agreement were to default,
the Portfolio might experience losses, including delays and expenses in
enforcing its rights. To minimize this risk, the investment adviser (under
the review of the Board of Trustees) will review the creditworthiness of the
seller of the repurchase agreement and must find such creditworthiness
satisfactory before a Portfolio may enter into the repurchase agreement.
A Portfolio may invest no more than 10% of its assets in repurchase
agreements maturing in more than seven days, and no more than 25% of its
assets in repurchase agreements in which the underlying securities have
maturities in excess of one year, although there is no limit on the
percentage of each Portfolio's assets which may be invested in repurchase
agreements which mature in less than seven days and which have underlying
securities with maturities of less than one year. Open repurchase agreements
are considered to mature in one day.
5
<PAGE>
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into reverse repurchase agreements with banks and
broker-dealers. These agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed upon price that reflects a rate of
interest paid for the use of the funds for the period. Such transactions are
advantageous only if the Portfolios have the opportunity to earn a greater
rate of interest on the cash derived from the transaction than the interest
cost of obtaining that cash. The Portfolios may be unable to realize a rate
of return from the use of the proceeds equal to or greater than the interest
expense of the repurchase agreement. Thus, the Portfolios only enter into
such agreements when it appears advantageous to do so. The use of reverse
repurchase agreements may magnify any increase or decrease in the value of a
Portfolio's investments. The Fund's custodian maintains, in a segregated
account, liquid securities of each Portfolio that have a value equal to or
greater than the respective Portfolio's commitments under reverse repurchase
agreements. The value of securities subject to reverse repurchase agreements
will not exceed 30% of a Portfolio's total assets.
- --------------------------------------------------------------------------------
OTHER INVESTMENT COMPANIES
All of the Portfolios reserve the right to invest up to 10% of their total
assets, calculated at the time of purchase, in securities issued by other
investment companies, including business development companies and small
business investment companies. No Portfolio may invest more than 5% of its
total assets in the securities of any one investment company or in more than
3% of the voting securities of any other investment company.
- --------------------------------------------------------------------------------
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES
No Portfolio may invest more than 15% of its net assets (10% for the Money
Market and Blue Chip Portfolios) in illiquid investments. Illiquid
investments cannot be sold within seven days at approximately the price at
which a Portfolio values the investment. Illiquid investments include most
repurchase agreements maturing in more than seven days, time deposits with a
notice or demand period of more than seven days, certain mortgage-backed
securities, certain over-the-counter options contracts (and segregated
assets used to cover such options), and many restricted securities.
Restricted securities have a contractual restriction on resale or otherwise
cannot be resold publicly until registered under the Securities Act of 1933
(the "1933 Act").
Each of the Portfolios may invest in restricted securities. If restricted
securities are illiquid, they are subject to the liquidity limitations
described above. Restricted securities are not, however, considered illiquid
if they are eligible for sale to qualified institutional purchasers in
reliance upon Rule 144A under the 1933 Act and that are determined to be
liquid by the Board of Trustees or by the Adviser pursuant to board approved
procedures. Such procedures take into account trading activity for such
securities and the availability of reliable pricing information, among other
factors. To the extent that qualified institutional purchasers become for a
time uninterested in purchasing certain restricted securities, a Portfolio's
holding of such securities may become illiquid. Even when determined to be
liquid, restricted securities are less liquid than they would be if they
were not restricted. Therefore the purchase price and subsequent valuation
of restricted securities normally reflect a discount from the price at which
they would trade if they were not restricted.
- --------------------------------------------------------------------------------
EURO CONVERSION
On January 1, 1999, eleven participating countries in the European Economic
Monetary Union (Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, and Spain) adopted the EURO as their
official currency. On January 1, 1999, governments of these countries began
issuing new debt and redenominating existing debt in EUROS, although
corporations
6
<PAGE>
may choose to issue securities in either EUROS or in the national currency
of a participating country. Also, on January 1, the new European Central
Bank (the "ECB") assumed responsibility for monetary policy in participating
countries. Currency conversion is occurring through a "triangulation"
process whereby an amount denominated in one national currency is converted
to EUROS, which then is converted to the second national currency. For
investors, such as several of the Portfolios, in securities of issuers
located or doing substantial business in the participating countries, the
EURO conversion presents unique risks arising from various uncertainties,
including: (1) the readiness of EURO payment, clearing, and other operating
systems, (2) the legal treatment of debt instruments and financial contracts
denominated in or referring to existing national currencies rather than the
EURO, (3) exchange rate fluctuations between the EURO and other currencies
during the transition period of January 1, 1999 through December 31, 2000
and beyond, (4) potential U.S. tax issues with respect to securities held by
the Portfolios, and (5) the ECB's ability to manage monetary policy for the
participating countries. Three other European Community countries (Denmark,
Greece and the United Kingdom) may convert to the EURO at a later date.
These and other uncertainties may adversely affect the general economy
and/or financial systems in Europe as well as the fortunes of individual
issuers located or doing business there.
- --------------------------------------------------------------------------------
INVESTMENTS IN CAPITAL SECURITIES
Each Portfolio (other than the Blue Chip and Money Market Portfolios) may
invest in capital (trust-preferred) securities. These securities are issued
by trusts or other special purpose entities created for the purpose of
investing in junior subordinated debentures. Capital securities, which have
no voting rights, have a final stated maturity date and a fixed schedule for
periodic payments. In addition, capital securities have provisions which
provide preference over common and preferred stock upon liquidation,
although the securities are subordinated to other, more senior debt. The
issuers of these securities may defer interest payments for a number of
years (up to five years), although interest continues to accrue
cumulatively. In addition, the trust may be terminated and the debentures
distributed in liquidation. Because of the structure of these securities,
they have the characteristics, and involve the associated risks, of both
fixed income and preferred equity securities. At the present time, the
Internal Revenue Service treats capital securities as debt. Proposed tax
legislation may cause this tax treatment to be modified in the future. In
the event that the tax treatment of interest payments of these types of
securities is modified, the Portfolio will reconsider the appropriateness of
continued investment in these securities. For purposes of percentage
limitations applicable to the Portfolio, these securities will be treated as
debt securities.
- --------------------------------------------------------------------------------
LOWER RATED DEBT SECURITIES
The High Yield Bond Portfolio invests a substantial portion of its assets in
income-bearing securities offering high current income. Additionally, the
High Grade Bond Portfolio may invest a portion of its assets in such
securities. Such high yielding income-bearing securities often do not meet
the High Grade or Investment Grade quality level. Securities falling short
of Investment Grade are commonly known as "junk bonds." These lower rated
securities are, on balance, predominantly speculative with respect to their
capacity to pay interest and repay principal in accordance with their terms
and generally entail more credit risk than higher rated securities. The
market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated
securities may depress prices and diminish liquidity for such securities.
Factors adversely affecting the market value of lower rated securities
adversely affects a Portfolio's net asset value. In addition, a Portfolio
may incur additional expenses to the extent it were required to seek
recovery upon a default in the payment of principal or interest on its
income bearing securities. Although some risk is inherent in all securities,
holders of income bearing debt securities have a claim on the assets of the
7
<PAGE>
issuer prior to the holders of common stock. Therefore, an investment in
such securities generally entails less financial risk than an investment in
equity securities of the same issuer.
Lower rated securities may be issued by corporations in the early stages of
their development. They may also be issued in connection with a corporate
reorganization or as part of a corporate takeover. Companies that issue such
high yielding lower rated securities are often highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with Investment Grade securities. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of lower rated securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss
due to default by the issuer is significantly greater for the holders of
lower rated income bearing securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer.
Lower rated income bearing securities frequently have call or buy-back
features that would permit an issuer to call or repurchase the security from
the Portfolio. If a call were exercised by the issuer during a period of
declining interest rates, a Portfolio would likely have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the Portfolio. The premature disposition of a lower
rated high yielding security because of a call or buy-back feature, the
deterioration of the issuer's creditworthiness or a default may also make it
more difficult for a Portfolio to time its receipt of income, which may have
tax implications.
A Portfolio may have difficulty disposing of certain lower rated securities
for which there is a thin trading market. Because not all dealers maintain
markets in all lower rated securities, there is no established retail
secondary market for many of these securities, and the Fund anticipates that
they could be sold only to a limited number of dealers or institutional
investors. To the extent there is a secondary trading market for lower rated
securities, it is generally not so liquid as that for Investment Grade
securities. The lack of a liquid secondary market may have an adverse impact
on market value of such securities and a Portfolio's ability to dispose of
them when necessary to meet the Portfolio's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness
of the issuer. The lack of a liquid secondary market for certain securities
may also make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing a Portfolio's assets. Market quotations
are generally available on many high yield issues only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
It is likely that a major economic recession could severely affect the
market for, and the values of, lower rated securities, as well as the
ability of the issuers of such securities to repay principal and pay
interest thereon.
A Portfolio may acquire lower rated securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. The SAI contains more information about the risks of
restricted securities. A Portfolio may acquire lower rated securities during
an initial offering. Such securities involve special risks because they are
new issues.
From time to time, there have been proposals for legislation designed to
limit the use of certain high yielding securities in connection with
leveraged buy-outs, mergers and acquisitions, or to limit the deductibility
of interest payments on such securities. Such proposals, if enacted into
law, could reduce the market for such securities generally, could negatively
affect the financial condition of issuers of high yield securities by
removing or reducing a source of future financing and could negatively
affect the value of specific high yield issues. However, the likelihood of
any such legislation or the effect thereof is uncertain.
Zero coupon securities and pay-in-kind bonds involve additional special
obligations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior
8
<PAGE>
to maturity or to a specified cash payment date when the securities begin
paying current interest (the "cash payment date"), and therefore are issued
and traded at a discount from their face amount or par value. The discount
varies depending upon the time remaining until maturity or cash payment
date, prevailing interest rates, liquidity of the security and the perceived
credit quality of the issuer. The discount, absent financial difficulties of
the issuer, decreases as the final maturity or cash payment date of the
security approaches. The market prices of zero coupon securities are
generally more volatile than those of securities that pay interest
periodically, and they are more likely to respond to changes in interest
rates than non-zero coupon securities having similar maturities and credit
quality. The credit risk factors pertaining to lower-rated securities
generally also apply to lower-rated zero coupon bonds and pay-in-kind bonds.
Such zero coupon, pay-in-kind or delayed interest bonds carry an additional
risk in that, unlike bonds that pay interest throughout the period to
maturity, a Portfolio will realize no cash until the cash payment date
unless a portion of such securities is sold and, if the issuer defaults, a
Portfolio may obtain no return at all on its investment.
Current federal income tax law requires the holder of zero coupon securities
or of certain pay-in-kind bonds (bonds that pay interest through the
issuance of additional bonds) to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its
qualification as a registered investment company and avoid liability for
federal income and excise taxes, a Portfolio will be required to distribute
income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE POSITIONS
Notwithstanding their investment objective(s), each Portfolio may, for
temporary defensive purposes, invest all (15% for the Blue Chip Portfolio)
of its assets in cash and/or money market instruments of the type in which
the Money Market Portfolio invests.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
FUNDAMENTAL POLICIES
In seeking to achieve its investment objective(s), each Portfolio has
adopted the following investment restrictions. These are fundamental
policies and may not be changed without a majority vote of the outstanding
shares of each Portfolio affected. As used in this Statement of Additional
Information and in the Prospectus, the phrase "majority vote" of a Portfolio
(or the Fund) means the vote of the lesser of (i) 67% of the shares of the
Portfolio (Fund) present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50%
of the outstanding shares of the Portfolio (Fund). A change in policy
affecting only one Portfolio may be effected by a majority vote of the
outstanding shares of such Portfolio.
Except as noted below, each Portfolio may not:
1. As to 75% of the value of each Portfolio's total assets (with the
exception of the Money Market Portfolio which is subject to 100% of the
value of its total assets), purchase securities of any issuer (other than
U.S. Government securities or government agency securities) if, as a result,
more than 5% of the value of the Portfolio's assets (taken at the time of
investment) would be invested in securities of that issuer.
2. Purchase more than 10% of any class of securities of any issuer
(other than U.S. Government securities or government agency securities). For
the purpose of this restriction, all outstanding debt securities of an
issuer shall be deemed a single class of security and all preferred stocks
of an issuer shall be deemed a single class of security.
9
<PAGE>
3. Purchase any security, if, immediately after such purchase, more
than 25% of the Portfolio's total net assets would be invested in issuers in
the same industry. This restriction does not apply to U.S. Government
securities, government agency securities, obligations of banks or savings
institutions, or to instruments secured by these instruments, such as
repurchase agreements for U.S. Government securities (these instruments are
described in Appendix A to the Prospectus).
4. Purchase securities of other investment companies, except (i) by
purchase in the open market involving only customary brokers' commissions
and only if immediately thereafter not more than 5% of such Portfolio's
total net assets would be invested in such securities, or (ii) as part of a
merger, consolidation or acquisition of assets.
5. Purchase or sell (although it may purchase securities of issuers
which invest or deal in) interests in oil, gas or other mineral exploration
or development programs, real estate, commodities or commodity contracts.
6. Purchase any securities on margin (except that the Portfolio may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities) or make short sales unless, by
virtue of its ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if the
right is conditional, the sale is made upon the same condition.
7. Purchase or retain the securities of any issuer if any of the
officers or trustees of the Fund or any officers or directors of the Fund's
investment adviser own individually more than .50% of the securities of such
issuer and together own more than 5% of the securities of such issuer.
8. Issue senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur pursuant to (9) below.
9. Borrow money, except from banks for temporary or emergency purposes,
and in no event in excess of 5% of its total assets, or pledge or mortgage
more than 15% of its total assets.
10. Underwrite securities issued by others, except to the extent that it
may be deemed to be a statutory underwriter in the sale of restricted
securities which require registration under the Securities Act of 1933
before resale.
11. Participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not include the "bunching" of orders
for the sale or purchase of portfolio securities with the other Portfolios
or with other investment company and client accounts managed by the Fund's
investment adviser or its affiliates to reduce brokerage commissions or
otherwise to achieve best overall execution).
12. Alone, or together with any other Portfolios, make investments for
the purpose of exercising control over, or management of, any issuer.
13. Lend money or securities, except as provided in (14) below (the
making of demand deposits with banks, and the purchase of securities such as
bonds, debentures, commercial paper and short-term obligations in accordance
with the Portfolio's investment objectives and policies, shall not be
considered the making of a loan).
14. Lend its portfolio securities in excess of 20% of its net assets or
in a manner inconsistent with the guidelines set forth under "Investment
Objectives, Policies and Techniques" in this Statement of Additional
Information.
10
<PAGE>
15. Invest in foreign securities, except as follows: the Value Growth
and Managed Portfolios may invest up to 25% of its net assets in foreign
equity and debt securities traded on U.S. exchanges and payable in U.S.
dollars, and the High Grade Bond and High Yield Bond Portfolios may each
invest up to 25% of its net assets in foreign debt securities traded on U.S.
exchanges and payable in U.S. dollars.
16. Write, purchase or sell puts, calls or combinations thereof, other
than writing covered call options.
- --------------------------------------------------------------------------------
NON-FUNDAMENTAL (OPERATING) POLICIES
The following are non-fundamental (operating) policies approved by the Board
of Trustees. Such policies may be changed by the Board of Trustees without
approval of the Shareholders. These non-fundamental policies are applicable
to each of the Portfolios.
1. Each Portfolio will not invest more than 15% of its total net assets
in "illiquid" securities (except 10% for the Money Market and Blue Chip
Portfolios).
2. Each Portfolio intends to meet either the diversification standards
set by Section 817(h)(2) of the Internal Revenue Code or the diversification
requirements prescribed by regulations promulgated under Section 817(h).
3. Each Portfolio intends to comply in all material respects with
insurance laws and regulations applicable to investments of separate
accounts of Participating Insurance Companies.
If a percentage limitation is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from
a change in values or net assets will not be considered a violation.
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------
The Board of Trustees is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on the
Trustees of investment companies by the Investment Company Act. The Board of
Trustees elects officers of the Fund annually. The officers and trustees of
the Fund and their principal occupations for the past five years are set
forth below. Corporate positions may, in some instances, have changed during
this period. The four Trustees listed with an asterisk are "interested
persons" as defined in the Investment Company Act.
EDWARD M. WIEDERSTEIN*, PRESIDENT AND TRUSTEE (51)
5400 University Avenue
West Des Moines, Iowa 50266
Farmer; Chairman and Director, FBL Financial Group, Inc.; President and
Director, Iowa Farm Bureau Federation, Farm Bureau Life Insurance Company,
FBL Insurance Brokerage, Inc., Farm Bureau Mutual Insurance Company and
other affiliates of the foregoing; Director, Multi-Pig Corporation, Western
Agricultural Insurance Company, Western Ag Insurance Agency, Inc., Western
Farm Bureau Life Insurance Company, American Ag Insurance Company, and
WellMark Blue Cross/ Blue Shield of Iowa.
11
<PAGE>
RICHARD D. HARRIS*, SENIOR VICE PRESIDENT, SECRETARY-TREASURER AND TRUSTEE (55)
5400 University Avenue
West Des Moines, Iowa 50266
Senior Vice President, Secretary-Treasurer and Director, FBL Financial
Group, Inc.; Senior Vice President and Secretary-Treasurer, Farm Bureau Life
Insurance Company and other affiliates of the foregoing. He holds other
positions with various affiliates of the foregoing. Former Director, Public
Policy Division, Iowa Farm Bureau Federation; Director, Iowa FFA Foundation
and Iowa Make-A-Wish Foundation.
STEPHEN M. MORAIN*, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND ASSISTANT
SECRETARY (53)
5400 University Avenue
West Des Moines, Iowa 50266
General Counsel and Assistant Secretary, Iowa Farm Bureau Federation;
General Counsel, Secretary and Director, Farm Bureau Management Corporation;
Senior Vice President, General Counsel and Director, FBL Financial Group,
Inc., EquiTrust Investment Management Services, Inc. and EquiTrust Marketing
Services, LLC; Senior Vice President and General Counsel, Farm Bureau Life
Insurance Company, FBL Insurance Brokerage, Inc. and other affiliates of the
foregoing; Director, Iowa Agricultural Finance Corporation and Iowa Business
Development Finance Corporation; Chairman, Edge Technologies, Inc.
THOMAS R. GIBSON, CHIEF EXECUTIVE OFFICER (54)
5400 University Avenue
West Des Moines, Iowa 50266
Chief Executive Officer and Director, FBL Financial Group, Inc., EquiTrust
Investment Management Services, Inc. and EquiTrust Marketing Services, LLC;
Chief Executive Officer, Farm Bureau Life Insurance Company, Western Farm
Bureau Life Insurance Company, FBL Insurance Brokerage, Inc. and other
affiliates of the foregoing.
TIMOTHY J. HOFFMAN, VICE PRESIDENT (48)
5400 University Avenue
West Des Monies, Iowa 50266
Chief Property/Casualty Officer, FBL Financial Group, Inc.; Executive Vice
President and General Manager, Farm Bureau Mutual Insurance Company and
other affiliates of the foregoing; Vice President, Farm Bureau Life
Insurance Company, Western Farm Bureau Life Insurance Company and other
affiliates of the foregoing; Vice President and Director, EquiTrust
Investment Management Services, Inc. and EquiTrust Marketing Services, LLC.
WILLIAM J. ODDY, CHIEF OPERATING OFFICER (55)
5400 University Avenue
West Des Moines, Iowa 50266
Chief Operating Officer, FBL Financial Group, Inc.; Executive Vice President
and General Manager, Farm Bureau Life Insurance Company, Western Farm Bureau
Life Insurance Company and other affiliates of the foregoing; Vice
President, Farm Bureau Mutual Insurance Company and other affiliates of the
foregoing; President, Treasurer and Director, Communications Providers,
Inc.; Chief Operating Officer and Director, EquiTrust Marketing Services,
LLC; President and Director, EquiTrust Investment Management Services, Inc.,
FBL Real Estate Ventures, Ltd. and RIK, Inc.; Chief Executive Officer,
Western Computer Services, Inc.
12
<PAGE>
JAMES W. NOYCE, CHIEF FINANCIAL OFFICER (43)
5400 University Avenue
West Des Moines, Iowa 50266
Chief Financial Officer, FBL Financial Group, Inc., Farm Bureau Life
Insurance Company, Western Farm Bureau Life Insurance Company and other
affiliates of the foregoing. Chief Financial Officer, Treasurer and
Director, EquiTrust Investment Management Services, Inc. and EquiTrust
Marketing Services, LLC. He holds other positions with various affiliates of
the foregoing.
LOU ANN SANDBURG, VICE PRESIDENT-INVESTMENTS AND ASSISTANT TREASURER (51)
5400 University Avenue
West Des Moines, Iowa 50266
Vice President-Investments and Assistant Treasurer, FBL Financial Group,
Inc., Farm Bureau Life Insurance Company, Western Farm Bureau Life Insurance
Company and other affiliates of the foregoing. Vice President-Investments,
EquiTrust Investment Management Services, Inc. and EquiTrust Marketing
Services, LLC. She holds other positions with various affiliates of the
foregoing.
DENNIS M. MARKER, INVESTMENT VICE PRESIDENT, ADMINISTRATION AND ASSISTANT
SECRETARY (47)
5400 University Avenue
West Des Moines, Iowa 50266
Investment Vice President, Administration, FBL Financial Group, Inc. and
Farm Bureau Life Insurance Company; Investment Vice
President-Administration, Secretary and Director, EquiTrust Investment
Management Services, Inc. and EquiTrust Marketing Services, LLC. He holds
other positions with various affiliates of the foregoing.
SUE A. CORNICK, MARKET CONDUCT AND MUTUAL FUNDS VICE PRESIDENT AND ASSISTANT
SECRETARY (38)
5400 University Avenue
West Des Moines, Iowa 50266
Market Conduct and Mutual Funds Vice President and Assistant Secretary,
EquiTrust Investment Management Services, Inc. and EquiTrust Marketing
Services, LLC.
KRISTI ROJOHN, ASSISTANT SECRETARY (36)
5400 University Avenue
West Des Moines, Iowa 50266
Assistant Mutual Funds Manager and Assistant Secretary, EquiTrust Investment
Management Services, Inc. and EquiTrust Marketing Services, LLC.
ELAINE A. FOLLOWWILL, ASSISTANT SECRETARY (28)
5400 University Avenue
West Des Moines, Iowa 50266
Compliance Assistant and Assistant Secretary, EquiTrust Investment
Management Services, Inc. and EquiTrust Marketing Services, LLC.
DONALD G. BARTLING, TRUSTEE (71)
Box 104
Herman, Nebraska 68029
Farmer; Partner, Bartling Brothers Partnership (farming business).
13
<PAGE>
JOHN R. GRAHAM*, TRUSTEE (53)
1512 Country Club Place
Manhattan, Kansas 66502
Executive Vice President, Kansas Farm Bureau, Kansas Farm Bureau Services,
Kansas Agricultural Marketing Association, FB Services Insurance Agency,
Kansas Farm Bureau Life Insurance Company, Farm Bureau Mutual Insurance
Company, Inc., and KFB Insurance Company, Inc.; Chairman, Chief Executive
Officer and Director, FB Capital Management, Inc. of Kansas and Graham
Capital Management, Inc.; Director, National Association of Independent
Insurers, Didde Corporation and Farm Bureau Mutual Insurance Agency of
Kansas; Partner, Arthur-Graham Rental Properties, CM Brass and G&H Real
Estate Investments; Trustee, Master Teacher Employee Benefit Pension Trust.
ERWIN H. JOHNSON, TRUSTEE (56)
1841 March Avenue
Charles City, Iowa 50616
Farmer; Owner and Manager, Center View Farms, Co.; Director, First Security
Bank and Trust Co., Charles City, Iowa; Farm Financial Planner, Iowa State
University Cooperative Extension Service; Financial and Farm Management
Consultant; Iowa State University Overseas Projects.
KENNETH KAY, TRUSTEE (55)
R.R. 2, Box 75
Atlantic, Iowa 50022
Farmer; Salesman, Pioneer Seed Corn; Voting Delegate, Vice President and
former President, Cass County Farm Bureau; Director, First Whitney Bank &
Trust; Board Member, Transportation Committee Chairman, Cass Atlantic
Development Corporation.
CURTIS C. PIETZ, TRUSTEE (67)
R.R. 3 Box 79
Lakefield, Minnesota 65150
Retired Farmer; Investor and Co-Owner, Storden Seed and Chemical Service,
Inc.; Director, Minnesota Rural Finance Authority and Minnesota Farm Bureau
Federation; previous Farm Bureau leadership; active in Farm Management.
The officers and trustees of the Fund also serve in similar capacities as
officers and directors of EquiTrust Money Market Fund, Inc. and EquiTrust
Series Fund, Inc. Several of the officers and trustees also are officers and
directors of the Adviser. The Fund pays no direct remuneration to any
officer of the Fund. Each of the trustees not affiliated with the Adviser
will be compensated by the Fund. Each of these unaffiliated trustees will
receive a fee of $115 plus expenses for each trustees' meeting attended. For
the fiscal year ended December 31, 1998, the Fund paid trustees' fees
totaling $1,840.
14
<PAGE>
TABLE OF TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE PENSION AND RETIREMENT TOTAL COMPENSATION FROM
COMPENSATION FROM BENEFITS ACCRUED AS PART ALL FUNDS IN THE
NAME OF TRUSTEE THE FUND OF FUND EXPENSES EQUITRUST FAMILY
<S> <C> <C> <C>
Mr. Bartling $ 460 $ 0 $ 460
Mr. Graham 0 0 0
Mr. Johnson 460 0 460
Mr. Kay 460 0 460
Mr. Pietz 460 0 460
Mr. Wiederstein 0 0 0
Mr. Harris 0 0 0
</TABLE>
Trustees and officers of the Fund do not receive any benefits from the Fund
upon retirement nor does the Fund accrue any expenses for pension or
retirement benefits.
COMMITTEES OF BOARD OF TRUSTEES
The Board of Trustees has established an Audit Committee. The Audit
Committee of the Fund recommends the selection of independent auditors for
the Fund, reviews with such independent public accountants the planning,
scope and results of their audit of the Fund's financial statements and the
fees for service performed, reviews the financial statements of the Fund and
receives audit reports. The Audit Committee consists of four members,
including Messrs. Bartling, Johnson, Kay and Pietz. The Audit Committee met
two times in 1998.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
The following information supplements the information set forth in the
Prospectus under the heading "Portfolio Management." Pursuant to an
Investment Advisory and Management Services Agreement dated April 6, 1987
("Agreement"), EquiTrust Investment Management Services, Inc. ("Adviser")
acts as the Fund's investment adviser and manager, subject to the review of
the Board of Trustees. The Adviser is a wholly-owned subsidiary of FBL
Financial Services, Inc., which is a wholly-owned subsidiary of FBL
Financial Group, Inc., an Iowa corporation, 54% of whose outstanding voting
stock is owned by Iowa Farm Bureau Federation, an Iowa not-for-profit
corporation. The Adviser also acts as the investment adviser to individuals,
institutions and two other mutual funds: EquiTrust Money Market Fund, Inc.
and EquiTrust Series Fund, Inc. Personnel of the Adviser also manage
investments for the portfolios of insurance companies.
The Adviser subscribes to leading bond information services and receives
published reports and statistical compilations from the issuers themselves,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Fund or the Adviser's other clients. The Adviser
regards this information and material, however, as an adjunct to its own
research activities.
Under the Agreement, the Adviser regularly provides the Fund with investment
research, advice and supervision, and furnishes an investment program
consistent with the investment objective(s) and policies of each Portfolio,
determining, for each Portfolio, what securities shall be purchased and sold
and what portion of the Portfolio's assets shall be held uninvested, subject
always to: (i) the provisions of the Declaration of Trust, the Fund's
by-laws, the Investment Company Act and applicable requirements of the Code;
(ii) the Portfolio's investment objective(s), policies and
15
<PAGE>
restrictions; and (iii) such policies and instructions as the Board of
Trustees may from time to time establish. The Adviser also advises and
assists the officers of the Fund in taking such steps as are necessary or
appropriate to carry out the decisions of the Board of Trustees (and any
committees thereof) regarding the conduct of the business of the Fund. The
Adviser has agreed to arrange for any of its officers or directors to serve
without salary as trustees, officers or agents of the Fund if duly elected
to such positions.
The Adviser, at its expense, furnishes the Fund with office space and
facilities, simple business equipment, advisory, research and statistical
facilities and clerical services and personnel to administer the business
affairs of the Fund. As compensation for the Adviser's investment advisory,
management and clerical services, as well as the facilities it provides and
the expenses it assumes, the Agreement provides for the payment of a monthly
fee as described below.
As compensation for the advisory and management services provided by the
Adviser, the Fund has agreed to pay the Adviser an annual management fee,
accrued daily and payable monthly, based on the average daily net assets of
each Portfolio as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS
FIRST SECOND OVER
PORTFOLIO $200 MILLION $200 MILLION $400 MILLION
<S> <C> <C> <C>
Money Market 0.25% 0.25% 0.25%
High Grade Bond 0.30% 0.275% 0.25%
Managed 0.45% 0.45% 0.40%
High Yield Bond 0.45% 0.45% 0.40%
Value Growth 0.45% 0.45% 0.40%
Blue Chip 0.20% 0.20% 0.20%
</TABLE>
The Adviser is not required to pay expenses of the Fund other than those set
forth above. Each Portfolio will pay all other expenses incurred in its
operation, including a portion of the Fund's general administrative
expenses, allocated on the basis of the Portfolio's net assets. Expenses
that will be borne directly by the Portfolios include, but are not limited
to, the following: net asset value calculations; portfolio transaction
costs; interest on Fund obligations; miscellaneous reports; membership dues;
all expenses of shareholders' and trustees' meetings and of preparing,
printing and mailing proxy statements, reports and notices to shareholders;
all expenses of registering the Fund's shares under federal and state
securities laws; the typesetting costs of printing Fund prospectuses and
supplements thereto; investor services (including allocable telephone and
personnel expenses); all taxes and fees payable to federal, state or other
governmental authorities; the fees and expenses of independent public
auditors, legal counsel, custodian, transfer and dividend disbursing agent
and any registrar; fees of trustees who are not affiliated with the Adviser;
insurance premiums for fidelity bond and other coverage of the Fund's
operations; and such non-recurring expenses as may arise including actions,
suits or proceedings affecting the Fund and the legal obligation the Fund
may have to indemnify its officers and trustees with respect thereto. See
"Underwriting and Distribution Expenses" and "Other Information --
Accounting Services" for a description of certain other Fund expenses.
The Agreement was approved on March 13, 1987, by the Board of Trustees, and
on August 21, 1990, by Farm Bureau Life Insurance Company, pursuant to
voting instructions of policyowners, as sole Shareholder of the Value Growth
Portfolio, High Grade Bond Portfolio, High Yield Bond Portfolio, Managed
Portfolio and the Money Market Portfolio. An amendment to the Agreement
extending the Agreement to the Blue Chip Portfolio was approved by the Board
of Trustees on August 21, 1990, reapproved on August 15, 1991 and approved
by Shareholders of that Portfolio on November 13,
16
<PAGE>
1991 pursuant to instructions from variable life insurance policyowners
indirectly invested in the Portfolio.
The Agreement will continue in effect, with respect to a Portfolio, from
year to year so long as its continuation is approved at least annually by
(a) the vote of a majority of those Trustees who are not parties to the
Agreement or "interested persons" of either party to the Agreement cast in
person at a meeting called for the purpose of voting on such approval, and
(b) either (i) the vote of a majority of the Trustees or (ii) the vote of a
majority of the outstanding shares of such Portfolio.
The Agreement will be deemed to have been approved or disapproved by the
Shareholders of a Portfolio if a majority of the outstanding shares of such
Portfolio vote for or against approval of the Agreement, notwithstanding (a)
that the Agreement has not been approved or disapproved by a majority of the
outstanding shares of any other Portfolio, and (b) that the Agreement has
not been approved or disapproved by a vote of a majority of the outstanding
shares of the Fund. The Agreement may be terminated without penalty at any
time upon 60 days' notice by either party, and will terminate automatically
upon assignment.
The Agreement provides that the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties, or from reckless
disregard by the Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is
the Adviser's opinion that the terms and conditions of such transactions
will not be influenced by existing or potential custodial or other Fund
relationships.
For the fiscal years ended December 31, 1998, 1997, and 1996, the advisory
and management fee expense was as follows:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1998 1997 1996
<S> <C> <C> <C>
Money Market Portfolio $ 14,320 $ 10,533 $ 9,579
High Grade Bond Portfolio $ 22,977 $ 12,594 $ 9,973
Managed Portfolio $ 239,288 $ 168,689 $ 109,830
High Yield Bond Portfolio $ 55,831 $ 32,916 $ 26,585
Value Growth Portfolio $ 203,671 $ 168,315 $ 104,228
Blue Chip Portfolio $ 95,465 $ 47,121 $ 20,647
</TABLE>
The Adviser has also agreed to reimburse any Portfolio of the Fund to the
extent that the annual operating expenses (including the investment advisory
fee but excluding brokerage, interest, taxes and extraordinary expenses) of
that Portfolio exceed 1.50% of its average daily net assets for any fiscal
year of the Portfolio. However, the amount reimbursed shall not exceed the
amount of the advisory fee paid by the Portfolio for such period. This
reimbursement agreement will remain in effect for as long as the Agreement
remains in effect and cannot be changed without a shareholder vote. In
addition, the Adviser has agreed to reimburse any Portfolio to the extent
that annual operating expenses, including the investment advisory fee,
exceed .65%. There can be no assurance that the Adviser will continue to
limit expenses beyond December 31, 1999. The agreement to reimburse any
Portfolio to the extent any operating expenses exceed .65% also applied to
the period May 1, 1997 through December 31, 1997. For the period January 1,
1997 through April 30, 1997 and for the fiscal year ended 1996 expenses were
limited to .55%.
17
<PAGE>
- --------------------------------------------------------------------------------
UNDERWRITING AND DISTRIBUTION EXPENSES
- --------------------------------------------------------------------------------
Pursuant to an Underwriting Agreement ("Underwriting Agreement"), the
Adviser also serves, without compensation from the Fund, as the principal
underwriter and sole distributor of the Fund's shares. Under the terms of
the Underwriting Agreement, the Adviser is not obligated to sell any
specific number of shares. The Agreement was approved on August 12, 1987, by
the Board of Trustees, including a vote of a majority of the trustees who
are not "interested persons" of either party to the Underwriting Agreement.
Unless terminated earlier as described below, the Underwriting Agreement
will continue in effect from year to year so long as its continuance is
approved annually by (a) the vote of a majority of the trustees who are not
parties to the Underwriting Agreement or "interested persons" of either
party to the Underwriting Agreement cast in person at a meeting called for
the purpose of voting on such approval, and (b) either (i) the vote of a
majority of the Trustees or (ii) the vote of a majority of the outstanding
shares of the Fund. The Underwriting Agreement may be terminated without
penalty at any time upon six months' notice by either party, and will
terminate automatically upon assignment. The Adviser has authority, pursuant
to the Underwriting Agreement, to enter into similar contracts with other
investment companies.
Pursuant to the Underwriting Agreement, the Fund is responsible for the
payment of all fees and expenses of registering its shares under federal and
state securities laws. The Fund will also pay the fees and expenses incurred
in connection with: (i) the preparation, printing and mailing of annual
prospectuses to existing Shareholders; (ii) the preparation, printing and
mailing of any notice, proxy statement, report, supplemental prospectus or
other communications to Shareholders; and (iii) the printing and mailing of
confirmations of purchases of shares. The Fund will also pay for certain
other items, including, but not limited to, the following: any issue or
initial transfer taxes; the wiring of funds for share purchases and
redemptions (unless paid by the Shareholder who initiates the transaction);
and the printing and postage of business reply envelopes. The
above-described expenses will be allocated among the Portfolios on the basis
of their respective net assets.
The Adviser is obligated to pay for the printing (but not the typesetting)
and distribution of prospectuses and statements of additional information to
prospective VA contract and VLI policyholders, and the preparation, printing
and distribution of any reports or other literature or advertising in
connection with the offering of the shares. The Adviser pays all fees and
expenses in connection with its qualification and registration as a broker
or dealer under federal and state laws. The Adviser also pays for any
activity which is primarily intended to result in the sale of shares of the
Fund.
The Adviser intends to enter into agreements with Participating Insurance
Companies pursuant to which the Participating Insurance Companies will
assume the Adviser's obligation to pay for the printing and distribution of
prospectuses of the Fund in connection with the Participating Insurance
Companies' sale of VA contracts and VLI policies. The Adviser continuously
offers shares of each Portfolio of the Fund to the separate accounts of
Participating Insurance Companies. Such shares are sold at their respective
net asset values and involve no sales charge.
The Adviser also acts as principal underwriter and sole distributor of the
shares of EquiTrust Money Market Fund, Inc. and EquiTrust Series Fund, Inc.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
With respect to transactions in portfolio securities, whether through a
broker as agent or with a dealer as principal, the Adviser endeavors to
obtain for the Fund the most favorable prices and efficient execution of
orders. Subject to this primary consideration, the Adviser may place a
Portfolio's transactions with firms that furnish research, statistical and
other services. In particular, the Adviser may direct brokerage transactions
to a specific broker in return for certain data and
18
<PAGE>
research-oriented software. Certain affiliates of the Adviser also place
portfolio transactions with these brokerage firms, and such affiliates share
the benefits of the research and other services obtained from these brokers.
The Adviser regards information which is customarily available only in
return for brokerage as among the many elements to be considered in arriving
at investment decisions. No specific value can be determined for most such
information and services and they are deemed supplemental to the Adviser's
own efforts in the performance of its duties under the Investment Advisory
and Management Services Agreement. Any research benefits derived are
available for all clients.
Brokerage research services, as provided in Section 28(e) of the Securities
Exchange Act of 1934, include: advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends; portfolio strategy and performance of accounts;
and the execution of securities transactions and performance of functions
incidental thereto (such as clearance and settlement).
If, in the judgment of the Adviser, the Fund or any Portfolio will be
benefited by such supplemental research services, the Adviser is authorized
to pay greater spreads or commissions than another broker or dealer may
charge for the same transaction. Accordingly, while the Adviser generally
seeks reasonably competitive spreads or commissions, the Portfolios will not
necessarily be paying the lowest spread or commission available in every
case. Information received from brokerage research will be in addition to
and not in lieu of the services required to be performed by the Adviser
under the Agreement. The expenses of the Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information. Neither
the Adviser nor any of its affiliates will receive any brokerage business
arising out of portfolio transactions for the Fund. The Fund and each
Portfolio paid brokerage commissions during the fiscal years ended December
31, 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1998 1997 1996
<S> <C> <C> <C>
The Fund $ 417,481 $ 156,687 $ 124,514
Money Market Portfolio -0- -0- -0-
High Grade Bond Portfolio -0- -0- -0-
Managed Portfolio $ 50,143 $ 35,480 $ 72,610
High Yield Bond Portfolio $ 375 -0- -0-
Value Growth Portfolio $ 334,263 $ 109,507 $ 42,359
Blue Chip Portfolio $ 32,700 $ 11,700 $ 9,545
</TABLE>
In some instances, the Portfolios may deal in securities which are not
listed on a national securities exchange but rather are traded in the
over-the-counter market. The Portfolios may also purchase listed securities
through the "third market." Where transactions are executed in the
over-the-counter or "third market," the Adviser will seek to deal with
primary market makers but, when necessary, will utilize the services of
brokers. In all such cases, the Adviser will attempt to negotiate the best
price and execution. Money market instruments generally are traded directly
with the issuer. On occasion, other securities may be purchased directly
from the issuer. The cost of a Portfolio's securities transactions will
consist primarily of brokerage commissions or dealer or underwriter spreads.
Certain investments may be appropriate for certain of the Portfolios and the
Adviser's other clients. Investment decisions for the Portfolios and such
other clients are made with a view to achieving their respective investment
objectives and after consideration of factors such as their current
respective holdings, availability of cash for investment and the size of
their respective investments in general. Frequently, a particular security
may be bought or sold for only one client, or in different amounts and at
different times for more than one but less than all clients. Likewise, a
particular security may
19
<PAGE>
be bought for one or more clients when one or more other clients are selling
the security. In addition, purchases or sales of the same security may be
made for two or more Portfolios or other clients on the same day. In this
event, such transactions will be allocated among the Portfolios or other
clients in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a Portfolio. It is the opinion of the
Board of Trustees that the benefits available, because of the Adviser's
organization, outweigh any disadvantages that may arise from exposure to
simultaneous transactions. Purchase and sale orders for a Portfolio may be
combined with those of other clients of the Adviser in the interest of the
most favorable net results to the Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
The portfolio turnover rates for the Portfolios are set forth under
"Financial Highlights" in the Prospectus. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of a Portfolio's securities during
a fiscal year by the average monthly value of the Portfolio's securities
during such fiscal year. In determining the portfolio turnover rate, all
securities whose maturities or expiration dates at the time of acquisition
were one year or less are excluded. Thus, the portfolio turnover rate
measures only that portion of the Portfolio that is considered to be
long-term. Portfolio turnover rates may be affected by factors such as
purchase and redemption requirements and market volatility and may vary
greatly from time to time. Frequency of portfolio turnover will not be a
limiting factor if the investment adviser deems it desirable to purchase or
sell securities. Increased portfolio turnover may result in greater
brokerage commissions and consequent expense to the Portfolio. If any
Portfolio were to derive more than 30% of its gross income from the sale of
securities held less than three months, it might fail to qualify under the
tax laws as a regulated investment company for that year and consequently
would lose certain beneficial tax treatment of its income; however, each
Portfolio intends to continue to qualify as a regulated investment company
each year. See "Taxes."
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
The Fund continuously offers shares of the various Portfolios at the
respective net asset values of the Portfolios determined in the manner set
forth under "Net Asset Value." Shares of the Fund may be purchased only by
the separate accounts of Participating Insurance Companies, which are
investment mediums for the VA contracts or VLI policies issued by the
Participating Insurance Companies. (Please refer to the prospectuses for the
VA contracts and the VLI policies for a description of how to purchase a
contract or policy.)
Shares of each Portfolio are sold without a sales charge at net asset value
next determined after an order for purchase and payment in proper form are
received. Payment for shares is made in federal funds transmitted by wire on
the next business day following the order for purchase.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund ordinarily redeems full and fractional shares of a Portfolio for
cash at the net asset value next determined after a request for redemption
is received in proper form. The Fund charges no redemption fee. Except as
described below, the Fund is required to pay redemption proceeds within
seven days after receipt of a proper notice of redemption; however, the Fund
intends to pay redemption proceeds within one business day after receipt of
such notice.
The Fund may suspend the right of redemption or postpone the date of
payment, with respect to the shares of a Portfolio, during any period when
(a) trading on the New York Stock Exchange is
20
<PAGE>
restricted as determined by the Commission or such exchange is closed for
trading other than customary weekend and holiday closings; (b) an emergency
exists, as determined by the Commission, as a result of which disposal of
such Portfolio's securities, or determination of the net asset value of such
Portfolio, is not reasonably practicable; or (c) the Commission by order
permits such suspension for the protection of Shareholders. In such event,
redemption will be effected at the net asset value next determined after the
suspension has been terminated unless the Shareholder has withdrawn the
redemption request in writing and the request has been received prior to the
day of such determination of net asset value.
If a conflict between VA contract holders and VLI policyowners arose that
required a substantial amount of assets be withdrawn from the Fund, orderly
portfolio management could be disrupted to the potential detriment of such
contract holders and policyowners.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of each Portfolio is determined as of the
earlier of 3:00 p.m. (Central Time) or the close of the New York Stock
Exchange, on each day that (i) the New York Stock Exchange is open for
business (except the day after Thanksgiving, the weekdays before and after
Christmas (in 1999), the weekday after New Year's Day (in 2000) and any day
on which the Fund's offices are closed because of a weather-related or
comparable type of emergency); and (ii) an order for purchase or redemption
of shares of the Portfolio is received. The net asset value per share of
each Portfolio is computed by dividing the total value of the Portfolio's
securities and other assets, less liabilities, by the total number of
outstanding shares of such Portfolio.
The Fund reserves the right to calculate or estimate the net asset value of
a Portfolio more frequently than once daily if deemed desirable. If the
Fund's offices should be closed because of a weather-related or comparable
type of emergency and the Fund is unable to segregate orders and redemption
requests received on that day, the Fund will price those orders and
redemptions at the net asset value next determined for each Portfolio.
The following supplements the discussion in the Prospectus under the heading
"Other Information -- Net Asset Value."
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
The net asset value per share of the Money Market Portfolio is computed by
dividing the total value of the Portfolio's securities and other assets,
less liabilities (including dividends payable), by the number of shares
outstanding. The assets are determined by valuing the portfolio securities
at amortized cost, pursuant to Rule 2a-7 under the Investment Company Act.
The amortized cost method of valuation involves valuing a security at cost
at the time of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument.
The purpose of the amortized cost method of valuation is to attempt to
maintain a constant net asset value per share of $1.00. While this method
provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price
the Portfolio would receive if it sold its portfolio securities. Under the
direction of the Board of Trustees, certain procedures have been adopted to
monitor and stabilize the price per share. Calculations are made to compare
the value of the portfolio securities, valued at amortized cost, with market
based values. Market values are obtained by using actual quotations provided
by market makers, estimates of market value (provided the Board of Trustees
has reviewed and approved the method of making such estimates), or values
obtained from yield data relating to classes of money market instruments
published by reputable sources at the mean between the bid and asked prices
for those instruments. If a deviation of 1/2 of 1% or more between the
Portfolio's $1.00 per share net asset value and the net
21
<PAGE>
asset value calculated by reference to market based valuations were to
occur, or if there were other deviations which the Board of Trustees
believed would result in dilution or other unfair results material to
Shareholders, the Board of Trustees would consider what action, if any,
should be initiated.
The market value of debt securities usually reflects yields generally
available on securities of similar quality. When yields decline, the market
value of a fund holding higher yielding securities can be expected to
increase; when yields increase, the market value of a fund invested at lower
yields can be expected to decline. In addition, if the Money Market
Portfolio has net redemptions at a time when interest rates have increased,
the Portfolio may be forced to sell portfolio securities prior to maturity
at a price below the Portfolio's carrying value. Also, because the Portfolio
generally will be valued at amortized cost rather than market value, any
yield quoted may be different from the yield that would result if the entire
Portfolio were valued at market value, since the amortized cost method does
not take market fluctuation into consideration.
- --------------------------------------------------------------------------------
OTHER PORTFOLIOS
The net asset value per share of each Portfolio other than the Money Market
Portfolio is computed by dividing the total value of the Portfolio's
securities and other assets, less liabilities, by the number of Portfolio
shares then outstanding. Securities traded on a national exchange are valued
at the last sale price as of the close of business on the day the securities
are being valued, or, lacking any sales, at the mean between closing bid and
asked prices. Securities other than money market instruments traded in the
over-the-counter market are valued at the mean between closing bid and asked
prices or at yield equivalent as obtained from one or more dealers that make
markets in the securities. Securities traded both in the over-the-counter
market and on a national exchange are valued according to the broadest and
most representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. Securities and assets for
which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of
Trustees. Money market instruments are valued at market value, except that
debt instruments maturing in 60 days or less are valued using the amortized
cost method of valuation.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are allocated specifically to such Portfolio,
and constitute the underlying assets of such Portfolio. The underlying
assets of each Portfolio are segregated on the Fund's books of account, and
are charged with the liabilities of such Portfolio and with a share of the
general liabilities of the Fund. Expenses with respect to any two or more
Portfolios are allocated in proportion to the net assets of the respective
Portfolios except where allocations of direct expenses can otherwise be
fairly made.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
The Fund intends that each of the Portfolios will qualify each year as a
regulated investment company under Subchapter M of Chapter 1 of the Code.
If, as intended, each Portfolio continues to qualify as a regulated
investment company and distributes substantially all of its net investment
income and net capital gains to its shareholders, then, under the provisions
of Subchapter M, there should be little or no income or gains taxable to it.
In addition, each Portfolio intends to comply with other distribution rules
specified in the Code so that it will not incur a 4% nondeductible federal
excise tax that otherwise would apply.
Each Portfolio of the Fund must meet several requirements to maintain its
status as a regulated investment company. These requirements include the
following: (1) at least 90% of the Portfolio's gross income must be derived
from dividends, interest, payments with respect to securities loaned, and
gains from the sale or disposition of securities; and (2) at the close of
each quarter of the Portfolio's taxable year, (a) at least 50% of the value
of the Portfolio's total assets must consist of
22
<PAGE>
cash, U.S. Government securities and other securities (no more than 5% of
the value of the Portfolio may consist of such other securities of any one
issuer, and the Portfolio must not hold more than 10% of the outstanding
voting stock of any issuer), and (b) the Portfolio must not invest more than
25% of the value of its total assets in the securities of any one issuer
(other than U.S. Government securities).
Each of the Portfolios also intends to comply with section 817(h) of the
Code and the regulations issued thereunder, which impose certain investment
diversification requirements on separate accounts of Participating Insurance
Companies that are used to support VA contracts and VLI policies. In
general, these requirements are that no more than 55% of the value of the
assets of a Portfolio 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 these purposes, all securities
of the same issuer are treated as a single investment and each United States
government agency or instrumentality is treated as a separate issuer. These
diversification requirements are in addition to the requirements of
subchapter M and the Investment Company Act, and may affect the securities
in which a Portfolio may invest. In order to comply with the current or
future requirements of section 817(h) (or related provisions of the Code),
the Fund may be required, for example, to alter the investment objectives of
one or more of the Portfolios. (To the extent required by law, approval of
owners of VA contracts or VLI policies or of the Commission will be obtained
before changing investment objectives.)
If a Portfolio fails to qualify as a regulated investment company, it will
be subject to federal, and possibly state, corporate taxes on its taxable
income and gains (without any deduction for its distributions to its
shareholders) and distributions to its shareholders will constitute ordinary
income to the extent of such Portfolio's available earnings and profits.
Owners of VA contracts and VLI policies indirectly invested in such a
Portfolio might be taxed currently on the investment earnings under their
contracts or policies and thereby lose the benefit of tax deferral. In
addition, if a Portfolio fails to comply with the diversification
requirements of section 817(h) of the Code and the regulations thereunder,
owners of VA contracts and VLI policies indirectly invested in the Portfolio
would be taxed on the investment earnings under their contracts or policies
and thereby lose the benefit of tax deferral. Accordingly, compliance with
the above rules is carefully monitored by the Adviser and the Fund intends
that each Portfolio comply with these rules as they exist or as they may be
modified from time to time. Compliance with the tax requirements described
above may result in a reduction in the return under a Portfolio, since, to
comply with the above rules, the investments utilized (and the time at which
such investments are entered into and closed out) may be different from what
the Adviser might otherwise believe desirable.
The foregoing discussion of federal income tax consequences is a general and
abbreviated summary based on tax laws and regulations in effect on the date
of this SAI. Tax law is subject to change by legislative, administrative or
judicial action. Each prospective investor should consult his or her own tax
adviser as to the tax consequences of investments in the Portfolios. For
information concerning the federal income tax consequences to the owners of
VA contracts and VLI policies, see the prospectuses for such contracts or
policies.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The following supplements the discussion of dividends and distributions in
the Prospectus under the headings "Other Information -- Distributions and
Taxes -- DISTRIBUTIONS."
MONEY MARKET PORTFOLIO
The Money Market Portfolio declares dividends of all its daily net
investment income on each day the Portfolio's net asset value per share is
determined. Dividends are payable monthly and are automatically reinvested
and distributed on the last business day of each month in full and
fractional
23
<PAGE>
shares of the Portfolio at the then-current net asset value unless a
Shareholder requests payment in cash.
Net investment income, for dividend purposes consists of (i) accrued
interest income, plus or minus (ii) amortized purchase discount or premium,
plus or minus (iii) all short-term realized gains or losses and unrealized
appreciation or depreciation on portfolio assets, minus (iv) all accrued
expenses of the Portfolio. Expenses of the Portfolio are accrued daily. So
long as portfolio securities are valued at amortized cost, there will be no
unrealized appreciation or depreciation on such securities.
HIGH GRADE BOND AND HIGH YIELD BOND PORTFOLIOS
Each of these Portfolios declares dividends of all its investment income on
each day the Portfolio's Net Asset Value is determined. Dividends are
automatically reinvested and distributed on the last business day of each
month. Any short-term and long-term gains will be declared and distributed
periodically, but in no event less frequently than annually.
OTHER PORTFOLIOS
It is the policy of each of the Managed, Blue Chip and Value Growth
Portfolios to distribute at least annually substantially all its net
investment income, if any, and any net realized capital gains.
Both dividend and capital gain distributions will be made in shares of a
Portfolio unless a Shareholder requests payment in cash.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise several types of performance
information for a Portfolio. Each Portfolio, except the Money Market
Portfolio, may advertise "average annual total return" and "total return."
The High Grade Bond and High Yield Bond Portfolios may also advertise
"yield." The Money Market Portfolio may advertise "yield" and "effective
yield." Each of these figures is based upon historical results and is not
necessarily representative of the future performance of a Portfolio.
The rate of return for a Portfolio should be distinguished from the rate of
return of a corresponding subaccount of a separate account of a
Participating Insurance Company, whose rate will reflect the deduction of
additional charges, including a mortality and expense risk charge, and
therefore will be lower. Contract holders and policyowners should consult
the prospectus for the relevant VA contract or VLI policy.
Average annual total return and total return measure both the net income
generated by, and the effect of any realized and unrealized appreciation or
depreciation of, the underlying investments of a Portfolio over the
designated period assuming the reinvestment of all dividends and
distributions during the period. Thus, these figures reflect the change in
value of an investment in the Portfolio during a specified period. Average
annual total return will be quoted for at least one-, five- and ten-year
periods (or, if such periods have not yet elapsed, at the end of a shorter
period corresponding to the life of the Portfolio). Average annual total
return figures represent the average annual percentage change in the value
of a specific dollar amount invested in the Portfolio's shares for the
designated period. Total return figures are not annualized and represent the
aggregate percentage or dollar value change over the period.
Yield is a measure of the net investment income per share earned over a
specific one-month or 30-day period (seven-day period for the Money Market
Portfolio) expressed as a percentage of the Portfolio's net asset value per
share at the end of the period (except for the Money Market Portfolio where
the net asset value per share at the beginning of the period is used). Yield
is an annualized figure, meaning that it is assumed that the Portfolio
generates the same level of investment income over a one-year period. The
effective yield for the Money Market Portfolio is calculated similarly, but
24
<PAGE>
the net investment income earned is assumed to be compounded when
annualized. The Money Market Portfolio's effective yield will be slightly
higher than its yield due to this compounding. Semi-annual compounding is
assumed for Portfolios other than the Money Market Portfolio.
From time to time, the Fund may include in its sales literature and
shareholder reports for the High Grade Bond and High Yield Bond Portfolios a
quotation of the current "distribution rate" for the Portfolios. The
distribution rate is simply a measure of the level of income and short-term
capital gain dividends distributed for a specified period. It differs from
yield, which is a measure of the income actually earned by the Portfolio's
investments and from total return, which is a measure of the income actually
earned by, plus the effect of any realized or unrealized appreciation or
depreciation of such investments, during the period. Distribution rate,
therefore, is not intended to be a complete measure of performance.
Distribution rate may sometimes be greater than yield since, for instance,
it may include short-term gains (which may be non-recurring) and may not
reflect the amortization of bond premiums.
Additionally, from time to time, in advertisements or reports to
shareholders, a Portfolio may compare its performance to that of the
Consumer Price Index or various unmanaged indexes such as the Dow Jones
Industrial Average, the Standard & Poor's 500, the Shearson/Lehman
Government and Corporate Bond Index and the Salomon Brothers High Grade Bond
Index. A Portfolio may also use mutual fund quotation services such as
Lipper Analytical Services, Inc., an independent mutual fund reporting
service, or similar industry services, for purposes of comparing a
Portfolio's rank or performance with that of other mutual funds having
similar investment objectives. Performance comparisons should not be
considered representative of the future performance of any Portfolio.
- --------------------------------------------------------------------------------
PERFORMANCE CALCULATION
A Portfolio's standardized average annual total return quotation is computed
in accordance with a method prescribed by rules of the Commission. The
standardized average annual total return for a Portfolio for a specified
period is determined by assuming a hypothetical $10,000 investment in the
Portfolio's shares on the first day of the period at the then effective net
asset value per share ("initial investment"), and computing the ending
redeemable value ("redeemable value") of that investment at the end of the
period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years
in the period) and 1 is subtracted from the result, which is then expressed
as a percentage. The calculation assumes that all income and capital gains
dividends by the Portfolio have been reinvested at net asset value on the
reinvestment dates during the period. Standardized average annual total
return figures for various periods are set forth in the table on page 27.
Calculation of a Portfolio's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by
first taking an investment (assumed to be $10,000) in the Portfolio's shares
on the first day of the period at the then effective net asset value per
share ("initial investment") and computing the ending value ("ending value")
of that investment at the end of the period. The total return percentage is
then determined by subtracting the initial investment from the ending value
and dividing the difference by the initial investment and expressing the
result as a percentage. This calculation assumes that all income and capital
gains dividends by the Portfolio have been reinvested at net asset value on
the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period.
Total return figures for various periods are set forth in the table on page
28.
The yield for a Portfolio other than the Money Market Portfolio is computed
in accordance with the formula set forth below, which is a standardized
method prescribed by rules of the Commission. Based upon the 30-day period
ended December 31, 1998 the High Grade Bond Portfolio's yield was 6.07% and
the High Yield Bond Portfolio's yield was 6.55%. A Portfolio's yield is
computed by
25
<PAGE>
dividing the net investment income per share earned during the specific
one-month or 30-day period by the offering price per share on the last day
of the period, according to the following formula:
(6)
Yield = 2 [(a-b +1) -1]
--------------------
cd
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 offering price per share on the last day of the period.
In computing yield, the Fund follows certain standardized accounting
practices specified by Commission rules. These practices are not necessarily
consistent with those that the Fund uses to prepare its annual and interim
financial statements in accordance with generally accepted accounting
principles.
The Money Market Portfolio's yield is computed in accordance with a standard
method prescribed by rules of the Commission. Under that method, the yield
quotation is based on a seven-day period and is computed as follows. The net
investment income per share (accrued interest on portfolio securities, plus
or minus amortized premium or discount, less accrued expenses) for the
period is divided by the price per share (expected to remain constant at
$1.00) at the beginning of the period ("base period return") and the result
is divided by seven and multiplied by 365 and the resulting yield figure is
carried to the nearest one hundredth of one percent. Realized capital gains
or losses and unrealized appreciation or depreciation of investments are not
included in the calculation.
The Money Market Portfolio's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect
of assumed compounding. The formula for the effective yield is [(base period
return +1) raised to the power of 365/7] -1.
The Money Market Portfolio's yield and effective yield for the seven-day
period ending December 31, 1998 were 4.39% and 4.48%, respectively.
A Portfolio's performance quotations are based upon historical results and
are not necessarily representative of future performance. The Fund's shares
are sold at net asset value, and return and net asset value will fluctuate
except that the Money Market Portfolio seeks to maintain a $1.00 net asset
value per share. Factors affecting a Portfolio's performance include general
market conditions, operating expenses and investment management. Shares of a
Portfolio are redeemable at net asset value, which may be more or less than
original cost.
The figures below show performance information for various periods ended
December 31, 1998. The rate of return for a Portfolio should be
distinguished from the rate of return of a corresponding subaccount of a
separate account of a Participating Insurance Company, whose rate will
reflect the deduction of additional charges, including a mortality and
expense risk charge, and, if calculated for corresponding periods, would be
lower. VA contract holders and VLI policyowners should consult the
prospectus for such contract or policy.
26
<PAGE>
AVERAGE ANNUAL TOTAL RETURN TABLE FOR PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
STANDARD
AVERAGE ANNUAL
PORTFOLIO TOTAL RETURN
<S> <C>
Value Growth
Life of Portfolio (1) 5.68
Ten-Year 7.84
Five-Year 2.60
One-Year (24.43)
High Grade Bond
Life of Portfolio (1) 9.42
Ten-Year 9.19
Five-Year 7.43
One-Year 7.51
High Yield Bond
Life of Portfolio (1) 11.15
Ten-Year 10.87
Five-Year 8.99
One-Year 6.88
Managed
Life of Portfolio (1) 9.61
Ten-Year 10.32
Five-Year 7.22
One-Year (8.71)
Blue Chip (2)
Life of Portfolio 19.45
Five-Year 20.19
One-Year 18.91
</TABLE>
27
<PAGE>
TOTAL RETURN TABLE FOR PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PORTFOLIO TOTAL RETURN
<S> <C>
Value Growth
Life of Portfolio (1) 85.72
Ten-Year 112.77
Five-Year 13.70
One-Year (24.43)
High Grade Bond
Life of Portfolio (1) 174.42
Ten-Year 140.99
Five-Year 43.10
One-Year 7.51
High Yield Bond
Life of Portfolio (1) 227.18
Ten-Year 180.58
Five-Year 53.80
One-Year 6.88
Managed
Life of Portfolio (1) 179.65
Ten-Year 166.90
Five-Year 41.68
One-Year (8.71)
Blue Chip (2)
Life of Portfolio 330.52
Five-Year 150.79
One-Year 18.91
</TABLE>
(1) The Value Growth, High Grade Bond, High Yield Bond and
Managed Portfolios commenced operations on October 15,
1987.
(2) The Blue Chip Portfolio commenced operations on
October 15, 1990.
- --------------------------------------------------------------------------------
ORGANIZATION OF THE FUND
- --------------------------------------------------------------------------------
The Fund was organized as a business trust under the laws of the
Commonwealth of Massachusetts on November 3, 1986.
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of the Portfolios and to divide or combine the
shares of any Portfolio into a greater or lesser number of shares of that
Portfolio without thereby changing the proportionate beneficial interests in
the Portfolio. The shares of the Fund are divided into six separate series
(I.E., Portfolios), and the shares of each Portfolio have equal rights and
privileges and represent an equal proportionate interest with all other
shares of that Portfolio. Upon liquidation of the Fund or any Portfolio of
the Fund, Shareholders of each Portfolio are entitled to share pro rata in
the net assets of that Portfolio available for distribution to Shareholders.
Shares have no preemptive or conversion rights. The right of redemption is
described elsewhere herein. Shares of each Portfolio are fully paid and non-
assessable by the Fund. The Trustees are authorized to classify unissued
shares of the Fund by assigning them to a Portfolio for issuance.
The assets received by the Fund on the sale of shares of each Portfolio and
all income, earnings, profits and proceeds thereof, (subject only to the
rights of creditors), are allocated to each Portfolio,
28
<PAGE>
and constitute the assets of such Portfolio. The assets of each Portfolio
are required to be segregated on the Fund's books of account.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Fund. The Declaration of Trust contains an express disclaimer of
Shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each instrument entered into or
executed by the Fund. The Declaration of Trust also provides for
indemnification out of Fund property of any Shareholder held personally
liable for the claims and liabilities to which a Shareholder may become
subject by reason of being or having been a Shareholder. Thus, the risk of a
Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet
its obligations.
- --------------------------------------------------------------------------------
SHAREHOLDER VOTING RIGHTS
- --------------------------------------------------------------------------------
Shareholders have the right to vote on the election of Trustees and on any
and all matters which, by law or the provisions of the Fund's by-laws, they
may be entitled to vote. Shareholders of all Portfolios vote for a single
set of Trustees; thereafter, the Trustees will serve for terms of unlimited
duration (subject to certain removal procedures by the Trustees or the
Shareholders).
All shares of the Fund have equal voting rights and may be voted in the
election of Trustees and on other matters submitted to the vote of
Shareholders. The Board of Trustees has the power to alter the number of
Trustees and to appoint successor Trustees, provided that immediately after
the appointment of any successor Trustee at least two-thirds of the Trustees
have been elected by shareholders of the Fund. As permitted by Massachusetts
law, there normally will be no meetings of Shareholders for the purposes of
electing trustees unless and until such time as fewer than a majority of the
trustees holding office have been elected by Shareholders. At that time, the
Trustees then in office will call a Shareholders' meeting for the election
of Trustees. The Trustees must call a meeting of Shareholders for the
purpose of voting upon the question of removal of any Trustee when requested
to do so by the record holders of 10% of the outstanding shares of the Fund.
At such a meeting, a Trustee may be removed after the holders of record of
not less than two-thirds of the outstanding shares of the Fund have declared
that the Trustee be removed either by declaration in writing or by votes
cast in person or by proxy. Except as set forth above, the Trustees shall
continue to hold office and may appoint successor Trustees, provided that
immediately after the appointment of any successor Trustee, at least
two-thirds of the Trustees have been elected by the Shareholders. The shares
do not have cumulative voting rights, which means that the holders of a
majority of the shares voting for the election of Trustees can elect all the
Trustees.
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Fund, except that
amendments to conform the Declaration to the requirements of applicable
federal laws or regulations, or to the regulated investment company
provisions of the Code, or to designate and establish additional Portfolios,
may be made by the Trustees without the vote or consent of the Shareholders.
If not terminated by the vote or written consent of a majority of its
outstanding shares, the Fund will continue indefinitely.
In matters which only affect a particular Portfolio, the matter shall have
been effectively acted upon by a majority vote of that Portfolio even
though: (i) the matter has not been approved by a majority vote of any other
Portfolio; or (ii) the matter has not been approved by a majority vote of
the Fund.
To the extent required by law, the Participating Insurance Companies will
vote Fund shares held in their separate accounts in accordance with
instructions received from the VLI policyowners or VA contract holders
having voting interests in the separate accounts. In addition, to the extent
required by law, Farm Bureau Life Insurance Company will vote Fund shares
held in its general account in proportion to voting instructions received
from its VLI policyowners and its VA contract holders. Each share will have
one vote and fractional shares will be counted. On any matters affecting an
29
<PAGE>
individual Portfolio, only the Shareholders of that Portfolio will be
entitled to vote. On matters relating to all the Portfolios, but affecting
the Portfolios differently, separate votes by Portfolio will be required.
Shares for which no voting instructions are received shall be voted by the
Participating Insurance Companies in proportion to the shares for which
voting instructions are received.
As used in this SAI, the phrase "majority vote" of a Portfolio (or of the
Fund) means the vote of the lesser of (i) 67% of the shares of the Portfolio
(Fund) present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50%
of the outstanding shares of the Portfolio (Fund).
- --------------------------------------------------------------------------------
CONTROL PERSONS
- --------------------------------------------------------------------------------
Farm Bureau Life Insurance Company ("Farm Bureau"), an Iowa corporation, and
subsidiary of FBL Financial Group, Inc., through its Variable Accounts owns
all of the Fund's outstanding shares, other than the shares of the Fund
purchased for investment by Farm Bureau through its general account to get
the Portfolios of the Fund started and any additional shares acquired by
Farm Bureau through reinvestment of dividends on those shares. The
organizational expenses of the Fund were paid by Farm Bureau.
Because Farm Bureau owns the shares of the Fund, the Fund is deemed to be
controlled by Farm Bureau by nature of the definitions contained in the
Investment Company Act of 1940. However, Farm Bureau will generally vote the
shares of the Fund held by the Variable Account in accordance with
instructions received from its VLI policyholders and VA contractholders. The
shares held in Farm Bureau's general account will generally be voted in
proportion to voting instructions received from Farm Bureau's VLI
policyholders. Under certain circumstances, however, Farm Bureau may
disregard voting instructions received from VLI policyholders.
As of the date of this SAI, Farm Bureau owned more than 25% of the
outstanding voting securities of the Money Market Portfolio through its
general account. Such shares were acquired for investment and can only be
disposed of by redemption or transfer to an affiliate. Officers and trustees
of the Fund owned less than 1% of the outstanding voting securities of each
Portfolio.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
CUSTODIAN
Bankers Trust Company, Global Assets-Insurance Group, 16 Wall Street, New
York, N.Y., 10005, is the custodian of all cash and securities owned by the
Fund. The custodian performs no managerial or policy-making functions for
the Fund.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
The Fund's independent auditors for the current fiscal year are Ernst &
Young LLP, 801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309. The
independent auditors audit and report on the Fund's annual financial
statements, review certain regulatory reports and perform other professional
accounting, auditing, tax and advisory services when engaged to do so by the
Fund.
- --------------------------------------------------------------------------------
ACCOUNTING SERVICES
The Fund has entered into an accounting services agreement with EquiTrust
Investment Management Services, Inc. ("EquiTrust"), pursuant to which
EquiTrust performs accounting services for the Fund. In addition, the
agreement provides that EquiTrust shall calculate the Fund's net asset value
in
30
<PAGE>
accordance with the Fund's current Prospectus and prepare for Fund approval
and use various tax returns and other reports. For such services, each
Portfolio pays EquiTrust an annual fee, payable monthly, of 0.05% of the
Portfolio's average daily net assets, with the annual fee payable by a
Portfolio not to exceed $30,000. During the fiscal year ended December 31,
1998, the aggregate amount of such fees paid to EquiTrust was $85,980.
- --------------------------------------------------------------------------------
DIVIDEND DISBURSING AND TRANSFER AGENT
EquiTrust Investment Management Services, Inc., serves as the Fund's
dividend disbursing and transfer agent.
- --------------------------------------------------------------------------------
LEGAL MATTERS
The firm of Sutherland Asbill & Brennan LLP, Washington, D.C., is counsel
for the Fund.
- --------------------------------------------------------------------------------
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information set forth in
the registration statement and exhibits relating thereto which the Fund has
filed with the Commission in Washington, D.C., under the Securities Act of
1933 and the Investment Company Act, which reference is hereby made.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited financial statements of the Fund, including the notes thereto,
contained in the Annual Report to Shareholders of EquiTrust Variable
Insurance Series Fund for the fiscal year ended December 31, 1998 were filed
with the Commission on February 23, 1999 and are incorporated by reference.
Additional copies of such Annual Report to Shareholders may be obtained
without charge by contacting the Fund.
31
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A -- MONEY MARKET INSTRUMENTS
- --------------------------------------------------------------------------------
The Money Market Portfolio invests in money market instruments maturing in
thirteen months or less from the time of investment, including the
instruments described below. In addition, the other Portfolios, subject to
their respective investment objectives, may invest in certain money market
instruments.
U.S. GOVERNMENT SECURITIES: Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY OR INSTRUMENTALITY SECURITIES: Debt securities issued
or guaranteed by agencies or instrumentalities of the U.S. Government.
Although these securities are not direct obligations of the U.S. Government,
some are supported by the full faith and credit of the U.S. Treasury; others
are supported only by the limited right of the issuer to borrow from the
U.S. Treasury; and others are supported only by the credit of the
instrumentality and not the U.S. Treasury.
OBLIGATIONS OF BANKS OR SAVINGS INSTITUTIONS: Certificates of deposit,
bankers' acceptances and other short-term debt obligations of commercial
banks or savings and loan associations. None of the Portfolios will invest
in any instruments issued by a commercial bank unless it has total assets of
at least $100 million and has its deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"). Similarly, the Portfolios will not invest in
any instrument issued by a savings and loan association unless it has total
assets of at least $100 million, has been issued a charter by the Office of
Thrift Supervision ("OTS") or was formerly a member of the Federal Home Loan
Bank System and is now subject to regulation by the OTS and is insured by
the FDIC. However, the Portfolios may invest in an obligation of a bank or
savings and loan association with assets of less than $100 million if the
principal amount of such obligation is fully covered by FDIC insurance. The
limit of such coverage is currently $100,000.
COMMERCIAL PAPER: Short-term unsecured promissory notes issued by
corporations, primarily to finance short-term credit needs.
In addition, the Portfolios may invest in commercial paper issued by major
corporations in reliance on the so-called "private placement" exemption from
registration by Section 4(2) of the Securities Act of 1933 ("Section 4(2)
paper") subject to the below-noted requirements with respect to ratings.
Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as
the Portfolios, who agree that it is purchasing the paper for investment and
not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) paper normally is resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. A Portfolio's investment adviser considers the legally
restricted but readily saleable Section 4(2) paper to be liquid; however,
the paper will be treated as illiquid unless, pursuant to procedures
approved by the Board of Trustees, a particular investment in Section 4(2)
paper is determined to be liquid. The investment adviser monitors the
liquidity of the Portfolios' investments in Section 4(2) paper on a
continuing basis.
OTHER CORPORATE DEBT SECURITIES: Outstanding nonconvertible corporate debt
securities (E.G., bonds and debentures) which were not issued as short-term
obligations but which have thirteen months or less remaining until maturity.
REPURCHASE AGREEMENTS: See "Repurchase Agreements" under "Investment
Objectives, Policies and Techniques."
As to obligations of banks or savings institutions, commercial paper, other
corporate debt securities and repurchase agreements, a Portfolio only will
invest in U.S. dollar-denominated instruments which
A-1
<PAGE>
the Board of Trustees determines present minimal credit risks and which, at
the time of acquisition, generally are either:
1. rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"); or
2. rated in one of the two highest rating categories by only one NRSRO if
that NRSRO is the only NRSRO that has rated the instrument or issuer;
3. in the case of an unrated instrument, determined by the Board of
Trustees to be of comparable quality to either of the above; or
4. issued by an issuer that has received a rating of the type described in
1 or 2 above on other securities that are comparable in priority and
security to the instrument.
FLOATING AND VARIABLE RATE SECURITIES: The Portfolio may invest in
instruments having rates of interest that are adjusted periodically or that
float continuously or periodically according to formulas intended to
minimize fluctuation in the value of the instruments ("Variable Rate
Securities"). The interest rate on a Variable Rate Security ordinarily is
determined by reference to, or is a percentage of, a specified market rate
such as a bank's prime rate, the 90-day U.S. Treasury Bill rate, or the rate
of return on commercial paper or bank certificates of deposit. Generally,
the changes in the interest rate on Variable Rate Securities reduce the
fluctuation in the market value of such securities. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Some Variable Rate
Securities have a demand feature ("Variable Rate Demand Securities")
entitling the purchaser to resell the securities at an amount approximately
equal to the principal amount thereof plus accrued interest. As in the case
for other Variable Rate Securities, the interest rate on Variable Rate
Demand Securities varies according to some specified market rate intended to
minimize fluctuation in the value of the instruments. Some of these Variable
Rate Demand Securities are unrated, their transfer is restricted by the
issuer and there is little if any secondary market for the securities. Thus,
any inability of the issuers of such securities to pay on demand could
adversely affect the liquidity of these securities. The Portfolio determines
the maturity of Variable Rate Securities in accordance with Commission rules
which allow the Portfolio to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.
A-2
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B -- QUALITY COMPOSITION OF BOND PORTFOLIOS
- --------------------------------------------------------------------------------
The tables below reflect the average composition by quality rating of the
investment securities of the High Yield Bond Portfolio and the High Grade
Bond Portfolio for the fiscal year ended December 31, 1998. Percentages are
weighted averages based upon the portfolio composition at the end of each
month during the year. The percentage of total assets represented by bonds
rated by Moody's and S&P is shown. The percentage of total assets
represented by unrated bonds is also shown. Although not specifically rated
by Moody's or S&P, U.S. Government securities are reflected as Aaa and AAA
(highest quality) for purposes of the tables. The category noted as "Cash
and Other Assets" includes all assets other than the rated and unrated bonds
reflected in the table including, without limitation, equity securities,
preferred stocks, money market instruments, repurchase agreements, options
and cash.
The allocations reflected in the tables do not necessarily reflect the view
of the investment adviser as to the quality of the bonds in the Portfolio on
the date shown; and they are not necessarily representative of the
composition of the Portfolio at other times. The composition of the
Portfolio will change over time.
HIGH YIELD BOND PORTFOLIO COMPOSITION OF PORTFOLIO BY QUALITY
<TABLE>
<CAPTION>
PERCENTAGE OF
PORTFOLIO BY PERCENTAGE OF
MOODY'S MOODY'S S&P PORTFOLIO BY
RATING CATEGORY RATINGS RATING CATEGORY S&P RATINGS
<S> <C> <C> <C>
A.................... 3.78% A.................... 10.41%
Baa.................. 47.78 BBB.................. 41.15
Ba................... 20.38 BB................... 13.31
B.................... 4.42 B.................... 7.16
Ca................... 0.61 C....................
Caa.................. CCC.................. 2.36
Not rated............ Not rated............ 2.58
Cash and Other Cash and Other
Assets............. 23.03 Assets............... 23.03
------------- -------------
100.00% 100.00%
</TABLE>
B-1
<PAGE>
HIGH GRADE BOND PORTFOLIO COMPOSITION OF PORTFOLIO BY QUALITY
<TABLE>
<CAPTION>
PERCENTAGE OF
PORTFOLIO BY PERCENTAGE OF
MOODY'S MOODY'S S&P PORTFOLIO BY
RATING CATEGORY RATINGS RATING CATEGORY S&P RATINGS
<S> <C> <C> <C>
Aaa.................. 37.35% Aaa.................. 37.35%
Aa................... 2.23 AA................... 3.61
A.................... 18.05 A.................... 28.07
Baa.................. 17.62 BBB.................. 6.22
Ba................... 3.53 BB................... 1.28
Not rated............ Not rated............ 2.25
Cash and Other Cash and Other
Assets............. 21.22 Assets............... 21.22
------------- -------------
100.00% 100.00%
</TABLE>
The description of each bond quality category set forth in the tables is
intended to be a general guide and not a definitive statement as to how
Moody's and S&P define such rating category. A more complete description of
the rating categories is set forth under "Appendix C -- Description of
Corporate Bond Ratings." The ratings of Moody's and S&P represent their
opinions as to the capacity to pay interest and principal of the securities
that they undertake to rate. It should be emphasized, however, that ratings
are relative and subjective and do not evaluate market value risk. After
purchase by a Portfolio, an obligation may cease to be rated or its rating
may be reduced. Neither event would require a Portfolio to eliminate the
obligation from its portfolio. An issue may be unrated simply because the
issuer chose not to have it rated, and not necessarily because it is of
lower quality. Unrated issues may be less marketable than rated issues.
B-2
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX C -- DESCRIPTION OF CORPORATE BOND RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
Aaa: Bonds that 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 exceptionally stable margin and principal
is secure. While the various protective elements
are likely to change, such changes as can be
anticipated are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds that 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 fluctuation
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
with "Aaa" securities.
A: Bonds that are rated A possess many favorable
investment attributes and may be considered as
upper medium-grade obligations. This rating
indicates an extremely strong capacity to pay
principal and interest which is considered
adequate but elements may be present which suggest
a susceptibility to impairment sometime in the
future.
Baa: Bonds rated Baa are considered 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. Such bonds lack
outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba: Bonds 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 both good and
bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of a
desirable investment. Assurance of interest and
principal payments or of maintenance of other
terms of the contract over any long period of time
may be small.
Caa: Bonds 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 rated Ca represent obligations which are
speculative in a high degree. Such issues are
often in default or have other market
shortcomings.
</TABLE>
- --------------------------------------------------------------------------------
S&P
<TABLE>
<S> <C>
AAA: Bonds rated AAA are highest grade debt
obligations. This rating indicates an extremely
strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality
obligations. Capacity to pay principal and
interest is very strong, and in the majority of
instances they differ from "AAA" issues only in a
small degree.
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
A: Bonds rated A have a strong capacity to pay
principal and interest, although they are more
susceptible to the adverse effects of changes in
circumstances and economic conditions.
BB: Bonds rated BBB are regarded as having an adequate
capacity
B: to pay principal and interest. Whereas they
normally
CCC: exhibit protection parameters, adverse economic
conditions
CC: or changing circumstances are more likely to lead
to a weakened capacity to pay principal and
interest for bonds in this category, than for
bonds in the "A" category.
D: Bonds rated D are in default, and payment of
interest and/or principal is in arrears. Plus (+)
or Minus (-): The ratings from "AA" to "BB" may be
modified by the addition of a plus or minus sign
to show relative standing within the rating
categories.
NR: Not rated by the indicated rating agency.
</TABLE>
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S
<TABLE>
<S> <C>
P-1: The rating P-1 is the highest commercial paper
rating assigned by Moody's and indicates that, in
Moody's opinion, the issuer or supporting
institution has a superior ability for repayment
of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many
of the following characteristics: (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.
P-2: The rating P-2 indicates that, in Moody's opinion,
the issuer or supporting institution has a strong
ability for repayment of senior short-term debt
obligations. Strong ability for repayment will
normally be evidenced by many of the
characteristics listed under the description of
"P-1." Earnings trends and coverage ratios, while
sound, may be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is
maintained.
</TABLE>
- --------------------------------------------------------------------------------
S&P
<TABLE>
<S> <C>
A-1: This designation indicates that the degree of
safety regarding timely payment of debt having an
original maturity of no more than 365 days is
either overwhelming or very strong.
A-2: This designation indicates that capacity for
timely payment of debt having an original maturity
of no more than 365 days is strong; however, the
relative degree of safety is not as high as for
issues designated "A-1."
</TABLE>
C-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
The following financial statements are filed as part of this
Registration Statement.(1)
Included in Part A - Prospectus: Financial Highlights
Incorporated by reference in Part B - Statement of Additional
Information:
Annual Report to Shareholders
Report of Independent Auditors
Statements of Assets and Liabilities as of December 31, 1998
Schedules of Investments as of December 31, 1998
Statements of Operations for the year ended December 31, 1998
Statements of Changes in Net Assets for the year ended
December 31, 1998
Statements of Changes in Net Assets for the year ended
December 31, 1997
Notes to Financial Statements, December 31, 1998
(1) To be filed by amendment.
(b) EXHIBITS:
a. (i) Declaration of Trust.(1)
(ii) Amendment to Declaration of Trust.(1)
(iii) Amendment to Declaration of Trust.(1)
(iv) Amendments to Declaration of Trust.(1)
(v) Amendment to Declaration of Trust.(1)
(vi) Amendment to Declaration of Trust.(1)
b. By-Laws of Registrant.(1)
c. None.
d. (i) Investment Advisory and Management Services Agreement.(1)
C-1
<PAGE>
(ii) Amendment to Investment Advisory Management Services Agreement.(1)
(iii) Amendment to Investment Advisory Management Services Agreement.(1)
e. Underwriting Agreement between Registrant and EquiTrust Investment
Management Services, Inc.(1)
f. None.
g. Custodian Agreement between Registrant and Bankers Trust Company Des
Moines, N.A.(1)
h. (i) Dividend Disbursing and Transfer Agent Agreement between Registrant
and EquiTrust Investment Management Services, Inc.(1)
(ii) Fidelity Bond Joint Insureds Agreement.(1)
(iii) Joint Insureds DO & EO Agreement.(1)
(iv) (A) Subscription Agreement.(1)
(B) Additional Subscription Agreement.(1)
(C) Subscription Agreement for the Money Market Portfolio.(1)
(D) Subscription Agreement for the Blue Chip Portfolio.(1)
(v) Participation Agreement.(1)
(vi) Accounting Services Agreement.(1)
i.* Consent of Sutherland Asbill & Brennan LLP.
j.* Consent of Ernst & Young LLP.
k. None.
l. See Exhibits h(iv)(A) and h(iv)(B).
m. None.
n. Financial Data Schedules.(2)
o. None.
----------
(1) Incorporated by reference to Post Effective Amendment No. 15 to the
Registration Statement, filed with the Commission on May 1, 1998.
(2) Incorporated by reference to Form N-SAR for EquiTrust Variable
Insurance Series Fund, filed with the Commission on
February 23, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by the Registrant. All of the outstanding common
stock of the Registrant is owned by Farm Bureau Life Insurance Company ("Farm
Bureau"), an Iowa life insurance corporation, Farm Bureau Life Variable Account
and Farm Bureau Life Annuity Account, separate accounts of Farm Bureau which are
registered as unit investment trusts under the Investment Company Act of 1940,
as amended (File Nos. 811-5068/33-12789 and 811-7974/33-67538). Farm Bureau is
owned by FBL Financial Group, Inc., an Iowa corporation. 54.30% of the
outstanding voting shares of FBL Financial Group, Inc. are owned by Iowa Farm
Bureau Federation. Iowa Farm Bureau Federation is an Iowa not-for-profit
corporation, the members of which are county farm bureau organizations and their
individual members. Therefore, various companies controlled by Iowa Farm Bureau
Federation or otherwise affiliated with Farm Bureau, may be deemed to be under
common control with the Registrant. These companies, together with the identity
of the owners of their common stock, are set forth on a diagram incorporated
herein by reference to item 26 of post-effective amendment number 7 to the Form
N-4 registration statement filed with the Commission by Farm Bureau on
May 1, 1999.
C-2
<PAGE>
ITEM 25. INDEMNIFICATION.
See Article XI, Section 2 of the Registrant's Declaration of Trust, filed
as Exhibit 1 to this Registration Statement, which provision is incorporated
herein by reference to post-effective amendment No. 15 filed on May 1, 1998.
The Investment Advisory and Management Services Agreement between the
Registrant and the EquiTrust Investment Management Services, Inc. ("Adviser")
provides that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties thereunder on the part
of the Adviser, the Adviser shall not be liable for any error of judgment or
mistake of law, or for any loss suffered by the Fund in connection with the
matters to which such Agreement relates.
In addition, the Registrant maintains a directors and officers "errors and
omissions" liability insurance policy under which the Registrant and its
trustees and officers are named insureds.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to trustees, 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 by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, 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 Registrant will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Registrant's investment adviser is EquiTrust Investment Management
Services, Inc. In addition to its services to Registrant as investment adviser,
underwriter and transfer and dividend disbursing agent, all as set forth in
parts A and B of this Registration Statement, the Adviser acts as adviser,
underwriter, and shareholder service, transfer and dividend disbursing agent for
EquiTrust Money Market Fund, Inc., a diversified open-end management investment
company, and EquiTrust Series Fund, Inc., a diversified open-end series
management investment company.
The principal occupations of the principal executive officers and directors
of the Adviser are their services as officers, directors and/or employees of FBL
Financial Group, Inc. and the Iowa Farm Bureau Federation and/or its affiliates
as disclosed below. The address of FBL Financial Group, Inc. and the
Federation and its affiliates is 5400 University Avenue, West Des Moines, Iowa
50266.
C-3
<PAGE>
NAME AND POSITION(S) PRINCIPAL OCCUPATIONS
WITH ADVISER ---------------------
------------
Stephen M. Morain Incorporated herein by reference to the
Senior Vice President, Statement of Additional Information (Part B) of
General Counsel and Director this Registration Statement.
William J. Oddy Incorporated herein by reference to the
President and Director Statement of Additional Information (Part B) of
this Registration Statement.
Dennis M. Marker Incorporated herein by reference to the
Investment Vice President, Statement of Additional Information (Part B) of
Administration, Secretary this Registration Statement.
and Director
Thomas R. Gibson Incorporated herein by reference to the
Chief Executive Officer and Statement of Additional Information (Part B) of
Director this Registration Statement.
Timothy J. Hoffman Incorporated herein by reference to the
Vice President and Director Statement of Additional Information (Part B) of
this Registration Statement.
James W. Noyce Incorporated herein by reference to the
Chief Financial Officer, Statement of Additional Information (Part B) of
Treasurer and Director this Registration Statement.
Thomas E. Burlingame Vice President, Associate General Counsel, FBL
Director Financial Group, Inc.
F. Walter Tomenga Vice President, Corporate Affairs and Marketing
Director Services, FBL Financial Group, Inc.
Lynn E. Wilson Vice President, Life Sales, FBL Financial Group,
Director Inc.
Lou Ann Sandburg, Incorporated herein by reference to the
Vice President Investments, Statement of Additional Information (Part B) of
Secretary and Director this Registration Statement.
Sue A. Cornick Incorporated herein by reference to the
Market Conduct and Mutual Statement of Additional Information (Part B) of
Funds Vice President and this Registration Statement.
Assistant Secretary
C-4
<PAGE>
Kristi Rojohn Incorporated herein by reference to the
Assistant Mutual Funds Statement of Additional Information (Part B) of
Manager and Assistant this Registration Statement.
Secretary
Elaine A. Followwill Incorporated herein by reference to the
Compliance Assistant and Statement of Additional Information (Part B) of
Assistant Secretary this Registration Statement.
Roger F. Grefe, Investment Management Vice President, FBL
Investment Management Vice Financial Group, Inc.
President
Robert Rummelhart, Fixed-Income Vice President, FBL Financial
Fixed-Income Vice President Group, Inc.
Roger PJ Soener Real Estate Vice President, FBL Financial Group,
Real Estate Vice President Inc. He holds other positions with various
affiliates of the foregoing.
James P. Brannen Controller and Vice President, FBL Financial
Controller and Vice Group, Inc. and various affiliates of the
President foregoing.
Kathleen E. Kruidenier Manager, Private Investor Services, EquiTrust
Manager, Private Investor Investment Management Services, Inc.
Services
Sharon M. Jerdee Investment Accounting Director, EquiTrust
Investment Accounting Investment Management Services, Inc.
Director
Charles T. Happel Portfolio Manager, EquiTrust Marketing Services,
Portfolio Manager Inc.
Laura Kellen Beebe Portfolio Manager, EquiTrust Marketing Services,
Portfolio Manager Inc.
Robert A. Simons Senior Counsel - Investments, FBL Financial
Senior Counsel - Investments Group, Inc.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) EquiTrust Investment Management Services, Inc., the principal
underwriter for Registrant, also acts as the investment adviser, principal
underwriter and transfer and dividend disbursing agent for EquiTrust Money
Market Fund, Inc. and EquiTrust Series Fund, Inc., both diversified open-end
management investment companies.
(b) The principal business address of each director and officer of the
principal underwriter is 5400 University Avenue, West Des Moines, Iowa 50266.
See Item 28 for information on the officers of EquiTrust Investment Management
Services, Inc.
C-5
<PAGE>
(c) Inapplicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
will be maintained at the offices of the Registrant and the offices of the
Adviser, EquiTrust Investment Management Services, Inc., 5400 University Avenue,
West Des Moines, Iowa 50266.
ITEM 29. MANAGEMENT SERVICES.
Inapplicable.
ITEM 30. UNDERTAKINGS.
Inapplicable.
C-6
<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 the requirements
of Securities Act Rule 485(b) for effectiveness of this Registration
Statement and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
West Des Moines and State of Iowa, on the 22nd day of April, 1999.
EQUITRUST VARIABLE INSURANCE SERIES FUND
By: /s/ Edward M. Wiederstein
----------------------------------------
Edward M. Wiederstein
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Edward M. Wiederstein President and Trustee April 22, 1999
- ------------------------------ (Principal Executive Officer) (dated)
Edward M. Wiederstein Senior Vice President,
Secretary-Treasurer
and Trustee
/s/ Richard D. Harris (Principal Financial and April 22, 1999
- ------------------------------ Accounting Officer) (dated)
Richard D. Harris
Donald G. Bartling* Trustee April 22, 1999
(dated)
John R. Graham* Trustee April 22, 1999
(dated)
Erwin H. Johnson* Trustee April 22, 1999
(dated)
Kenneth Kay* Trustee April 22, 1999
(dated)
Curtis C. Pietz* Trustee April 22, 1999
(dated)
*By: /s/ Stephen M. Morain
-------------------------
Stephen M. Morain Attorney-in-Fact, pursuant to
Power of Attorney
C-7
<PAGE>
Sutherland Asbill & Brennan LLP
ATLANTA - AUSTIN - NEW YORK - TALLAHASSEE - WASHINGTON
1275 Pennsylvania Avenue, NW Tel: (202) 383-0100
Washington, DC 20004-2415 Fax: (202) 637-3593
STEPHEN E. ROTH
DIRECT LINE: (202)383-0158
INTERNET: [email protected]
April 28, 1999
Board of Directors
EquiTrust Variable Insurance Series Fund
5400 University Avenue
West Des Moines, Iowa 50266
Re: EquiTrust Variable Insurance Series Fund
File No. 33-12791
----------------------------------------
Gentlemen:
We hereby consent to the reference to our name as legal counsel in the
Prospectus and the Statement of Additional Information, filed as part of the
Post-Effective Amendment No. 17 to the N-1A Registration Statement for the
EquiTrust Variable Insurance Series Fund. In giving this consent, we do not
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
------------------------------
Stephen E. Roth, Esq.
<PAGE>
We consent to the references to our firm under the caption "Financial
Highlights" in the Prospectus for EquiTrust Variable Insurance Series Fund in
Part A and "Other Information - Independent Auditors" in Part B and to the
incorporation by reference of our report dated January 25, 1999 on the
financial statements of EquiTrust Variable Insurance Series Fund, in this
Post-Effective Amendment No. 17 to Form N-1A Registration Statement under the
Securities Act of 1933 (No. 33-12791) and related Prospectus of EquiTrust
Variable Insurance Series Fund.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 26, 1999
