<PAGE> 1
FILE NO. 2-51173
FILE NO. 811-2480
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. 33 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 32 /X/
SECURITY FIRST TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11365 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
---------------------------------
(310) 312-6100
(REGISTRANT'S TELEPHONE NUMBER)
RICHARD C. PEARSON, ESQUIRE COPIES TO:
SECURITY FIRST LIFE INSURANCE COMPANY ROBERT J. ROUTIER, ESQUIRE
11365 WEST OLYMPIC BOULEVARD ROUTIER, MACKEY & JOHNSON, P.C.
LOS ANGELES, CALIFORNIA 90064 1700 K STREET, N.W.
(NAME AND ADDRESS OF AGENT FOR SERVICE) WASHINGTON, D.C. 20006
--------------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
- ----------
X ON DECEMBER 1, 1995 PURSUANT TO PARAGRAPH (B) OF RULE 485
- ----------
60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)
- ----------
ON [DATE] PURSUANT TO PARAGRAPH (A) OF RULE 485
- ----------
THE REGISTRANT DECLARES THAT IT HAS REGISTERED AN INDEFINITE NUMBER OF ITS
SHARES UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE MOST RECENT RULE 24F-2 NOTICE WAS FILED ON
SEPTEMBER 28, 1995.
<PAGE> 2
SECURITY FIRST TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM N-1A HEADINGS IN PROSPECTUS
OR STATEMENT OF
ADDITIONAL INFORMATION
PART A
<S> <C>
1. Cover Page Cover (Prospectus)
2. Synopsis *
3. Condensed Financial Information Condensed Financial Information
4. General Description of Registrant Cover; The Trust; The Series; Investment
Objectives and Policies; Growth and Income
Series**; Bond Series**; Value Equity Series***;
U.S. Government Income Series***
5. Management of the Fund Management of the Trust
5a. Management's Discussion of Fund Series Performance
Performance
6. Capital Stock and other Securities Dividends, Distributions and Federal Taxes; Trust
Shares; Reports
7. Purchase of Securities Being Offered How to Buy and Redeem Shares
8. Redemption or Repurchase How to Buy and Redeem Shares
9. Pending Legal Proceedings *
PART B
10. Cover Page Cover (Statement of Additional Information)
11. Table of Contents Table of Contents
12. General Information and History The Trust
13. Investment Objectives and Policies Investment Policies and Restrictions; Portfolio
Turnover
14. Management of the Fund Management of the Trust
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
15. Control Persons and Principal Principal Holders of Securities
Holders of Securities
16. Investment Advisory and Other Investment Adviser and Other Services; Custodian;
Independent Auditors; Legal Counsel
17. Brokerage Allocation Brokerage
18. Capital Stock and Other Securities *
19. Purchase, Redemption and Pricing of Pricing and Redemption of Securities Being
Securities Being Offered Offered; Federal Registration of Shares
20. Tax Status Taxation
21. Underwriters *
22. Calculations of Yield Quotations of *
Money Market Funds
23. Financial Statements *
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
*Omitted from Prospectus or Statement of Additional Information because Item is
not applicable.
**Prospectus or Statement of Additional Information Describing the Growth and
Income Series, Bond Series and U.S. Government Income Series.
***Prospectus or Statement of Additional Information Describing the Value
Equity Series and U.S. Government Income Series.
<PAGE> 4
SECURITY FIRST TRUST
PROSPECTUS
--------------------------------------------------------------
GROWTH AND INCOME SERIES
BOND SERIES
U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
--------------------------------------------------------------
Security First Trust ("Trust") is a diversified open-end
management investment company. The Trust's shares are offered
continuously and sold to separate accounts of life insurance
companies to fund variable contracts. Shares of the Trust are
not sold directly to the general public. Shares of the Trust
may be purchased and redeemed at net asset value without the
imposition of a sales charge.
This prospectus describes three separate series of shares,
the Growth and Income Series, the Bond Series and the U.S.
Government Income Series (referred to separately and
collectively as "the Series"). Each Series has its own
investment objective(s) and policies. The Trust has an
additional series which is not described herein. This
additional series is not available for contracts offered in
connection with this prospectus.
The Growth and Income Series seeks capital growth and
production of income through flexible and aggressive portfolio
management. Conservation of principal is a secondary
objective.
The Bond Series seeks maximization of investment income
over the long term consistent with conservation of principal
through investment primarily in marketable debt securities.
The Bond Series may invest up to 20% of the value of the
Series' total net assets in lower-rated/unrated bonds. Bonds
of this type are typically subject to greater market
fluctuations and risks of loss of income and principal due to
default by the issuer than are investments in lower-yielding,
higher-rated bonds.
The U.S. Government Income Series seeks to provide current
income. The Series pursues this objective by investing in a
professionally managed, diversified portfolio limited
primarily to U.S. government securities.
A Statement of Additional Information about the Trust
which is incorporated by reference into this Prospectus has
been filed with the Securities and Exchange Commission. It is
available, at no charge, by writing to the Trust at 11365 West
Olympic Boulevard, Los Angeles, California 90064, Attention:
Customer Service, or you can call (310) 312-6100 or (800)
283-4536. The date of the Statement of Additional Information
is the same as the date of this Prospectus.
--------------------------------------------------------------
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. IT SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
--------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------
Prospectus dated December 1, 1995 (12/95)
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Financial Information........................................................... 3
Series Performance........................................................................ 5
The Trust................................................................................. 6
The Series................................................................................ 6
Investment Objectives and Policies........................................................ 6
Growth and Income Series.................................................................. 6
Bond Series............................................................................... 7
U.S. Government Income Series............................................................. 8
Management of the Trust................................................................... 9
How to Buy and Redeem Shares.............................................................. 11
Dividends, Distributions and Federal Taxes................................................ 13
Trust Shares.............................................................................. 14
Effect of Banking Laws.................................................................... 14
Portfolio Turnover........................................................................ 14
Reports................................................................................... 15
Legal Proceedings......................................................................... 15
Table of Contents of Statement of Additional Information.................................. 16
Appendix A................................................................................ 17
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer described herein and, if given or made, such information or
representations must not be relied upon as having been authorized. This
Prospectus does not constitute an offer in any jurisdiction to any person to
whom such offer would be unlawful therein.
2
<PAGE> 6
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)(1)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990(2) 1989 1988
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $ 9.26 $8.81 $8.32 $7.54 $7.30 $ 9.19 $7.13 $ 8.98
------ ----- ----- ----- ----- ------ ----- ------
Income From
Investment
Operations:
Net Investment
Income.......... $ .29 $ .23 $ .22 $ .23 $ .39 $ .31 $ .25 $ .17
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)..... 1.35 .44 .49 .79 .29 (1.11) 2.22 (.58)
------ ----- ----- ----- ----- ------ ----- ------
Total From
Investment
Operations..... $ 1.64 $ .67 $ .71 $1.02 $ .68 $ (.80) $2.47 $ (.41)
------ ----- ----- ----- ----- ------ ----- ------
Less Distributions:
Dividends (from
net investment
income)......... $ (.26) $(.22) $(.22) $(.24) $(.44) $ (.30) $(.17) $ (.40)
Distributions
(from capital
gains).......... (.06) (.79) (.24) (1.04)
------ ----- ----- ----- ----- ------ ----- ------
Total
Distributions... $ (.32) $(.22) $(.22) $(.24) $(.44) $(1.09) $(.41) $(1.44)
====== ===== ===== ===== ===== ====== ===== ======
Net Asset Value,
End of Period..... $10.58 $9.26 $8.81 $8.32 $7.54 $ 7.30 $9.19 $ 7.13
====== ===== ===== ===== ===== ====== ===== ======
Total Return....... 17.71% 7.60% 8.53% 13.53% 9.32% (8.71)% 34.64% (4.57)%
Ratios/Supplemental
Data:
Net Assets, End
of Period......... $83,789,646 $65,660,970 $55,160,198 $42,814,515 $33,493,074 $42,108,056 $38,783,743 $25,303,236
Ratio of Expenses
to Average
Net Assets........ .74% .78% .75% .86% .97% .77% .86% .80%
Ratio of Net
Investment
Income to
Average Net
Assets............ 3.10% 2.62% 2.77% 3.10% 4.01% 4.22% 3.40% 2.74%
Portfolio Turnover
Rate.............. 8% 11% 5% 20% 36% 34% 98% 140%
<CAPTION>
1987 1986
----------- -----------
<S> <<C> <C>
Net Asset Value,
Beginning of
Period............ $ 7.76 $7.31
------ -----
Income From
Investment
Operations:
Net Investment
Income.......... $ .42 $ .18
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)..... 1.98 .86
----- -----
Total From
Investment
Operations..... $ 2.40 $1.04
Less Distributions:
Dividends (from
net investment
income)......... $ (.20) $(.16)
------ -----
Distributions
(from capital
gains).......... (.98) (.43)
---- ----
Total
Distributions... $(1.18) $(.59)
====== =====
Net Asset Value,
End of Period..... $ 8.98 $7.76
====== =====
Total Return....... 30.93% 14.23%
Ratios/Supplemental
Data:
Net Assets, End
of Period......... $22,539,285 $15,059,542
Ratio of Expenses
to Average
Net Assets........ .90% 1.00%
Ratio of Net
Investment
Income to
Average Net
Assets............ 5.66% 2.51%
Portfolio Turnover
Rate.............. 169% 130%
</TABLE>
- ------------
(1) Financial information for periods prior to June 24, 1987 reflect the results
of operations for Security First Variable Life Fund (the "Fund"), whose
assets and liabilities were acquired by the Growth and Income Series. (See
Note A to the Trust's financial statements in the Statement of Additional
Information.)
(2) On October 16, 1990 a significant contractholder in the Capitol Life
Separate Account A terminated its group annuity contract which resulted in
the redemption of 2,020,051.159 shares ($12,180,908.49 of net asset value)
in the Growth and Income Series.
3
<PAGE> 7
SECURITY FIRST TRUST BOND SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)(1)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990(2) 1989 1988
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................... $3.82 $4.08 $3.95 $3.68 $3.95 $4.10 $3.94 $3.99
----- ----- ----- ----- ----- ----- ----- -----
Income from Investment
Operations:
Net Investment Income....... $ .24 $ .21 $ .22 $ .24 $ .52 $ .29 $ .30 $ .29
Net Gains or (Losses) on
Securities (both realized
and unrealized)........... .08 (.25) .14 .28 (.24) (.14) .14 (.06)
----- ----- ----- ----- ----- ----- ----- -----
Total from Investment
Operations............... $ .32 $(.04) $ .36 $ .52 $ .28 $ .15 $ .44 $ .23
----- ----- ----- ----- ----- ----- ----- -----
Less Distributions:
Dividends
(from net investment
income)................... $(.22) $(.22) $(.23) $(.25) $(.55) $(.30) $(.28) $(.28)
Distributions (from capital
gains)....................
----- ----- ----- ----- ----- ----- ----- -----
Total Distributions....... $ .22 $(.22) $(.23) $(.25) $(.55) $(.30) $(.28) $(.28)
----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End
of Period................... $3.92 $3.82 $4.08 $3.95 $3.68 $3.95 $4.10 $3.94
===== ===== ===== ===== ===== ===== ===== =====
Total Return................. 8.38% (.98)% 9.11% 14.13% 7.09% 3.66% 11.17% 9.27%
Ratios/Supplemental Data:
Net Assets, End of Period.... $7,977,781 $7,225,964 $7,229,959 $5,682,609 $4,793,766 $9,371,386 $8,317,356 $7,249,964
Ratio of Expenses to Average
Net Assets.................. 1.29% 1.30% 1.45% 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of Net Investment
Income to Average
Net Assets................ 6.27% 5.45% 6.02% 6.42% 6.89% 7.45% 7.65% 7.23%
Portfolio Turnover Rate...... 56% 58% 36% 50% 310% 186% 148% 130%
<CAPTION>
1987 1986
---------- ----------
<S> <C> <C>
Net Asset Value, Beginning
of Period................... $4.21 $3.80
----- -----
Income from Investment
Operations:
Net Investment Income....... $ .22 $ .28
Net Gains or (Losses) on
Securities (both realized
and unrealized)........... (.06) .43
----- -----
Total from Investment
Operations............... $ .16 $ .71
----- -----
Less Distributions:
Dividends
(from net investment
income)................... $(.24) $(.30)
Distributions (from capital
gains).................... (.14)
----- -----
Total Distributions....... $(.38) $(.30)
----- -----
Net Asset Value, End
of Period................... $3.99 $4.21
===== =====
Total Return................. 0.48% 18.68%
Ratios/Supplemental Data:
Net Assets, End of Period.... $6,488,658 $5,128,574
Ratio of Expenses to Average
Net Assets.................. 1.50% 1.50%
Ratio of Net Investment
Income to Average
Net Assets................ 6.71% 7.96%
Portfolio Turnover Rate...... 40% 92%
</TABLE>
- ------------
(1) Financial information for periods prior to June 24, 1987 reflect the results
of operations for Security First Legal Reserve Fund (the "Fund"), whose
assets and liabilities were acquired by the Bond Series. (See Note A to the
Trust's financial statements in the Statement of Additional Information.)
(2) On October 16, 1990 a significant contractholder in the Capitol Life
Separate Account A terminated its group annuity contract which resulted in
the redemption of 1,334,514.417 shares ($5,217,951.37 of net asset value) in
the Bond Series.
4
<PAGE> 8
SECURITY FIRST TRUST U.S. GOVERNMENT INCOME SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1995 1994 1993(1)
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......................................... $ 4.91 $ 5.07 $ 5.00
---------- ---------- ----------
Income From Investment Operations:
Net Investment Income...................................................... $ .21 $ .11 $ .03
Net Gains or (Losses) on Securities (both realized and unrealized)......... .15 (.19) .04
---------- ---------- ----------
Total From Investment Operations......................................... $ .36 $ (.08) $ .07
---------- ---------- ----------
Less Distributions:
Dividends (from Net Investment Income)..................................... (.14) (.07)
Distributions (from Capital Gains)......................................... (.01)
----------
Total Distributions...................................................... (.14) (.08)
----------
Net Asset Value, End of Period............................................... $ 5.13 $ 4.91 $ 5.07
========== ========== ==========
Total Return(2).............................................................. 7.33% (1.58)% 7.10%
Ratios/Supplemental Data:
Net Assets, End of Period.................................................... $5,996,149 $3,424,487 $ 469,060
Ratio of Expenses to Average Net Assets(2)................................... .70% .70% .70%
Ratio of Net Investment Income to Average Net Assets(2)...................... 5.19% 3.62% 3.91%
Portfolio Turnover Rate...................................................... 16% 17% 0%
</TABLE>
- ---------------
(1) The U.S. Government Income Series commenced operations on May 19, 1993.
(2) Annualized.
SERIES PERFORMANCE
Information concerning the performance of the series of the Trust is
contained in the Annual and Semi-annual Reports for the Trust, copies of which
may be obtained free of charge by writing to the Trust at 11365 West Olympic
Boulevard, Los Angeles, California 90064, Attention: Customer Service or by
calling (310) 312-6100 or (800) 283-4536.
5
<PAGE> 9
THE TRUST
The Trust was established under Massachusetts law pursuant to a Declaration
of Trust dated February 13, 1987, as an unincorporated business trust, a form of
organization that is commonly called a Massachusetts business trust.
The Trust is registered with the Securities and Exchange Commission as a
diversified open-end management investment company ("mutual fund") under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of investments or investment policy.
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares and to divide such shares into an unlimited number of series, all
without shareholder approval. Shares of the Series, when issued, are without par
value, fully paid, fully transferable and redeemable at the option of the
shareholder. Pursuant to this authority, the Board of Trustees established the
U.S. Government Income Series on January 11, 1993.
The Trust's business activities are the responsibility of its Board of
Trustees. Investment advisory services are provided to the three Series
described herein by Security First Investment Management Corporation ("Security
Management"). (See "Investment Adviser," page 9.) T. Rowe Price Associates, Inc.
("Price Associates") is a sub-adviser to Security Management and provides
investment management services to the Growth and Income and Bond Series. Virtus
Capital Management, Inc. ("Virtus") is a sub-adviser to Security Management and
provides investment management services to the U.S. Government Income Series.
(See "Sub-Advisers", page 10).
THE SERIES
Each Series operates as a diversified, open-end management investment
company and each is treated as a regulated investment company under the Internal
Revenue Code of 1986 ("Code"). Each share of a Series represents an equal
proportionate interest in the Trust with each other share of that Series. Every
share of a Series has an equal proportionate interest in the net assets and net
liabilities of that Series, equal rights to all distributions and is entitled to
one vote for all permitted purposes. Each Series' assets are segregated and a
shareholder's interest in the Trust is limited to the Series in which the
shareholder invests. Each Series continually offers its shares for sale at net
asset value without sales or redemption charges.
INVESTMENT OBJECTIVES AND POLICIES
Each Series has its own investment objectives and policies designed to meet
specific investment goals. There can be no assurance that a Series will achieve
its objectives. The actual return to a contract owner will be affected by
contract fees and separate account charges, as well as the charges imposed by
the Trust. Prospective investors should consult their contract prospectus
regarding these additional fees and charges. Each Series also has certain
investment policies and restrictions which are described in the Statement of
Additional Information incorporated herein. The investment policies and
restrictions of each Series which are fundamental may not be changed without a
majority vote of its shareholders. Other investment policies and restrictions
may be changed without a vote of the shareholders.
GROWTH AND INCOME SERIES
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objectives of the Growth and Income Series are
capital growth and production of income. Conservation of principal is a
secondary objective. It is impossible for shareholders of this Series to be
assured that these objectives can be realized because virtually all securities
fluctuate in market price, corporate earnings, and dividends and the return on
fixed income instruments may vary from year to year. Thus, there is no guarantee
that a shareholder's capital or income will increase or that purchases of the
Growth and Income Series' shares will involve a preservation of original capital
or protection against loss of value.
The Growth and Income Series will ordinarily invest substantially all of its
assets in common stocks, but may also invest in other securities, including
preferred stocks, securities of foreign issuers, and fixed income instruments.
This Series' investment objectives are sufficiently flexible so as to permit
substantial investments in other equity securities and fixed income instruments
when business and market conditions indicate that to be an appropriate course of
action.
6
<PAGE> 10
Accordingly, the percentage of the Series' assets invested in common stocks,
other equity securities and fixed income instruments can be expected to vary
from time to time in light of management's interpretation of business and market
conditions, fiscal and monetary policies, and underlying asset values.
Investments are not concentrated in any one industry or group of industries
but are varied according to what is judged advantageous under varying economic
conditions. While the portfolio is diversified by investments in a cross-section
of business and industry, the Growth and Income Series is intended to follow a
policy of flexibility. The Growth and Income Series will not invest in companies
for the purpose of exercising control of management.
BOND SERIES
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Bond Series is to achieve the
highest investment income over the long term consistent with the preservation of
capital. This Series seeks to achieve this investment objective through
investment principally in marketable debt securities. A secondary objective is
growth of principal and income with respect to those Series assets that are
invested in common and preferred stocks.
It is impossible for the shareholders of the Bond Series to be assured that
these objectives will be realized because virtually all securities fluctuate in
market price. In addition, corporate earnings, dividends and the return on fixed
income instruments may vary from year to year. Thus, there is no guarantee that
a shareholder's capital or income will increase or that purchases of this
Series' shares involve a preservation of original capital or protection against
loss of value.
It is the policy of the Bond Series to purchase and hold securities which
are believed to have potential for the generation of investment income. Growth
of capital and income will be secondary considerations in the selection of
portfolio securities. This Series is not intended to buy and sell for short-term
trading profits, and as a result, portfolio changes will usually be accomplished
gradually. Nevertheless, the Trustees are not restricted and may effect
short-term transactions when events subsequent to portfolio purchases make the
investments appear undesirable for long-term holding.
Under normal circumstances, the Bond Series will invest not less than 65% of
its total assets in fixed-income debt instruments, including debt securities
issued in private placements. The Series may also invest in residential and
commercial real estate mortgages secured by first liens and up to 10% of the
value of its total assets in common and preferred stocks. U.S. dollar
denominated foreign fixed income debt securities and Canadian government
securities may also be purchased. Generally speaking, the Bond Series will
invest in what is known as "Investment Grade" securities. This Series may,
however, invest up to 20% of its assets in securities rated Ba or B by Moody's
Investors Service, Inc. or BB or B by Standard and Poor's. As of December 1,
1995, no amounts were invested in lower graded debt securities. (For a more
complete description of the investment grades assigned to debt securities by the
nationally recognized rating agencies, see Appendix A hereto.)
INVESTMENT RISKS OF HIGH-YIELD, HIGH RISK BONDS
Investment in the lower graded debt securities (i.e., High Yield, High Risk
Bonds) involves certain risk factors not normally associated with investment
grade bonds. To the extent that this Series invests in High-Yield, High-Risk
bonds, such investment will be subject to such risks including: (a) Sensitivity
to Interest Rate and Economic Changes--High-yield bonds are very sensitive to
adverse economic changes and corporate developments. During an economic downturn
or substantial period of rising interest rates, highly leveraged issuers may
experience financial stress that would adversely affect their ability to service
their principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing; (b) Payment Expectations--High-yield
bonds may contain redemption or call provisions. If an issuer exercised these
provisions in a declining interest rate market, the Bond Series would have to
replace the security with a lower yielding security, resulting in a decreased
return for investors. Conversely, a high-yield bond's value will decrease in a
rising interest rate market, as will the value of the Bond Series' assets; and
(c) Liquidity and Valuation--There may be little trading in the secondary
market for particular bonds, which may affect adversely the Bond Series' ability
to value accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield bonds, especially in a thin market.
7
<PAGE> 11
U.S. GOVERNMENT INCOME SERIES
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the U.S. Government Income Series is to provide
current income. The investment objective cannot be changed without approval of
shareholders. The U.S. Government Income Series pursues its investment objective
by investing primarily in securities which are primary or direct obligations of
the U.S. government, its agencies, or instrumentalities or which are guaranteed
by the U.S. government, its agencies, or instrumentalities ("U.S. Government
Securities"). The Series may also invest in certain collateralized mortgage
obligations ("CMOs") and adjustable rate mortgage securities ("ARMS"), both of
which represent or are supported by direct or indirect obligations of the U.S.
Government or its instrumentalities. As a matter of investment policy which can
be changed without shareholder approval, the Series will invest, under normal
circumstances, at least 65% of the value of its total assets in U.S. Government
Securities (including such CMOs and ARMS). Unless indicated otherwise, the
investment policies of the Series may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The U.S. government securities in which the Series invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Federal Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National Mortgage
Association and Federal Home Loan Mortgage Corporation.
The obligations of U.S. government agencies or instrumentalities which the
Series may buy are backed in a variety of ways by the U.S. government or its
agencies or instrumentalities. Some of these obligations, such as Government
National Mortgage Association mortgage-backed securities and obligations of the
Farmers Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers Home
Administration, Federal Farm Credit Banks, Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations.
CMOs. The U.S. Government Income Series may also invest in CMOs which are
rated AAA or better by a nationally recognized rating agency and which are
issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Series may invest
may be: (i) privately issued securities which are collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of an agency or instrumentality of the U.S. government.
The mortgage-related securities provide for a periodic payment consisting of
both interest and principal.
ARMS. ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the U.S. Government Income Series
invests are issued by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Series, would
receive monthly scheduled payments of principal and interest, and may receive
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unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. governmental securities.
Repurchase Agreements. The U.S. government securities in which the U.S.
Government Income Series invests may be purchased pursuant to repurchase
agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Series and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Series, the Series
could receive more or less than the repurchase price on any sale of such
securities.
When-Issued and Delayed Delivery Transactions. The U.S. Government Income
Series may purchase U.S. government securities on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Series
purchases securities with payment and delivery scheduled for a future time. The
Series engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Series' Investment
objective and policies, not for investment leverage. In when-issued and delayed
delivery transactions, the Series relies on the seller to complete the
transaction. The seller's failure may cause the Series to miss a price or
yield considered to be advantageous.
Lending of Portfolio Securities. In order to generate additional income,
the U.S. Government Income Series may lend portfolio securities up to one-third
of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Series will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
subadviser has determined are creditworthy under guidelines established by the
Board of Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
Mortgage backed securities evidence an undivided interest in mortgage pools.
These securities are subject to more rapid repayment than their stated maturity
would indicate because prepayments of principal on mortgages in the pool are
passed through to the holder of the securities. During periods of declining
interest rates, prepayments of mortgages in the pool can be expected to
increase. The pass-through of these prepayments would have the effect of
reducing the Series' position in these securities and requiring the Series to
reinvest the prepayments at interest rates prevailing at the time of
reinvestment. In addition, if such securities were purchased at a premium, the
Series could experience a capital loss if prepayment is effected before the
premium has been amortized.
MANAGEMENT OF THE TRUST
TRUSTEES
Management of the business and affairs of the Trust and the exercise of its
Trust powers are the responsibility of the Board of Trustees.
INVESTMENT ADVISER
Security Management serves as the investment adviser and manager to the
Growth and Income Series and Bond Series pursuant to a Master Investment
Management and Advisory Agreement dated June 6, 1994 and to the U.S. Government
Income Series pursuant to a Master Investment Management and Advisory Agreement
dated May 18, 1994 (the "Advisory Agreements"). The Advisory Agreements have an
initial term of two years and may be continued in effect from year to year
thereafter. Security Management, a Delaware corporation, is a subsidiary of
Security First Group, Inc. ("SFG") (formerly, The Holden Group, Inc.), also a
Delaware corporation, whose business primarily involves insurance marketing and
service. Security Management and SFG maintain their principal place of business
at 11365 West Olympic Boulevard, Los Angeles, California 90064. The voting
securities of SFG are wholly owned by London Insurance Group, Inc., a Canadian
insurance services corporation which is a publicly traded subsidiary of Trilon
Financial Corporation of Toronto, Canada. Security Management is affiliated with
and investment adviser to Security First Life Insurance Company and Fidelity
Standard Life Insurance Company. Security Management is registered as an
investment adviser under the Investment Advisers Act of 1940.
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Under the Advisory Agreements, Security Management is responsible to the
Trust as its exclusive investment adviser and business manager to manage the
investments of each of the three Series of the Trust described herein in
accordance with the investment objectives and policies, programs and
restrictions of each Series. Pursuant to the Advisory Agreements, Security
Management shall obtain and evaluate information relating to the economy,
industries, business, securities markets, and particular issues of securities.
In addition, Security Management agrees to formulate and implement a continuing
program for the management of each Series' assets, give investment advice and
manage the investment and reinvestment of each Series' securities. Security
Management's obligations include the making and execution of all investment
decisions, the placement of orders for the purchase and sale of securities with
or through such brokers, dealers or issuers as Security Management may select,
the furnishing to the Trust any necessary office space, equipment and personnel,
clerical and bookkeeping services and other necessary office expenses, and the
providing of services of individuals who perform executive and administrative
functions for the Trust.
Under the Advisory Agreements, Security Management receives an advisory fee
from each Series described herein at the following annual rates: Growth and
Income Series .50%, Bond Series .50% and U.S. Government Income Series .90%. The
advisory fee, which is accrued daily and payable monthly, is based on the
average daily net assets of each Series.
SUB-ADVISERS
Under each Advisory Agreement, Security Management has authority to delegate to
one or more sub-advisers certain of its investment advisory functions, subject
to supervision by Security Management. Pursuant to this authority, and with the
approval of shareholders, Security Management has executed a Sub-Advisory
Agreement with Price Associates, dated June 6, 1994 respecting the Growth and
Income Series and Bond Series, and a Sub-Advisory Agreement with Virtus, the
successor in interest to Signet Asset Management, dated May 18, 1994 respecting
the U.S. Government Income Series. Each agreement has an initial term of two
years and may be extended from year to year thereafter.
Price Associates is a Maryland corporation which was incorporated in 1947 as
the successor to the investment counseling business founded by Mr. T. Rowe Price
in 1937. Its principal offices are located at 100 East Pratt Street, Baltimore,
Maryland 21202. Price Associates and certain of its subsidiaries serve as
investment advisers to individual and institutional investors (including mutual
funds) with total net assets under supervision of approximately $65 billion.
Price Associates is registered as an investment adviser under the Investment
Advisers Act of 1940.
Virtus is a Maryland corporation with its principal offices located at 707
East Main Street, Suite 1300, Richmond, Virginia 23219. Effective as of March 1,
1995, Virtus assumed the obligations of Signet Asset Management, a division of
Signet Trust Company, under the Sub-Advisory Agreement. This assumption resulted
from a corporate reorganization under which all of the operations and personnel
of Signet Asset Management were transferred to Virtus. Signet Banking Corp., the
sole stockholder of Signet Trust Company, is the sole stockholder of Virtus.
Signet Banking Corp. is a multi-state, multi-bank holding company which has
provided investment management services since 1956. As of September 30, 1995,
Virtus had investment authority over $2.2 billion in assets, of which Virtus is
managing $241 million in equities. Virtus advises seven mutual funds having over
$1 billion in assets. In addition, Virtus manages three equity common trust
funds with $43.9 million in assets and three fixed income common trust funds
with $190.9 million in assets. Shares of the U.S. Government Income Series are
not deposits of, or endorsed or guaranteed by, Signet Trust Company or its
affiliates, and are not federally insured.
Under the Sub-Advisory Agreements, Price Associates and Virtus provide
investment management services to the Series which are the subject of the
Agreements. Each has the discretion to purchase or sell securities on behalf
of the Trust in accordance with the Series' investment objectives or
restrictions and to communicate with brokers, dealers, custodians or other
parties on behalf of the Series and to allocate brokerage or obtain research
services. In performing these services, each subadvisor must obtain and
evaluate information relating to the economy, industries, business, securities
markets and securities as it may deem necessary and it must formulate and
implement a continuing plan for performance of its services.
The Sub-Advisory Agreement with Price Associates provides that Security
Management shall pay a sub-advisory fee at an annual rate equal to 0.35% of the
average daily net assets of each Series it subadvises, which fees are accrued
daily and paid monthly. Under the Sub-Advisory Agreement with Virtus, Security
Management is obligated to pay a sub-advisory
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fee at an annual rate equal to 0.75% of the average daily net assets of the
Series it subadvises, which fees are accrued daily and paid monthly.
PORTFOLIO MANAGERS
Brian C. Rogers has primary responsibility for portfolio management of the
Growth and Income Series. He has held this position since 1989. He is a Managing
Director with Price Associates and has been in their employ for more than ten
years. His other responsibilities include management of two publicly offered
mutual funds of Price Associates and separate institutional investment accounts.
Veena A. Kutler is portfolio manager for the Bond Series. She has held this
position since 1991. She has been a bond portfolio manager with Price Associates
for more than five years. Since 1991, Ms. Kutler has managed other publicly
offered bond funds for Price Associates; prior to that she advised institutional
bond accounts.
John S. Hall has been the portfolio manager for the U.S. Government Income
Series since August 1995. Prior to his employment with Virtus, John was a
portfolio manager with another bank located in New Orleans, Louisiana.
EXPENSES
Under the Advisory Agreements, each Series will pay its fair share of the
expenses related to the Trust's organization, its legal and independent
accounting and auditing expense, costs related to reports, notices and proxy
material, compensation and expense of disinterested trustees, share issuance
expenses, expenses of custodians, transfer agents, registrars and other agents,
brokers' commissions, all taxes and fees payable to governmental agencies,
expenses of shareholders' and Trustees' meetings and interest expenses. These
expenses are paid from the income received by each Series in the form of
dividends or interest on investments. In the event that a Series' income is
insufficient to pay its share of the Trust's expenses, they will be paid from
that Series' capital. Security Management is responsible for paying all expenses
and charges not assumed by the Trust.
For the fiscal year ended July 31, 1995 the ratios of total expenses to
average net assets were: .74% for the Growth and Income Series, 1.29% for the
Bond Series and .70% for the U.S. Government Income Series. Under the Advisory
Agreement, Security Management and Virtus are obligated, to the extent required
by law, to defer their advisory fees paid with respect to a Series if the
aggregate annual operating expenses of the Series, exclusive of its share of
taxes, interest, brokerage fees and certain extraordinary expenses, exceed 2.5%
of the first $30 million of average net assets, 2.0% of the net $70.0 million of
average net assets and 1.5% of any remaining average net assets. While they are
not obligated to do so, Security Management and Virtus have agreed to continue,
until notice to the contrary, to defer their fees (and make contributions in
respect of excess expenses) in order to maintain the expense ratio of the U.S.
Government Income Series at a level of .70% or less.
For the fiscal year ended July 31, 1995, Security Management earned
management fees of $109,066 from the Growth and Income Series and $10,939 from
the Bond Series.
In regard to the U.S. Government Income Series, for the fiscal year ended
July 31, 1995, Security Management earned advisory fees of $42,206 ($7,034 after
payment of subadvisory fees). Of this amount, Security Management waived $32,025
($3,216 after waiver of subadvisory fees). Virtus earned subadvisory fees of
$35,172 and of this amount, it waived $28,809. In addition, Virtus reimbursed
the Series for its expenses in the amount of $4,932.
HOW TO BUY AND REDEEM SHARES
DETERMINING NET ASSET VALUE
The net asset value per share of each Series is determined as of the close
of regular trading on the New York Stock Exchange, or such other time as shall
be determined by the Trustees, on each day in which there is a sufficient degree
of trading in a Series' portfolio securities that the current net asset value
per share of the Series might be materially affected
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by changes in the value of portfolio securities. The net asset value per share
of the three Series described herein will fluctuate. Net asset value per share
is computed by dividing the value of the securities held by a Series plus any
cash or other assets (including interest and dividends accrued but not received)
minus all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses are accrued daily.
BUYING SHARES
Trust shares are sold solely to life insurance company separate accounts to
fund variable contracts, to life insurance company general accounts and to any
other investors permitted under Section 817(h) of the Code and the regulations
thereunder. Individuals wishing to invest in shares of any of the Series should
refer to the prospectus of the separate account through which shares of the
Trust are purchased.
The Trust markets its own shares; it does not utilize the services of an
underwriter. The shares of any of the Series may be purchased by the insurance
company directly from the Trust at the net asset value per share. There are no
minimum purchase amounts. The Trust reserves the right to accept or reject any
order. An order to purchase shares of a Series is not binding on the Trust until
payment has been received.
Applications to purchase shares of the Series are available from the Trust.
Requests for such applications should be addressed to Security First Trust,
11365 West Olympic Boulevard, Los Angeles, California 90064.
Purchases of the shares of a Series are made at the net asset value per
share determined following receipt of an order by the Trust, without the
assessment of a sales charge. The Trust may not sell shares of any Series at
less than net asset value.
An insurance company separate account may enter into a participation
agreement under which the separate account may periodically purchase shares of
any of the Series on the terms specified in the agreement. Checks drawn on
foreign banks will not be accepted unless provision has been made for payment
through a U.S. bank in U.S. dollars. If full payment does not accompany the
order, full payment must be received by the Trust no later than seven days
following the date that the order is received. If payment is not received within
the stipulated time period, the order is subject to cancellation.
As a condition of this offering, if an order to purchase shares of any of
the Series is cancelled due to nonpayment, the purchaser will be responsible for
any loss incurred by the Series by reason of such cancellation, and if the
purchaser remains a shareholder, the Trust will have authority as agent of the
shareholder to reimburse the Series for the loss incurred. Investors whose
orders have been cancelled may be prohibited or restricted from placing future
orders.
REDEMPTION OF SHARES
Upon written request, the Trust will redeem Series shares from shareholders
of record at the per share net asset value next determined after receipt by the
Trust of the request, together with any additional documents which may be
required for redemption. The written request must be executed by each registered
owner exactly as the shares are registered, and the request or the share power
must specify the total number of shares to be redeemed. There is no charge for
either partial or complete redemption. Such a request should also identify the
shareholder's account by number.
It is requested that all redemption requests made by mail be sent by
certified mail with return receipt requested. Redemptions will not become
effective until all documents in the form required have been received by the
Trust. Payment for shares redeemed generally will be made by the Trust not later
than seven days after receipt of the written redemption request.
A shareholder may receive more or less than was paid for the shares
depending on the investment experience of the portfolio securities held by a
Series and the value of such securities at the time of redemption. Such a
transaction may result in a taxable event (gain or loss) to the shareholder.
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DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DISTRIBUTIONS BY SERIES
The present policy of the Growth and Income, Bond and U.S. Government Income
Series is to pay dividends from their net investment income from time to time,
as determined by the Board of Trustees. It is also the policy of these three
Series to distribute net realized long-term capital gains, if any, at least once
each year.
Unless the shareholder elects otherwise, dividends and capital gain
distributions of the Series described herein are automatically reinvested in
additional shares. Such shares are credited to the shareholder's account at net
asset value on a date which is determined by the Board of Trustees and which is
between the record date and the payment date. In the initial application to
purchase shares of a Series, the shareholder may specify that dividends are to
be paid in cash and capital gain distributions reinvested in additional shares,
or that all dividends and distributions are to be paid in cash. The
shareholder's instructions with respect to the payment of distributions by a
Series may be changed without cost by a request made in writing to the Trust. To
be effective as to any dividend or capital gain distribution, the shareholder's
written request for a change must be received by the Trust prior to the
declaration thereof and in any event at least thirty days before the date set
for payment.
TAXATION OF SHAREHOLDERS
Under the Code each Series is treated as a separate regulated investment
company providing the qualification requirements of Sub-chapter M of the Code
are met. The Trust intends each Series to qualify as a regulated investment
company. As a general rule, distributions from a regulated investment company to
its shareholders are taxed in the following manner: (a) distributions derived
from interest, dividends and net short-term capital gains are taxable to the
shareholder as ordinary income, and (b) distributions derived from net long-term
capital gains are taxable to the shareholder as long-term capital gains
regardless of the actual length of time the shareholder has owned the investment
company's shares.
Because the Series' shares are sold only to life insurance companies as the
underlying investment media for their separate accounts and to other entities
permitted under Section 817(h) of the Code, the foregoing rules are modified by
special rules of the Code for taxing life insurance companies. Under these
special rules, a life insurance company generally will not incur any federal
income tax liability on Series distributions to a separate account on a variable
contract as defined in Section 817(d) of the Code. See the contract prospectus
for information regarding the federal income tax treatment of the contracts and
distributions to the separate account.
DIVERSIFICATION REQUIREMENTS
Each Series intends to comply with the diversification requirements imposed
by Section 817(h) of the Code and the regulations thereunder. These
requirements, which are in addition to the diversification requirements imposed
on the Series by the 1940 Act and Subchapter M of the Code, place certain
limitations on the assets of each separate account and, because Section 817(h)
and those regulations treat the assets of each Series as assets of the related
separate account, of each Series. Specifically, the regulations provide that,
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Series may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and while each U.S. governmental agency and
instrumentality is considered a separate issuer for these purposes, a particular
foreign government and its agencies, instrumentalities and political
subdivisions all will be considered to be the same issuer. Similarly, all
repurchase agreements purchased from a broker-dealer will be considered the
securities issued by that broker-dealer. Section 817(h) provides, as a safe
harbor, that a separate account will be treated as being adequately diversified
if the diversification requirements under Subchapter M are satisfied and no more
than 55% of the value of the account's total assets are cash and cash items,
government securities and securities of other investment companies meeting the
requirements of Subchapter M. Failure of a Series to satisfy the section 817(h)
requirements may result in taxation of the insurance company issuing the
contracts, and in less favorable tax treatment of the contract holders than as
is described in the applicable contract prospectus.
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TRUST SHARES
On any matter submitted to all shareholders of the Trust, shares of each
Series entitle their holders to one vote per share (with proportionate voting
for fractional shares), irrespective of the relative net asset value of the
Series' shares. However, on matters affecting an individual Series, a separate
vote of shareholders of that Series is required. Shareholders of a Series are
not entitled to vote on any matter which does not affect that Series but which
requires a separate vote of another Series.
The Trust is not required to hold annual meetings of its shareholders. Those
persons elected at the shareholders' meeting held on June 6, 1994 will continue
in office until they resign, die or are removed by a written instrument signed
by at least two-thirds of the Trustees, by vote of shareholders of the Trust
holding not less than two-thirds of the shares then outstanding, cast in person
or by proxy at a meeting called for the purpose; or by a written declaration
signed by shareholders holding not less than two-thirds of the shares then
outstanding and filed with the Trust's custodian, The Bank of New York, 48 Wall
Street, New York, New York 10286.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Board
of Trustees or a Trustee. The Declaration of Trust provides for indemnification
from the Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
EFFECT OF BANKING LAWS
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of a customer. Virtus is subject to such banking laws and
regulations.
Virtus believes, based on the advice of its counsel, that Virtus may serve
as subadviser for the U.S. Government Income Series without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. Changes in
either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of such or future
statutes or regulations, could prevent Virtus from continuing to perform in its
capacity as subadviser to the Trust. If it were prohibited from engaging in this
activity, the Trustees would consider alternative subadvisers and means of
continuing available investment services. It is not expected that existing
shareholders would suffer any adverse financial consequences (if other
subadviser with equivalent abilities to Virtus is found) as a result of any of
these occurrences.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to state
law.
PORTFOLIO TURNOVER
Although the U.S. Government Income Series does not intend to invest for the
purpose of seeking short-term profits, securities in its portfolio will be sold
whenever the Series' subadviser believes it is appropriate to do so in light of
the Series' investment objective, without regard to the length of time a
particular security may have been held. The subadviser to the U.S. Government
Income Series does not anticipate that portfolio turnover will result in adverse
tax consequences. The U.S. Government Income Series estimates that the annual
rate of portfolio turnover will not exceed 100%.
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REPORTS
Trust shareholders will be kept informed through annual and semi-annual
reports showing the financial activities of the Series in which they have
invested. Financial statements of the Trust will be audited annually by
certified public accountants. Shareholder inquiries should be addressed to
Security First Trust: Customer Service, 11365 West Olympic Boulevard, Los
Angeles, California 90064.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which the Trust or Security Management
is a party.
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TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trust....................................................................... 3
Investment Policies and Restrictions............................................ 4
Investment Adviser and Other Services........................................... 15
Principal Holders of Securities................................................. 21
Management of the Trust......................................................... 21
Brokerage....................................................................... 22
Portfolio Turnover.............................................................. 25
Pricing and Redemption of Securities Being Offered.............................. 27
Taxation........................................................................ 28
Commercial Paper Ratings........................................................ 29
Custodian....................................................................... 31
Independent Auditors............................................................ 31
Federal Registration of Shares.................................................. 31
Legal Counsel................................................................... 31
</TABLE>
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APPENDIX A
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's rates the long-term debt securities issued by various entities from
"Aaa" to "C." Aaa -- Best quality. These securities carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest payments
are protected by a larger, or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of these issues. Aa -- High quality by all standards. They are rated
lower than the best bond because margins of protection may not be as large as in
Aaa securities, fluctuation of protective elements may be of greater amplitude,
or there may be other elements present that make the long-term risks appear
somewhat greater. A -- Upper medium grade obligations. These bonds possess many
favorable investment attributes. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future. Baa -- Medium grade
obligations. 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 -- Have speculative elements; future cannot be
considered as well assured. 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. Bonds in this class are characterized by uncertainty of
position. B -- Generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small. Caa -- Of poor standing.
Issues may be in default or there may be present elements of danger with respect
to principal or interest. Ca -- Speculative in a high degree; often in default
or have other marked shortcomings. C -- Lowest rated class of bonds; can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
STANDARD & POOR'S CORPORATION
Standard & Poor's rates the long-term securities debt of various entities in
categories ranging from "AAA" to "D" according to quality. AAA -- Highest
rating. Capacity to pay interest and repay principal is extremely strong.
AA -- High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree. A -- Have
a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of change in circumstances and
economic conditions than debt in higher rated categories. BBB -- Regarded as
having adequate capacity to pay interest and repay principal. These bonds
normally exhibit adequate protection parameters, but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories. BB, B,
CCC, CC, C -- Regarded, on balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C1 -- Reserved for income bonds on which
no interest is being paid. D -- In default and payment of interest and/or
repayment of principal is in arrears.
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SECURITY FIRST TRUST
PROSPECTUS
----------------------------------------------------------------
VALUE EQUITY SERIES
U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
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Security First Trust ("Trust") is a diversified open-end
management investment company. The Trust's shares are offered
continuously and sold to separate accounts of life insurance
companies to fund variable contracts. Shares of the Trust are
not sold directly to the general public. Shares of the Trust may
be purchased and redeemed at net asset value without the
imposition of a sales charge.
This prospectus describes two separate series of shares, the
Value Equity Series and the U.S. Government Income Series
(referred to separately and collectively as "the Series"). The
Trust has additional Series which are not described herein.
These additional Series are not available for contracts offered
in connection with this prospectus.
The Value Equity Series seeks to provide growth of capital and
income. The Series pursues this objective by investing in common
stocks of high quality companies. Emphasis is placed on stocks
where the value is low when compared to present earnings.
The U.S. Government Income Series seeks to provide current
income. The Series pursues this objective by investing in a
professionally managed, diversified portfolio limited primarily
to U.S. government securities.
A Statement of Additional Information about the Trust which is
incorporated by reference into this Prospectus has been filed
with the Securities and Exchange Commission. It is available, at
no charge, by writing to the Trust at 11365 West Olympic
Boulevard, Los Angeles, California 90064, Attention: Customer
Service, or you can call (310) 312-6100 or (800) 283-4536. The
date of the Statement of Additional Information is the same as
the date of this Prospectus.
----------------------------------------------------------------
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. IT SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
----------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------------------------------------------
Prospectus dated December 1, 1995 SIG (12/95)
<PAGE> 22
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Financial Information...................................................... 3
Series Performance................................................................... 4
The Trust............................................................................ 5
The Series........................................................................... 5
Investment Objectives and Policies................................................... 5
Value Equity Series.................................................................. 5
U.S. Government Income Series........................................................ 7
Management of the Trust.............................................................. 9
How to Buy and Redeem Shares......................................................... 11
Dividends, Distributions and Federal Taxes........................................... 12
Trust Shares......................................................................... 13
Effect of Banking Laws............................................................... 14
Portfolio Turnover................................................................... 14
Reports.............................................................................. 14
Legal Proceedings.................................................................... 14
</TABLE>
2
<PAGE> 23
SECURITY FIRST TRUST VALUE EQUITY SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, July 31, July 31,
1995 1994 1993(1)
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................................. $ 4.99 $ 5.00 $ 5.00
---------- ---------- ----------
Income From Investment Operations:
Net Investment Income............................................... $ .05 $ .05 $ .01
Net Gains or (Losses) on Securities (both realized and
unrealized)....................................................... .71 (.03) (.01)
---------- ---------- ----------
Total From Investment Operations.................................. $ .76 $ .02 $ .00
---------- ---------- ----------
Less Distributions:
Dividends (from Net Investment Income).............................. (.05) (.03)
---------- ----------
Total Distributions............................................... (.05) (.03)
---------- ----------
Net Asset Value, End of Period........................................ $ 5.70 $ 4.99 $ 5.00
========== ========== ==========
Total Return(2)....................................................... 15.23% .40% 0.00%
Ratios/Supplemental Data:
Net Assets, End of Period............................................. $7,765,719 $3,007,073 $1,333,852
Ratio of Expenses to Average Net Assets(2)............................ 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets(2)............... 1.29% 1.38% .85%
Portfolio Turnover Rate............................................... 84% 121% 7%
</TABLE>
- ---------------
(1) The Value Equity Series commenced operations on May 19, 1993.
(2) Annualized.
3
<PAGE> 24
SECURITY FIRST TRUST U.S. GOVERNMENT INCOME SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1995 July 31, 1994 July 31, 1993(1)
------------- ------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................................. $ 4.91 $ 5.07 $ 5.00
------------ ------------ --------
Income From Investment Operations:
Net Investment Income.............................................. $ .21 $ .11 $ .03
Net Gains or (Losses) on Securities (both realized and
unrealized)...................................................... .15 (.19) .04
------------ ------------ --------
Total From Investment Operations................................. $ .36 $ (.08) $ .07
------------ ------------ --------
Less Distributions:
Dividends (from Net Investment Income)............................. (.14) (.07)
Distributions (from Capital Gains)................................. (.01)
------------ ------------
Total Distributions.............................................. (.14) (.08)
------------ ------------
Net Asset Value, End of Period....................................... $ 5.13 $ 4.91 $ 5.07
============ ============ ========
Total Return(2)...................................................... 7.33% (1.58)% 7.10%
Ratios/Supplemental Data:
Net Assets, End of Period............................................ $ 5,996,149 $ 3,424,487 $469,060
Ratio of Expenses to Average Net Assets(2)........................... .70% .70% .70%
Ratio of Net Investment Income to Average Net Assets(2).............. 5.19% 3.62% 3.91%
Portfolio Turnover Rate.............................................. 16% 17% 0%
</TABLE>
- ---------------
(1) The U.S. Government Income Series commenced operations on May 19, 1993.
(2) Annualized.
SERIES PERFORMANCE
Information concerning the performance of the series of the Trust is
contained in the Annual and Semi-annual Reports for the Trust, copies of which
may be obtained free of charge by writing to the Trust at 11365 West Olympic
Boulevard, Los Angeles, California, 90064, Attention: Customer Service or by
calling (310) 312-6100 or (800) 283-4536.
4
<PAGE> 25
THE TRUST
The Trust was established under Massachusetts law pursuant to a Declaration
of Trust dated February 13, 1987, as an unincorporated business trust, a form of
organization that is commonly called a Massachusetts business trust.
The Trust is registered with the Securities and Exchange Commission as a
diversified open-end management investment company ("mutual fund") under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of investments or investment policy.
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares and to divide such shares into an unlimited number of series, all
without shareholder approval. Shares of the Series, when issued, are without par
value, fully paid, fully transferable and redeemable at the option of the
shareholder. Pursuant to this authority, the Board of Trustees established the
Value Equity Series and the U.S. Government Income Series on January 11, 1993.
The Trust's business activities are the responsibility of its Board of
Trustees. Investment advisory services are provided to the two Series described
herein by Security First Investment Management Corporation ("Security
Management"). Virtus Capital Management, Inc. ("Virtus") is a sub-adviser to
Security Management and provides investment management services to the Value
Equity Series and the U.S. Government Income Series. (See "Sub-Adviser", page
9).
THE SERIES
Each Series described herein operates as a diversified, open-end management
investment company and each is treated as a regulated investment company under
the Internal Revenue Code of 1986 ("Code"). Each share of a Series represents an
equal proportionate interest in the Trust with each other share of that Series.
Every share of a Series has an equal proportionate interest in the net assets
and net liabilities of that Series, equal rights to all distributions and is
entitled to one vote for all permitted purposes. Each Series' assets are
segregated and a shareholder's interest in the Trust is limited to the Series in
which the shareholder invests. Each Series continually offers its shares for
sale at net asset value without sales or redemption charges.
INVESTMENT OBJECTIVES AND POLICIES
Each Series has its own investment objectives and policies designed to meet
specific investment goals. There can be no assurance that a Series will achieve
its objectives. The actual return to a contract owner will be affected by
contract fees and separate account charges, as well as the charges imposed by
the Trust. Prospective investors should consult their contract prospectus
regarding these additional fees and charges. Each Series also has certain
investment policies and restrictions which are described in the Statement of
Additional Information incorporated herein by reference. The investment
objectives and restrictions of each Series are deemed to be fundamental policies
which may not be changed without a majority vote of its shareholders.
VALUE EQUITY SERIES
INVESTMENT OBJECTIVE
The investment objective of the Value Equity Series is to provide growth of
capital and income. The investment objective cannot be changed without approval
of shareholders. While there is no assurance that the Series will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
5
<PAGE> 26
INVESTMENT POLICIES
The Value Equity Series pursues its investment objective by investing in the
securities of high quality companies. Emphasis is placed on stocks where the
value is low when compared to present earnings. The Value Equity Series'
investment approach is based on the conviction that, over the long term, the
economy will continue to expand and develop and that this economic growth will
be reflected in the growth of the revenues and earnings of publicly-held
corporations. Unless indicated otherwise, the investment policies of the Series
may be changed by the Trustees without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
Acceptable Investments. The securities in which the Value Equity Series
invests include but are not limited to the following securities.
Common Stocks. The Value Equity Series invests primarily in common stocks
of companies selected by the Series' subadviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects of the companies. Ordinarily, these companies will be in the top 30%
of their industries with regard to revenues. However, other factors such as
product position, market share, potential earnings growth, or asset values will
be considered by the subadviser and may outweigh revenues. At least 65% of the
Series' portfolio will be invested in common stocks, unless it is in a defensive
position.
Other Corporate Securities. The Value Equity Series may invest in preferred
stocks, corporate bonds, notes, warrants, rights, and convertible securities of
these companies.
Commercial Paper. The Value Equity Series may invest in commercial paper
rated A-1 by Standard & Poor's Corporation, or Prime-1 by Moody's Investors
Service, Inc., or F-1 by Fitch Investors Service Inc. and money market
instruments (including commercial paper) which are unrated but of comparable
quality, including Canadian Commercial Paper ("CCPs") and Europaper.
Bank Instruments. The Value Equity Series may invest in instruments of
domestic and foreign banks and savings and loans (such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances) if
they have capital, surplus, and undivided profits over $100,000,000, or if the
principal amount of the instrument is insured by the Bank Insurance Fund
("BIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC") or the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC. These instruments may include Eurodollar Certificates
of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), Eurodollar
Time Deposits ("ETDs") and American Depository Receipts ("ADRs"). ADRs are
receipts typically issued by an American bank or trust company that evidences
ownership of underlying securities issued by a foreign issuer.
Repurchase Agreements. Certain securities in which the Value Equity Series
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other recognized
financial institutions sell U.S. government securities or other securities to
the Series and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the original seller does not repurchase
the securities from the Series, the Series could receive more or less than the
repurchase price on any sale of such securities.
U.S. Government Securities. The Value Equity Series may invest in
securities issued and/or guaranteed as to payment of principal and interest by
the U.S. government, its agencies or instrumentalities including those
obligations purchased on a when-issued or delayed delivered basis.
Put and Call Options. The Value Equity Series may purchase put options on
its portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Series holds against decreases in value. The Series
may also write covered call options on all or any portion of its portfolio to
generate income for the Series. The Series will write call options on securities
either held in its portfolio or which it has the right to obtain without payment
of further consideration or for which it hs segregated cash or U.S. government
securities in the amount of any additional consideration.
6
<PAGE> 27
The Value Equity Series may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers of
the options when options on the portfolio securities held by the Series are not
traded on an exchange. The Series purchases and writes options only with
investment dealers and other financial institutions (such as commercial banks or
savings and loan associations) deemed creditworthy by the Series' subadviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-trade options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Series will
not buy call options or write put options without further notification to
shareholders.
Financial Futures and Options on Futures. The Value Equity Series may
purchase and sell financial futures contracts to hedge all or a portion of its
portfolio against changes in stock prices. Financial futures contracts call for
the delivery of particular debt instruments at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument called
for in the contract and the buyer agrees to take delivery of the instrument at
the specified future time.
The Value Equity Series may also write call options and purchase put options
on financial futures contracts as a hedge to attempt to protect securities in
its portfolio against decreases in value. When the Series writes a call option
on a futures contract, it is undertaking the obligation of selling a futures
contract at a fixed price at any time during a specified period if the option is
exercised. Conversely, as purchaser of a put option on a futures contract, the
Series is entitled (but not obligated) to sell a futures contract at the fixed
price during the life of the option.
The Value Equity Series may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Series' existing futures positions and premiums paid for related
options would exceed 5% of the market value of the Series' total assets. When
the Series purchases futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account with the
Series' custodian (or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures contract is
unleveraged.
Lending of Portfolio Securities. In order to generate additional income,
the Value Equity Series may lend portfolio securities up to one-third of the
value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Series will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the subadviser has determined
are creditworthy under guidelines established by the Board of Trustees and will
receive collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned.
When-Issued and Delayed Delivery Transactions. The Value Equity Series may
purchase securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Series purchases securities with
payment and delivery scheduled for a future time. The Series engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Series' investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Series relies on the seller to complete the transaction. The
seller's failure may cause the Series to miss a price or yield considered to be
advantageous.
U.S. GOVERNMENT INCOME SERIES
INVESTMENT OBJECTIVE
The investment objective of the U.S. Government Income Series is to provide
current income. The investment objective cannot be changed without approval of
shareholders. While there is no assurance that the Series will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
7
<PAGE> 28
INVESTMENT POLICIES
The U.S. Government Income Series pursues its investment objective by
investing primarily in securities which are primary or direct obligations of the
U.S. government, its agencies, or instrumentalities or which are guaranteed by
the U.S. government, its agencies, or instrumentalities ("U.S. Government
Securities"). The Series may also invest in certain collateralized mortgage
obligations ("CMOs") and adjustable rate mortgage securities ("ARMS"), both of
which represent or are supported by direct or indirect obligations of the U.S.
Government or its instrumentalities. As a matter of investment policy which can
be changed without shareholder approval, the Series will invest, under normal
circumstances, at least 65% of the value of its total assets in U.S. Government
Securities (including such CMOs and ARMS). Unless indicated otherwise, the
investment policies of the Series may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The U.S. government securities in which the Series invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Federal Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National Mortgage
Association and Federal Home Loan Mortgage Corporation.
The obligations of U.S. government agencies or instrumentalities which the
Series may buy are backed in a variety of ways by the U.S. government or its
agencies or instrumentalities. Some of these obligations, such as Government
National Mortgage Association mortgage-backed securities and obligations of the
Farmers Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers Home
Administration, Federal Farm Credit Banks, Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations.
CMOs. The U.S. Government Income Series may also invest in CMOs which are
rated AAA or better by a nationally recognized rating agency and which are
issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Series may invest
may be: (i) privately issued securities which are collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of an agency or instrumentality of the U.S. government.
The mortgage-related securities provide for a periodic payment consisting of
both interest and principal.
ARMS. ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the U.S. Government Income Series
invests are issued by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Series, would
receive monthly scheduled payments of principal and interest, and may
8
<PAGE> 29
receive unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. governmental securities.
Repurchase Agreements. The U.S. government securities in which the U.S.
Government Income Series invests may be purchased pursuant to repurchase
agreements. For a discussion of repurchase agreements, see "Value Equity
Series -- Repurchase Agreements", page 6.
When-Issued and Delayed Delivery Transactions. The U.S. Government Income
Series may purchase U.S. government securities on a when-issued or delayed
delivery basis. For a discussion of these transactions, see "Value Equity
Series -- When-Issued and Delayed Delivery Transactions", page 7.
Lending of Portfolio Securities. In order to generate additional income,
the U.S. Government Income Series may lend portfolio securities subject to the
same limitations as those applicable to the Value Equity Series' portfolio
lending activities (see "Value Equity Series -- Lending of Portfolio
Securities", page 7.
Mortgage backed securities evidence an undivided interest in mortgage pools.
These securities are subject to more rapid repayment than their stated maturity
would indicate because prepayments of principal on mortgages in the pool are
passed through to the holder of the securities. During periods of declining
interest rates, prepayments of mortgages in the pool can be expected to
increase. The pass-through of these prepayments would have the effect of
reducing the Series' position in these securities and requiring the Series to
reinvest the prepayments at interest rates prevailing at the time of
reinvestment. In addition, if such securities were purchased at a premium, the
Series could experience a capital loss if prepayment is effected before the
premium has been amortized.
MANAGEMENT OF THE TRUST
TRUSTEES
Management of the business and affairs of the Trust and the exercise of its
Trust powers are the responsibility of the Board of Trustees.
INVESTMENT ADVISER
Security Management serves as the investment adviser and manager of the two
Series described herein pursuant to a Master Investment Management and Advisory
Agreement ("Advisory Agreement"), dated May 18, 1994. Security Management, a
Delaware corporation, is a subsidiary of Security First Group, Inc. ("SFG")
(formerly The Holden Group, Inc.), also a Delaware corporation, whose business
primarily involves insurance marketing and service. Security Management and SFG
maintain their principal place of business at 11365 West Olympic Boulevard, Los
Angeles, California 90064. The voting securities of SFG are owned by London
Insurance Group, Inc., a Canadian insurance services corporation which is a
publicly traded subsidiary of Trilon Financial Corporation of Toronto, Canada.
Security Management is affiliated with and investment adviser to Security First
Life Insurance Company and Fidelity Standard Life Insurance Company.
Under the Advisory Agreement, Security Management is responsible to the
Trust as its exclusive investment adviser and business manager to manage the
investments of each of the Series of the Trust in accordance with the investment
objectives and policies, programs and restrictions of each Series. Pursuant to
the Advisory Agreement, Security Management shall obtain and evaluate
information relating to the economy, industries, business, securities markets,
and particular issues of securities. In addition, Security Management agrees to
formulate and implement a continuing program for the management of each Series'
assets, give investment advice and manage the investment and reinvestment of
each Series' securities. Security Management's obligations include the making
and execution of all investment decisions, the placement of orders for the
purchase and sale of securities with or through such brokers, dealers or issuers
as Security Management may select, the furnishing to the Trust any necessary
office space,
9
<PAGE> 30
equipment and personnel, clerical and bookkeeping services and other necessary
office expenses, and the providing of services of individuals who perform
executive and administrative functions for the Trust.
Under the Advisory Agreement, Security Management receives an advisory fee
from each Series described herein at the following annual rates: Value Equity
Series .90%, and U.S. Government Income Series .90%. The advisory fee, which is
accrued daily and payable monthly, is based on the average daily net assets of
each Series.
SUB-ADVISER
Under the Advisory Agreement, Security Management has authority to
delegate to one or more sub-advisers certain of its investment advisory
functions, subject to supervision by Security Management. Pursuant to this
authority, Security Management has executed a Sub-Advisory Agreement with
Virtus, the successor in interest to Signet Asset Management. Virtus is a
Maryland corporation with its principal offices located at 707 East Main
Street, Suite 1300, Richmond, Virginia 23219. Effective as of March 1, 1995,
Virtus assumed the obligations of Signet Asset Management, a division of Signet
Trust Company, under the Sub-Advisory Agreement. This assumption resulted from
a corporate reorganization under which all of the operations and personnel of
Signet Asset Management were transferred to Virtus. Signet Banking Corp., the
sole stockholder of Signet Trust Company, is the sole stockholder of Virtus.
Signet Banking Corp. is a multi-state, multi-bank holding company which has
provided investment management services since 1956. As of September 30, 1995,
Virtus had investment authority over $2.2 billion in assets, of which Virtus is
managing $241 million in equities. Virtus advises seven mutual funds having
over $1 billion in assets. In addition, Virtus manages three equity common
trust funds with $43.9 million in assets and three fixed income common trust
funds with $190.9 million in assets. Shares of the Value Equity Series and the
U.S. Government Income Series are not deposits of, or endorsed or guaranteed
by, Signet Trust Company or its affiliates, and are not federally insured.
Under the Sub-Advisory Agreement, Virtus provides investment management
services to each of the respective Series for which it serves as subadviser. The
subadviser has the discretion to purchase or sell securities on behalf of the
Trust and to communicate with brokers, dealers, custodians or other parties on
behalf of the Trust and to allocate brokerage or obtain research services. In
performing these services, the subadviser obtains and evaluates information
relating to the economy, industries, business, securities markets and securities
as it may deem necessary and it must formulate and implement a continuing plan
for performance of its services.
The Sub-Advisory Agreement with Virtus provides that Security Management
shall pay a subadvisory fee to Virtus at an annual rate equal to .75% of the
average daily net assets of each Series it subadvises, which fees are accrued
daily and paid monthly.
PORTFOLIO MANAGERS
James M. Baker has been the Portfolio Manager for the Value Equity Series
since October 1995. He has been a portfolio manager with Virtus for more than
three years and his other duties include equity and balanced investment
portfolios for institutional and personal accounts. Prior to Virtus, he was a
portfolio manager with a large regional bank.
John S. Hall has been the portfolio manager for the U.S. Government Income
Series since August 1995. Prior to his employment with Virtus, John was a
portfolio manager with another bank located in New Orleans, Louisiana.
EXPENSES
Under the Advisory Agreement, each Series will pay its fair share of the
expenses related to the Trust's legal and independent accounting and auditing
expense, costs related to reports, notices and proxy material, compensation and
expense of disinterested trustees, share issuance expenses, expenses of
custodians, transfer agents, registrars and other agents, brokers' commissions,
all taxes and fees payable to governmental agencies, expenses of shareholders'
and Trustees' meetings and interest expenses. These expenses are paid from the
income received by each Series in the form of dividends or interest on
investments. In the event that a Series' income is insufficient to pay its share
of the Trust's expenses, they will be paid from that Series' capital. Security
Management is responsible for paying all expenses and charges not assumed by the
Trust.
10
<PAGE> 31
For the fiscal year ended July 31, 1995 the ratios of total expenses to
average net assets were: 1.00% for the Value Equity Series and .70% for the U.S.
Government Income Series. Under the Advisory Agreement, Security Management and
Virtus are obligated, to the extent required by law, to defer their advisory
fees paid with respect to a Series if the aggregate annual operating expenses of
the Series, exclusive of its share of taxes, interest, brokerage fees and
certain extraordinary expenses, exceed 2.5% of the first $30 million of average
net assets, 2.0% of the next $70 million of average net assets and 1.5% of any
remaining average net assets. While they are not obligated to do so, Security
Management and Virtus have agreed to continue, until notice to the contrary, to
defer their fees (and make contribution in respect of excess expenses) in order
to maintain the expense ratios of the Value Equity and the U.S. Government
Income Series at a level of 1.00% and .70% respectively, or less.
In regard to the Value Equity Series, for the fiscal year ended July 31,
1995, Security Management earned advisory fees of $45,690 ($7,615 after payment
of subadvisory fees). Of this amount, Security Management waived $28,437 ($3,601
after waiver of subadvisory fees). Virtus earned subadvisory fees of $38,075 and
of this amount, it waived $24,836. In addition Virtus reimbursed the Series for
its expenses in the amount of $8,177.
In regard to the U.S. Government Income Series, for the fiscal year ended
July 31, 1995, Security Management earned advisory fees of $42,206 ($7,034 after
payment of subadvisory fees). Of this amount, Security Management waived $32,025
($3,216 after waiver of subadvisory fees). Virtus earned subadvisory fees of
$35,172 and of this amount, it waived $28,809. In addition, Virtus reimbursed
the Series for its expenses in the amount of $4,932.
HOW TO BUY AND REDEEM SHARES
DETERMINING NET ASSET VALUE
The net asset value per share of each Series is determined as of the close
of regular trading on the New York Stock Exchange, or such other time as shall
be determined by the Trustees, on each day in which there is a sufficient degree
of trading in a Series' portfolio securities that the current net asset value
per share of the Series might be materially affected by changes in the value of
portfolio securities. The net asset value per share of the Value Equity Series
and the U.S. Government Income Series will fluctuate. Net asset value per share
is computed by dividing the value of the securities held by a Series plus any
cash or other assets (including interest and dividends accrued but not received)
minus all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses are accrued daily.
BUYING SHARES
Trust shares are sold solely to life insurance company separate accounts to
fund variable contracts, to life insurance company general accounts and to any
other investors permitted under section 817(h) of the Code and the regulations
thereunder. Individuals wishing to invest in shares of any of the Series should
refer to the prospectus of the separate account through which shares of the
Trust are purchased.
The Trust markets its own shares; it does not utilize the services of an
underwriter. The shares of any of the Series may be purchased by the insurance
company directly from the Trust at the net asset value per share. There are no
minimum purchase amounts. The Trust reserves the right to accept or reject any
order. An order to purchase shares of a Series is not binding on the Trust until
payment has been received.
Applications to purchase shares of the Series are available from the Trust.
Requests for such applications should be addressed to Security First Trust,
11365 West Olympic Boulevard, Los Angeles, California 90064.
Purchases of the shares of a Series are made at the net asset value per
share determined following receipt of an order by the Trust, without the
assessment of a sales charge. The Trust may not sell shares of any Series at
less than net asset value.
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An insurance company separate account may enter into a participation
agreement under which the separate account may periodically purchase shares of
any of the Series on the terms specified in the agreement. Checks drawn on
foreign banks will not be accepted unless provision has been made for payment
through a U.S. bank in U.S. dollars. If full payment does not accompany the
order, full payment must be received by the Trust no later than seven days
following the date that the order is received. If payment is not received within
the stipulated time period, the order is subject to cancellation.
As a condition of this offering, if an order to purchase shares of any of
the Series is cancelled due to nonpayment, the purchaser will be responsible for
any loss incurred by the Series by reason of such cancellation, and if the
purchaser remains a shareholder, the Trust will have authority as agent of the
shareholder to reimburse the Series for the loss incurred. Investors whose
orders have been cancelled may be prohibited or restricted from placing future
orders.
REDEMPTION OF SHARES
Upon written request, the Trust will redeem Series shares from shareholders
of record at the per share net asset value next determined after receipt by the
Trust of the request, together with any additional documents which may be
required for redemption. The written request must be executed by each registered
owner exactly as the shares are registered, and the request or the share power
must specify the total number of shares to be redeemed. There is no charge for
either partial or complete redemption. Such a request should also identify the
shareholder's account by number.
It is requested that all redemption requests made by mail be sent by
certified mail with return receipt requested. Redemption will not become
effective until all documents in the form required have been received by the
Trust. Payment for shares redeemed generally will be made by the Trust within
seven days of receipt of the written redemption request.
A shareholder may receive more or less than was paid for the shares
depending on the investment experience of the portfolio securities held by a
Series and the value of such securities at the time of redemption. Such a
transaction may result in a taxable event (gain or loss) to the shareholder.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DISTRIBUTIONS BY SERIES
The present policy of the Value Equity Series and the U.S. Government Income
Series is to pay dividends from their net investment income from time to time,
as determined by the Board of Trustees. It is also the policy of these two
Series to distribute net realized long-term capital gains, if any, at least once
each year.
Unless the shareholder elects otherwise, dividends and capital gain
distributions of both Series are automatically reinvested in additional shares.
Such shares are credited to the shareholder's account at net asset value on a
date which is determined by the Board of Trustees and which is between the
record date and the payment date. In the initial application to purchase shares
of a Series, the shareholder may specify that dividends are to be paid in cash
and capital gain distributions reinvested in additional shares, or that all
dividends and distributions are to be paid in cash. The shareholder's
instructions with respect to the payment of distributions by a Series may be
changed without cost by a request made in writing to the Trust. To be effective
as to any dividend or capital gain distribution, the shareholder's written
request for a change must be received by the Trust prior to the declaration
thereof and in any event at least thirty days before the date set for payment.
TAXATION OF SHAREHOLDERS
Under the Internal Revenue Code ("Code") each Series is treated as a
separate regulated investment company providing the qualification requirements
of Subchapter M of the Code are met. The Trust intends each Series to qualify as
a regulated investment company. As a general rule, distributions from a
regulated investment company to its
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<PAGE> 33
shareholders are taxed in the following manner: (a) distributions derived from
interest, dividends and net short-term capital gains are taxable to the
shareholder as ordinary income, and (b) distributions derived from net long-term
capital gains are taxable to the shareholder as long-term capital gains
regardless of the actual length of time the shareholder has owned the investment
company's shares.
Because the Series' shares are sold only to life insurance companies as the
underlying investment media for their separate accounts and to other entities
permitted under Section 817(h) of the Code, the foregoing rules are modified by
special rules of the Code for taxing life insurance companies. Under these
special rules, a life insurance company generally will not incur any federal
income tax liability on Series distributions to a separate account on a variable
contract as defined in Section 817(d) of the Code. See the contract prospectus
for information regarding the federal income tax treatment of the contracts and
distributions to the separate account.
DIVERSIFICATION REQUIREMENTS
Each Series intends to comply with the diversification requirements imposed
by section 817(h) of the Code and the regulations thereunder. These
requirements, which are in addition to the diversification requirements imposed
on the Series by the 1940 Act and Subchapter M of the Code, place certain
limitations on the assets of each separate account and, because section 817(h)
and those regulations treat the assets of each Series as assets of the related
separate account, of each Series. Specifically, the regulations provide that,
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Series may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and while each U.S. governmental agency and
instrumentality is considered a separate issuer for these purposes, a particular
foreign government and its agencies, instrumentalities and political
subdivisions all will be considered to be the same issuer. Similarly, all
repurchase agreements purchased from a broker-dealer will be considered the
securities issued by that broker-dealer. Section 817(h) provides, as a safe
harbor, that a separate account will be treated as being adequately diversified
if the diversification requirements under Subchapter M are satisfied and no more
than 55% of the value of the account's total assets are cash and cash items,
governmental securities and securities of other investment companies meeting the
requirements of Subchapter M. Failure of a Series to satisfy the section 817(h)
requirements may result in taxation of the insurance company issuing the
contracts, and in less favorable tax treatment of the contract holders than as
is described in the applicable contract prospectus.
TRUST SHARES
On any matter submitted to all shareholders of the Trust, shares of each
Series entitle their holders to one vote per share (with proportionate voting
for fractional shares), irrespective of the relative net asset value of the
Series' shares. However, on matters affecting an individual Series, a separate
vote of shareholders of that Series is required. Shareholders of a Series are
not entitled to vote on any matter which does not affect that Series but which
requires a separate vote of another Series. The Trust is not required to hold
annual meetings of its shareholders. Those persons elected as the initial
Trustees will continue in office until they resign, die or are removed by a
written instrument signed by at least two-thirds of the Trustees, by vote of
shareholders of the Trust holding not less than two-thirds of the shares then
outstanding, cast in person or by proxy at a meeting called for the purpose; or
by a written declaration signed by shareholders holding not less than two-thirds
of the shares then outstanding and filed with the Trust's custodian, The Bank of
New York, 48 Wall Street, New York, New York 10286.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Board
of Trustees or a Trustee. The Declaration of Trust provides for indemnification
from the Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the
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<PAGE> 34
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
EFFECT OF BANKING LAWS
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of a customer. Virtus is subject to such banking laws and
regulations.
Virtus believes, based on the advice of its counsel, that Virtus may serve
as subadviser for the Value Equity Series and the U.S. Government Income Series
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of such or future statutes or regulations, could prevent Virtus
from continuing to perform in its capacity as subadviser to the Trust. If it
were prohibited from engaging in this activity, the Trustees would consider
alternative subadvisers and means of continuing available investment services.
It is not expected that existing shareholders would suffer any adverse financial
consequences (if other subadviser with equivalent abilities to Virtus is found)
as a result of any of these occurrences.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to state
law.
PORTFOLIO TURNOVER
The Value Equity Series conducts portfolio transactions to accomplish its
investment objective as market conditions change, to invest new money obtained
from selling its shares and to meet redemption requests. The Value Equity Series
may dispose of portfolio securities at any time if it appears that selling the
securities will help the Series achieve its investment objective. However,
relatively high portfolio turnover may result in higher transaction costs to the
Series. It is not anticipated that the portfolio trading engaged in by the Value
Equity Series will result in an annual rate of portfolio turnover exceeding
100%. Although the U.S. Government Income Series does not intend to invest for
the purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Series' subadviser believes it is appropriate to do so in
light of the Series' investment objective, without regard to the length of time
a particular security may have been held. The subadviser to the U.S. Government
Income Series does not anticipate that portfolio turnover will result in adverse
tax consequences. The U.S. Government Income Series estimates that the annual
rate of portfolio turnover will not exceed 100%.
REPORTS
Trust shareholders will be kept informed through annual and semi-annual
reports showing the financial activities of the Series in which they have
invested. Financial statements of the Trust will be audited annually by
certified public accountants. Shareholder inquiries should be addressed to
Security First Trust: Customer Service, 11365 West Olympic Boulevard, Los
Angeles, California 90064.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which the Trust or Security Management
is a party.
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TABLE OF CONTENTS
OF STATEMENT OF
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Trust......................................... 3
Investment Policies and Restrictions.............. 4
Investment Adviser and Other Services............. 14
Principal Holders of Securities................... 17
Management of the Trust........................... 18
Brokerage......................................... 19
Portfolio Turnover................................ 20
Pricing and Redemption of Securities Being
Offered......................................... 21
Taxation.......................................... 22
Bond Ratings...................................... 23
Commercial Paper Ratings.......................... 25
Custodian......................................... 26
Independent Auditors.............................. 27
Federal Regulation of Shares...................... 27
Legal Counsel..................................... 27
</TABLE>
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<PAGE> 36
Rule 497(c)
'33 Act File No. 2-51173
SECURITY FIRST TRUST
GROWTH AND INCOME SERIES
BOND SERIES
U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Prospectus of Security First Trust (the "Trust"), dated
December 1, 1995, which may be obtained by writing to Security First Trust,
11365 West Olympic Boulevard, Los Angeles, California 90064, Attention:
Customer Services or by telephoning (310) 312-6100 or (800) 283-4536.
The date of this Statement of Additional Information is December 1, 1995.
<PAGE> 37
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trust 3
Investment Policies and Restrictions 4
Investment Adviser and Other Services 15
Principal Holders of Securities 21
Management of the Trust 21
Brokerage 22
Portfolio Turnover 25
Pricing and Redemption of Securities Being Offered 25
Taxation 27
Bond Ratings 28
Commercial Paper Ratings 29
Custodian 31
Independent Auditors 31
Federal Registration of Shares 31
Legal Counsel 31
</TABLE>
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<PAGE> 38
THE TRUST
GENERAL INFORMATION ABOUT THE TRUST
Security First Trust (the "Trust") is registered with the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended,
("1940 Act") as a diversified, open-end investment management company. The
Trust was established pursuant to a Declaration of Trust under the laws of the
Commonwealth of Massachusetts as a voluntary association known as a
"Massachusetts business trust." It operates as a "series company" as that term
is used in Rule 18f-2 under the 1940 Act with four series of shares, three of
which are the Growth and Income Series, the Bond Series and the U.S. Government
Income Series.
The assets received by the Trust from the issue or sale of the shares
of a Series and all income, earnings, profits and proceeds attributable to
them, subject only to the rights of creditors, are specifically allocated to
that Series and are required to be segregated on the books of account of the
Trust. The assets of a Series are also required to be charged with all of the
expenses attributable to that Series. Any general expenses of the Trust not
readily identifiable as belonging to a particular Series shall be allocated by
or under the direction of the Board of Trustees in such manner as the Board
determines to be fair and equitable.
Each share of a Series represents an equal proportionate interest in
that Series with each other share of that Series and is entitled to such
dividends and distributions out of the income belonging to that Series as are
declared by the Board of Trustees. Upon the liquidation of a Series, its
shareholders are entitled to share pro rata in the net assets belonging to that
Series available for distribution.
As described under "Trust Shares" in the prospectus, the Declaration
of Trust provides that no annual or regular meetings of shareholders are
required. In addition, after the Trustees were initially elected by
shareholders, the Trustees became a self-perpetuating body. Thus, there will
ordinarily be no shareholder meetings unless otherwise required by the 1940
Act.
The 1940 Act specifically requires that a shareholder meeting be held
for the purpose of electing Trustees if at any time less than a majority of the
Trustees has been elected by the shareholders of the Trust. The shareholders
also have the power to remove a Trustee by the affirmative vote of the holders
of not less than two-thirds of the shares of the Trust outstanding and entitled
to vote either by a declaration in writing filed with the custodian or by votes
cast in person or by proxy at a meeting called for the purpose of removal. The
Trustees will promptly call such a meeting when requested to do so by the
record holders of not less than 10 percent of the outstanding shares.
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<PAGE> 39
Ten or more shareholders who have been shareholders for at least six
months preceding the date of application and who hold in the aggregate either
shares having a net asset value of at least $100,000 or at least 1 percent of
the outstanding shares, whichever is less, may apply in writing to the Trustees
stating that they wish to communicate with other shareholders to obtain
signatures in order to request a meeting to remove a Trustee. This application
must be accompanied by the proposed communication and form of the request that
they wish to transmit. The Trustees will, within five business days after
receipt of such application, either afford to the applicants access to a list
of the names and addresses of all shareholders or inform such applicants as to
the approximate number of shareholders of record and the approximate cost of
mailing to them the proposed communication and form of request.
Shares of each Series vote separately as a class on any matter
submitted to shareholders except as to voting for Trustees and as otherwise
required by the 1940 Act, in which cases the shareholders of all of the Series
vote together as one class. In the event that the Trustees determine that a
matter affects only the interest of one or more Series, then only the
shareholders of the affected Series will be entitled to vote on the matter.
INVESTMENT POLICIES AND RESTRICTIONS
Certain of the investment policies and restrictions of the Series
described below are fundamental policies that may not be changed without the
approval of at least a majority of the outstanding shares of a Series or of 67%
of the shares of a Series represented at a meeting of shareholders at which the
holders of 50% or more of the outstanding shares of the Series are represented.
Investment policies or restrictions which are not fundamental may be changed
without the approval of shareholders.
GROWTH AND INCOME SERIES
The following investment policies of the Growth and Income Series are
fundamental. While the purchase of equity securities will generally be limited
to seasoned and readily marketable securities of issuers listed on national
securities exchanges, the Growth and Income Series may invest in securities not
listed on a national exchange but generally such securities will have
well-established over-the-counter markets. The fixed income debt instruments
in which this Series may invest include: (1) marketable straight debt
securities rated at the time of purchase within the four highest grades
assigned by Moody's (Aaa, Aa, A or Baa) or by Standard & Poor's (AAA, AA, A or
BBB); (2) securities issued or guaranteed by the United States government or
its agencies or instrumentalities; (3) marketable securities issued or
guaranteed by the Dominion of Canada, any Province of Canada, or any
instrumentality or political subdivision thereof; (4) bank obligations such as
certificates of deposit and bankers' acceptances having investment quality and
which in the opinion of the Board of Trustees are comparable with debt
securities which may be purchased by the Series as described in (1) above; (5)
commercial paper; (6) repurchase agreements; and (7) other debt securities
including securities convertible into or
4
<PAGE> 40
carrying warrants to purchase common stock or other equity interests. The
Growth and Income Series reserves the right to hold cash reserves, and it may
do so temporarily as the Board of Trustees deems necessary for defensive or
emergency purposes.
INVESTMENT RESTRICTIONS FOR THE GROWTH AND INCOME SERIES
As matters of fundamental investment policy, the Growth and Income
Series may not: (1) purchase any security if, as a result of such purchase,
more than 5% of the value of a Series' total assets would be invested in the
securities of a single issuer, except securities issued or guaranteed by the
United States Government or its agencies or instrumentalities; (2) purchase any
security if, as a result of such purchase, more than 10% of the outstanding
securities of any class of any issuer would be held by a Series (for this
purpose, all indebtedness of any issuer shall be deemed a single class), except
securities issued or guaranteed by the United States Government or any of its
agencies or instrumentalities; (3) purchase any security if, as a result of
such purchase, 25% or more of the value of a Series' total assets would be
invested in the securities of issuers having their principal business
activities in the same industry, except this limitation does not apply to
securities issued or guaranteed by the United States Government or any of its
agencies or instrumentalities, or to certificates of deposit or bankers'
acceptances; (4) purchase any security if, as a result of such purchase, more
than 5% of the value of a Series' total assets would be invested in the
securities of issuers which at the time of purchase had been in operation for
less than three years, except obligations issued or guaranteed by the United
States Government or any of its agencies or instrumentalities (for this
purpose, the period of operation of any issuer shall include the period of
operation of any predecessor issuer or unconditional guarantor of such issuer);
(5) purchase securities with legal or contractual restrictions on resale
("restricted securities") (excluding repurchase agreements), except debt
securities in private placements within the limits imposed in restriction (11)
below pertaining to loans; (6) purchase or sell real estate, except that the
Series may invest in the securities of companies whose business involves the
purchase or sale of real estate; (7) purchase securities of other investment
companies, except in connection with a merger, consolidation, acquisition or
organization; (8) purchase or sell commodities or commodity contracts; (9)
purchase participations or other direct interests in oil, gas, or other mineral
exploration or development programs; (10) make short sales of securities or
purchase securities on margin, except for such short-term credits as may be
necessary for the clearance or purchases of portfolio securities; (11) make
loans, except that the Series may acquire publicly distributed bonds,
debentures, notes and other debt securities and may enter into repurchase
agreements; (12) borrow money, except as a temporary measure for extraordinary
or emergency purposes and then only from banks in amounts not exceeding the
lesser of 10% of a Series' total assets valued at cost or 5% of its total
assets valued at market and only if immediately thereafter there is an asset
coverage of at least 300%; (13) invest in puts, calls, straddles, spreads, or
any combinations thereof; (14) mortgage, pledge or hypothecate securities,
except in connection with the borrowings permitted under restriction (12) and
then only where the market value of the securities mortgaged, pledged or
hypothecated does not exceed
5
<PAGE> 41
10% of its net assets taken at market; (15) underwrite securities issued by
other persons; (16) invest in companies for the purpose of exercising
management or control; (17) purchase or retain the securities of any issuer if,
to the knowledge of the Trustees, those Trustees or officers of the Trust and
of its investment adviser who each own beneficially more than 0.50% of the
outstanding securities of such issuer together own beneficially more than 5% of
such securities; (18) purchase any securities which would cause more than 2% of
the value of either of the Series' total assets at the time of such purchase to
be invested in warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange, or more than 5% of the value of either's total
assets to be invested in warrants whether or not so listed, such warrants in
each case to be valued at the lesser of cost or market, but assigning no value
to warrants acquired by the Series in units with or attached to debt
securities; (19) issue securities or other obligations senior to shares of the
Series; and (20) purchase any security if, as a result of such purchase, more
than 10% of the value of either Series' total assets would be invested in
foreign securities which are not publicly traded in the United States.
BOND SERIES
The following investment policies of the Bond Series are not
fundamental. Under normal circumstances, the Bond Series will invest not less
than 65% of its total assets in fixed-income debt instruments, including debt
securities issued in private placements. The Series may also invest in
residential and commercial real estate mortgages secured by first liens and up
to 10% of the value of its total assets in common and preferred stocks. U.S.
dollar denominated foreign fixed income debt securities and Canadian government
securities may also be purchased. The series may enter into financial futures
contracts or options on financial futures contracts for hedging and non-hedging
purposes where such is deemed in the interest of shareholders. The percentage
of the Series' assets which may be invested in common and preferred stocks, as
opposed to investments in fixed-income instruments, can be expected to vary
from time to time in light of changes in business and market conditions, fiscal
and monetary policies and underlying security values and shall be limited to
securities listed on a national securities exchange or regularly traded on a
national or regional basis.
The fixed income debt instruments in which the Bond Series may invest
include: (1) marketable convertible and non-convertible debt securities rated
at the time of purchase within the four highest grades assigned by Moody's
(Aaa, Aa A or Baa) or by Standard & Poor's (AAA, AA, A or BBB) or comparable
unrated securities; (2) marketable convertible and non-convertible debt
securities rated at the time of purchase within the grades Ba or B assigned by
Moody's or grades BB or B assigned by Standard & Poor's or comparable unrated
securities, limited to a maximum of 20% of the value of the Series total net
assets; (3) securities issued or guaranteed by the United States government or
its agencies or instrumentalities; (4) U.S. dollar denominated marketable
foreign securities; (5) securities issued or guaranteed by the Dominion of
Canada, and any Province of Canada, or any instrumentality or political
subdivision thereof; (6) bank obligations such as certificates of deposit and
bankers' acceptances having investment
6
<PAGE> 42
quality and which in the opinion of the Board of Trustees are comparable with
debt securities which may be purchased by the Series as described in (1) above;
(7) commercial paper; (8) repurchase agreements; (9) other debt securities
including securities convertible into or carrying warrants to purchase common
stock or other equity interests; and (10) mortgage-backed securities as well as
residential and commercial real estate mortgages secured by first liens. The
Series reserves the right to hold cash reserves, and it may do so temporarily
as management deems necessary for defensive or emergency purposes.
INVESTMENT RESTRICTIONS FOR THE BOND SERIES
The Bond Series has certain fundamental policies which may not be
changed without shareholder approval. At a meeting of shareholders held on
June 6, 1994, the Board was granted the authority to make certain other
policies "non-fundamental," meaning that these policies may be changed by
actions of the Board of Trustees.
As matters of fundamental investment policy, the Bond Series may not:
(1) purchase any security if, as a result of such purchase, more than 5% of the
value of the Series' total assets would be invested in the securities of a
single issuer, except securities issued or guaranteed by the United States
Government or its agencies or instrumentalities; (2) purchase any security if,
as a result of such purchase, more than 10% of the outstanding securities of
any class of any issuer would be held by the Series (for this purpose, all
indebtedness of any issuer shall be deemed a single class), except securities
issued or guaranteed by the United States Government or any of its agencies or
instrumentalities; (3) purchase any security if, as a result of such purchase,
25% or more of the value of a Series' total assets would be invested in the
securities of issuers having their principal business activities in the same
industry, except this limitation does not apply to securities issued or
guaranteed by the United States Government or any of its agencies or
instrumentalities, or to certificates of deposit or bankers' acceptances; (4)
purchase or sell commodities or commodity contracts; (5) purchase
participations or other direct interests in oil, gas, or other mineral
exploration or development programs; (6) make loans, except that the Series may
acquire publicly distributed bonds, debentures, notes and other debt securities
and may enter into repurchase agreements; (7) borrow money, except as a
temporary measure for extraordinary or emergency purposes and then only from
banks in amounts not exceeding the lesser of 10% of the Series' total assets
valued at cost or 5% of its total assets valued at market and only if
immediately thereafter there is an asset coverage of at least 300%; (8)
mortgage, pledge or hypothecate securities, except in connection with the
borrowings permitted under restriction (7) and then only where the market value
of the securities mortgaged, pledged or hypothecated does not exceed 10% of its
net assets taken at market; (9) underwrite securities issued by other persons;
(10) invest in companies for the purpose of exercising management or control;
(11) purchase or retain the securities of any issuer if, to the knowledge of
the Trustees, those Trustees or officers of the Trust and of its investment
adviser who each own beneficially more than 0.50% of the outstanding securities
of such issuer together own beneficially more
7
<PAGE> 43
than 5% of such securities; and (12) issue securities or other obligations
senior to shares of the Series.
The following investment restrictions are not fundamental to the Bond
Series. The Bond Series may not: (1) invest more than 5% of its total assets
in the securities of companies with less than 3 years of continuous operation
unless such securities are guaranteed by the United States, Canada or a foreign
government; (2) purchase securities of open-end investment companies and may
not purchase the shares of closed-end investment companies except in the open
market at normal rates; (3) purchase securities on margin or make short sales
unless fully covered; (4) invest more than 15% of its total assets in
securities with legal or contractual restrictions on resale ("restricted
securities") or otherwise illiquid securities (excluding repurchase agreements
maturing in less than 7 days); (5) invest more than 5% of its total assets in
puts, calls, straddles, spreads or any combination thereof (excluding options
on financial futures contracts); (6) enter into a futures contract or purchase
an option on a futures contract for non-hedging purposes if the initial margin
deposit and premium would exceed 5% of its total assets; (7) purchase or sell
real estate or real estate limited partnerships unless acquired as a result of
ownership of securities, except that it may invest in the securities of
companies that own or deal in real estate; (8) purchase any securities which
would cause more than 2% of the value of the Series' total assets at the time
of such purchase to be invested in warrants which are not listed on the New
York Stock Exchange or the American Stock Exchange, or more than 5% of the
value of total assets to be invested in warrants whether or not so listed, such
warrants in each case to be valued at the lesser of cost or market but
assigning no value to warrants acquired by the Series in units with or attached
to debt securities; (9) invest more than 20% of its total assets in high-yield,
high-risk bonds (see discussion below on Certain Risk Factors Relating to
High-Yield Bonds); or (10) invest more than 10% of total assets in U.S. dollar
denominated foreign securities which are not publicly traded in the United
States (see Risks and Considerations Applicable to Investment Securities of
Foreign Issuers below).
CERTAIN RISK FACTORS RELATING TO THE BOND SERIES INVESTMENTS
HIGH YIELD BONDS. As noted above, the Bond Series may invest up to 20% of its
assets in high-yield, high-risk bonds. These bonds present certain risks not
normally found in the lower yield investment grade bonds.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. High-yield bonds are very
sensitive to adverse economic changes and corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress that would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the
issuer of a bond defaulted on its obligations to pay interest or principal or
entered into bankruptcy proceeding, the Bond Series may incur losses or
expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of high-yield bonds and the Bond Series' net asset
value.
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PAYMENT EXPECTATIONS. High-yield bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining interest
rate market, the Bond Series would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
a high-yield bond's value will decrease in a rising interest rate market, as
will the value of the Bond Series' assets. If the Bond Series experiences
unexpected net redemptions, this may force it to sell high-yield bonds without
regard to their investment merits, thereby decreasing the asset base upon which
their expenses can be spread and possibly reducing the Bond Series' rate of
return.
LIQUIDITY AND VALUATION. There may be little trading in the secondary market
for particular bonds, which may affect adversely the Bond Series' ability to
value accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield bonds, especially in a thin market.
ILLIQUID SECURITIES. The Bond Series may invest up to 15% of its net assets in
restricted or illiquid securities. The term "illiquid securities" for this
purpose means securities that the Series may not be able to dispose of within
seven days in the ordinary course of business at approximately the amount at
which the Bond Series has valued the securities. Illiquid restricted
securities may be sold only in privately negotiated transactions or in public
offerings with respect to which a registration statement is in effect under the
Securities Act of 1933.
However, not all restricted securities are illiquid. In recent years
a large institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual
or legal restrictions on resale to the general public or certain institutions
is not dispositive of the liquidity of such investments.
The Board of Trustees is responsible for establishing policies and
procedures for investments in restricted securities and other illiquid
securities, and the Board will monitor compliance with these policies and
procedures by investment advisers to the Series.
RISKS AND CONSIDERATIONS APPLICABLE TO INVESTMENT IN SECURITIES OF FOREIGN
ISSUERS. Elements of risk and opportunity which must be recognized and
evaluated by the Investment Adviser when investment in foreign issuers are made
for the Bond Series include trade imbalances and related economic policies;
expropriation or confiscatory taxation; limitation on the removal of funds or
other assets; political or social instability; the diverse structure and
liquidity of securities markets in various countries and regions; policies of
governments with respect to possible nationalization of their industries; and
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other specific local political and economic considerations. Foreign companies
and foreign investment practices are generally not subject to uniform
accounting, auditing and financial reporting standards and practices or
regulatory requirements comparable to those of U.S. companies. There may be
less information publicly available about foreign companies.
Additional costs may also be incurred in connection with the Bond
Series' investment activities in the area of foreign securities. Foreign
brokerage commissions are generally higher than in the United States.
Administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances including bankruptcy, ability to
recover lost assets, expropriation, nationalization, record access, etc.) may
be associated with the maintenance of assets in foreign jurisdictions.
U.S. GOVERNMENT INCOME SERIES
The U.S. Government Income Series invests primarily in securities
which are guaranteed as to payment of principal and interest by the U.S.
government or its instrumentalities.
U.S. Government Obligations - The types of U.S. government obligations
in which the Series may invest generally include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued
or guaranteed by U.S. government agencies or instrumentalities. These
securities are backed by: (1) the full faith and credit of the U.S. Treasury;
(2) the issuer's right to borrow from the U.S. Treasury; (3) the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or (4) the credit of the agency or instrumentality issuing
the obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are: Federal Land Banks;
Central Bank for Cooperatives; Federal Intermediate Credit Banks; Federal Home
Loan Banks; Farmers Home Association; and Federal National Mortgage
Association.
Collateralized Mortgage Obligations (CMOs) - Privately issued CMOs
generally represent an ownership interest in federal agency mortgage
pass-through securities such as those issued by the Government National
Mortgage Association. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for
such CMOs has expanded considerably since its inception. The size of the
primary issuance market and the active participation in the secondary market by
securities dealers and other investors make government-related pools highly
liquid.
Adjustable Rate Mortgage Securities (ARMS) - Not unlike other U.S.
government securities, the market value of ARMS will generally vary inversely
with changes in market interest rates. Thus, the market value of ARMS generally
declines when interest rates rise and generally rises when interest rates
decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other
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similar investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely,
if ARMS are purchased at a discount, both a scheduled payment of principal and
an unscheduled prepayment of principal would increase current and total
returns.
When-Issued and Delayed Delivery Transactions - These transactions
are arrangements in which the U.S. Government Income Series purchases securities
with payment and delivery scheduled for a future time. The Series engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Series' investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Series relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Series to miss a
price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for the Series. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Series sufficient to make payment for
the securities to be purchased are segregated on the Series' records at the
trade date. These securities are marked to market daily and maintained until
the transaction is settled.
Repurchase Agreements - The Series or its custodian will take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. In the event that a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Series might be delayed pending court action. The Series believes that
under the regular procedures normally in effect for custody of the Series'
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Series and allow retention or
disposition of such securities. The Series will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the sub-adviser to be creditworthy pursuant
to guidelines established by the Trustees.
Reverse Repurchase Agreements - The Series may also enter into
reverse repurchase agreements. These transactions are similar to borrowing
cash. In a reverse repurchase agreement, the Series transfers possession of a
portfolio instrument to another person, such as a financial institution, broker,
or dealer, in return for a percentage of the instrument's market value in cash,
and agrees that on a stipulated date in the future the Series will repurchase
the portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable the
Series to avoid selling portfolio instruments at a time when a sale may be
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deemed to be disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Series will be able to avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Series in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Series' records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
Lending of Portfolio Securities - The collateral received when the
Series lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Series. During the time portfolio securities are on loan, the
borrower pays the Series any dividends or interest paid on such securities.
Loans are subject to termination at the option of the Series or the borrower.
The Series may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on the cash
or equivalent collateral to the borrower or placing broker. The Series does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
INVESTMENT RESTRICTIONS FOR THE U.S. GOVERNMENT INCOME SERIES
The investment restrictions of the Series described below are
fundamental policies that may not be changed without the approval of a least a
majority of the outstanding shares of a Series or of 67% of the shares of a
Series represented at a meeting of shareholders at which the holders of 50% or
more of the outstanding shares of the Series are represented.
As a matter of fundamental policy, the Series may not: (1) issue
senior securities except that the Series may borrow money directly or through
reverse repurchase agreements in amounts up to one-third of the value of its
net assets, including the amount borrowed (the Series will not borrow money or
engage in reverse repurchase agreements for investment leverage, but rather as
a temporary, extraordinary, or emergency measure or to facilitate management of
the portfolio by enabling the Series to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Series will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Series will
restrict the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse repurchase
agreements); (2) purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of purchases and sales of
securities (the deposit or payment by the Series of initial or variation margin
in connection with financial futures contracts or related options transactions
is not considered the purchase of a security on margin); (3) mortgage, pledge,
or hypothecate any assets, except to secure permitted borrowings (in those
cases, it may pledge assets having a value of 15% of its
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assets taken at cost. Margin deposits for the purchase and sale of financial
futures contracts and related options are not deemed to be a pledge); (4) lend
any of its assets except portfolio securities up to one-third of the value of
its total assets (this shall not prevent the Series from purchasing or holding
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Series' investment objective, policy, and
limitations or Declaration of Trust); (5) purchase or sell commodities,
commodity contracts, or commodity futures contracts; (6) purchase or sell real
estate, although it may invest in securities secured by real estate or
interests in real estate or issued by companies, including real estate
investment trusts, which invest in real estate or interests therein; (7) with
respect to 75% of the value of its total assets, purchase securities issued by
any one issuer (other than cash, cash items or securities issued or guaranteed
by the government of the United States or its agencies or instrumentalities),
if as a result more than 5% of the value of its total assets would be invested
in the securities of that issuer; (8) acquire more than 10% of the outstanding
voting securities of any one issuer; (9) invest 25% or more of its total assets
in securities of issuers having their principal business activities in the same
industry; (10) underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with its investment objective, policies, and
limitations; or (11) purchase restricted securities if immediately thereafter
more than 10% of the net assets of the Series, taken at market value, would be
invested in such securities (except for commercial paper issued under Section
4(2) of the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Board of Trustees).
The following limitations for the U.S. Government Income Series may be changed
by the Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitation becomes effective. Under these
limitations, the Series will not: (1) invest more than 10% of the value of its
net assets in illiquid securities, including repurchase agreements providing
for settlement in more than seven days after notice and certain restricted
securities determined by the Trustees not to be liquid; (2) invest in other
investment companies to the extent of more than 3% of the total outstanding
voting stock of any investment company, invest more than 5% of its total assets
in any one investment company, or invest more than 10% of its total assets in
investment companies in general (the Series will purchase securities of
closed-end investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not applicable
if the securities are acquired in a merger, consolidation, reorganization or
acquisition of assets); (3) invest more than 5% of the value of its total
assets in securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor; (4) purchase
or retain the securities of any issuer if the officers and Trustees of the
Trust or its investment adviser, owning individually more than 1/2 of 1% of the
issuer's securities, together own more than 5% of the issuer's securities; (5)
purchase interests in oil, gas, or other mineral exploration or development
programs or leases, although it may invest in the securities of issuers which
invest in or sponsor such programs; (6) invest more than 5% of its net assets
in warrants, including those acquired in units or attached to other securities
(to
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comply with certain state restrictions, the Series will limit its investment in
such warrants not listed on the New York or American Stock Exchanges to 2% of
its net assets. If state restrictions change, this latter restriction may be
revised without notice to shareholders. For purposes of this investment
restriction, warrants will be valued at the lower of cost or market, except
that warrants acquired by the Series in units with or attached to securities
may be deemed to be without value); (7) enter into transactions for the purpose
of engaging in arbitrage; (8) purchase put options on securities unless the
securities are held in the Series' portfolio and not more than 5% of the value
of the Series' total assets would be invested in premiums on open put option
positions; (9) write call options on securities unless the securities are held
in its portfolio or unless the Series is entitled to them in deliverable form
without further payment or after segregating cash in the amount of any further
payment; or (10) sell securities short unless (a) it owns, or has right to
acquire, an equal amount of such securities, or (b) it has segregated an amount
of its other assets equal to the lesser of the market value of the securities
sold short or the amount required to acquire such securities. (The segregated
amount will not exceed 10% of the Series' net assets. While in a short
position, the Series will retain the securities, rights, or segregated assets).
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result in
a violation of such restriction.
REPURCHASE AGREEMENTS
The Growth and Income Series and the Bond Series may invest in
repurchase agreements. A repurchase agreement is an instrument through which
an investor (such as a Series) purchases a security from a bank with an
agreement by the seller to repurchase the security at the same price, plus
interest at a specified rate. The underlying securities are limited to those
which would otherwise qualify for investment by the Series. Repurchase
agreements usually have a short duration, often less than one week. As a
fundamental investment policy of the Growth and Income Series, the Series will
not will enter into a repurchase agreement of a duration of more than seven
business days if, as a result, more than 10% of the value of the Series' total
assets would be so invested. As a non-fundamental policy of the Bond Series,
the Series will not invest more than 10% of its assets in repurchase agreements
maturing in more than seven days. Neither of the Series will enter into
repurchase agreements with securities dealers unless the Series has been
advised by legal counsel that such a transaction would not constitute a
purchase of an interest in such a dealer under section 12(d)(3) of the
Investment Company Act of 1940.
INVESTMENT ADVISER AND OTHER SERVICES
The following sets forth certain additional information concerning
Security First Investment Management Corporation ("Security Management"), the
investment adviser for the three Series described herein; T. Rowe Price
Associates, Inc. ("Price Associates"), the sub-adviser to Security Management
for the Growth and Income and
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Bond Series; and Virtus Capital Management ("Virtus") the sub-adviser to
Security Management for the U.S. Government Income Series.
SECURITY MANAGEMENT AND THE ADVISORY AGREEMENTS
Security Management serves as the investment adviser to the Growth
and Income Series and the Bond Series of the Trust pursuant to a Master
Investment Management and Advisory Agreement dated June 6, 1994. Security
Management serves as the investment adviser to the U.S. Government Income
Series pursuant to a Master Investment Management and Advisory Agreement dated
May 18, 1994 (collectively, the "Advisory Agreements"). Security Management
was incorporated in Delaware on December 6, 1973 and is a wholly- owned
subsidiary of Security First Group, Inc., also a Delaware corporation
(formerly, The Holden Group, Inc.). Security Management and Security First
Group, Inc. maintain their principal places of business at 11365 West Olympic
Boulevard, Los Angeles, California 90064. The common stock of Security First
Group is currently wholly owned by London Insurance Group, a Canadian insurance
services corporation which is a publicly-traded subsidiary of Trilon Financial
Corporation of Toronto, Canada. Security Management also acts as investment
adviser to two affiliated insurance companies, Security First Life Insurance
Company and Fidelity Standard Life Insurance Company.
The Advisory Agreements provide that Security Management is
responsible for supervising and directing the investments of each of the Series
in accordance with the investment objectives of each. Pursuant to the Advisory
Agreements, Security Management shall obtain and evaluate information relating
to the economy, industries, business, securities markets, and particular issues
of securities. In addition, Security Management agrees to formulate and
implement a continuing program for the management of each of the Series'
assets, give investment advice and manage the investment and reinvestment of
the Series' securities. Security Management's obligations include the making
and execution of investment decisions, and the placement of orders for the
purchase and sale of securities with or through such brokers, dealers or
issuers as Security Management may select. Security Management is also
authorized to enter into sub-advisory agreements with third parties for the
provision of investment advice to Security Management relating to each Series'
portfolio of securities, investments, cash and other properties.
The Advisory Agreements provide that Security Management and the
Trust agree to maintain and preserve such accounts, books and records for such
period or periods, as may be prescribed by the Securities and Exchange
Commission. They also provide that the accounts, books and records will be
made available for reasonable inspections by the Securities and Exchange
Commission, the Trust's auditors, or any governmental instrumentality having
regulatory authority over the Trust.
Under the Advisory Agreements, the Trust will assume and pay legal
and independent accounting and auditing expenses of the Trust, costs related to
reports, notices and proxy material, compensation and expense of disinterested
trustees, share
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issuance expenses, expenses of custodians, transfer agents and registrars,
brokers' commissions, all taxes and fees payable to governmental agencies,
expenses of shareholders' and trustees' meetings and interest expenses.
Security Management will be responsible for paying all expenses and charges not
assumed by the Trust.
The Advisory Agreements provide that Security Management, its
officers, directors and employees shall not be liable for any error of
judgment, mistake of law, or loss suffered by the Trust, while rendering
services under the Agreements, except for loss resulting from willful
misfeasance, bad faith, gross negligence in the performance of their duties on
behalf of the Trust or reckless disregard of their duties and obligations under
the Agreements.
For its services to the Growth and Income Series and Bond Series,
Security Management receives from the Trust fees computed by using an annual
rate of .50% (1/2 of 1%) based on the average daily net assets of each of the
Series. Such compensation is accrued daily and payable monthly.
For its services to the U.S. Government Income Series, Security
Management receives from the Trust fees computed by using an annual rate of
0.90% of the average daily net assets of the Series. Such compensation is
accrued daily and payable monthly.
Security Management is obligated under the Advisory Agreements to
waive that portion of its advisory fees, to the extent required by law, where
aggregate annual operating expenses of each Series, exclusive of taxes,
interest, brokerage fees and certain extraordinary expenses, exceed 2.5% of the
first $30.0 million of average net assets of a Trust Series, 2.0% of the next
$70.0 million of average net assets of the Series, plus 1.5% of the remaining
net assets, calculated on the basis of the Trust's fiscal year. Such expense
limitations are currently required by California law. Such waiver (or
reimbursement) shall not exceed the full amount of the management fee for such
year, except as may be elected by Security Management in its discretion. Each
Series (except the U.S. Government Income Series) will subsequently repay
Security Management for any amounts so contributed to the Series by Security
Management (excluding advisory fees), provided such subsequent repayment does
not result in increasing the Series' aggregate annual operating expenses above
the expense limitation percentages.
The Trust determines the aggregate repayment due Security Management
from each Series, if any, on the day following the end of the fiscal year.
Thereafter, during the fiscal year the Trust will determine any repayment due
on a daily basis. Settlement of such repayment amounts from each Series shall
be no less frequently than monthly, except where the cumulative expenses of a
Series on an annual basis do not exceed the expense limitation percentages. If
during a fiscal year payments are made and the expenses of a Series
subsequently exceed such limitations, that Series shall recover any prior
repayments from Security Management to the extent of the excess determined on
August 1.
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For the fiscal years ended July 31, 1995, 1994 and 1993 management
fees of $109,066, $92,008 and $70,892 were paid by the Growth and Income Series
to Security Management.
During the fiscal year ended July 31, 1995, management fees in the
amount of $10,939 were earned by Security Management from the Bond Series.
During the fiscal year ended July 31, 1994, management fees of $11,108 were
earned, of which $310 was waived. During the fiscal year ended July 31, 1993,
management fees of $9,561 were earned, of which $934 was waived, and $15,424
was paid by the Series to Security Management in reimbursement for prior Series
expenses paid by Security Management.
During the fiscal year ended July 31, 1995, Security Management
earned a management fee of $7,034 from the U.S. Government Income Series, but
waived $3,216 pursuant to the Advisory Agreement. During the fiscal year ended
July 31, 1994, Security Management earned a management fee of $2,595 from the
Series but waived $1,052 pursuant to the Advisory Agreement.
Each Advisory Agreement provides that it will remain in effect for an
initial term of two years from its initial effective date and will continue in
effect from year to year thereafter as to each Series provided that such
continuance is specifically approved at least annually by the Board of Trustees
(at a meeting called for that purpose), or by vote of a majority of the
outstanding shares of each Series. In either case, renewal of the Advisory
Agreement must be approved by a majority of the Trust's independent Trustees.
Each Advisory Agreement provides that it will terminate automatically if
assigned and that it may be terminated as to a particular Series without
penalty by either party upon 60 days' prior written notice to the other party,
provided that termination by the Trust must be authorized by a resolution of a
majority of the Board of Trustees or by a vote of a majority of the outstanding
shares of the affected Series.
PRICE ASSOCIATES AND THE PRICE SUB-ADVISORY AGREEMENT
Price Associates serves as sub-adviser to Security Management with
respect to the Growth and Income Series and the Bond Series pursuant to a
Sub-Advisory Agreement (the "Price Sub-Advisory Agreement") dated June 6, 1994.
Price Associates is a Maryland corporation which was incorporated in 1947, as
the successor to the investment counseling business founded by the late Mr. T.
Rowe Price in 1937. Its principal offices are located at 100 East Pratt
Street, Baltimore, Maryland 21202. Price Associates and its subsidiaries serve
as investment advisers to individual and institutional investors (including
mutual funds) with total net assets under supervision of approximately $65
billion. Price Associates is registered as an investment adviser under the
Investment Advisers Act of 1940.
Under the Price Sub-Advisory Agreement Price Associates provides
investment management services to the Growth and Income Series and the Bond
Series of the Trust. Price Associates has the discretion to purchase or sell
securities on behalf
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of the Trust in accordance with the Trust's investment objectives or
restrictions and to communicate with brokers, dealers, custodians or other
parties on behalf of the Trust and to allocate brokerage or obtain research
services. In performing these services, Price Associates must obtain and
evaluate information relating to the economy, industries, business, securities
markets and securities as it may deem necessary, and it must formulate and
implement a continuing plan for performance of its services.
The Price Sub-Advisory Agreement provides that Price Associates, its
officers, directors and employees shall not be liable for any error of
judgment, mistake of law, or loss suffered by the Trust, while rendering
services under the Agreement, except for loss resulting from willful
misfeasance, bad faith, gross negligence in the performance of their duties on
behalf of the Trust or reckless disregard of their duties and obligations under
the Price Sub-Advisory Agreement.
For its services, Price Associates receives a fee from Security
Management computed by using an annual rate of .35% based on the average daily
net assets of each Series described herein. Such compensation is accrued daily
and payable monthly.
For the fiscal years ended July 31, 1995, 1994 and 1993, Price
Associates received advisory fees from the Growth and Income Series of
$255,372, $215,314 and $166,806, respectively. For the fiscal years ended July
31, 1995, 1994 and 1993, the ratios of total expenses to average net assets for
this Series were .74%, .78% and .75%, respectively.
For the fiscal years ended July 31, 1995, 1994 and 1993, Price
Associates received advisory fees from the Bond Series of $25,523, $25,980 and
$22,386, respectively. For the fiscal years ended July 31, 1995, 1994 and
1993, the ratio of total expenses to average net assets for this Series were
1.29%, 1.30% and 1.45%, respectively.
The Price Sub-Advisory Agreement provides that it will remain in
effect for an initial term of two years and will continue in effect from year
to year thereafter as to each Series, provided that such continuance is
specifically approved at least annually by the Board of Trustees (at a meeting
called for that purpose), or by vote of a majority of the outstanding shares of
each Series. In either case, renewal of the Price Sub-Advisory Agreement must
be approved by a majority of the Trust's independent Trustees. The Price
Sub-Advisory Agreement provides that it will terminate automatically if
assigned and that it may be terminated without penalty by either party or by a
Series of the Trust upon 60 days prior written notice to the other party,
provided that termination by a Series of the Trust must be authorized by a
resolution of a majority of the Board of Trustees or by a vote of a majority of
the outstanding shares of the Series of the Trust.
No single shareholder owns beneficially more than 10% of the stock of
Price Associates.
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VIRTUS AND THE VIRTUS SUB-ADVISORY AGREEMENT
Virtus serves as sub-adviser to Security Management with respect to
the U.S. Government Income Series pursuant to a sub-advisory agreement (the
"Virtus Sub-Advisory Agreement") dated May 18, 1994. Effective as of March 1,
1995, Virtus assumed the obligations of Signet Asset Management, a division of
Signet Trust Company, under the Sub-Advisory Agreement. Signet Banking Corp.,
the sole stockholder of Signet Trust Company, is the sole stockholder of
Virtus. Signet Banking Corporation is a multi-state, multi-bank holding
company which has provided investment management services since 1956. As of
September 30, 1995, Virtus had investment authority over $2.2 billion in
assets. In addition to serving as sub-adviser to the Trust, Virtus acts as
investment adviser to the Medalist Funds (formerly, "Signet Select Funds"), a
publicly-held mutual fund comprised of a series of investment portfolios. The
principal business offices of Virtus are located at 707 East Main Street,
Suite 1300, Richmond, Virginia 23219.
As compensation for providing services under the Virtus Sub-Advisory
Agreement, Virtus receives from Security Management a fee computed by using an
annual rate of 0.75% based on the average daily net assets of the U.S.
Government Income Series. This fee is accrued daily, and paid monthly.
The Virtus Sub-Advisory Agreement provides that Virtus shall waive its
subadvisory fee (in coordination with waivers by Security Management of its
fee, as discussed above under "Security Management and the Advisory Agreements",
page 15) to the extent the expenses of either New Series must be reduced in
order to comply with any state law expense limitation. The Virtus Sub-Advisory
Agreement also provides that Virtus may voluntarily waive a greater amount of
its fees than would otherwise be required by reason of the foregoing, and may
also voluntarily make contributions to a New Series, in order to maintain the
expenses of the Series at or below levels that may be required by state law.
Under the Virtus Sub-Advisory Agreement Virtus provides investment
management services to the U.S. Government Income Series. Virtus has the
discretion to purchase or sell securities on behalf of the Series in accordance
with the Series' investment objectives or restrictions and to communicate with
brokers, dealers, custodians or other parties on behalf of the Series and to
allocate brokerage or obtain research services. In performing these services,
Virtus must obtain and evaluate information relating to the economy,
industries, business, securities markets and securities as it may deem
necessary, and it must formulate and implement a continuing plan for
performance of its services.
The Virtus Sub-Advisory Agreement provides that Virtus and its
officers, directors and employees shall not be liable for any error of
judgment, mistake of law, or loss suffered by the Trust, while rendering
services under the Virtus Sub-Advisory Agreement, except for loss resulting
from willful misfeasance, bad faith, gross negligence
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in the performance of their duties on behalf of the Trust or reckless disregard
of their duties and obligations.
During the fiscal year ended July 31, 1995, Virtus earned a
sub-advisor fee of $35,172 from the U.S. Government Income Series, but waived
$28,809 pursuant to the Sub-Advisory Agreement. During the fiscal year ended
July 31, 1994, Virtus's predecessor earned a sub-advisor fee of $12,976 from
this Series but waived $10,577 pursuant to the Virtus Sub-Advisory Agreement.
The Virtus Sub-Advisory Agreement provides that it will remain in
effect for an initial term of two years and will continue in effect from year
to year thereafter, provided that such continuance is specifically approved at
least annually by the Board of Trustees (at a meeting called for that purpose),
or by vote of a majority of the outstanding shares of the Series. In either
case, renewal of the Virtus Sub-Advisory Agreement must be approved by a
majority of the Trust's independent Trustees. The Virtus Sub- Advisory
Agreement provides that it will terminate automatically if assigned and that it
may be terminated without penalty by either party or by the relevant Series
upon 60 days prior written notice to the other party, provided that termination
by the Series must be authorized by a resolution of a majority of the Board of
Trustees or by a vote of a majority of the outstanding shares of the Series.
PRINCIPAL HOLDERS OF SECURITIES
Investment companies registered as unit investment trusts under the
1940 Act, Security First Life Separate Account A and Fidelity Standard Life
Separate Account, the depositors of which are the Security First Life Insurance
Company and Fidelity Standard Life Insurance Company, Los Angeles, California,
have entered into participation agreements with the Trust for the purchase of
Series shares at net asset value. As of July 31, 1995, Security First Life
Separate Account A was the owner of 74.56% of the outstanding shares of Bond
Series, 71.23% of the outstanding shares of the Growth & Income Series and 100%
of the outstanding shares of the U.S. Government Income Series. As of July 31,
1995, Fidelity Standard Life Separate Account was the owner of 23.58% of the
outstanding shares of the Bond Series and 27.05% of the outstanding shares of
the Growth & Income Series. The address of Security First Life Separate
Account A and Fidelity Standard Life Separate Account and the depositors,
Security First Life Insurance Company and Fidelity Standard Life Insurance
Company, is 11365 West Olympic Boulevard, Los Angeles, California 90064.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, their principal occupations
for the past five years, and the positions they hold with affiliated persons of
the Trust are:
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Jack R. Borsting - Trustee. Executive Director, Center for
Telecommunications Management, University of Southern California, 3415 South
Figueroa, DCC 217, Los Angeles, CA 90089-0871. Prior to 1995, he was the Dean
of the Department of Information & Operations Management, School of Business
Administration, University of Southern California.
*Melvin M. Hawkrigg - Trustee and Chairman. Chairman of the Board of
Trilon Financial Corporation, BCE Place, 181 Bay Street, Suite 4420, P.O. Box
771, Toronto, Ontario, Canada M5J 2T3.
Katherine L. Hensley - Trustee. Retired. Formerly, Partner of
O'Melveny & Myers. 400 South Hope Street, Los Angeles, CA 90071-2899.
Lawrence E. Marcus - Trustee. Retired. Formerly, Executive Vice
President of Neiman-Marcus Company, a general merchandise retailer. 4616
Dorset, Dallas, Texas 75229.
Robert G. Mepham - President. 11365 West Olympic Boulevard, Los
Angeles, California 90064. President and Chief Executive Officer of Security
First Group, Inc. and an officer of its subsidiaries.
Jane F. Eagle - Senior Vice President, Finance. 11365 West Olympic
Boulevard, Los Angeles, CA 90064. Senior Vice President of Security First
Group, Inc. and an officer of its subsidiaries.
Cheryl M. MacGregor - Senior Vice President, Administration. 11365
West Olympic Boulevard, Los Angeles, CA 90064. Senior Vice President,
Administration of Security First Group, Inc. and an officer of its
subsidiaries.
Richard C. Pearson - Senior Vice President, General Counsel and
Secretary. 11365 West Olympic Boulevard, Los Angeles, California 90064.
Senior Vice President, Secretary and General Counsel of Security First Group,
Inc. and an officer of its subsidiaries.
James C. Turner - Vice President, Taxation. 11365 West Olympic
Boulevard, Los Angeles, California 90064. Vice President, Taxation of Security
First Group, Inc.
Each "disinterested" Trustee receives a Trustee's fee of $7,000 per
year, $1,000 for each Trustees' meeting attended and reimbursement of expenses.
Ms. Eagle is also Senior Vice President, Finance of Security
Management. Mr. Mepham is also Chairman and President of Security Management.
Mr. Pearson is also Senior Vice President, General Counsel and Secretary of
Security Management. Mr. Turner is also Vice President, Taxation and Assistant
Secretary of Security Management.
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* Trustees who are "interested persons" as that term is defined in the
Investment Company Act of 1940.
BROKERAGE
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Trust are made by Security Management pursuant to
the terms of the Advisory Agreement. However, pursuant to the terms of the
Sub-Advisory Agreements, Price Associates and Virtus may allocate brokerage and
principal business or obtain research services from organizations with which
the Trust or Security Management may be dealing. Security Management is
ultimately responsible for implementing these decisions, including the
allocation of principal business and portfolio brokerage and the negotiation of
commissions.
In purchasing and selling the Series' portfolio securities, it is
Security Management's, Price Associates' and Virtus's policies to seek quality
execution at the most favorable prices through responsible broker-dealers and,
in the case of agency transactions, at competitive commission rates. However,
under certain conditions, a Series may pay higher brokerage commissions in
return for brokerage and research services. In selecting broker-dealers to
execute a Series' portfolio transactions, consideration will be given to such
factors as the price of the security, the rate of commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
brokerage and research services which they provide to Security Management,
Price Associates, Virtus or the Series.
Security Management, Price Associates or Virtus may cause a Series to
pay a broker-dealer who furnishes brokerage and/or research services a
commission that is in excess of the commission another broker-dealer would have
received for executing the transaction if it is determined that such commission
is reasonable in relation to the value of the brokerage and/or research
services which have been provided. This determination may be viewed in terms
of either that particular transaction or the overall responsibilities of
Security Management, Price Associates and Virtus with respect to the accounts
over which they exercise investment discretion. In some cases, research
services are generated by third parties, but are provided to Security
Management, Price Associates or Virtus by or through broker-dealers.
Price Associates and Virtus may effect principal transactions on
behalf of a Series with a broker-dealer who furnishes brokerage and/or research
services, designate any such broker-dealer to receive selling concessions,
discounts or other allowances, or otherwise deal with any such broker-dealer in
connection with the acquisition of securities in underwritings. Additionally,
purchases and sales of fixed income securities are transacted with the issuer,
the issuer's underwriter, or with a primary market maker acting as principal or
agent. The Trust does not usually pay brokerage commissions for these
purchases and sales, although the price of the securities generally includes
compensation which is not disclosed separately. The prices the Trust pays to
underwriters of newly-issued securities usually include a
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concession paid by the issuer to the underwriter. Transactions placed through
dealers who are serving as primary market makers reflect the spread between the
bid and asked prices.
Security Management, Price Associates and Virtus receive a wide range
of research services from broker-dealers including information on securities
markets, the economy, individual companies, statistical information, accounting
and tax law interpretations, technical market action, pricing and appraisal
services, and credit analysis. Research services are received primarily in the
form of written reports, telephone contacts, personal meetings with security
analysts, corporate and industry spokespersons, economists, academicians,
government representatives, and access to various computer-generated data.
Research services received from broker-dealers are supplemental to Security
Management's, Price Associates' and Virtus's own research efforts and, when
utilized, are subject to internal analysis before being incorporated into the
investment process.
Each year Security Management, Price Associates and Virtus assess the
contribution of the brokerage and research services provided by broker-dealers
and allocate a portion of the brokerage business of their clients on the basis
of these assessments. In addition, broker-dealers sometimes suggest a level of
business they would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any firm may be
less than the suggested allocations, but can (and often does) exceed the
suggestions because total brokerage is allocated on the basis of all the
considerations described above. In no instance is a broker-dealer excluded
from receiving business because it has not been identified as providing
research services.
Security Management, Price Associates and Virtus cannot readily
determine the extent to which commissions or net prices charged by
broker-dealers reflect the value of their unsolicited research services. In
some instances, Security Management and/or Price Associates and/or Virtus will
receive research services they might otherwise have had to perform for
themselves. The research services provided by broker-dealers can be useful to
Security Management, Price Associates and Virtus in serving their other
clients, but they can also be useful in serving the Trust.
Security Management, Price Associates and Virtus do not allocate
business to any broker-dealer on the basis of its efforts in promoting sales of
shares of the Series. However, this does not mean that such broker-dealers
will not receive business from the Trust.
Some of Price Associates' other clients have investment objectives
and programs similar to one or more of the Series. Price Associates may
occasionally make recommendations to other clients which result in their
purchasing or selling securities simultaneously with a Series. As a result,
the demand for securities being purchased or the supply of securities being
sold may increase, and this could have an adverse effect on the price of those
securities. It is Price Associates' policy not to
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favor one client over another in making recommendations or in placing orders.
If two or more Price Associates' clients are purchasing or selling a given
security on the same day from or to the same broker-dealer, Price Associates
may average the price of the transactions and allocate the average among the
clients participating in the transaction. Price Associates has established a
general investment policy that it will ordinarily not make additional purchases
of a common stock of a company for its clients (including the T. Rowe Price
Funds) if, as a result of such purchases, 10% or more of the outstanding common
stock of such company would be held by its clients in the aggregate.
All brokerage commissions will be allocated by Price Associates
according to the foregoing policies. The Growth and Income Series paid
brokerage commissions to securities dealers in connection with underwritings
during the fiscal years ended July 31, 1995, 1994 and 1993 of $17,878, $49,322
and $18,617, respectively. The Bond Series and U.S. Government Income Series
did not pay any brokerage commissions or discounts to securities dealers in
those years.
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PORTFOLIO TURNOVER
The portfolio turnover rate can be expected to be higher during
periods of rapidly changing economic or market conditions than in a more stable
period. Portfolio turnover may be defined as the ratio of the total dollar
amount of the lesser of the purchase or sales of securities to the monthly
average value of portfolio securities owned by the Trust. The portfolio
turnover rates for the Growth and Income Series for the fiscal years ended July
31, 1995, 1994 and 1993 were 8%, 11% and 5%, respectively. The portfolio
turnover rates for the Bond Series for the fiscal years ended July 31, 1995,
1994 and 1993 were 56%, 58% and 36%, respectively. The portfolio turnover
rates for the U.S. Government Income Series for the fiscal years ended July 31,
1995 and 1994 were 16% and 17%, respectively, and 0% for the period May 19,
1993 through July 31, 1993.
High portfolio turnover involves correspondingly greater brokerage
commissions (to the extent such commissions are payable) and other transaction
costs that are borne directly by the Series involved. Higher turnover rates
reflect an increased rate of realization of gains and losses by the Series,
which would normally affect the taxable income of the Series' shareholders.
Where the shareholder is an insurance company separate account funding variable
annuity contracts and qualified as such under the Internal Revenue Code
("Code"), the contract owners are not currently charged with such income or
losses except to the extent provided under the Code (normally when
distributions under the contracts are made).
PRICING AND REDEMPTION OF SECURITIES BEING OFFERED
DETERMINING NET ASSET VALUE
The net asset value per share of each Series is determined by
dividing the value of the Series' securities, plus any cash and other assets
(including dividends and interest accrued and not collected), less all
liabilities (including accrued expenses), by the number of shares outstanding.
GROWTH AND INCOME AND BOND SERIES
Debt securities other than convertible securities and short-term
obligations are valued at prices obtained for the day of valuation from a bond
pricing service of a major dealer in bonds, when such prices are available.
However, when such prices are not available and where Security Management deems
it appropriate to do so, an over-the-counter or exchange quotation may be used.
The market value of the Series' other portfolio securities is determined as
follows: securities traded on a national securities exchange are valued at the
bid price for such securities, as reported by securities dealers. When market
quotations are not readily available, or when restricted securities are being
valued, such securities are valued at fair value as determined in
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good faith by the Board of Trustees. Any other assets are also valued at their
fair value as determined in good faith by the Board.
U.S. GOVERNMENT INCOME SERIES
The market values of the Series' portfolio securities are determined
as follows:
- - for equity securities, according to the last sale price on a national
securities exchange, if available;
- - in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
- - for unlisted equity securities, the latest bid prices;
- - for bonds and other fixed income securities, as determined by an
independent pricing service;
- - for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for short-term
obligations with maturities of less than 60 days, at amortized cost; or
- - for all other securities, at fair value as determined in good faith by
the Board of Trustees.
The Series will value future contracts, options, put options on
futures and financial futures at their market values established by the
exchanges at the close of option trading on such exchanges unless the Board
determines in good faith that another method of valuing option positions is
necessary to appraise their fair value.
REDEMPTION OF SHARES
The Trust will redeem shares at the net asset value per share next to
be determined after receipt of a duly executed request for redemption.
Redemption of shares or payment may be suspended at times (i) when the New York
Stock Exchange is closed other than customary weekends and holidays, (ii) when
trading on said exchange is restricted, (iii) when an emergency (as determined
by the Securities and Exchange Commission) exists, making disposal of portfolio
securities or the valuation of net assets of the Series not reasonably
practicable, or (iv) when the Securities and Exchange Commission has by order
permitted such suspension for the protection of shareholders of the Trust.
The Trust's redemption procedures will not be changed without prior
notice to shareholders.
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TAXATION
Under the Code, each of the Series is treated as a separate regulated
investment company providing the qualification requirements of Subchapter M are
otherwise met. As a regulated investment company, a Series will not be subject
to federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable year
is distributed.
In order to qualify as a regulated investment company under the Code,
a Series must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks or securities, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
(b) derive less than 30% of its gross income from the sale or other disposition
of stocks or securities held less than three months, and (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Series' assets is represented by cash, Government
securities and other securities limited in respect of any one issuer to 5% of
the Series' assets and to not more than 10% of the voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities of any one issuer (other than Government securities).
In addition to the diversification requirements contained in the
Trust's investment restrictions, the Trust is also subject to diversification
requirements applicable to variable annuities under Section 817(h) of the Code.
Under this section, a variable annuity will not receive the tax treatment
afforded annuities if its underlying investments are not adequately
diversified. Under applicable regulations, no more than 55% of total assets
can be invested in one investment, 70% in two investments, 80% in three
investments and 90% in four investments. Investments are generally defined as
securities issued by any one issuer. U.S. Government agencies or
instrumentalities are considered separate issuers.
Unlike public shareholders, under the Code a life insurance company
separate account will not incur any federal income tax liability on dividends
and capital gains distributions received from a regulated investment company by
a separate account funding variable annuity contracts as defined in section
817(d) of the Code.
To the extent that there is in excess of $250,000 invested in a
Series other than through variable contract premium payment, the Code imposes a
4% nondeductible excise tax on the undistributed income of such Series to the
extent the Series does not distribute at least 98% of its net investment income
and its net capital gains (both long- and short-term) for each taxable year by
the end of such year. For purposes of the 4% excise tax, dividends and
distributions will be treated as paid when actually distributed, except that
dividends declared in December payable to shareholders of record on a specified
date in December, and paid before February 1 of the following year, will be
treated as having been (i) paid by the Series on the record date and (ii)
received by
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each shareholder on such date. Net capital gains realized for the one year
period ending on October 31 of each tax year are subject to distribution in
this manner.
Series which do not have in excess of $250,000 invested other than
through variable contract premium payments are not subject to the above
described 4% excise tax.
Each Series will send written notices to its shareholders (Separate
Accounts) regarding the tax status of all distributions made during each
taxable year.
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or 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 in Aaa
securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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STANDARD & POOR'S CORPORATION
Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the higher-rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher-rated categories.
FITCH INVESTORS SERVICE, INC.
Fitch's investment grade bond ratings are summarized as follows: AAA
- - Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events;
AA - Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
'F-1+'; A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings; BBB - Bonds considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) Minus (-) - Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the 'AAA' category.
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COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's employs the following three designations, all judged to be of
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. 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.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in the
relevant market. Ratings are graded into several categories, ranging from
"A-1" for the highest quality obligations to "D" for the lowest. Categories
A-1, A-2 and A-3 are as follows: A-1--This highest category indicates that the
degree of safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted with a plus (+)
sign designation; A-2--Capacity for timely payments on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1"; and A-3--Issues carrying this designation
have adequate capacity for timely payment. They are, however, more vulnerable
to the adverse effects of changes in circumstances than obligations carrying
the higher designations.
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CUSTODIAN
The Bank of New York (the "Custodian"), 48 Wall Street, New York, New
York 10286, serves as the Trust's custodian. Pursuant to the terms of the
Custodian Agreement executed with the Trust, the Trust will forward to the
Custodian the proceeds of each purchase of Series shares. The Custodian will
hold such proceeds and make disbursements therefrom in accordance with the
terms of the Custodian Agreement. It will retain possession of the securities
purchased with such proceeds and maintain appropriate records with respect to
receipt and disbursements of money, receipt and release of securities, and all
other transactions of the Custodian with respect to the securities and other
assets of the Series.
The Custodian Agreement provides that each of the Series shall pay to
the Custodian compensation for its services, in accordance with the Custodian's
regularly established rate schedule. Said compensation shall be computed on
the basis of the Series' average daily net assets payable as of the end of each
month. The Custodian Agreement may be terminated by either the Trust or the
Custodian upon 60 days' written notice to the other party. Such termination
shall not be in contravention of any applicable federal or state laws or
regulations, or any provision of the Trust Declaration or By-Laws.
INDEPENDENT AUDITORS
The financial statements of Security First Trust included in this
Statement of Additional Information and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, for the periods indicated
in their reports thereon which appear elsewhere herein and in the Registration
Statement. The financial statements audited by Ernst & Young LLP have been
included in reliance on their reports, given on their authority as experts in
accounting and auditing.
FEDERAL REGISTRATION OF SHARES
The Trust's shares are registered for sale under the Securities Act
of 1933.
LEGAL COUNSEL
Routier, Mackey and Johnson, P.C., whose address is 1700 K Street,
N.W., Washington, D.C. 20006 is legal counsel to the Trust.
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[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
To the Trustees and Shareholders
Security First Trust
We have audited the accompanying statement of assets and liabilities,
including the portfolios of investments, of Security First Trust (comprised of
Bond Series, Growth and Income Series, Value Equity Series and U.S. Government
Income Series) as of July 31, 1995, the related statements of operations and
the changes in net assets for each of the periods indicated. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of July 31, 1995, by correspondence with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Security First Trust (comprised
of Bond Series, Growth and Income Series, Value Equity Series, and U.S.
Government Income Series) at July 31, 1995, the results of its operations and
the changes in its net assets for each of the periods indicated in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
September 12, 1995
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SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ------ ------ ------
<S> <C> <C> <C> <C>
ASSETS
Investments -- Note A and Schedule I:
Investment securities, at
market (cost: Bond
Series - $7,615,670;
Growth and Income Series
- $49,552,608; Value
Equity Series -
$6,140,865; U.S.
Government Income Series
- $5,528,736) $7,849,278 $67,411,628 $6,991,313 $5,576,167
Short-term investments -
(cost: Growth and
Income Series -
$16,039,906) 16,039,906
---------- ----------- ---------- ----------
7,849,278 83,451,534 6,991,313 5,576,167
Cash 38,462 245,482 778,838 303,696
Interest receivable 123,353 117,370
Dividends receivable 144,110 6,568
Receivable for capital
shares purchased 2,322 60,806 18,660 5,672
Prepaid insurance 1,388 14,310 1,256 1,025
---------- ----------- ---------- ----------
8,014,803 83,916,242 7,796,635 6,003,930
LIABILITIES
Payable for securities purchased 16,979
Payable to affiliates 17 237 61 24
Accrued expenses 17,936 36,807 10,327 5,915
Payable to investment
adviser -- Note B 2,372 24,542 3,513 1,350
Payable for directors' fees 181 1,543 36 35
Payable for capital shares
redeemed 16,516 63,467 457
---------- ----------- ----------- -----------
37,022 126,596 30,916 7,781
NET ASSETS
Composed of:
Capital shares (authorized
100,000,000 shares of
$.01 par value for each
series) 7,737,759 64,263,853 6,880,622 5,815,686
Undistributed net investment income 276,600 1,316,678 41,590 159,926
Accumulated net realized
gain (loss) (270,186) 350,095 (6,941) (26,894)
Net unrealized
appreciation of
investments 233,608 17,859,020 850,448 47,431
---------- ----------- ----------- -----------
Net assets $7,977,781 $83,789,646 $ 7,765,719 $ 5,996,149
========== =========== =========== ===========
Capital shares outstanding 2,034,763 7,918,360 1,363,119 1,169,195
Net asset value per share $ 3.92 $ 10.58 $ 5.70 $ 5.13
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 69
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 551,886 $ 738,459 $ 26,618 $ 277,202
Dividends 2,039,934 90,616
Miscellaneous income 8,811
------------ ------------ ------------ ------------
551,886 2,787,204 117,234 277,202
Expenses:
Custodian fees 29,737 39,598 22,627 16,691
Adviser fees -- Note B 25,523 255,372 38,075 35,172
Management fees -- Note B 10,939 109,066 7,615 7,034
Printing expenses 4,423 35,931 2,200 261
Audit fees 14,388 14,370 8,274 4,105
Insurance expenses 1,874 17,440 770 802
Directors' fees and expenses 3,000 30,991 2,213 2,197
Legal expense 2,632 24,953 1,358 1,408
Taxes, license and fees 1,604 1,675 1,675 1,675
Miscellaneous expenses 3,041 2,690 523
------------ ------------ ------------ ------------
94,120 532,437 87,497 69,868
Less: Waiver of management fees (3,601) (3,216)
Waiver of adviser fees (24,836) (28,809)
Excess expenses
reimbursed by Fund
Manager -- Note B (8,177) (4,932)
------------ ------------ ------------ ------------
94,120 532,437 50,883 32,911
------------ ------------ ------------ ------------
Net Investment Income 457,766 2,254,767 66,351 244,291
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
-- Notes A and C
Net realized gain (loss) on sale of
investments (85,491) 723,499 10,119 (26,894)
Net unrealized appreciation of
investments during the year 258,476 9,667,042 866,272 155,555
------------ ------------ ------------ ------------
Net gain on investments 172,985 10,390,541 876,391 128,661
------------ ------------ ------------ ------------
Increase in net assets
resulting from operations $ 630,751 $ 12,645,308 $ 942,742 $ 372,952
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 70
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 457,766 $ 2,254,767 $ 66,351 $ 244,291
Net realized gain (loss) on
investments (85,491) 723,499 10,119 (26,894)
Net unrealized appreciation
of investments during the
year 258,476 9,667,042 866,272 155,555
----------- ----------- ---------- ----------
Increase in net assets
resulting from operations 630,751 12,645,308 942,742 372,952
Distributions to shareowners
from:
Net investment income (403,613) (1,896,472) (43,805) (133,049)
Net realized gains (440,124)
Capital share transactions --
Note D:
Reinvestment of net
investment income
distributed 403,613 1,896,472 43,805 133,049
Reinvestment of net
realized gains 440,124
Sales of capital shares 1,520,473 14,215,043 4,494,367 2,982,198
Redemptions of capital
shares (1,399,407) (8,731,675) (678,463) (783,488)
----------- ----------- ---------- ----------
Increase in net assets from
capital share transactions 524,679 7,819,964 3,859,709 2,331,759
----------- ----------- ---------- ----------
Total increase in net assets 751,817 18,128,676 4,758,646 2,571,662
Net Assets:
Beginning of year 7,225,964 65,660,970 3,007,073 3,424,487
----------- ----------- ---------- ----------
End of year (including
undistributed net
investment income: Bond
Series - $276,600;
Growth and Income Series
- $1,316,678; Value
Equity Series - $41,590;
U.S. Government Income
Series - $159,926) $ 7,977,781 $83,789,646 $7,765,719 $5,996,149
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 71
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1994
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 404,434 $ 1,607,834 $ 27,548 $ 64,380
Net realized gain (loss) on
investments 49,276 2,664,404 (13,267) 3,614
Net unrealized appreciation
(depreciation) of
investments during the year (531,421) 64,572 (16,873) (110,876)
----------- ------------ ----------- ----------
Increase (decrease) in net assets
resulting from operations (77,711) 4,336,810 (2,592) (42,882)
Distributions to shareowners
from:
Net investment income (408,147) (1,431,711) (10,567) (18,886)
Net realized gains (3,614)
Capital share transactions --
Note D:
Reinvestment of net
investment income
distributed 408,147 1,431,711 10,567 18,886
Reinvestment of net
realized gains 3,614
Sales of capital shares 2,057,153 16,521,743 3,217,442 3,772,938
Redemptions of capital
shares (1,983,437) (10,357,781) (1,541,629) (774,629)
----------- ------------ ----------- ----------
Increase in net assets from
capital share transactions 481,863 7,595,673 1,686,380 3,020,809
----------- ------------ ----------- ----------
Total increase (decrease)
in net assets (3,995) 10,500,772 1,673,221 2,955,427
Net Assets:
Beginning of year 7,229,959 55,160,198 1,333,852 469,060
----------- ------------ ----------- ----------
End of year (including
undistributed net
investment income: Bond
Series - $222,447;
Growth and Income Series
- $958,383; Value Equity
Series - $19,044; U.S.
Government Income Series
- $48,684) $ 7,225,964 $ 65,660,970 $ 3,007,073 $3,424,487
=========== ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 72
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ------------------------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
CORPORATE NOTES 32.8%
Banking: 7.5
$ 100,000 Bankers Trust NY Corp.
8.25%, due 05/01/05 $ 107,728 $ 106,317
100,000 Citicorp
5.70%, due 02/12/96 100,038 99,744
100,000 First Chicago Corp.
5.50%, due 04/15/96 99,989 99,573
125,000 National Australia Bank
9.70%, due 10/15/98 125,000 136,094
100,000 Shawmut Corp.
8.875%, due 04/01/96 102,016 101,579
50,000 Wells Fargo
8.35%, due 11/01/96 51,576 51,336
----------- ------------
586,347 594,643
Credit Card-Backed: 2.6
100,000 First Chicago Credit Card Tr
91-D
8.40%, due 06/15/98 99,779 101,750
100,000 Standard Credit Card
7.25%, due 04/07/08 98,466 102,971
----------- ------------
198,245 204,721
Electrical Utilities: 1.6
125,000 Long Island Lighting
5.25%, due 03/01/96 123,884 124,140
Finance and Credit: 5.4
65,000 American Express
Credit Corp. 7.75%,
due 03/01/97 63,937 66,465
50,000 Associates Corp. No.
America
8.80%, due 03/01/96 49,973 50,735
50,000 Beneficial Financial
9.05%, due 03/14/97 49,992 52,131
50,000 Commercial Credit
Group Inc.
9.60%, due 05/15/99 50,656 54,942
100,000 Greyhound Financial
Corp.
5.125%, due 02/15/96 99,766 99,563
100,000 Margaretten Financial
Corp.
6.75%, due 06/15/00 96,100 99,683
----------- ------------
410,424 423,519
</TABLE>
<PAGE> 73
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CORPORATE NOTES
(CONTINUED)
Food & Beverage: 1.5%
$ 50,000 Coca Cola Enterprises
8.50%, due 02/01/22 $ 56,447 $ 55,355
60,000 Philip Morris
8.75%, due 12/01/96 59,976 61,936
----------- ------------
116,423 117,291
Industrial - Other: 6.4
50,000 Boeing Co.
8.75%,due 08/15/21 57,904 56,862
100,000 Columbia Healthcare
7.69%, due 06/15/25 99,875 98,177
100,000 GMAC
9.625%, due 12/15/01 114,809 112,659
125,000 General Electric
Capital Corp.
9.38%, due 10/06/98 125,191 135,112
100,000 Hertz Corp.
6.625%, due 07/15/00 99,610 98,961
----------- ------------
497,389 501,771
Miscellaneous: 3.4
175,000 Tennessee Valley Auth.
8.375%, due 10/01/99 176,919 187,598
80,000 U. S. West Communication
7.50%, due 06/15/23 70,099 77,922
----------- ------------
247,018 265,520
Savings & Loan: 0.7
50,000 Ahmanson (H.F.) & Co.
8.25%, due 10/01/02 49,856 52,692
Telephone: 3.7
125,000 AT&T Credit Corp.
9.85%, due 03/15/96 125,282 127,729
50,000 GTE Corp.
8.85%, due 03/01/98 50,072 52,534
100,000 Rochester Telephone
Corp.
8.77%, due 04/16/01 100,000 107,847
----------- ------------
275,354 288,110
TOTAL CORPORATE NOTES 2,504,940 2,572,407
</TABLE>
<PAGE> 74
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- --------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
FEDERAL AGENCIES 42.6%
Federal Home Loan Bank: 2.2
$ 175,000 5.43%, due 02/25/99 $ 161,348 $ 170,461
Federal Home Loan Mortgage Corp.: 5.9
235,000 7.125%, due 07/21/99 228,311 241,683
9,344 9.00%, due 01/01/17 9,126 9,657
20,515 9.00%, due 06/01/19 19,526 21,201
41,220 9.50%, due 04/01/19 39,835 42,984
150,000 7.00%, due 07/15/21 150,697 146,343
----------- ------------
447,495 461,868
Federal National Mortgage Assn.: 2.5
175,000 8.35%, due 11/10/99 176,865 187,798
9,069 7.50%, due 08/25/21 9,187 9,143
----------- ------------
186,052 196,941
Government National Mortgage
Assn.: 32.0
6,079 9.00%, due 04/15/09 6,294 6,349
90,012 9.00%, due 05/15/09 93,024 94,006
136,852 7.00%, due 08/15/23 140,409 133,517
98,254 9.25%, due 07/15/17 103,584 102,491
1,648 11.25%, due 07/15/13 1,728 1,813
15,470 11.50%, due 02/15/18 17,152 17,462
86,613 11.50%, due 11/15/15 97,163 97,768
5,571 12.50%, due 04/15/10 6,243 6,316
279,438 7.50%, due 10/15/23 290,716 279,262
28,968 10.00%, due 06/15/17 31,363 31,594
111,743 10.00%, due 03/15/20 121,411 121,874
314,560 9.00%, due 05/15/16 330,044 330,093
189,012 9.00%, due 07/15/16 198,319 198,345
163,286 9.00%, due 10/15/16 171,332 171,349
168,124 9.00%, due 11/15/16 176,409 176,426
71,410 10.00%, due 08/15/16 75,941 77,726
34,492 10.00%, due 11/15/17 36,686 37,542
70,645 10.00%, due 03/15/19 75,149 76,893
197,377 7.00%, due 03/15/24 186,408 192,628
170,967 7.50%, due 06/15/23 160,785 170,992
195,259 7.00%, due 01/15/24 182,076 190,561
----------- ------------
2,502,236 2,515,007
TOTAL FEDERAL AGENCIES 3,297,131 3,344,277
</TABLE>
<PAGE> 75
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 24.6%
U.S. Treasury Bonds: 14.6
$ 400,000 7.125%, due 02/15/23 $ 381,150 $ 407,750
200,000 8.75%, due 05/15/20 210,150 240,875
100,000 8.75%, due 08/15/20 102,537 120,531
150,000 8.00%, due 11/15/21 151,395 168,047
180,000 8.50%, due 02/15/20 212,914 211,443
----------- ------------
1,058,146 1,148,646
U.S. Treasury Notes: 7.5
310,000 7.75%, due 11/30/99 315,915 327,341
250,000 7.25%, due 08/15/22 259,157 258,125
----------- ------------
575,072 585,466
350,000 U. S. Treasury Securities
Stripped: 2.5
0.00%, due 05/15/04 180,381 198,482
----------- ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 1,813,599 1,932,594
----------- ------------
TOTAL INVESTMENTS 100.0 $ 7,615,670 7,849,278
===========
Other assets less liabilities 128,503
-----------
NET ASSETS $ 7,977,781
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 76
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- -------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CAPITAL EQUIPMENT 2.1%
Electrical Equipment: 1.6
17,000 General Electric Co. $ 659,175 $ 1,003,000
25,000 Westinghouse
Electric Corp. 636,314 343,750
----------- ------------
1,295,489 1,346,750
Machinery: 0.5
25,000 Coltec Industries
Inc.* 407,875 381,250
CONSUMER CYCLICALS 0.8
Automobiles & Related: 0.8
7,000 Ford Motor Service
Cv. Pfd. 350,000 665,875
CONSUMER NONDURABLES 24.1
Food Products: 5.3
12,000 Anheuser-Busch Company, Inc. 623,460 667,500
12,000 CPC International Inc. 493,152 741,000
12,000 General Mills, Inc. 515,191 627,000
10,000 Pepsico, Inc. 304,450 468,750
25,000 Quaker Oats Company 854,562 868,750
20,000 Ralston-Ralston Purina Group 748,625 1,070,000
----------- ------------
3,539,440 4,443,000
Hospital Supplies: 1.3
30,000 Baxter International Inc. 752,235 1,117,500
Miscellaneous Consumer Products: 6.8
18,000 American Brands Inc. 659,565 717,750
10,000 Clorox Co. 378,300 656,250
12,000 Colgate Palmolive 661,092 840,000
25,000 Corning Inc. 832,712 800,000
29,000 Hanson PLC Sponsored ADR 414,020 500,250
15,000 Philip Morris Cos. Inc. 1,117,700 1,076,250
8,249 RJR Nabisco Hldngs Corp. 228,143 227,879
18,000 Tambrands, Inc. 684,390 848,250
----------- ------------
4,975,922 5,666,629
</TABLE>
*Non-Income Producing
<PAGE> 77
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- -------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CONSUMER NONDURABLES (CONTINUED)
Pharmaceuticals: 10.7%
15,000 American Home Products $ 923,550 $ 1,185,000
15,000 Johnson & Johnson 599,325 1,076,250
12,000 Eli Lilly & Co. 794,502 939,000
24,000 Pfizer, Inc. 683,710 1,215,000
20,000 Schering-Plough Corp. 559,450 930,000
30,200 SmithKline Beecham PLC ADR 498,641 1,359,000
25,000 Upjohn Co. 834,717 962,500
15,000 Warner Lambert Co. 1,005,959 1,258,125
----------- ------------
5,899,854 8,924,875
CONSUMER SERVICES 10.7
Restaurants: 0.2
12,000 Darden Restaurants
Inc.* 108,149 130,500
General Merchandisers: 3.6
15,000 Dayton-Hudson 1,021,926 1,134,375
30,000 K Mart Corp. 436,825 472,500
20,000 J.C. Penney Inc. 429,490 967,500
30,000 TJX Companies Inc. 369,300 438,750
----------- ------------
2,257,541 3,013,125
Media and
Communications: 5.0
17,000 Dun and Bradstreet
Corp. 715,100 956,250
13,000 McGraw-Hill Inc. 756,235 999,375
30,000 Meredith Corp. 398,400 862,500
14,014 Times Mirror Co. New 270,830 402,902
5,986 Times Mirror Co.
Series B 115,788 148,153
20,000 Vodafone Group PLC SPON ADR 653,900 787,500
----------- ------------
2,910,253 4,156,680
Miscellaneous: 1.9
15,000 Readers Digest Assn.
Inc. 586,050 641,250
30,000 WMX Technologies,
Inc. 930,265 937,500
1,450 U. S. Industries* 15,470 20,844
----------- ------------
1,531,785 1,599,594
</TABLE>
*Non-Income Producing
<PAGE> 78
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- -------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
ENERGY 11.4%
Oil: 11.4
12,000 Atlantic Richfield
Co. $ 1,242,918 $ 1,383,000
15,000 British Petroleum PLC 840,450 1,361,250
8,715 Burlington Resources
Inc. 218,178 338,796
18,000 Exxon Corp. 1,063,910 1,305,000
15,000 Halliburton Co. 422,450 609,375
8,000 Mobil Corp. 480,128 782,000
12,000 Murphy Oil Corp. 430,220 490,500
8,000 Pennzoil Co. 589,241 375,000
10,000 Royal Dutch Petroleum Co.
ADR 796,120 1,270,000
15,300 Texaco Inc. 578,282 1,019,363
20,000 Unocal Corp. 344,700 562,500
----------- ------------
7,006,597 9,496,784
FINANCIAL 13.6
Bank and Trust: 4.9
75,000 California Federal
Bank* 944,450 1,040,625
10,000 Chemical Banking
Corp. 272,500 516,250
10,000 First Interstate
Bancorp 330,000 861,250
15,000 J.P. Morgan and Co. 945,615 1,098,750
20,000 National City Corp. 501,000 612,500
----------- ------------
2,993,565 4,129,375
Financial Services: 7.5
52,000 American Express 976,137 2,008,500
20,000 H&R Block Inc. 271,513 750,000
15,000 Federal Home Loan
Mortgage Corp. 196,650 982,500
15,000 Student Loan Marketing
Assn. 518,550 808,125
36,789 Travellers Inc. 756,494 1,742,879
----------- ------------
2,719,344 6,292,004
Insurance: 1.2
10,000 CIGNA Corp. 487,963 806,250
14,000 Willis Corroon Group Sponsored
ADR 292,946 162,750
----------- ------------
780,909 969,000
</TABLE>
*Non-Income Producing
<PAGE> 79
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
PROCESS INDUSTRIES 6.7%
Chemicals: 3.4
15,000 Great Lakes Chemical
Corp. $ 738,195 $ 982,500
13,000 Minnesota Mining &
Manufacturing 708,295 736,125
12,000 Monsanto Co. 634,212 1,117,500
----------- ------------
2,080,702 2,836,125
Forest Products: 0.8
15,000 Weyerhaeuser Co. 392,498 701,250
Paper & Paper Products: 2.5
33,500 Albany International
Corp. 438,603 850,062
10,000 Kimberly-Clark Corp. 473,300 633,750
10,000 Union Camp Corp. 400,800 562,500
----------- ------------
1,312,703 2,046,312
TECHNOLOGY 1.6
Electronic Systems: 1.6
30,000 Honeywell Inc. 999,350 1,286,250
TRANSPORTATION 3.2
Railroads: 1.5
30,000 Canadian Pacific Ord Par $5 584,625 536,250
35,000 Southern Pacific Railroad* 553,350 691,250
----------- ------------
1,137,975 1,227,500
Transportation Services: 1.7
20,000 PHH Corporation 691,400 947,500
20,000 Ryder System Inc. 312,263 497,500
----------- ------------
1,003,663 1,445,000
</TABLE>
*Non-Income Producing
<PAGE> 80
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- ---------- ------------------------------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
UTILITIES 6.6%
Telephone: 3.5
12,000 American Telephone & Telegraph Co. $ 439,460 $ 633,000
25,000 General Telephone Electronics
Corp. 831,107 887,500
17,000 Southern New England Telecom.
Corp. 589,010 582,250
13,000 Telefonos De Mexico 653,635 429,000
10,000 U.S. West Inc. 360,800 428,750
----------- ------------
2,874,012 2,960,500
Utility Holding Companies: 3.1
22,000 Entergy Corp. 534,695 522,500
16,000 General Public Utilities Corp. 368,552 462,000
40,000 Pacificorp 667,000 735,000
50,000 SCE Corp. 652,500 856,250
----------- ------------
2,222,747 2,575,750
TOTAL EQUITY SECURITIES 49,552,608 67,411,628
</TABLE>
<TABLE>
<CAPTION>
Principal Short-Term Investments
- ----------- -----------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS 19.2
Commercial Paper: 19.2
1,600,000 American Home Products
6.00%, due 08/01/95 1,595,686 1,595,686
1,500,000 Aon Corp.
5.72%, due 08/24/95 1,494,244 1,494,244
500,000 Cargill Inc.
5.70%, due 09/05/95 497,128 497,128
2,000,000 Cargill Inc.
5.70%, due 08/07/95 1,997,727 1,997,727
2,700,000 Ciesco
5.70%, due 08/29/95 2,687,526 2,687,526
100,000 General Electric
5.88%, due 08/08/95 99,877 99,877
1,000,000 Heinz HJ Co.
5.73%, due 08/11/95 998,354 998,354
1,700,000 Kellogg Co.
5.70%, due 08/25/95 1,693,227 1,693,227
</TABLE>
<PAGE> 81
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Short-Term Investments Portfolio Cost Value
- ----------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
(CONTINUED)
$1,300,000 Kimberly Clark
5.70%, due 08/08/95 $ 1,298,488 $ 1,298,488
1,900,000 Met Life FDG
5.72%, due 09/05/95 1,889,115 1,889,115
500,000 Pitney Bowes Cr
5.55%, due 10/13/95 494,133 494,133
1,300,000 PHH Corp.
5.72%, due 08/25/95 1,294,401 1,294,401
----------- ------------
TOTAL SHORT-TERM INVESTMENTS 16,039,906 16,039,906
----------- ------------
TOTAL INVESTMENTS 100.0% $65,592,514 83,451,534
===========
Other assets less liabilities 338,112
------------
NET ASSETS $ 83,789,646
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 82
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- --------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CAPITAL EQUIPMENT 5.3%
Construction & Mining: 1.8
3,150 Parker Hannifin Corp $ 104,552 $ 128,362
Electrical Equipment: 1.4
1,650 General Electric Co. 84,348 97,350
Industrial Machinery & Equipment: 2.1
1,850 Dover Corp 121,517 146,612
CONSUMER CYCLICALS 0.9
Automobiles & Related: 0.9
1,250 General Motors Corp. 61,350 60,937
CONSUMER NONDURABLES 37.2
Food & Beverages: 10.7
2,200 Anheuser-Busch Company,
Inc. 122,189 122,375
1,650 Canadaigua Wine Inc. 73,837 72,188
1,700 Hershey Foods Inc. 83,716 97,963
8,100 Hudson Foods Inc. 126,994 111,375
2,700 Pepsico, Inc 106,493 126,562
4,500 Richfood Holdings 81,000 104,625
3,950 Sara Lee Co 103,983 113,069
----------- ------------
698,212 748,157
Retail Trade: 2.4
3,800 Rite Aid Corp 86,885 107,825
2,050 Toys R Us* 78,590 57,400
----------- ------------
165,475 165,225
Miscellaneous Consumer
Products: 3.9
3,200 PPG Industries 128,183 146,400
2,400 Premark International 119,868 126,900
----------- ------------
248,051 273,300
</TABLE>
*Non-Income Producing
<PAGE> 83
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ---------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CONSUMER NONDURABLES
(CONTINUED)
Pharmaceuticals: 16.8%
2,250 Becton Dickinson & Co. $ 129,082 $ 132,469
5,500 Bergen Brunswig 128,205 118,938
2,250 Columbia/HCA Healthcare 92,176 110,250
1,600 Cordis Corp.* 118,400 115,600
2,900 Health Care & Retirement
Corp.* 85,748 92,800
2,700 Merck & Co. 115,020 139,388
2,200 Pfizer, Inc. 78,057 111,100
2,300 Schering Plough Corp. 85,094 106,950
2,500 Walgreen Co. 117,437 129,375
3,200 Watson Pharmaceuticals 81,250 115,200
----------- ------------
1,030,469 1,172,070
Restaurants: 3.4
2,700 McDonald's Corp. 79,699 104,286
7,200 Wendy's Intl Inc. 106,314 134,100
----------- ------------
186,013 238,386
CONSUMER SERVICES 6.4
Media and Communications: 2.8
2,400 Harris Corp. 120,240 137,400
1,150 SBC Communications Inc. 45,115 55,344
----------- ------------
165,355 192,744
General Merchandisers: 1.0
2,050 Sears Roebuck & Co. 63,953 66,881
Miscellaneous Consumer
Services: 2.6
2,500 Browning Ferris Indus Inc. 90,008 96,563
1,300 Federal Express Corp. 85,631 87,750
----------- ------------
175,639 184,313
</TABLE>
*Non-Income Producing
<PAGE> 84
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ---------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
ENERGY 5.9%
Oil: 5.9
1,850 Amoco Corp. $ 115,366 $ 124,412
2,400 Chevron Corp. 112,160 118,500
1,200 Mobil Corp. 102,732 117,300
1,500 Phillips Petroleum 54,367 53,063
----------- ------------
384,625 413,275
FINANCIAL 10.0
Commercial Banking: 4.2
1,400 Citicorp 56,084 87,325
1,200 First Fidelity Bancorp. 56,022 75,600
2,350 Nationsbank Corp. 127,391 131,894
----------- ------------
239,497 294,819
Financial Services: 5.0
1,550 Dean Witter Discover & Co. 62,474 78,275
900 Federal Home Loan
Mortgage Corp. 53,245 58,950
3,300 Fleet Financial Group,
Inc. 123,014 117,563
2,400 Reliastar Financial 86,592 91,500
----------- ------------
325,325 346,288
Insurance: 0.8
1,900 Allstate Corp. 54,895 59,375
MEDIA & LEISURE 2.4
Broadcasting: 2.4
1,450 Capital Cities/ABC, Inc. 126,818 169,288
</TABLE>
<PAGE> 85
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ------------------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
PROCESS INDUSTRIES 7.2%
Chemicals: 6.0
1,700 Du Pont EI De Nemours & $ 103,267 $ 113,900
Co.
2,500 Lubrizol Corp. 87,125 87,812
1,500 Minnesota Mining &
Manufacturing 80,055 84,937
1,400 Monsanto Co. 118,174 130,375
----------- ------------
388,621 417,024
Paper & Paper Products: 1.2
2,500 Chesapeake Corp. 79,898 82,500
TECHNOLOGY 17.2
Aerospace & Defense: 3.5
2,000 Sunstrand Corp. 120,369 133,750
1,300 United Technologies
Corp. 84,494 109,200
----------- ------------
204,863 242,950
Computer and Office
Equipment: 3.3
2,450 Apple Computer 120,050 110,250
1,100 International Business
Machines 80,095 119,763
----------- ------------
200,145 230,013
Electronic Equipment: 8.5
2,600 Cirrus Logic 42,575 119,600
1,100 Hewlett Packard Co. 53,210 85,663
1,400 KLA Instruments Corp.* 87,850 121,450
2,500 Tandy Corp. 123,163 148,437
2,250 Varian Associates 84,600 124,031
----------- ------------
391,398 599,181
Information Processing: 1.9
4,700 Sungard Data Systems* 119,262 136,300
</TABLE>
*Non-Income Producing
<PAGE> 86
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- -------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
UTILITIES 7.5%
Telephone: 5.9
2,800 ALLTEL Corp. $ 84,280 $ 73,850
1,750 BellSouth Corp. 103,873 118,562
4,500 Carolina Pwr & Lt Co. 127,184 136,688
600 GTE Corp. 20,847 21,300
1,850 Sprint Corp. 67,041 63,363
----------- ------------
403,225 413,763
Utility Holding Companies: 1.6
3,600 Kansas City Power & Light
Co. 84,475 79,200
1,500 Southern Co. 32,884 33,000
----------- ------------
117,359 112,200
TOTAL INVESTMENTS 100.0 $ 6,140,865 6,991,313
===========
Other assets less
liabilities 774,406
------------
NET ASSETS $ 7,765,719
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 87
SCHEDULE I
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 41.5%
U.S. Treasury Notes:
$ 250,000 7.875%, due 08/15/01 $ 261,608 $ 269,063
400,000 7.875%, due 11/15/04 421,147 437,000
150,000 7.75%, due 03/31/96 153,451 151,922
750,000 7.50%, due 02/15/05 769,329 801,563
160,000 5.50%, due 04/15/00 161,398 155,450
500,000 5.125%, due 03/31/96 498,554 497,969
----------- ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 41.5 2,265,487 2,312,967
----------- ------------
FEDERAL AGENCIES: 58.5
550,000 Federal Farm Credit
Bank
6.05%, due 04/21/03 536,351 530,569
125,000 Federal Farm Credit
MTN
6.94%, due 05/19/05 126,055 126,217
350,000 Federal Home Loan
Bank
4.80%, due 09/22/98 349,645 336,465
250,000 Federal Home Loan
Bank
8.00%, due 08/27/01 260,910 267,385
700,000 Federal National
Mortgage Assn.
7.00%, due 02/10/96 705,131 703,647
150,000 Federal National
Mortgage Assn.
8.625%, due 06/30/04 163,446 168,271
100,000 Student Loan Marketing
Assn.
7.50%, due 03/08/00 105,643 104,396
1,000,000 Tennessee Valley Auth.
8.25%, due 11/15/96 1,016,068 1,026,250
----------- ------------
TOTAL FEDERAL AGENCIES 58.5 3,263,249 3,263,200
----------- ------------
TOTAL INVESTMENTS 100.0 $ 5,528,736 5,576,167
===========
Other assets less liabilities 419,982
------------
NET ASSETS $ 5,996,149
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 88
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1995
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
Security First Trust (the Trust) was established under Massachusetts law
pursuant to a Declaration of Trust dated February 13, 1987, as an unincorporated
business trust, a form of organization that is commonly called a Massachusetts
Business Trust. The Trust is registered with the Securities and Exchange
Commission as a diversified open-end management investment company (mutual fund)
under the Investment Company Act of 1940 (1940 Act).
On June 17, 1987, the shareowners of Security First Legal Reserve Fund, Inc. and
Security First Variable Life Fund, Inc. (the Funds), each of which was a
Maryland corporation registered as an investment company under the 1940 Act,
approved Plans of Reorganization and Liquidation and on July 24, 1987, the Funds
became Series of the Trust and their shareowners became shareowners of the Bond
Series and the Growth and Income Series, respectively, in a tax-free exchange of
shares. The Trust operates as a "series company," as that term is used in Rule
18f-2 under the 1940 Act. Financial information for periods prior to June 17,
1987, reflect the results of the respective funds.
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares and to divide such shares into an unlimited number of series, all without
shareowner approval. Pursuant to this authority, the Board of Trustees of
Security First Trust established the Value Equity Series and the U.S. Government
Income Series on January 11, 1993, which commenced operations May 19, 1993. The
following is a summary of significant accounting policies followed by the Trust:
FEDERAL INCOME TAXES -- Each series of the Trust has elected to qualify as a
"Regulated Investment Company." No provision for federal income taxes is
necessary because each series intends to maintain its qualification as a
"Regulated Investment Company" under the Internal Revenue Code and distribute
each year substantially all of its net income and realized capital gains to its
shareowners. Income and gains to be distributed are determined as of December
31, because the Trust reports for tax purposes on a calendar year.
PORTFOLIO VALUATION -- Investments are carried at market value. The market value
of equity securities is determined as follows: Securities traded on a national
securities exchange are valued at the last sale price; securities not traded on
a national securities exchange are valued at the bid price for such securities
as reported by security dealers. Fixed maturities are valued at prices obtained
from a major dealer in bonds. Short-term investments which have remaining
maturities of more than 60 days and for which representative market quotations
are readily available are valued at the most recent bid price or yield
equivalent as quoted by a major broker-dealer in money market securities.
Securities with remaining maturities of 60 days or less are valued at their
amortized cost. Securities and other assets for which such procedures are deemed
not to reflect fair value, or for which representative quotes are not readily
available, are valued at prices deemed best to reflect their fair value as
determined in good faith by or under supervision of officers of the Trust in a
manner specifically authorized by the Board of Directors and applied on a
consistent basis.
<PAGE> 89
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DIVIDENDS AND DISTRIBUTIONS -- Each series declare dividends annually. Net
realized gains from security transactions, if any, are distributed annually.
OTHER -- As is common in the industry, security transactions are accounted for
no later than the day following the date the securities are purchased or sold.
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily.
NOTE B -- REMUNERATION OF MANAGER AND OTHERS
Bond Series and Growth and Income Series:
The Manager, Security First Investment Management Corporation (Security
Management), is entitled by agreement to a monthly fee equal to 1/24 of 1% of
the average daily net asset value of the Bond Series and Growth and Income
Series (equivalent annually to .5%), less compensation payable to the Series'
investment adviser. However, to the extent that operating expenses (including
management fees but excluding interest and taxes and certain extraordinary
expenses) of each series exceed 2.5% of the first $30 million of each series'
average daily net assets, 2.0% of the next $70 million of each series' average
daily net assets, and 1.5% of each series' average daily net assets in excess of
that amount, calculated on the basis of each series' fiscal year (the expense
limitation), the agreement requires that Security Management waive its fee. In
addition, for the year ended July 31, 1995, Security Management has also agreed
to reimburse the Bond Series for any remaining expenses exceeding a limitation
equivalent annually to 1.5%. Security Management may elect on an annual basis to
reimburse the Series for future excess expenses.
If during the fiscal year repayments are made to the Manager and the series'
expenses subsequently exceed the expense limitation, the Series shall recover
such repayments from the Manager to the extent of the excess determined.
Conversely, if during the fiscal year repayments are made by the Manager and the
series' expenses subsequently are within the expense limitation, the Manager
shall recover such repayments to the extent of the excess repaid. It is
management's opinion that it is reasonably possible that actual operating
expense may be less than the expense limitation; however, in accordance with the
requirements of FASB Statement No. 5, no accrual has been made for the
contingent obligation to repay Security Management for excess expense
reimbursements since the conditions required for such accrual have not, in the
opinion of management, been met.
T. Rowe Price Associates provides investment advice and makes investment
decisions for the Bond Series and Growth and Income Series. T. Rowe Price
Associates is paid an annual fee of 0.35% of the average daily net assets of
each series less any compensation payable to Security Management acting as
adviser on certain assets in which a series may invest.
<PAGE> 90
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
Value Equity Series and U.S. Government Income Series:
The Manager, Security Management, is entitled by agreement to a monthly fee
equal to 1/13 of 1% of the average daily net asset value of the Value Equity
Series and U.S. Government Income Series (equivalent annually to .9%), less
compensation payable to the Series' investment adviser. However, to the extent
that operating expenses (including management fees but excluding interest and
taxes and certain extraordinary expenses) of each series exceed 2.5% of the
first $30 million of each series' average daily net assets, 2.0% of the next $70
million of each series' average daily net assets and 1.5% of each series'
average daily net assets in excess of that amount, calculated on the basis of
each series' fiscal year (the expense limitation), the agreement requires that
Security Management and Virtus Capital Management waive their fees. For a period
of three years from inception, Security Management and Virtus Capital Management
have also agreed to reimburse the Value Equity Series for any remaining expenses
exceeding a limitation equivalent annually to 1% and to reimburse the U.S.
Government Income Series for any remaining expenses exceeding a limitation
equivalent annually to .7%.
Virtus Capital Management provides investment advice and makes investment
decisions for the Value Equity Series and U.S. Government Income Series. Virtus
Capital Management is paid an annual fee of .75% of the average daily net assets
of the two series.
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the year ended
July 31, 1995 were as follows:
<TABLE>
<CAPTION>
Growth U.S.
and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities:
Purchases $ 3,444,298 $3,666,168
Sales 2,492,260 669,025
Other Investment Securities:
Purchases 1,004,611 $ 5,914,475 $7,130,826
Sales 1,498,031 4,586,430 3,863,454
</TABLE>
<PAGE> 91
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS (CONTINUED)
Net realized gain or loss on sale of investments is determined by the specific
identification method and would not have been significantly different using the
average cost method. The cost of investments at July 31, 1995 was the same for
both financial statement and federal income tax purposes. At July 31, 1995, the
composition of unrealized appreciation and depreciation of investment securities
was as follows:
<TABLE>
<CAPTION>
Unrealized
--------------------------
Appreciation Depreciation Net
------------ ------------ -----------
<S> <C> <C> <C>
Bond Series $ 269,580 $ (35,972) $ 233,608
Growth and Income Series 18,889,037 (1,030,017) 17,859,020
Value Equity Series 937,325 (86,876) 850,449
U.S. Government Income Series 77,186 (29,755) 47,431
</TABLE>
NOTE D -- CAPITAL SHARE TRANSACTIONS
Transactions in capital shares of the Trust were as follows:
<TABLE>
<CAPTION>
Shares issued
in connection
with reinvestment of
---------------------------
Net Net
Investment Realized
Income Gain
Sold Distributions Distributions Redeemed Net
--------- ------------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1995
Bond Series 401,797 112,741 (370,655) 143,883
Growth and Income Series 1,480,071 209,555 48,632 (912,125) 826,133
Value Equity Series 888,244 9,164 (137,439) 759,969
U.S. Government Income Series 604,546 28,069 (161,083) 471,532
YEAR ENDED JULY 31, 1994
Bond Series 518,848 103,591 (504,901) 117,538
Growth and Income Series 1,804,652 156,987 (1,129,791) 831,848
Value Equity Series 633,670 2,052 (299,366) 336,356
U.S. Government Income Series 754,219 3,747 717 (153,461) 605,222
</TABLE>
<PAGE> 92
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS
The per share information for each respective series' capital stock outstanding
throughout the period is as follows:
<TABLE>
<CAPTION>
NET REALIZED TOTAL
AND INCOME DISTRIBUTIONS
NET ASSET UNREALIZED (LOSSES) DIVIDENDS FROM NET ASSET
VALUE AT NET GAINS FROM FROM NET REALIZED VALUE AT
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAINS PERIOD RETURN(2)
--------- ---------- ----------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND SERIES
Year ended
July 31,
1991 $3.95 $ .52 $ (.24) $ .28 $ (.55) $ 3.68 7.09%
1992 3.68 .24 .28 .52 (.25) 3.95 14.13
1993 3.95 .22 .14 .36 (.23) 4.08 9.11
1994 4.08 .21 (.25) (.04) (.22) 3.82 (0.98)
1995 3.82 .24 .08 .32 (.22) 3.92 8.38
GROWTH AND
INCOME SERIES
Year ended
July 31,
1991 $7.30 $ .39 $ .29 $ .68 $ (.44) $ 7.54 9.32%
1992 7.54 .23 .79 1.02 (.24) 8.32 13.53
1993 8.32 .22 .49 .71 (.22) 8.81 8.53
1994 8.81 .23 .44 .67 (.22) 9.26 7.60
1995 9.26 .29 1.35 1.64 (.26) $ (.06) 10.58 17.71
VALUE EQUITY
SERIES
May 19, 1993
through
July 31,
1993 (3) $5.00 $ .01 $ (.01) $ .00 $ .00 $ 5.00 0.00% (1)
Year ended
July 31,
1994 5.00 .05 (.03) .02 (.03) 4.99 0.40
1995 4.99 .05 .71 .76 (.05) 5.70 15.23
U.S. GOVERNMENT
INCOME SERIES
May 19, 1993
through
July 31,
1993 (3) $5.00 $ .03 $ .04 $ .07 $ .00 $ 5.07 7.10% (1)
Year ended
July 31,
1994 5.07 .11 (.19) (.08) (.07) $ (.01) 4.91 (1.58)
1995 4.91 .21 .15 .36 (.14) 5.13 7.33
</TABLE>
(1) Annualized
(2) Total return computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable annuity
account.
(3) The Value Equity Series and U.S. Government Income Series commenced
operations on May 19, 1993.
<PAGE> 93
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Ratio of
Ratio of Net
Operating Investment
Expenses Income Portfolio Net Assets
to Average to Average Turnover End of
Net Assets Net Assets Rate Period
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1991 1.50% 6.89% 310% $ 4,793,766
1992 1.50 6.42 50 5,682,609
1993 1.45 6.02 36 7,229,959
1994 1.30 5.45 58 7,225,964
1995 1.29 6.27 56 7,977,781
GROWTH AND INCOME SERIES
Year ended July 31,
1991 .97% 4.01% 36% $ 33,493,074
1992 .86 3.10 20 42,814,515
1993 .75 2.77 5 55,160,198
1994 .78 2.62 11 65,660,970
1995 .74 3.10 8 83,789,646
VALUE EQUITY SERIES
May 19, 1993 through July
31, 1993 (2) 1.00% (1) .85% (1) 7% $ 1,333,852
Year Ended July 31, 1994 1.00 1.38 121 3,007,073
Year Ended July 31, 1995 1.00 1.29 84 7,765,719
U.S. GOVERNMENT INCOME SERIES
May 19, 1993 through July
31, 1993 (2) .70% (1) 3.91% (1) 0% $ 469,060
Year ended July 31, 1994 .70 3.62 17 3,424,487
Year ended July 31, 1995 .70 5.19 16 5,996,149
</TABLE>
(1) Annualized
(2) The Value Equity Series and U.S. Government Income Series commenced
operations on May 19, 1993.
<PAGE> 94
Rule 497(c)
'33 Act File No. 2-51173
SECURITY FIRST TRUST
VALUE EQUITY SERIES
U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Prospectus of Security First Trust (the "Trust"), dated
December 1, 1995, which may be obtained by writing to Security First Trust,
11365 West Olympic Boulevard, Los Angeles, California 90064, Attention: Customer
Services or by telephoning (310) 312-6100 or (800) 283-4536.
The date of this Statement of Additional Information is December 1, 1995.
<PAGE> 95
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trust 3
Investment Policies and Restrictions 4
Investment Adviser and Other Services 14
Principal Holders of Securities 17
Management of the Trust 18
Brokerage 19
Portfolio Turnover 20
Pricing and Redemption of Securities Being Offered 21
Taxation 22
Bond Ratings 23
Commercial Paper Ratings 25
Custodian 26
Independent Auditors 27
Federal Registration of Shares 27
Legal Counsel 27
</TABLE>
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THE TRUST
GENERAL INFORMATION ABOUT THE TRUST
Security First Trust (the "Trust") is registered with the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended,
("1940 Act") as a diversified, open-end investment management company. The Trust
was established pursuant to a Declaration of Trust under the laws of the
Commonwealth of Massachusetts as a voluntary association known as a
"Massachusetts business trust." It operates as a "series company" as that term
is used in Rule 18f-2 under the 1940 Act with, among others, two series of
shares: the Value Equity Series and the U.S. Government Income Series.
The assets received by the Trust from the issue or sale of the shares
of a Series and all income, earnings, profits and proceeds attributable to them,
subject only to the rights of creditors, are specifically allocated to that
Series and are required to be segregated on the books of account of the Trust.
The assets of a Series are also required to be charged with all of the expenses
attributable to that Series. Any general expenses of the Trust not readily
identifiable as belonging to a particular Series shall be allocated by or under
the direction of the Board of Trustees in such manner as the Board determines to
be fair and equitable.
Each share of a Series represents an equal proportionate interest in
that Series with each other share of that Series and is entitled to such
dividends and distributions out of the income belonging to that Series as are
declared by the Board of Trustees. Upon the liquidation of a Series, its
shareholders are entitled to share pro rata in the net assets belonging to that
Series available for distribution.
As described under "Trust Shares" in the prospectus, the Declaration of
Trust provides that no annual or regular meetings of shareholders are required.
In addition, after the Trustees were initially elected by shareholders, the
Trustees became a self-perpetuating body. Thus, there will ordinarily be no
shareholder meetings unless otherwise required by the 1940 Act.
The 1940 Act specifically requires that a shareholder meeting be held
for the purpose of electing Trustees if at any time less than a majority of the
Trustees has been elected by the shareholders of the Trust. The shareholders
also have the power to remove a Trustee by the affirmative vote of the holders
of not less than two-thirds of the shares of the Trust outstanding and entitled
to vote either by a declaration in writing filed with the custodian or by votes
cast in person or by proxy at a meeting called for the purpose of removal. The
Trustees will promptly call such a meeting when requested to do so by the record
holders of not less than 10 percent of the outstanding shares.
Ten or more shareholders who have been shareholders for at least six
months preceding the date of application and who hold in the aggregate either
shares having a net asset value of at least $100,000 or at least 1 percent of
the Trust's outstanding shares, whichever is less, may apply in writing to the
Trustees stating that they wish to communicate with other shareholders to obtain
signatures in order to request a meeting to remove a Trustee. This application
must
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be accompanied by the proposed communication and form of the request that they
wish to transmit. The Trustees will, within five business days after receipt of
such application, either afford to the applicants access to a list of the names
and addresses of all shareholders or inform such applicants as to the
approximate number of shareholders of record and the approximate cost of mailing
to them the proposed communication and form of request.
Shares of each Series vote separately as a class on any matter
submitted to shareholders except as to voting for Trustees and as otherwise
required by the 1940 Act, in which cases the shareholders of all of the Series
vote together as one class. In the event that the Trustees determine that a
matter affects only the interest of one or more Series, then only the
shareholders of the affected Series will be entitled to vote on the matter.
INVESTMENT POLICIES AND RESTRICTIONS
VALUE EQUITY SERIES
The Value Equity Series invests primarily in the securities of high
quality companies, including common stocks, preferred stocks, corporate bonds,
notes, warrants and convertible securities.
Convertible Securities - Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined number of
the issuer's underlying common stock at the option of the holder during a
specified time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of "usable"
bonds and warrants or a combination of the features of several of these
securities. The investment characteristics of each convertible security vary
widely, which allows convertible securities to be employed for different
investment objectives.
The Value Equity Series will exchange or convert the convertible
securities held in its portfolio into shares of the underlying common stock in
instances in which, in the sub-adviser's opinion, the investment characteristics
of the underlying common shares will assist the Series in achieving its
investment objectives. Otherwise, the Series may hold or trade convertible
securities. In selecting convertible securities for the Series, the sub-adviser
evaluates the investment characteristics of the convertible security as a fixed
income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the sub-adviser considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
Warrants - Warrants are basically options to purchase common stock at a
specific price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants may have
a life ranging from less than a year to
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twenty years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the common
stocks does not exceed the warrant's exercise price during the life of the
warrant, the warrant will expire as worthless. Warrants have no voting rights,
pay no dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the market
price of the warrant may tend to be greater than the percentage increase or
decrease in the market price of the optioned common stock.
Futures and Options Transactions - As a means of reducing fluctuations
in the net asset value of the Value Equity Series, the Series may attempt to
hedge all or a portion of its portfolio by buying and selling financial futures
contracts, buying put options on portfolio securities and listed put options on
futures contracts, and writing call options on futures contracts. The Value
Equity Series may also write covered call options on portfolio securities to
attempt to increase its current income. The Series will maintain its positions
in securities, option rights, and segregated cash subject to puts and calls
until the options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which provides
a secondary market for options of the same series.
Financial Futures Contracts - A futures contract is a firm commitment
by two parties: the seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the buyer who agrees to
take delivery of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common
stocks represented in a particular index.
Put Options on Financial Futures Contracts - The Series may purchase
listed put options on financial futures contracts. Unlike entering directly into
a futures contract, which requires the purchaser to buy a financial instrument
on a set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease in value
and the option will increase in value. In such an event, the Series will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Series upon the sale of the second
option will be large enough to offset both the premium paid by the Series for
the original option plus the decrease in value of the hedged securities.
Alternatively, the Series may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract of the
type underlying the option (for a price less than the strike price of the
option) and exercise the option. The Series would then deliver the futures
contract in return for payment of the strike price. If the Series neither
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closes out nor exercises an option, the option will expire on the date provided
in the option contract, and only the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts - In addition to purchasing
put options on futures, the Series may write listed call options on futures
contracts to hedge its portfolio. When the Series writes a call option on a
futures contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any time
during the life of the option if the option is exercised. As stock prices fall,
causing the prices of futures to go down, the Series' obligation under a call
option on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Series' call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call, so
that the Series keeps the premium received for the option. This premium can
substantially offset the drop in value of the Series' fixed income or indexed
portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Series, or exercise of
it by the buyer, the Series may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be less
than the premium received by the Series for the initial option. The net premium
income of the Series will then substantially offset the decrease in value of the
hedged securities.
The Series will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Series will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
Risks - When the Value Equity Series uses financial futures and options
on financial futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in the Series' portfolio. This may cause the future
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Series' sub-adviser could be
incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Series may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the sub-adviser will
consider liquidity before entering into options transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
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Series' ability to establish and close out futures and options positions depends
on this secondary market.
"Margin" in Futures Transactions - Unlike the purchase or sale of a
security, the Series does not pay or receive money upon the purchase or sale of
a futures contract. Rather, the Series is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
futures contract initial margin does not involve the borrowing of funds by the
Series to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Series upon termination of the futures contract, assuming all contractual
obligations have been satisfied.
A futures contract held by the Series is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Series pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Series but is instead
settlement between the Series and the broker of the amount one would owe the
other if the futures contract expired. In computing its daily net asset value,
the Series will mark to market its open futures positions.
The Series is also required to deposit and maintain margin when it
writes call options on futures contracts.
Purchasing Put Options on Portfolio Securities - The Series may
purchase put options on portfolio securities to protect against price movements
in particular securities in its portfolio. A put option gives the Series, in
return for a premium, the right to sell the underlying security to the writer
(seller) at a specified price during the term of the option.
Writing Covered Call Options on Portfolio Securities - The Series may
also write covered call options to generate income. As writer of a call option,
the Series has the obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of the exercise price.
The Series may only sell call options either on securities held in its portfolio
or on securities which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any additional
consideration).
Over-the-Counter - The Series may purchase and write over-the-counter
options on portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities held by the
Series and not traded on an exchange.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation.
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Exchange-traded options have a continuous liquid market while over-the-counter
options may not.
U.S. Government Obligations - The types of U.S. government obligations
in which the Series may invest are described below under "U.S. Government Income
Series".
Commercial Paper - The Series may invest in commercial paper rated at
least A-1 by Standard & Poor's Corporation, or Prime-1 by Moody's Investors
Service, Inc., or F-1 by Fitch Investors Service, Inc., and money market
instruments (including commercial paper) which are unrated but of comparable
quality, including Canadian Commercial Paper ("CCPs") and Europaper. In the case
where commercial paper, CCPs or Europaper has received different ratings from
different rating services, such commercial paper, CCPs or Europaper is an
acceptable investment so long as at least one rating is one of the preceding
high quality ratings and provided the sub-adviser has determined that such
investment presents minimal credit risks.
Bank Instruments - The Series may invest in the instruments of banks
and savings and loans whose deposits are insured by the Bank Insurance Fund
("BIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"), or the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC, such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances (which are not necessarily
guaranteed by those organizations.)
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, the
Series may invest in:
- Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
- Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in foreign branches of U.S. or foreign
banks;
- Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
- Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposits issued by U.S.
branches of foreign banks and held in the United States.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to different risks than
domestic obligations of domestic banks or corporations. Examples of these risks
include international economic and political developments, foreign governmental
restrictions that may adversely
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affect the payment of principal or interest, foreign withholding or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing entity, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, record keeping, and the public
availability of information. These factors will be carefully considered by the
Value Equity Series' sub-adviser in selecting investments for the Series.
When-Issued and Delayed Delivery Transactions - These transactions are
arrangements in which the Value Equity Series purchases securities with payment
and delivery scheduled for a future time. The Series engages in when-issued and
delayed delivery transactions only for the purpose of acquiring portfolio
securities consistent with the Series' investment objective and policies, not
for investment leverage. In when-issued and delayed delivery transactions, the
Series relies on the seller to complete the transaction. The seller's failure to
complete the transaction may cause the Series to miss a price or yield
considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for the Series. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Series sufficient to make payment for
the securities to be purchased are segregated on the Series' records at the
trade date. These securities are marked to market daily and maintained until the
transaction is settled.
Restricted and Illiquid Securities - The Series intends to invest in
restricted securities. Restricted securities are any securities in which the
Series may otherwise invest pursuant to its investment objective and policies
but which are subject to restriction on resale under federal securities law.
However, the Series will limit investments in illiquid securities, including
certain restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 10% of its net assets.
The Series may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Series, who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Series through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity.
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The Series believes that Section 4(2) commercial paper and possibly certain
other restricted securities which meet the criteria for liquidity established by
the Board of Trustees are liquid. The Series intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established by the
Trustees, including Section 4(2) commercial paper, as determined by the
sub-adviser, as liquid and not subject to the investment limitation applicable
to illiquid securities. In addition, because such Section 4(2) commercial paper
is liquid, the Series intends to not subject such paper to the limitation
applicable to restricted securities.
The Board of Trustees is responsible for establishing policies and
procedures for investments in restricted securities and other illiquid
securities, and the Board will monitor compliance with these policies and
procedures by investment advisers to the Series.
Repurchase Agreements - The Series or its custodian will take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. In the event that a defaulting seller
filed for bankruptcy or became insolvent, disposition of such securities by the
Series might be delayed pending court action. The Series believes that under the
regular procedures normally in effect for custody of the Series' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Series and allow retention or disposition of such
securities. The Series will only enter into repurchase agreements with banks and
other recognized financial institutions such as broker/dealers which are deemed
by the sub-adviser to be creditworthy pursuant to guidelines established by the
Trustees.
Reverse Repurchase Agreements - The Series may also enter into reverse
repurchase agreements. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Series transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Series will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the Series
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Series will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Series in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Series' records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
Lending of Portfolio Securities - The collateral received when the
Series lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Series. During the time portfolio securities are on loan, the
borrower pays the Series any dividends or interest paid on such securities.
Loans are subject to termination at the option of the Series or the borrower.
The Series may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on the cash
or equivalent collateral to the
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borrower or placing broker. The Series does not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
U.S. GOVERNMENT INCOME SERIES
The U.S. Government Income Series invests primarily in securities which
are guaranteed as to payment of principal and interest by the U.S. government or
its instrumentalities.
U.S. Government Obligations - The types of U.S. government obligations
in which the Series may invest generally include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued
or guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by: (1) the full faith and credit of the U.S. Treasury; (2) the
issuer's right to borrow from the U.S. Treasury; (3) the discretionary authority
of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or (4) the credit of the agency or instrumentality issuing
the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: Federal Land Banks; Central Bank
for Cooperatives; Federal Intermediate Credit Banks; Federal Home Loan Banks;
Farmers Home Association; and Federal National Mortgage Association.
Collateralized Mortgage Obligations (CMOs) - Privately issued CMOs
generally represent an ownership interest in federal agency mortgage
pass-through securities such as those issued by the Government National Mortgage
Association. The terms and characteristics of the mortgage instruments may vary
among pass-through mortgage loan pools. The market for such CMOs has expanded
considerably since its inception. The size of the primary issuance market and
the active participation in the secondary market by securities dealers and other
investors make government-related pools highly liquid.
Adjustable Rate Mortgage Securities (ARMS) - Not unlike other U.S.
government securities, the market value of ARMS will generally vary inversely
with changes in market interest rates. Thus, the market value of ARMS generally
declines when interest rates rise and generally rises when interest rates
decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital appreciation
than other similar investments (e.g. investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns.
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When-Issued and Delayed Delivery Transactions, Lending of Portfolio
Securities, Repurchase Agreements and Reverse Repurchase Agreements - The U.S.
Government Income Series may also engage in these investment techniques, which
are described above under "Value Equity Series," page 4.
INVESTMENT RESTRICTIONS
The investment restrictions of the Series described below are
fundamental policies that may not be changed without the approval of a least a
majority of the outstanding shares of a Series or of 67% of the shares of a
Series represented at a meeting of shareholders at which the holders of 50% or
more of the outstanding shares of the Series are represented.
Value Equity Series
U.S. Government Income Series
As a matter of fundamental policy, neither Series may: (1) issue senior
securities except that the Series may borrow money directly or through reverse
repurchase agreements in amounts up to one-third of the value of its net assets,
including the amount borrowed (the Series will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate management of
the portfolio by enabling the Series to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Series will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Series will
restrict the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse repurchase
agreements); (2) purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of purchases and sales of
securities (the deposit or payment by the Series of initial or variation margin
in connection with financial futures contracts or related options transactions
is not considered the purchase of a security on margin); (3) mortgage, pledge,
or hypothecate any assets, except to secure permitted borrowings (in those
cases, it may pledge assets having a value of 15% of its assets taken at cost.
Margin deposits for the purchase and sale of financial futures contracts and
related options are not deemed to be a pledge); (4) lend any of its assets
except portfolio securities up to one-third of the value of its total assets
(this shall not prevent the Series from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted by the
Series' investment objective, policies, and limitations or Declaration of
Trust); (5) purchase or sell commodities, commodity contracts, or commodity
futures contracts except that the Value Equity Series may buy and sell financial
futures contracts; (6) purchase or sell real estate, although it may invest in
securities secured by real estate or interests in real estate or issued by
companies, including real estate investment trusts, which invest in real estate
or interests therein; (7) with respect to 75% of the value of its total assets,
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purchase securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities), if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer; (8) acquire
more than 10% of the outstanding voting securities of any one issuer; (9) invest
25% or more of its total assets in securities of issuers having their principal
business activities in the same industry; (10) underwrite any issue of
securities, except as it may be deemed to be an underwriter under the Securities
Act of 1933 in connection with the sale of securities in accordance with its
investment objective, policies, and limitations; or (11) purchase restricted
securities if immediately thereafter more than 10% of the net assets of the
Series, taken at market value, would be invested in such securities (except for
commercial paper issued under Section 4(2) of the Securities Act of 1933 and
certain other restricted securities which meet the criteria for liquidity as
established by the Board of Trustees).
The above investment limitations cannot be changed without shareholder
approval. The following limitations for the Value Equity and U.S. Government
Income Series, however, may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
limitation becomes effective. Under these limitations, neither Series will: (1)
invest more than 10% of the value of its net assets in illiquid securities,
including repurchase agreements providing for settlement in more than seven days
after notice and certain restricted securities determined by the Trustees not to
be liquid; (2) invest in other investment companies to the extent of more than
3% of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general (a Series will
purchase securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of assets); (3) invest more than 5%
of the value of its total assets in securities of issuers which have records of
less than three years of continuous operations, including the operation of any
predecessor; (4) purchase or retain the securities of any issuer if the officers
and Trustees of the Trust or its investment adviser, owning individually more
than 1/2 of 1% of the issuer's securities, together own more than 5% of the
issuer's securities; (5) purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in the
securities of issuers which invest in or sponsor such programs; (6) in the case
of the Value Equity Series, purchase securities of a company for the purpose of
exercising control or management; (7) invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other securities (to
comply with certain state restrictions, the Series will limit its investment in
such warrants not listed on the New York or American Stock Exchanges to 2% of
its net assets. If state restrictions change, this latter restriction may be
revised without notice to shareholders. For purposes of this investment
restriction, warrants will be valued at the lower of cost or market, except that
warrants acquired by the Series in units with or attached to securities may be
deemed to be without value); (8) enter into transactions for the purpose of
engaging in arbitrage; (9) purchase put options on securities unless the
securities are held in the Series' portfolio and not more than 5% of the value
of the Series' total assets would be invested in premiums on open put option
positions; (10) write call
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options on securities unless the securities are held in its portfolio or unless
the Series is entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment; or (11) sell
securities short unless (a) it owns, or has right to acquire, an equal amount of
such securities, or (b) it has segregated an amount of its other assets equal to
the lesser of the market value of the securities sold short or the amount
required to acquire such securities. (The segregated amount will not exceed 10%
of the Series' net assets. While in a short position, the Series will retain the
securities, rights, or segregated assets).
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
INVESTMENT ADVISOR AND OTHER SERVICES
The following sets forth certain additional information concerning
Security First Investment Management Corporation ("Security Management"), the
investment adviser and manager for the Value Equity Series and the U.S.
Government Income Series, and Virtus Capital Management, Inc. ("Virtus"), the
successor in interest to Signet Asset Management, the sub-adviser to Security
Management for these Series.
SECURITY MANAGEMENT AND THE ADVISORY AGREEMENT
Security Management serves as investment adviser to the Value Equity
and U.S. Government Income Series pursuant to a Master Investment Management and
Advisory Agreement ("Advisory Agreement") dated May 18, 1994. Security
Management was incorporated in Delaware on December 6, 1973 and is a
wholly-owned subsidiary of Security First Group, Inc., also a Delaware
corporation (formerly, The Holden Group, Inc.). Security Management and Security
First Group, Inc. maintain their principal places of business at 11365 West
Olympic Boulevard, Los Angeles, California 90064. The common stock of Security
First Group is owned by London Insurance Group, a Canadian insurance services
corporation which is a publicly-traded subsidiary of Trilon Financial
Corporation of Toronto, Canada. Security Management also acts as investment
adviser to two affiliated insurance companies, Security First Life Insurance
Company and Fidelity Standard Life Insurance Company. Security Management serves
as investment adviser to the Trust for other series of the Trust under a
separate advisory agreement.
The Advisory Agreement provides that Security Management is responsible
for supervising and directing the investments of each of the Series in
accordance with the investment objectives of each. Pursuant to the Advisory
Agreement, Security Management shall obtain and evaluate information relating to
the economy, industries, business, securities markets, and particular issues of
securities. In addition, Security Management agrees to formulate and implement a
continuing program for the management of each of the Series' assets, give
investment advice and manage the investment and reinvestment of the Series'
securities. Security Management's obligations include the making and execution
of investment
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decisions, and the placement of orders for the purchase and sale of securities
with or through such brokers, dealers or issuers as Security Management may
select. Security Management is also authorized to enter into sub-advisory
agreements with third parties for the provision of investment advice to Security
Management relating to each Series' portfolio of securities, investments, cash
and other properties.
The Advisory Agreement provides that Security Management and the Trust
agree to maintain and preserve such accounts, books and records for such period
or periods, as may be prescribed by the Securities and Exchange Commission. It
also provides that the accounts, books and records will be made available for
reasonable inspections by the Securities and Exchange Commission, the Trust's
auditors, or any governmental instrumentality having regulatory authority over
the Trust.
Under the Advisory Agreement, the Trust will assume and pay legal and
independent accounting and auditing expenses of the Trust, costs related to
reports, notices and proxy material, compensation and expense of disinterested
trustees, share issuance expenses of custodians, transfer agents and registrars,
brokers' commissions, all taxes and fees payable to governmental agencies,
expenses of shareholders' and trustees' meetings and interest expenses. Security
Management will be responsible for paying all expenses and charges not assumed
by the Trust.
The Advisory Agreement provides that Security Management, its officers,
directors and employees shall not be liable for any error of judgment, mistake
of law, or loss suffered by the Trust, while rendering services under the
Agreement, except for loss resulting from willful misfeasance, bad faith, gross
negligence in the performance of their duties on behalf of the Trust or reckless
disregard of their duties and obligations under the Advisory Agreements.
For its services, Security Management receives from the Trust fees
computed by using an annual rate of 0.90% of the average daily net assets of
each of the Value Equity and U.S. Government Income Series. Such compensation is
accrued daily and payable monthly by each Series.
Security Management is obligated under the Advisory Agreement to waive
some or all of its advisory fees to the extent required by any applicable
expense limitation imposed by state laws. In addition, Security Management may
voluntarily make contributions to a Series in order to maintain such Series'
expenses at or below any such state law limitation.
During the fiscal year ended July 31, 1995, Security Management earned
a management fee of $7,615 from the Value Equity Series, but waived $3,601
pursuant to the Advisory Agreement.
During the fiscal year ended July 31, 1995, Security Management earned
a management fee of $7,034 from the U.S. Government Income Series, but waived
$3,216 pursuant to the Advisory Agreement.
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The Advisory Agreement provides that it will remain in effect for an
initial term of two years from its initial effective date and will continue in
effect from year to year thereafter as to each Series provided that such
continuance is specifically approved at least annually by the Board of Trustees
(at a meeting called for that purpose), or by vote of a majority of the
outstanding shares of such Series. In either case, renewal of the Advisory
Agreement must be approved by a majority of the Trust's independent Trustees.
The Advisory Agreement provides that it will terminate automatically if assigned
and that it may be terminated as to a particular Series without penalty by
either party upon 60 days' prior written notice to the other party, provided
that termination by the Trust must be authorized by a resolution of a majority
of the Board of Trustees or by a vote of a majority of the outstanding shares of
the affected Series.
VIRTUS
Virtus serves as sub-adviser to Security Management with respect to the
Value Equity and U.S. Government Income Series pursuant to a sub-advisory
agreement ("Sub-Advisory Agreement") dated May 18, 1994. Effective as of March
1, 1995, Virtus assumed the obligations of Signet Asset Management, a division
of Signet Trust Company, under the Sub-Advisory Agreement. Signet Banking Corp.,
the sole stockholder of Signet Trust Company, is the sole stockholder of Virtus.
Signet Banking Corporation is a multi-state, multi-bank holding company which
has provided investment management services since 1956. As of September 30,
1995, Virtus had investment authority over $2.2 billion in assets. In addition
to serving as sub-adviser to the Trust, Virtus acts as investment adviser to the
Medalist Funds (formerly, "Signet Select Funds"), a publicly-held mutual fund
comprised of a series of investment portfolios. The principal business offices
of Virtus are located at 707 East Main Street, Suite 1300, Richmond,
Virginia 23219.
As compensation for providing services under the Sub-Advisory
Agreement, Virtus receives from Security Management a fee computed by using an
annual rate of 0.75% based on the average daily net assets of each of the Value
Equity and the U.S. Government Income Series. These fees are accrued daily, and
paid monthly.
The Sub-Advisory Agreement provides that Virtus shall waive its
subadvisory fee (in coordination with waivers by Security Management of its fee,
as discussed above under "Security Management and the Advisory Agreement," page
14) to the extent the expenses of either Series must be reduced in order to
comply with any state law expense limitation. The Sub-Advisory Agreement also
provides that Virtus may voluntarily waive a greater amount of its fees than
would otherwise be required by reason of the foregoing, and may also voluntarily
make contributions to a Series, in order to maintain the expenses of the Series
at or below levels that may be required by state law.
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SUB-ADVISORY AGREEMENT
Under the Sub-Advisory Agreement Virtus provides investment management
services to the Value Equity Series and U.S. Government Income Series. Virtus
has the discretion to purchase or sell securities on behalf of the respective
Series in accordance with the Series' investment objectives or restrictions and
to communicate with brokers, dealers, custodians or other parties on behalf of
the Series and to allocate brokerage or obtain research services. In performing
these services, Virtus must obtain and evaluate information relating to the
economy, industries, business, securities markets and securities as it may deem
necessary, and it must formulate and implement a continuing plan for performance
of its services.
The Sub-Advisory Agreement provides that Virtus and its officers,
directors and employees shall not be liable for any error of judgment, mistake
of law, or loss suffered by the Trust, while rendering services under the
Sub-Advisory Agreement, except for loss resulting from willful misfeasance, bad
faith, gross negligence in the performance of their duties on behalf of the
Trust or reckless disregard of their duties and obligations.
During the fiscal year ended July 31, 1995, Virtus earned a sub-advisor
fee of $38,075 from the Value Equity Series, but waived $24,836 pursuant to the
Sub-Advisory Agreement, and it earned a sub-advisor fee of $35,172 from the U.S.
Government Income Series, but waived $28,809 pursuant to the Sub-Advisory
Agreement.
The Sub-Advisory Agreement provides that it will remain in effect for
an initial term of two years and will continue in effect from year to year
thereafter, provided that such continuance is specifically approved at least
annually by the Board of Trustees (at a meeting called for that purpose), or by
vote of a majority of the outstanding shares of the affected Series. In either
case, renewal of the Sub-Advisory Agreement must be approved by a majority of
the Trust's independent Trustees. The Sub-Advisory Agreement provides that it
will terminate automatically if assigned and that it may be terminated without
penalty by either party or by the relevant Series upon 60 days prior written
notice to the other party, provided that termination by the Series must be
authorized by a resolution of a majority of the Board of Trustees or by a vote
of a majority of the outstanding shares of the Series.
PRINCIPAL HOLDERS OF SECURITIES
An investment company registered as unit investment trust under the
1940 Act, Security First Life Separate Account A the depositor of which is the
Security First Life Insurance Company, Los Angeles, California has entered into
participation agreements with the Trust for the purchase of Series shares at net
asset value. As of July 31, 1995, Security
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First Life Separate Account A was the owner of 100% of the outstanding shares of
the Value Equity Series and 100% of the outstanding shares of the U.S.
Government Income Series. The address of Security First Life Separate Account A
is 11365 West Olympic Boulevard, Los Angeles, California 90064.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, their principal occupations
for the past five years, and the positions they hold with affiliated persons of
the Trust are:
Jack R. Borsting - Trustee. Executive Director, Center for
Telecommunications Management, University of Southern California, 3415 South
Figueroa, DCC 217, Los Angeles, CA 90089-0871. Prior to 1995, he was the Dean of
the Department of Information & Operations Management, School of Business
Administration, University of Southern California.
*Melvin M. Hawkrigg - Trustee and Chairman. Chairman of the Board of
Trilon Financial Corporation, BCE Place, 181 Bay Street, Suite 4420, P.O. Box
771, Toronto, Ontario, Canada M5J 2T3.
Katherine L. Hensley - Trustee. Retired. Formerly, Partner of O'Melveny
& Myers. 400 South Hope Street, Los Angeles, CA 90071-2899.
Lawrence E. Marcus - Trustee. Retired. Formerly, Executive Vice
President of Neiman-Marcus Company, a general merchandise retailer. 4616 Dorset,
Dallas, Texas 75229.
Robert G. Mepham - President. 11365 West Olympic Boulevard, Los
Angeles, California 90064. President and Chief Executive Officer of Security
First Group, Inc. and an officer of its subsidiaries.
Jane Frances Eagle - Senior Vice President, Finance. 11365 West Olympic
Boulevard, Los Angeles, CA 90064. Senior Vice President, Finance of Security
First Group, Inc. and an officer of its subsidiaries.
Cheryl M. MacGregor - Senior Vice President, Administration. 11365 West
Olympic Boulevard, Los Angeles, CA 90064. Senior Vice President, Administration
of Security First Group, Inc. and an officer of its subsidiaries.
Richard C. Pearson - Senior Vice President, General Counsel and
Secretary. 11365 West Olympic Boulevard, Los Angeles, California 90064. Senior
Vice President, Secretary and General Counsel of Security First Group, Inc. and
an officer of its subsidiaries.
James C. Turner - Vice President, Taxation. 11365 West Olympic
Boulevard, Los Angeles, California 90064. Vice President, Taxation of Security
First Group, Inc.
Each "disinterested" Trustee receives a Trustee's fee of $7,000 per
year, $1,000 for each Trustees' meeting attended and reimbursement of expenses.
Ms. Eagle is also Senior Vice President, Finance of Security
Management. Mr. Mepham is also Chairman and President of Security Management.
Mr. Pearson is also Senior Vice President, General Counsel and Secretary of
Security Management. Mr. Turner is also Vice President and Assistant Secretary
of Security Management.
* Trustees who are "interested persons" as that term is defined in the
Investment Company Act of 1940.
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BROKERAGE
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Trust are made by Security Management pursuant to the terms of
the Advisory Agreement. However, pursuant to the terms of the Sub-Advisory
Agreement, Virtus may allocate brokerage and principal business or obtain
research services from organizations with which the Trust or Security Management
may be dealing. Security Management is ultimately responsible for implementing
these decisions, including the allocation of principal business and portfolio
brokerage and the negotiation of commissions.
In purchasing and selling the Series' portfolio securities, it is
Security Management's and Virtus's policy to seek quality execution at the most
favorable security prices through responsible broker-dealers and, in the case of
agency transactions, at competitive commission rates. However, under certain
conditions, a Series may pay higher brokerage commissions in return for
brokerage and research services. In selecting broker-dealers to execute a
Series' portfolio transactions, consideration will be given to such factors as
the price of the security, the rate of commission, the size and difficulty of
the order, the reliability, integrity, financial condition, general execution
and operational capabilities of competing broker-dealers, and brokerage and
research services which they provide to Security Management, Virtus or the
Series.
Security Management or Virtus may cause a Series to pay a broker-dealer
who furnishes brokerage and/or research services a commission that is in excess
of the commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services which have been provided.
This determination may be viewed in terms of either that particular transaction
or the overall responsibilities of Security Management and Virtus with respect
to the accounts over which it exercises investment discretion. In some cases,
research services are generated by third parties, but are provided to Security
Management or Virtus by or through broker-dealers.
Virtus may effect principal transactions on behalf of a Series with a
broker-dealer who furnishes brokerage and/or research services, designate any
such broker-dealer to receive selling concessions, discounts or other
allowances, or otherwise deal with any such broker-dealer in connection with the
acquisition of securities in underwritings. Additionally, purchases and sales of
fixed income securities are transacted with the issuer, the issuer's
underwriter, or with a primary market maker acting as principal or agent. The
Trust does not usually pay brokerage commissions for these purchases and sales,
although the price of the securities generally includes compensation which is
not disclosed separately. The prices the Trust pays to underwriters of
newly-issued securities usually include a concession paid by the issuer to the
underwriter. Transactions placed through dealers who are serving as primary
market makers reflect the spread between the bid and asked prices.
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Security Management and Virtus receive a wide range of research
services from broker-dealers including information on securities markets, the
economy, individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analysis. Research services are received primarily in the form of written
reports, telephone contacts, personal meetings with security analysts, corporate
and industry spokespersons, economists, academicians, government representatives
and access to various computer-generated data. Research services received from
broker-dealers are supplemental to Security Management's and Virtus's own
research efforts and, when utilized, are subject to internal analysis before
being incorporated into the investment process.
Each year Security Management and Virtus assess the contribution of the
brokerage and research services provided by broker-dealers and allocates a
portion of the brokerage business of its clients on the basis of these
assessments. In addition, broker-dealers sometimes suggest a level of business
they would like to receive in return for the various brokerage and research
services they provide. Actual brokerage received by any firm may be less than
the suggested allocations, but can (and often does) exceed the suggestions
because total brokerage is allocated on the basis of all the considerations
described above. In no instance is a broker-dealer excluded from receiving
business because it has not been identified as providing research services.
Security Management and Virtus cannot readily determine the extent to
which commissions or net prices charged by broker-dealers reflect the value of
their unsolicited research services. In some instances, Security Management
and/or Virtus will receive research services they might otherwise have had to
perform for themselves. The research services provided by broker-dealers can be
useful to Security Management or Virtus in serving other clients, but they can
also be useful in serving the Trust. Neither Security Management nor Virtus
allocates business to any broker-dealer on the basis of its efforts in promoting
sales of shares of the Series. However, this does not mean that such
broker-dealers will not receive business from the Trust.
During the fiscal years ended July 31, 1995 and 1994 and the period May 19, 1993
through July 31, 1993, the Value Equity Series paid brokerage commissions to
securities dealers in the amounts of $22,760, $12,180 and $3,091, respectively.
The U.S. Government Income Series paid no brokerage commissions or discounts to
securities dealers for the fiscal years ended July 31, 1995 and 1994, or for the
period May 19, 1993 through July 31, 1993.
PORTFOLIO TURNOVER
The portfolio turnover rate can be expected to be higher during periods
of rapidly changing economic or market conditions than in a more stable period.
Portfolio turnover may be defined as the ratio of the total dollar amount of the
lesser of the purchase or sales of securities to the monthly average value of
portfolio securities owned by the Trust. The
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portfolio turnover rates for the Value Equity Series for the fiscal years ended
July 31, 1995 and 1994 and for the period May 19, 1993 through July 31, 1993
were 84%, 121% and 7%, respectively. The portfolio turnover rates for the U.S.
Government Income Series for the fiscal years ended July 31, 1995 and 1994 and
for the period May 19, 1993 through July 31, 1993 were 16%, 17% and 0%,
respectively.
PRICING AND REDEMPTION OF SECURITIES BEING OFFERED
DETERMINING NET ASSET VALUE
The net asset value per share of each Series is determined by dividing
the value of the Series' securities, plus any cash and other assets (including
dividends and interest accrued and not collected), less all liabilities
(including accrued expenses), by the number of shares outstanding.
VALUE EQUITY AND U.S. GOVERNMENT INCOME SERIES
The market values of the Series' portfolio securities are determined as
follows:
- for equity securities, according to the last sale price on a
national securities exchange, if available;
- in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked
prices;
- for unlisted equity securities, the latest bid prices;
- for bonds and other fixed income securities, as determined by an
independent pricing service;
- for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with maturities of less than 60 days, at
amortized cost; or
- for all other securities, at fair value as determined in good
faith by the Board of Trustees.
The Series will value future contracts, options, put options on futures
and financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Board determines in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
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REDEMPTION OF SHARES
The Trust will redeem shares at the net asset value per share next to
be determined after receipt of a duly executed request for redemption.
Redemption of shares or payment may be suspended at times (i) when the New York
Stock Exchange is closed other than customary weekends and holidays, (ii) when
trading on said exchange is restricted, (iii) when an emergency (as determined
by the Securities and Exchange Commission) exists, making disposal of portfolio
securities or the valuation of net assets of the Series not reasonably
practicable, or (iv) when the Securities and Exchange Commission has by order
permitted such suspension for the protection of shareholders of the Trust.
The Trust's redemption procedures will not be changed without prior
notice to shareholders.
TAXATION
Under the Internal Revenue Code, as amended, ("Code") each of the
Series is treated as a separate regulated investment company provided the
qualification requirements of Subchapter M are otherwise met. As a regulated
investment company, a Series will not be subject to federal income tax on net
investment income and capital gains (short- and long-term), if any, that it
distributes to its shareholders if at least 90% of its net investment income and
net short-term capital gains for the taxable year is distributed.
In order to qualify as a regulated investment company under the Code, a
Series must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks or securities, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
(b) derive less than 30% of its gross income from the sale or other disposition
of stocks or securities held less than three months, and (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Series' assets is represented by cash, Government securities
and other securities limited in respect of any one issuer to 5% of the Series'
assets and to not more than 10% of the voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in the securities
of any one issuer (other than Government securities).
In addition to the diversification requirements contained in the
Trust's investment restrictions, the Trust is also subject to diversification
requirements applicable to variable annuities under section 817(h) of the Code.
Under this section, a variable annuity will not receive the tax treatment
afforded annuities if its underlying investments are not adequately diversified.
Under applicable regulations, no more than 55% of total assets can be invested
in one investment, 70% in two investments, 80% in three investments and 90% in
four investments. Investments are generally defined as securities issued by any
one issuer. U.S.
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Government agencies or instrumentalities are considered separate issuers;
federally insured certificates of deposit are considered securities issued by
the U.S. Government because of the insurance.
Unlike public shareholders, under the Code a life insurance company
separate account will not incur any federal income tax liability on dividends
and capital gains distributions received from a regulated investment company by
a separate account funding variable annuity contracts as defined in section
817(d) of the Code.
To the extent that there is in excess of $250,000 invested in a Series
other than through variable contract premium payment, the Code imposes a 4%
nondeductible excise tax on such Series to the extent the Series does not
distribute at least 98% of its net investment income and its net capital gains
(both long- and short-term) for each taxable year by the end of such year. For
purposes of the 4% excise tax, dividends and distributions will be treated as
paid when actually distributed, except that dividends declared in December
payable to shareholders of record on a specified date in December, and paid
before February 1 of the following year, will be treated as having been (i) paid
by the Series on the record date and (ii) received by each shareholder on such
date. Net capital gains realized for the one year period ending on October 31 of
each tax year are subject to distribution in this manner.
Series which do not have in excess of $250,000 invested other than
through variable contract premium payments are not subject to the above
described 4% excise tax.
Each Series will send written notices to its shareholder (Separate
Account) regarding the tax status of all distributions made during each taxable
year.
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or 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 in Aaa securities.
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Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION
Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the higher-rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher-rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher-rated categories.
FITCH INVESTORS SERVICE, INC.
Fitch's investment grade bond ratings are summarized as follows: AAA -
Bonds considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events; AA - Bonds
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated 'F-1+'; A - Bonds considered
to be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings; BBB - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and
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circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) Minus (-) - Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'AAA' category.
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's employs the following three designations, all judged to be of
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
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.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in the
rrelevant market. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. Categories A-1, A-2
and A-3 are as follows: A-1--This highest category indicates that the degree of
safety regarding timely payment is strong. Those
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issues determined to possess extremely strong safety characteristics are denoted
with a plus (+) sign designation; A-2--Capacity for timely payments on issues
with this designation is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1"; and A-3--Issues carrying this
designation have adequate capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations.
FITCH INVESTORS SERVICE, INC.
Fitch's short term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows: F-1+ - Exceptionally Strong
Credit Quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment; F-1 - Very Strong Credit Quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated 'F-1+'; F-2 - Good Credit Quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings; F-3 - Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payments is
adequate, however, near-term adverse changes could cause these securities to be
rated below investment grade; F-S - Weak Credit Quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions; D - Default. Issues assigned this rating are in actual or
imminent payment default.
26
<PAGE> 120
CUSTODIAN
The Bank of New York (the "Custodian"), 48 Wall Street, New York, New
York 10286, serves as custodian for the assets of each of the Series. Pursuant
to the terms of the Custodian Agreement executed with the Trust, the Trust will
forward to the Custodian the proceeds of each purchase of Series shares. The
Custodian will hold such proceeds and make disbursements therefrom in accordance
with the terms of the Custodian Agreement. It will retain possession of the
securities purchased with such proceeds and maintain appropriate records with
respect to receipt and disbursements of money, receipt and release of
securities, and all other transactions of the Custodian with respect to the
securities and other assets of the Series.
The Custodian Agreement provides that each of the Series shall pay to
the Custodian compensation for its services, in accordance with the Custodian's
regularly established rate schedule. Said compensation shall be computed on the
basis of the Series' average daily net assets payable as of the end of each
month. The Custodian Agreement may be terminated by either the Trust or the
Custodian upon 60 days' written notice to the other party. Such termination
shall not be in contravention of any applicable federal or state laws or
regulations, or any provision of the Trust Declaration or By-Laws.
INDEPENDENT AUDITORS
The financial statements of Security First Trust included in this
Statement of Additional Information and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, for the periods indicated in their
reports thereon which appear elsewhere herein and in the Registration Statement.
The financial statements audited by Ernst & Young LLP have been included in
reliance on their reports, given on their authority as experts in accounting and
auditing.
FEDERAL REGISTRATION OF SHARES
The Trust's shares are registered for sale under the Securities Act of
1933.
LEGAL COUNSEL
Routier, Mackey and Johnson, P.C., whose address is 1700 K Street,
N.W., Suite 1003, Washington, D.C. 20006 is legal counsel to the Trust.
27
<PAGE> 121
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
To the Trustees and Shareholders
Security First Trust
We have audited the accompanying statement of assets and liabilities,
including the portfolios of investments, of Security First Trust (comprised of
Bond Series, Growth and Income Series, Value Equity Series and U.S. Government
Income Series) as of July 31, 1995, the related statements of operations and
the changes in net assets for each of the periods indicated. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of July 31, 1995, by correspondence with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Security First Trust (comprised
of Bond Series, Growth and Income Series, Value Equity Series, and U.S.
Government Income Series) at July 31, 1995, the results of its operations and
the changes in its net assets for each of the periods indicated in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
September 12, 1995
<PAGE> 122
SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ------ ------ ------
<S> <C> <C> <C> <C>
ASSETS
Investments -- Note A and Schedule I:
Investment securities, at
market (cost: Bond
Series - $7,615,670;
Growth and Income Series
- $49,552,608; Value
Equity Series -
$6,140,865; U.S.
Government Income Series
- $5,528,736) $7,849,278 $67,411,628 $6,991,313 $5,576,167
Short-term investments -
(cost: Growth and
Income Series -
$16,039,906) 16,039,906
---------- ----------- ---------- ----------
7,849,278 83,451,534 6,991,313 5,576,167
Cash 38,462 245,482 778,838 303,696
Interest receivable 123,353 117,370
Dividends receivable 144,110 6,568
Receivable for capital
shares purchased 2,322 60,806 18,660 5,672
Prepaid insurance 1,388 14,310 1,256 1,025
---------- ----------- ---------- ----------
8,014,803 83,916,242 7,796,635 6,003,930
LIABILITIES
Payable for securities purchased 16,979
Payable to affiliates 17 237 61 24
Accrued expenses 17,936 36,807 10,327 5,915
Payable to investment
adviser -- Note B 2,372 24,542 3,513 1,350
Payable for directors' fees 181 1,543 36 35
Payable for capital shares
redeemed 16,516 63,467 457
---------- ----------- ----------- -----------
37,022 126,596 30,916 7,781
NET ASSETS
Composed of:
Capital shares (authorized
100,000,000 shares of
$.01 par value for each
series) 7,737,759 64,263,853 6,880,622 5,815,686
Undistributed net investment income 276,600 1,316,678 41,590 159,926
Accumulated net realized
gain (loss) (270,186) 350,095 (6,941) (26,894)
Net unrealized
appreciation of
investments 233,608 17,859,020 850,448 47,431
---------- ----------- ----------- -----------
Net assets $7,977,781 $83,789,646 $ 7,765,719 $ 5,996,149
========== =========== =========== ===========
Capital shares outstanding 2,034,763 7,918,360 1,363,119 1,169,195
Net asset value per share $ 3.92 $ 10.58 $ 5.70 $ 5.13
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 123
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 551,886 $ 738,459 $ 26,618 $ 277,202
Dividends 2,039,934 90,616
Miscellaneous income 8,811
------------ ------------ ------------ ------------
551,886 2,787,204 117,234 277,202
Expenses:
Custodian fees 29,737 39,598 22,627 16,691
Adviser fees -- Note B 25,523 255,372 38,075 35,172
Management fees -- Note B 10,939 109,066 7,615 7,034
Printing expenses 4,423 35,931 2,200 261
Audit fees 14,388 14,370 8,274 4,105
Insurance expenses 1,874 17,440 770 802
Directors' fees and expenses 3,000 30,991 2,213 2,197
Legal expense 2,632 24,953 1,358 1,408
Taxes, license and fees 1,604 1,675 1,675 1,675
Miscellaneous expenses 3,041 2,690 523
------------ ------------ ------------ ------------
94,120 532,437 87,497 69,868
Less: Waiver of management fees (3,601) (3,216)
Waiver of adviser fees (24,836) (28,809)
Excess expenses
reimbursed by Fund
Manager -- Note B (8,177) (4,932)
------------ ------------ ------------ ------------
94,120 532,437 50,883 32,911
------------ ------------ ------------ ------------
Net Investment Income 457,766 2,254,767 66,351 244,291
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
-- Notes A and C
Net realized gain (loss) on sale of
investments (85,491) 723,499 10,119 (26,894)
Net unrealized appreciation of
investments during the year 258,476 9,667,042 866,272 155,555
------------ ------------ ------------ ------------
Net gain on investments 172,985 10,390,541 876,391 128,661
------------ ------------ ------------ ------------
Increase in net assets
resulting from operations $ 630,751 $ 12,645,308 $ 942,742 $ 372,952
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 124
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 457,766 $ 2,254,767 $ 66,351 $ 244,291
Net realized gain (loss) on
investments (85,491) 723,499 10,119 (26,894)
Net unrealized appreciation
of investments during the
year 258,476 9,667,042 866,272 155,555
----------- ----------- ---------- ----------
Increase in net assets
resulting from operations 630,751 12,645,308 942,742 372,952
Distributions to shareowners
from:
Net investment income (403,613) (1,896,472) (43,805) (133,049)
Net realized gains (440,124)
Capital share transactions --
Note D:
Reinvestment of net
investment income
distributed 403,613 1,896,472 43,805 133,049
Reinvestment of net
realized gains 440,124
Sales of capital shares 1,520,473 14,215,043 4,494,367 2,982,198
Redemptions of capital
shares (1,399,407) (8,731,675) (678,463) (783,488)
----------- ----------- ---------- ----------
Increase in net assets from
capital share transactions 524,679 7,819,964 3,859,709 2,331,759
----------- ----------- ---------- ----------
Total increase in net assets 751,817 18,128,676 4,758,646 2,571,662
Net Assets:
Beginning of year 7,225,964 65,660,970 3,007,073 3,424,487
----------- ----------- ---------- ----------
End of year (including
undistributed net
investment income: Bond
Series - $276,600;
Growth and Income Series
- $1,316,678; Value
Equity Series - $41,590;
U.S. Government Income
Series - $159,926) $ 7,977,781 $83,789,646 $7,765,719 $5,996,149
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 125
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1994
<TABLE>
<CAPTION>
U.S.
Growth and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 404,434 $ 1,607,834 $ 27,548 $ 64,380
Net realized gain (loss) on
investments 49,276 2,664,404 (13,267) 3,614
Net unrealized appreciation
(depreciation) of
investments during the year (531,421) 64,572 (16,873) (110,876)
----------- ------------ ----------- ----------
Increase (decrease) in net assets
resulting from operations (77,711) 4,336,810 (2,592) (42,882)
Distributions to shareowners
from:
Net investment income (408,147) (1,431,711) (10,567) (18,886)
Net realized gains (3,614)
Capital share transactions --
Note D:
Reinvestment of net
investment income
distributed 408,147 1,431,711 10,567 18,886
Reinvestment of net
realized gains 3,614
Sales of capital shares 2,057,153 16,521,743 3,217,442 3,772,938
Redemptions of capital
shares (1,983,437) (10,357,781) (1,541,629) (774,629)
----------- ------------ ----------- ----------
Increase in net assets from
capital share transactions 481,863 7,595,673 1,686,380 3,020,809
----------- ------------ ----------- ----------
Total increase (decrease)
in net assets (3,995) 10,500,772 1,673,221 2,955,427
Net Assets:
Beginning of year 7,229,959 55,160,198 1,333,852 469,060
----------- ------------ ----------- ----------
End of year (including
undistributed net
investment income: Bond
Series - $222,447;
Growth and Income Series
- $958,383; Value Equity
Series - $19,044; U.S.
Government Income Series
- $48,684) $ 7,225,964 $ 65,660,970 $ 3,007,073 $3,424,487
=========== ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 126
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ------------------------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
CORPORATE NOTES 32.8%
Banking: 7.5
$ 100,000 Bankers Trust NY Corp.
8.25%, due 05/01/05 $ 107,728 $ 106,317
100,000 Citicorp
5.70%, due 02/12/96 100,038 99,744
100,000 First Chicago Corp.
5.50%, due 04/15/96 99,989 99,573
125,000 National Australia Bank
9.70%, due 10/15/98 125,000 136,094
100,000 Shawmut Corp.
8.875%, due 04/01/96 102,016 101,579
50,000 Wells Fargo
8.35%, due 11/01/96 51,576 51,336
----------- ------------
586,347 594,643
Credit Card-Backed: 2.6
100,000 First Chicago Credit Card Tr
91-D
8.40%, due 06/15/98 99,779 101,750
100,000 Standard Credit Card
7.25%, due 04/07/08 98,466 102,971
----------- ------------
198,245 204,721
Electrical Utilities: 1.6
125,000 Long Island Lighting
5.25%, due 03/01/96 123,884 124,140
Finance and Credit: 5.4
65,000 American Express
Credit Corp. 7.75%,
due 03/01/97 63,937 66,465
50,000 Associates Corp. No.
America
8.80%, due 03/01/96 49,973 50,735
50,000 Beneficial Financial
9.05%, due 03/14/97 49,992 52,131
50,000 Commercial Credit
Group Inc.
9.60%, due 05/15/99 50,656 54,942
100,000 Greyhound Financial
Corp.
5.125%, due 02/15/96 99,766 99,563
100,000 Margaretten Financial
Corp.
6.75%, due 06/15/00 96,100 99,683
----------- ------------
410,424 423,519
</TABLE>
<PAGE> 127
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CORPORATE NOTES
(CONTINUED)
Food & Beverage: 1.5%
$ 50,000 Coca Cola Enterprises
8.50%, due 02/01/22 $ 56,447 $ 55,355
60,000 Philip Morris
8.75%, due 12/01/96 59,976 61,936
----------- ------------
116,423 117,291
Industrial - Other: 6.4
50,000 Boeing Co.
8.75%,due 08/15/21 57,904 56,862
100,000 Columbia Healthcare
7.69%, due 06/15/25 99,875 98,177
100,000 GMAC
9.625%, due 12/15/01 114,809 112,659
125,000 General Electric
Capital Corp.
9.38%, due 10/06/98 125,191 135,112
100,000 Hertz Corp.
6.625%, due 07/15/00 99,610 98,961
----------- ------------
497,389 501,771
Miscellaneous: 3.4
175,000 Tennessee Valley Auth.
8.375%, due 10/01/99 176,919 187,598
80,000 U. S. West Communication
7.50%, due 06/15/23 70,099 77,922
----------- ------------
247,018 265,520
Savings & Loan: 0.7
50,000 Ahmanson (H.F.) & Co.
8.25%, due 10/01/02 49,856 52,692
Telephone: 3.7
125,000 AT&T Credit Corp.
9.85%, due 03/15/96 125,282 127,729
50,000 GTE Corp.
8.85%, due 03/01/98 50,072 52,534
100,000 Rochester Telephone
Corp.
8.77%, due 04/16/01 100,000 107,847
----------- ------------
275,354 288,110
TOTAL CORPORATE NOTES 2,504,940 2,572,407
</TABLE>
<PAGE> 128
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- --------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
FEDERAL AGENCIES 42.6%
Federal Home Loan Bank: 2.2
$ 175,000 5.43%, due 02/25/99 $ 161,348 $ 170,461
Federal Home Loan Mortgage Corp.: 5.9
235,000 7.125%, due 07/21/99 228,311 241,683
9,344 9.00%, due 01/01/17 9,126 9,657
20,515 9.00%, due 06/01/19 19,526 21,201
41,220 9.50%, due 04/01/19 39,835 42,984
150,000 7.00%, due 07/15/21 150,697 146,343
----------- ------------
447,495 461,868
Federal National Mortgage Assn.: 2.5
175,000 8.35%, due 11/10/99 176,865 187,798
9,069 7.50%, due 08/25/21 9,187 9,143
----------- ------------
186,052 196,941
Government National Mortgage
Assn.: 32.0
6,079 9.00%, due 04/15/09 6,294 6,349
90,012 9.00%, due 05/15/09 93,024 94,006
136,852 7.00%, due 08/15/23 140,409 133,517
98,254 9.25%, due 07/15/17 103,584 102,491
1,648 11.25%, due 07/15/13 1,728 1,813
15,470 11.50%, due 02/15/18 17,152 17,462
86,613 11.50%, due 11/15/15 97,163 97,768
5,571 12.50%, due 04/15/10 6,243 6,316
279,438 7.50%, due 10/15/23 290,716 279,262
28,968 10.00%, due 06/15/17 31,363 31,594
111,743 10.00%, due 03/15/20 121,411 121,874
314,560 9.00%, due 05/15/16 330,044 330,093
189,012 9.00%, due 07/15/16 198,319 198,345
163,286 9.00%, due 10/15/16 171,332 171,349
168,124 9.00%, due 11/15/16 176,409 176,426
71,410 10.00%, due 08/15/16 75,941 77,726
34,492 10.00%, due 11/15/17 36,686 37,542
70,645 10.00%, due 03/15/19 75,149 76,893
197,377 7.00%, due 03/15/24 186,408 192,628
170,967 7.50%, due 06/15/23 160,785 170,992
195,259 7.00%, due 01/15/24 182,076 190,561
----------- ------------
2,502,236 2,515,007
TOTAL FEDERAL AGENCIES 3,297,131 3,344,277
</TABLE>
<PAGE> 129
SCHEDULE I
SECURITY FIRST TRUST BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 24.6%
U.S. Treasury Bonds: 14.6
$ 400,000 7.125%, due 02/15/23 $ 381,150 $ 407,750
200,000 8.75%, due 05/15/20 210,150 240,875
100,000 8.75%, due 08/15/20 102,537 120,531
150,000 8.00%, due 11/15/21 151,395 168,047
180,000 8.50%, due 02/15/20 212,914 211,443
----------- ------------
1,058,146 1,148,646
U.S. Treasury Notes: 7.5
310,000 7.75%, due 11/30/99 315,915 327,341
250,000 7.25%, due 08/15/22 259,157 258,125
----------- ------------
575,072 585,466
350,000 U. S. Treasury Securities
Stripped: 2.5
0.00%, due 05/15/04 180,381 198,482
----------- ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 1,813,599 1,932,594
----------- ------------
TOTAL INVESTMENTS 100.0 $ 7,615,670 7,849,278
===========
Other assets less liabilities 128,503
-----------
NET ASSETS $ 7,977,781
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 130
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- -------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CAPITAL EQUIPMENT 2.1%
Electrical Equipment: 1.6
17,000 General Electric Co. $ 659,175 $ 1,003,000
25,000 Westinghouse
Electric Corp. 636,314 343,750
----------- ------------
1,295,489 1,346,750
Machinery: 0.5
25,000 Coltec Industries
Inc.* 407,875 381,250
CONSUMER CYCLICALS 0.8
Automobiles & Related: 0.8
7,000 Ford Motor Service
Cv. Pfd. 350,000 665,875
CONSUMER NONDURABLES 24.1
Food Products: 5.3
12,000 Anheuser-Busch Company, Inc. 623,460 667,500
12,000 CPC International Inc. 493,152 741,000
12,000 General Mills, Inc. 515,191 627,000
10,000 Pepsico, Inc. 304,450 468,750
25,000 Quaker Oats Company 854,562 868,750
20,000 Ralston-Ralston Purina Group 748,625 1,070,000
----------- ------------
3,539,440 4,443,000
Hospital Supplies: 1.3
30,000 Baxter International Inc. 752,235 1,117,500
Miscellaneous Consumer Products: 6.8
18,000 American Brands Inc. 659,565 717,750
10,000 Clorox Co. 378,300 656,250
12,000 Colgate Palmolive 661,092 840,000
25,000 Corning Inc. 832,712 800,000
29,000 Hanson PLC Sponsored ADR 414,020 500,250
15,000 Philip Morris Cos. Inc. 1,117,700 1,076,250
8,249 RJR Nabisco Hldngs Corp. 228,143 227,879
18,000 Tambrands, Inc. 684,390 848,250
----------- ------------
4,975,922 5,666,629
</TABLE>
*Non-Income Producing
<PAGE> 131
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- -------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CONSUMER NONDURABLES (CONTINUED)
Pharmaceuticals: 10.7%
15,000 American Home Products $ 923,550 $ 1,185,000
15,000 Johnson & Johnson 599,325 1,076,250
12,000 Eli Lilly & Co. 794,502 939,000
24,000 Pfizer, Inc. 683,710 1,215,000
20,000 Schering-Plough Corp. 559,450 930,000
30,200 SmithKline Beecham PLC ADR 498,641 1,359,000
25,000 Upjohn Co. 834,717 962,500
15,000 Warner Lambert Co. 1,005,959 1,258,125
----------- ------------
5,899,854 8,924,875
CONSUMER SERVICES 10.7
Restaurants: 0.2
12,000 Darden Restaurants
Inc.* 108,149 130,500
General Merchandisers: 3.6
15,000 Dayton-Hudson 1,021,926 1,134,375
30,000 K Mart Corp. 436,825 472,500
20,000 J.C. Penney Inc. 429,490 967,500
30,000 TJX Companies Inc. 369,300 438,750
----------- ------------
2,257,541 3,013,125
Media and
Communications: 5.0
17,000 Dun and Bradstreet
Corp. 715,100 956,250
13,000 McGraw-Hill Inc. 756,235 999,375
30,000 Meredith Corp. 398,400 862,500
14,014 Times Mirror Co. New 270,830 402,902
5,986 Times Mirror Co.
Series B 115,788 148,153
20,000 Vodafone Group PLC SPON ADR 653,900 787,500
----------- ------------
2,910,253 4,156,680
Miscellaneous: 1.9
15,000 Readers Digest Assn.
Inc. 586,050 641,250
30,000 WMX Technologies,
Inc. 930,265 937,500
1,450 U. S. Industries* 15,470 20,844
----------- ------------
1,531,785 1,599,594
</TABLE>
*Non-Income Producing
<PAGE> 132
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- -------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
ENERGY 11.4%
Oil: 11.4
12,000 Atlantic Richfield
Co. $ 1,242,918 $ 1,383,000
15,000 British Petroleum PLC 840,450 1,361,250
8,715 Burlington Resources
Inc. 218,178 338,796
18,000 Exxon Corp. 1,063,910 1,305,000
15,000 Halliburton Co. 422,450 609,375
8,000 Mobil Corp. 480,128 782,000
12,000 Murphy Oil Corp. 430,220 490,500
8,000 Pennzoil Co. 589,241 375,000
10,000 Royal Dutch Petroleum Co.
ADR 796,120 1,270,000
15,300 Texaco Inc. 578,282 1,019,363
20,000 Unocal Corp. 344,700 562,500
----------- ------------
7,006,597 9,496,784
FINANCIAL 13.6
Bank and Trust: 4.9
75,000 California Federal
Bank* 944,450 1,040,625
10,000 Chemical Banking
Corp. 272,500 516,250
10,000 First Interstate
Bancorp 330,000 861,250
15,000 J.P. Morgan and Co. 945,615 1,098,750
20,000 National City Corp. 501,000 612,500
----------- ------------
2,993,565 4,129,375
Financial Services: 7.5
52,000 American Express 976,137 2,008,500
20,000 H&R Block Inc. 271,513 750,000
15,000 Federal Home Loan
Mortgage Corp. 196,650 982,500
15,000 Student Loan Marketing
Assn. 518,550 808,125
36,789 Travellers Inc. 756,494 1,742,879
----------- ------------
2,719,344 6,292,004
Insurance: 1.2
10,000 CIGNA Corp. 487,963 806,250
14,000 Willis Corroon Group Sponsored
ADR 292,946 162,750
----------- ------------
780,909 969,000
</TABLE>
*Non-Income Producing
<PAGE> 133
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
PROCESS INDUSTRIES 6.7%
Chemicals: 3.4
15,000 Great Lakes Chemical
Corp. $ 738,195 $ 982,500
13,000 Minnesota Mining &
Manufacturing 708,295 736,125
12,000 Monsanto Co. 634,212 1,117,500
----------- ------------
2,080,702 2,836,125
Forest Products: 0.8
15,000 Weyerhaeuser Co. 392,498 701,250
Paper & Paper Products: 2.5
33,500 Albany International
Corp. 438,603 850,062
10,000 Kimberly-Clark Corp. 473,300 633,750
10,000 Union Camp Corp. 400,800 562,500
----------- ------------
1,312,703 2,046,312
TECHNOLOGY 1.6
Electronic Systems: 1.6
30,000 Honeywell Inc. 999,350 1,286,250
TRANSPORTATION 3.2
Railroads: 1.5
30,000 Canadian Pacific Ord Par $5 584,625 536,250
35,000 Southern Pacific Railroad* 553,350 691,250
----------- ------------
1,137,975 1,227,500
Transportation Services: 1.7
20,000 PHH Corporation 691,400 947,500
20,000 Ryder System Inc. 312,263 497,500
----------- ------------
1,003,663 1,445,000
</TABLE>
*Non-Income Producing
<PAGE> 134
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- ---------- ------------------------------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
UTILITIES 6.6%
Telephone: 3.5
12,000 American Telephone & Telegraph Co. $ 439,460 $ 633,000
25,000 General Telephone Electronics
Corp. 831,107 887,500
17,000 Southern New England Telecom.
Corp. 589,010 582,250
13,000 Telefonos De Mexico 653,635 429,000
10,000 U.S. West Inc. 360,800 428,750
----------- ------------
2,874,012 2,960,500
Utility Holding Companies: 3.1
22,000 Entergy Corp. 534,695 522,500
16,000 General Public Utilities Corp. 368,552 462,000
40,000 Pacificorp 667,000 735,000
50,000 SCE Corp. 652,500 856,250
----------- ------------
2,222,747 2,575,750
TOTAL EQUITY SECURITIES 49,552,608 67,411,628
</TABLE>
<TABLE>
<CAPTION>
Principal Short-Term Investments
- ----------- -----------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS 19.2
Commercial Paper: 19.2
1,600,000 American Home Products
6.00%, due 08/01/95 1,595,686 1,595,686
1,500,000 Aon Corp.
5.72%, due 08/24/95 1,494,244 1,494,244
500,000 Cargill Inc.
5.70%, due 09/05/95 497,128 497,128
2,000,000 Cargill Inc.
5.70%, due 08/07/95 1,997,727 1,997,727
2,700,000 Ciesco
5.70%, due 08/29/95 2,687,526 2,687,526
100,000 General Electric
5.88%, due 08/08/95 99,877 99,877
1,000,000 Heinz HJ Co.
5.73%, due 08/11/95 998,354 998,354
1,700,000 Kellogg Co.
5.70%, due 08/25/95 1,693,227 1,693,227
</TABLE>
<PAGE> 135
SCHEDULE I
SECURITY FIRST TRUST GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Short-Term Investments Portfolio Cost Value
- ----------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
(CONTINUED)
$1,300,000 Kimberly Clark
5.70%, due 08/08/95 $ 1,298,488 $ 1,298,488
1,900,000 Met Life FDG
5.72%, due 09/05/95 1,889,115 1,889,115
500,000 Pitney Bowes Cr
5.55%, due 10/13/95 494,133 494,133
1,300,000 PHH Corp.
5.72%, due 08/25/95 1,294,401 1,294,401
----------- ------------
TOTAL SHORT-TERM INVESTMENTS 16,039,906 16,039,906
----------- ------------
TOTAL INVESTMENTS 100.0% $65,592,514 83,451,534
===========
Other assets less liabilities 338,112
------------
NET ASSETS $ 83,789,646
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 136
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- --------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CAPITAL EQUIPMENT 5.3%
Construction & Mining: 1.8
3,150 Parker Hannifin Corp $ 104,552 $ 128,362
Electrical Equipment: 1.4
1,650 General Electric Co. 84,348 97,350
Industrial Machinery & Equipment: 2.1
1,850 Dover Corp 121,517 146,612
CONSUMER CYCLICALS 0.9
Automobiles & Related: 0.9
1,250 General Motors Corp. 61,350 60,937
CONSUMER NONDURABLES 37.2
Food & Beverages: 10.7
2,200 Anheuser-Busch Company,
Inc. 122,189 122,375
1,650 Canadaigua Wine Inc. 73,837 72,188
1,700 Hershey Foods Inc. 83,716 97,963
8,100 Hudson Foods Inc. 126,994 111,375
2,700 Pepsico, Inc 106,493 126,562
4,500 Richfood Holdings 81,000 104,625
3,950 Sara Lee Co 103,983 113,069
----------- ------------
698,212 748,157
Retail Trade: 2.4
3,800 Rite Aid Corp 86,885 107,825
2,050 Toys R Us* 78,590 57,400
----------- ------------
165,475 165,225
Miscellaneous Consumer
Products: 3.9
3,200 PPG Industries 128,183 146,400
2,400 Premark International 119,868 126,900
----------- ------------
248,051 273,300
</TABLE>
*Non-Income Producing
<PAGE> 137
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ---------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CONSUMER NONDURABLES
(CONTINUED)
Pharmaceuticals: 16.8%
2,250 Becton Dickinson & Co. $ 129,082 $ 132,469
5,500 Bergen Brunswig 128,205 118,938
2,250 Columbia/HCA Healthcare 92,176 110,250
1,600 Cordis Corp.* 118,400 115,600
2,900 Health Care & Retirement
Corp.* 85,748 92,800
2,700 Merck & Co. 115,020 139,388
2,200 Pfizer, Inc. 78,057 111,100
2,300 Schering Plough Corp. 85,094 106,950
2,500 Walgreen Co. 117,437 129,375
3,200 Watson Pharmaceuticals 81,250 115,200
----------- ------------
1,030,469 1,172,070
Restaurants: 3.4
2,700 McDonald's Corp. 79,699 104,286
7,200 Wendy's Intl Inc. 106,314 134,100
----------- ------------
186,013 238,386
CONSUMER SERVICES 6.4
Media and Communications: 2.8
2,400 Harris Corp. 120,240 137,400
1,150 SBC Communications Inc. 45,115 55,344
----------- ------------
165,355 192,744
General Merchandisers: 1.0
2,050 Sears Roebuck & Co. 63,953 66,881
Miscellaneous Consumer
Services: 2.6
2,500 Browning Ferris Indus Inc. 90,008 96,563
1,300 Federal Express Corp. 85,631 87,750
----------- ------------
175,639 184,313
</TABLE>
*Non-Income Producing
<PAGE> 138
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ---------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
ENERGY 5.9%
Oil: 5.9
1,850 Amoco Corp. $ 115,366 $ 124,412
2,400 Chevron Corp. 112,160 118,500
1,200 Mobil Corp. 102,732 117,300
1,500 Phillips Petroleum 54,367 53,063
----------- ------------
384,625 413,275
FINANCIAL 10.0
Commercial Banking: 4.2
1,400 Citicorp 56,084 87,325
1,200 First Fidelity Bancorp. 56,022 75,600
2,350 Nationsbank Corp. 127,391 131,894
----------- ------------
239,497 294,819
Financial Services: 5.0
1,550 Dean Witter Discover & Co. 62,474 78,275
900 Federal Home Loan
Mortgage Corp. 53,245 58,950
3,300 Fleet Financial Group,
Inc. 123,014 117,563
2,400 Reliastar Financial 86,592 91,500
----------- ------------
325,325 346,288
Insurance: 0.8
1,900 Allstate Corp. 54,895 59,375
MEDIA & LEISURE 2.4
Broadcasting: 2.4
1,450 Capital Cities/ABC, Inc. 126,818 169,288
</TABLE>
<PAGE> 139
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- --------- ------------------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
PROCESS INDUSTRIES 7.2%
Chemicals: 6.0
1,700 Du Pont EI De Nemours & $ 103,267 $ 113,900
Co.
2,500 Lubrizol Corp. 87,125 87,812
1,500 Minnesota Mining &
Manufacturing 80,055 84,937
1,400 Monsanto Co. 118,174 130,375
----------- ------------
388,621 417,024
Paper & Paper Products: 1.2
2,500 Chesapeake Corp. 79,898 82,500
TECHNOLOGY 17.2
Aerospace & Defense: 3.5
2,000 Sunstrand Corp. 120,369 133,750
1,300 United Technologies
Corp. 84,494 109,200
----------- ------------
204,863 242,950
Computer and Office
Equipment: 3.3
2,450 Apple Computer 120,050 110,250
1,100 International Business
Machines 80,095 119,763
----------- ------------
200,145 230,013
Electronic Equipment: 8.5
2,600 Cirrus Logic 42,575 119,600
1,100 Hewlett Packard Co. 53,210 85,663
1,400 KLA Instruments Corp.* 87,850 121,450
2,500 Tandy Corp. 123,163 148,437
2,250 Varian Associates 84,600 124,031
----------- ------------
391,398 599,181
Information Processing: 1.9
4,700 Sungard Data Systems* 119,262 136,300
</TABLE>
*Non-Income Producing
<PAGE> 140
SCHEDULE I
SECURITY FIRST TRUST VALUE EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
No. of Value of Amortized Market
Shares Equity Securities Portfolio Cost Value
- -------- ----------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
UTILITIES 7.5%
Telephone: 5.9
2,800 ALLTEL Corp. $ 84,280 $ 73,850
1,750 BellSouth Corp. 103,873 118,562
4,500 Carolina Pwr & Lt Co. 127,184 136,688
600 GTE Corp. 20,847 21,300
1,850 Sprint Corp. 67,041 63,363
----------- ------------
403,225 413,763
Utility Holding Companies: 1.6
3,600 Kansas City Power & Light
Co. 84,475 79,200
1,500 Southern Co. 32,884 33,000
----------- ------------
117,359 112,200
TOTAL INVESTMENTS 100.0 $ 6,140,865 6,991,313
===========
Other assets less
liabilities 774,406
------------
NET ASSETS $ 7,765,719
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 141
SCHEDULE I
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1995
<TABLE>
<CAPTION>
Percentage
of Market Cost/
Value of Amortized Market
Principal Fixed Maturities Portfolio Cost Value
- ----------- ------------------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 41.5%
U.S. Treasury Notes:
$ 250,000 7.875%, due 08/15/01 $ 261,608 $ 269,063
400,000 7.875%, due 11/15/04 421,147 437,000
150,000 7.75%, due 03/31/96 153,451 151,922
750,000 7.50%, due 02/15/05 769,329 801,563
160,000 5.50%, due 04/15/00 161,398 155,450
500,000 5.125%, due 03/31/96 498,554 497,969
----------- ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 41.5 2,265,487 2,312,967
----------- ------------
FEDERAL AGENCIES: 58.5
550,000 Federal Farm Credit
Bank
6.05%, due 04/21/03 536,351 530,569
125,000 Federal Farm Credit
MTN
6.94%, due 05/19/05 126,055 126,217
350,000 Federal Home Loan
Bank
4.80%, due 09/22/98 349,645 336,465
250,000 Federal Home Loan
Bank
8.00%, due 08/27/01 260,910 267,385
700,000 Federal National
Mortgage Assn.
7.00%, due 02/10/96 705,131 703,647
150,000 Federal National
Mortgage Assn.
8.625%, due 06/30/04 163,446 168,271
100,000 Student Loan Marketing
Assn.
7.50%, due 03/08/00 105,643 104,396
1,000,000 Tennessee Valley Auth.
8.25%, due 11/15/96 1,016,068 1,026,250
----------- ------------
TOTAL FEDERAL AGENCIES 58.5 3,263,249 3,263,200
----------- ------------
TOTAL INVESTMENTS 100.0 $ 5,528,736 5,576,167
===========
Other assets less liabilities 419,982
------------
NET ASSETS $ 5,996,149
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 142
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1995
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
Security First Trust (the Trust) was established under Massachusetts law
pursuant to a Declaration of Trust dated February 13, 1987, as an unincorporated
business trust, a form of organization that is commonly called a Massachusetts
Business Trust. The Trust is registered with the Securities and Exchange
Commission as a diversified open-end management investment company (mutual fund)
under the Investment Company Act of 1940 (1940 Act).
On June 17, 1987, the shareowners of Security First Legal Reserve Fund, Inc. and
Security First Variable Life Fund, Inc. (the Funds), each of which was a
Maryland corporation registered as an investment company under the 1940 Act,
approved Plans of Reorganization and Liquidation and on July 24, 1987, the Funds
became Series of the Trust and their shareowners became shareowners of the Bond
Series and the Growth and Income Series, respectively, in a tax-free exchange of
shares. The Trust operates as a "series company," as that term is used in Rule
18f-2 under the 1940 Act. Financial information for periods prior to June 17,
1987, reflect the results of the respective funds.
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares and to divide such shares into an unlimited number of series, all without
shareowner approval. Pursuant to this authority, the Board of Trustees of
Security First Trust established the Value Equity Series and the U.S. Government
Income Series on January 11, 1993, which commenced operations May 19, 1993. The
following is a summary of significant accounting policies followed by the Trust:
FEDERAL INCOME TAXES -- Each series of the Trust has elected to qualify as a
"Regulated Investment Company." No provision for federal income taxes is
necessary because each series intends to maintain its qualification as a
"Regulated Investment Company" under the Internal Revenue Code and distribute
each year substantially all of its net income and realized capital gains to its
shareowners. Income and gains to be distributed are determined as of December
31, because the Trust reports for tax purposes on a calendar year.
PORTFOLIO VALUATION -- Investments are carried at market value. The market value
of equity securities is determined as follows: Securities traded on a national
securities exchange are valued at the last sale price; securities not traded on
a national securities exchange are valued at the bid price for such securities
as reported by security dealers. Fixed maturities are valued at prices obtained
from a major dealer in bonds. Short-term investments which have remaining
maturities of more than 60 days and for which representative market quotations
are readily available are valued at the most recent bid price or yield
equivalent as quoted by a major broker-dealer in money market securities.
Securities with remaining maturities of 60 days or less are valued at their
amortized cost. Securities and other assets for which such procedures are deemed
not to reflect fair value, or for which representative quotes are not readily
available, are valued at prices deemed best to reflect their fair value as
determined in good faith by or under supervision of officers of the Trust in a
manner specifically authorized by the Board of Directors and applied on a
consistent basis.
<PAGE> 143
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DIVIDENDS AND DISTRIBUTIONS -- Each series declare dividends annually. Net
realized gains from security transactions, if any, are distributed annually.
OTHER -- As is common in the industry, security transactions are accounted for
no later than the day following the date the securities are purchased or sold.
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily.
NOTE B -- REMUNERATION OF MANAGER AND OTHERS
Bond Series and Growth and Income Series:
The Manager, Security First Investment Management Corporation (Security
Management), is entitled by agreement to a monthly fee equal to 1/24 of 1% of
the average daily net asset value of the Bond Series and Growth and Income
Series (equivalent annually to .5%), less compensation payable to the Series'
investment adviser. However, to the extent that operating expenses (including
management fees but excluding interest and taxes and certain extraordinary
expenses) of each series exceed 2.5% of the first $30 million of each series'
average daily net assets, 2.0% of the next $70 million of each series' average
daily net assets, and 1.5% of each series' average daily net assets in excess of
that amount, calculated on the basis of each series' fiscal year (the expense
limitation), the agreement requires that Security Management waive its fee. In
addition, for the year ended July 31, 1995, Security Management has also agreed
to reimburse the Bond Series for any remaining expenses exceeding a limitation
equivalent annually to 1.5%. Security Management may elect on an annual basis to
reimburse the Series for future excess expenses.
If during the fiscal year repayments are made to the Manager and the series'
expenses subsequently exceed the expense limitation, the Series shall recover
such repayments from the Manager to the extent of the excess determined.
Conversely, if during the fiscal year repayments are made by the Manager and the
series' expenses subsequently are within the expense limitation, the Manager
shall recover such repayments to the extent of the excess repaid. It is
management's opinion that it is reasonably possible that actual operating
expense may be less than the expense limitation; however, in accordance with the
requirements of FASB Statement No. 5, no accrual has been made for the
contingent obligation to repay Security Management for excess expense
reimbursements since the conditions required for such accrual have not, in the
opinion of management, been met.
T. Rowe Price Associates provides investment advice and makes investment
decisions for the Bond Series and Growth and Income Series. T. Rowe Price
Associates is paid an annual fee of 0.35% of the average daily net assets of
each series less any compensation payable to Security Management acting as
adviser on certain assets in which a series may invest.
<PAGE> 144
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
Value Equity Series and U.S. Government Income Series:
The Manager, Security Management, is entitled by agreement to a monthly fee
equal to 1/13 of 1% of the average daily net asset value of the Value Equity
Series and U.S. Government Income Series (equivalent annually to .9%), less
compensation payable to the Series' investment adviser. However, to the extent
that operating expenses (including management fees but excluding interest and
taxes and certain extraordinary expenses) of each series exceed 2.5% of the
first $30 million of each series' average daily net assets, 2.0% of the next $70
million of each series' average daily net assets and 1.5% of each series'
average daily net assets in excess of that amount, calculated on the basis of
each series' fiscal year (the expense limitation), the agreement requires that
Security Management and Virtus Capital Management waive their fees. For a period
of three years from inception, Security Management and Virtus Capital Management
have also agreed to reimburse the Value Equity Series for any remaining expenses
exceeding a limitation equivalent annually to 1% and to reimburse the U.S.
Government Income Series for any remaining expenses exceeding a limitation
equivalent annually to .7%.
Virtus Capital Management provides investment advice and makes investment
decisions for the Value Equity Series and U.S. Government Income Series. Virtus
Capital Management is paid an annual fee of .75% of the average daily net assets
of the two series.
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the year ended
July 31, 1995 were as follows:
<TABLE>
<CAPTION>
Growth U.S.
and Value Government
Income Equity Income
Bond Series Series Series Series
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities:
Purchases $ 3,444,298 $3,666,168
Sales 2,492,260 669,025
Other Investment Securities:
Purchases 1,004,611 $ 5,914,475 $7,130,826
Sales 1,498,031 4,586,430 3,863,454
</TABLE>
<PAGE> 145
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS (CONTINUED)
Net realized gain or loss on sale of investments is determined by the specific
identification method and would not have been significantly different using the
average cost method. The cost of investments at July 31, 1995 was the same for
both financial statement and federal income tax purposes. At July 31, 1995, the
composition of unrealized appreciation and depreciation of investment securities
was as follows:
<TABLE>
<CAPTION>
Unrealized
--------------------------
Appreciation Depreciation Net
------------ ------------ -----------
<S> <C> <C> <C>
Bond Series $ 269,580 $ (35,972) $ 233,608
Growth and Income Series 18,889,037 (1,030,017) 17,859,020
Value Equity Series 937,325 (86,876) 850,449
U.S. Government Income Series 77,186 (29,755) 47,431
</TABLE>
NOTE D -- CAPITAL SHARE TRANSACTIONS
Transactions in capital shares of the Trust were as follows:
<TABLE>
<CAPTION>
Shares issued
in connection
with reinvestment of
---------------------------
Net Net
Investment Realized
Income Gain
Sold Distributions Distributions Redeemed Net
--------- ------------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1995
Bond Series 401,797 112,741 (370,655) 143,883
Growth and Income Series 1,480,071 209,555 48,632 (912,125) 826,133
Value Equity Series 888,244 9,164 (137,439) 759,969
U.S. Government Income Series 604,546 28,069 (161,083) 471,532
YEAR ENDED JULY 31, 1994
Bond Series 518,848 103,591 (504,901) 117,538
Growth and Income Series 1,804,652 156,987 (1,129,791) 831,848
Value Equity Series 633,670 2,052 (299,366) 336,356
U.S. Government Income Series 754,219 3,747 717 (153,461) 605,222
</TABLE>
32
<PAGE> 146
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS
The per share information for each respective series' capital stock outstanding
throughout the period is as follows:
<TABLE>
<CAPTION>
NET REALIZED TOTAL
AND INCOME DISTRIBUTIONS
NET ASSET UNREALIZED (LOSSES) DIVIDENDS FROM NET ASSET
VALUE AT NET GAINS FROM FROM NET REALIZED VALUE AT
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAINS PERIOD RETURN(2)
--------- ---------- ----------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND SERIES
Year ended
July 31,
1991 $3.95 $ .52 $ (.24) $ .28 $ (.55) $ 3.68 7.09%
1992 3.68 .24 .28 .52 (.25) 3.95 14.13
1993 3.95 .22 .14 .36 (.23) 4.08 9.11
1994 4.08 .21 (.25) (.04) (.22) 3.82 (0.98)
1995 3.82 .24 .08 .32 (.22) 3.92 8.38
GROWTH AND
INCOME SERIES
Year ended
July 31,
1991 $7.30 $ .39 $ .29 $ .68 $ (.44) $ 7.54 9.32%
1992 7.54 .23 .79 1.02 (.24) 8.32 13.53
1993 8.32 .22 .49 .71 (.22) 8.81 8.53
1994 8.81 .23 .44 .67 (.22) 9.26 7.60
1995 9.26 .29 1.35 1.64 (.26) $ (.06) 10.58 17.71
VALUE EQUITY
SERIES
May 19, 1993
through
July 31,
1993 (3) $5.00 $ .01 $ (.01) $ .00 $ .00 $ 5.00 0.00% (1)
Year ended
July 31,
1994 5.00 .05 (.03) .02 (.03) 4.99 0.40
1995 4.99 .05 .71 .76 (.05) 5.70 5.23
U.S. GOVERNMENT
INCOME SERIES
May 19, 1993
through
July 31,
1993 (3) $5.00 $ .03 $ .04 $ .07 $ .00 $ 5.07 7.10% (1)
Year ended
July 31,
1994 5.07 .11 (.19) (.08) (.07) $ (.01) 4.91 (1.58)
1995 4.91 .21 .15 .36 (.14) 5.13 7.33
</TABLE>
(1) Annualized
(2) Total return computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable annuity
account.
(3) The Value Equity Series and U.S. Government Income Series commenced
operations on May 19, 1993.
<PAGE> 147
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Ratio of
Ratio of Net
Operating Investment
Expenses Income Portfolio Net Assets
to Average to Average Turnover End of
Net Assets Net Assets Rate Period
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1991 1.50% 6.89% 310% $ 4,793,766
1992 1.50 6.42 50 5,682,609
1993 1.45 6.02 36 7,229,959
1994 1.30 5.45 58 7,225,964
1995 1.29 6.27 56 7,977,781
GROWTH AND INCOME SERIES
Year ended July 31,
1991 .97% 4.01% 36% $ 33,493,074
1992 .86 3.10 20 42,814,515
1993 .75 2.77 5 55,160,198
1994 .78 2.62 11 65,660,970
1995 .74 3.10 8 83,789,646
VALUE EQUITY SERIES
May 19, 1993 through July
31, 1993 (2) 1.00% (1) .85% (1) 7% $ 1,333,852
Year Ended July 31, 1994 1.00 1.38 121 3,007,073
Year Ended July 31, 1995 1.00 1.29 84 7,765,719
U.S. GOVERNMENT INCOME SERIES
May 19, 1993 through July
31, 1993 (2) .70% (1) 3.91% (1) 0% $ 469,060
Year ended July 31, 1994 .70 3.62 17 3,424,487
Year ended July 31, 1995 .70 5.19 16 5,996,149
</TABLE>
(1) Annualized
(2) The Value Equity Series and U.S. Government Income Series commenced
operations on May 19, 1993.
<PAGE> 148
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Prospectus/Statement of Additional Information Describing
Value Equity Series and U.S. Government Income Series:
- Condensed Financial Information (Per Share Income
and Capital Changes Table) is included in Part A
of the Registration Statement
- Financial statements for the above-referenced
Series of Security First Trust are included in
Part B of the Registration Statement
(2) Prospectus/Statement of Additional Information Describing
Growth and Income Series, Bond Series and U.S. Government
Income Series:
- Condensed Financial Information (Per Share Income
and Capital Changes Table) is included in Part A
of the Registration Statement
- Financial statements for the above-referenced
Series of Security First Trust are included in
Part B of the Registration Statement
(b) Exhibits
(11) Consent of Independent Auditors herewith
Item 25. Persons Controlled by or Under Common Control with Registrant
Previously filed with the Securities and Exchange Commission as part of
the Registration Statement of Security First Trust and incorporated
herein by reference.
Item 26. Number of Holders of Securities
As of July 31, 1995:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Growth and Income Series 3
Bond Series 3
Value Equity Series 1
U.S. Government Income Series 2
</TABLE>
<PAGE> 149
Item 27. Indemnification
Previously filed as part of the registration statement of Security First
Trust and incorporated herein by reference.
Item 28. Business and Other Connections of Investment Adviser
Security First Investment Management Corporation is also investment
adviser to two affiliated life insurance companies.
Each of the directors and officers of Security First Investment
Management Corporation is also an officer of its parent, Security First Group,
Inc., and certain of its subsidiaries, including Security First Life Insurance
Company and Fidelity Standard Life Insurance Company. Each of these companies is
located at 11365 West Olympic Boulevard, Los Angeles, California 90064.
Item 29. Principal Underwriters
Not applicable.
Item 30. Location of Accounts and Records
Books and documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the Rules (17 CFR 270.31a-1 to 31a-3)
promulgated thereunder and records relating to shareholder records are
maintained by The Bank of New York in New York, New York. Registrant's Agreement
and Declaration of Trust, By-Laws and other records are maintained by the
Registrant at its principal executive offices.
Item 31. Management Services
Registrant asserts that all material management related services
contract provisions have been discussed in the Prospectus and Statement of
Additional Information.
Item 32. Undertakings
The Trust undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Trust's latest annual or semi-annual report to
shareholders upon request and without charge.
<PAGE> 150
SIGNATURES
As required by 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 amended Registration Statement to be signed on its behalf in the City of
Los Angeles and State of California on this 22nd day of November, 1995.
SECURITY FIRST TRUST
(Registrant)
By /s/ Robert G. Mepham
----------------------------
Robert G. Mepham
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert G. Mepham President November 22, 1995
- ----------------------------- (Principal Executive
Robert G. Mepham Officer)
/s/ Jane F. Eagle Senior Vice President, Finance November 22, 1995
- ----------------------------- (Principal Financial and
Jane F. Eagle Accounting Officer)
Jack R. Borsting* Trustee November 22, 1995
- -----------------------------
Jack R. Borsting
Melvin M. Hawkrigg* Trustee November 22, 1995
- -----------------------------
Melvin M. Hawkrigg
Katherine L. Hensley* Trustee November 22, 1995
- -----------------------------
Katherine L. Hensley
</TABLE>
<PAGE> 151
<TABLE>
<S> <C> <C>
Lawrence E. Marcus* Trustee November 22, 1995
- -----------------------------
Lawrence E. Marcus
By /s/ Richard C. Pearson November 22, 1995
---------------------------
*(Richard C. Pearson as
Attorney-in-Fact for
each of the persons
indicated)
</TABLE>
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Condensed Financial
Information" and "Independent Auditors" and to the use of our report dated
September 12, 1995 in the Registration Statement (Form N-1A Post-Effective
Amendments No. 33 under the Securities Act of 1933 and No. 32 under the
Investment Company Act of 1940) and related Statements of Additional Information
of Security First Trust.
/s/ ERNST & YOUNG LLP
------------------------------
ERNST & YOUNG LLP
Los Angeles, California
November 21, 1995
