<PAGE> 1
FILE NO. 2-51173
FILE NO. 811-2480
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRE-EFFECTIVE AMENDMENT NO.
[ ]
POST-EFFECTIVE AMENDMENT NO. 36 [X]
------------------------
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 35 [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)
------------------------
<TABLE>
<S> <C>
RICHARD C. PEARSON, ESQUIRE COPIES TO:
SECURITY FIRST LIFE INSURANCE COMPANY ROBERT J. ROUTIER, ESQUIRE
11365 WEST OLYMPIC BOULEVARD ROUTIER & JOHNSON, P.C.
LOS ANGELES, CALIFORNIA 90064 1700 K STREET, N.W.
(NAME AND ADDRESS OF AGENT FOR SERVICE) WASHINGTON, D.C. 20006
</TABLE>
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It is proposed that this filing will become effective:
<TABLE>
<S> <C>
X immediately upon filing pursuant to paragraph (b)
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on [date] pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(1)
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on [date] pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on [date] pursuant to paragraph (a)(2) of Rule 485
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This post-effective amendment designates a new effective date for a previously
filed post-effective amendment.
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</TABLE>
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 29, 1997.
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<PAGE> 2
SECURITY FIRST TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
HEADINGS IN PROSPECTUS
OR STATEMENT OF
ITEM NUMBER IN FORM N-1A ADDITIONAL INFORMATION
- ------------------------------------------------ ------------------------------------------
<S> <C> <C>
PART A
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; T. Rowe Price
Growth and Income Series**;
Bond Series**; Virtus Equity Series***;
Virtus U.S Government Income Series***
5. Management of the Fund.................... Management of the Trust
5a. Management's Discussion of Fund
Performance............................... Series 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
15. Control Persons and Principal Holders of
Securities................................ Principal 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
Securities Being Offered.................. Pricing and Redemption of Securities Being
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 T. Rowe
Price Growth and Income Series, Bond Series and Virtus U.S. Government
Income Series.
*** Prospectus or Statement of Additional Information Describing the Virtus
Equity Series and Virtus U.S. Government Income Series.
<PAGE> 3
SECURITY FIRST TRUST
PROSPECTUS
- --------------------------------------------------------------------------------
T. ROWE PRICE GROWTH AND INCOME SERIES
BOND SERIES
VIRTUS 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 T. Rowe Price
Growth and Income Series, the Bond Series and the Virtus U.S. Government Income
Series (formerly 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 T. Rowe Price 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 Virtus 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.
- --------------------------------------------------------------------------------
IMPORTANT NOTICE
ANNUITIES, MUTUAL FUNDS, AND OTHER INVESTMENTS ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY. THEY ARE NOT DEPOSITS, OBLIGATIONS, OR GUARANTEED
BY ANY BANK. THEY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
Prospectus dated December 1, 1997 (12/97)
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Financial Information........................................................ 3
Series Performance..................................................................... 5
The Trust.............................................................................. 5
The Series............................................................................. 6
Investment Objectives and Policies..................................................... 6
T. Rowe Price Growth and Income Series................................................. 6
Bond Series............................................................................ 6
Virtus 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................................................................. 13
Portfolio Turnover..................................................................... 14
Reports................................................................................ 14
Legal Proceedings...................................................................... 14
Table of Contents of Statement of Additional Information............................... 15
</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> 5
SECURITY FIRST TRUST
T. ROWE PRICE 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)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990(1)
------------ ------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............. $12.10 $10.58 $9.26 $8.81 $8.32 $7.54 $7.30 $ 9.19
Income From
Investment
Operations:
Net Investment
Income........... $ .30 $ .30 $ .29 $ .23 $ .22 $ .23 $ .39 $ .31
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)...... 4.69 1.56 1.35 .44 .49 .79 .29 (1.11)
--- --- --- --- ---- --- ---- ----
Total From
Investment
Operations...... $ 4.99 $1.86 $1.64 $ .67 $ .71 $1.02 $ .68 $ (.80)
Less Distributions:
Dividends (from net
investment
income).......... $ (.29) $(.30) $(.26) $(.22) $(.22) $(.24) $(.44) $ (.30)
Distributions (from
capital gains)... (.54) (.04) (.06) (.79)
--- --- --- --- ---- --- ---- ----
Total
Distributions... $ (.83) $(.34) $(.32) $(.22) $(.22) $(.24) $(.44) $(1.09)
Net Asset Value, End
of Period.......... $16.26 $12.10 $10.58 $9.26 $8.81 $8.32 $7.54 $ 7.30
Total Return........ 41.24% 17.58% 17.71% 7.60% 8.53% 13.53% 9.32% (8.71)%
Ratios/Supplemental
Data:
Net Assets, End of
Period............. $204,703,098 $112,552,893 $83,789,646 $65,660,970 $55,160,198 $42,814,515 $33,493,074 $42,108,056
Ratio of Expenses to
Average Net
Assets............. .57% .64% .74% .78% .75% .86% .97% .77%
Ratio of Net
Investment Income
to Average Net
Assets............. 2.44% 2.73% 3.10% 2.62% 2.77% 3.10% 4.01% 4.22%
Portfolio Turnover
Rate............... 14% 8% 8% 11% 5% 20% 36% 34%
Average Commission
Rate Paid.......... .01
<CAPTION>
1989 1988
----------- -----------
<S> <<C> <C>
Net Asset Value,
Beginning of
Period............. $7.13 $ 8.98
Income From
Investment
Operations:
Net Investment
Income........... $ .25 $ .17
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)...... 2.22 (.58)
--- ---
Total From
Investment
Operations...... $2.47 $ (.41)
Less Distributions:
Dividends (from net
investment
income).......... $(.17) $ (.40)
Distributions (from
capital gains)... (.24) (1.04)
--- ---
Total
Distributions... $(.41) $(1.44)
Net Asset Value, End
of Period.......... $9.19 $ 7.13
Total Return........ 34.64% (4.57)%
Ratios/Supplemental
Data:
Net Assets, End of
Period............. $38,783,743 $25,303,236
Ratio of Expenses to
Average Net
Assets............. .86% .80%
Ratio of Net
Investment Income
to Average Net
Assets............. 3.40% 2.74%
Portfolio Turnover
Rate............... 98% 140%
Average Commission
Rate Paid..........
</TABLE>
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(1) 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 T. Rowe Price Growth and Income Series.
3
<PAGE> 6
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)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990(1)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............. $3.88 $3.92 $3.82 $4.08 $3.95 $3.68 $3.95 $4.10
Income from
Investment
Operations:
Net Investment
Income........... $ .24 $ .24 $ .24 $ .21 $ .22 $ .24 $ .52 $ .29
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)...... .14 (.04) .08 (.25) .14 .28 (.24) (.14)
Total from
Investment
Operations...... $ .38 $ .20 $ .32 $(.04) $ .36 $ .52 $ .28 $ .15
Less Distributions:
Dividends (from net
investment
income).......... $(.24) $(.24) $(.22) $(.22) $(.23) $(.25) $(.55) $(.30)
Distributions (from
capital gains)...
---- ---- ---- ---- ---- ---- ---- ----
Total
Distributions... $(.24) $(.24) $(.22) $(.22) $(.23) $(.25) $(.55) $(.30)
Net Asset Value, End
of Period.......... $4.02 $3.88 $3.92 $3.82 $4.08 $3.95 $3.68 $3.95
Total Return........ 9.79% 5.10% 8.38% (.98)% 9.11% 14.13% 7.09% 3.66%
Ratios/Supplemental
Data:
Net Assets, End of
Period............. $10,634,720 $8,981,365 $7,977,781 $7,225,964 $7,229,959 $5,682,609 $4,793,766 $9,371,386
Ratio of Expenses to
Average Net
Assets............. .75% .90% 1.29% 1.30% 1.45% 1.50% 1.50% 1.50%
Ratio of Net
Investment Income
to Average Net
Assets........... 6.41% 6.32% 6.27% 5.45% 6.02% 6.42% 6.89% 7.45%
Portfolio Turnover
Rate............... 54% 34% 56% 58% 36% 50% 310% 186%
<CAPTION>
1989 1988
---------- ----------
<S> <<C> <C>
Net Asset Value,
Beginning of
Period............. $3.94 $3.99
Income from
Investment
Operations:
Net Investment
Income........... $ .30 $ .29
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)...... .14 (.06)
Total from
Investment
Operations...... $ .44 $ .23
Less Distributions:
Dividends (from net
investment
income).......... $(.28) $(.28)
Distributions (from
capital gains)... (.14)
---- ----
Total
Distributions... $(.28) $(.28)
Net Asset Value, End
of Period.......... $4.10 $3.94
Total Return........ 11.17% 9.27%
Ratios/Supplemental
Data:
Net Assets, End of
Period............. $8,317,356 $7,249,964
Ratio of Expenses to
Average Net
Assets............. 1.50% 1.50%
Ratio of Net
Investment Income
to Average Net
Assets........... 7.65% 7.23%
Portfolio Turnover
Rate............... 148% 130%
</TABLE>
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(1) 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> 7
SECURITY FIRST TRUST
VIRTUS 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 JULY 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993(1)
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................ $ 5.15 $ 5.13 $ 4.91 $ 5.07 $ 5.00
----------- ----------- ---------- ---------- ----------
Income From Investment Operations:
Net Investment Income............................. $ .23 $ .18 $ .21 $ .11 $ .03
Net Gains or (Losses) on Securities (both realized
and unrealized)................................. .20 .04 .15 (.19) .04
----------- ----------- ---------- ---------- ----------
Total From Investment Operations................ $ .43 $ .22 $ .36 $ (.08) $ .07
----------- ----------- ---------- ---------- ----------
Less Distributions:
Dividends (from Net Investment Income)............ (.22) (.19) (.14) (.07)
Distributions (from Capital Gains)................ (.01) (.01)
----------- ----------- ---------- ----------
Total Distributions............................. (.22) (0.2) (.14) (.08)
----------- ----------- ---------- ----------
Net Asset Value, End of Period...................... $ 5.36 $ 5.15 $ 5.13 $ 4.91 $ 5.07
=========== =========== ========== ========== ==========
Total Return(2)..................................... 8.35% 4.29% 7.33% (1.58)% 7.10%
Ratios/Supplemental Data:
Net Assets, End of Period........................... $28,889,460 $14,888,824 $5,996,149 $3,424,487 $ 469,060
Ratio of Expenses to Average Net Assets(2).......... .70% .70% .70% .70% .70%
Ratio of Net Investment Income to Average Net
Assets(2)......................................... 5.68% 5.38% 5.19% 3.62% 3.91%
Portfolio Turnover Rate............................. 62% 148% 16% 17% 0%
</TABLE>
- ---------------
(1) The Virtus 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.
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
Virtus 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
5
<PAGE> 8
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 T. Rowe Price Growth and Income Series.
Neuberger & Berman, Ltd.("Neuberger & Berman") is the subadviser to Security
Management with respect to the Bond Series. Virtus Capital Management, Inc.
("Virtus") is a sub-adviser to Security Management and provides investment
management services to the Virtus U.S. Government Income Series. (See
"Sub-Advisers", page 9).
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.
T. ROWE PRICE GROWTH AND INCOME SERIES
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objectives of the T. Rowe Price 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 T.
Rowe Price Growth and Income Series' shares will involve a preservation of
original capital or protection against loss of value.
The T. Rowe Price 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.
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 T. Rowe Price Growth and Income Series is intended
to follow a policy of flexibility. The T. Rowe Price 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.
6
<PAGE> 9
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 July 31, 1997,
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.
VIRTUS U.S. GOVERNMENT INCOME SERIES
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Virtus U.S. Government Income Series is to
provide current income. The investment objective cannot be changed without
approval of shareholders. The Virtus 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.
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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 Virtus 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 Virtus 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
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 Virtus
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 Virtus 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.
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<PAGE> 11
Lending of Portfolio Securities. In order to generate additional income,
the Virtus 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 T.
Rowe Price Growth and Income Series and Bond Series pursuant to a Master
Investment Management and Advisory Agreement dated October 30, 1997 and to the
Virtus U.S. Government Income Series pursuant to a Master Investment Management
and Advisory Agreement dated October 30, 1997 (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"), 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 a subsidiary of Metropolitan Life
Insurance Company, a New York life insurance company. Security Management is
affiliated with and investment adviser to Security First Life Insurance Company.
Security Management is registered as an investment adviser under the Investment
Advisers Act of 1940.
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: T. Rowe Price
Growth and Income Series .50%, Bond Series .50% and Virtus 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 October 30, 1997 respecting the T. Rowe
Price Growth and Income Series, a Sub-Advisory Agreement with Neuberger &
Berman, Ltd., dated October 30, 1997 respecting the Bond Series, and a
Sub-Advisory Agreement with
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<PAGE> 12
Virtus dated October 30, 1997 respecting the Virtus 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 $125 billion.
Price Associates is registered as an investment adviser under the Investment
Advisers Act of 1940.
Neuberger & Berman was founded in 1939 to manage assets for high net worth
individuals. It is an investment adviser registered as such with the Securities
and Exchange Commission ("SEC") under the Investment Advisers Act of 1940. It is
also registered with the SEC as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the New York Stock Exchange. Its offices are
located at 605 Third Avenue, New York, New York 10158. Currently, it provides
investment management services to a wide variety of clients, including
individuals, investment companies, pension and profit-sharing plans, trusts and
charitable organizations, and has approximately $46 billion in assets under its
management for clients, including approximately $11 billion under management by
its Fixed Income Group.
Virtus is a Maryland corporation with its principal offices located at 707
East Main Street, Suite 1300, Richmond, Virginia 23219. Signet Banking Corp., is
the sole stockholder of Virtus. Shares of the Virtus 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.
The parent of Virtus, Signet Banking Corp., has entered into a merger
agreement with First Union Corporation . As a result upon the close of this
transaction, the Sub-Advisory Agreement between Virtus and Security Management
will be deemed to have been assigned and thereby terminated. It is expected that
approval by shareholders of the Virtus U.S. Government Income Series will be
sought for a new Sub-Advisory Agreement with Virtus.
Under the Sub-Advisory Agreements, Price Associates, Neuberger & Berman 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 Agreements with Price Associates and Neuberger & Berman
provide that Security Management shall pay a sub-advisory fee at an annual rate
equal to 0.35% of the average daily net assets of the Series each 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 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
T. Rowe Price 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.
The principals of Neuberger & Berman that will have significant management
responsibilities for the Bond Series are Messrs. Theodore Giuliano and Martin
McKerrow, who are co-directors of Neuberger & Berman Fixed Income Group. Messrs.
Giuliano and McKerrow have been employed by Neuberger & Berman in the management
of fixed income securities since 1984.
L. Robert Cheshire is the portfolio manager of the Virtus U.S. Government
Income Series effective November 1997. He is newly employed by Virtus. He is
also employed by First Union Corporation ("First Union"). He joined First Union
(the Fidelity Bank) in 1990 as Vice President and Senior Portfolio Manager. He
is head of the Newark Taxable Fixed Income Unit and manages the Evergreen
Intermediate Term Government Securities Fund. Prior to joining First Union, Mr.
Cheshire was a Vice President at Shearson Lehman Hutton for eleven years in the
Asset Management Division and Government Securities.
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<PAGE> 13
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, 1997 the ratios of total expenses to
average net assets were: .57% for the T. Rowe Price Growth and Income Series,
.75% for the Bond Series and .70% for the Virtus 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 Virtus U.S. Government Income Series at a level of .70% or
less.
For the fiscal year ended July 31, 1997, Security Management earned
management fees of $225,438 from the T. Rowe Price Growth and Income Series and
$14,681 from the Bond Series.
In regard to the Virtus U.S. Government Income Series, for the fiscal year
ended July 31, 1997, Security Management earned advisory fees of $184,392
($30,776 after payment of subadvisory fees). Of this amount, Security Management
waived $70,100 ($522 after waiver of subadvisory fees). Virtus earned
subadvisory fees of $153,616 and of this amount, it waived $69,578.
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 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
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<PAGE> 14
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.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DISTRIBUTIONS BY SERIES
The present policy of the T. Rowe Price Growth and Income, Bond and Virtus
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.
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<PAGE> 15
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.
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, 1 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 Virtus 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
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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 Virtus 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 Virtus U.S.
Government Income Series does not anticipate that portfolio turnover will result
in adverse tax consequences. The Virtus 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......................................... 15
Principal Holders of Securities............................................... 21
Management of the Trust....................................................... 22
Brokerage..................................................................... 24
Portfolio Turnover............................................................ 27
Pricing and Redemption of Securities Being Offered............................ 27
Taxation...................................................................... 29
Bond Ratings.................................................................. 30
Commercial Paper Ratings...................................................... 32
Custodian..................................................................... 33
Independent Auditors.......................................................... 33
Federal Registration of Shares................................................ 33
Legal Counsel................................................................. 33
</TABLE>
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SECURITY FIRST TRUST
PROSPECTUS
- --------------------------------------------------------------------------------
VIRTUS EQUITY SERIES
VIRTUS 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 two separate series of shares, the Virtus Equity
Series and the Virtus 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 Virtus 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 Virtus 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.
- --------------------------------------------------------------------------------
IMPORTANT NOTICE
ANNUITIES, MUTUAL FUNDS, AND OTHER INVESTMENTS ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY. THEY ARE NOT DEPOSITS, OBLIGATIONS, OR GUARANTEED
BY ANY BANK. THEY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
Prospectus dated December 1, 1997 SIG (12/97)
<PAGE> 19
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Financial Information...................................................... 3
Series Performance................................................................... 4
The Trust............................................................................ 4
The Series........................................................................... 5
Investment Objectives and Policies................................................... 5
Virtus Equity Series................................................................. 5
Virtus U.S. Government Income Series................................................. 7
Management of the Trust.............................................................. 8
How to Buy and Redeem Shares......................................................... 10
Dividends, Distributions and Federal Taxes........................................... 11
Trust Shares......................................................................... 12
Effect of Banking Laws............................................................... 12
Portfolio Turnover................................................................... 13
Reports.............................................................................. 13
Legal Proceedings.................................................................... 13
</TABLE>
2
<PAGE> 20
SECURITY FIRST TRUST
VIRTUS 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 Year Ended Year Ended
July 31, 1997 July 31, 1996 July 31, 1995 July 31, 1994 July 31, 1993(1)
------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 6.05 $ 5.70 $ 4.99 $ 5.00 $ 5.00
----------- ----------- ----------- ----------- -----------
Income From Investment Operations:
Net Investment Income................ $ .09 $ .10 $ .05 $ .05 $ .01
Net Gains or (Losses) on Securities
(both realized and unrealized)..... $ 2.60 .46 71 (.03) (.01)
----------- ----------- ----------- ----------- -----------
Total From Investment Operations... $ 2.69 $ .56 $ .76 $ .02 $ .00
----------- ----------- ----------- ----------- -----------
Less Distributions:
Dividends (from Net Investment
Income)............................ (.11) (.05) (.05) (.03)
Distributions (from Capital Gains)... (.45) (.16)
----------- -----------
Total Distributions................ (.56) (.21) (.05) (.03)
----------- ----------- ----------- -----------
Net Asset Value, End of Period......... $ 8.18 $ 6.05 $ 5.70 $ 4.99 $ 5.00
=========== =========== =========== =========== ===========
Total Return(2)........................ 44.46 9.82% 15.23% .40% 0.00%
Ratios/Supplemental Data:
Net Assets, End of Period.............. $ 47,571,469 $ 20,701,776 $ 7,765,719 $ 3,007,073 $1,333,852
Ratio of Expenses to Average Net
Assets(2)............................ 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets(2)................ 1.50% 2.24% 1.29% 1.38% .85%
Portfolio Turnover Rate................ 55% 88% 84% 121% 7%
Average Commission Rate Paid........... .02
</TABLE>
- ---------------
(1) The Virtus Equity Series commenced operations on May 19, 1993.
(2) Annualized.
3
<PAGE> 21
SECURITY FIRST TRUST
VIRTUS 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 Year Ended Year Ended
July 31, 1997 July 31, 1996 July 31, 1995 July 31, 1994 July 31, 1993(1)
------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 5.15 $ 5.13 $ 4.91 $ 5.07 $ 5.00
----------- ----------- ----------- ----------- -----------
Income From Investment Operations:
Net Investment Income................ $ .23 $ .18 $ .21 $ .11 $ .03
Net Gains or (Losses) on Securities
(both realized and unrealized)..... .20 .04 .15 (.19) .04
----------- ----------- ----------- ----------- -----------
Total From Investment Operations... $ .43 $ .22 $ .36 $ (.08) $ .07
----------- ----------- ----------- ----------- -----------
Less Distributions:
Dividends (from Net Investment
Income)............................ (.22) (.19) (.14) (.07)
Distributions (from Capital Gains)... (.01) (.01)
----------- ----------- ----------- -----------
Total Distributions................ (.22) (.20) (.14) (.08)
----------- ----------- ----------- -----------
Net Asset Value, End of Period......... $ 5.36 $ 5.15 $ 5.13 $ 4.91 $ 5.07
=========== =========== =========== =========== ===========
Total Return(2)........................ 8.35% 4.29% 7.33% (1.58)% 7.10%
Ratios/Supplemental Data:
Net Assets, End of Period.............. $ 28,889,460 $ 14,888,824 $ 5,996,149 $ 3,424,487 $469,060
Ratio of Expenses to Average Net
Assets(2) .70% .70% .70% .70% .70%
Ratio of Net Investment Income to
Average Net Assets(2)................ 5.68% 5.38% 5.19% 3.62% 3.91%
Portfolio Turnover Rate................ 62% 148% 16% 17% 0%
</TABLE>
- ---------------
(1) The Virtus 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.
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
4
<PAGE> 22
value, fully paid, fully transferable and redeemable at the option of the
shareholder. Pursuant to this authority, the Board of Trustees established the
Virtus Equity Series and the Virtus 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 Virtus
Equity Series and the Virtus 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.
VIRTUS EQUITY SERIES
INVESTMENT OBJECTIVE
The investment objective of the Virtus 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.
INVESTMENT POLICIES
The Virtus Equity Series is managed to take advantage of trends in the stock
market that favor different styles of stock selection (value or growth) and
different sizes of companies (consisting of large, medium and small). The value
style seeks stocks that, in the opinion of the advisor, are undervalued and are
or will be worth more than their current price. The growth style seeks stocks
with higher earnings growth rates which, in the opinion of the advisor will lead
to appreciation in stock price. Unless indicated otherwise, the investment
policies (but not the investment objectives) of the Series may be changed by the
Trustees without the approval of the contractholders. Contractholders will be
notified before any material change in these policies becomes effective.
Acceptable Investments. The securities in which the Virtus Equity Series
invests include but are not limited to the following securities.
Common Stocks. At least 65% of the Series' portfolio will be invested in
common stocks, unless it is in a defensive position. The sub-advisor will
consider factors such as revenues, product position, market share, potential
earnings growth or asset values in making stock selections.
Other Corporate Securities. The Virtus Equity Series may invest in
preferred stocks, corporate bonds, notes, warrants, rights, and convertible
securities of these companies.
Commercial Paper. The Virtus 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
5
<PAGE> 23
instruments (including commercial paper) which are unrated but of comparable
quality, including Canadian Commercial Paper ("CCPs") and Europaper.
Bank Instruments. The Virtus 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 Virtus 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 Virtus 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 Virtus 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 has segregated cash or U.S. government
securities in the amount of any additional consideration.
The Virtus 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 Virtus 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 Virtus 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 Virtus 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 Virtus 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
6
<PAGE> 24
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 Virtus 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.
VIRTUS U.S. GOVERNMENT INCOME SERIES
INVESTMENT OBJECTIVE
The investment objective of the Virtus 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.
INVESTMENT POLICIES
The Virtus 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 Virtus 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
7
<PAGE> 25
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 Virtus 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
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 Virtus
U.S. Government Income Series invests may be purchased pursuant to repurchase
agreements. For a discussion of repurchase agreements, see "Virtus Equity
Series -- Repurchase Agreements", page 6.
When-Issued and Delayed Delivery Transactions. The Virtus 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 "Virtus
Equity Series -- When-Issued and Delayed Delivery Transactions", page 7.
Lending of Portfolio Securities. In order to generate additional income,
the Virtus U.S. Government Income Series may lend portfolio securities subject
to the same limitations as those applicable to the Virtus Equity Series'
portfolio lending activities (see "Virtus Equity Series -- Lending of Portfolio
Securities", page 6.
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 October 30, 1997. Security Management, a
Delaware corporation, is a subsidiary of Security First Group, Inc. ("SFG") 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 a subsidiary of Metropolitan Life
Insurance Company, a New York life insurance company. Security Management is
affiliated with and investment adviser to Security First Life Insurance Company.
Security Management is registered as an investment adviser under the Investment
Advisers Act of 1940.
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
8
<PAGE> 26
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 Agreement, Security Management receives an advisory fee
from each Series described herein at the following annual rates: Virtus Equity
Series .90%, and Virtus 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, dated October 30,
1997 with Virtus, with respect to the Series. Virtus is a Maryland corporation
with its principal offices located at 707 East Main Street, Suite 1300,
Richmond, Virginia 23219. Virtus is a wholly owned subsidiary of Signet Banking
Corp. Shares of the Virtus Equity Series and the Virtus U.S. Government Income
Series are not deposits of, or endorsed or guaranteed by, Signet Banking Corp.
or its affiliates, and are not federally insured.
The parent of Virtus, Signet Banking Corp., has entered into a merger
agreement with First Union Corporation. As a result, upon the close of this
transaction, the Sub-Advisory Agreement between Virtus and Security Management
will be deemed to have been assigned and thereby terminated. It is expected that
approval by shareholders of the Virtus U.S. Government Income Series and the
Virtus Equity Series will be sought for a new Sub-Advisory Agreement with
Virtus.
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
Tanya Orr Bird joined Virtus in 1994. She has been managing the Virtus
Equity Series since March, 1996. Tanya co-manages two other Virtus mutual funds
and a number of institutional separate accounts. Prior to joining Virtus
Capital, she worked as an Investment Consultant for five years. Tanya is a
Chartered Financial Analyst with a B.S. in Mathematics from the University of
Pittsburgh and an MBA from The College of William and Mary.
L. Robert Cheshire is the portfolio manager of the Virtus U.S. Government
Income Series effective November 1997. He is newly employed by Virtus. He is
also employed by First Union Corporation ("First Union"). He joined First Union
(the Fidelity Bank) in 1990 as Vice President and Senior Portfolio Manager. He
is head of the Newark Taxable Fixed Income Unit and manages the Evergreen
Intermediate Term Government Securities Fund. Prior to joining First Union, Mr.
Cheshire was a Vice President at Shearson Lehman Hutton for eleven years in the
Asset Management Division and Government Securities.
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.
For the fiscal year ended July 31, 1997 the ratios of total expenses to
average net assets were: 1.00% for the Virtus Equity Series and .70% for the
Virtus 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
9
<PAGE> 27
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 Virtus Equity and the Virtus U.S. Government Income Series at a
level of 1.00% and .70% respectively, or less.
In regard to the Virtus Equity Series, for the fiscal year ended July 31,
1997, Security Management earned advisory fees of $277,576 ($46,763 after
payment of subadvisory fees). Of this amount, Security Management waived $14,845
($816 after waiver of subadvisory fees). Virtus earned subadvisory fees of
$233,813 and of this amount, it waived $14,845.
In regard to the Virtus U.S. Government Income Series, for the fiscal year
ended July 31, 1997, Security Management earned advisory fees of $184,392
($30,776 after payment of subadvisory fees). Of this amount, Security Management
waived $69,578 ($522 after waiver of subadvisory fees). Virtus earned
subadvisory fees of $153,616 and of this amount, it waived $69,578.
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 Virtus Equity Series
and the Virtus 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.
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.
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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 Virtus Equity Series and the Virtus 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 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
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<PAGE> 29
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, 1 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 Virtus Equity Series and the Virtus 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.
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<PAGE> 30
PORTFOLIO TURNOVER
The Virtus 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 Virtus engaged in by
the Virtus 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 Virtus U.S. Government Income Series does not anticipate that
portfolio turnover will result in adverse tax consequences. The Virtus 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> 32
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
BOND SERIES
VIRTUS 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, 1997, 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, 1997.
<PAGE> 33
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 30
Custodian 31
Independent Auditors 31
Federal Registration of Shares 31
Legal Counsel 31
</TABLE>
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<PAGE> 34
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 T. Rowe Price Growth and Income Series, the Bond
Series and the Virtus 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> 35
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.
T. ROWE PRICE GROWTH AND INCOME SERIES
The following investment policies of the T. Rowe Price 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 T. Rowe Price 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
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<PAGE> 36
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 carrying warrants to purchase common stock or other equity
interests. The T. Rowe Price 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 T. ROWE PRICE GROWTH AND INCOME SERIES
As matters of fundamental investment policy, the T. Rowe Price 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
5
<PAGE> 37
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 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
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<PAGE> 38
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 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. 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
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<PAGE> 39
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 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
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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.
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.
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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
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.
VIRTUS U.S. GOVERNMENT INCOME SERIES
The Virtus 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.
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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.
When-Issued and Delayed Delivery Transactions -- These transactions are
arrangements in which the Virtus 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
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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
Bond 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 VIRTUS U.S. GOVERNMENT INCOME SERIES
The investment restrictions of the Bond 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
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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 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
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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 Virtus 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 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).
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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 T. Rowe Price 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 T. Rowe Price 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 T. Rowe Price Growth and Income; Neuberger & Berman, the sub-advisor to
the Bond Series; and Virtus Capital Management ("Virtus") the sub-adviser to
Security Management for the Virtus U.S. Government Income Series.
SECURITY MANAGEMENT AND THE ADVISORY AGREEMENTS
Security Management serves as the investment adviser to the T. Rowe
Price Growth and Income Series, the Bond Series and the Virtus U.S. Government
Income Series of the Trust pursuant to a Master Investment Management and
Advisory Agreement dated October 30, 1997 (the "Advisory Agreement"). 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. Security Management and Security First Group, Inc. maintain their
principal places of business at 11365 West Olympic Boulevard, Los
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Angeles, California 90064. The common stock of Security First Group is
currently wholly owned by a subsidiary of Metropolitan Life Insurance Company, a
New York life insurance company. Security Management also acts as investment
adviser to an affiliated insurance company, Security First Life Insurance
Company.
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 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. 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 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, 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 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 Agreement.
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For its services to the T. Rowe Price 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 Virtus 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 Agreement 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 Virtus 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.
For the fiscal years ended July 31, 1997, 1996 and 1995 management
fees of $225,438, $150,392, and $109,066 were paid by the T. Rowe Price Growth
and Income Series to Security Management.
During the fiscal years ended July 31, 1997, 1996 and 1995, management
fees in the amount of $14,681, $12,950 and $10,939 were earned by Security
Management from the Bond Series.
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During the fiscal year ended July 31, 1997 Security Management earned a
management fee of $30,776 from the Virtus U.S. Government Income Series, but
waived $522 pursuant to the Advisory Agreement. During the fiscal year ended
July 31, 1996, Security Management earned a management fee of $15,090 from the
Series, but waived $295 pursuant to the Advisory Agreement. During the fiscal
year ended July 31, 1995, Security Management earned a management fee of $7,034
from the Series, but waived $3,216 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 T. Rowe Price Growth and Income Series pursuant to a Sub-Advisory
Agreement (the "Price Sub-Advisory Agreement") dated October 30, 1997. 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 in approximately $125 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 T. Rowe Price Growth and Income Series.
Price Associates has the discretion to purchase or sell securities on behalf 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
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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 the T. Rowe Price Growth and Income Series. Such compensation is
accrued daily and payable monthly.
For the fiscal years ended July 31, 1997, 1996 and 1995, Price
Associates received advisory fees from the T. Rowe Price Growth and Income
Series of $526,023, $351,274 and $255,372, respectively. For the fiscal years
ended July 31, 1997, 1996 and 1995, the ratios of total expenses to average
net assets for this Series were .57%, .64%, and .74%, 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.
NEUBERGER & BERMAN AND NEUBERGER & BERMAN SUB-ADVISORY AGREEMENT
Neuberger & Berman was founded in 1939 to manage assets for high net
worth individuals. It is an investment adviser registered as such with the
Securities and Exchange Commission ("SEC") under the Investment Advisers Act
of 1940. It is also registered with the SEC as a broker-dealer under the
Securities Exchange Act of 1934, and is a member of the New York Stock Exchange.
Its offices are located at 605 Third Avenue, New York, New York 10158.
Currently, it provides investment management services to a wide variety of
clients, including individuals, investment companies, pension and
profit-sharing plans, trusts and charitable organizations, and has
approximately $46 billion in assets under its management for clients,
including approximately $11 billion under management by its Fixed Income Group.
Under the Neuberger & Berman Sub-Advisory Agreement, dated October 30,
1997 Neuberger & Berman provides investment management services to the Bond
Series. Neuberger & Berman has the discretion to purchase or sell securities on
behalf 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, Neuberger & Berman 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 Neuberger & Berman Sub-Advisory Agreement provides that Neuberger
& Berman, 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 Neuberger & Berman Sub-Advisory Agreement.
For its services, Neuberger & Berman receives a fee from Security
Management computed by using an annual rate of .35% based on the average daily
net assets of the Bond Series. Such compensation is accrued daily and payable
monthly.
Neuberger & Berman began providing sub-advisory services to the Bond
Series on July 15, 1997. In the fiscal year ended July 31, 1997, Neuberger &
Berman received advisory fees of $1,798.
The Neuberger & Berman 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 the Bond 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 Neuberger &
Berman Sub-Advisory Agreement must be approved by a majority of the Trust's
independent Trustees. The Neuberger & Berman 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.
VIRTUS AND THE VIRTUS SUB-ADVISORY AGREEMENT
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Virtus serves as sub-adviser to Security Management with respect to the
Virtus U.S. Government Income Series pursuant to a sub-advisory agreement (the
"Virtus Sub-Advisory Agreement") dated October 30, 1997. Signet Banking Corp.,
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. 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 Virtus 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 Agreement",
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 Virtus 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
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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, 1997, Virtus earned a
sub-advisory fee of $153,616 from the Virtus U.S. Government Income Series, but
waived $69,578 in accordance with the sub-advisory agreement. During the fiscal
year ended July 31, 1996, Virtus earned a sub-advisor fee of $75,451 from the
Series, but waived $43,033 pursuant to the Sub-Advisory Agreement. During the
fiscal year ended July 31, 1995, Virtus earned a sub-advisor fee of $35,172 from
the Series, but waived $28,809 pursuant to the 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, the depositors of which is the
Security First Life Insurance Company, has entered into participation agreements
with the Trust for the purchase of Series shares at net asset value. As of July
31, 1997, Security First Life Separate Account A was the owner of 99.98% of the
outstanding shares of Bond Series, 99.98% of the outstanding shares of the T.
Rowe Price Growth & Income Series and 100% of the outstanding shares of the
Virtus U.S. Government Income Series. The address of Security First Life
Separate Account A the depositor, Security First Life Insurance Company, is
11365 West Olympic Boulevard, Los Angeles, California 90064.
MANAGEMENT OF THE TRUST
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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.
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
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also Senior Vice President, General Counsel and Secretary of
Security Management. Mr. Turner is also Vice President, Taxation and Assistant
Secretary of Security Management.
* There is one vacant position as Trustee of the Trust.
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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 Agreements, Price Associates, Neuberger & Berman 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', Neuberger & Berman's 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 and with the
exception of the Bond Series advised by Neuberger & Berman, 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, Neuberger & Berman, 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, Neuberger & Berman or Virtus by or through broker-dealers.
Price Associates, Neuberger & Berman 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 concession
paid by the issuer
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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, Neuberger & Berman 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',
Neuberger & Berman'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, Price Associates, Neuberger & Berman
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, Neuberger & Berman 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 Neuberger &
Berman 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, Neuberger & Berman and
Virtus in serving their other clients, but they can also be useful in serving
the Trust.
Security Management, Price Associates, Neuberger & Berman 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', Neuberger & Berman's or Virtus's other
clients have investment objectives and programs similar to one or more of the
Series. They 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', Neuberger & Berman's and
Virtus's policy not to
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favor one client over another in making recommendations or in placing orders. If
two or more clients are purchasing or selling a given security on the same day
from or to the same broker-dealer, the advisor 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,
Neuberger & Berman and Virtus according to the foregoing policies. The T. Rowe
Price Growth and Income Series paid brokerage commissions to securities dealers
in connection with underwritings during the fiscal years ended July 31, 1997,
1996 and 1995 of $74,367, $51,969 and $17,878, respectively. The Bond Series
and Virtus 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 T. Rowe Price Growth and Income Series for the fiscal
years ended July 31, 1997, 1996 and 1995 were 14%, 8% and 8%, respectively. The
portfolio turnover rates for the Bond Series for the fiscal years ended July 31,
1997, 1996 and 1995 were 54%, 34% and 56%, respectively. The portfolio turnover
rates for the Virtus U.S. Government Income Series for the fiscal years ended
July 31, 1997, 1996, and 1995 were 62%, 148% and 16%, respectively.
High portfolio turnover involved 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, qualified as such under the Internal Revenue Code ("Code"),
however, 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.
T. ROWE PRICE 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.
VIRTUS 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 (repealed effective for tax
years beginning after August 5, 1997), 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
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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 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 has a very strong capacity to pay interest and repay
principal, and differs 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"), 1 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 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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Rule 497(c)
'33 Act File No. 2-51173
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
VIRTUS 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, 1997, 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, 1997.
<PAGE> 66
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 Virtus Equity Series and the Virtus U.S. Government Income Series
(formerly 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
VIRTUS EQUITY SERIES
The Virtus 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 Virtus 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 Virtus 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 Virtus
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 Virtus Equity 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 Virtus 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 Virtus Equity 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 "Virtus 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 Virtus 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.
VIRTUS U.S. GOVERNMENT INCOME SERIES
The Virtus 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 Virtus
U.S. Government Income Series may also engage in these investment techniques,
which are described above under "Virtus 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.
Virtus Equity Series
Virtus 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 Virtus 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 Virtus Equity and Virtus 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 Virtus 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 Virtus Equity Series and the Virtus U.S.
Government Income Series, and Virtus Capital Management, Inc. ("Virtus"), the
sub-adviser to Security Management for these Series.
SECURITY MANAGEMENT AND THE ADVISORY AGREEMENT
Security Management serves as investment adviser to the Virtus Equity
and Virtus U.S. Government Income Series pursuant to a Master Investment
Management and Advisory Agreement ("Advisory Agreement") dated October 30, 1997.
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. 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 a
subsidiary of Metropolitan Life Insurance Company, a New York life insurance
company. Security Management also acts as investment adviser to an affiliated
life insurance company, Security First Life Insurance Company. Security
Management serves as investment adviser to other series of the Trust.
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 Virtus Equity and Virtus 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, 1997, Security Management earned
a management fee of $46,763 from the Virtus Equity Series, but waived $816
pursuant to the Advisory Agreement.
During the fiscal year ended July 31, 1997, Security Management earned
a management fee of $30,776 from the Virtus U.S. Government Income Series, but
waived $522 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
Virtus Equity and Virtus U.S. Government Income Series pursuant to a
Sub-Advisory Agreement ("Sub-Advisory Agreement") dated October 30, 1997. Signet
Banking Corp. is the sole stockholder of Virtus. 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 7 North Eighth Street, 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 Virtus
Equity and the Virtus 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 Virtus Equity Series and Virtus 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, 1997, Virtus earned a sub-advisor
fee of $233,813 from the Virtus Equity Series, but waived $14,845 pursuant to
the Sub-Advisory Agreement, and it earned a sub-advisor fee of $153,616 from the
U.S. Government Income Series, but waived $69,578 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.
The parent of Virtus, Signet Banking Corp., has entered into a merger
agreement with First Union Corporation. As a result, upon the close of this
transaction, the Sub-Advisory Agreement between Virtus and Security Management
will be deemed to have been assigned and thereby terminated. It is expected
that approval by shareholders of the Virtus U.S. Government Income Series and
the Virtus Equity Series will be sought for a new Sub-Advisory Agreement with
Virtus.
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, 1997, Security
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First Life Separate Account A was the owner of 100% of the outstanding shares of
the Virtus Equity Series and 100% of the outstanding shares of the Virtus 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.
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.
- -----------------
* There is one vacant position as Trustee of the Trust.
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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, 1997, 1996 and 1995, the Virtus Equity
Series paid brokerage commissions to securities dealers in the amounts of
$13,361, $51,605 and $22,760, respectively. The Virtus U.S. Government Income
Series paid no brokerage commissions or discounts to securities dealers for the
fiscal years ended July 31, 1997, 1996 and 1995.
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 Virtus Equity Series for the fiscal years ended
July 31, 1997, 1996 and 1995 were 55%, 88% and 84%, respectively. The portfolio
turnover rates for the Virtus U.S. Government Income Series for the fiscal years
ended July 31, 1997, 1996 and 1995 were 62%, 148% and 16%, 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.
VIRTUS EQUITY AND VIRTUS 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 (repealed effective for tax
years beginning after August 5, 1997), 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
25
<PAGE> 90
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> 91
CUSTODIAN
The Bank of New York (the "Custodian"), 1 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 30 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 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> 92
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 the Security First Trust's Bond Series, T.
Rowe Price Growth and Income Series, Virtus Equity Series, and Virtus U.S.
Government Income Series as of July 31, 1997, the related statement of
operations and the change 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, 1997, 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 the Security First Trust's
Bond Series, T. Rowe Price Growth and Income Series, Virtus Equity Series, and
Virtus U.S. Government Income Series as of July 31, 1997, the results of their
operations and the changes in their net assets for each of the periods
indicated in conformity with generally accepted accounting principles.
September 17, 1997
Los Angeles, California
<PAGE> 93
SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1997
<TABLE>
<CAPTION>
T. Rowe Price Virtus
Growth and Virtus U.S.Government
Income Equity Income
Bond Series Series Series Series
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments at market - Note A
and Schedule I:
Investment securities (cost:
Bond Series - $9,573,049; Growth
and Income Series - $137,932,607;
Equity Series - $35,054,331;
U.S. Government Income Series -
$27,465,189) $ 9,840,004 $ 203,089,226 $ 45,690,443 $ 27,877,589
Cash 605,734 1,443,948 1,823,022 645,701
Interest receivable 136,080 4,516 6,937 384,351
Dividends receivable 340,007 72,786
Receivable for securites sold 264 6,436
Receivable for capital shares purchased 66,781 421,389 13,196 3,768
Prepaid insurance 607 11,573 2,667 1,637
------------- ------------- ------------- -------------
10,649,470 205,310,659 47,609,051 28,919,482
LIABILITIES
Payable for securities purchased 499,919
Accrued expenses 11,250 44,902 13,382 11,355
Payable for capital shares redeemed 980 11,641
Payable to investment adviser - Note B 3,103 58,484 22,709 6,673
Payable for directors fees 397 4,256 511 353
------------- ------------- ------------- -------------
14,750 607,561 37,582 30,022
NET ASSETS
Composed of:
Capital shares (authorized
100,000,000 shares of $.01 par
value for each series) 10,142,076 126,295,340 35,737,755 27,761,358
Undistributed net investment income 365,111 2,268,916 293,831 767,587
Undistributed net realized gain (loss) (139,422) 10,982,223 903,771 (51,885)
Net unrealized appreciation of
investments 266,955 65,156,619 10,636,112 412,400
------------- ------------- ------------- -------------
Net assets $ 10,634,720 $ 204,703,098 $ 47,571,469 $ 28,889,460
============= ============= ============= =============
Capital shares outstanding 2,648,013 12,588,079 5,816,681 5,387,452
Net asset value per share $ 4.02 $ 16.26 $ 8.18 $ 5.36
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 94
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
T. Rowe Price Virtus
Growth and Virtus U.S.Government
Income Equity Income
Bond Series Series Series Series
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 3,063,055 $ 746,573
Interest $ 695,889 1,445,915 50,572 $ 1,313,061
Miscellaneous income 518 240 252
------------ ------------ ------------ ------------
696,407 4,509,210 797,397 1,313,061
EXPENSES
Custodian fees 15,778 29,641 15,554 8,833
Adviser fees - Note B 34,257 526,023 233,813 153,616
Management fees - Note B 14,681 225,438 46,763 30,776
Printing expenses 2,010 28,695 7,682 8,069
Audit fees 2,115 4,159 5,000 2,772
Insurance expenses 1,143 15,395 2,903 1,940
Directors' fees and expenses 1,876 27,800 5,649 3,699
Taxes, licenses and fees 874 879 874 874
Miscellaneous expenses 225 8,795 2,575
------------ ------------ ------------ ------------
72,734 858,255 327,033 213,154
Less: Waiver of management fees (816) (522)
Waiver of adviser fees (14,845) (69,578)
------------ ------------ ------------ ------------
72,734 858,255 311,372 143,054
------------ ------------ ------------ ------------
Net investment income 623,673 3,650,955 486,025 1,170,007
NET REALIZED AND UNREALIZED GAINS
ON INVESTMENTS - Notes A and C
Net realized gain on sale of investments 94,297 12,767,189 1,259,322 54,633
Net unrealized appreciation of
investments during the year 226,803 38,374,380 11,009,490 508,296
------------ ------------ ------------ ------------
Net gain on investments 321,100 51,141,569 12,268,812 562,929
------------ ------------ ------------ ------------
Increase in net assets
resulting from operations $ 944,773 $ 54,792,524 $ 12,754,837 $ 1,732,936
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 95
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
T. Rowe Price Virtus
Growth and Virtus U.S.Government
Income Equity Income
Bond Series Series Series Series
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 623,673 $ 3,650,955 $ 486,025 $ 1,170,007
Net realized gain on sale of investments 94,297 12,767,189 1,259,322 54,633
Net unrealized appreciation of
investments during the year 226,803 38,374,380 11,009,490 508,296
------------- ------------- ------------- -------------
Increase in net assets
resulting from operations 944,773 54,792,524 12,754,837 1,732,936
Distributions to shareowners from:
Net investment income (584,627) (2,941,810) (439,597) (779,578)
Net realized gains (5,408,660) (1,801,912)
Capital share transactions - Note D:
Reinvestment of net investment income
distributed 584,627 2,941,810 439,597 779,578
Reinvestment of net realized gains
distributed 5,408,660 1,801,912
Sales of capital shares 2,732,192 45,115,260 15,570,582 13,139,907
Redemptions of capital shares (2,023,610) (7,757,579) (1,455,726) (872,207)
------------- ------------- ------------- -------------
Increase in net assets from
capital share transactions 1,293,209 45,708,151 16,356,365 13,047,278
------------- ------------- ------------- -------------
Total increase in net assets 1,653,355 92,150,205 26,869,693 14,000,636
Net Assets:
Beginning of year 8,981,365 112,552,893 20,701,776 14,888,824
------------- ------------- ------------- -------------
End of year (including undistributed net
investment income: Bond Series -
$365,111; Growth and Income
Series - $2,268,916; Equity
Series - $293,831; U.S. Government
Income Series - $767,587) $ 10,634,720 $ 204,703,098 $ 47,571,469 $ 28,889,460
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 96
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
T. Rowe Price Virtus
Growth and Virtus U.S.Government
Income Equity Income
Bond Series Series Series Series
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 544,363 $ 2,733,038 $ 321,275 $ 543,959
Net realized gain (loss) on sale of 36,467 3,625,576 1,781,966 (56,907)
investments
Net unrealized appreciation (depreciation)
of investments during the year (193,455) 8,923,218 (1,223,826) (143,327)
-------------- -------------- -------------- --------------
Increase in net assets
resulting from operations 387,375 15,281,832 879,415 343,725
Distributions to shareowners from:
Net investment income (494,898) (2,489,944) (115,461) (326,728)
Net realized gains (351,978) (328,664) (22,717)
Capital share transactions - Note D:
Reinvestment of net investment income
distributed 494,898 2,489,944 115,461 326,728
Reinvestment of net realized gains
distributed 351,978 328,664 22,717
Sales of capital shares 2,367,725 20,549,022 12,488,481 8,862,888
Redemptions of capital shares (1,751,516) (7,067,607) (431,839) (313,938)
-------------- -------------- -------------- --------------
Increase in net assets from
capital share transactions 1,111,107 16,323,337 12,500,767 8,898,395
-------------- -------------- -------------- --------------
Total increase in net assets 1,003,584 28,763,247 12,936,057 8,892,675
Net Assets:
Beginning of year 7,977,781 83,789,646 7,765,719 5,996,149
-------------- -------------- -------------- --------------
End of year (including undistributed net
investment income: Bond Series -
$326,064; Growth and Income
Series - $1,559,772; Equity
Series - $247,404; U.S. Government
Income Series - $377,157) $ 8,981,365 $ 112,552,893 $ 20,701,776 $ 14,888,824
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 97
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CORPORATE NOTES 25.4%
Aerospace and Defense: 0.6%
Boeing Co., 8.75%, 08/15/21 $ 50,000 $ 61,688
--------
61,688
Automobiles and Related: 1.7%
Ford Motor Credit, 9.50%, 04/15/00 50,000 54,188
GMAC Corporate Bond, 9.63%, 12/15/01 100,000 112,500
--------
166,688
Banking: 5.7%
Banc One Corp., 7.75%, 07/15/25 300,000 322,875
HSBC Fin Nederland Bank, 7.40%, 04/15/03 100,000 103,250
National Australia Bank, 9.70%, 10/15/98 125,000 130,469
--------
556,594
Electric and Electronic Equipment: 2.4%
General Electric Capital, 9.38%, 10/06/98 125,000 130,271
Honeywell, Inc., 6.60%, 04/15/01 100,000 101,375
--------
231,646
Electric Utilities: 2.0%
National Rural Utilities, 6.50%, 09/15/02 100,000 101,250
Public Service Electric & Gas Co., 6.25%, 01/01/07 100,000 98,000
--------
199,250
Finance and Credit: 2.6%
Commercial Credit Group, 9.60%, 05/15/99 50,000 53,062
Margaretten Financial, 6.75%, 06/15/00 100,000 101,125
Standard Credit Card, 7.25%, 04/07/08 100,000 105,294
--------
259,481
Forest Products: 1.1%
Noranda Forest, Inc., 7.50%, 07/15/03 100,000 104,500
</TABLE>
13
<PAGE> 98
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CORPORATE NOTES
(CONTINUED)
Insurance Carriers: 1.0%
Prudential Insurance Co.
America, 6.88%, 04/15/03 $ 100,000 $ 101,125
Media and Communications: 0.5%
News American Holdings Inc., 7.50%, 03/01/00 50,000 51,563
Oil and Gas Extraction: 1.0%
Quaker State Corp., 6.63%, 10/15/05 100,000 99,875
Security and Commodity Brokers and Services: 4.4%
Lehman Brothers, 8.50%, 05/01/07 100,000 112,000
Smith Barney Inc., 7.38%, 05/15/07 300,000 314,625
---------
426,625
Telephone Communication: 2.4%
GTE Corp., 8.85%, 03/01/98 50,000 50,850
Rochester Telephone, 8.77%, 04/16/01 100,000 107,875
U.S. West Communications, 7.50%, 06/15/23 80,000 81,200
---------
239,925
---------
TOTAL CORPORATE NOTES
(COST $2,418,889) 2,498,960
FEDERAL AGENCIES 27.1%
Federal Home Loan Bank: 2.7%
5.43%, 02/25/99 75,000 74,730
5.50%, 01/10/01 200,000 197,164
---------
271,894
</TABLE>
14
<PAGE> 99
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
FEDERAL AGENCIES
(CONTINUED)
Federal Home Loan Mortgage Corp.: 3.0%
7.13%, 07/21/99 $ 235,000 $ 240,894
9.00%, 01/01/17 3,456 3,675
9.50%, 04/01/19 33,602 35,954
9.00%, 06/01/19 14,175 15,074
------
295,597
Federal National Mortgage Assn.: 2.0%
8.35%, 11/10/99 175,000 184,394
7.50%, 08/25/21 9,069 9,031
-----
193,425
Government National Mortgage Assn.: 19.4%
7.50%, 10/15/23 245,924 250,379
7.50%, 06/15/23 141,713 144,281
7.00%, 01/15/24 173,715 174,203
9.50%, 01/15/25 52,147 56,497
9.50%, 05/15/25 42,745 46,525
9.00%, 04/15/09 4,617 4,887
9.00%, 05/15/09 23,103 24,453
9.00%, 05/15/09 6,703 7,094
9.00%, 05/15/09 8,063 8,534
9.00%, 05/15/09 4,037 4,273
9.00%, 05/15/09 3,511 3,716
9.00%, 05/15/09 17,729 18,764
11.25%, 07/15/13 1,587 1,775
10.00%, 08/15/16 39,834 43,755
10.00%, 06/15/17 28,196 30,971
10.00%, 11/15/17 33,622 36,931
11.50%, 11/15/15 71,152 80,802
10.00%, 03/15/20 58,410 64,159
11.50%, 02/15/18 10,590 12,027
10.00%, 03/15/19 56,447 62,003
11.25%, 09/15/15 82,908 92,701
9.25%, 05/15/20 30,671 32,760
</TABLE>
15
<PAGE> 100
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
FEDERAL AGENCIES
(CONTINUED)
9.25%, 07/15/17 $ 57,810 $ 61,748
9.25%, 01/15/20 31,744 33,906
9.25%, 01/15/21 33,025 35,275
9.25%, 09/15/21 26,546 28,355
9.25%, 06/15/21 63,744 68,087
9.25%, 04/15/21 74,673 79,760
9.25%, 07/15/21 42,368 45,254
7.00%, 03/15/24 161,655 162,110
9.25%, 05/15/21 90,713 96,892
7.00%, 08/15/23 93,211 93,472
---------
1,906,349
---------
TOTAL FEDERAL AGENCIES
(COST $2,598,205) 2,667,265
U.S. GOVERNMENT OBLIGATIONS 42.7%
U.S. Treasury Bonds: 11.4%
8.75%, 08/15/20 100,000 128,545
8.00%, 11/15/21 150,000 179,780
7.25%, 08/15/22 250,000 277,003
6.88%, 08/15/25 500,000 534,150
---------
1,119,478
U.S. Treasury Notes: 31.3%
3.38%, 01/15/07 250,000 245,938
6.63%, 04/30/02 475,000 489,022
6.38%, 05/15/99 1,000,000 1,010,860
7.75%, 11/30/99 15,000 15,644
5.63%, 11/30/00 550,000 546,903
7.00%, 07/15/06 100,000 106,418
6.50%, 10/15/06 650,000 669,877
---------
3,084,662
---------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $4,086,316) 4,204,140
---------
TOTAL FIXED MATURITIES
(COST $9,103,410) 9,370,365
</TABLE>
16
<PAGE> 101
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Short Term Investments Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 4.8%
Commercial Paper: 4.3%
Abbott Laboratories, 5.50%, 08/06/97 $ 125,000 $ 124,904
Ciesco, 5.50%, 08/05/97 300,000 299,816
------------
424,720
Federal Home Loan Mortgage Corp.: 0.5%
5.36%, 08/13/97 45,000 44,919
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $469,639) 469,639
------------
TOTAL INVESTMENTS
(COST $9,573,049) 100.0% 9,840,004
Other assets less liabilities 794,716
------------
NET ASSETS $ 10,634,720
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 102
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 6.4%
Electrical Equipment: 4.7%
General Electric Co. 50,000 $ 3,506,250
Honeywell, Inc. 30,000 2,240,625
Hubbell, Inc. Class B 40,000 1,902,500
Westinghouse Electric Corp. 75,000 1,804,688
---------
9,454,063
Machinery: 1.7%
Coltec Industries, Inc.* 50,000 1,100,000
Pall Corp. 100,000 2,512,500
---------
3,612,500
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Ford Motor Co. 22,857 934,280
CONSUMER NONDURABLES 19.6%
Food & Beverages: 6.6%
Anheuser-Busch Company, Inc. 50,000 2,146,875
CPC International, Inc. 12,000 1,151,250
General Mills, Inc. 25,000 1,728,125
International Flavors & Fragrance 35,000 1,857,188
McCormick & Co. 50,000 1,300,000
Pepsico, Inc. 50,000 1,912,500
Quaker Oats Company 30,000 1,535,625
Ralston-Ralston Purina Group 20,000 1,805,000
---------
13,436,563
Health Services: 0.9%
Baxter International, Inc. 30,000 1,732,500
</TABLE>
*Non-Income Producing
18
<PAGE> 103
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CONSUMER NONDURABLES
(CONTINUED)
Miscellaneous Consumer Products: 5.5%
Colgate Palmolive Co. 24,000 $ 1,818,000
Corporate Express, Inc. 150,000 2,250,000
Fortune Brands, Inc. 25,000 885,938
Gallaher Group PLC* 25,000 448,438
Philip Morris Companies, Inc. 45,000 2,030,625
UST, Inc. 60,000 1,747,500
Waste Management, Inc. 60,000 1,920,000
-----------
11,100,501
Pharmaceuticals: 6.6%
Abbott Laboratories 40,000 2,617,500
American Home Products 30,000 2,473,125
Johnson & Johnson 30,000 1,863,750
Pharmacia-Upjohn, Inc. 36,250 1,368,438
Schering-Plough Corp. 40,000 2,182,500
Smith-Kline Beecham PLC ADR 30,200 2,933,175
-----------
13,438,488
CONSUMER SERVICES 10.7%
Entertainment & Leisure: 1.7%
ITT Corp. New* 40,000 2,557,500
Readers Digest Assn., Inc. 35,000 848,750
-----------
3,406,250
General Merchandise Stores: 5.8%
Dayton Hudson Corp. 45,000 2,908,125
J.C. Penney, Inc. 20,000 1,171,250
Limited, Inc. 75,000 1,673,438
Neiman-Marcus Group, Inc. 75,000 2,137,500
Toys R Us, Inc.* 60,000 2,043,750
Walmart Stores 50,000 1,875,000
-----------
11,809,063
</TABLE>
*Non-Income Producing
19
<PAGE> 104
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CONSUMER SERVICES
(CONTINUED)
Media and Communications: 3.2%
Dun & Bradstreet Corp. 40,000 $ 1,080,000
Knight Ridder, Inc. 40,000 1,987,500
McGraw Hill, Inc. 26,000 1,763,125
Meredith Corp. 60,000 1,661,250
-----------
6,491,875
ENERGY 8.7%
Oil And Gas Extraction: 8.7%
Amerada Hess Corp. 44,600 2,623,038
Atlantic Richfield Co. 24,000 1,788,000
British Petroleum PLC 30,000 2,473,125
Chevron Corp. 20,000 1,580,000
Exxon Corp. 36,000 2,313,000
Mobil Corp. 16,000 1,224,000
Murphy Oil Corp. 12,000 624,750
Royal Dutch Petroleum Co. ADR 40,000 2,237,500
Texaco, Inc. 15,300 1,775,756
Unocal Corp. 25,000 1,000,000
-----------
17,639,169
FINANCIAL 16.0%
Banking: 4.5%
Bankers Trust New York Corp. 20,000 2,023,750
Chase Manhattan Corp. 15,000 1,703,438
Mellon Bank Corp. 50,000 2,521,875
National City Corp. 20,000 1,190,000
Wells Fargo & Co. 6,666 1,832,733
----------
9,271,796
Federal Agencies: 1.1%
Federal Home Loan Mortgage Corp. 60,000 2,163,750
</TABLE>
20
<PAGE> 105
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
FINANCIAL
(CONTINUED)
Financial Services: 5.8%
American Express Co. 52,000 $ 4,355,000
H&R Block, Inc. 50,000 1,915,625
Mercury Finance Co.* 96,800 187,550
Travelers Group, Inc. 73,577 5,292,945
-----------
11,751,120
Insurance Carriers: 3.8%
St. Paul Companies, Inc. 30,000 2,353,125
Travelers Aetna P&C 40,000 1,720,000
U S F & G Corp. 80,000 1,965,000
Willis Corroon Group PLC Sponsored ADR 150,000 1,621,875
-----------
7,660,000
Security and Commodity Brokers and Services: 0.8%
J.P. Morgan & Co., Inc. 15,000 1,738,125
PROCESS INDUSTRIES 11.4%
Chemicals and Allied Products: 6.5%
Corning, Inc. 45,000 2,784,375
Dow Chemical Co. 30,000 2,850,000
Dupont Co. 34,000 2,280,125
Great Lakes Chemical Corp. 40,000 2,002,500
Imperial Chemical ADR 30,000 2,021,250
Minnesota Mining & Manufacturing Co. 13,000 1,231,750
-----------
13,170,000
Forest Products: 1.3%
Georgia Pacific Corp. 18,000 1,699,875
Weyerhaeuser Co. 15,000 933,750
-----------
2,633,625
Metal Mining: 2.5%
Newmont Mining Corp. 75,000 3,093,750
Reynolds Metals Co. 25,000 1,950,000
-----------
5,043,750
</TABLE>
*Non-Income Producing
21
<PAGE> 106
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
PROCESS INDUSTRIES
(CONTINUED)
Paper And Allied Products: 1.1%
International Paper Co. 25,000 $ 1,450,000
Union Camp Corp. 15,000 878,438
-----------
2,328,438
TECHNOLOGY 0.9%
Computer and Office Equipment:
Intuit* 0.9% 75,000 1,889,063
TRANSPORTATION 3.0%
Aerospace and Defense: 1.8%
Olin Corp. 35,900 1,521,263
Raytheon Co. 40,000 2,235,000
-----------
3,756,263
Railroad Transportation: 1.2%
Burlington Northern Santa Fe 25,000 2,414,063
UTILITIES 6.1%
Telephone Communication: 2.7%
AT&T Co. 60,000 2,208,750
Frontier Corp. 70,000 1,443,750
GTE Corp. 25,000 1,160,938
Southern New England Telecom Corp. 17,000 675,750
-----------
5,489,188
Utility Holding Companies: 3.4%
Edison International 50,000 1,262,500
Entergy Corp. 22,000 600,875
General Public Utilities Corp. 16,000 555,000
Peco Energy Co. 50,000 1,175,000
Pacificorp 70,000 1,561,875
Unicom Corp. 75,000 1,701,557
-----------
6,856,807
-----------
TOTAL EQUITY SECURITIES
(COST $104,064,573) 169,221,240
</TABLE>
*Non-Income Producing
22
<PAGE> 107
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Short-Term Investments Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 16.7%
Commercial Paper: 16.7%
Asset Securitization Co., 5.50%, 08/22/97 $ 800,000 $ 797,425
BMW US Capital Corp., 5.51%, 09/18/97 5,000,000 4,963,205
Beta Finance Inc., 5.56%, 08/08/97 2,000,000 1,997,823
Chubb Capital Corp., 5.50%, 08/18/97 1,000,000 997,398
Delaware Funding Corp., 5.53%, 08/15/97 5,000,000 4,989,219
Dover Corp., 5.50%, 08/18/97 3,000,000 2,992,187
Golden Managers Acceptance, 5.54%, 08/05/97 375,000 374,769
Internationale Nederland, 5.55%, 08/04/97 1,000,000 999,537
Internationale Nederland, 5.52%, 08/08/97 3,575,000 3,571,146
Koch Industries, Inc., 5.855%, 08/01/97 500,000 500,000
Motorola Credit Corp., 5.46%, 09/16/97 3,900,000 3,872,692
Pfizer Inc., 5.52%, 08/05/1997 1,809,000 1,807,885
Province Of Quebec, 5.54%, 12/05/97 2,300,000 2,255,196
Vermond American Corp., 5.47%, 08/28/97 3,765,000 3,749,504
-------------
(COST $33,868,034) 33,867,986
TOTAL INVESTMENTS
(COST $137,932,607) 100.0% 203,089,226
Other assets less liabilities 1,613,872
NET ASSETS $204,703,098
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 108
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 5.6%
Electrical Equipment: 3.3%
Amp, Inc. 3,500 $ 182,875
Applied Materials, Inc.* 3,600 330,750
Grainger W.W. Inc. 3,500 336,000
Harris Corp. 4,200 364,875
Tandy Corp. 2,800 166,425
Whirlpool Corp. 2,300 115,000
----------
1,495,925
Machinery: 2.3%
Caterpillar, Inc. 9,800 548,800
Cooper Industries, Inc. 2,700 150,019
Cummins Engine, Inc. 2,300 180,550
Tenneco, Inc. 3,200 149,200
----------
1,028,569
CONSUMER NONDURABLES 3.5%
Food & Beverages: 0.4%
Seagram Ltd. 4,500 172,406
Health Services: 1.3%
Baxter International, Inc. 4,300 248,594
Becton, Dickinson & Co. 2,000 107,250
Columbia/HCA Healthcare 7,300 235,425
----------
591,269
Miscellaneous: 1.3%
Browning Ferris Industries 6,800 251,600
Fortune Brands, Inc. 2,200 77,963
Gallaher Group PLC* 2,200 39,463
Service Corp. International 3,400 115,600
Sherwin Williams Co. 3,400 109,013
----------
593,639
Pharmaceuticals: 0.5%
Pharmacia-Upjohn, Inc. 5,600 211,400
</TABLE>
*Non-Income Producing
24
<PAGE> 109
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
CONSUMER CYCLICALS 2.5%
Automobiles & Related: 2.5%
Chrysler Corp. 8,200 $ 304,425
Ford Motor Co. 12,800 523,200
Genuine Parts Co. 3,600 117,450
Goodyear Tire And Rubber 3,400 219,513
-----------
1,164,588
CONSUMER SERVICES 5.7%
Entertainment & Leisure: 0.5%
ITT Corp. New * 3,700 236,569
General Merchandise Stores: 4.3%
American Stores Company 4,000 101,000
CVS Corp. 2,600 147,875
Federated Deparment Stores* 3,700 162,106
May Dept. Stores Co. 3,800 212,325
Nordstrom, Inc. 2,600 147,388
J.C. Penney, Inc. 3,900 228,150
Pitney Bowes, Inc. 1,900 142,738
Sears Roebuck & Co. 6,300 398,869
Toys R Us, Inc.* 3,300 112,406
V.F. Corp. 3,400 305,150
-----------
1,958,007
Building Materials & Garden Supplies: 0.3%
Armstrong World Industries 2,600 191,913
Media & Communications: 0.6%
Times Mirror Co. 2,000 109,250
Viacom, Inc.* 5,600 172,900
-----------
282,150
</TABLE>
*Non-Income Producing
25
<PAGE> 110
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
ENERGY 17.4%
Gas Production And Distribution: 0.3%
Columbia Gas System 1,700 $ 116,875
Oil And Gas Extraction: 17.1%
Amerada Hess Corp. 1,800 105,863
Amoco Corp. 8,100 761,400
Burlington Resources, Inc. 2,000 94,500
Chevron Corp. 6,600 522,225
Exxon Corp. 29,600 1,901,800
Mobil Corp. 15,900 1,216,350
Phillips Petroleum Co. 2,900 133,581
Royal Dutch Petroleum Co. ADR 41,600 2,327,000
Texaco, Inc. 5,300 615,131
Unocal Corp. 2,900 116,000
----------
7,793,850
FINANCIAL 31.0%
Banking: 14.4%
Banc One Corp. 4,501 252,563
Bank Of New York, Inc. 4,400 213,675
Bankamerica Corp. 13,400 1,011,700
Bankers Trust New York 3,200 323,800
Barnett Banks, Inc. 3,000 170,813
Chase Manhattan Corp. 1,300 147,631
Citicorp. 8,000 1,086,000
Comerica, Inc. 2,100 158,813
Fifth Third Bancorp. 3,150 199,041
First Chicago Corp. 3,600 273,150
First Union Corp. 4,300 436,181
Golden West Financial Corp. 2,200 185,075
Household International, Inc. 3,100 401,450
Key Corp. 2,700 167,906
Mellon Bank Corp. 4,000 201,750
National City Corp. 2,800 166,600
</TABLE>
26
<PAGE> 111
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
FINANCIAL
(CONTINUED)
Nationsbank Corp. 9,800 $ 697,638
Norwest Corp. 2,800 176,575
PNC Bank Corp. 3,900 178,425
Wachovia Corp. 2,300 148,350
----------
6,597,136
Federal Agencies: 1.0%
Federal Home Loan Mortgage Corp. 12,400 447,175
Financial Services: 3.6%
American Express Co. 6,200 519,250
Beneficial Corp. 1,200 87,000
Fleet Financial Group 2,900 196,838
MGIC Investment Corp. 1,200 63,075
Republic NY Corp. 2,400 277,200
Travelers Group, Inc. 6,900 496,369
----------
1,639,732
Insurance Carriers: 8.3%
Aetna, Inc. 4,400 501,325
Allstate Corp. 2,700 213,300
American General Corp. 3,400 181,050
Cigna Corp. 3,000 598,500
Chubb Corp. 2,500 176,250
General Re Corp. 3,100 647,513
Hartford Financial Service Group, Inc. 1,400 121,975
Lincoln National Corp. 1,800 127,800
Loews Corp. 3,700 400,063
MBIA, Inc. 1,800 212,400
Safeco Corp. 2,400 114,900
St. Paul Companies, Inc. 1,400 109,813
Transamerica Corp. 4,000 403,500
----------
3,808,389
</TABLE>
27
<PAGE> 112
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
FINANCIAL
(CONTINUED)
Security, Commodity Brokers, & Services: 3.7%
Merrill Lynch & Co., Inc. 8,000 $ 563,500
J.P. Morgan & Co., Inc. 5,500 637,313
Morgan Stanley Dean Witter 9,185 480,490
----------
1,681,303
PROCESS INDUSTRIES 6.7%
Chemicals and Allied Products: 3.1%
Air Products & Chemical 5,100 449,756
Dow Chemical Co. 6,600 627,000
W.R. Grace & Co. 1,700 104,550
Great Lakes Chemical Corp. 2,200 110,138
Union Carbide, Inc. 2,100 116,288
----------
1,407,732
Forest Products: 0.4%
Weyerhaeuser Co. 2,900 180,525
Gold And Silver Products: 0.2%
Barrick Gold Corp. 4,300 98,094
Metal Mining: 1.6%
Alcan Aluminum Ltd. 5,000 195,938
Inco Ltd. 3,400 105,188
NACCO Industries 2,200 152,625
USX-Marathon Group 5,300 170,594
USX-U.S. Steel Group 3,000 109,688
----------
734,033
Paper And Allied Products: 1.4%
International Paper Co. 4,100 229,600
Union Camp Corp. 2,300 134,694
Willamette Industries, Inc. 3,600 274,275
----------
638,569
</TABLE>
28
<PAGE> 113
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
TECHNOLOGY 5.7%
Computer & Office Equipment: 5.7%
Digital Equipment Corp.* 3,100 $ 127,681
International Business Machines Corp. 17,700 1,871,775
LSI Logic Corp.* 2,500 78,906
Seagate Technology, Inc.* 1,300 53,381
Xerox Corp. 5,900 485,275
-----------
2,617,018
TRANSPORTATION 11.4%
Aerospace & Defense: 7.0%
Allied Signal, Inc. 2,300 212,175
Boeing Co. 11,600 682,225
Lockheed Martin Corp. 5,600 596,400
McDonnell Douglas Corp. 2,200 168,300
Northrop Grumman Corp. 2,900 333,863
Raytheon Co. 3,300 184,388
TRW, Inc. 3,400 198,900
Textron, Inc. 8,000 560,500
United Technologies Corp. 3,000 253,688
-----------
3,190,439
Airline Transportation: 1.7%
AMR Corp.* 4,000 430,250
Delta Air Lines, Inc. 4,000 355,500
-----------
785,750
Railroad Transportation: 2.7%
Burlington Northern Santa Fe 4,300 415,219
CSX Corp. 2,600 160,550
Norfolk Southern Corp. 4,100 454,075
Union Pacific 2,800 200,725
-----------
1,230,569
</TABLE>
*Non-Income Producing
29
<PAGE> 114
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
UTILITIES 10.5%
Electric Utilities: 0.9%
Consolidated Edison Co. 3,000 $ 94,875
Energy Corp. 6,128 310,613
-----------
405,488
Telephone Communication: 7.5%
AT&T Co. 18,100 666,306
Airtouch Communications* 5,200 171,275
Bell Atlantic Corp. 10,600 769,163
Bell South Corp. 11,100 525,863
MCI Communications Corp. 7,900 278,969
NYNEX Corp. 6,900 382,519
Sprint Corp. 5,300 262,350
U.S. West, Inc. 6,300 230,344
U.S. West, Inc. Media Group* 6,300 138,994
-----------
3,425,783
Utility Holding Companies: 2.1%
Carolina Power & Light 2,200 78,375
Dominion Resources, Inc. 2,900 106,575
Edison International 8,348 210,787
Entergy Corp. 3,500 95,594
GPU, Inc. 2,400 83,250
Peco Energy Company 3,800 89,300
PG&E Corp. 6,500 161,267
Southern Co. 6,400 140,400
-----------
965,548
-----------
TOTAL INVESTMENTS
(COST $35,054,331) 100.0% 45,690,443
Other assets less liabilities 1,881,026
-----------
NET ASSETS $47,571,469
===========
</TABLE>
*Non-Income Producing
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 115
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 37.5%
U.S. Treasury Notes: 37.5%
6.00%, 11/30/97 $ 2,800,000 $ 2,804,648
5.875%, 01/31/99 1,000,000 1,002,890
5.875%, 02/28/99 2,800,000 2,808,792
6.38%, 05/15/99 800,000 808,688
7.75%, 01/31/00 200,000 209,094
5.50%, 04/15/00 160,000 158,917
6.25%, 08/31/00 500,000 506,230
5.63%, 02/28/01 550,000 546,546
7.88%, 08/15/01 1,500,000 1,607,805
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $10,369,780) 10,453,610
-----------
FEDERAL AGENCIES 52.3%
Federal Farm Credit Bank: 2.4%
6.05%, 04/21/03 550,000 547,833
6.94%, 05/19/05 125,000 130,245
-----------
678,078
Federal Home Loan Bank: 5.8%
4.80%, 09/22/98 350,000 346,801
6.83%, 06/07/01 1,000,000 1,015,360
8.00%, 08/27/01 250,000 267,528
-----------
1,629,689
Federal Home Loan Mortgage Corp.: 22.2%
7.00%, 07/15/99 855,976 862,652
7.36%, 06/05/07 1,500,000 1,562,625
7.00%, 07/01/07 164,678 164,884
7.00%, 09/01/10 382,599 387,619
6.50%, 04/11/11 1,665,787 1,661,622
6.00%, 05/11/11 1,569,183 1,540,247
-----------
6,179,649
</TABLE>
31
<PAGE> 116
SCHEDULE I
SECURITY FIRST TRUST
VIRTUS U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1997
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
FEDERAL AGENCIES
(CONTINUED)
Federal National Mortgage Assn.: 9.5%
6.00%, 11/01/03 $ 113,320 $ 112,292
8.63%, 06/30/04 150,000 170,460
6.50%, 03/01/09 259,706 262,381
7.00%, 04/01/11 1,707,619 1,725,225
8.00%, 09/01/25 379,849 391,837
------------
2,662,195
Other Federal Agencies: 12.3%
Farmermac, 7.37%, 08/01/06 1,500,000 1,598,370
Gov't. National Mortgage Assn., 7.50%, 01/15/26 1,428,843 1,454,733
Small Business Administration, 6.90%, 08/25/08 268,053 269,555
Student Loan Marketing Assn., 7.50%, 03/08/00 100,000 103,896
------------
3,426,554
------------
TOTAL FEDERAL AGENCIES
(COST $14,247,595) 14,576,165
------------
TOTAL FIXED MATURITIES
(COST $24,617,375) 25,029,775
Short-Term Investments
- -------------------------------------------------
SHORT-TERM INVESTMENTS 10.2%
Federal Home Loan Bank, 5.39%, 08/08/97 1,250,000 1,248,681
Federal Home Loan Mortgage Corp., 5.30%, 08/05/97 1,100,000 1,099,351
Federal Home Loan Mortgage Corp., 5.22%, 08/04/97 500,000 499,782
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $2,847,814) 2,847,814
------------
TOTAL INVESTMENTS
(COST $27,465,189) 100.0% 27,877,589
Other assets less liabilities 1,011,871
------------
NET ASSETS $ 28,889,460
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE> 117
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
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
and the T. Rowe Price Growth and Income Series (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.
On February 27, 1997 the Board of Trustees unanimously approved the name change
of the T. Rowe Price Bond Series to the Bond Series.
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.
33
<PAGE> 118
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, which approximates market value due to
the short duration to maturity. 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.
DIVIDENDS AND DISTRIBUTIONS -- Each series declares 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 T. Rowe Price Growth and Income Series:
Effective July 15, 1997, Neuberger & Berman, LLC became investment advisers for
the Bond Series replacing T. Rowe Price Associates. 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 advisers, Neuberger &
Berman, LLC (Bond Series) and T. Rowe Price Associates (Growth and Income
Series). 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, 1997, 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.
34
<PAGE> 119
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
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 Growth and Income Series, while Neuberger & Berman, LLC
provides the same for the Bond Series. T. Rowe Price Associates and Neuberger &
Berman, LLC are each paid an annual fee of .35% of the average daily net assets
of the series for which they respectively provide investment advice less any
compensation payable to Security Management acting as adviser on certain assets
in which a series may invest.
Virtus Equity Series and Virtus U.S. Government Income Series:
The Manager, Security Management, is entitled by agreement to a monthly fee
equal to 1/13 of 1% (equivalent annually to .9%) of the average daily net asset
value of the Virtus Equity Series (the Equity Series) and Virtus U.S. Government
Income Series (the U.S. Government Income Series), less compensation payable to
the Series' investment adviser, Virtus Capital Managment (Virtus). 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 waive their fees. 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 ratios of the
Equity Series and the U.S. Government Income Series at a level of 1% and .7%
respectively, or less.
Virtus provides investment advice and makes investment decisions for the Equity
Series and the U.S. Government Income Series. Virtus is paid an annual fee of
.75% of the average daily net assets of the two series.
35
<PAGE> 120
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the year ended
July 31, 1997 were as follows:
<TABLE>
<CAPTION>
T. Rowe Price Virtus
Growth U.S.
and Virtus Government
Income Equity Income
Bond Series Series Series Series
----------- ------ ------ ------
<S> <C> <C> <C> <C>
U.S. Government Securities:
Purchases $ 4,552,737 $22,367,938
Sales 2,806,299 11,321,907
Other Investment Securities:
Purchases 1,213,738 $53,277,272 $31,192,673
Sales 2,058,626 17,502,639 16,852,648
</TABLE>
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, 1997 was the same for
both financial statement and federal income tax purposes. At July 31, 1997, 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 $ 277,855 $ 10,900 $ 266,955
T. Rowe Price Growth and Income Series 67,090,357 1,933,738 65,156,619
Virtus Equity Series 10,838,973 202,861 10,636,112
Virtus U.S. Government Income Series 422,800 10,400 412,400
</TABLE>
36
<PAGE> 121
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1997
Bond Series 697,683 153,044 (519,644) 331,083
T. Rowe Price Growth and Income Series 3,217,205 223,202 410,369 (561,799) 3,288,977
Virtus Equity Series 2,258,599 68,155 279,366 (209,066) 2,397,054
Virtus U.S. Government Income Series 2,512,098 151,669 (166,573) 2,497,194
YEAR ENDED JULY 31, 1996
Bond Series 604,806 125,609 (448,248) 282,167
T. Rowe Price Growth and Income Series 1,739,490 216,141 30,554 (605,443) 1,380,742
Virtus Equity Series 2,053,694 19,537 55,612 (72,335) 2,056,508
Virtus U.S. Government Income Series 1,714,405 63,075 4,386 (60,803) 1,721,063
</TABLE>
37
<PAGE> 122
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 Related 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,
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
1996 3.92 .24 (.04) .20 (.24) 3.88 5.10
1997 3.88 .24 .14 .38 (.24) 4.02 9.79
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended
July 31,
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
1996 10.58 .30 1.56 1.86 (.30) (.04) 12.10 17.58
1997 12.10 .30 4.69 4.99 (.29) (.54) 16.26 41.24
VIRTUS 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
1996 5.70 .10 .46 .56 (.05) $ (.16) 6.05 9.82
1997 6.05 .09 2.60 2.69 (.11) (.45) 8.18 44.46
VIRTUS
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
1996 5.13 .18 .04 .22 (.19) (.01) 5.15 4.29
1997 5.15 .23 .20 .43 (.22) 5.36 8.35
</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 Virtus Equity Series and U.S. Government Income Series commenced
operations on May 19, 1993.
38
<PAGE> 123
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (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,
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
1996 .90 6.32 34 8,981,365
1997 .75 6.41 54 10,634,720
T. ROWE PRICE
GROWTH AND INCOME SERIES
Year ended July 31,
1993 .75% 2.77% 5% $ 55,160,198
1994 .78 2.62 11 65,660,970
1995 .74 3.10 8 83,789,646
1996 .64 2.73 8 112,552,893
1997 .57 2.44 14 204,703,098
VIRTUS 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
Year ended July 31, 1996 1.00 2.24 88 20,701,776
Year ended July 31, 1997 1.00 1.56 55 47,571,469
VIRTUS
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
Year ended July 31, 1996 .70 5.38 148 14,888,824
Year ended July 31, 1997 .70 5.68 62 28,889,460
</TABLE>
(1) Annualized
(2) The Virtus Equity Series and U.S. Government Income Series commenced
operations on May 19, 1993.
39
<PAGE> 124
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- SUBSEQUENT EVENTS
On August 13, 1997, an agreement was signed for Metropolitan Life Insurance
Company to acquire the parent of Security Management, Security First Group,
Inc., from London Insurance Group, Inc. The closing of the transaction is
pending regulatory approval.
40
<PAGE> 125
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Prospectus/Statement of Additional Information Describing Virtus Equity
Series and Virtus 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 T. Rowe Price
Growth and Income Series, Bond Series and Virtus 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
(1) Declaration of Trust* (PEA No. 20)
(2) By-Laws* (PEA No. 20)
(5) a. Master Investment Management and
Advisory Agreement, dated October 30, 1997 herewith
b. Sub-Advisory Agreement, October 30, 1997 herewith
c. Sub-Advisory Agreement, October 30, 1997 herewith
d. Sub-Advisory Agreement, October 30, 1997 herewith
(11) Consent of Independent Auditors herewith
(16) Powers of Attorney (PEA No. 26)
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, 1997:
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
------------------------------------------------------- --------------
<S> <C>
T. Rowe Price Growth and Income Series................. 3
Bond Series............................................ 2
Virtus Equity Series................................... 1
Virtus U.S. Government Income Series................... 2
</TABLE>
<PAGE> 126
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.
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 at 1 Wall Street, New York, New York 10286.
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> 127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 1st day of December 1997.
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>
ROBERT G. MEPHAM President December 1, 1997
- ------------------------- (Principal Executive
Robert G. Mepham Officer)
JANE F. EAGLE Senior Vice President, Finance December 1, 1997
- ------------------------- (Principal Financial and
Jane F. Eagle Accounting Officer)
JACK R. BORSTING* Trustee December 1, 1997
- -------------------------
Jack R. Borsting
KATHERINE L. HENSLEY* Trustee December 1, 1997
- -------------------------
Katherine L. Hensley
LAWRENCE E. MARCUS* Trustee December 1, 1997
- -------------------------
Lawrence E. Marcus
By /s/ RICHARD C. PEARSON December 1, 1997
- --------------------------
*(Richard C. Pearson as
Attorney-in-Fact for
each of the persons
indicated)
</TABLE>
<PAGE> 1
MASTER INVESTMENT MANAGEMENT AND ADVISORY AGREEMENT
BETWEEN
SECURITY FIRST TRUST
AND
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION
MASTER INVESTMENT MANAGEMENT AND ADVISORY AGREEMENT, made as of the 30th day
of October, 1997, between the SECURITY FIRST TRUST (the "Trust"), a business
trust organized and existing under the laws of the Commonwealth of
Massachusetts, and SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION ("Adviser"),
a corporation organized and existing under the laws of the State of Delaware.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end, diversified
management investment company and is registered as such under the Investment
Company Act of 1940 (the "Act"); and
WHEREAS, the Adviser is engaged principally in the business of providing
investment advice, business management and administrative services and is
registered as an investment adviser under the Investment Advisers Act of 1940;
and
WHEREAS, the Trust operates as a "series company" as contemplated by Rule
18f-2 under the Act and is authorized to issue shares of beneficial interest in
separate series with each such series representing interest in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust currently offers shares of beneficial interest in four
separate series: Bond Series, T. Rowe Price Growth and Income Series, Virtus
Equity Series and Virtus U.S. Government Income Series, (collectively "Trust
Series"); and
WHEREAS, the Trust desires to retain the Adviser to render investment
supervisory, business management and administrative services to each of the
Trust Series in the manner and on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises, and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
1. Employment of Adviser -- The Trust hereby employs Adviser as its
exclusive investment adviser and business manager to manage the investment and
reinvestment of the assets of the Trust, to administer its affairs, and to
perform the other services herein set forth.
2. Effective Date -- It is understood and agreed that as to the Trust
Series this Agreement shall take effect on , 1997 ("Effective Date")
provided that on or prior to that date the terms of this Agreement have been
approved by a vote of (a) a majority of the members of the Board of Trustees of
the Trust, including a majority of the Trustees who are not parties to this
Agreement or "interested persons" (as defined in the Act) of any such party,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding "voting securities" (as defined in the
Act) of the Trust Series of the Trust.
3. Term of Agreement and Continuance -- The term of this Agreement shall
begin on the Effective Date and, unless sooner terminated as hereinafter
provided, shall remain in effect for a period of two years from that date.
Thereafter, this Agreement shall continue in effect from year to year only so
long as such continuance is specifically approved at least annually by
affirmative vote of the Board of Trustees of the Trust, which affirmative vote
shall include a majority of those members of the Board who are not parties to
the agreement or "interested persons" of any such party (as defined in the Act),
or by affirmative vote of a majority of the outstanding shares of the Trust
Series entitled to be cast and of a majority of those members of the Board who
are not parties to the Agreement or "interested persons" (as defined in the Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such continuance.
4. Termination Without Penalty -- This Agreement may be terminated as to a
particular Trust Series at any time on sixty (60) days' written notice, without
the payment of any penalty, by the Board of Trustees of the Trust, by the vote
of a majority of the outstanding voting securities of such Trust Series, or by
the Adviser.
5. Assignment Terminates Agreement -- This Agreement shall terminate
automatically in the event of its assignment by either party. For the purpose of
this paragraph, the term "assignment" shall have the meaning defined in Section
2(a)(4) of the Act.
<PAGE> 2
6. Amendment of Agreement -- This Agreement may be amended by mutual
consent; however, such consent on the part of a Trust Series requires either a
vote of a majority of the outstanding voting securities of such Trust Series or
a vote of a majority of the Board of Trustees, and in either event, a vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or the Adviser and who have no direct or indirect interest in the
operations of the Trust, this Agreement, or the Adviser, cast in person at a
meeting called for this purpose.
7. Actions by Each Trust Series -- It is understood and agreed that this
Agreement may be approved, continued, terminated without penalty or amended as
to one or more Trust Series without affecting other Trust Series based upon the
vote of (a) the Board of Trustees, including a majority of the non-interested
Trustees, or (b) the shareholders of a particular Trust Series. The approval,
continuation, termination without penalty or amendment of this Agreement shall
be conditioned upon the actions of each of the Trust Series acting as a separate
entity. Failure to approve or continue this Agreement or the vote to terminate
this Agreement as to one Trust Series shall not act to negate this Agreement as
to other Trust Series.
8. Duties of Adviser
(a) Adviser agrees to act as the Trust's exclusive investment adviser and
business manager to supervise and direct the investments of each Trust Series in
accordance with the investment objectives and policies, programs and
restrictions of each series as stated in the Trust's registration statement and
its current prospectus and statement of additional information, and such other
limitations as are imposed upon the Trust by virtue of regulations adopted under
section 817(h) of the Internal Revenue Code of 1986, as such may be amended from
time to time, and such other limitations as the Trust may impose by notice in
writing to the Adviser.
(b) The Adviser shall obtain and evaluate such information relating to the
economy, industries, businesses, securities markets and securities as it may
deem necessary to use in the discharge of its obligations hereunder and shall
formulate and implement a continuing program for the management of the assets
and resources of each Trust Series in a manner consistent with the particular
series' investment objectives, policies and restrictions. The Adviser, as agent
and attorney-in-fact with respect to the Trust, when it deems appropriate, may
(i) buy, sell, exchange, convert and otherwise trade in any stocks, bonds and
other securities (including money market instruments), and (ii) place orders for
the execution of such securities transactions with or through such brokers,
dealers or issuers as the Adviser may select. The Adviser agrees to use its best
efforts in acting as an investment adviser for the Trust as provided in this
Agreement, and shall maintain such staff and facilities as it shall consider
requisite for such purposes;
(c) All transactions will be consummated by payment to, or delivery by, the
Trust's Custodian of all cash and/or securities due to or from the Trust in
accordance with the Trust's Custodial Agreement. The Adviser shall not act as
Custodian for the Trust, but may issue such instructions to the Custodian as may
be appropriate in connection with the settlement of transactions initiated by
the Adviser pursuant to sub-paragraph (b) hereof. Instructions of the Adviser to
the Trust and/or the Custodian shall be made in writing sent by first class
mail, or by tested telegram cable or telex, as provided in the Custodial
Agreement, or at the option of the Adviser, orally and confirmed in writing as
soon as practical thereafter, and the Adviser shall instruct brokers and dealers
executing orders on behalf of the Trust to forward to the Trust and/or the
Custodian copies of all confirmations. The Adviser shall not be responsible for
any loss incurred by reason of any act or omission of any broker or dealer or
the Custodian; provided, however, that the Adviser will make reasonable efforts
to require that brokers and dealers selected by the Adviser perform their
obligations with respect to the Trust;
(d) The Adviser may delegate any of the foregoing authority to one or more
third parties at its discretion and to the extent in the opinion of counsel for
Adviser that such delegation is consistent with applicable laws and regulations
and is in the best interests of the Trust; provided, however, such delegation
will in no way derogate the responsibility of Adviser under this Agreement;
(e) The Adviser shall report to the Board of Trustees of the Trust, or to
any committee or officers of the Trust acting pursuant to the authority of the
Board, at such times and in such detail as the Board may deem appropriate in
order to enable the Trust to determine that its investment objectives and
policies are being observed and implemented and that the obligations of Adviser
under this Agreement are being fulfilled. Any investment program undertaken by
Adviser pursuant to this Agreement and any other activities undertaken by
Adviser on behalf of the Trust shall at all times be subject to any directives
of the Board of Trustees or any duly constituted committee or officer of the
Trust acting pursuant to authority of the Board of Trustees;
(f) In the management of the business affairs of the Trust, the Adviser
shall:
(i) Furnish to the Trust at its own expense office space and equipment,
bookkeeping services (to the extent not otherwise provided by custodian or
transfer agent), wire and telephone communication services and such
-2-
<PAGE> 3
other services and facilities of this nature as may reasonably be necessary
to the proper management of the Trust's business affairs;
(ii) Provide the necessary executive and other personnel for managing
the affairs of the Trust, including personnel to perform clerical and other
office functions;
(iii) Permit members of the Adviser's organization to serve without
compensation from the Trust as officers, directors or agents of the Trust,
if desired by the Board of Trustees of the Trust;
(iv) Furnish general purpose accounting forms, supplies, stationery and
postage relating to the obligations of the Adviser under the terms of this
Agreement; and
(v) Pay all expenses and charges not assumed by the Trust as hereinafter
specifically provided, as may be incurred by the Adviser in the performance
of its obligation hereunder.
9. Fees -- Each Series shall pay the Adviser as full compensation for all
services rendered hereunder a monthly fee at an annual rate of .50% ( 1/2 of 1%)
based on the average daily net assets of the Bond Series and the T. Rowe Price
Growth and Income Series and at the annual rate of .90% (nine-tenths of 1%)
based on the average daily net asset value of each of the Virtus Equity and
Virtus U.S. Government Income Series of the Trust during the year, computed in
the manner used for determination of the offering price of shares of the Trust
Series. Adviser's compensation shall be accrued daily and payable monthly.
10. Expense Limitation Where Required by State Law -- To the extent that
such is required by law, if the aggregate expenses of a Trust Series in any
fiscal year exceed 2.5% of the first $30,000,000 of the average net assets of a
Trust Series for that year, 2.0% of the next $70,000,000 of the average net
assets for that year plus 1.5% of the remaining average net assets for that year
(all calculated on a daily basis), the Adviser agrees to waive such portion of
its advisory fee, as may be necessary to provide for any such expenses. Such
waiver shall not exceed the full amount of the advisory fee for such year except
as may be elected by the Adviser in its discretion. For this purpose, aggregate
expenses of the Trust Series shall include the compensation of the Adviser, but
shall exclude interest and taxes and certain extraordinary expenses. For the
purposes of this paragraph the term "fiscal year" shall be prorated in the event
of a period of less than a full fiscal year. The expense limitation shall be
that part of 2.5%, 2.0% or 1.5% as the case may be, proportional to the portion
of a full fiscal year elapsed. It is understood and agreed that any amounts
contributed by the Adviser to the Trust Series either prior to or after the date
of this Agreement, shall be repaid by the Trust Series to the Adviser,
commencing with the fiscal year following the disbursement, provided that such
repayment does not result in increasing the Trust's aggregate expenses above the
aforementioned expense limitation ratios. Calculation of such repayment amounts
shall be determined on a daily basis and paid no less frequently than monthly.
If during any year that the Trust is making repayments to the Adviser, the
Trust's expenses exceed such limitation ratios, the Trust shall recover such
prior repayments from the Adviser to the extent of the excess determined on a
cumulative annual basis.
11. Agreements with Sub-Advisory Organizations -- It is understood and
agreed that Adviser may enter into sub-advisory agreements with third parties
for the provision of investment advice to Adviser relating to each Trust Series'
portfolio of securities, investments, cash and other properties.
12. Trust Expenses -- The Trust shall assume and pay the expenses and
charges for:
(a) All costs of preparation, printing and mailing of reports, notices,
and proxy solicitation material furnished to Trust shareholders or to
regulatory authorities, or of sales literature, prospectuses and offering
circulars;
(b) Compensation and expenses of Trustees of the Trust who are not
directors, officers or employees of the Adviser or of a company affiliated
with the Adviser;
(c) Charges and expenses of any custodian or depository appointed by the
Trust for the safekeeping of its assets, or for other custodial, disbursing
agent and transfer agent services;
(d) Charges and expenses of independent accountants and auditors;
(e) Charges and expenses of any transfer agents and registrars;
(f) Costs of issuing shares of the Trust, if any;
(g) Fees and expenses, including legal, involved in registering and
maintaining registration of the Trust and of its shares with the Securities
and Exchange Commission and with any applicable state laws;
(h) Legal fees and expenses in connection with the affairs of the Trust;
-3-
<PAGE> 4
(i) Brokers' commissions and issue and transfer taxes chargeable to the
Trust in connection with securities transactions to which the Trust is a
party;
(j) All taxes and registration, filing and other fees payable by the
Trust to federal, state or other governmental agencies;
(k) All expenses of shareholders' and Trustees' meetings and of
preparing and printing reports to shareholders; fees and expenses of legal
counsel in connection with the Trust's legal existence, financial structure
and relations with shareholders;
(l) Premiums for the fidelity bond maintained by the Trust pursuant to
the requirements of Section 17 of the Investment Company Act of 1940, or
other insurance policy protecting the assets of the Trust; and
(m) All interest expenses.
13. Public Reference to Adviser -- The Trust agrees to furnish the Adviser
at its principal office copies of all post-effective amendments to its
registration statement, prospectuses, statements of additional information,
proxy materials, reports to stockholders, sales literature, or other material
prepared for distribution to stockholders of the Trust or the public, which
refer in any way to the Adviser, ten (10) days prior to use thereof and not to
use such material if the Adviser shall object thereto in writing within seven
(7) days after receipt of such material. In the event of termination of this
Agreement, the Trust will, on written request of the Adviser, forthwith delete
any reference to the Adviser from any materials described in the preceding
sentence. The Trust shall furnish or otherwise make available to the Adviser
such other information relating to the business affairs of the Trust as the
Adviser at any time, or from time to time, reasonably requires in order to
discharge its obligations hereunder.
14. Information Regarding Adviser -- The Adviser, its officers, directors
and employees, shall make available and provide such information relating to
itself, its organization, its personnel, and its activities as may, from time to
time, reasonably be required by the Trust in the preparation of registration
statements, prospectuses, reports and other documents required by federal and
state securities laws. In addition, the Adviser, its officers, directors and
employees, shall provide such information to the Board of Trustees of the Trust
as said Board shall request and which may be reasonably necessary for the Board
to evaluate the terms of this Agreement in accordance with the requirements of
the Act.
15. Dual Interests Permitted -- It is understood that Trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser as
directors, officers, shareholders, or otherwise and that directors, officers,
agents and shareholders of the Adviser are or may be interested in the Trust as
Trustees, officers, stockholders or otherwise, that Adviser may be interested in
the Trust and that the existence of any such dual interest shall not affect the
validity hereof or of any transactions hereunder except as otherwise provided in
the Declaration of Trust of the Trust and the Certificate of Incorporation of
the Adviser, respectively, or by specific provision of applicable law.
16. Advisory Service Not Exclusive -- It is understood that the Adviser may
perform investment advisory services for various clients including investment
companies. The Trust understands and agrees that the Adviser may give advice and
take action with respect to any other clients which may differ from advice given
or the timing or nature of actions taken with respect to the Trust, so long as
it is the Adviser's policy, to the extent practical, to allocate investment
opportunities to the Trust over a period of time on a fair and equitable basis
relative to other clients. It is understood that the Adviser shall not have any
obligation to initiate the purchase or sale, or to recommend for purchase or
sale, for the Trust any security which the Adviser, its principals, affiliates
or employees, may purchase or sell for its or their own accounts or for the
account of any other client, if in the opinion of the Adviser such transaction
or investment appears unsuitable, impractical or undesirable for the Trust.
17. Brokerage Fees -- The Adviser, in carrying out its duties under this
Agreement, may cause the Trust to pay a broker-dealer which furnishes brokerage
or research services [as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "34 Act")] a higher commission
than that which might be charged by another broker-dealer which does not furnish
brokerage or research services or which furnishes brokerage or research services
deemed to be of lesser value, if such commission is deemed reasonable in
relation to the brokerage and research services provided by the broker-dealer,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to the accounts as to which it
exercises investment discretion (as such term is defined in Section 3(a)(35) of
the 34 Act).
18. Compliance With Trust Documents -- Nothing herein contained shall be
deemed to require the Trust to take any action contrary to its Declaration of
Trust or By-Laws, or any applicable statutory or regulatory requirement to which
-4-
<PAGE> 5
it is subject or by which it is bound, or to relieve or deprive the Board of
Trustees of the Trust of its responsibility for and control of the conduct of
the affairs of the Trust.
19. Limitation of Liabilities -- Neither the Adviser nor any of its
officers, directors, or employees, nor any person performing trading, or other
functions of the Trust (at the direction or request of the Adviser) or the
Adviser in connection with the Adviser's discharge of its obligations undertaken
or reasonably assumed with respect to this Agreement, shall be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which this Agreement relates, except for loss
resulting from willful misfeasance, bad faith, or gross negligence in the
performance of its or his duties on behalf of the Trust or from reckless
disregard by the Adviser or any such person of the duties of the Adviser under
this Agreement.
Without limiting the generality of the foregoing, neither the Adviser nor
any such person shall be deemed to have acted unlawfully or to have breached any
duty to the Trust under state or federal law solely by reason of having caused
the Trust to pay a member of any securities exchange, or any other securities
broker or dealer, an amount of commission for effecting a securities transaction
in excess of the commission another member of a securities exchange, or another
securities broker or dealer, would have charged for effecting that transaction
if the Adviser, or such person, determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such member, broker or dealer, viewed in terms of either
that particular transaction or the overall responsibilities of the Adviser with
respect to the accounts as to which the Adviser exercises investment discretion.
20. Books and Records -- The Adviser and the Trust agree to maintain and
preserve for such period or periods as the Securities and Exchange Commission
may prescribe by rules and regulations, such accounts, books and other documents
as constitute the records forming the basis for all reports, including financial
statements required to be filed pursuant to the Act and for the Trust auditor's
certification relating thereto. The Adviser and the Trust agree that all
accounts, books and other records maintained and preserved by each as required
hereby shall be subject at any time, and from time to time, to such reasonable
periodic, special and other examinations by the Securities and Exchange
Commission, the Trust's auditors, the Trust or any representative of the Trust,
or any governmental agency or other instrumentality having regulatory authority
over the Trust. It is expressly understood and agreed that the books and records
maintained by the Adviser on behalf of the Trust shall, at all times remain the
property of the Trust. Moreover, the Trust agrees to supply the Adviser with
copies of all documents filed with the Securities and Exchange Commission, and
with such other information relating to the Trust's affairs as the Adviser may
reasonably request.
21. Definition of Terms -- Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the Act shall be resolved by reference to such term or
provision of the Act and to interpretations thereof, if any, by the United
States courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Securities and Exchange Commission
validly issued pursuant to said Act. Specifically, the terms "vote of a majority
of the outstanding voting securities," "interested person," "assignment," and
"affiliated person," as used herein shall have the meanings assigned to them by
the Act and rules thereunder. In addition, where the effect of a requirement of
the Act, reflected in any provision of this Agreement is relaxed by a rule,
regulation or order of the Securities and Exchange Commission, whether of
special or of general application, such provision shall be deemed to incorporate
the effect of such rule, regulation or order.
22. Notices -- Unless otherwise specified herein, all notices, instructions
and advices with respect to securities transactions or other matters
contemplated by this Agreement shall be deemed duly given to the Adviser when
received in writing by the Adviser at 11365 West Olympic Boulevard, Los Angeles,
California, 90064, and to the Trust when deposited for first class mail,
addressed to (or delivered by hand to) the Trust at 11365 West Olympic
Boulevard, Los Angeles, California 90064 and to the Custodian at State Street
Bank and Trust Company, P.O. Box 2357, Boston, Massachusetts 02107, or such
other address or addresses as shall be specified, in each case, in a notice
similarly given. The Adviser may rely upon any notice (written or oral) from any
person which the Adviser reasonably believes to be genuine and authorized.
23. Additional Series -- Nothing herein shall be deemed to prevent the Trust
from establishing new Trust Series and, in connection therewith, from retaining
an investment adviser other than the Adviser to provide investment advisory
services to such new Trust Series.
24. Entire Agreement -- This writing constitutes the entire Agreement
between the parties and no conditions or warranties shall be implied herefrom
unless expressly set forth herein.
25. This Agreement shall be governed by the laws of the state of Delaware.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the day and the year first above written.
Attest: SECURITY FIRST TRUST
on behalf of each of the Trust Series
/s/ JAMES C. TURNER By: /s/ RICHARD C. PEARSON
- ------------------------------------ ----------------------------------
Assistant Secretary
Attest: SECURITY FIRST INVESTMENT
MANAGEMENT CORPORATION
/s/ JAMES C. TURNER By: /s/ RICHARD C. PEARSON
- ------------------------------------ ----------------------------------
Assistant Secretary
-6-
<PAGE> 1
SUB-ADVISORY AGREEMENT
BETWEEN
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION
AND
T. ROWE PRICE ASSOCIATES, INC.
SUB-ADVISORY AGREEMENT, made this 30th day of October, 1997, by and between
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION, a corporation organized and
existing under the laws of the State of Delaware (the "Adviser"), and T. ROWE
PRICE ASSOCIATES, INC., a corporation organized and existing under the laws of
the State of Maryland, (the "Sub-Adviser").
WITNESSETH:
WHEREAS, Security First Trust (the "Trust") is an open-end, diversified,
management investment company, registered as such under the Investment Company
Act of 1940 consisting of multiple investment series; and
WHEREAS, shares of the Trust are made available only to fund variable
contracts offered by life insurance companies; and
WHEREAS, at present the Trust is comprised of four investment series one of
which is the T. Rowe Price Growth and Income Series (the "Growth and Income
Series"), which is to be operated as the underlying investment media for certain
variable contracts funded through separate accounts of life insurance companies;
and
WHEREAS, the Trust has contracted with the Adviser for the Adviser to
provide investment advisory, business management and administrative services to
the investment series of the Trust pursuant to a Master Investment Management
and Advisory Agreement; and
WHEREAS, the Adviser is authorized by the terms of the Master Investment
Management and Advisory Agreement with the Trust to enter into sub-advisory
agreements with third parties; and
WHEREAS, the Sub-Adviser is engaged principally in the business of rendering
investment advisory services to registered investment companies and other
clients and is registered as an investment adviser under the Investment Advisers
Act of 1940;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. The Adviser acts as investment adviser and manager for the Growth and
Income Series pursuant to a Master Investment Advisory Agreement, and as such
has authority and responsibility for supervising and directing the investments
of the Growth and Income Series in accordance with its investment objectives and
policies, programs and restrictions as stated in the Trust's registration
statement and its current prospectus and statement of additional information,
and such other limitations as are imposed upon the Trust pursuant to section
817(h) of the Internal Revenue Code of 1986. Pursuant to its agreement with the
Trust, the Adviser, as agent and attorney-in-fact for the Growth and Income
Series may, when it deems appropriate, (a) buy, sell, exchange, convert and
otherwise trade in any stocks, bonds or other securities, and (b) place orders
for the execution of such security transactions with or through such brokers,
dealers or issuers as the Adviser may select subject, however, at all times to
the supervision of the Board of Trustees of the Trust. The Adviser may delegate
any of the foregoing authority to Sub-Adviser to the extent, in the opinion of
counsel for the Adviser, such delegation is consistent with life insurance
company separate account ownership of the Trust shares for federal income tax
purposes; provided, however, that nothing in this Agreement shall be interpreted
to derogate the responsibilities of the Adviser to the Trust or the Growth and
Income Series under the aforementioned Master Investment Management and Advisory
Agreement.
2. The Adviser hereby employs Sub-Adviser to render the advisory services
set forth herein for the fee specified herein.
3. During the term of this Agreement, or any continuance or extension
thereof, and unless otherwise limited by the Adviser as hereinafter provided,
the Sub-Adviser will, to the best of its ability, exercise investment discretion
on behalf of the Growth and Income Series with respect to the purchase, holding
or sale of securities in accordance with the
<PAGE> 2
stated investment objectives and policies of the Growth and Income Series as
communicated to the Sub-Adviser by Adviser and as is required to comply with the
terms of the Master Investment Management and Advisory Agreement, the
diversification requirements of the Investment Company Act of 1940 and section
817(h) of the Internal Revenue Code. The Sub-Adviser shall not be required to
respond to inquiries from the Adviser with regard to specific securities other
than securities which are or have been held by the Growth and Income Series
during the time this Agreement is in effect. The Adviser reserves the right,
subject to shareholder approval as required by law, to limit the authority of
the Sub-Adviser herein solely in its discretion. The Sub-Adviser shall, for all
purposes stated herein, be deemed an independent contractor and shall not have
custody of any of the assets of the Trust nor authority to act for or represent
the Growth and Income Series except as expressly provided herein.
4. The Sub-Adviser may employ, retain or otherwise avail itself of the
services or facilities of other persons or organizations for the purposes of
obtaining such statistical and other factual information, such advice regarding
economic factors and trends, such advice as to occasional transactions in
specific securities or such other information, advice or assistance as the
SubAdviser may deem necessary, appropriate or convenient for the discharge of
its obligations hereunder or otherwise helpful to the Growth and Income Series,
or in the discharge of Sub-Adviser's overall responsibilities with respect to
the other accounts which it serves as investment adviser or sub-adviser. The
SubAdviser is authorized to allocate brokerage and principal business to firms
that provide such services or facilities and to cause the Growth and Income
Series to pay a member of a securities exchange or any other securities broker
or dealer, an amount of commission for effecting a securities transaction in
excess of the amount of commission another member of an exchange, broker or
dealer would have charged for effecting that transaction, if the Sub-Adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research service (as such services
are defined in Section 28(e) of the Securities Exchange Act of 1934) provided by
such member, broker or dealer, viewed in terms of either that particular
transaction or the overall responsibilities of the Sub-Adviser with respect to
the accounts as to which the Sub-Adviser exercises investment discretion (as
that term is defined in Section 3(a)(35) of the Securities Exchange Act of
1934).
5. The Sub-Adviser shall obtain and evaluate such information relating to
the economy, industries, businesses, securities markets and securities as it may
deem necessary or useful in the discharge of its obligations hereunder and shall
formulate and implement a continuing program for performance of its services
pursuant to this Agreement.
6. The Sub-Adviser, its officers, directors and employees, shall make
available and provide such information relating to itself, its organization, its
personnel, and its activities as may be required by the Trust in the preparation
of registration statements, prospectuses, proxy materials, reports and other
documents required by federal and state securities laws. In addition, the
SubAdviser, its officers, directors and employees shall provide such information
to the Board of Trustees of the Trust as said Board shall request and which may
be reasonably necessary for the Board to evaluate the terms of this Agreement in
accordance with the requirements of the Investment Company Act of 1940.
7. The Sub-Adviser agrees to maintain and preserve for such period or
periods as the Securities and Exchange Commission may prescribe by rules and
regulations, such accounts, books, and other documents as constitute the records
forming the basis for all reports, including financial statements required to be
filed pursuant to the Act and for the Trust's auditor's certification. The
SubAdviser agrees that all accounts, books and other records maintained and
preserved as required hereby shall be subject at any time, and from time to
time, to such reasonable periodic' special and other examinations by the
Securities and Exchange Commission, the Trust's auditors, the Trust or any
representative of the Trust, or any governmental agency or other instrumentality
having regulatory authority over the Trust. It is expressly understood and
agreed that any books and records maintained by the Sub-Adviser on behalf of the
Trust shall, at all times remain the property of the Trust. Moreover, the
Adviser agrees to supply the Sub-Adviser with copies of all documents filed by
the Trust with the Securities and Exchange Commission and with such other
information relating to the Trust's affairs as the Sub-Adviser may reasonably
request.
8. The Adviser shall pay the Sub-Adviser a fee, based on the value of the
net assets of the Growth and Income Series for which it serves as SubAdviser
subject to this Agreement as determined in accordance with the Trust's current
prospectus and statement of additional information, and computed as follows:
(a) The fee shall be at the annual rate of 0.35 of 1% of the average
daily net assets of the Growth and Income Series.
(b) The fee shall be accrued for each calendar day and the sum of the
daily fee accruals shall be paid monthly to the Sub-Adviser as soon as is
practicable after the end of each succeeding calendar month. The daily fee
accruals will be computed by multiplying the fraction of one over the number
of calendar days in the year by the annual rate described in subparagraph
(a) of this Paragraph 8, and multiplying this product by the net assets of
2
<PAGE> 3
the Growth and Income Series as determined in accordance with the procedures
set forth in the Trust's current prospectus and statement of additional
information as of the close of business on the previous business day.
9. The Adviser agrees to furnish the Sub-Adviser at its principal office all
post-effective amendments to the Trust's registration statement and all
prospectuses, statements of additional information, proxy materials, reports to
shareholders, sales literature, and other material prepared for distribution to
persons having a beneficial interest in shares of the Growth and Income Series,
or to the public, which refer in any way to the Sub-Adviser ten (10) days prior
to use thereof and not to use such material if the Sub-Adviser shall object
thereto in writing within seven (7) days after receipt of such material. In the
event of termination of this Agreement, the Adviser shall ensure that the Growth
and Income Series will, on written request of the Sub-Adviser, forthwith delete
any reference to the Sub-Adviser from any materials described in the preceding
sentence. The Adviser shall furnish or otherwise make available to the
SubAdviser such other information relating to the business affairs of the Trust
and the Growth and Income Series as the Sub-Adviser at any time, or from time to
time, reasonably requires in order to discharge its obligations hereunder.
10. Nothing herein contained shall limit the freedom of the Sub-Adviser or
any affiliated person of the Sub-Adviser to render investment supervisory and
management administrative services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms, or
corporations, or to engage in other business activities. The Adviser understands
and agrees that the Sub-Adviser may give advice and take action with respect to
any of its other clients which may differ from advice given to the Adviser so
long as it is the Sub-Adviser's policy, to the extent practical, to allocate
investment opportunities to the Growth and Income Series over a period of time
on a fair and equitable basis relative to other clients. It is understood that
the Sub-Adviser shall not have any obligation to recommend for purchase or sale,
for the Growth and Income Series any security which the Sub-Adviser, its
principals, affiliates or employees may purchase or sell for its or their own
accounts or for the account of any other client, if in the opinion of the
SubAdviser such transaction or investment appears unsuitable, impractical or
undesirable for the Growth and Income Series. In discharging its duties
hereunder, Sub-Adviser shall be governed by the requirements of the Investment
Company Act of 1940, including, but not limited to, Section 17 thereof.
11. The Sub-Adviser shall not purchase or sell, or recommend the purchase or
sale of the securities of any issuer for the Growth and Income Series on the
basis of any material non-public ("inside") information.
12. (a) This Agreement shall take effect as to the Growth and Income Series
on , 1997 ("Effective Date") and shall continue in effect for a period
of two years provided that prior to the Effective Date the terms of this
Agreement have been approved by a vote of (i) a majority of the members of the
Board of Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party, cast in person at a meeting called for
the purpose of voting on such approval, and (ii) a majority of the outstanding
"voting securities" (as defined in the Act) of the Growth and Income Series.
(b) This Agreement shall continue in effect from year to year after the
initial period so long as such continuance is specifically approved at least
annually by the Board of Trustees of the Trust, or by vote of a majority of the
outstanding voting securities of the Growth and Income Series, and, concurrently
with such approval by the Board of Trustees or prior to such approval by the
holders of the outstanding voting securities of the Growth and Income Series, as
the case may be, by the vote, cast in person at a meeting called for the purpose
of voting on such approval, of a majority of Trustees of the Trust who are not
parties to this Agreement or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party; and the Sub-Adviser shall not have
notified the Adviser nor shall the Adviser have notified the Sub-Adviser in
writing that it does not desire such continuation at least sixty (60) days prior
to the termination date of this Agreement.
(c) This Agreement may be terminated by either party hereto, without the
payment of any penalty, upon sixty (60) days' notice in writing to the other
party, or by the Growth and Income Series upon sixty (60) days' prior written
notice to both parties hereto, provided, that in the case of termination by the
Growth and Income Series, such actions shall have been authorized by resolution
of the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Growth and Income Series.
(d) This Agreement may not be amended without the written consent of the
Adviser and Sub-Adviser, and affirmative vote of a majority of the outstanding
voting securities of the Growth and Income Series and by a vote of a majority of
the Board of Trustees of the Trust who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
3
<PAGE> 4
13. This Agreement shall terminate automatically in the event of its
assignment by either party. For the purpose of this paragraph, the term
"assignment" shall have the meaning set forth in Section 2(a)(4) of the
Investment Company Act of 1940.
14. To the extent that such is required by state law, if the aggregate
expenses of the Growth and Income Series in any fiscal year exceed 2.5% of the
first $30,000,000 of the average net asset value of the Series for that year,
2.0% of the next $70,000,000 of the average net asset value of such Series for
that year, plus 1.5% of the remaining average net assets for that year (all
calculated on a daily basis), the Sub-Adviser agrees to waive such portion of
its fee, as may be necessary to provide for any such excess expenses, but such
waiver shall not exceed the full amount of the fee for such year except as may
be elected by the Sub-Adviser in its discretion. For this purpose, aggregate
expenses of the Growth and Income Series shall include the compensation of the
Adviser, but shall exclude interest, taxes, brokerage fees on portfolio
transactions, commissions paid on the distribution of Trust shares, and certain
extraordinary expenses including litigation expenses. For the purposes of this
paragraph the term "fiscal year" shall be prorated in the event of a period of
less than a full fiscal year. The expense limitation shall be that part of 2.5%,
2.0% or 1.5% as the case may be, proportional to the portion of a full fiscal
year elapsed.
15. Neither the Sub-Adviser nor any of its officers, directors, or
employees, performing services under this Agreement shall be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or the
Adviser in connection with the matters to which this Agreement relates, except
for loss resulting from willful misfeasance, bad faith, or gross negligence in
the performance of its duties or from reckless disregard by the Sub-Adviser or
such person of the duties of the Sub-Adviser under this Agreement.
16. Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Investment Company Act of 1940 shall be resolved by reference to such
term or provision of that Act and to interpretations thereof, if any, by the
United States Courts, and by rules, regulations or orders of the Securities and
Exchange Commission validly issued pursuant to said Act. Specifically, the terms
"affiliated person," as used in paragraph 8, and "vote of a majority of the
outstanding voting securities," and "interested person," as used in paragraph 10
hereof, shall have the meanings assigned to them by Section 2(a) of the
Investment Company Act of 1940. In addition, where the effect of a requirement
of the Investment Company Act of 1940 reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Securities and
Exchange Commission or state regulatory authorities, whether of special or of
general application, such provision shall be deemed to incorporate the effect of
such rule, regulation or order.
17. Unless otherwise specified herein, all notices, instructions and advice
with respect to securities transactions or other matters contemplated by this
Agreement shall be deemed duly given to Sub-Adviser when received in writing by
Sub-Adviser at 100 East Pratt Street, Baltimore, Maryland 21202, to the Trust at
11365 West Olympic Boulevard, Los Angeles, California 90064 and to the Adviser
at 11365 West Olympic Boulevard, Los Angeles, California 90064. Sub-Adviser may
rely upon any notice (written or oral) from any person which Sub-Adviser
reasonably believes to be genuine and authorized.
18. Nothing herein contained shall be deemed to prevent the Adviser from
contracting with other investment advisory organizations other than Sub-Adviser
to provide investment advisory services on a sub-advisory basis to one or more
investment series of the Trust other than the Growth and Income Series.
19. This writing constitutes the entire agreement between the parties and
no conditions or warranties shall be implied herefrom unless expressly set forth
herein.
20. This Agreement shall be governed by the laws of the State of Delaware.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers "hereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and the year first above
written.
SECURITY FIRST INVESTMENT
MANAGEMENT CORPORATION
Attest:
/s/ JAMES C. TURNER By: /s/ RICHARD C. PEARSON
- ------------------------------------ -------------------------------
Assistant Secretary
Attest: T. ROWE PRICE ASSOCIATES, INC.
/s/ NANCY M. MORRIS By: /s/ DARRELL N. BRAMAN
- ------------------------------------ --------------------------------
5
<PAGE> 1
SUB-ADVISORY AGREEMENT
BETWEEN
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION
AND
NEUBERGER & BERMAN, LLC
SUB-ADVISORY AGREEMENT, made this 30th day of October, 1997, by and between
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION, a corporation organized and
existing under the laws of the State of Delaware (the "Adviser"), and NEUBERGER
& BERMAN, LLC, a limited liability company organized and existing under the laws
of Delaware, (the "Sub-Adviser").
WITNESSETH:
WHEREAS, Security First Trust (the "Trust") is an open-end, diversified,
management investment company, registered as such under the Investment Company
Act of 1940 consisting of multiple investment series; and
WHEREAS, shares of the Trust are made available only to fund variable
contracts offered by life insurance companies; and
WHEREAS, at present the Trust is comprised of four investment series, one of
which is the Bond Series, (the "Bond Series"), which are to be operated as the
underlying investment media for certain variable contracts funded through
separate accounts of life insurance companies; and
WHEREAS, the Trust has contracted with the Adviser for the Adviser to
provide investment advisory, business management and administrative services to
the investment series of the Trust pursuant to a Master Investment Management
and Advisory Agreement; and
WHEREAS, the Adviser is authorized by the terms of the Master Investment
Management and Advisory Agreement with the Trust to enter into sub-advisory
agreements with third parties; and
WHEREAS, the Sub-Adviser is engaged principally in the business of rendering
investment advisory services to registered investment companies and other
clients and is registered as an investment adviser under the Investment Advisers
Act of 1940;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. The Adviser acts as investment adviser and manager for the Bond Series
pursuant to a Master Investment Advisory Agreement, and as such has authority
and responsibility for supervising and directing the investments of the Bond
Series in accordance with its investment objectives and policies, programs and
restrictions as stated in the Trust's registration statement and its current
prospectus and statement of additional information, and such other limitations
as are imposed upon the Trust pursuant to section 817 (h) of the Internal
Revenue Code of 1986. Pursuant to its agreement with the Trust, the Adviser, as
agent and attorney-in-fact for the Bond Series may, when it deems appropriate,
(a) buy, sell, exchange, convert and otherwise trade in any stocks, bonds or
other securities, and (b) place orders for the execution of such security
transactions with or through such brokers, dealers or issuers as the Adviser may
select subject, however, at all times to the supervision of the Board of
Trustees of the Trust. The Adviser may delegate any of the foregoing authority
to Sub-Adviser; provided, however, that nothing in this Agreement shall be
interpreted to derogate the responsibilities of the Adviser to the Trust or the
Bond Series under the aforementioned Master Investment Management and Advisory
Agreement.
2. The Adviser hereby employs Sub-Adviser to render the advisory services
set forth herein for the fee specified herein.
3. During the term of this Agreement, or any continuance or extension
thereof, and unless otherwise limited by the Adviser as hereinafter provided,
the Sub-Adviser will, to the best of its ability, exercise investment discretion
on behalf of the Bond Series with respect to the purchase, holding or sale of
securities in accordance with the stated investment objectives and policies of
the Bond Series as communicated to the Sub-Adviser by Adviser in writing and as
is required to comply with the terms of the Master Investment Management and
Advisory Agreement, the diversification
<PAGE> 2
requirements of the Investment Company Act of 1940 and section 817 (h) of the
Internal Revenue Code. The Sub-Adviser shall not be required to respond to
inquiries from the Adviser with regard to specific securities other than
securities which are or have been held by the Bond Series during the time this
Agreement is in effect. The Adviser reserves the right, subject to shareholder
approval as required by law, to limit the authority of the Sub-Adviser herein
solely in its discretion. The Sub-Adviser shall, for all purposes stated herein,
be deemed an independent contractor and shall not have custody of any of the
assets of the Trust nor authority to act for or represent the Bond Series except
as expressly provided herein.
4. The Sub-Adviser may employ, retain or otherwise avail itself of the
services or facilities of other persons or organizations for the purposes of
obtaining such statistical and other factual information, such advice regarding
economic factors and trends, such advice as to occasional transactions in
specific securities or such other information, advice or assistance as the
SubAdviser may deem necessary, appropriate or convenient for the discharge of
its obligations hereunder or otherwise helpful to the Bond Series, or in the
discharge of Sub-Adviser's overall responsibilities with respect to the other
accounts which it serves as investment adviser or sub-adviser.
5. The Sub-Adviser shall obtain and evaluate such information relating to
the economy, industries, businesses, securities markets and securities as it may
deem necessary or useful in the discharge of its obligations hereunder and shall
formulate and implement a continuing program for performance of its services
pursuant to this Agreement.
6. The Sub-Adviser, its officers, directors and employees, shall make
available and provide such information relating to itself, its organization, its
personnel, and its activities as may be required by the Trust in the preparation
of registration statements, prospectuses, proxy materials, reports and other
documents required by federal and state securities laws. In addition, the
SubAdviser, its officers, directors and employees shall provide such information
to the Board of Trustees of the Trust as said Board shall request and which may
be reasonably necessary for the Board to evaluate the terms of this Agreement in
accordance with the requirements of the Investment Company Act of 1940.
7. The Sub-Adviser agrees to maintain and preserve for such period or
periods as the Securities and Exchange Commission may prescribe by rules and
regulations, such accounts, books, and other documents as constitute the records
forming the basis for all reports, including financial statements required to be
filed pursuant to the Act and for the Trust's auditor's certification. The
SubAdviser agrees that all accounts, books and other records maintained and
preserved as required hereby shall be subject at any time, and from time to
time, to such reasonable periodic, special and other examinations by the
Securities and Exchange Commission, the Trust's auditors, the Trust or any
representative of the Trust, or any governmental agency or other instrumentality
having regulatory authority over the Trust. It is expressly understood and
agreed that any books and records maintained by the Sub-Adviser on behalf of the
Trust shall, at all times remain the property of the Trust. Moreover, the
Adviser agrees to supply the Sub-Adviser with copies of all documents filed by
the Trust with the Securities and Exchange Commission and with such other
information relating to the Trust's affairs as the Sub-Adviser may reasonably
request.
8. The Adviser shall pay the Sub-Adviser a fee, based on the value of the
net assets of the Bond Series for which it serves as Sub-Adviser subject to this
Agreement as determined in accordance with the Trust's current prospectus and
statement of additional information, and computed as follows:
(a) The fee shall be at the annual rate of 0.35 of 1% of the average
daily net assets of the Bond Series.
(b) The fee shall be accrued for each calendar day and the sum of the
daily fee accruals shall be paid monthly to the Sub-Adviser as soon as is
practicable after the end of each succeeding calendar month. The daily fee
accruals will be computed by multiplying the fraction of one over the number
of calendar days in the year by the annual rate described in subparagraph
(a) of this Paragraph 8, and multiplying this product by the net assets of
the Bond Series as determined in accordance with the procedures set forth in
the Trust's current prospectus and statement of additional information as of
the close of business on the previous business day.
9. The Adviser agrees to furnish the Sub-Adviser at its principal office all
post-effective amendments to the Trust's registration statement and all
prospectuses, statements of additional information, proxy materials, reports to
shareholders, sales literature, and other material prepared for distribution to
persons having a beneficial interest in shares of the Bond Series, or to the
public, which refer in any way to the Sub-Adviser ten (10) days prior to use
thereof and not to use such material if the Sub-Adviser shall object thereto in
writing within seven (7) days after receipt of such material. In the event of
termination of this Agreement, the Adviser shall ensure that the Bond Series
will, on written request of the Sub-Adviser, forthwith delete any reference to
the Sub-Adviser from any materials described in the preceding sentence. The
Adviser shall furnish or otherwise make available to the Sub-Adviser such other
information relating to the business affairs of the Trust and the Bond Series as
the Sub-Adviser at any time, or from time to time, reasonably requires in order
to discharge its obligations hereunder.
(2)
<PAGE> 3
10. Nothing herein contained shall limit the freedom of the Sub-Adviser or
any affiliated person of the Sub-Adviser to render investment supervisory and
management administrative services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms, or
corporations, or to engage in other business activities. The Adviser understands
and agrees that the Sub-Adviser may give advice and take action with respect to
any of its other clients which may differ from advice given to the Adviser so
long as it is the Sub-Adviser's policy, to the extent practical, to allocate
investment opportunities to the Bond Series over a period of time on a fair and
equitable basis relative to other clients. It is understood that the Sub-Adviser
shall not have any obligation to recommend for purchase or sale, for the Bond
Series any security which the Sub-Adviser, its principals, affiliates or
employees may purchase or sell for its or their own accounts or for the account
of any other client, if in the opinion of the Sub-Adviser such transaction or
investment appears unsuitable, impractical or undesirable for the Bond Series.
In discharging its duties hereunder, Sub-Adviser shall be governed by the
requirements of the Investment Company Act of 1940, including, but not limited
to, Section 17 thereof.
11. The Sub-Adviser shall not purchase or sell, or recommend the purchase or
sale of the securities of any issuer for the Bond Series on the basis of any
material non-public ("inside") information.
12. (a) This Agreement shall take effect as to the Bond Series on
, 1997 ("Effective Date") and shall continue in effect for a period of one
year provided that prior to the Effective Date the terms of this Agreement have
been approved by a vote of (i) a majority of the members of the Board of
Trustees of the Trust, including a majority of the Trustees who are not parties
to this Agreement or "interested persons" (as defined in the Investment Company
Act of 1940) of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) a majority of the outstanding
"voting securities" (as defined in the Act) of the Bond Series.
(b) This Agreement shall continue in effect from year to year after the
initial period so long as such continuance is specifically approved at least
annually by the Board of Trustees of the Trust, or by vote of a majority of the
outstanding voting securities of the Bond Series, and, concurrently with such
approval by the Board of Trustees or prior to such approval by the holders of
the outstanding voting securities of the Bond Series, as the case may be, by the
vote, cast in person at a meeting called for the purpose of voting on such
approval, of a majority of Trustees of the Trust who are not parties to this
Agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party; and the Sub-Adviser shall not have notified the Adviser
nor shall the Adviser have notified the Sub-Adviser in writing that it does not
desire such continuation at least sixty (60) days prior to the termination date
of this Agreement.
(c) This Agreement may be terminated by either party hereto, without the
payment of any penalty, upon sixty (60) days' notice in writing to the other
party, or by the Bond Series upon sixty (60) days' prior written notice to both
parties hereto, provided, that in the case of termination by the Bond Series,
such actions shall have been authorized by resolution of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Bond Series.
(d) This Agreement may not be amended without the written consent of the
Adviser and Sub-Adviser, and, to the extent required by the Investment Company
Act of 1940, an affirmative vote of a majority of the outstanding voting
securities of the Bond Series and by a vote of a majority of the Board of
Trustees of the Trust who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval.
13. This Agreement shall terminate automatically in the event of its
assignment by either party. For the purpose of this paragraph, the term
"assignment" shall have the meaning set forth in Section 2 (a) (4) of the
Investment Company Act of 1940.
14. To the extent that such is required by state law, if the aggregate
expenses of the Bond Series in any fiscal year exceed 2.5% of the first
$30,000,000 of the average net asset value of the Series for that year, 2.0% of
the next $70,000,000 of the average net asset value of such Series for that
year, plus 1.5% of the remaining average net assets for that year (all
calculated on a daily basis), the Sub-Adviser agrees to waive such portion of
its fee, as may be necessary to provide for any such excess expenses, but such
waiver shall not exceed the full amount of the fee for such year except as may
be elected by the Sub-Adviser in its discretion. For this purpose, aggregate
expenses of the Bond Series shall include the compensation of the Adviser, but
shall exclude interest, taxes, brokerage fees on portfolio transactions,
commissions paid on the distribution of Trust shares, and certain extraordinary
expenses including litigation expenses. For the purposes of this paragraph the
term "fiscal year" shall be prorated in the event of a period of less than a
full fiscal year. The expense limitation shall be that part of 2.5%, 2.0% or
1.5% as the case may be, proportional to the portion of a full fiscal year
elapsed.
(3)
<PAGE> 4
15. Neither the Sub-Adviser nor any of its principals, officers, directors,
or employees, performing services under this Agreement shall be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or the
Adviser in connection with the matters to which this Agreement relates, except
for loss resulting from willful misfeasance, bad faith, or gross negligence in
the performance of its duties or from reckless disregard by the Sub-Adviser or
such person of the duties of the Sub-Adviser under this Agreement.
16. Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Investment Company Act of 1940 shall be resolved by reference to such
term or provision of that Act and to interpretations thereof, if any, by the
United States Courts, and by rules, regulations or orders of the Securities and
Exchange Commission validly issued pursuant to said Act. Specifically, the terms
"affiliated person," as used in paragraph 8, and "vote of a majority of the
outstanding voting securities," and "interested person," as used in paragraph 10
hereof, shall have the meanings assigned to them by Section 2 (a) of the
Investment Company Act of 1940. In addition, where the effect of a requirement
of the Investment Company Act of 1940 reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Securities and
Exchange Commission or state regulatory authorities, whether of special or of
general application, such provision shall be deemed to incorporate the effect of
such rule, regulation or order.
17. Unless otherwise specified herein, all notices, instructions and advice
with respect to securities transactions or other matters contemplated by this
Agreement shall be deemed duly given to Sub-Adviser when received in writing by
Sub-Adviser at Neuberger & Berman, LLC, 605 Third Avenue, New York, New York
10158-3698, Attention: C. Carl Randolph, to the Trust at 11365 West Olympic
Boulevard, Los Angeles, California 90064 and to the Adviser at 11365 West
Olympic Boulevard, Los Angeles, California 90064. Sub-Adviser may rely upon any
notice (written or oral) from any person which Sub-Adviser reasonably believes
to be genuine and authorized.
18. Nothing herein contained shall be deemed to prevent the Adviser from
contracting with other investment advisory organizations other than Sub-Adviser
to provide investment advisory services on a sub-advisory basis to one or more
investment series of the Trust other than the Bond Series.
19. This writing constitutes the entire agreement between the parties and no
conditions or warranties shall be implied herefrom unless expressly set forth
herein.
20. This Agreement shall be governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized and their respective
corporate seals
to be hereunto affixed, as of the day and the year first above written.
SECURITY FIRST INVESTMENT
MANAGEMENT CORPORATION
Attest:
/s/ JAMES C. TURNER By: /s/ RICHARD C. PEARSON
- ------------------------------------ -------------------------------
Assistant Secretary
Attest: NEUBERGER & BERMAN, LLC
/s/ By: /s/ MARTIN McKERROW
- ------------------------------------ -------------------------------
(4)
<PAGE> 1
SUBADVISORY AGREEMENT
BETWEEN
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION
AND
VIRTUS CAPITAL MANAGEMENT, INC.
SUB-ADVISORY AGREEMENT ("Agreement"), made this 30th day of October, 1997,
by and between SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION, a corporation
organized and existing under the laws of the State of Delaware (the "Adviser"),
and VIRTUS CAPITAL MANAGEMENT, INC., (the "Subadviser"), a subsidiary of Signet
Trust Company, a banking association organized and existing under the laws of
the State of Virginia.
WITNESSETH:
WHEREAS, Security First Trust (the "Trust"), is an open-end, diversified,
management investment company registered as such under the Investment Company
Act of 1940 ("Act") consisting of multiple investment series; and
WHEREAS, shares of the Trust are made available to fund variable contracts
offered by life insurance companies; and
WHEREAS, at present the Trust is comprised of four investment series, two of
which, the Virtus Equity Series and the Virtus U.S. Government Income Series
(collectively, the "Virtus Series"), are the subject of this Agreement; and
WHEREAS, the Trust has contracted with the Adviser for the Adviser to
provide investment advisory, business management and administrative services to
the Trust on behalf of the Virtus Series pursuant to a Master Investment
Management and Advisory Agreement (the "Advisory Agreement"); and
WHEREAS, the Adviser is authorized by the terms of the Advisory Agreement to
enter into subadvisory agreements with third parties; and
WHEREAS, the Subadviser is engaged in the business of rendering investment
management services and desires to serve as subadviser for the Virtus Series;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. The Adviser shall act as investment adviser and manager for each of the
Virtus Series pursuant to the Advisory Agreement, and as such has authority and
responsibility for supervising and directing the investments of the Virtus
Series in accordance with their investment objectives and policies, programs and
restrictions as stated in the Trust's registration statement and its current
prospectus and statement of additional information, and such other limitations
as are imposed upon the Trust pursuant to section 817(h) of the Internal Revenue
Code. Pursuant to its agreement with the Trust, the Adviser, as agent and
attorney-in-fact for the Trust on behalf of the Virtus Series may, when it deems
appropriate, (a) buy, sell, exchange, convert and otherwise trade in any stocks,
bonds or other securities, and (b) place orders for the execution of such
security transactions with or through such brokers, dealers or issuers as the
Adviser may select subject, however, at all times to the supervision of the
Board of Trustees of the Trust. The Adviser may delegate any of the foregoing
authority to Subadviser; provided, however, that nothing in this Agreement shall
be interpreted to derogate the responsibilities of the Adviser to the Trust or
the Virtus Series under the aforementioned Advisory Agreement.
2. The Adviser hereby employs Subadviser to render the advisory services set
forth herein for the fee specified herein.
3. During the term of this Agreement, or any extension thereof, and unless
otherwise limited by the Adviser as hereinafter provided, the Subadviser will,
to the best of its ability, exercise investment discretion on behalf of the
Virtus Series with respect to the purchase, holding or sale of securities in
accordance with the stated investment objectives and policies of the respective
Virtus Series as communicated to the Subadviser by the Adviser and as is
required to comply with the terms of the Advisory Agreement, the diversification
requirements of the Act and section 817(h) of the Internal Revenue Code. The
Subadviser shall not be required to respond to inquiries from the Adviser with
regard to specific securities other than securities which are or have been held
by the Virtus Series during the time this Agreement is in effect. The Adviser
reserves the right, subject to shareholder approval as required by law, to limit
the authority of the Subadviser herein solely in its discretion. The Subadviser
shall, for all purposes stated herein, be deemed an
<PAGE> 2
independent contractor and shall not have custody of any of the assets of the
Trust nor authority to act for or represent the Virtus Series except as
expressly provided herein.
4. The Subadviser may employ, retain or otherwise avail itself of the
services or facilities of other persons or organizations for the purposes of
obtaining such statistical and other factual information, such advice regarding
economic factors and trends, such advice as to occasional transactions in
specific securities or such other information, advice or assistance as the
Subadviser may deem necessary, appropriate or convenient for the discharge of
its obligations hereunder or otherwise helpful to the Virtus Series, or in the
discharge of Subadviser's overall responsibilities with respect to the other
accounts which it serves as investment adviser or subadviser. The Subadviser is
authorized to allocate brokerage and principal business to firms that provide
such services or facilities and to cause the Virtus Series to pay a member of a
securities exchange or any other securities broker or dealer, an amount of
commission for effecting a securities transaction in excess of the amount of
commission another member of an exchange, broker or dealer would have charged
for effecting that transaction, if the Subadviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services (as such services are defined in Section 28(e)
of the Securities Exchange Act of 1934) provided by such member, broker or
dealer, viewed in terms of either that particular transaction or the overall
responsibilities of the Subadviser with respect to the accounts as to which the
Subadviser exercises investment discretion (as that term is defined in Section
3(a)(35) of the Securities Exchange Act of 1934).
5. The Subadviser shall obtain and evaluate such information relating to the
economy, industries, businesses, securities markets and securities as it may
deem necessary or useful in the discharge of its obligations hereunder and shall
formulate and implement a continuing program for performance of its services
pursuant to this Agreement.
6. The Subadviser, its directors, officers and employees, shall make
available and provide such information relating to itself, its organization, its
personnel, and its activities as may be required by the Trust in the preparation
of registration statements, prospectuses, proxy materials, reports and other
documents required by federal and state securities laws. In addition, the
Subadviser, its directors, officers and employees shall provide such information
to the Board of Trustees of the Trust as said Board shall request and which may
be reasonably necessary for the Board to evaluate the terms of this Agreement in
accordance with the requirements of the Act.
7. The Subadviser agrees to maintain and preserve for such period or periods
as the Securities and Exchange Commission may prescribe by rules and
regulations, such accounts, books, and other documents relating to the Virtus
Series as constitute the records forming the basis for all reports, including
financial statements required to be filed pursuant to the Act and for the
Trust's auditor's certification. The Subadviser agrees that all accounts, books
and other records maintained and preserved as required hereby shall be subject
at any time, and from time to time, to such reasonable periodic, special and
other examinations by the Securities and Exchange Commission, the Trust's
auditors, the Trust or any representative of the Trust, or any governmental
agency or other instrumentality having regulatory authority over the Trust. It
is expressly understood and agreed that any books and records maintained by the
Subadviser on behalf of the Trust shall at all times remain the property of the
Trust. Moreover, the Adviser agrees to supply the Subadviser with copies of all
documents filed by the Trust with the Securities and Exchange Commission and
with such other information relating to the Trust's affairs as the Subadviser
may reasonably request.
8. The Adviser shall pay the Subadviser a fee, based on the value of the net
assets of each of the Virtus Series as determined in accordance with the Trust's
current prospectus and statement of additional information, and computed as
follows:
(a) The fee shall be at the annual rate of 0.75 of 1% of the average
daily net assets of each of the Virtus Series.
(b) The fee shall be accrued for each calendar day and the sum of the
daily fee accruals shall be paid monthly to the Subadviser as soon as is
practicable after the end of each month and, in any event, by the tenth day
of each succeeding calendar month. The daily fee accruals will be computed
by multiplying the fraction of one over the number of calendar days in the
year by the annual rate described in subparagraph (a) of this Paragraph 8,
and multiplying this product by the net assets of each of the Virtus Series
as determined in accordance with the procedures set forth in the Trust's
current prospectus and statement of additional information as of the close
of business on the previous business day.
9. The Adviser agrees to furnish the Subadviser at its principal office all
post-effective amendments to the Trust's registration statement and all
prospectuses, statements of additional information, proxy materials, reports to
shareholders, sales literature, and other material prepared for distribution to
persons having a beneficial interest in shares of the Virtus Series, or to the
public, which refer in any way to the Subadviser ten (10) days prior to use
thereof and not to use
--2--
<PAGE> 3
such material if the Subadviser shall object thereto in writing within seven (7)
days after receipt of such material. In the event of termination of this
Agreement, the Adviser shall ensure that the Trust will, on written request of
the Subadviser, forthwith delete any reference to the Subadviser from any
materials described in the preceding sentence. The Adviser shall furnish or
otherwise make available to the Subadviser such other information relating to
the business affairs of the Trust and the Virtus Series as the Subadviser at any
time, or from time to time, reasonably requires in order to discharge its
obligations hereunder.
10. Nothing herein contained shall limit the freedom of the Subadviser or
any affiliated person of the Subadviser to render investment supervisory and
management administrative services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms, or
corporations, or to engage in other business activities. The Adviser understands
and agrees that the Subadviser may give advice and take action with respect to
any of its other clients which may differ from action taken under this Agreement
so long as it is the Subadviser's policy, to the extent practical, to allocate
investment opportunities to the Virtus Series over a period of time on a fair
and equitable basis relative to other clients. It is understood that the
Subadviser shall not have any obligation to purchase or sell for the Virtus
Series any security which the Subadviser, its principals, affiliated persons or
employees may purchase or sell for its or their own accounts or for the account
of any other client, if in the opinion of the Subadviser such transaction or
investment appears unsuitable, impractical or undesirable for the Virtus Series.
In discharging its duties hereunder, Subadviser shall be governed by the
requirements of the Act, including, but not limited to, Section 17 thereof.
11. The Subadviser shall not purchase or sell, or recommend the purchase or
sale of the securities of any issuer for the Virtus Series on the basis of any
material non-public ("inside") information.
12. (a) This Agreement shall take effect as to each Virtus Series on
, 1997 ("Effective Date") and shall continue in effect for a
period of two years provided that prior to the Effective Date the terms of this
Agreement have been approved by a vote of (a) a majority of the members of the
Board of Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or "interested persons" (as defined in the Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) a majority of the outstanding "voting securities" (as defined
in the Act) of each such Virtus Series.
(b) This Agreement shall continue in effect as to a Virtus Series from year
to year after the initial two year period described above so long as such
continuance is specifically approved at least annually by the Board of Trustees
of the Trust, or by vote of a majority of the outstanding voting securities of
the Virtus Series, and, concurrently with such approval by the Board of Trustees
or prior to such approval by the holders of the outstanding voting securities of
the Virtus Series, as the case may be, by the vote, cast in person at a meeting
called for the purpose of voting on such approval, of a majority of Trustees of
the Trust who are not parties to this Agreement or "interested persons" (as
defined in the Act) of any such party; and the Subadviser shall not have
notified the Adviser nor shall the Adviser have notified the Subadviser in
writing that it does not desire such continuation at least sixty (60) days prior
to the termination date of this Agreement.
(c) This Agreement may be terminated by either party hereto, without the
payment of any penalty, upon sixty (60) days' notice in writing to the other
party, or by either or both of the Virtus Series upon sixty (60) days' prior
written notice to both parties hereto, provided, that in the case of termination
by one or both of the Virtus Series, such actions shall have been authorized by
resolution of the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the affected Virtus Series.
(d) This Agreement may not be amended without the written consent of the
Adviser and Subadviser, and affirmative vote of a majority of the outstanding
voting securities of the affected Virtus Series and by a vote of a majority of
the Board of Trustees of the Trust including a majority of the Trustees who are
not parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such amendment.
(e) It is understood and agreed that this Agreement may be approved,
continued, terminated without penalty or amended as to either of the Virtus
Series without affecting the other Virtus Series. The approval, continuation,
termination without penalty or amendment of this Agreement shall be conditioned
upon the actions of each of the Virtus Series acting as a separate entity.
Failure to approve or continue this Agreement or the vote to terminate this
Agreement as to one Virtus Series shall not act to negate this Agreement as to
the other Virtus Series.
13. This Agreement shall terminate automatically in the event of its
assignment by either party. For the purpose of this paragraph, the term
"assignment" shall have the meaning set forth in Section 2(a)(4) of the Act.
14. If the aggregate expenses of a Virtus Series exceed any applicable state
expense limitations and the Adviser waives all or a portion of its fees
attributable to such Virtus Series pursuant to Paragraph 10 of the Advisory
Agreement dated , 1997, the Subadviser agrees to waive such portion of
its fee under this Agreement attributable to
--3--
<PAGE> 4
that Series as may be necessary to provide for any such excess expenses, but
such waiver shall not exceed the full amount of the fee for such year except as
may be elected by the Subadviser in its discretion or as provided hereinbelow.
For this purpose, aggregate expenses of a Virtus Series shall include the
compensation of the Adviser, but shall exclude interest, taxes, brokerage fees
on portfolio transactions, commissions paid on the distribution of shares, and
certain extraordinary expenses including litigation expenses. For the purposes
of this paragraph the term "fiscal year" shall be prorated in the event of a
period of less than a full fiscal year. The expense limitation shall be that
part of the applicable annual expense limitation proportional to the portion of
a full fiscal year elapsed. Notwithstanding the foregoing, the Adviser and
Subadviser may voluntarily agree to waive their respective fees, or to make
contributions to a Virtus Series, so as to reduce the expenses of the Virtus
Series below that required by law.
15. Neither the Subadviser nor any of its officers, directors, or employees
performing services under this Agreement shall be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust or the Adviser
in connection with the matters to which this Agreement relates, except for loss
resulting from willful misfeasance, bad faith, or gross negligence in the
performance by the Subadviser or such person of the duties of the Subadviser or
from reckless disregard by the Subadviser or such person of the duties of the
Subadviser under this Agreement.
16. Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Act shall be resolved by reference to such term or provision of that Act
and to interpretations thereof, if any, by the United States Courts, and by
rules, regulations or orders of the Securities and Exchange Commission validly
issued pursuant to the Act. Specifically, the terms "affiliated person," as used
in paragraph 10, and "vote of a majority of the outstanding voting securities,"
and "interested person," as used in paragraph 12 hereof, shall have the meanings
assigned to them by Section 2(a) of the Act. In addition, where the effect of a
requirement of the Act reflected in any provision of this Agreement is relaxed
by a rule, regulation or order of the Securities and Exchange Commission,
whether of special or of general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
17. Unless otherwise specified herein, all notices, instructions and advice
with respect to securities transactions or other matters contemplated by this
Agreement shall be deemed duly given to Subadviser when received in writing by
Subadviser at 7 North Eighth Street, Richmond, Virginia 23219, to the Trust at
11365 West Olympic Boulevard, Los Angeles, California 90064 and to the Adviser
at 11365 West Olympic Boulevard, Los Angeles, California 90064. The Subadviser
may rely upon any notice (written or oral) from any person which the Subadviser
reasonably believes to be genuine and authorized.
18. Nothing herein contained shall be deemed to prevent the Adviser from
contracting with investment advisory organizations other than Subadviser to
provide investment advisory services on a subadvisory basis to one or more
investment series of the Trust other than the Virtus Series.
19. This writing constitutes the entire agreement between the parties and no
conditions or warranties shall be implied herefrom unless expressly set forth
herein.
20. This Agreement shall be governed by the laws of the State of Delaware.
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<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and the year first above
written.
SECURITY FIRST INVESTMENT
MANAGEMENT CORPORATION
Attest:
/s/ JAMES C. TURNER By: /s/ RICHARD C. PEARSON
- ----------------------------------- -------------------------------
Assistant Secretary
VIRTUS CAPITAL MANAGEMENT, INC.
Attest:
/s/ By: /s/ JOHN S. HALL
- ----------------------------------- -------------------------------
Assistant Secretary
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