<PAGE> 1
FILE NO. 2-51173
FILE NO. 811-2480
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 37 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 36 [X]
SECURITY FIRST TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11365 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
---------------------------------
(310) 312-6100
(REGISTRANT'S TELEPHONE NUMBER)
RICHARD C. PEARSON, ESQUIRE COPIES TO:
SECURITY FIRST LIFE INSURANCE COMPANY JOHN DUDLEY
11365 WEST OLYMPIC BOULEVARD SULLIVAN & WORCHESTER
LOS ANGELES, CALIFORNIA 90064 1025 CONNECTICUT AVENUE, N.W.
(NAME AND ADDRESS OF AGENT FOR SERVICE) WASHINGTON, D.C. 20036
--------------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b)
-------
X ON NOVEMBER 27, 1998 PURSUANT TO PARAGRAPH (b) OF RULE 485
-------
60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1) ON [DATE] PURSUANT
-------
TO PARAGRAPH (a)(1) 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2)
-------
ON [DATE] PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
-------
------- THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
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 25, 1998.
<PAGE> 2
SECURITY FIRST TRUST
CROSS REFERENCE SHEET
ITEM NUMBER IN FORM N-1A HEADINGS IN PROSPECTUS
OR STATEMENT OF
ADDITIONAL INFORMATION
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; Equity Series;
U.S. Government Income
Series
5. Management of the Fund Management of the Trust
5a. Management's Discussion of Fund Series Performance
Performance
6. Capital Stock and other Securities Dividends, Distributions
and Federal Taxes; Trust
Shares; Reports
7. Purchase of Securities Being Offered How to Buy and Redeem
Shares
8. Redemption or Repurchase How to Buy and Redeem
Shares
9. Pending Legal Proceedings *
PART B
10. Cover Page Cover (Statement of
Additional Information)
11. Table of Contents Table of Contents
12. General Information and History The Trust
13. Investment Objectives and Policies Investment Policies and
Restrictions; Portfolio
Turnover
14. Management of the Fund Management of the Trust
<PAGE> 3
15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
16. Investment Advisory and Other Investment Adviser and
Other Services;
Custodian; Independent
Auditors; Legal Counsel
17. Brokerage Allocation Brokerage
18. Capital Stock and Other Securities *
19. Purchase, Redemption and Pricing of Pricing and Redemption
Securities Being Offered 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 *
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.
<PAGE> 4
SECURITY FIRST TRUST
PROSPECTUS
- --------------------------------------------------------------------------------
T. ROWE PRICE GROWTH AND INCOME SERIES
BOND SERIES
EQUITY SERIES
U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
- --------------------------------------------------------------------------------
Security First Trust ("Trust") is a diversified open-end management investment
company. The Trust's shares are offered continuously and sold to separate
accounts of life insurance companies to fund variable contracts. Shares of the
Trust are not sold directly to the general public. Shares of the Trust may be
purchased and redeemed at net asset value without the imposition of a sales
charge.
This prospectus describes four separate series of shares, the T. Rowe Price
Growth and Income Series, the Bond Series, the Equity Series (formerly the
Virtus Equity Series) and the U.S. Government Income Series (formerly the Virtus
U.S. Government Income Series) (referred to separately and collectively as "the
Series"). Each Series has its own investment objective(s) and policies.
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 Equity Series seeks to provide growth of capital and income. The Series
pursues this objective by investing in common stocks of high quality companies.
Emphasis is placed on stocks where the value is low when compared to present
earnings.
The U.S. Government Income Series seeks to provide current income. The
Series pursues this objective by investing in a professionally managed,
diversified portfolio limited primarily to U.S. government securities.
A Statement of Additional Information about the Trust which is incorporated
by reference into this Prospectus has been filed with the Securities and
Exchange Commission. It is available, at no charge, by writing to the Trust at
11365 West Olympic Boulevard, Los Angeles, California 90064, Attention: Customer
Service, or you can call (310) 312-6100 or (800) 283-4536. The date of the
Statement of Additional Information is the same as the date of this Prospectus.
- --------------------------------------------------------------------------------
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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 November 27, 1998 (11/98)
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Financial Information............................. 3
Series Performance.......................................... 6
The Trust................................................... 6
The Series.................................................. 7
Investment Objectives and Policies.......................... 7
T. Rowe Price Growth and Income Series...................... 7
Bond Series................................................. 8
Equity Series............................................... 8
U.S. Government Income Series............................... 10
Management of the Trust..................................... 12
How to Buy and Redeem Shares................................ 14
Dividends, Distributions and Federal Taxes.................. 15
Trust Shares................................................ 16
Portfolio Turnover.......................................... 16
Reports..................................................... 16
Legal Proceedings........................................... 16
Table of Contents of Statement of Additional Information.... 17
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer described herein and, if given or made, such information or
representations must not be relied upon as having been authorized. This
Prospectus does not constitute an offer in any jurisdiction to any person to
whom such offer would be unlawful therein.
2
<PAGE> 6
SECURITY FIRST TRUST
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,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.............. $16.26 $12.10 $10.58 $9.26 $8.81 $8.32 $7.54
Income From
Investment
Operations:
Net Investment
Income............ $ .28 $ .30 $ .30 $ .29 $ .23 $ .22 $ .23
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)....... 1.27 4.69 1.56 1.35 .44 .49 .79
--- --- --- --- ---- --- ----
Total From
Investment
Operations....... $ 1.55 $ 4.99 $1.86 $1.64 $ .67 $ .71 $1.02
Less Distributions:
Dividends (from net
investment
income)........... $ (.30) $ (.29) $(.30) $(.26) $(.22) $(.22) $(.24)
Distributions (from
capital gains).... (.95) (.54) (.04) (.06)
--- --- --- --- ---- --- ----
Total
Distributions.... $(1.25) $ (.83) $(.34) $(.32) $(.22) $(.22) $(.24)
Net Asset Value, End
of Period........... $16.56 $16.26 $12.10 $10.58 $9.26 $8.81 $8.32
Total Return......... 9.53% 41.24% 17.58% 17.71% 7.60% 8.53% 13.53%
Ratios/Supplemental
Data:
Net Assets, End of
Period.............. $290,441,528 $204,703,098 $112,552,893 $83,789,646 $65,660,970 $55,160,198 $42,814,515
Ratio of Expenses to
Average Net
Assets.............. .57% .57% .64% .74% .78% .75% .86%
Ratio of Net
Investment Income to
Average Net
Assets.............. 1.92% 2.44% 2.73% 3.10% 2.62% 2.77% 3.10%
Portfolio Turnover
Rate................ 11% 14% 8% 8% 11% 5% 20%
Average Commission
Rate Paid........... .05 .01
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1991 1990(1) 1989
---- ------- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of
Period.............. $7.30 $ 9.19 $7.13
Income From
Investment
Operations:
Net Investment
Income............ $ .39 $ .31 $ .25
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)....... .29 (1.11) 2.22
---- ---- ----
Total From
Investment
Operations....... $ .68 $ (.80) $2.47
Less Distributions:
Dividends (from net
investment
income)........... $(.44) $ (.30) $(.17)
Distributions (from
capital gains).... (.79) (.24)
---- ---- ----
Total
Distributions.... $(.44) $(1.09) $(.41)
Net Asset Value, End
of Period........... $7.54 $ 7.30 $9.19
Total Return......... 9.32% (8.71)% 34.64%
Ratios/Supplemental
Data:
Net Assets, End of
Period.............. $33,493,074 $42,108,056 $38,783,743
Ratio of Expenses to
Average Net
Assets.............. .97% .77% .86%
Ratio of Net
Investment Income to
Average Net
Assets.............. 4.01% 4.22% 3.40%
Portfolio Turnover
Rate................ 36% 34% 98%
Average Commission
Rate Paid...........
</TABLE>
- ---------------
(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> 7
SECURITY FIRST TRUST
BOND SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............. $4.02 $3.88 $3.92 $3.82 $4.08 $3.95 $3.68 $3.95
----- ----- ----- ----- ----- ----- ----- -----
Income from
Investment
Operations:
Net Investment
Income........... $ .19 $ .24 $ .24 $ .24 $ .21 $ .22 $ .24 $ .52
-----
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)...... .11 .14 (.04) .08 (.25) .14 .28 (.24)
----- ----- ----- ----- ----- ----- -----
Total from
Investment
Operations...... $ .30 $ .38 $ .20 $ .32 $(.04) $ .36 $ .52 $ .28
----- ----- ----- ----- ----- ----- ----- -----
Less Distributions:
Dividends (from net
investment
income).......... $(.21) $(.24) $(.24) $(.22) $(.22) $(.23) $(.25) $(.55)
----- ----- ----- ----- ----- ----- ----- -----
Total
Distributions... $(.21) $(.24) $(.24) $(.22) $(.22) $(.23) $(.25) $(.55)
----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End
of Period.......... $4.11 $4.02 $3.88 $3.92 $3.82 $4.08 $3.95 $3.68
===== ===== ===== ===== ===== ===== ===== =====
Total Return........ 7.46% 9.79% 5.10% 8.38% (.98)% 9.11% 14.13% 7.09%
Ratios/Supplemental
Data:
Net Assets, End of
Period............. $17,934,392 $10,634,720 $8,981,365 $7,977,781 $7,225,964 $7,229,959 $5,682,609 $4,793,766
Ratio of Expenses to
Average Net
Assets............. .73% .75% .90% 1.29% 1.30% 1.45% 1.50% 1.50%
Ratio of Net
Investment Income
to Average Net
Assets........... 5.78% 6.41% 6.32% 6.27% 5.45% 6.02% 6.42% 6.89%
Portfolio Turnover
Rate............... 125% 54% 34% 56% 58% 36% 50% 310%
<CAPTION>
YEAR ENDED JULY 31,
-----------------------
1990(1) 1989
------- ----
<S> <C> <C>
Net Asset Value,
Beginning of
Period............. $4.10 $3.94
----- -----
Income from
Investment
Operations:
Net Investment
Income........... $ .29 $ .30
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)...... (.14) .14
----- -----
Total from
Investment
Operations...... $ .15 $ .44
----- -----
Less Distributions:
Dividends (from net
investment
income).......... $(.30) $(.28)
----- -----
Total
Distributions... $(.30) $(.28)
----- -----
Net Asset Value, End
of Period.......... $3.95 $4.10
===== =====
Total Return........ 3.66% 11.17%
Ratios/Supplemental
Data:
Net Assets, End of
Period............. $9,371,386 $8,317,356
Ratio of Expenses to
Average Net
Assets............. 1.50% 1.50%
Ratio of Net
Investment Income
to Average Net
Assets........... 7.45% 7.65%
Portfolio Turnover
Rate............... 186% 148%
</TABLE>
- ---------------
(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> 8
SECURITY FIRST TRUST
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 JULY 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(1)
------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 8.18 $ 6.05 $ 5.70 $ 4.99 $ 5.00 $ 5.00
----------- ----------- ----------- ---------- ---------- ----------
Income From Investment Operations:
Net Investment Income............... $ .07 $ .09 $ .10 $ .05 $ .05 $ .01
Net Gains or (Losses) on Securities
(both realized and unrealized).... $ 1.04 2.60 .46 .71 (.03) (.01)
----------- ----------- ----------- ---------- ---------- ----------
Total From Investment
Operations...................... $ 1.11 $ 2.69 $ .56 $ .76 $ .02 $ .00
----------- ----------- ----------- ---------- ---------- ----------
Less Distributions:
Dividends (from Net Investment
Income)........................... (.08) (.11) (.05) (.05) (.03)
Distributions (from Capital
Gains)............................ (.64) (.45) (.16)
----------- ----------- -----------
Total Distributions............... (.72) (.56) (.21) (.05) (.03)
----------- ----------- ----------- ---------- ---------- ----------
Net Asset Value, End of Period........ $ 8.57 $ 8.18 $ 6.05 $ 5.70 $ 4.99 $ 5.00
=========== =========== =========== ========== ========== ==========
Total Return(2)....................... 13.57% 44.46% 9.82% 15.23% .40% 0.00%
Ratios/Supplemental Data:
Net Assets, End of Period............. $54,803,152 $47,571,469 $20,701,776 $7,765,719 $3,007,073 $1,333,852
Ratio of Expenses to Average Net
Assets(2)........................... .91% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets(2)............... .86% 1.56% 2.24% 1.29% 1.38% .85%
Portfolio Turnover Rate............... 87% 55% 88% 84% 121% 7%
Average Commission Rate Paid.......... .06 .02
</TABLE>
- ---------------
(1) The Equity Series commenced operations on May 19, 1993.
(2) Annualized.
5
<PAGE> 9
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP, the Trust's independent auditors, whose report thereon appears in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(1)
------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 5.36 $ 5.15 $ 5.13 $ 4.91 $ 5.07 $ 5.00
----------- ----------- ----------- ---------- ---------- ----------
Income From Investment Operations:
Net Investment Income............... $ .27 $ .23 $ .18 $ .21 $ .11 $ .03
Net Gains or (Losses) on Securities
(both realized and unrealized).... .06 .20 .04 .15 (.19) .04
----------- ----------- ----------- ---------- ---------- ----------
Total From Investment
Operations...................... $ .33 $ .43 $ .22 $ .36 $ (.08) $ .07
----------- ----------- ----------- ---------- ---------- ----------
Less Distributions:
Dividends (from Net Investment
Income)........................... (.24) (.22) (.19) (.14) (.07)
Distributions (from Capital
Gains)............................ (.01) (.01)
----------- ----------- ----------- ---------- ----------
Total Distributions............... (.24) (.22) (0.2) (.14) (.08)
----------- ----------- ----------- ---------- ----------
Net Asset Value, End of Period........ $ 5.45 $ 5.36 $ 5.15 $ 5.13 $ 4.91 $ 5.07
=========== =========== =========== ========== ========== ==========
Total Return(2)....................... 6.16% 8.35% 4.29% 7.33% (1.58)% 7.10%
Ratios/Supplemental Data:
Net Assets, End of Period............. $34,090,919 $28,889,460 $14,888,824 $5,996,149 $3,424,487 $ 469,060
Ratio of Expenses to Average Net
Assets(2)........................... .66% .70% .70% .70% .70% .70%
Ratio of Net Investment Income to
Average Net Assets(2)............... 5.53% 5.68% 5.38% 5.19% 3.62% 3.91%
Portfolio Turnover Rate............... 103% 62% 148% 16% 17% 0%
</TABLE>
- ---------------
(1) 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.
6
<PAGE> 10
The Trust's business activities are the responsibility of its Board of
Trustees. Investment advisory services are provided to the four Series described
herein by Security First Investment Management Corporation ("Security
Management"). (See "Investment Adviser," page 12.) 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. BlackRock Financial Management, Inc.
("BlackRock") (the successor to Provident Capital Management, Inc.) is a
sub-adviser to Security Management and provides investment management services
to the Equity Series and the U.S. Government Income Series. (See "Sub-Advisers",
page 12).
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.
7
<PAGE> 11
BOND SERIES
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Bond Series is to achieve the
highest investment income over the long term consistent with the preservation of
capital. This Series seeks to achieve this investment objective through
investment principally in marketable debt securities. A secondary objective is
growth of principal and income with respect to those Series assets that are
invested in common and preferred stocks.
It is impossible for the shareholders of the Bond Series to be assured that
these objectives will be realized because virtually all securities fluctuate in
market price. In addition, corporate earnings, dividends and the return on fixed
income instruments may vary from year to year. Thus, there is no guarantee that
a shareholder's capital or income will increase or that purchases of this
Series' shares involve a preservation of original capital or protection against
loss of value.
It is the policy of the Bond Series to purchase and hold securities which
are believed to have potential for the generation of investment income. Growth
of capital and income will be secondary considerations in the selection of
portfolio securities. This Series is not intended to buy and sell for short-term
trading profits, and as a result, portfolio changes will usually be accomplished
gradually. Nevertheless, the Trustees are not restricted and may determine to
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, 1998,
approximately 9.0% of the Series investment portfolio was invested in high yield
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.
EQUITY SERIES
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the 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 following
investment policies.
The 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 stock 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
8
<PAGE> 12
the Series may be changed by the Trustees without the approval of the
contractholders. Contractholders will be notified before any material changes in
these policies becomes effective.
Acceptable Investments. The securities in which the 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 Equity Series may invest in preferred
stocks, corporate bonds, notes, warrants, rights, and convertible securities of
these companies.
Commercial Paper. The Equity Series may invest in commercial paper rated A-1
by Standard & Poor's Corporation, or Prime-1 by Moody's Investors Service, Inc.,
or F-1 by Fitch Investors Service Inc. and money market instruments (including
commercial paper) which are unrated but of comparable quality, including
Canadian Commercial Paper ("CCPs") and Europaper.
Bank Instruments. The 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 ("EDCs"),
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 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 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 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 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 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 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
9
<PAGE> 13
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 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
Equity Series may lend portfolio securities up to one-third of the value of its
total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Series will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the subadviser has determined
are creditworthy under guidelines established by the Board of Trustees and will
receive collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned.
When-Issued and Delayed Delivery Transactions. The Equity Series may
purchase securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Series purchases securities with
payment and delivery scheduled for a future time. The Series engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Series' investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Series relies on the seller to complete the transaction. The
seller's failure may cause the Series to miss a price or yield considered to be
advantageous.
U.S. GOVERNMENT INCOME SERIES
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the U.S. Government Income Series is to provide
current income. The investment objective cannot be changed without approval of
shareholders. The U.S. Government Income Series pursues its investment objective
by investing primarily in securities which are primary or direct obligations of
the U.S. government, its agencies, or instrumentalities or which are guaranteed
by the U.S. government, its agencies, or instrumentalities ("U.S. Government
Securities"). The Series may also invest in certain collateralized mortgage
obligations ("CMOs") and adjustable rate mortgage securities ("ARMS"), both of
which represent or are supported by direct or indirect obligations of the U.S.
Government or its instrumentalities. As a matter of investment policy which can
be changed without shareholder approval, the Series will invest, under normal
circumstances, at least 65% of the value of its total assets in U.S. government
securities (including such CMOs and ARMS). Unless indicated otherwise, the
investment policies of the Series may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The U.S. government securities in which the Series invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Federal Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National Mortgage
Association and Federal Home Loan Mortgage Corporation.
The obligations of U.S. government agencies or instrumentalities which the
Series may buy are backed in a variety of ways by the U.S. government or its
agencies or instrumentalities. Some of these obligations, such as Government
National Mortgage Association mortgage-backed securities and obligations of the
Farmers Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers Home
Administration, Federal Farm Credit Banks, Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations.
CMOs. The U.S. Government Income Series may also invest in CMOs which are
rated AAA or better by a nationally recognized rating agency and which are
issued by private entities such as investment banking firms and companies
10
<PAGE> 14
related to the construction industry. The CMOs in which the Series may invest
may be: (i) privately issued securities which are collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of an agency or instrumentality of the U.S. government.
The mortgage-related securities provide for a periodic payment consisting of
both interest and principal.
ARMS. ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the U.S. Government Income Series
invests are issued by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Series, would
receive monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. governmental securities.
Repurchase Agreements. The U.S. government securities in which the U.S.
Government Income Series invests may be purchased pursuant to repurchase
agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Series and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Series, the Series
could receive more or less than the repurchase price on any sale of such
securities.
When-Issued and Delayed Delivery Transactions. The U.S. Government Income
Series may purchase U.S. government securities on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Series
purchases securities with payment and delivery scheduled for a future time. The
Series engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Series' Investment
objective and policies, not for investment leverage. In when-issued and delayed
delivery transactions, the Series relies on the seller to complete the
transaction. The seller's failure may cause the Series to miss a price or yield
considered to be advantageous.
Lending of Portfolio Securities. In order to generate additional income,
the U.S. Government Income Series may lend portfolio securities up to one-third
of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Series will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
subadviser has determined are creditworthy under guidelines established by the
Board of Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
Mortgage backed securities evidence an undivided interest in mortgage pools.
These securities are subject to more rapid repayment than their stated maturity
would indicate because prepayments of principal on mortgages in the pool are
passed through to the holder of the securities. During periods of declining
interest rates, prepayments of mortgages in the pool can be expected to
increase. The pass-through of these prepayments would have the effect of
reducing the Series' position in these securities and requiring the Series to
reinvest the prepayments at interest rates prevailing at the time of
reinvestment. In addition, if such securities were purchased at a premium, the
Series could experience a capital loss if prepayment is effected before the
premium has been amortized.
11
<PAGE> 15
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
Equity Series and U.S. Government Income Series pursuant to a Master Investment
Management and Advisory Agreement dated March 27, 1998 (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 four 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%, Equity Series .70% and U.S.
Government Income Series .55%. The advisory fees, which are accrued daily and
payable monthly, are 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 BlackRock dated March 27, 1998 respecting the Equity
Series and the U.S. Government Income Series. Each agreement has an initial term
of two years and may be extended from year to year thereafter.
Price Associates is a Maryland corporation which was incorporated in 1947 as
the successor to the investment counseling business founded by Mr. T. Rowe Price
in 1937. Its principal offices are located at 100 East Pratt Street, Baltimore,
Maryland 21202. Price Associates and certain of its subsidiaries serve as
investment advisers to individual and institutional investors (including mutual
funds) with total net assets under supervision of approximately $130 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 $50 billion in
12
<PAGE> 16
assets under its management for clients, including approximately $11 billion
under management by its Fixed Income Group.
BlackRock is a wholly-owned subsidiary of BlackRock, Inc., which is a
wholly-owned subsidiary of PNC Bank, N.A. The principal offices of BlackRock and
BlackRock, Inc. are located at 345 Park Avenue, New York, New York 10154, with
additional offices in Philadelphia, Wilmington, Chicago and Edinburgh.
BlackRock, Inc. is a fully integrated money management firm with global fixed
income, equity and cash management capabilities. As of December 31, 1997,
BlackRock, Inc. and its subsidiaries managed or administered approximately $55
billion in assets.
Under the Sub-Advisory Agreements, Price Associates, Neuberger & Berman and
BlackRock 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 BlackRock, Security Management is obligated to pay a sub-advisory fee at an
annual rate equal to 0.55% of the average daily net assets of the Equity Series
and .40% of the U.S. Government Income Series, 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.
Mr. Daniel Eagan is the portfolio manager for the Equity Series. Mr. Eagan
is a Portfolio Manager at BlackRock specializing in large cap value and select
equity products. He is also responsible for portfolio risk modeling and
quantitative analysis as it applies to the investment management process. Mr.
Eagan has been the portfolio manager since March 27, 1998. Prior to joining
BlackRock, Mr. Eagan was Director of Investment Strategy at PNC Asset Management
Group, responsible for asset allocation strategy and the quantitative
application of financial techniques to the investment management process. Mr.
Eagan served as a senior investment research consultant for William M. Mercer
Asset Planning Inc., a nationwide investment consulting practice, from June 1992
to September 1994.
Mr. Scott Amero is the portfolio manager for the U.S. Government Income
Series. Mr. Amero is a Managing Director and Portfolio Manager at BlackRock
Financial Management, and a member of its Investment Strategy Committee. Mr.
Amero serves as Vice President for BlackRock's family of closed-end mutual funds
and Smith Barney Adjustable Rate Government Income Fund. Mr. Amero has been the
portfolio manager since March 27, 1998.
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.
13
<PAGE> 17
For the fiscal year ended July 31, 1998 the ratios of total expenses to
average net assets were: .57% for the T. Rowe Price Growth and Income Series,
.73% for the Bond Series, .91% for the Equity Series and .66% for the U.S.
Government Income Series. Under the Advisory Agreements, Security Management and
BlackRock 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.
For the fiscal year ended July 31, 1998, Security Management earned
management fees of $374,539 from the T. Rowe Price Growth and Income Series and
$20,472 from the Bond Series.
In regard to the Equity Series, for the fiscal year ended July 31, 1998,
Security Management earned advisory fees of $437,078 ($79,767 after payment of
advisory fees). Of this amount, Security Management waived $20,111 ($220 after
waiver of subadvisory fees to the Series' former subadvisor, Virtus Capital
Management ("Virtus"). BlackRock earned subadvisory fees of $104,810, while the
former subadvisor, Virtus earned $252,501 and of this amount Virtus waived
$19,891.
In regard to the U.S. Government Income Series, for the fiscal year ended
July 31, 1998, Security Management earned advisory fees of $258,431 ($50,153
after payment of advisory fees). Of this amount, Security Management waived
$82,952 ($206 after waiver of subadvisory fees to the Series' former subadvisor,
Virtus). BlackRock earned subadvisory fees of $46,152 while the former
subadvisor, Virtus earned $162,126 and of this amount Virtus waived $82,746.
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 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 three 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
14
<PAGE> 18
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, Equity and
U.S. Government Income Series is to pay dividends from their net investment
income from time to time, as determined by the Board of Trustees. It is also the
policy of these Series to distribute net realized long-term capital gains, if
any, at least once each year.
Unless the shareholder elects otherwise, dividends and capital gain
distributions of the Series described herein are automatically reinvested in
additional shares. Such shares are credited to the shareholder's account at net
asset value on a date which is determined by the Board of Trustees and which is
between the record date and the payment date. In the initial application to
purchase shares of a Series, the shareholder may specify that dividends are to
be paid in cash and capital gain distributions reinvested in additional shares,
or that all dividends and distributions are to be paid in cash. The
shareholder's instructions with respect to the payment of distributions by a
Series may be changed without cost by a request made in writing to the Trust. To
be effective as to any dividend or capital gain distribution, the shareholder's
written request for a change must be received by the Trust prior to the
declaration thereof and in any event at least thirty days before the date set
for payment.
TAXATION OF SHAREHOLDERS
Under the Code each Series is treated as a separate regulated investment
company providing the qualification requirements of Sub-chapter M of the Code
are met. The Trust intends each Series to qualify as a regulated investment
company. As a general rule, distributions from a regulated investment company to
its shareholders are taxed in the following manner: (a) distributions derived
from interest, dividends and net short-term capital gains are taxable to the
shareholder as ordinary income, and (b) distributions derived from net long-term
capital gains are taxable to the shareholder as long-term capital gains
regardless of the actual length of time the shareholder has owned the investment
company's shares.
Because the Series' shares are sold only to life insurance companies as the
underlying investment media for their separate accounts and to other entities
permitted under Section 817(h) of the Code, the foregoing rules are modified by
special rules of the Code for taxing life insurance companies. Under these
special rules, a life insurance company generally will not incur any federal
income tax liability on Series distributions to a separate account on a variable
contract as defined in Section 817(d) of the Code. See the contract prospectus
for information regarding the federal income tax treatment of the contracts and
distributions to the separate account.
DIVERSIFICATION REQUIREMENTS
Each Series intends to comply with the diversification requirements imposed
by Section 817(h) of the Code and the regulations thereunder. These
requirements, which are in addition to the diversification requirements imposed
on the Series by the 1940 Act and Subchapter M of the Code, place certain
limitations on the assets of each separate account and, because Section 817(h)
and those regulations treat the assets of each Series as assets of the related
separate account, of each Series. Specifically, the regulations provide that,
except as permitted by the "safe harbor"
15
<PAGE> 19
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.
PORTFOLIO TURNOVER
The 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 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 BlackRock engaged in by
the Equity Series will result in an annual rate of portfolio turnover exceeding
100%. Although the U.S. Government Income Series does not intend to invest for
the purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Series' subadviser believes it is appropriate to do so in
light of the Series' investment objective, without regard to the length of time
a particular security may have been held. The subadviser to the U.S. Government
Income Series does not anticipate that the portfolio turnover will result in
adverse tax consequences. The U.S. Government Income Series estimates that the
annual rate of portfolio turnover will not exceed 100%.
REPORTS
Trust shareholders will be kept informed through annual and semi-annual
reports showing the financial activities of the Series in which they have
invested. Financial statements of the Trust will be audited annually by
certified public accountants. Shareholder inquiries should be addressed to
Security First Trust: Customer Service, 11365 West Olympic Boulevard, Los
Angeles, California 90064.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which the Trust or Security Management
is a party.
16
<PAGE> 20
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............................. 21
Management of the Trust..................................... 21
Brokerage................................................... 23
Portfolio Turnover.......................................... 25
Pricing and Redemption of Securities Being Offered.......... 26
Taxation.................................................... 27
Bond Ratings................................................ 28
Commercial Paper Ratings.................................... 30
Custodian................................................... 31
Independent Auditors........................................ 31
Federal Registration of Shares.............................. 31
Legal Counsel............................................... 31
</TABLE>
17
<PAGE> 21
Rule 497(c)
`33 Act File No. 2-51173
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
BOND SERIES
EQUITY SERIES
U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Prospectus of Security First Trust (the "Trust"), dated
November 27, 1998, 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 November 27, 1998.
<PAGE> 22
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 21
Management of the Trust 21
Brokerage 23
Portfolio Turnover 25
Pricing and Redemption of Securities Being Offered 26
Taxation 27
Bond Ratings 28
Commercial Paper Ratings 30
Custodian 31
Independent Auditors 31
Federal Registration of Shares 31
Legal Counsel 31
</TABLE>
2
<PAGE> 23
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.
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
3
<PAGE> 24
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 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
4
<PAGE> 25
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 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
5
<PAGE> 26
companies for the purpose of exercising management or control; (17) purchase or
retain the securities of any issuer if, to the knowledge of the Trustees, those
Trustees or officers of the Trust and of its investment adviser who each own
beneficially more than 0.50% of the outstanding securities of such issuer
together own beneficially more than 5% of such securities; (18) purchase any
securities which would cause more than 2% of the value of either of the Series'
total assets at the time of such purchase to be invested in warrants which are
not listed on the New York Stock Exchange or the American Stock Exchange, or
more than 5% of the value of either's total assets to be invested in warrants
whether or not so listed, such warrants in each case to be valued at the lesser
of cost or market, but assigning no value to warrants acquired by the Series in
units with or attached to debt securities; (19) issue securities or other
obligations senior to shares of the Series; and (20) purchase any security if,
as a result of such purchase, more than 10% of the value of either Series' total
assets would be invested in foreign securities which are not publicly traded in
the United States.
BOND SERIES
The following investment policies of the Bond Series are not
fundamental. Under normal circumstances, the Bond Series will invest not less
than 65% of its total assets in fixed-income debt instruments, including debt
securities issued in private placements. The Series may also invest in
residential and commercial real estate mortgages secured by first liens and up
to 10% of the value of its total assets in common and preferred stocks. U.S.
dollar denominated foreign fixed income debt securities and Canadian government
securities may also be purchased. The Series may enter into financial futures
contracts or options on financial futures contracts for hedging and non-hedging
purposes where such is deemed in the interest of shareholders. The percentage of
the Series' assets which may be invested in common and preferred stocks, as
opposed to investments in fixed-income instruments, can be expected to vary from
time to time in light of changes in business and market conditions, fiscal and
monetary policies and underlying security values and shall be limited to
securities listed on a national securities exchange or regularly traded on a
national or regional basis.
The fixed income debt instruments in which the Bond Series may invest
include: (1) marketable convertible and non-convertible debt securities rated at
the time of purchase within the four highest grades assigned by Moody's (Aaa, Aa
A or Baa) or by Standard & Poor's (AAA, AA, A or BBB) or comparable unrated
securities; (2) marketable convertible and non-convertible debt securities rated
at the time of purchase within the grades Ba or B assigned by Moody's or grades
BB or B assigned by Standard & Poor's or comparable unrated securities, limited
to a maximum of 20% of the value of the Series total net assets; (3) securities
issued or guaranteed by the United States government or its agencies or
instrumentalities; (4) U.S. dollar denominated marketable foreign securities;
(5) securities issued or guaranteed by the Dominion of Canada, and any Province
of Canada, or any instrumentality or political subdivision thereof; (6) bank
obligations such as certificates of deposit and bankers' acceptances having
investment quality and which in the opinion of the Board of Trustees are
comparable with debt
6
<PAGE> 27
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 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
7
<PAGE> 28
government; (2) purchase securities of open-end investment companies and may not
purchase the shares of closed-end investment companies except in the open market
at normal rates; (3) purchase securities on margin or make short sales unless
fully covered; (4) invest more than 15% of its total assets in securities with
legal or contractual restrictions on resale ("restricted securities") or
otherwise illiquid securities (excluding repurchase agreements maturing in less
than 7 days); (5) invest more than 5% of its total assets in puts, calls,
straddles, spreads or any combination thereof (excluding options on financial
futures contracts); (6) enter into a futures contract or purchase an option on a
futures contract for non-hedging purposes if the initial margin deposit and
premium would exceed 5% of its total assets; (7) purchase or sell real estate or
real estate limited partnerships unless acquired as a result of ownership of
securities, except that it may invest in the securities of companies that own or
deal in real estate; (8) purchase any securities which would cause more than 2%
of the value of the Series' total assets at the time of such purchase to be
invested in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange, or more than 5% of the value of total assets to be
invested in warrants whether or not so listed, such warrants in each case to be
valued at the lesser of cost or market but assigning no value to warrants
acquired by the Series in units with or attached to debt securities, (9) invest
more than 20% of its total assets in high-yield, high-risk bonds (see discussion
below on Certain Risk Factors Relating to High-Yield Bonds); or (10) invest more
than 10% of total assets in U.S. dollar denominated foreign securities which are
not publicly traded in the United States (see Risks and Considerations
Applicable to Investment Securities of Foreign Issuers below).
CERTAIN RISK FACTORS RELATING TO THE BOND SERIES INVESTMENTS
HIGH YIELD BONDS. As noted above, the Bond Series may invest up to 20% of its
assets in high-yield, high-risk bonds. These bonds present certain risks not
normally found in the lower yield investment grade bonds:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. HIGH-YIELD BONDS are very
sensitive to adverse economic changes and corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress that would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a bond defaulted on its obligations to pay interest or principal or entered
into bankruptcy proceeding, the Bond Series may incur losses or expenses in
seeking recovery of amounts owed to it. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high-yield bonds and the Bond Series' net asset value.
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
8
<PAGE> 29
experiences unexpected net redemptions, this may force it to sell high-yield
bonds without regard to their investment merits, thereby decreasing the asset
base upon which their expenses can be spread and possibly reducing the Bond
Series' rate of return.
LIQUIDITY AND VALUATION. There may be little trading in the secondary market for
particular bonds, which may affect adversely the Bond Series' ability to value
accurately or dispose of such bonds. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high-yield bonds, especially in a thin market.
ILLIQUID SECURITIES. The Bond Series may invest up to 15% of its net assets in
restricted or illiquid securities. The term "illiquid securities" for this
purpose means securities that the Series may not be able to dispose of within
seven days in the ordinary course of business at approximately the amount at
which the Bond Series has valued the securities. Illiquid restricted securities
may be sold only in privately negotiated transactions or in public offerings
with respect to which a registration statement is in effect under the Securities
Act of 1933.
However, not all restricted securities are illiquid. In recent years a
large institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
The Board of Trustees is responsible for establishing policies and procedures
for investments in restricted securities and other illiquid securities, and the
Board will monitor compliance with these policies and procedures by investment
advisers to the Series.
RISKS AND CONSIDERATIONS APPLICABLE TO INVESTMENT IN SECURITIES OF FOREIGN
ISSUERS. Elements of risk and opportunity which must be recognized and evaluated
by the Investment Adviser when investment in foreign issuers are made for the
Bond Series include trade imbalances and related economic policies;
expropriation or confiscatory taxation; limitation on the removal of funds or
other assets, political or social instability; the diverse structure and
liquidity of securities markets in various countries and regions; policies of
governments with respect to possible nationalization of their industries; and
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
9
<PAGE> 30
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.
EQUITY SERIES
The 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 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 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 great
than the percentage increase or decrease in the market price of the optioned
common stock.
10
<PAGE> 31
Futures and Options Transactions - As a means of reducing fluctuations
in the net asset value of the 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 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, ad 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 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 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 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)
11
<PAGE> 32
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 Equity Series uses financial futures and options on
financial futures as hedging devices, there is a risk that the process 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
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 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
12
<PAGE> 33
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 received 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 it 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 write 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.
Exchange-traded options have a continuous liquid market while
over-the-counter options may not.
13
<PAGE> 34
U.S. Government Obligations - The types of U.S. government obligations
in which the Series may invest are described below under "U.S. Government Income
Series".
Commercial Paper - The Series may invest in commercial paper rated at
lease 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' acceptance, 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 affect the payment of principal or
interest, foreign withholding or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the
14
<PAGE> 35
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
Equity Series' sub-adviser in selecting investments for the Series.
When-Issued and Delayed Delivery Transactions - These transactions are
arrangements in which the 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 sellers 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.
15
<PAGE> 36
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, by 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
Equity 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
16
<PAGE> 37
the time portfolio securities on loan, the borrower pays the Series any
dividends or inter paid on such securities. Loans are subject to termination at
the option of the Series or the borrower. The Series 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.
U.S. GOVERNMENT INCOME SERIES
The U.S. Government Income Series invests primarily in securities which
are guaranteed as to payment of principal and interest by the U.S. government or
its instrumentalities.
U.S. Government Obligations - The types of U.S. government obligations
in which the Series may invest generally include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued
or guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by: (1) the full faith and credit of the U.S. Treasury; (2) the
issuer's right to borrow from the U.S. Treasury; (3) the discretionary authority
of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or (4) the credit of the agency or instrumentality issuing
the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: Federal Land Banks; Central Bank
for Cooperatives; Federal Intermediate Credit Banks; Federal Home Loan Banks;
Farmers Home Association; and Federal National Mortgage Association.
Collateralized Mortgage Obligations (CMOs) - Privately issued CMOs
generally represent an ownership Interest in federal agency mortgage
pass-through securities such as those issued by the Government National Mortgage
Association. The terms and characteristics of the mortgage instruments may vary
among pass-through mortgage loan pools. The market for such CMOs has expanded
considerably since its inception. The size of the primary issuance market and
the active participation in the secondary market by securities dealers and other
investors make government-related pools highly liquid.
Adjustable Rate Mortgage Securities (ARMS) - Not unlike other U.S.
government securities, the market value of ARMS will generally vary inversely
with changes in market interest rates. Thus, the market value of ARMS generally
declines when interest rates rise and generally rises when interest rates
decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal
17
<PAGE> 38
payments result in some loss of a holder's principal investment to the extent of
the premium paid. Conversely, if ARMS are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal would
increase current and total returns.
When-Issued and Delayed Delivery Transactions - These transactions are
arrangements in which the U.S. Government Income Series purchases securities
with payment and delivery scheduled for a future time. The Series engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Series' investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Series relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Series to miss a
price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for the Series. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Series sufficient to make payment for
the securities to be purchased are segregated on the Series' records at the
trade date. These securities are marked to market daily and maintained until the
transaction is settled.
Repurchase Agreements - The Series or its custodian will take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. In the event that a defaulting seller
filed for bankruptcy or became insolvent, disposition of such securities by the
Series might be delayed pending court action. The Series believes that under the
regular procedures normally in effect for custody of the Series' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Series and allow retention or disposition of such
securities. The Series will only enter into repurchase agreements with banks and
other recognized financial institutions such as broker/dealers which are deemed
by the sub-adviser to be creditworthy pursuant to guidelines established by the
Trustees.
Reverse Repurchase Agreements - The Series may also enter into reverse
repurchase agreements. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Series transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Series will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the Series
to avoid selling portfolio instruments at a time when a sale may be 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
18
<PAGE> 39
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 U.S.
Government Income 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 EQUITY SERIES AND U.S. GOVERNMENT INCOME SERIES
The investment restrictions of the Series described below are
fundamental policies that may not be changed without the approval of 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.
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
19
<PAGE> 40
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 except that the 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,
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 limitations cannot be changed without shareholder approval.
The following limitations for the Equity and U.S. Government Income Series,
however, may be changed by the Trustees without shareholder approval.
Shareholders will be notified before any material change in these limitation
becomes effective. Under these limitations, neither Series 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 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
20
<PAGE> 41
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 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.
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
21
<PAGE> 42
for the Series; 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 BlackRock Financial
Management, Inc. ("BlackRock") the sub-adviser to Security Management for the
Equity Series and the 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 and the Bond Series, pursuant to a Master
Investment Management and Advisory Agreement dated October 30, 1997 and serves
as the investment adviser to the Equity Series and the U.S. Government Income
Series pursuant to a Master Investment Management and Advisory Agreement dated
March 27, 1998 ("the Advisory Agreements"). Security Management was incorporated
in Delaware on December 6, 1973 and is a wholly-owned subsidiary of Security
First Group, Inc., also a Delaware corporation. Security Management and Security
First Group, Inc. maintain their principal places of business at 11365 West
Olympic Boulevard, Los Angeles California 90064. The common stock of Security
First Group is currently wholly owned by 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 Agreements provide that Security Management is responsible
for supervising and directing the investments of each of the Series in
accordance with the investment objectives of each. Pursuant to the Advisory
Agreements, Security Management shall obtain and evaluate information relating
to the economy, industries, business, securities markets, and particular issues
of securities. In addition, Security Management agrees to formulate and
implement a continuing program for the management of each of the Series' assets,
give investment advice and manage the investment and reinvestment of the Series'
securities. Security Management's obligations include the making and execution
of investment decisions, and the placement of orders for the purchase and sale
of securities with or through such brokers, dealers or issuers as Security
Management may select. Security Management is also authorized to enter into
sub-advisory agreements with third parties for the provision of investment
advice to Security Management relating to each Series' portfolio of securities,
investments, cash and other properties.
The Advisory Agreements provide that Security Management and the Trust
agree to maintain and preserve such accounts, books and records for such period
or periods, as may be prescribed by the Securities and Exchange Commission. They
also provide that the accounts, books and records will be made available for
reasonable inspections by the Securities and Exchange Commission, the Trust's
auditors, or any governmental instrumentality having regulatory authority over
the Trust.
22
<PAGE> 43
Under the Advisory Agreements, the Trust will assume and pay legal and
independent accounting and auditing expenses of the Trust, costs related to
reports, notices and proxy material, compensation and expense of disinterested
trustees, share issuance expenses, expenses of custodians, transfer agents and
registrars, brokers' commissions, all taxes and fees payable to governmental
agencies, expenses of shareholders' and trustees' meetings and interest
expenses. Security Management will be responsible for paying all expenses and
charges not assumed by the Trust.
The Advisory Agreements provide that Security Management, its officers,
directors and employees shall not be liable for any error of judgment, mistake
of law, or loss suffered by the Trust, while rendering services under the
Agreements, except for loss resulting from willful misfeasance, bad faith, gross
negligence in the performance of their duties on behalf of the Trust or reckless
disregard of their duties and obligations under the Agreements.
For its services to the 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 Equity Series and U.S. Government Income Series, Security
Management receives from the Trust fees computed by using an annual rate of 70%
and .55%, respectively, of the average daily net assets of the respective
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 Equity Series and 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 a 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
as 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
23
<PAGE> 44
repayments from Security Management to the extent of the excess determined on
August 1.
For the fiscal year ended July 31, 1998, management fees of $374,539
were paid by the T. Rowe Price Growth and Income Series to Security Management.
During the fiscal year ended July 31, 1998, management fees in the
amount of $20,472 were earned by Security Management from the Bond Series.
In regard to the U.S. Government Income Series, for the fiscal year
ended July 31, 1998, Security Management earned advisory fees of $258,431
($50,153 after payment of advisory fees). Of this amount, Security Management
waived $82,952 ($206 after waiver of subadvisory fees to the Series' former
subadvisor, Virtus Capital Management ("Virtus").
In regard to the Equity Series, for the fiscal year ended July 31,
1998, Security Management earned advisory fees of $437,078 ($79,767 after
payment of advisory fees). Of this amount, Security Management waived $20,111
($220 after waiver of subadvisory fees to the Series' former subadvisor,
Virtus).
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 of approximately $129.5 billion.
Price Associates is registered as an investment adviser under the Investment
Advisers Act of 1940.
24
<PAGE> 45
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 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 year ended July 31, 1998, Price Associates received
advisory fees from the T. Rowe Price Growth and Income Series of $865,740. For
the fiscal year ended July 31, 1998, the ratios of total expenses to average net
assets for this Series was .57%.
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.
25
<PAGE> 46
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 $50 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, 1998, Neuberger & Berman
received advisory fees of $47,766.
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
26
<PAGE> 47
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.
BLACKROCK AND THE BLACKROCK SUB-ADVISORY AGREEMENT
BlackRock serves as sub-adviser to Security Management with respect to
the Equity Series and U.S. Government Income Series pursuant to sub-advisory
agreements (the "BlackRock Sub-Advisory Agreements") dated March 27, 1998.
BlackRock is a wholly-owned subsidiary of BlackRock, Inc., which is wholly-owned
subsidiary of PNC Bank, N.A. The principal offices of BlackRock and BlackRock,
Inc. are located at 345 Park Avenue, New York, New York 10154, with additional
offices in Philadelphia, Wilmington, Chicago and Edinburgh. BlackRock, Inc. is a
fully integrated money management firm with global fixed income, equity and cash
management capabilities. As of December 31, 1997, BlackRock, Inc. And its
subsidiaries managed or administered approximately $55 billion in assets.
As compensation for providing services under the BlackRock Sub-Advisory
Agreements, BlackRock receives from Security Management fees computed by using
an annual rate of 0.55% based on average daily assets of the Equity Series and
an annual rate of 0.40% based on the average daily net assets of the U.S.
Government Income Series. These fees are accrued daily, and paid monthly.
The BlackRock Sub-Advisory Agreements provide that BlackRock shall
waive its subadvisory fees to the extent the expenses of either the Series must
be reduced in order to comply with any state law expense limitation.
Under the BlackRock Sub-Advisory Agreements BlackRock provides
investment management services to the Equity Series and U.S. Government Income
Series. BlackRock 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, BlackRock 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 BlackRock Sub-Advisory Agreements provide that BlackRock 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 BlackRock Sub-Advisory 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.
27
<PAGE> 48
During the fiscal year ended July 31, 1998, BlackRock earned a
sub-advisor fee of $104,810 from the Equity Series, while the former
sub-advisor, Virtus earned a sub-advisor fee of $252,501, but waived $19,891
pursuant to the Sub-Advisory agreement. During the same period, BlackRock earned
a sub-advisor fee of $46,152 from the U.S. Government Income Series, while the
former sub-advisor, Virtus earned a sub-advisor fee of $162,126, but waived
$82,746 pursuant to the Sub-Advisory agreement.
The BlackRock Sub-Advisory Agreements provide 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 BlackRock Sub-Advisory Agreement must be approved by a
majority of the Trust's independent Trustees. The BlackRock 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, 1998, Security First Life Separate Account A was the owner of 99.27% of the
outstanding shares of Bond Series, 98.79% of the outstanding shares of the T.
Rowe Price Growth & Income Series and 100% of the outstanding shares of the
Equity Series and 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
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.
28
<PAGE> 49
Howard H. Kayton* - Trustee. Senior Vice President and Chief Actuary of
Security First Group, Inc. 11365 West Olympic Boulevard, Los Angeles, CA 90064.
Lawrence E. Marcus - Trustee. Retired. Formerly, Executive Vice
President of Neiman-Marcus Company, a general merchandise retailer. 4616 Dorset,
Dallas, Texas 75229.
Richard C. Pearson - President. 11365 West Olympic Boulevard, Los
Angeles, California 90064. President 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.
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. Pearson is also President of Security Management. Mr. Turner is
also Vice President, Taxation and Assistant Secretary of Security Management.
* Interested Trustee
29
<PAGE> 50
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 BlackRock 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 BlackRock'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, BlackRock
or the Series.
Security Management, Price Associates or BlackRock 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 BlackRock 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 BlackRock by or through broker-dealers.
Price Associates, Neuberger & Berman and BlackRock 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
30
<PAGE> 51
concession paid by the issuer to the underwriter. Transactions placed through
dealers who are serving as primary market makers reflect the spread between the
bid and asked prices. Security Management, Price Associates, Neuberger & Berman
and BlackRock 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 BlackRock'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
BlackRock 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 BlackRock
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 BlackRock 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
BlackRock in serving their other clients, but they can also be useful in serving
the Trust.
Security Management, Price Associates, Neuberger & Berman and BlackRock
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 BlackRock'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 &
31
<PAGE> 52
Berman's and BlackRock's policy not to 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 BlackRock 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 year ended July 31,
1998, of $172,708. The Equity Series paid brokerage commissions to securities
dealers during said fiscal year of $109,018. The Bond Series and U.S. Government
Income Series did not pay any brokerage commissions or discounts to securities
dealers in those years.
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 rate for the T.
Rowe Price Growth and Income Series for the fiscal year ended July 31, 1998, was
11%. The portfolio turnover rate for the Bond Series for the fiscal year ended
July 31, 1998, was 125%. The portfolio turnover rate during said period for the
Equity Series was 87%. The portfolio turnover rate for the U.S. Government
Income Series for said period was 103%.
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).
32
<PAGE> 53
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 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.
EQUITY AND U.S. GOVERNMENT INCOME SERIES
The market values of the Series' portfolio securities are determined as
follows:
- - for equity securities, according to the last sale price on a national
securities exchange, if available;
- - in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
- - for unlisted equity securities, the latest bid prices;
- - for bonds and other fixed income securities, as determined by an
independent pricing service;
- - for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with maturities of less than 60 days, at amortized cost; or
- - for all other securities, at fair value as determined in good faith by
the Board of Trustees.
33
<PAGE> 54
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.
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
34
<PAGE> 55
annuities under Section 817(h) of the Code. Under this section, a variable
annuity will not receive the tax treatment afforded annuities if its underlying
investments are not adequately diversified. Under applicable regulations, no
more than 55% of total assets can be invested in one investment, 70% in two
investments, 80% in three investments and 90% in four investments. Investments
are generally defined as securities issued by any one issuer. U.S. Government
agencies or instrumentalities are considered separate issuers.
Unlike public shareholders, under the Code a life insurance company
separate account will not incur any federal income tax liability on dividends
and capital gains distributions received from a regulated investment company by
a separate account funding variable annuity contracts as defined in section
817(d) of the Code.
To the extent that there is in excess of $250,000 invested in a Series
other than through variable contract premium payment, the Code imposes a 4%
nondeductible excise tax on the undistributed income of such Series to the
extent the Series does not distribute at least 98% of its net investment income
and its net capital gains (both long- and short-term) for each taxable year by
the end of such year. For purposes of the 4% excise tax, dividends and
distributions will be treated as paid when actually distributed, except that
dividends declared in December payable to shareholders of record on a specified
date in December, and paid before February 1 of the following year, will be
treated as having been (i) paid by the Series on the record date and (ii)
received by 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.
35
<PAGE> 56
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 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 obligors
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 obligors 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
36
<PAGE> 57
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 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
37
<PAGE> 58
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.
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 at July 31, 1998, and
for the periods indicated in this report appearing in this Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon which
appears elsewhere herein and in the Registration Statement, and are included in
reliance upon such report given upon the authority of such firm 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
Sullivan & Worchester LLP whose address is 1025 Connecticut Avenue
N.W., Washington, D.C. 20036 is legal counsel to the Trust.
38
<PAGE> 59
SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1998
<TABLE>
<CAPTION>
T. Rowe Price
Growth and Equity U.S. Government
Bond Series Income Series Series Income Series
----------- -------------- ------ ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments at market - Note A and Schedule I:
Investment securities (cost:
Bond Series - $17,447,343; Growth
and Income Series - $219,360,421;
Equity Series - $48,427,386;
U.S. Government Income Series -
$33,556,857) $ 17,657,984 $288,114,149 $54,358,814 $34,037,268
Cash 261,586 1,458,149 973,199 121,161
Interest receivable 208,858 3,954 3,731 403,122
Dividends receivable 418,950 60,808
Receivable from fund manager 366,000
Receivable for securities sold 336 122,688 201,557
Receivable for capital shares purchased 14,516 231,449
Unrealized appreciation on foreign
currency contracts 3,872
------------ ------------ ----------- -----------
18,147,152 290,592,651 55,519,240 34,763,108
LIABILITIES
Payable for securities purchased 194,555 618,869 593,985
Accrued expenses 12,570 56,915 15,951 14,903
Payable for capital shares redeemed 53,460 51,289
Payable to investment adviser - Note B 5,227 88,314 26,623 11,460
Payable for directors' fees 408 5,894 1,185 552
------------ ------------ ----------- -----------
212,760 151,123 716,088 672,189
NET ASSETS
Capital shares (authorized 100,000,000
shares of $.01 par value for each series) 17,089,639 206,912,555 39,946,430 32,422,964
Undistributed net investment income 510,948 2,834,997 261,050 1,101,590
Undistributed net realized gain 119,292 11,940,248 8,664,244 85,954
Net unrealized appreciation of investments 214,513 68,753,728 5,931,428 480,411
------------ ------------ ----------- -----------
NET ASSETS $ 17,934,392 $290,441,528 $54,803,152 $34,090,919
============ ============ =========== ===========
Capital shares outstanding 4,363,493 17,539,794 6,391,475 6,257,420
Net asset value per share $ 4.11 $ 16.56 $ 8.57 $ 5.45
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 60
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
T. Rowe Price
Growth and Equity U.S. Government
Bond Series Income Series Series Income Series
----------- ------------- ------ ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 4,473,055 $ 847,243
Interest $ 893,827 1,705,283 68,966 $2,060,963
Miscellaneous income 27 8,525 279
----------- ------------ ------------ ----------
893,827 6,178,365 924,734 2,061,242
EXPENSES
Custodian fees 14,513 45,844 18,118 12,495
Adviser fees - Note B 47,766 865,740 357,311 208,278
Management fees - Note B 20,472 374,539 79,767 50,153
Printing expenses 8,525 88,942 18,237 17,566
Audit fees 6,313 7,681 6,392 5,154
Insurance expenses 607 11,573 2,667 1,639
Directors' fees and expenses 1,069 21,321 4,958 2,922
Taxes, licenses and fees 858 858 858 858
Miscellaneous expenses 4,605 6,790 3,718
----------- ------------ ------------ ----------
100,123 1,421,103 495,098 302,783
Less: Waiver of management fees (220) (206)
Waiver of adviser fees (19,891) (82,746)
----------- ------------ ------------ ----------
100,123 1,421,103 474,987 219,831
----------- ------------ ------------ ----------
NET INVESTMENT INCOME 793,704 4,757,262 449,747 1,841,411
NET REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS - Notes A and C
Net realized gain on sale of investments 258,714 14,401,027 11,847,457 137,839
Net unrealized appreciation (depreciation) of:
Investments during the year (56,314) 3,597,110 (4,704,685) 68,011
Assets denominated in foreign currencies 3,872
----------- ------------ ------------ ----------
Net gain on investments 206,272 17,998,137 7,142,772 205,850
----------- ------------ ------------ ----------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 999,976 $ 22,755,399 $ 7,592,519 $2,047,261
=========== ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 61
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
T. Rowe Price
Growth and Equity U.S. Government
Bond Series Income Series Series Income Series
----------- ------------- ------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 793,704 $ 4,757,262 $ 449,747 $ 1,841,411
Net realized gain on sale of investments 258,714 14,401,027 11,847,457 137,839
Net unrealized appreciation (depreciation)
during the year (52,442) 3,597,110 (4,704,685) 68,011
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 999,976 22,755,399 7,592,519 2,047,261
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (647,867) (4,191,181) (482,528) (1,507,408)
Net realized gains (13,443,002) (4,086,984)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 647,867 4,191,181 482,528 1,507,408
Reinvestment of net realized gains
distributed 13,443,002 4,086,984
Sales of capital shares 7,387,828 68,143,134 6,440,386 6,833,426
Redemptions of capital shares (1,088,132) (5,160,103) (6,801,222) (3,679,228)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS 6,947,563 80,617,214 4,208,676 4,661,606
------------ ------------- ------------ ------------
TOTAL INCREASE IN NET ASSETS 7,299,672 85,738,430 7,231,683 5,201,459
NET ASSETS
BEGINNING OF YEAR 10,634,720 204,703,098 47,571,469 28,889,460
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series -$510,948;
Growth and Income Series - $2,834,998;
Equity Series - $261,051; U.S. Government
Income Series - $1,101,590) $ 17,934,392 $ 290,441,528 $ 54,803,152 $ 34,090,919
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 62
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
T. Rowe Price Virtus Virtus
Growth and Equity U.S. Government
Bond Series Income Series Series Income 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 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
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.
12
<PAGE> 63
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ---------------- --------- --------- -----
<S> <C> <C> <C>
CORPORATE NOTES 27.3%
Aerospace & Defense: 0.4%
Boeing Co., 8.75%, 08/15/21 50,000 $ 63,188
Automobiles & Related: 1.6%
Ford Motor Credit, 9.50%, 04/15/00 50,000 52,875
GMAC Corporate Bond, 9.63%,12/15/01 100,000 110,750
Mark IV Industries, Inc., 7.75%, 04/01/06 120,000 122,400
----------
286,025
Banking: 3.2%
Banc One Corp., 7.75%, 07/15/25 300,000 343,882
HSBC Fin Nederland Bank, 7.40%, 04/15/03 100,000 102,625
National Australia Bank, 9.70%,10/15/98 125,000 125,938
----------
572,445
Building Materials & Garden Supplies: 0.6%
NBTY, Inc., 8.63%, 09/15/07 100,000 102,750
Computer & Office Equipment: 0.8%
Hydrochem Ind. Service, Inc.,10.375%, 08/01/07 85,000 87,263
Printpack, Inc.,10.625%, 08/15/06 60,000 64,350
----------
151,613
Electric and Electronic Equipment: .6%
Honeywell, Inc., 6.60%, 04/15/01 100,000 101,750
Electric Utilities: 1.1%
National Rural Utilities, 6.50%, 09/15/02 100,000 101,875
Public Service Electric & Gas Co., 6.25%, 01/01/07 100,000 100,250
</TABLE>
13
<PAGE> 64
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ---------------- ---------- --------- -----
<S> <C> <C> <C>
CORPORATE NOTES (CONTINUED)
Finance & Credit: 4.1%
Chase Mortgage Securities, 6.60%,11/19/07 110,000 $ 112,266
Commercial Credit Group, 9.60%, 05/15/99 50,000 51,366
General Electric Capital, 9.38%,10/06/98 125,000 125,705
Margaretten Financial, 6.75%, 06/15/00 100,000 101,125
Standard Credit Card, 7.25%, 04/07/08 100,000 107,322
UCFC Trust, 6.48%, 05/15/12 230,000 230,857
----------
728,641
Food & Beverages: 1.2%
Ameriserve Food Co.,10.125%, 07/15/07 85,000 85,850
Doskocil Manufacturing Inc.,10.125%, 09/15/07 60,000 63,750
Southern Foods Group, 9.875% ,09/01/07 60,000 62,400
----------
212,000
Forest Products: 1.1%
Noranda Forest, Inc., 7.50%, 07/15/03 100,000 103,250
Stone Container Corp.,12.25%, 04/01/02 80,000 82,200
----------
185,450
Insurance Carriers: 0.6%
Prudential Insurance Co. of America, 6.88%, 04/15/03 100,000 101,875
Media & Communications: 0.8%
Heritage Media Corp., 8.75%, 02/15/06 130,000 139,425
Miscellaneous Consumer Products: 2.8%
French Fragrances, Inc.,10.375%, 05/15/07 60,000 64,200
Home Products International, Inc., 9.625%, 05/15/08 70,000 69,825
Hedstrom Corp., 10.00%, 06/01/2007 70,000 70,525
Iron Age Corp., 9.875%, 05/01/08 70,000 69,300
</TABLE>
14
<PAGE> 65
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ---------------- ----------- --------- ------
<S> <C> <C> <C>
CORPORATE NOTES (CONTINUED )
Miscellaneous Consumer Products (Continued)
Kinder Care Learning Centers, 9.50%, 02/15/09 70,000 $ 71,663
Revlon Worldwide Parent, 0.00%, 03/15/01 120,000 95,250
S C International Service, Inc., 9.25%, 09/01/07 60,000 62,250
----------
503,013
Oil and Gas Extraction: 1.0%
Derby Cycle Corp., 10.00%, 05/15/08 70,000 70,525
Quaker State Corp., 6.63%,10/15/05 100,000 102,250
----------
172,775
Security and Commodity Brokers & Services: 5.8%
Lehman Brothers, 8.50%, 05/01/07 100,000 113,875
Morgan Stanley, 6.52%, 01/15/08 350,000 355,775
MS Wells Fargo, 6.54%, 07/15/30 230,000 234,238
Salomon Smith Barney, Inc., 7.38%, 05/15/07 300,000 319,875
----------
1,023,763
Telephone Communication: 0.5%
U.S. West Communications, 7.50%, 06/15/23 80,000 83,000
Textile Mill Products: 0.7%
GFSI, Inc., 9.625%, 03/01/07 60,000 63,450
Polymer Group, Inc., 9.00%, 07/01/07 60,000 61,725
----------
125,175
Transportation: 0.4%
Newport News Shipbuilding, Inc., 9.25%, 12/01/06 60,000 64,050
----------
TOTAL CORPORATE NOTES
(COST $4,696,113) 4,819,063
</TABLE>
15
<PAGE> 66
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ---------------- ---------- --------- -----
<S> <C> <C> <C>
FEDERAL AGENCIES 48.9%
Federal Home Loan Bank: 1.1%
5.50%, 01/10/01 200,000 $ 199,180
Federal Home Loan Mortgage Corp.: 1.6%
7.13%, 07/21/99 235,000 238,250
9.00%, 01/01/17 3,393 3,611
9.50%, 04/01/19 27,110 28,915
9.00%, 06/01/19 13,929 14,826
----------
285,602
Federal National Mortgage Assn.: 18.3%
8.35%, 11/10/99 175,000 180,619
6.92%, 03/19/07 75,000 80,159
6.21%, 11/07/07 1,635,000 1,669,384
6.31%, 02/01/08 224,055 226,923
7.00%, 09/01/10 393,134 400,871
6.50%, 03/01/13 393,458 395,917
7.50%, 08/25/21 9,069 9,159
6.425%, 03/17/30 260,000 262,600
----------
3,225,632
Government National Mortgage Assn.: 27.9%
9.00%, 04/15/09 3,616 3,836
9.00%, 05/15/09 18,293 19,443
9.00%, 05/15/09 6,378 6,778
9.00%, 05/15/09 5,960 6,335
9.00%, 05/15/09 2,343 2,490
9.00%, 05/15/09 3,185 3,385
9.00%, 05/15/09 16,865 17,925
11.25%, 09/15/15 81,493 91,195
11.50%, 11/15/15 56,761 64,512
10.00%, 08/15/16 11,736 12,825
</TABLE>
16
<PAGE> 67
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ---------------- ---------- -------- ------
<S> <C> <C> <C>
FEDERAL AGENCIES (CONTINUED)
Government National Mortgage Association (Continued)
10.00%, 06/15/17 27,745 $ 30,320
9.25%, 07/15/17 43,816 46,842
10.00%, 11/15/17 7,899 8,632
11.50%, 02/15/18 8,627 9,804
10.00%, 03/15/19 43,111 47,112
10.00%, 03/15/20 28,609 31,264
9.25%, 05/15/20 30,285 32,376
7.50%, 09/15/20 288,804 297,467
9.25%, 03/15/21 26,237 28,049
9.25%, 04/15/21 73,819 78,917
9.25%, 05/15/21 89,432 95,608
9.25%, 06/15/21 21,652 23,147
7.50%, 06/15/23 119,473 123,057
7.00%, 08/15/23 91,040 92,519
7.50%, 10/15/23 200,869 206,894
7.00%, 01/15/24 158,559 161,136
7.00%, 03/15/24 145,746 148,115
9.50%, 01/15/25 51,167 55,309
9.50%, 05/15/25 18,267 19,745
7.00%, 02/15/26 581,579 591,030
8.00%, 08/15/26 467,435 485,399
8.00%, 01/15/27 143,117 148,617
8.00%, 02/15/28 207,901 215,890
6.50%, 04/15/28 814,437 812,653
7.00%, 05/01/28 493,056 501,068
7.00%, 06/01/28 393,753 400,151
----------
4,919,845
TOTAL FEDERAL AGENCIES
(COST $8,551,228 ) 8,630,259
</TABLE>
17
<PAGE> 68
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ---------------- ---------- --------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 16.5%
U.S. Treasury Bonds: 4.1%
6.75%, 08/15/26 645,000 $ 729,347
U.S. Treasury Notes: 12.4%
7.75%, 11/30/99 15,000 15,430
5.625%, 11/30/00 115,000 115,324
6.375%, 08/15/02 440,000 452,782
5.75%, 04/30/03 935,000 942,611
3.375%, 01/15/07 454,716 439,788
6.625%, 05/15/07 205,000 219,398
----------
2,185,333
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $2,912,375) 2,914,680
FOREIGN GOVERNMENT OBLIGATIONS 2.3%
Swedish Government Bond, 5.50%, 04/12/02 401,554 415,043
----------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $408,688) 401,554 415,043
----------
TOTAL FIXED MATURITIES
(COST $16,568,404) 16,288,483 16,779,045
</TABLE>
18
<PAGE> 69
SCHEDULE I
SECURITY FIRST TRUST
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Short-Term Investments Portfolio Principal Value
- ---------------------- ----------- --------- -------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 5.0%
Federal Home Loan Mortgage Corp.: 5.0%
5.45%, 08/06/98 60,000 $ 59,954
5.46%, 08/07/98 625,000 624,430
5.48%, 08/18/98 195,000 194,555
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $878,939) 878,939
------------
TOTAL INVESTMENTS
(COST $17,447,343) 100.0% 17,657,984
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain
------------
<S> <C>
Forward Foreign Currency Contract To Sell 3,270,000
Swedish Krona (Settlement date 08/21/98; Receivable
amount $ 415,238; market value $411,366) 3,872
Other assets less liabilities 272,536
------------
NET ASSETS $ 17,934,392
============
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 70
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------ -------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 5.2%
Electrical Equipment: 4.4%
General Electric Co. 50,000 $ 4,471,875
Honeywell, Inc. 30,000 2,514,375
Hubbell, Inc. Class B 40,000 1,680,000
Motorola, Inc. 75,000 3,918,750
------------
12,585,000
Machinery: 0.8%
Pall Corp. 100,000 2,250,000
CONSUMER CYCLICALS 1.0%
Automobiles & Related: 1.0%
Genuine Parts Co. 80,000 2,775,000
CONSUMER NONDURABLES 20.0%
Food & Beverages: 5.7%
Anheuser-Busch Company, Inc. 50,000 2,590,625
Best Foods 24,000 1,335,000
General Mills, Inc. 25,000 1,548,438
Int'l. Flavors & Fragrance 75,000 3,150,000
McCormick & Co. 75,000 2,432,813
Pepsico, Inc. 50,000 1,946,875
Quaker Oats Company 30,000 1,590,000
Ralston-Ralston Purina Group 60,000 1,931,250
------------
16,525,001
</TABLE>
20
<PAGE> 71
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- --------- ------ ------
<S> <C> <C> <C>
CONSUMER NONDURABLES (CONTINUED)
Health Services: 1.4%
Baxter International, Inc. 30,000 $ 1,792,500
United States Surgical Corp. 50,000 2,293,750
------------
4,086,250
Miscellaneous Consumer Products: 6.6%
Colgate Palmolive Co. 30,000 2,767,500
Eastman Kodak 40,000 3,355,000
Fortune Brands, Inc. 100,000 3,693,750
Owens Corning Fiber 70,000 2,887,500
Philip Morris Companies, Inc. 100,000 4,381,250
UST, Inc. 75,000 2,025,000
------------
19,110,000
Pharmaceuticals: 6.3%
Abbott Laboratories 80,000 3,330,000
American Home Products 60,000 3,090,000
Amgen* 38,000 2,790,625
Johnson & Johnson 45,000 3,476,250
Pharmacia-Upjohn, Inc. 36,250 1,715,078
Schering-Plough Corp. 40,000 3,870,000
------------
18,271,953
</TABLE>
*Non-income producing.
21
<PAGE> 72
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ---------- ------ ------
<S> <C> <C> <C>
CONSUMER SERVICES 13.5%
Building and Real Estate: 2.0%
Crescent Real Estate Equity Co. 90,000 $ 2,643,750
Starwood Hotel & Resort Trust 75,000 3,079,687
-----------
5,723,437
Entertainment & Leisure: 1.2%
Hilton Hotels Corp. 100,000 2,518,750
Readers Digest Assn., Inc. 35,000 958,125
-----------
3,476,875
General Merchandise Stores: 4.8%
Dayton Hudson Corp. 90,000 4,320,000
J.C. Penney, Inc. 20,000 1,173,750
Neiman-Marcus Group, Inc.* 75,000 2,475,000
Toys R Us, Inc.* 150,000 3,412,500
Tupperware Corp. 90,000 2,272,500
-----------
13,653,750
Media & Communications: 2.7%
CBS Corp. 75,000 2,545,313
Knight Ridder, Inc. 50,000 2,637,500
Meredith Corp. 60,000 2,508,750
-----------
7,691,563
Miscellaneous Business Services: 2.8%
Browning Ferris, Inc. 100,000 3,518,750
Corporate Express, Inc.* 150,000 1,790,625
Waste Management, Inc. 50,750 2,797,587
-----------
8,106,962
</TABLE>
*Non-income producing.
22
<PAGE> 73
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ---------- ------ --------
<S> <C> <C> <C>
ENERGY 10.1%
Oil And Gas Extraction: 10.1%
Amerada Hess Corp. 55,000 $ 2,787,813
Amoco Corp. 100,000 4,175,000
Atlantic Richfield Co. 30,000 2,032,500
British Petroleum PLC 30,000 2,407,500
Chevron Corp. 40,000 3,305,000
Exxon Corp. 36,000 2,529,000
Mobil Corp. 16,000 1,116,000
Occidental Petroleum Corp. 80,000 1,780,000
Pioneer Natural Resources, Co. 125,000 2,460,938
Royal Dutch Petroleum, Co. ADR 40,000 2,040,000
Texaco, Inc. 30,600 1,857,038
Unocal Corp. 75,000 2,456,250
-------------
28,947,039
FINANCIAL 14.0%
Banking: 4.0%
Bankers Trust New York Corp. 20,000 2,241,250
Chase Manhattan Corp. 30,000 2,268,750
Mellon Bank Corp. 50,000 3,359,376
National City Corp. 20,000 1,337,500
Wells Fargo & Co. 6,666 2,372,263
-------------
11,579,139
Federal Agencies: 1.0%
Federal Home Loan Mortgage Corp. 60,000 2,835,000
Financial Services: 5.3%
American Express Co. 35,000 3,863,125
H&R Block, Inc. 50,000 2,125,000
J.P. Morgan & Co., Inc. 15,000 1,891,875
Travelers Group, Inc. 110,365 7,422,046
-------------
15,302,046
</TABLE>
23
<PAGE> 74
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ---------- ------ ------
<S> <C> <C> <C>
FINANCIAL (CONTINUED)
Insurance Carriers: 3.7%
Loews Corp. 30,000 $ 2,418,750
St. Paul Companies, Inc. 105,136 3,804,609
Travelers Aetna P&C 40,000 1,730,000
Willis Corroon Group PLC Sponsored ADR 175,000 2,843,750
------------
10,797,109
PROCESS INDUSTRIES 10.0%
Chemicals and Allied Products: 5.5%
Corning, Inc. 45,000 1,380,938
Dow Chemical Co. 30,000 2,722,500
Dupont Co. 34,000 2,101,625
Great Lakes Chemical Corp. 60,000 2,366,250
Hercules, Inc. 90,000 3,121,875
Imperial Chemical ADR 30,000 1,573,125
Minnesota Mining & Manufacturing Co. 35,000 2,629,375
------------
15,895,688
Forest Products: 0.7%
Georgia Pacific Corp. 18,000 924,750
Weyerhaeuser Co. 30,000 1,260,000
------------
2,184,750
Metal Mining: 2.3%
Inco Ltd. 150,000 1,640,625
Newmont Mining Corp. 75,000 1,415,625
Phelps Dodge Corp. 40,000 2,222,500
Reynolds Metals Co. 25,000 1,312,500
------------
6,591,250
</TABLE>
24
<PAGE> 75
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<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: 1.5%
Kimberly Clark 60,000 $ 2,696,250
International Paper Co. 25,000 1,115,625
Union Camp Corp. 15,000 636,563
-----------
4,448,438
TECHNOLOGY 3.4%
Computer and Office Equipment: 3.4%
First Data Corp. 100,000 2,893,750
Hewlett Packard Co. 70,000 3,893,750
Intuit* 60,000 2,985,000
-----------
9,772,500
TRANSPORTATION 6.1%
Aerospace and Defense: 2.7%
Allied Signal, Inc. 75,000 3,262,500
Olin Corp. 45,000 1,757,813
Raytheon Co CL B 50,000 2,765,625
-----------
7,785,938
Railroad Transportation: 3.4%
Burlington Northern Santa Fe 25,000 2,573,439
Norfolk Southern Corp. 140,000 4,182,500
Union Pacific Corp. 70,000 2,940,000
-----------
9,695,939
UTILITIES 6.5%
Telephone Communication: 3.9%
AT&T Co. 40,000 2,425,000
Frontier Corp. 70,000 2,349,375
GTE Corp. 40,000 2,175,000
</TABLE>
*Non-income producing
25
<PAGE> 76
SCHEDULE I
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------ ------
<S> <C> <C> <C>
UTILITIES (CONTINUED)
Telephone Communication (Continued)
SBC Communications, Inc. 75,000 $ 3,070,313
Southern New England Telecom Corp. 17,000 1,170,875
-------------
11,190,563
Utility Holding Companies: 2.6%
Edison International 50,000 1,387,500
GPU 16,000 572,000
Peco Energy Co. 50,000 1,496,875
Pacificorp 70,000 1,500,625
Unicom Corp. 75,000 2,592,188
-------------
7,549,188
-------------
TOTAL EQUITY SECURITIES
(COST $ 190,076,650) 258,830,378
</TABLE>
<TABLE>
<CAPTION>
Market
Short-Term Investments Principal Value
- ---------------------- --------- -------
<S> <C> <C> <C>
Commercial Paper: 10.2%
BBV Finance Delaware, 5.57% , 08/21/98 9,000,000 8,972,133
General Motors Corp., 5.54%, 08/12/98 6,900,000 6,888,302
General Electric Capital Services, Inc., 5.52%, 08/14/98 1,400,000 1,397,199
General Electric Capital, 5.51%, 09/08/98 2,300,000 2,286,528
Metlife Funding, Inc., 5.50%, 09/11/98 7,200,000 7,154,783
National Australia Funding, Inc., 5.51%, 09/08/98 2,600,000 2,584,826
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $29,283,771) 29,283,771
TOTAL INVESTMENTS
(COST $219,360,421) 100.0% 288,114,149
Other assets less liabilities 2,327,379
-------------
NET ASSETS $ 290,441,528
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 77
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ---------- ------ ------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 8.1%
Electrical Equipment: 6.9%
Amp, Inc. 6,700 $ 196,813
General Electric Co. 20,400 1,821,975
Emerson Electric Co. 6,400 380,400
Lucent Technologies Inc. 10,400 961,350
Motorola, Inc. 7,300 381,425
------------
3,741,963
Machinery: 1.2%
Eaton Corp. 3,800 247,950
Illinois Tool Works, Inc. 7,000 392,438
------------
640,388
CONSUMER NONDURABLES 22.6%
Food and Beverages: 5.7%
Anheuser-Busch Company, Inc. 6,000 310,125
Archer Daniels Midland Co. 11,200 191,800
Best Foods 10,200 567,375
Coca Cola 15,500 1,250,656
Pepsico, Inc. 12,300 477,394
Tyson Foods, Inc. 10,200 220,575
------------
3,017,925
Health Services: 1.2%
Foundation Health System, Inc. 8,800 181,500
United Healthcare Corp. 8,700 491,550
------------
673,050
</TABLE>
27
<PAGE> 78
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<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: 5.3%
Colgate Palmolive Co. 4,400 $ 406,725
Mattel, Inc. 4,300 165,282
McDonalds Corp. 7,400 494,413
Phillip Morris Companies, Inc. 23,200 1,016,450
Proctor & Gamble Co. 10,200 809,625
------------
2,892,495
Pharmaceuticals: 10.4%
American Home Products Co. 20,200 1,040,300
Bristol Myers Squibb Co. 6,900 786,169
Johnson & Johnson 8,900 687,525
Eli Lilly & Co. 10,700 719,575
Pfizer, Inc. 8,000 880,000
Pharmacia-Upjohn, Inc. 5,900 279,512
Merck & Co. 10,400 1,282,450
------------
5,675,531
CONSUMER CYCLICALS 2.5%
Automobiles & Related: 2.5%
Ford Motor Co. 11,700 666,169
General Motors Corp. 6,800 491,725
Goodyear Tire And Rubber Co. 3,400 207,188
------------
1,365,082
</TABLE>
28
<PAGE> 79
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------- ------------
<S> <C> <C> <C>
CONSUMER SERVICES 8.4%
General Merchandise Stores: 5.6%
Albertsons, Inc. 6,500 $ 312,406
Home Depot, Inc. 14,400 603,000
K Mart Corp.* 22,200 362,138
J.C. Penney, Inc. 7,000 410,813
Pep Boys Manny Moe & Jack 7,200 124,200
Sears Roebuck & Co. 6,300 319,725
Toys R Us, Inc.* 10,600 241,150
Walmart Stores 11,000 694,375
------------
3,067,807
Media & Communications: 2.4%
Disney Walt Co. 13,800 475,238
Mc Graw-Hill Companies, Inc. 3,800 311,363
News Corp. 9,900 251,831
Tribune Co. 4,300 289,175
------------
1,327,607
Building & Real Estate: 0.4%
Fluor Corp. 3,200 134,600
Starwood Hotel & Resort Trust 5,400 221,738
------------
356,338
ENERGY 8.5%
Oil And Gas Extraction: 8.5%
Atlantic Richfield Co. 5,100 345,525
British Petroleum Co. 4,300 345,075
Exxon Corp. 25,700 1,802,213
Enron Corp. 4,200 222,338
Mobil Corp. 7,400 516,150
Royal Dutch Petroleum Co. ADR 16,600 846,600
Schlumberger Limited 6,300 381,544
------------
4,459,445
</TABLE>
*Non-income producing.
29
<PAGE> 80
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------- ------------
<S> <C> <C> <C>
FINANCIAL
Banking: 8.5%
Banc One Corp. 9,950 $ 514,291
Bankamerica Corp. 7,700 691,075
Bank of Boston Corp. 7,600 367,650
Chase Manhattan Corp. 13,200 998,250
First Chicago Corp. 7,200 603,450
Household International, Inc. 6,300 313,425
Nationsbank Corp. 9,362 746,620
Washington Mutual, Inc. 9,750 389,391
Wells Fargo & Co. 1,500 533,813
-----------
5,157,965
Federal Agencies: 1.0%
Federal Home Loan Mortgage Corp. 7,600 471,200
Financial Services: 6.2%
Associates First Capital Corp. 2,600 201,988
CIT Group, Inc. 6,800 225,250
Equifax, Inc. 7,500 306,562
Fleet Financial Group 6,700 575,781
Morgan Stanley Dean Witter 9,185 799,669
Standard & Poor's 5,000 559,375
Travelers Group, Inc. 10,350 693,450
-----------
3,362,075
Insurance Carriers: 3.8%
Aetna, Inc. 2,900 201,006
Allstate Corp. 9,300 394,669
American General Corp. 3,400 232,262
American International Group 5,700 859,632
Cigna Corp. 2,100 138,731
Conseco, Inc. 5,800 243,600
-----------
2,069,900
</TABLE>
30
<PAGE> 81
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------- ------------
<S> <C> <C> <C>
PROCESS INDUSTRIES 4.9%
Chemicals and Allied Products: 3.0%
Air Products & Chemical 6,400 $ 224,000
Dow Chemical Co. 5,100 462,825
Dupont Co. 4,400 272,800
IMC Global, Inc. 8,100 207,056
Minnesota Mining & Manufacturing Co. 3,600 269,550
PPG Industries, Inc. 3,000 190,125
------------
1,626,356
Metal Mining: 0.6%
Barrick Gold Corp. 7,800 127,725
Phelps Dodge Corp. 3,400 188,913
------------
316,638
Paper And Allied Products: 1.3%
International Paper Co. 4,100 182,963
Kimberly Clark Corp. 6,800 305,575
Westvaco Corp. 9,300 233,081
------------
721,619
TECHNOLOGY 13.8%
Computer & Office Equipment: 13.8%
Applied Materials, Inc.* 6,500 217,750
Cisco System Inc.* 7,200 689,400
Compaq Computer corp. 15,800 519,425
Hewlett Packard Co. 6,500 360,750
Ikon Office Solution 10,000 107,500
Intel Corp. 11,800 996,362
International Business Machines Corp. 8,100 1,073,250
Microsoft Corp. 16,300 1,795,038
Oracle Corp.* 17,200 455,800
</TABLE>
*Non-income producing.
31
<PAGE> 82
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------- ------------
<S> <C> <C> <C>
TECHNOLOGY (CONTINUED)
Computer & Office Equipment (Continued)
Seagate Technology, Inc.* 9,000 $ 204,750
Texas Instruments 5,200 308,425
Xerox Corp. 3,300 348,356
-------------
7,076,806
TRANSPORTATION 3.2%
Aerospace & Defense: 1.8%
Boeing Company. 7,500 291,094
Lockheed Martin Corp. 4,100 408,719
United Technologies Corp. 3,000 287,438
-------------
987,251
Transportation Services: 1.4%
Burlington Northern Santa Fe 2,800 288,225
CSX Corp. 5,400 218,363
Delta Air Lines, Inc. 2,100 257,250
-------------
763,838
UTILITIES 8.5%
Telephone Communication: 6.4%
AT&T Co. 12,700 769,938
Alltel Corp. 6,600 276,788
Bell Atlantic Corp. 10,000 453,750
GTE Corp. 10,800 587,250
SBC Communications, Inc. 23,000 940,125
Worldcom, Inc.* 7,900 417,713
-------------
3,445,564
</TABLE>
*Non-income producing.
32
<PAGE> 83
SCHEDULE I
SECURITY FIRST TRUST
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
- ----------------- ----------- ------- ------------
<S> <C> <C> <C>
UTILITIES (CONTINUED) 2.1%
Utility Holding Companies:
Cinergy Corp. 7,800 $ 246,188
Entergy Corp. 9,900 271,002
FPL Group, Inc. 6,500 395,281
Southern Co. 9,000 229,500
-----------
1,141,971
-----------
TOTAL INVESTMENTS
(COST $48,427,386) 100.0% 54,358,814
Other Assets Less Liabilities 444,338
-----------
NET ASSETS $54,803,152
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 84
SCHEDULE I
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ----------------- ----------- --------- ------------
<S> <C> <C> <C>
CORPORATE NOTES 6.1%
Finance & Credit: 6.1%
Chase Mortgage Finance Corp., 6.5%, 07/25/28 500,000 $ 501,884
General Electric Capital Mortgage
Services Inc., 6.65%, 05/25/28 350,000 353,105
GMAC Mortgage Corp., 5.94%, 07/01/13 520,694 508,490
Merit Securities Corp., 6.58%, 07/28/22 720,852 722,091
-----------
2,085,570
TOTAL CORPORATE NOTES
(COST $1,575,460) 2,085,570
U.S. GOVERNMENT OBLIGATIONS 26.6%
U.S. Treasury Bonds: 4.2%
8.75%, 11/15/08 500,000 569,140
12.75%, 11/15/10 600,000 850,470
-----------
1,419,610
U.S. Treasury Notes: 22.4%
5.375%, 01/31/00 600,000 599,274
6.50%, 08/31/01 1,125,000 1,155,420
6.50%, 10/15/06 250,000 264,605
3.375%, 01/15/07 340,000 328,837
6.625%, 05/15/07 3,500,000 3,745,805
6.00%, 08/15/00 1,500,000 1,514,760
-----------
7,608,701
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $8,954,689) 9,028,311
</TABLE>
34
<PAGE> 85
SCHEDULE I
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ----------------- ----------- --------- ------------
<S> <C> <C> <C>
FEDERAL AGENCIES 67.3%
Federal Farm Credit Bank: 6.7%
6.05%, 04/21/03 550,000 $ 556,672
6.94%, 05/19/05 125,000 132,678
7.37%, 08/01/06 1,500,000 1,598,115
-----------
2,287,465
Federal Home Loan Bank: 7.7%
4.80%, 09/22/98 350,000 349,615
5.375%, 02/13/01 1,000,000 992,650
6.83%, 06/07/01 1,000,000 1,008,580
8.00%, 08/27/01 250,000 265,953
-----------
2,616,798
Federal Home Loan Mortgage Corp.: 19.3%
7.00%, 07/15/99 438,670 439,976
7.36%, 06/05/07 1,500,000 1,570,395
7.00%, 07/01/07 126,236 129,312
7.00%, 09/01/10 270,400 275,975
6.50%, 04/01/11 1,431,562 1,442,298
6.00%, 05/11/11 1,431,350 1,417,480
6.00%, 05/15/16 300,000 299,155
6.10%, 10/15/18 1,000,000 1,001,348
-----------
6,575,939
</TABLE>
35
<PAGE> 86
SCHEDULE I
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 1998
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
- ----------------- ----------- --------- ------------
<S> <C> <C> <C>
FEDERAL AGENCIES (CONTINUED)
Federal National Mortgage Assn.: 28.2%
6.16%, 04/03/01 1,000,000 $ 1,011,370
6.00%, 11/01/03 91,732 91,932
8.625%, 06/30/04 150,000 170,928
6.50%, 05/01/08 1,679,081 1,699,533
6.50%, 07/01/08 989,868 1,001,925
8.50%, 10/01/09 938,880 979,656
6.50%, 03/01/09 180,661 182,383
7.00%, 04/01/11 1,377,816 1,404,931
6.25%, 07/18/13 1,100,000 1,106,097
8.00%, 11/01/13 931,749 966,104
6.50%, 05/17/15 700,000 710,718
8.00%, 10/01/25 276,003 286,179
-----------
9,611,756
Other Federal Agencies: 5.4%
Government National Mortgage Assn., 7.50%, 01/15/26 1,228,689 1,265,550
Government National Mortgage Assn., 6.00%, 07/20/27 454,301 463,101
Student Loan Marketing Assn., 7.50%, 03/08/00 100,000 102,778
-----------
1,831,429
-----------
TOTAL FEDERAL AGENCIES
(COST $23,026,708) 22,923,387
-----------
TOTAL INVESTMENTS
(COST $33,556,857) 100.0% 34,037,268
Other assets less liabilities 53,651
-----------
NET ASSETS $34,090,919
===========
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE> 87
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
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 Virtus Equity Series and the Virtus 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 and on March 4, 1998, the
name change of the Virtus Equity Series and the Virtus U.S. Government Income
Series to the Equity Series and U.S. Government Income Series, respectively.
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 annually 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.
37
<PAGE> 88
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.
CURRENCY TRANSLATION -- Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period. Purchases
and sales of securities and income and expenses are translated into U.S. dollars
at the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
FOREIGN CURRENCY CONTRACTS -- The Trust may use foreign currency contracts to
facilitate transactions in foreign securities and to manage the Trust's currency
exposure.
Contracts to buy generally are used to acquire exposure to foreign currencies,
while contracts to sell are used to hedge the Trust's investments against
currency fluctuations. Also, a contract to buy or sell can offset a previous
contract. Losses may arise from changes in the value of the foreign currency or
if the counterparties do not perform under the contractual terms.
The U.S. dollar value of forward foreign currency contracts is determined using
forward currency exchange rates supplied by The Wall Street Journal. Purchases
and sales of forward foreign currency contracts having the same settlement date
are offset, and any gain or loss is recognized on the date of offset; otherwise,
the gain or loss is recognized on the settlement date.
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.
38
<PAGE> 89
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS
Bond Series and T. Rowe Price Growth and Income Series:
Security First Investment Management Corporation (Security Management or
Manager) serves as both investment adviser and manager, and 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' sub-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, 1998, Security Management has also agreed to reimburse the Bond Series
for any remaining expenses exceeding a limitation equivalent annually to 1.5%.
Security Management may elect on an annual basis to reimburse the Series for
future excess expenses.
If during the fiscal year repayments are made to the Manager and the series'
expenses subsequently exceed the expense limitation, the Series shall recover
such repayments from the Manager to the extent of the excess determined.
Conversely, if during the fiscal year repayments are made by the Manager and the
series' expenses subsequently are within the expense limitation, the Manager
shall recover such repayments to the extent of the excess repaid. It is
management's opinion that it is reasonably possible that actual operating
expense may be less than the expense limitation; however, in accordance with the
requirements of FASB Statement No. 5, no accrual has been made for the
contingent obligation to repay Security Management for excess expense
reimbursements since the conditions required for such accrual have not, in the
opinion of management, been met. As of July 31, 1998, the T. Rowe Price Growth
and Income Series has a receivable from Security Management for $366,000 in
administrative settlements.
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.
39
<PAGE> 90
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
Equity Series and U.S. Government Income Series:
Security Management serves as both investment adviser and manager, and is
entitled by agreement to a monthly fee equal to 1/17 of 1% (equivalent annually
to .7%) of the average daily net asset value of the Equity Series and 1/22 of 1%
(equivalent annually to .55%) of the average daily net asset value of the U.S.
Government Income Series, less compensation payable to the Series' sub-advisers,
Blackrock, Inc. (Blackrock) for the U.S. Government Income Series and
Blackrock's subsidiary, Provident Capital Financial Management, Inc. (Provident)
for the Equity 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, Blackrock, and
Provident waive their fees.
Effective March 27, 1988, Blackrock became sub-adviser to the U.S. Government
Income Series and Provident became sub-adviser on the Equity Series. Blackrock
provides investment advice and makes investment decisions for the U.S.
Government Income Series while Provident does the same for the Equity Series.
Blackrock is paid an annual fee of .40% of the average daily net assets of the
U.S. Government Income Series and Provident is paid an annual fee of .55% of the
average daily net assets of the Equity Series.
Prior to March 27, 1988, Virtus Capital Management (Virtus) had been both the
Equity Series and U.S. Government Income Series sub-adviser. Virtus had been
paid an annual fee of .75% of the average daily net assets of the two series.
While they were not obligated to do so, Security Management and Virtus had
agreed 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 1.00% and .70% respectively, or
less.
40
<PAGE> 91
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the period
ended July 31, 1998 were as follows:
<TABLE>
<CAPTION>
T. Rowe Price
Growth U.S.
and Government
Income Equity Income
Bond Series Series Series Series
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Government Securities:
Purchases $16,117,622 $40,083,538
Sales 12,263,203 32,460,031
Other Investment Securities:
Purchases 6,635,580 $109,709,217 $58,330,327 1,377,318
Sales 2,997,759 23,697,140 44,957,272
</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, 1998 was the same for
both financial statement and federal income tax purposes. At July 31, 1998, 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 $ 237,384 $ 22,871 $ 214,513
T. Rowe Price Growth and Income Series 80,084,052 11,330,424 68,753,728
Equity Series 8,520,981 2,589,553 5,931,428
U.S. Government Income Series 498,459 18,048 480,411
</TABLE>
41
<PAGE> 92
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, 1998
Bond Series 1,821,690 164,017 (270,227) 1,715,480
T. Rowe Price Growth and Income Series 4,129,204 270,050 866,173 (313,712) 4,951,715
Equity Series 797,059 63,241 535,647 (821,153) 574,794
U.S. Government Income Series 1,267,299 286,579 (683,910) 869,968
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
</TABLE>
NOTE E -- IMPACT OF YEAR 2000 (UNAUDITED)
Security Management has developed a plan to modify its internal information
technology systems to be ready for the year 2000 and has begun converting
critical data processing systems. The project also includes determining whether
third party service providers have reasonable plans in place to become year 2000
compliant. Security Management currently expects the project to be substantially
complete by the first quarter of 1999. Security Management does not expect this
project to have a significant effect on plan operations.
42
<PAGE> 93
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- FINANCIAL HIGHLIGHTS
The per share information for each respective series' capital stock outstanding
throughout the period is as follows:
<TABLE>
<CAPTION>
NET REALIZED TOTAL
AND INCOME DISTRIBUTIONS
NET ASSET UNREALIZED (LOSSES) DIVIDENDS FROM NET ASSET
VALUE AT NET GAINS FROM FROM NET REALIZED VALUE AT
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAINS PERIOD RETURN(1)
---------- ---------- ----------- ---------- ---------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
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
1998 4.02 .19 .11 .30 (.21) 4.11 7.46
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
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
1998 16.26 .28 1.27 1.55 (.30) (.95) 16.56 9.53
EQUITY SERIES
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
1998 8.18 .07 1.04 1.11 (.08) (.64) 8.57 13.57
U.S. GOVERNMENT
INCOME SERIES
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
1998 5.36 .27 .06 .33 (.24) 5.45 6.16
</TABLE>
- ----------
(1) Total return computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable annuity
account.
43
<PAGE> 94
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET
OPERATING INVESTMENT
EXPENSES INCOME PORTFOLIO NET ASSETS
TO AVERAGE TO AVERAGE TURNOVER END OF
NET ASSETS NET ASSETS RATE PERIOD
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
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
1998 .73 5.78 125 17,934,392
T. ROWE PRICE
GROWTH AND INCOME SERIES
Year ended July 31,
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
1998 .57 1.92 11 290,441,528
EQUITY SERIES
Year ended July 31,
1994 1.00% 1.38% 121% $ 3,007,073
1995 1.00 1.29 84 7,765,719
1996 1.00 2.24 88 20,701,776
1997 1.00* 1.56* 55 47,571,469
1998 .91* .86* 87 54,803,152
U.S. GOVERNMENT INCOME SERIES
Year ended July 31,
1994 .70% 3.62% 17% $ 3,424,487
1995 .70 5.19 16 5,996,149
1996 .70 5.38 148 14,888,824
1997 .70** 5.68** 62 28,889,460
1998 .66** 5.53** 103 34,090,919
</TABLE>
* The former investment adviser had agreed to waive a portion of its
management and advisory fees. Absent this agreement, the ratio of expenses
to average net assets and the ratio of net investment income to average net
assets would have been .98% and .81% and 1.05% and 1.51% for 1998 and 1997
respectively.
** The former investment adviser had agreed to waive a portion of its
management and advisory fees. Absent this agreement, the ratio of expenses
to average net assets and the ratio of net investment income to average net
assets would have been .90% and 5.27% and 1.04% and 5.34% for 1998 and 1997
respectively.
44
<PAGE> 95
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, the Equity Series (formerly the Virtus
Equity Series), and the U.S. Government Income Series (formerly the Virtus U.S.
Government Income Series) as of July 31, 1998, the related statements of
operations for the year then ended and the changes in net assets for each of the
two years in the period then ended. 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, 1998, 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, the Equity Series (formerly the
Virtus Equity Series) and the U.S. Government Income Series (formerly the Virtus
U.S. Government Income Series) at July 31, 1998, the results of their operations
for the year then ended, and the changes in their net assets for each of the two
years in the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
September 14, 1998
Los Angeles, California
<PAGE> 96
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Prospectus/Statement of Additional Information Describing T.
Rowe Price Growth and Income Series, Bond Series and Equity
Series and U.S. Government Income Series:
- Condensed Financial Information (Per Share
Income and Capital Changes Table) is
included in Part A of the Registration
Statement
- Financial statements for the
above-referenced Series of Security First
Trust are included in Part B of the
Registration Statement
(b) Exhibits
(1) Declaration of Trust* (PEA No. 20)
(2) By-Laws* (PEA No. 20)
(5) a. Master Investment Management (PEA No. 20)
and Advisory Agreement, dated March 27, 1998
b. Sub-Advisory Agreement, March 27, 1998 herewith
c. Sub-Advisory Agreement, March 27, 1998 herewith
d. Sub-Advisory Agreement, March 27, 1998 (PEA No. 36)
(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, 1998:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
T. Rowe Price Growth and Income Series 3
Bond Series 3
Equity Series 1
U.S. Government Income Series 2
</TABLE>
Item 27. Indemnification
<PAGE> 97
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> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the Investment
Company Act, Registrant certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment to the Registration Statement
under rule 485(b) under the Securities Act and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf in the City of Los Angeles and State of California on this 25 day of
November 1998.
SECURITY FIRST TRUST
(Registrant)
By /s/ Richard C. Pearson
-------------------------------------
Richard C. Pearson
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------- ----
<S> <C> <C>
/s/ Richard C. Pearson President November 25, 1998
- ------------------------------- (Principal Executive
Richard C. Pearson Officer)
/s/ Jane F. Eagle Senior Vice President, November 25, 1998
- ------------------------------- Finance (Principal Financial
Jane F. Eagle and Accounting Officer)
Jack R. Borsting* Trustee November 25, 1998
- -------------------------------
Jack R. Borsting
Katherine L. Hensley* Trustee November 25, 1998
- -------------------------------
Katherine L. Hensley
</TABLE>
<PAGE> 99
<TABLE>
<S> <C> <C>
/s/ Howard H. Kayton
- -------------------------------
Howard H. Kayton Trustee November 25, 1998
Lawrence E. Marcus* Trustee November 25, 1998
- -------------------------------
Lawrence E. Marcus
By /s/ Richard C. Pearson November 25, 1998
- -------------------------------
*(Richard C. Pearson as
Attorney-in-Fact for
each of the persons
indicated)
</TABLE>
<PAGE> 1
EXHIBIT 5.B
SUB-ADVISORY AGREEMENT
BETWEEN
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION
AND
BLACKROCK FINANCIAL MANAGEMENT, INC.
SUB-ADVISORY AGREEMENT ("Agreement"), made this 27th day of March, 1998, by
and between SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION, a corporation
organized and existing under the laws of the State of Delaware (the "Adviser"),
and BLACKROCK FINANCIAL MANAGEMENT, INC. (the "Subadviser"), a Delaware
Corporation.
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, one
of which, the U.S. Government Income Series (the "Series"), is 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 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 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 the Series
pursuant to the Advisory Agreement, and as such has authority and responsibility
for supervising and directing the investments of the 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 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 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
Series with respect to the purchase, holding or sale of securities in accordance
with the stated
B-1
<PAGE> 2
investment objectives and policies of the 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 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 independent contractor and shall not have custody of any of the
assets of the Trust nor authority to act for or represent the 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 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 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 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.
B-2
<PAGE> 3
8. The Adviser shall pay the Subadviser a fee, based on the value of the
net assets of each of the Series as determined in accordance with the Trust's
current prospectus and statement of additional information, and computed as
follows:
(a) The fees shall be at the annual rate of 0.40 of 1% of the average
daily net assets of the U.S. Government Income Series;
(b) The fees 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 rates described in subparagraph (a) of this Paragraph 8,
and multiplying these products by the net assets of the 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 Series, or to the public,
which refer in any way to the Subadviser ten (10) days prior to use thereof and
not to use 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 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 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 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 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 Series on the basis of any material
non-public ("inside") information.
12. (a) This Agreement shall take effect as to the Series at the close of
business on March 27, 1998 (the "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 the Series.
(b) This Agreement shall continue in effect as to the 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 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 Series, as the case may be, by the vote, cast in person at a meeting called
B-3
<PAGE> 4
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 the Series upon sixty (60) days' prior written notice to both
parties hereto, provided, that in the case of termination by the 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
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 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.
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 the Series exceed any applicable state
expense limitations and the Adviser waives all or a portion of its fees
attributable to the Series pursuant to Paragraph 10 of the Advisory Agreement
dated October 30, 1997, the Subadviser agrees to waive such portion of its fee
under this Agreement attributable to the 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
the 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 the Series, so as to
reduce the expenses of the Series below that required by law.
15. The Adviser shall indemnify and hold harmless the Subadviser from and
against any and all claims, losses, liabilities or damages (including reasonable
attorneys' fees and other related expenses) arising from or in connection with
this Agreement or the performance by the Subadviser of its duties hereunder;
provided, however that nothing contained herein shall require that the
Subadviser be indemnified for any claim, loss, liability or damage (including
reasonable attorneys' fees and other related expenses) resulting from the
willful misfeasance, bad faith or gross negligence in the performance by the
Subadviser or by its officers, directors and employees of the duties of the
Subadviser or from the reckless disregard by the Subadviser or such person of
the duties of the Subadviser under this Agreement.
16. 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.
17. 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
B-4
<PAGE> 5
"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.
18. 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 345 Park Avenue, New York, NY 10154, 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.
19. 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 Series.
20. This writing constitutes the entire agreement between the parties and
no conditions or warranties shall be implied herefrom unless expressly set forth
herein.
21. 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
<TABLE>
<S> <C>
Attest:
/s/ By: /s/
- ------------------------------------- ----------------------------------------------------------
Secretary
BLACKROCK FINANCIAL MANAGEMENT, INC.
Attest:
/s/ By: /s/
- ------------------------------------- ----------------------------------------------------------
Secretary
</TABLE>
B-5
<PAGE> 1
EXHIBIT 5.C
SUB-ADVISORY AGREEMENT
BETWEEN
SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION
AND
PROVIDENT CAPITAL MANAGEMENT, INC.
SUB-ADVISORY AGREEMENT ("Agreement"), made this 27th day of March, 1998, by
and between SECURITY FIRST INVESTMENT MANAGEMENT CORPORATION, a corporation
organized and existing under the laws of the State of Delaware (the "Adviser"),
and PROVIDENT CAPITAL MANAGEMENT, INC. (the "Subadviser"), a Pennsylvania
Corporation.
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, one
of which, the Equity Series (the "Series"), is 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 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 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 the Series
pursuant to the Advisory Agreement, and as such has authority and responsibility
for supervising and directing the investments of the 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 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 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
Series with respect to the purchase, holding or sale of securities in accordance
with the stated
C-1
<PAGE> 2
investment objectives and policies of the 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 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 independent contractor and shall not have custody of any of the
assets of the Trust nor authority to act for or represent the 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 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 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 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.
C-2
<PAGE> 3
8. The Adviser shall pay the Subadviser a fee, based on the value of the
net assets of each of the Series as determined in accordance with the Trust's
current prospectus and statement of additional information, and computed as
follows:
(a) The fees shall be at the annual rate of 0.55 of 1% of the average
daily net assets of the Equity Series;
(b) The fees 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 rates described in subparagraph (a) of this Paragraph 8,
and multiplying these products by the net assets of the 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 Series, or to the public,
which refer in any way to the Subadviser ten (10) days prior to use thereof and
not to use 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 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 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 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 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 Series on the basis of any material
non-public ("inside") information.
12. (a) This Agreement shall take effect as to the Series at the close of
business on March 27, 1998 (the "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 the Series.
(b) This Agreement shall continue in effect as to the 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 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 Series, as the case may be, by the vote, cast in person at a meeting called
C-3
<PAGE> 4
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 the Series upon sixty (60) days' prior written notice to both
parties hereto, provided, that in the case of termination by the 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
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 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.
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 the Series exceed any applicable state
expense limitations and the Adviser waives all or a portion of its fees
attributable to the Series pursuant to Paragraph 10 of the Advisory Agreement
dated October 30, 1997, the Subadviser agrees to waive such portion of its fee
under this Agreement attributable to the 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
the 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 the Series, so as to
reduce the expenses of the Series below that required by law.
15. The Adviser shall indemnify and hold harmless the Subadviser from and
against any and all claims, losses, liabilities or damages (including reasonable
attorneys' fees and other related expenses) arising from or in connection with
this Agreement or the performance by the Subadviser of its duties hereunder;
provided, however that nothing contained herein shall require that the
Subadviser be indemnified for any claim, loss, liability or damage (including
reasonable attorneys' fees and other related expenses) resulting from the
willful misfeasance, bad faith or gross negligence in the performance by the
Subadviser or by its officers, directors and employees of the duties of the
Subadviser or from the reckless disregard by the Subadviser or such person of
the duties of the Subadviser under this Agreement.
16. 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.
17. 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
C-4
<PAGE> 5
"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.
18. 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 345 Park Avenue, New York, NY 10154, 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.
19. 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 Series.
20. This writing constitutes the entire agreement between the parties and
no conditions or warranties shall be implied herefrom unless expressly set forth
herein.
21. 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.
<TABLE>
<S> <C>
SECURITY FIRST INVESTMENT
MANAGEMENT CORPORATION
Attest:
/s/ By: /s/
- --------------------------------------------- -----------------------------------------
Secretary
PROVIDENT CAPITAL MANAGEMENT, INC.
Attest:
/s/ By: /s/
- --------------------------------------------- -----------------------------------------
Secretary
</TABLE>
C-5
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Condensed Financial
Information" and "Independent Auditors" and to the use of our report dated
September 14, 1998 in the Registration Statement (Form N-1A Post-Effective
Amendment No. 37 under the Securities Act of 1933 and No. 36 under the
Investment Company Act of 1940) and related Statement of Additional Information
of Security First Trust.
/s/ ERNST & YOUNG LLP
Los Angeles, California
November 25, 1998
