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. 40 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
AMENDMENT NO. 39 [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, ESQUIRE
11365 WEST OLYMPIC BOULEVARD SULLIVAN & WORCHESTER
LOS ANGELES, CALIFORNIA 90064 1025 CONNECTICUT AVE., 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 30, 2000, 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 22, 2000.
<PAGE>
SECURITY FIRST TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM N-1A HEADINGS IN PROSPECTUS
------------------------ OR STATEMENT OF
ADDITIONAL INFORMATION
----------------------
PART A
<S> <C> <C>
1. Cover Page Cover (Prospectus)
2. Risk/Return Summary: Investments, Risk/Return Summary
Risk, and Performance
3. Risk/Return Summary: Fee Table Expense Summary
4. Investment Objectives, Principal Series Performance - Growth and Income
Investment Strategies, Related Risks Series; Bond Series; Equity
Series; U.S. Government Income Series
Certain Investment Strategies and Risks
5. Management's Discussion of Fund Bar Chart and Performance Table
Performance
6. Management, Organization, and Management of the Series
Capital Structure
7. Shareholder Information Description of the Shares
8. Distribution Arrangements Other Information
9. Financial Highlights Information Financial Highlights
PART B
10. Cover Page and Table of Contents Cover (Statement of Additional Information);
Table of Contents
11. Fund History The Trust
12. Description of the Fund and Its The Trust
Investments
13. Management of the Fund Management of the Trust
14. Control Persons and Principal Principal Holders of Securities
Holders of Securities
<PAGE>
15. Investment Advisory and Other Investment Adviser and Other Services;
Custodian; Independent Auditors; Legal
Counsel
16. Brokerage Allocation and Other Brokerage
Practices
17. Capital Stock and Other Securities *
18. Purchase, Redemption and Pricing of Pricing and Redemption of Securities Being
Shares Offered; Federal Registration of Shares
19. Taxation of the Fund Taxation
20. Underwriters *
21. Calculations of Performance Data *
22. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
* Omitted from Prospectus or Statement of Additional Information because Item
is not applicable.
<PAGE>
--------------------------------------
SECURITY FIRST TRUST
PROSPECTUS
NOVEMBER 30, 2000
--------------------------------------
T. ROWE PRICE GROWTH AND INCOME SERIES
NEUBERGER BERMAN BOND SERIES
BLACKROCK EQUITY SERIES
BLACKROCK U.S. GOVERNMENT INCOME SERIES
--------------------------------------------------------------------------------
This prospectus describes the four series of the Security First Trust ("the
Trust"):
1. T. ROWE PRICE GROWTH AND INCOME SERIES ("Growth and Income Series")
seeks to provide reasonable current income and long-term growth of
capital and income;
2. NEUBERGER BERMAN BOND SERIES ("Bond Series") seeks to maximize
investment income over the long term and conserve principal;
3. BLACKROCK EQUITY SERIES ("Equity Series") seeks to provide growth of
capital and income; and
4. BLACKROCK U.S. GOVERNMENT INCOME SERIES ("Government Income Series")
seeks to provide current income.
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING. YOU
SHOULD READ IT AND KEEP IT FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE SERIES' SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. TO SUGGEST OTHERWISE
IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
IMPORTANT NOTICE
THE FDIC OR ANY OTHER GOVERNMENT AGENCY DOES NOT INSURE THESE SERIES. THEY ARE
NOT DEPOSITS, OBLIGATIONS, OR GUARANTEED BY ANY BANK. THEY INVOLVE INVESTMENT
RISKS, WHICH INCLUDE THE POSSIBLE LOSS OF ANY PRINCIPAL AMOUNT INVESTED.
--------------------------------------------------------------------------------
<PAGE>
-----------------------------------------
TABLE OF CONTENTS
-----------------------------------------
I. Expense Summary................................................... 1
II. Risk/Return Summary .............................................. 2
1. Growth and Income Series..................................... 2
2. Bond Series.................................................. 6
3. Equity Series................................................ 11
4. Government Income Series..................................... 18
III. Certain Investment Strategies and Risks........................... 23
IV. Management of the Series.......................................... 24
V. Description of the Shares......................................... 25
VI. Other Information................................................. 25
VII. Financial Highlights.............................................. 30
<PAGE>
The Trust offers shares of its four series to separate accounts established by
life insurance companies to fund variable contracts. The Trust also offers
shares of each of its series to qualified pension and retirement plans. The
series are described below:
----------------------------------
I. EXPENSE SUMMARY
----------------------------------
* EXPENSE TABLE
This table describes the expense that you may pay when you hold shares of
the series. These fees and expenses do not take into account the fees and
expenses imposed by insurance companies through which your investment in a
series may be made.
ANNUAL SERIES OPERATING EXPENSES (expenses that are deducted from a series'
assets):
<TABLE>
<CAPTION>
---------------------------- ----------------- ---------- ---------- ----------------
GROWTH AND BOND EQUITY GOVERNMENT
INCOME SERIES SERIES SERIES INCOME SERIES
---------------------------- ----------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
MANAGEMENT FEE .50% .50% .70% .55%
---------------------------- ----------------- ---------- ---------- ----------------
OTHER EXPENSES .05% .18% .10% .16%
---------------------------- ----------------- ---------- ---------- ----------------
TOTAL ANNUAL EXPENSES .55% .68% .80% .71%
---------------------------- ----------------- ---------- ---------- ----------------
</TABLE>
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the series with the cost of investing in other mutual funds. These examples
do not take into account the fees and expenses imposed by insurance
companies through which your investment in a series may be made.
The examples assume that:
o You invest $10,000.00 in the series for the time periods indicated and
you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The series' operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
-------------------------------- --------- ----------- ---------- ------------
SERIES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Growth and Income Series $55 $173 $302 $677
-------------------------------- --------- ----------- ---------- ------------
Bond Series 69 218 379 847
-------------------------------- --------- ----------- ---------- ------------
Equity Series 82 255 444 990
-------------------------------- --------- ----------- ---------- ------------
Government Income Series 73 227 395 883
-------------------------------- --------- ----------- ---------- ------------
</TABLE>
1
<PAGE>
----------------------------------
II. RISK RETURN SUMMARY
----------------------------------
Investment strategies that are common to all series are described under the
caption "Certain Investment Strategies"
1. GROWTH AND INCOME SERIES
--------------------------------------------------------------------------------
* INVESTMENT OBJECTIVE
The series' main investment objective is capital growth and income
production.
* PRINCIPAL INVESTMENT POLICIES
To meet these goals, the series usually invests at least 65% of its assets
in common stocks of well-established companies paying above-average
dividends. The series may also invest in other securities. These may
include preferred stock, stock in foreign companies and fixed-income
investments.
The series' investment goals are meant to be flexible enough to allow the
series to invest in different equity securities and fixed-income
investments. The subadvisor typically employs a "value" approach in
selecting investments. Companies that appear to be undervalued by various
measures and may be temporarily out of favor, but have good prospects for
capital appreciation and dividend growth are sought. As a result, you can
expect the series to vary its investments from time to time based upon the
management's view of:
o business and market conditions,
o fiscal and monetary policies, and
o underlying asset values.
Growth and Income Series may sell securities for a variety of reasons, such
as to secure gains, limit losses; or deploy assets in more promising
investments.
* PRINCIPAL RISKS
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
fall are described below. As with any mutual fund, the share price of the
series will change daily based on market conditions and other factors.
Please note that there are many circumstances that could cause the value of
your investment in the series to decline that are not described here. These
circumstances could prevent the series from reaching its objectives.
2
<PAGE>
The principal risks of investing in the series are:
>> MARKET RISK - The risk that the price of a security held by the series
will fall due to changing economic, political, or market conditions.
>> COMPANY RISK - Since securities' prices react to the economic
condition of the company that issued those securities, the series'
investments may rise or fall in a particular company based on:
o the issuer's real or anticipated earnings,
o changes in the issuer's management, and
o the potential for takeovers and acquisitions.
o The series' emphasis on stocks of established companies paying
high dividends and its potential investments in fixed income
securities may limit its potential for appreciation in a broad
market advance. Such securities may also be hurt when interest
rates rise sharply. Also, a company may reduce or eliminate its
dividend.
>> VALUE APPROACH RISK - This is the risk that the market will not
recognize a security's intrinsic value for a long time, or that a
stock judged to be undervalued may actually be appropriately priced.
The series' investment approach could fall out of favor with the
investing public, resulting in lagging performance versus other types
of stock funds.
>> FOREIGN MARKETS RISK - Investing in foreign securities involves risks
that relate to political, social and economic development. You may
also experience risks that come from the differences between how U.S.
and foreign markets are regulated.
Changes in the value of the U.S. dollar may cause changes in the value of
the series.
It is important to remember that, as with any mutual fund, you could lose
money on your investment in the Growth and Income Series.
* PORTFOLIO TURNOVER
The Growth and Income Series conducts portfolio transactions to:
o achieve its investment objective as market conditions change;
o invest new money obtained from selling its shares; and
o meet redemption requests.
The Growth and Income Series may dispose of portfolio securities at any
time if it appears that selling the securities will help achieve the
investment objective. Relatively high portfolio turnover, however, may
result in higher transaction costs to the series. It is anticipated that
the portfolio trading the portfolio manager engages in will result in an
annual rate of turnover that is less than 200%.
3
<PAGE>
* BAR CHART AND PERFORMANCE TABLE
The chart and performance table below are intended to indicate some of the
risks of investing in the series by showing changes in its performance over
time.
The performance table also shows how the series' performance compares over
time with that of one or more broad measures of market performance. The
chart and table provide past performance information. The series' past
performance does not necessarily show how the series will perform in the
future.
The returns shown do not reflect fees and charges imposed under the
variable annuity and life insurance contracts through which an investment
may be made. If these fees and charges were included, they would reduce
these returns.
o BAR CHART
The chart shows changes in the annual total returns of the series' shares
for the last ten years, assuming distributions were reinvested.
[Growth & Income Series Bar Chart here]
During the period shown in the bar chart, the highest quarterly return was
16.33% (for the calendar quarter ended March 1991), and the lowest
quarterly return was
-16.17% (for the calendar quarter ended September 1990).
4
<PAGE>
o PERFORMANCE TABLE
The table shows how the average annual total returns as of Dec. 31, 1999,
of the series' shares compare to a broad measure of market performance,
assuming distributions were reinvested.
------------------------------ ------------- ------------- ------------
1 Year 5 Years 10 Years
------------------------------ ------------- ------------- ------------
Growth and Income Series 8.84% 19.46% 13.40%
------------------------------ ------------- ------------- ------------
S&P 500 Index 21.04% 28.54% 18.2%
------------------------------ ------------- ------------- ------------
* PORTFOLIO MANAGER
Met Investors Advisory Corp. ("Met Investors"), formerly known as Security
First Investment Management Corporation ("Security Management"), currently
manages the series under a Master Investment Management and Advisory
Agreement dated October 30, 1997.
The Advisory Agreement gives Met Investors the power to hire one or more
sub-advisers, subject to its own supervision. Based on this authority, and
with the approval of shareholders, Met Investors entered into a
Sub-Advisory Agreement with Price Associates, dated October 30, 1997. For
the fiscal year ended July 31, 2000, pursuant to the subadvisory agreement,
Met Investors paid a subadvisory fee at the annual rate of 0.35% of average
net assets to Price Associates.
Price Associates is a Maryland corporation that was incorporated in 1947.
It is the successor to the investment counseling business founded by Mr. T.
Rowe Price in 1937. Its principal offices are at:
100 East Pratt Street
Baltimore, Maryland 21202.
Price Associates and some of its subsidiaries serve as investment advisers
to individuals and institutional investors (such as mutual funds), with
total assets under supervision of approximately $179.6 billion as of
September 30, 2000. Price Associates is registered as an investment adviser
under the Investment Advisers Act of 1940.
Price Associates provides investment management services to the series.
This means Price Associates may:
o purchase or sell securities on behalf of the Trust,
o communicate with brokers, dealers, custodians or other parties on
behalf of the Trust,
o allocate brokerage, and
o obtain research services.
5
<PAGE>
In performing these services, Price Associates must analyze information
that relates to the economy, industries, business and securities when
necessary. Price Associates must also form its own plan for performing
these services.
Mr. Brian C. Rogers is the primary portfolio manager for the Growth and
Income Series. He has held this position since 1989. Mr. Rogers has been
employed with Price Associates more than 10 years. He is a Director and
Managing Director of the company. His other duties include management of
two publicly offered T. Rowe Price mutual funds and separate institutional
investment accounts.
6
<PAGE>
2. BOND SERIES
--------------------------------------------------------------------------------
* INVESTMENT OBJECTIVE
The series' primary investment objective is to achieve the highest
long-term investment income with the preservation of capital.
The series' secondary objective is growth of principal and income by
investing in common and preferred stocks.
* PRINCIPAL INVESTMENT POLICIES
The series' investment goals are to purchase securities that will generate
investment income. To meet this goal, the series mainly invests in
marketable debt securities. The Bond Series does not usually buy securities
for short-term profits. As a result, its portfolio changes occur gradually.
The series, however, is not restricted to this policy. If a long-term
investment turns out to not be a good one, the series may decide to make
short-term investments.
Under normal circumstances, the series invests at least 65% of its total
assets in fixed-income debt instruments. The series also invests in
residential and commercial mortgages (secured by a first lien). Up to 10%
of its total assets are usually invested in common and preferred stocks.
U.S. dollar denominated foreign fixed income debt securities and Canadian
government securities may also be purchased.
Generally, the series will invest in what is known as "Investment grade"
securities. However, up to 20% of its assets may be invested in the
following high yield, high risk debt securities:
Ba or B graded securities by Moody's Investors Services, Inc.
("Moody's") or
BB or B graded securities by Standard and Poor's ("S&P").
As of July 31, 2000, about 10.0% of the series' investment portfolio was
invested in such high yield debt securities.
* PRINCIPAL RISKS
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
fall are described below. As with any mutual fund, the share price of the
series will change daily based on market conditions and other factors.
7
<PAGE>
Please note that there are many circumstances that could cause the value of
your investment in the series to decline that are not mentioned here. These
circumstances could prevent the series from reaching its objectives.
The principal risks of investing in the series are:
>> INCOME RISK - The risk that a portfolio's income may fall due to
falling interest rates. Income risk is generally the greatest for
short-term bonds, and the least for long-term bonds. Changes in
interest rates will affect bond prices as well as bond income.
>> INTEREST RATE RISK - The risk that bond prices overall will decline
over short or even extended periods due to rising interest rates.
Interest rate risk is generally modest for shorter-term bonds,
moderate for intermediate-term bonds, and high for longer-term bonds.
A bond's duration measures its sensitivity to changes in interest
rates. The longer the duration, the greater the bond's price movement
will be as interest rates change.
>> CREDIT RISK - A bond issuer (debtor) may fail to repay interest and
principal in a timely manner. The price of a security a portfolio
holds may fall due to changing economic, political, or market
conditions or disappointing earnings results.
>> CALL RISK - During periods of falling interest rates, a bond issuer
may "call" or repay, its high-yielding bond before the bond's maturity
date. Forced to invest the unanticipated proceeds at lower interest
rates, a portfolio would experience a decline in income.
>> MATURITY RISK - Interest rate risk will affect the price of a fixed
income security more if the security has a longer maturity because
changes in interest rates are increasingly difficult to predict over
longer periods of time. Fixed income securities with longer maturities
will therefore be more volatile than other fixed-income securities
with shorter maturities. Conversely, fixed income securities with
shorter maturities will be less volatile but generally provide lower
returns than fixed-income securities with longer maturities. The
average maturity of a portfolio's fixed income investments will affect
the volatility of the portfolio's share price.
>> MARKET RISK - The risk that the price of a security held by the series
will fall due to changing economic, political, or market conditions.
>> U.S. DOLLAR RISK - Changes in the value of the U.S. dollar may cause
changes in the value of the series.
>> COMPANY RISK - Since securities' prices react to the economic
condition of the company that issued those securities, the series'
investments may rise or fall in a particular company based on:
- the issuer's real or anticipated earnings,
- changes in the issuer's management, and
- the potential for takeovers and acquisitions.
8
<PAGE>
>> HIGH YIELD BOND RISK - High-yield, high-risk bonds involve risks that
investment-grade bonds do not have. These risks include:
o At times, there is little activity in the secondary market for
some bonds. This makes it difficult for the series to correctly
value these bonds. It can also be difficult to dispose of these
same bonds.
o The perceptions of investors may lower the value and liquidity of
high-yield bonds, whether or not these ideas are based on sound
analysis.
o Bad publicity may also lower the value and liquidity of
high-yield bonds, especially in a thin market.
>> FOREIGN MARKETS RISK - Investing in foreign securities involves risks
that relate to political, social, and economic development. You may
also experience risks that come from the differences between how U.S.
and foreign markets are regulated.
o These risks may include:
- government seizure of company assets,
- excessive taxation,
- withholding taxes on dividends and interest,
- limitations on the use of your portfolio, and
- social instability.
o Enforcing your legal rights may be difficult, costly, and slow.
o Foreign companies may not be subject to U.S. accounting standards
or government regulation.
o Foreign markets may be less liquid and more unstable.
o Foreign securities often trade in money other than U.S. dollars.
Changes in currency exchange rates will affect:
- the series' net asset value,
- the value of your dividends and earned interest, and
- gains and losses from the sale of securities.
It is important to remember that, as with any mutual fund, you could lose
money on your investment in the Bond Series.
* PORTFOLIO TURNOVER
The Bond Series conducts portfolio transactions to:
o achieve its investment objective as market conditions change,
o invest new money obtained from selling its shares, and
o meet redemption requests.
9
<PAGE>
The Bond Series may dispose of portfolio securities at any time if it appears
that selling the securities will help achieve the investment objective.
Relatively high portfolio turnover, however, may result in higher transaction
costs to the series. It is anticipated that the portfolio trading the portfolio
manager engages in will result in an annual rate of turnover that is less than
100%.
* BAR CHART AND PERFORMANCE TABLE
The chart and performance table below are intended to indicate some of the
risks of investing in the series by showing changes in its performance over
time.
The performance table also shows how the series' performance compares over
time with that of one or more broad measures of market performance. The
chart and table provide past performance information. The series' past
performance does not necessarily show how the series will perform in the
future.
The returns shown do not reflect fees and charges imposed under the
variable annuity and life insurance contracts through which an investment
may be made. If these fees and charges were included, they would reduce
these returns.
o BAR CHART
The chart shows changes in the annual total returns of the series' shares
for the last ten years, assuming distributions were reinvested.
[Bond Series Bar Chart here]
During the period shown in the bar chart, the highest quarterly return was
5.61% (for the calendar quarter ended June 1995), and the lowest quarterly
return was
-2.90% (for the calendar quarter ended March 1994).
10
<PAGE>
o PERFORMANCE TABLE
The table shows how the average annual total returns as of Dec. 31,
1999, of the series' shares compare to a broad measure of market
performance, assuming distributions were reinvested.
<TABLE>
<CAPTION>
------------------------------------------- ------------- ------------ -------------
1 Year 5 Years 10 Years
------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Bond Series -2.58% 6.53% 6.34%
------------------------------------------- ------------- ------------ -------------
Lehman Bros. Gov't/Corp. Index -2.15% 7.60% 7.65%
------------------------------------------- ------------- ------------ -------------
</TABLE>
* PORTFOLIO MANAGER
Met Investors Advisory Corp. ("Met Investors"), formerly known as Security
First Investment Management Corporation, currently manages the series under
a Master Investment Management and Advisory Agreement dated October 30,
1997.
The Advisory Agreement gives Met Investors the power to hire one or more
sub-advisers, subject to its own supervision. Based on this authority, and
with the approval of shareholders, Met Investors entered into a
Sub-Advisory Agreement with Neuberger Berman, dated October 30, 1997. For
the fiscal year ended July 31, 2000, pursuant to the subadvisory agreement,
Met Investors paid a subadvisory fee at an annual rate of 0.35% of annual
net assets to Neuberger Berman.
Neuberger Berman was founded in 1939 to manage assets for high net worth
persons. Its principal offices are at:
605 Third Avenue
New York, New York 10158.
Neuberger Berman is an investment management service for a wide variety of
clients. Its clients include individuals, investment companies, pension
plans, profit-sharing plans, trusts, and charitable organizations. As of
December 31, 1999, Neuberger Berman has about $54.4 billion in assets under
its management for its clients. Neuberger Berman is registered as an
investment adviser under the Investment Advisers Exchange Act of 1940. It
is also a registered broker-dealer with the SEC under the Securities Act of
1934 and is a member of the New York Stock Exchange.
Neuberger Berman provides investment management services to the series.
This means that Neuberger Berman may:
o purchase or sell securities on behalf of the Trust,
o communicate with brokers, dealers, custodians or other parties on
behalf of the Trust,
o allocate brokerage, and
o obtain research services.
11
<PAGE>
In performing these services, Neuberger Berman must analyze information
that relates to the economy, industries, business, and securities when
necessary. Neuberger Berman must also form its own plan for performing
these services.
Theodore Guiliano and Martin McKerrow are two principals at Neuberger
Berman who have significant management responsibilities for this series.
They are co-directors of Neuberger Berman's Fixed Income Group. They have
been employed with Neuberger Berman as managers of fixed-income securities
since 1984.
12
<PAGE>
3. THE EQUITY SERIES
--------------------------------------------------------------------------------
* INVESTMENT OBJECTIVE
The series' investment objective is to provide growth of capital and
income. This objective cannot be changed without the approval of the
shareholders.
* PRINCIPAL INVESTMENT POLICIES
The series is managed in a way that takes advantage of trends in the
domestic stock market that favor different styles of stock selection value
or growth stocks issued by all different sizes of companies (small, medium
and large).
VALUE STOCKS are, in the advisor's opinion, considered undervalued or
worth more than their current price.
GROWTH STOCKS have higher earnings that will, in the advisor's
opinion, lead to growth in stock prices.
Under normal circumstances, the series invests at least 65% of the series'
Portfolio in common stocks.
The Trustees may change the investment policies (but not the investment
objectives) without the approval of you or other contractholders. You will,
however, be notified before there is any material change.
The securities that are considered acceptable investments for the series
include but are not limited to the following:
o Common Stocks
o Other Corporate Securities
o Commercial Paper
o Bank Instruments
o Repurchase Agreements
o U.S. Government Securities
o Put and Call Options
o Over-the-Counter Options ("OTC")
o When-Issued and Delayed Delivery Transactions
o Financial Futures and Options on Futures
To generate additional income, the series may lend up to one third of its
total assets to broker-dealers, banks, or other institutional borrowers. It
will only lend to borrowers who are creditworthy according to guidelines
established by the Trustees. All collateral must be in the form of cash or
U.S. securities equal to at least 100% of the value loaned.
13
<PAGE>
* PRINCIPAL RISKS
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
fall are described below. As with any mutual fund, the share price of the
series will change daily based on market conditions and other factors.
Please note that there are many circumstances that could cause the value of
your investment in the series to decline that are not mentioned here. These
circumstances could prevent the series from reaching its objectives.
The principal risks of investing in the series are:
>> MARKET RISK - The risk that the price of a security held by the
series will fall due to changing economic, political, or market
conditions.
>> COMPANY RISK - Since securities' prices react to the economic
condition of the company that issued those securities, the
series' investments may rise or fall in a particular company
based on:
o the issuer's real or anticipated earnings,
o changes in the issuer's management, and
o the potential for takeover and acquisition.
>> OVER-THE-COUNTER RISK ("OTC") - These transactions involve risks
in addition to those incurred when securities are traded on an
exchange. OTC listed companies may be limited in their product
lines, markets, or financial resources. Compared with
exchange-listed stocks, many OTC stocks trade less frequently and
in smaller volume. This can make their value more unstable than
exchange-listed stocks and may make buying or selling them more
difficult.
The series may buy and write OTC options on securities in
negotiated transactions with the buyers or writers of the options
when options on the securities it holds are not traded on an
exchange. The series buys and writes options only with investment
dealers and other financial institution that are creditworthy.
>> RISK OF DEFAULT - The risk that a borrower may default on a loan
and that the collateral may not be sufficient to cover the
principal and interest.
Changes in the value of the U.S. dollar may cause changes in the value
of the series.
It is important to remember that, as with any mutual fund, you could
lose money on your investment in the Equity Series.
14
<PAGE>
* PORTFOLIO TURNOVER
The Equity Series conducts portfolio transactions to:
o achieve its investment objective as market conditions change,
o invest new money obtained from selling its shares, and
o meet redemption requests.
The Equity Series may dispose of portfolio securities at any time if it
appears that selling the securities will help achieve the investment
objective. Relatively high portfolio turnover, however, may result in
higher transaction costs to the series. It is anticipated that the
portfolio trading the portfolio manager engages in will result in an annual
rate of turnover that is less than 100%.
* BAR CHART AND PERFORMANCE TABLE
The chart and performance table below are intended to indicate some of the
risks of investing in the series by showing changes in its performance over
time.
The performance table also shows how the series' performance compares over
time with that of one or more broad measures of market performance. The
chart and table provide past performance information. The series' past
performance does not necessarily show how the series will perform in the
future.
The returns shown do not reflect fees and charges imposed under the
variable annuity and life insurance contracts through which an investment
may be made. If these fees and charges were included, they would reduce
these returns.
15
<PAGE>
o BAR CHART
The chart shows changes in the annual total returns of the series' shares
for the last six years, assuming distributions were reinvested.
[Equity Series Bar Chart here]
During the period shown in the bar chart, the highest quarterly return was
20.80% (for the calendar quarter ended December 1998), and the lowest
quarterly return was
-11.16% (for the calendar quarter ended September 1998).
o PERFORMANCE TABLE
The table shows how the average annual total returns of the series' shares
compare to a broad measure of market performance, assuming distributions
were reinvested.
<TABLE>
<CAPTION>
---------------------- ----------- ------------ -----------------------------------
1 Year 5 Years Inception (5/19/93) to Date
---------------------- ----------- ------------ -----------------------------------
<S> <C> <C> <C>
Equity Series 20.72% 23.90% 16.89%
---------------------- ----------- ------------ -----------------------------------
S&P 500 Index 21.04% 28.54% N/A%
---------------------- ----------- ------------ -----------------------------------
</TABLE>
16
<PAGE>
* PORTFOLIO MANAGER
Met Investors Advisory Corp. ("Met Investors"), formerly known as Security
First Investment Management Corporation, currently manages the series under
a Master Investment Management and Advisory Agreement dated October 30,
1997.
The Advisory Agreement gives Met Investors the power to hire one or more
sub-advisers, subject to its own supervision. Based on this authority, and
with the approval of shareholders, Met Investors entered into a
Sub-Advisory Agreement with BlackRock Financial Management, Inc.
("BlackRock"), dated March 27, 1998 For the fiscal year ended July 31,
2000, pursuant to the subadvisory agreement, Met Investors paid a
subadvisory fee at an annual rate of 0.55% of average annual net assets to
BlackRock.
BlackRock is a wholly owned subsidiary of BlackRock, Inc. BlackRock, Inc.,
is, in turn, a subsidiary of PNC Bank, N.A. The principal offices of both
BlackRock and BlackRock, Inc., are located at:
345 Park Avenue
New York, New York 10154
Additional offices are located in Philadelphia, Wilmington, Edinburgh and
Tokyo. BlackRock, Inc., is a fully integrated money management firm with
global fixed income, equity, and cash management capabilities. As of
December 31, 1999, BlackRock, Inc., and its subsidiaries managed or
administered approximately $165 billion in assets.
Mr. Daniel Eagan is the BlackRock employee who acts as portfolio manager
for the Equity Series. He has held this position since March 27, 1998. He
specializes in large cap value and select equity products. He is also
responsible for risk modeling and quantitative analysis.
Prior to joining BlackRock, Mr. Eagan was Director of Investment Strategy
at PNC Asset Management Group. He was 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 national
investment consulting practice, from June 1992 to September 1994.
17
<PAGE>
4. U.S. GOVERNMENT INCOME SERIES
--------------------------------------------------------------------------------
* INVESTMENT OBJECTIVE
The series' investment objective is to provide current income.
The investment objective cannot be changed without shareholder approval.
* PRINCIPAL INVESTMENT POLICIES
To meet these goals, the series usually invests in securities that are
primary obligations of or guaranteed by the United States government (or
its agencies). The series may also invest in collateralized mortgage
obligations ("CMOs") and adjustable rate mortgages ("ARMS").
The U.S. Government Income Series invests primarily in securities which are
guaranteed as to the payment of principal and interest by the U.S.
Government or its instrumentalities.
Unlike the series' investment objectives, the series' investment policies
can be changed without shareholder approval. Shareholders will, however, be
notified before any material change is made.
The series invests in the following securities:
>> U.S. GOVERNMENT SECURITIES - Under normal circumstances, the
series invests at least 65% of its total assets in U.S.
government securities. These securities include:
o direct obligations of the U.S. Treasury, such as:
- Treasury bills,
- notes,
- and bonds.
* PRINCIPAL RISKS
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
fall are described below. As with any mutual fund, the share price of the
series will change daily based on market conditions and other factors.
Please note that there are many circumstances that could cause the value of
your investment in the series to decline that are not mentioned here. These
circumstances could prevent the series from reaching its objectives.
18
<PAGE>
The principal risks of investing in the series are:
>> INTEREST RATE RISK - The values of debt securities are subject to
change when prevailing interest rates change. When interest rates
fall, the values of already-issued debt securities generally
rise. When interest rates rise, the values of already-issued debt
securities generally fall. The effect of these changes will
typically be greater for longer-term debt securities than
shorter-term debt securities. The series' share prices can go up
or down when interest rates change because of the effect of the
changes on the value of the series' investments in debt
securities.
>> MARKET RISK - The risk that the price of a security held by the
series will fall due to changing economic, political, or market
conditions.
>> COMPANY RISK - Since securities' prices react to the economic
condition of the company that issued those securities, the
series' investments may rise or fall in a particular company
based on:
o the issuer's real or anticipated earnings,
o changes in the issuer's management, and
o the potential for takeover and acquisition.
Changes in the value of the U.S. dollar may cause changes in the value
of the series.
Additionally, if these securities were bought at a premium, the series
may experience capital loss if prepayment occurs before the premium
has been amortized.
It is important to remember that as with any mutual fund, you could
lose money on your investment in the U.S. Government Income Series.
* PORTFOLIO TURNOVER
Although the U.S. Government Income Series does not intend to invest for the
purpose of short-term profits, the securities in its portfolio will be sold
whenever the subadvisor believes it should do so in light of the investment
objective. This will be done without regard to the length of time a particular
security may have been held. The subadvisor does not anticipate that the
portfolio turnover will result in adverse tax consequences. Relatively high
portfolio turnover, however, may result in higher transaction costs to the
series. The series estimates that the annual rate of turnover will be
approximately 300%.
* BAR CHART AND PERFORMANCE TABLE
The chart and performance table below are intended to indicate some of the risks
of investing in the series by showing changes in its performance over time.
19
<PAGE>
The performance table also shows how the series' performance compares over time
with that of one or more broad measures of market performance. The chart and
table provide past performance information. The series' past performance does
not necessarily show how the series will perform in the future.
The returns shown do not reflect fees and charges imposed under the variable
annuity and life insurance contracts through which an investment may be made. If
these fees and charges were included, they would reduce these returns.
o BAR CHART
The chart shows changes in the annual total returns of the series' shares
for the last six years, assuming distributions were reinvested.
[Government Income Series Bar Chart here]
During the period shown in the bar chart, the highest quarterly return was
4.48% (for the calendar quarter ended June 1995), and the lowest quarterly
return was
- 1.66% (for the calendar quarter ended June 1999).
20
<PAGE>
o PERFORMANCE TABLE
The table shows how the average annual total returns as of Dec. 31, 1999,
of the series' shares compare to a broad measure of market performance,
assuming distributions were reinvested.
<TABLE>
<CAPTION>
------------------------------------------- ----------- ----------- ----------------------------------
1 Year 5 Years Inception (5/19/93) to Date
------------------------------------------- ----------- ----------- ----------------------------------
<S> <C> <C> <C>
Government Income Series -2.54% 5.65% 4.08%
------------------------------------------- ----------- ----------- ----------------------------------
Lehman Bros. Intermediate Gov't Index -2.25% 7.43% N/A
------------------------------------------- ----------- ----------- ----------------------------------
</TABLE>
* PORTFOLIO MANAGER
Met Investors Advisory Corp. ("Met Investors"), formerly known as Security
First Investment Management Corporation, currently manages the series under
a Master Investment Management and Advisory Agreement dated October 30,
1997.
The Advisory Agreement gives Met Investors the power to hire one or more
sub-advisers, subject to its own supervision. Based on this authority, and
with the approval of shareholders, Met Investors entered into a
Sub-Advisory Agreement with BlackRock Financial Management, Inc.
("BlackRock"), dated March 27, 1998. For the fiscal year ended July 31,
2000, pursuant to the subadvisory agreement, Met Investors paid a
subadvisory fee at an annual rate of 0.40% of average annual net assets to
BlackRock.
BlackRock is a wholly owned subsidiary of BlackRock, Inc. BlackRock, Inc.,
is, in turn, a subsidiary of PNC Bank, N.A. The principal offices of both
BlackRock and BlackRock, Inc., are located at:
345 Park Avenue
New York, New York 10154
Additional offices are located in Philadelphia, Wilmington, Edinburgh and
Tokyo. BlackRock, Inc., is a fully integrated money management firm with
global fixed income, equity, and cash management capabilities. As of
December 31, 1999, BlackRock, Inc., and its subsidiaries managed or
administered approximately $165 billion in assets.
Mr. Scott Amero is the portfolio manager for the U.S. Government Income
Series. He has held this job since March 27, 1998. He is a Managing
Director and Portfolio Manager at BlackRock Financial Management. He is
also a member of its Investment Strategy Committee. Mr. Amero is a Vice
President for BlackRock's family of closed-end mutual funds and Smith
Barney Adjustable Rate Government Income Fund.
---------------------------------------
III. CERTAIN INVESTMENT STRATEGIES
---------------------------------------
Each series may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market, economic,
or political conditions exist. When a series invests defensively, it may
not be able to pursue its investment objective(s).
21
<PAGE>
A series' defensive investment policy may not be effective in protecting
its value. There can be no assurance that a series will achieve its goals.
Your actual return may also be affected by:
o contract fees,
o separate account charges, and
o charges imposed by the Trust.
You should consult your insurance contract prospectus regarding these
additional fees and charges.
Each series may actively and frequently trade to achieve its investment
strategies. This may result in higher capital gains for you. Frequent
trading also increases transaction costs, which could affect the series'
performance.
Each series also has certain investment policies and restrictions that are
described in the Trust's Statement of Additional Information ("SAI").
---------------------------------------
IV. MANAGEMENT OF THE SERIES
---------------------------------------
* INVESTMENT ADVISER
Met Investors Advisory Corp. ("Met Investors"), formerly known as
Security First Investment Management Corporation ("Security
Management"), currently manages the series under a Master Investment
Management Advisory Agreement dated October 30, 1997.
Met Investors is a Delaware corporation. It is a subsidiary of
Security First Group, Inc. ("SFG"), also a Delaware corporation, whose
business mainly involves insurance marketing and service. Security
Management and SFG maintain their principal places of business at:
11365 West Olympic Boulevard
Los Angeles, California 90064.
SFG is a wholly owned subsidiary of Metropolitan Life Insurance
Company, a New York life insurance company. Met Investors is
affiliated with Security First Life Insurance Company. Met Investors
is also the investment adviser to Security First Life Insurance
Company. Met Investors is registered as an investment adviser under
the Investment Advisers Act of 1940.
22
<PAGE>
* ADMINISTRATOR
Under the Advisory Agreement, Met Investors is required to manage the
investments of the series according to its investment objectives and
policies. Met Investors agrees to:
o develop and use a program for the management of the series'
assets,
o manage the investment of the series' securities, and
o give investment advice.
Met Investors's obligations include:
o making all investment decisions,
o placing orders to purchase and sell securities,
o providing the Trust with office space, equipment, and personnel,
and
o providing people to perform executive and administrative duties
for the Trust.
Under the Advisory Agreement, Met Investors receives an advisory fee from
each of the series. This fee accrues daily and is paid each month.
---------------------------------- ------------------------------
NAME OF SERIES ANNUAL ADVISORY FEE
---------------------------------- ------------------------------
Growth and Income Series 0.50%
---------------------------------- ------------------------------
Bond Series 0.50%
---------------------------------- ------------------------------
Equity Series 0.70%
---------------------------------- ------------------------------
Government Income Series 0.55%
---------------------------------- ------------------------------
As permitted by the Advisory Agreement, Met Investors has entered into
subadvisory agreements with other advisers. Under these subadvisory
agreements, the other advisers manage the series' assets, subject to the
oversight of Met Investors. A portion of the total advisory fee is paid as
a subadvisory fee to each of the other advisors.
---------------------------------------
V. DESCRIPTION OF SHARES
---------------------------------------
The Trust offers shares of each of its series to separate accounts established
by insurance companies for variable annuity and life insurance contracts. The
Trust also offers shares of each of its series to qualified pension and
retirement plans. All purchases, redemptions and exchanges are made through
these insurance company separate accounts and plans, which are the record owner
of the shares.
23
<PAGE>
Contractholders and plan beneficiaries seeking to buy, redeem, or exchange
interests in the Trust's shares should consult with the insurance company that
issued their contracts or their plan sponsor.
---------------------------------------
VI. OTHER INFORMATION
---------------------------------------
* PRICING OF SERIES' SHARES
The price of each series' shares is based on its net asset value (NAV). The
NAV is determined as of the close of regular trading on the New York Stock
Exchange NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing each series' total assets, less its
liability, by the number of shares outstanding The series value securities
based on market quotations when it calculates its NAV. If market quotations
are not readily available, securities and other assets are valued by
another method that the Board of Trustees believes accurately reflects fair
market value.
Some securities may be listed on foreign exchanges that are open on days
(such as U.S. holidays) when the series does not compute its price. This
could cause the value of the series' investments to be affected by trading
on days when shares cannot be bought or sold.
The net asset value per share will rise or fall. Net asset value per share
comes from the following equation:
(Value of the securities + any cash or other assets) - all liabilities
---------------------------------------------------------------------
Total number of shares outstanding
Expenses are accrued daily.
* BUYING SHARES
Trust shares are sold to life insurance company separate and general
accounts and to those investors permitted under the Code. If you are
investing through a variable insurance contract, you should refer to the
prospectus of the separate account through which Trust shares are
purchased.
Since the Trust markets its own shares, any insurance company may buy
directly from the Trust. The Trust is "open for business" on each day the
New York Stock Exchange (the "Exchange") is open for trading. A purchase
order, together with payment in proper form, received before the close of
regular trading on the Exchange (normally 4:00 P.M., Eastern Time) on a day
the Trust is open for business will be effected at that day's net asset
value. An order received after the close of regular trading on the Exchange
generally will be effected at the net asset value determined on the next
business day. There is no minimum purchase amount.
24
<PAGE>
For an application to purchase shares, or to redeem shares, please contact
the Trust at:
11365 West Olympic Boulevard
Los Angeles, California 90064
The Trust reserves the right to accept or reject any order. No purchase
order is binding until payment has been received.
If a purchase order is cancelled due to nonpayment, the buyer will be
responsible for any loss the series' incurs as a result. If the buyer
remains a shareholder, the Trust will have authority as an agent of the
shareholder to reimburse the series. If an investor has an order cancelled,
the investor may be prohibited or restricted from placing orders in the
future.
o PARTICIPATION AGREEMENTS
An insurance company's separate account may enter into a participation
agreement to buy shares of any of the series on the terms specified in
the agreement.
* REDEEMING SHARES
Shares may be redeemed without charge on any day that the net asset value
is calculated. All redemption orders are affected at the net asset value
per share next determined after a redemption request is received. 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 normally will be made within seven days.
The Trust may suspend the right of redemption or postpone the payment date
at times when the Exchange is closed, or during certain other periods as
permitted under the federal securities laws.
* DISTRIBUTIONS
As of now, all the series pay dividends from their net investment income at
times set by the Trust's Board of Trustees.
If there are any net realized long-term capital gains, they are distributed
at least once a year.
Dividends and capital gains are automatically reinvested in additional
shares unless the shareholder elects otherwise. Shares purchased this way
are credited to the account at net asset value on a date that is determined
by the Trustees that is between the record date and payment date. The
shareholders 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 30 days before the date set for payment.
25
<PAGE>
* TAX CONSIDERATIONS
Each series is treated as a separate regulated investment company. The
Trust intends each series to qualify as such. As a general rule,
distributions from a regulated investment company to its shareholders are
taxed in the following ways:
o distributions from interest, dividends, and net short-term
capital gains are taxable as ordinary income and
o distributions from net long-term capital gains are taxable a
long-term capital gains (regardless of how long the shareholder
has actually owned the shares).
Because the series are sold only to life insurance companies, the foregoing
rules are modified by special tax rules for life insurance companies. Under
these special rules, a life insurance company will not incur any federal
income tax liability on series distributions to a separate account on a
variable contract as described in ss.817(d) of the Internal Revenue Code
("the Code"). See your contract prospectus for information regarding the
federal tax treatment of the contracts and distributions to the separate
account.
* DIVERSIFICATION REQUIREMENTS
Each series intends to comply with the diversification requirements of the
following:
o ss.817(h) of the Code,
o the 1940 Act, and
o Subchapter M of the Code.
These regulations place certain limitations on the assets of each separate
account. These regulations treat the assets of each series as assets of the
related separate account of that particular series. Except as permitted by
the "safe harbor" described below, as of the end of each calendar quarter
or within 30 days thereafter, there is a limit with regard to how much of
the total assets of any series may be put in a single investment. For
example:
o No more than 55% may be represented by any 1 investment.
o No more than 70% may be represented by any 2 investments.
o No more than 80% may be represented by any 3 investments.
o No more than 90% may be represented by any 4 investments.
For this purpose, all securities of the same issuer are considered a single
investment. While each U.S. governmental agency and instrumentality is
considered a separate issuer for these purposes, a particular foreign
government and its agencies will be considered the same issuer. All
repurchase agreements bought from a broker-dealer will be considered the
securities issued by that broker-dealer.
26
<PAGE>
SAFE HARBOR
-----------
Section 817(h) provides that a separate account will be treated as being
adequately diversified if the diversifications requirements under
Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are:
o cash and cash items,
o government securities, and
o securities of other investment companies meeting the requirements
of Subchapter M.
Failure of a series to satisfy the ss.817(h) requirements may result in
taxation of the insurance company issuing the contracts. It may also result
in a less favorable tax treatment for you and other contract holders than
as is described in your particular 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. This is regardless of the net asset value of
the shares.
On matters affecting an individual series, however, a separate vote of
shareholders is required. Shareholders of a series are not entitled to vote
on any matter which does not affect their series if it requires a separate
vote of a different series.
The Trust is not required to hold annual shareholder meetings. Those
persons elected at the shareholders' meeting held June 6, 1994, will
continue in office until they:
o resign,
o die, or
o are removed by a written instrument signed by at least 2/3 of the
Trustees at a vote of shareholders of the Trust holding not less
than 2/3 of the outstanding shares (cast in person or by proxy)
at a meeting called specifically for the purpose.
They may also by removed by a written declaration signed by shareholders
holding not less than 2/3 of the shares then outstanding and filed with the
Trust's custodian at:
The Bank of New York
1 Wall Street
New York, New York 10286
27
<PAGE>
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
The Declaration of Trust, however, disclaims shareholder liability for:
o acts or obligations of the Trust that require notice of such
disclaimer be given in each agreement, and
o obligations or instruments 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
facing financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its
obligations.
* LEGAL PROCEEDINGS
There are no present or pending material legal proceedings affecting the
Trust. The Trust, in the ordinary course of its business, is engaged in
litigation of various kinds which in its judgment is not of material
importance in relation to its total assets.
---------------------------------------
VII. FINANCIAL HIGHLIGHTS
---------------------------------------
The financial highlights table is intended to help you understand the series'
financial performance for the past 5 years. Some information shows financial
results for a single series' share.
The total returns in the table show the rate at which you would have earned or
lost on an investment in a series, assuming you reinvested all your
distributions. The Trust's independent auditors, Deloitte & Touche LLP have
audited this information for July 1999 and 2000. For the years 1996 through
1998, the firm of Ernst & Young LLP audited this information. Deloitte &
Touche's report, together with the Trust's financial statements, is included in
the Annual Report to shareholders. These financial statements are incorporated
by reference into the SAI.
28
<PAGE>
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 for July 1996, 1997, and 1998. The schedule has been audited by
Deloitte & Touche LLP, the Trust's Independent Auditors, for July 1999 and 2000.
Deloitte & Touche's report, along with the series financial statements, are
included in the Statement of Additional Information, which is available upon
request.
<TABLE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<CAPTION>
FOR THE YEARS ENDED JULY 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........$ 18.01 $ 16.56 $ 16.26 $ 12.10 $ 10.58
--------------- --------------- --------------- --------------- ---------------
Income From Investment Operations:
Net Investment Income....................$ .29 $ .29 $ .28 $ .30 $ .30
Net Gains or (Losses) on Securities
(both realized and unrealized).........$ (1.61) $ 2.45 $ 1.27 $ 4.69 $ 1.56
--------------- --------------- --------------- --------------- ---------------
Total From Investment Operations.....$ (1.32) $ 2.74 $ 1.55 $ 4.99 $ 1.86
--------------- --------------- --------------- --------------- ---------------
Less Distributions:
Dividends (from net investment income)...$ (.29) $ (.29) $ (.30) $ (.29) $ (.30)
Distributions (from capital gains)....... (.77) (1.00) (.95) (.54) (.04)
--------------- --------------- --------------- --------------- ---------------
Total Distributions.................$ (1.06) $ (1.29) $ (1.25) $ (.83) $ (.34)
=============== =============== =============== =============== ===============
Net Asset Value, End of Period..............$ 15.63 $ 18.01 $ 16.56 $ 16.26 $ 12.10
=============== =============== =============== =============== ===============
Total Return................................ (7.33)% 16.55% 9.53% 41.24% 17.58%
Ratios/Supplemental Data:
Net Assets, End of Period...................$ 324,954,004 $ 369,111,185 $ 290,441,528 $ 204,703,098 $ 112,552,893
Ratio of Expenses to Average Net Assets..... .55% .59% .57% .57% .64%
Ratio of Net Investment Income to Average
Net Assets........................ 1.83% 1.83% 1.92% 2.44% 2.73%
Portfolio Turnover Rate..................... 16% 15% 11% 14% 8%
</TABLE>
29
<PAGE>
SECURITY FIRST TRUST
NEUBERGER BERMAN BOND SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP for July 1996, 1997, and 1998. The schedule has been audited by
Deloitte & Touche LLP, the Trust's Independent Auditors, for July 1999 and 2000.
Deloitte & Touche's report, along with the series financial statements, are
included in the Statement of Additional Information, which is available upon
request.
<TABLE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<CAPTION>
FOR THE YEARS ENDED JULY 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........$ 3.93 $ 4.11 $ 4.02 $ 3.88 $ 3.92
-------------- -------------- -------------- -------------- ---------------
Income From Investment Operations:
Net Investment Income....................$ .24 $ .18 $ .19 $ .24 $ .24
Net Gains or (Losses) on Securities
(both realized and unrealized).........$ (.11) $ (.14) $ .11 $ .14 $ (.04)
-------------- -------------- -------------- -------------- ---------------
Total From Investment Operations.....$ .13 $ .04 $ .30 $ .38 $ .20
-------------- -------------- -------------- -------------- ---------------
Less Distributions:
Dividends (from net investment income)...$ (.22) $ (.18) $ (.21) $ (.24) $ (.24)
Distributions (from capital gains)....... ) (.04)
-------------- -------------- -------------- -------------- ---------------
Total Distributions.................$ (.22) $ (.22) $ (.21) $ (.24) $ (.24)
============== ============== ============== ============== ===============
Net Asset Value, End of Period..............$ 3.84 $ 3.93 $ 4.11 $ 4.02 $ 3.88
============== ============== ============== ============== ===============
Total Return................................ 3.31% .97% 7.46% 9.79% 5.10%
Ratios/Supplemental Data:
Net Assets, End of Period...................$ 23,219,690 $ 24,717,704 $ 17,934,392 $ 10,634,720 $ 8,981,365
Ratio of Expenses to Average Net Assets..... .68% .66% .73% .75% .90%
Ratio of Net Investment Income to Average
Net Assets........................ 6.30% 5.46% 5.78% 6.41% 6.32%
Portfolio Turnover Rate..................... 177% 147% 125% 54% 34%
</TABLE>
30
<PAGE>
SECURITY FIRST TRUST
BLACKROCK EQUITY SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP for July 1996, 1997, and 1998. The schedule has been audited by
Deloitte & Touche LLP, the Trust's Independent Auditors, for July 1999 and 2000.
Deloitte & Touche's report, along with the series financial statements, are
included in the Statement of Additional Information, which is available upon
request.
<TABLE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<CAPTION>
FOR THE YEARS ENDED JULY 31,
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........$ 8.54 $ 8.57 $ 8.18 $ 6.05 $ 5.70
Income From Investment Operations:
Net Investment Income....................$ .02 $ .06 $ .07 $ .09 $ .10
Net Gains or (Losses) on Securities
(both realized and unrealized).........$ .68 $ 1.42 $ 1.04 $ 2.60 $ .46
-------------- -------------- -------------- -------------- --------------
Total From Investment Operations.....$ .70 $ 1.48 $ 1.11 $ 2.69 $ .56
-------------- -------------- -------------- -------------- --------------
Less Distributions:
Dividends (from net investment income)...$ (.05) $ (.07) $ (.08) $ (.11) $ (.05)
Distributions (from capital gains)....... (.26) (1.44) (.64) (.45) (.16)
-------------- -------------- -------------- -------------- --------------
Total Distributions.................$ (.31) $ (1.51) $ (.72) $ (.56) $ (.21)
============== ============== ============== ============== ==============
Net Asset Value, End of Period..............$ 8.93 $ 8.54 $ 8.57 $ 8.18 $ 6.05
============== ============== ============== ============== ==============
Total Return................................ 8.2% 17.27% 13.57% 44.46% 9.82%
Ratios/Supplemental Data:
Net Assets, End of Period...................$ 59,015,427 $ 58,313,162 $ 54,803,152 $ 47,571,469 $ 20,701,776
Ratio of Expenses to Average Net Assets..... .80% .81% .91% 1.00% 1.00%
Ratio of Net Investment Income to Average
Net Assets........................ .31% .72% .86% 1.56% 2.24%
Portfolio Turnover Rate..................... 83% 23% 87% 55% 88%
</TABLE>
31
<PAGE>
SECURITY FIRST TRUST
BLACKROCK U.S. GOVERNMENT INCOME SERIES
CONDENSED FINANCIAL INFORMATION
The following schedule of financial highlights has been audited by Ernst &
Young LLP for July 1996, 1997, and 1998. The schedule has been audited by
Deloitte & Touche LLP, the Trust's Independent Auditors, for July 1999 and 2000.
Deloitte & Touche's report, along with the series financial statements, are
included in the Statement of Additional Information, which is available upon
request.
<TABLE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<CAPTION>
FOR THE YEARS ENDED JULY 31,
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........$ 5.10 $ 5.45 $ 5.36 $ 5.15 $ 5.13
Income From Investment Operations:
Net Investment Income....................$ .30 $ .30 $ .27 $ .23 $ .18
Net Gains or (Losses) on Securities
(both realized and unrealized).........$ (.01) $ (.24) $ .06 .20 $ .04
-------------- -------------- -------------- -------------- --------------
Total From Investment Operations.....$ .29 $ .06 $ .33 $ .43 $ .22
-------------- -------------- -------------- -------------- --------------
Less Distributions:
Dividends (from net investment income)...$ (.29) $ (.31) $ (.24) $ (.22) $ (.19)
Distributions (from capital gains)....... ) (.10) (.01)
-------------- -------------- -------------- -------------- --------------
Total Distributions.................$ (.29) $ (.41) $ (.24) $ (.22) $ (.20)
============== ============== ============== ============== ==============
Net Asset Value, End of Period..............$ 5.10 $ 5.10 $ 5.45 $ 5.36 $ 5.15
============== ============== ============== ============== ==============
Total Return................................ 5.69% 1.10% 6.16% 8.35% 4.29%
Ratios/Supplemental Data:
Net Assets, End of Period...................$ 32,520,049 $ 32,312,549 $ 34,090,919 $ 28,889,460 $ 14,888,824
Ratio of Expenses to Average Net Assets..... .71% .71% .66% .70% .70%
Ratio of Net Investment Income to Average
Net Assets........................ 5.85% 5.37% 5.53% 5.68% 5.38%
Portfolio Turnover Rate..................... 159% 307% 103% 62% 148%
</TABLE>
32
<PAGE>
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.
PROPOSED TRUST REORGANIZATION
The Board of Trustees of the Trust has approved a proposed reorganization
of the Series of the Trust into portfolios of Met Investors Series Trust
("Met Trust"), a recently organized Delaware business trust. The
reorganization of a Series of the Trust is subject to prior approval by
shareholders of the Series, and the Board of Trustees has authorized a
special meeting of shareholders of the each Series for the purpose of
seeking such approvals.
If approved, all of the assets of each of the Series of the Trust will be
acquired by a portfolio of the Met Trust in exchange for Class A shares of
such portfolio and the assumption by such portfolio of identical
liabilities of the Series of the Trust. The reorganization is intended to
be tax-free for federal income tax purposes.
Subject to approvals by shareholders of each Series:
1. The Growth and Income Series would be merged into the Lord Abbett
Growth and Income Portfolio of the Met Trust. This portfolio has an
investment objective substantially similar to that of the Series. The
investment adviser to the portfolio would be Met Investors, and the
sub-adviser would be Lord Abbett & Co.
2. The Bond Series will be merged into the J.P. Morgan Quality Bond
Portfolio of the Met Trust. This portfolio has an investment objective
substantially similar to that of the Bond Series. The investment
adviser to the portfolio would be Met Investors, and the sub-adviser
would be J.P. Morgan Investment Management, Inc.
3. The Equity Series will be merged into the BlackRock Equity Portfolio
of the Met Trust, and the U.S. Government Income Series would be
merged into the BlackRock U.S. Government Income Portfolio of the Met
Trust. The investment objective of each of the portfolios would be
exactly the same as the Series. The investment adviser and sub-adviser
for each portfolio would be the same as for the Series, Security
Management and BlackRock, respectively.
A Prospectus/Proxy statement describing the proposed reorganizations in
detail will be furnished to shareholders of record as of November 27, 2000
or such later date as shall be determined by the Board of Trustees.
33
<PAGE>
* SECURITY FIRST TRUST
--------------------
If you want more information about the Trust and its series, the following
documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the series'
actual investments. Annual reports discuss the effect of recent market
conditions and the series' investment strategy on the series' performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated November 30, 2000,
provides more detailed information about the Trust and series and is
incorporated in this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI, and other
information about the Trust and its series and make inquiries about the Trust
and its series by contacting:
Security First Trust
11365 West Olympic Boulevard
Los Angeles, California 90064
Telephone: (310) 312-6100
Information about the Trust and its series (including its prospectus, SAI, and
shareholder reports) can be reviewed and copied at:
Public Reference Room
450 Fifth Street, N.W.
Securities and Exchange Commission
Washington, DC 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the Trust and its series are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Room at the above address.
The Trust's Investment Company Act file number is 811-2480.
34
<PAGE>
`33 Act File No. 2-51173
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
NEUBERGER BERMAN BOND SERIES
BLACKROCK EQUITY SERIES
BLACKROCK 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 30, 2000, 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 30, 2000.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
The Trust................................................................. 3
Investment Policies and Restrictions...................................... 4
Investment Adviser and Other Services..................................... 16
Principal Holders of Securities........................................... 20
Management of the Trust................................................... 21
Brokerage................................................................. 22
Portfolio Turnover........................................................ 23
Pricing and Redemption of Securities Being Offered........................ 24
Taxation.................................................................. 25
Bond Ratings.............................................................. 26
Commercial Paper Ratings ................................................. 27
Custodian................................................................. 27
Independent Auditors...................................................... 28
Federal Registration of Shares............................................ 28
Legal Counsel............................................................. 28
2
<PAGE>
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 on February 11, 1987, 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.
The Declaration of Trust provides that no annual or regular meetings of
shareholders are required. In addition, after the Trustees were initially
elected by shareholders, the Trustees became a self-perpetuating body. Thus,
there will ordinarily be no shareholder meetings unless otherwise required by
the 1940 Act.
The 1940 Act specifically requires that a shareholder meeting be held
for the purpose of electing Trustees if at any time less than a majority of the
Trustees has been elected by the shareholders of the Trust. The shareholders
also have the power to remove a Trustee by the affirmative vote of the holders
of not less than two-thirds of the shares of the Trust outstanding and entitled
to vote either by a declaration in writing filed with the custodian or by votes
cast in person or by proxy at a meeting called for the purpose of removal. The
Trustees will promptly call such a meeting when requested to do so by the record
holders of not less than 10 percent of the outstanding shares.
Ten or more shareholders who have been shareholders for at least six
months preceding the date of application and who hold in the aggregate either
shares having a net asset value of at least $100,000 or at least 1 percent of
the 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.
3
<PAGE>
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
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
4
<PAGE>
contractual restrictions on resale ("restricted securities") (excluding
repurchase agreements), except debt securities in private placements within the
limits imposed in restriction (11) below pertaining to loans; (6) purchase or
sell real estate, except that the Series may invest in the securities of
companies whose business involves the purchase or sale of real estate, (7)
purchase securities of other investment companies, except in connection with a
merger, consolidation, acquisition or organization; (8) purchase or sell
commodities or commodity contracts; (9) purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs;
(10) make short sales of securities or purchase securities on margin, except for
such short-term credits as may be necessary for the clearance or purchases of
portfolio securities, (11) make loans, except that the Series may acquire
publicly distributed bonds, debentures, notes and other debt securities and may
enter into repurchase agreements; (12) borrow money, except as a temporary
measure for extraordinary or emergency purposes and then only from banks in
amounts not exceeding the lesser of 10% of a Series' total assets valued at cost
or 5% of its total assets valued at market and only if immediately thereafter
there is an asset coverage of at least 300%; (13) invest in puts, calls,
straddles, spreads, or any combinations thereof: (14) mortgage, pledge or
hypothecate securities, except in connection with the borrowings permitted under
restriction (12) and then only where the market value of the securities
mortgaged, pledged or hypothecated does not exceed 10% of its net assets taken
at market; (15) underwrite securities issued by other persons; (16) purchase any
securities which would cause more than 10% of the value of either of the Series'
total assets at the time of such purchase to be invested in warrants: and (17)
purchase any security if, as a result of such purchase, more than 10% of the
value of the Series' total assets would be invested in foreign securities which
are not publicly traded in the United States.
NEUBERGER BERMAN BOND SERIES
The following investment policies of the Neuberger Berman Bond Series
(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 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.
5
<PAGE>
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 the 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
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 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).
6
<PAGE>
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 issue
of a bond defaulted on its obligations to pay interest or principal or entered
into bankruptcy proceeding, the Bond Series may incur losses or expenses in
seeking recovery of amounts owed to it. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high-yield bonds and the Bond Series' net asset value.
PAYMENT EXPECTATIONS. High-yield bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining interest rate
market, the Bond Series would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high-
yield bond's value will decrease in a rising interest rate market, as will the
value of the Bond Series' assets. If the Bond Series experiences unexpected net
redemptions, this may force it to sell high-yield bonds without regard to their
investment merits, thereby decreasing the asset base upon which their expenses
can be spread and possibly reducing the Bond Series' rate of return.
LIQUIDITY AND VALUATION. There may be little trading in the secondary
market for particular bonds, which may affect adversely the Bond Series' ability
to value accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield bonds, especially in a thin market.
ILLIQUID SECURITIES. The Bond Series may invest up to 15% of its net
assets in restricted or illiquid securities. The term "illiquid securities" for
this purpose means securities that the Series may not be able to dispose of
within seven days in the ordinary course of business at approximately the amount
at which the Bond Series has valued the securities. Illiquid restricted
securities may be sold only in privately negotiated transactions or in public
offerings with respect to which a registration statement is in effect under the
Securities Act of 1933.
However, not all restricted securities are illiquid. In recent years a
large institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
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
7
<PAGE>
governments with respect to possible nationalization of their industries; and
other specific local political and economic considerations. Foreign companies
and foreign investment practices are generally not subject to uniform
accounting, auditing and financial reporting standards and practices or
regulatory requirements comparable to those of U.S. companies. There may be less
information publicly available about foreign companies. Additional costs may
also be incurred in connection with the Bond Series' investment activities in
the area of foreign securities. Foreign brokerage commissions are generally
higher than in the United States. Administrative difficulties (such as the
applicability of foreign laws to foreign custodians in various circumstances
including bankruptcy, ability to recover lost assets, expropriation,
nationalization, record access, etc.) may be associated with the maintenance of
assets in foreign jurisdictions.
BLACKROCK EQUITY SERIES
The BlackRock 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.
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, and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out only on an exchange which provides a secondary
market for options of the same series.
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FINANCIAL FUTURES CONTRACTS - A futures contract is a firm commitment by
two parties; the seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the buyer who agrees to
take delivery of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common stocks
represented in a particular index.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS - The Series may purchase
listed put options on financial futures contracts. Unlike entering directly into
a futures contract, which requires the purchaser to buy a financial instrument
on a set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of a put option, the related futures contracts will also decrease in
value while the put 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 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 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) at the fixed strike price at any
time during the life of the option if the option is exercised. If 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.
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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 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 its portfolio. A put option gives the Series, in return
for a premium, the right to sell the underlying security to the writer (seller)
at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES - The Series may
also write covered call options to generate income. As a writer of a call
option, the Series has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the exercise
price. The Series may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any additional
consideration).
OVER-THE-COUNTER OPTIONS - 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 prices 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 generally have a continuous liquid market while
over-the-counter options may not.
U.S. GOVERNMENT OBLIGATIONS - The types of U.S. government obligations
in which the Series may invest are described below under "U.S. Government Income
Series".
COMMERCIAL PAPER - The Series may invest in commercial paper rated at
least A-1 by Standard & Poor's Corporation, or Prime-1 by Moody's Investors
Service, Inc., or F-1 by Fitch Investors Service, Inc., and money market
instruments (including commercial paper) which are unrated but of comparable
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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"),
both of which are 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 SIF or SAIF).
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:
o Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o 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 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 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.
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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.
The Series believes that Section 4(2) commercial paper and possibly
certain other restricted securities which meet the criteria for liquidity
established by the Board of Trustees are liquid. The Series intends, therefore,
to treat the restricted securities which meet the criteria for liquidity
established by the Trustees, including Section 4(2) commercial paper, as
determined by the sub-adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because such Section
4(2) commercial paper is liquid, the Series intends to not subject such paper to
the limitation applicable to restricted securities.
The Board of Trustees is responsible for establishing policies and
procedures for investments in restricted securities and other illiquid
securities, and the Board will monitor compliance with these policies and
procedures by investment advisers to the Series.
REPURCHASE AGREEMENTS - The Series or its custodian will take possession
of the securities subject to repurchase agreements, and these securities will be
marked to market daily. In the event that a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Series
might be delayed pending court action. The Series believes that under the
regular procedures normally in effect for custody of the Series' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Series and allow retention or disposition of such
securities. The Series will only enter into repurchase agreements with banks and
other recognized financial institutions such as broker/dealers which are deemed
by the sub-adviser to be creditworthy pursuant to guidelines established by the
Trustees.
REVERSE REPURCHASE AGREEMENTS - The Series may also enter into reverse
repurchase agreements. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Series transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Series will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the Series
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Series will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Series, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Series' records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
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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 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 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.
BLACKROCK U.S. GOVERNMENT INCOME SERIES
The BlackRock U.S. Government Income Series (the "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) - Like other U.S. government
securities, the market value of ARMS will generally vary inversely with changes
in market interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - These transactions are
arrangements in which the 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.
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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 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
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liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Series will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Series will
restrict the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse repurchase
agreements); (2) purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of purchases and sales of
securities (the deposit or payment by the Series of initial or variation margin
in connection with financial futures contracts or related options transactions
is not considered the purchase of a security on margin); (3) mortgage, pledge,
or hypothecate any assets, except to secure permitted borrowings (in those
cases, it may pledge assets having a value of 15% of its assets taken at cost.
Margin deposits for the purchase and sale of financial futures contracts and
related options are not deemed to be a pledge); (4) lend any of its assets
except portfolio securities up to one-third of the value of its total assets
(this shall not prevent the Series from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted by the
Series' investment objective, policy, and limitations or Declaration of Trust);
(5) purchase or sell commodities, commodity contracts, or commodity futures
contracts 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
warrants, including those acquired in units or attached to other securities 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
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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 Met
Investors Advisory Corp. ("Met Investors"), formerly known as Security First
Investment Management Corporation ("Security Management"), the investment
adviser for the Series; T. Rowe Price Associates, Inc. ("Price Associates"), the
sub-adviser to Met Investors 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.
MET INVESTORS AND THE ADVISORY AGREEMENTS
Met Investors 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"). Met Investors was incorporated in Delaware
on December 6, 1973 and is a wholly-owned subsidiary of Security First Group,
Inc., also a Delaware corporation. Met Investors 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. Met Investors also acts as investment adviser to an
affiliated insurance company, Security First Life Insurance Company.
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The Advisory Agreements provide that Met Investors 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, Met
Investors shall obtain and evaluate information relating to the economy,
industries, business, securities markets, and particular issues of securities.
In addition, Met Investors 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. Met
Investors'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. Met Investors is also authorized to enter into sub-advisory agreements
with third parties for the provision of investment advice to Met Investors
relating to each Series' portfolio of securities, investments, cash and other
properties.
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. Met Investors will be responsible for paying all expenses and charges
not assumed by the Trust.
The Advisory Agreements provide that Met Investors, 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, Met Investors 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.
For the fiscal year ended July 31, 2000, management fees of $1,714,097
($514,229 after payment of subadvisory fees) were paid by the T. Rowe Price
Growth and Income Series to Met Investors.
During the fiscal year ended July 31, 2000, management fees in the
amount of $121,324 ($36,397 after payment of the subadvisory fee) were earned by
Met Investors from the Bond Series.
In regard to the U.S. Government Income Series, for the fiscal year
ended July 31, 2000, Met Investors earned advisory fees of $178,490 ($48,679
after payment of subadvisory fees). In regard to the Equity Series, for the
fiscal year ended July 31, 2000, Met Investors earned advisory fees of $418,770
($89,739 after payment of subadvisory fees). 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.
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PRICE ASSOCIATES AND THE PRICE SUB-ADVISORY AGREEMENT
Price Associates serves as sub-adviser to Met Investors 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 $179.6 billion as of September 30,
2000. Price Associates is registered as an investment adviser under the
Investment Advisers Act of 1940.
Under the Price Sub-Advisory Agreement Price Associates provides
investment management services to the T. Rowe Price Growth and Income Series.
Price Associates has the discretion to purchase or sell securities on behalf of
the Trust in accordance with the Trust's investment objectives or restrictions
and to communicate with brokers, dealers, custodians or other parties on behalf
of the Trust and to allocate brokerage or obtain research services. In
performing these services, Price Associates must obtain and evaluate information
relating to the economy, industries, business, securities markets 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, 2000, Price Associates received
advisory fees from the T. Rowe Price Growth and Income Series of $1,199,868. For
the fiscal year ended July 31, 2000, the ratios of total expenses to average net
assets for this Series was .55%.
The Price Sub-Advisory Agreement provides that it will remain in effect
for an initial term of two years and will continue in effect from year to year
thereafter as to each Series, provided that such continuance is specifically
approved at least annually by the Board of Trustees (at a meeting called for
that purpose), or by vote of a majority of the outstanding shares of each
Series. In either case, renewal of the Price Sub-Advisory Agreement must be
approved by a majority of the Trust's independent Trustees. The Price
Sub-Advisory Agreement provides that it will terminate automatically if assigned
and that it may be terminated without penalty by either party or by a Series of
the Trust upon 60 days prior written notice to the other party, provided that
termination by a Series of the Trust must be authorized by a resolution of a
majority of the Board of Trustees or by a vote of a majority of the outstanding
shares of the Series of the Trust.
No single shareholder owns beneficially more than 10% of the stock of
Price Associates.
NEUBERGER BERMAN AND NEUBERGER BERMAN SUB-ADVISORY AGREEMENT
Neuberger Berman was founded in 1939 to manage assets for high net worth
individuals. It is an investment adviser registered as such with the Securities
and Exchange Commission ("SEC") under the Investment Advisers Act of 1940. It is
also registered with the SEC as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the New York Stock Exchange. Its offices are
located at 605 Third Avenue, New York, New York 10158. Currently, it provides
18
<PAGE>
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 $54.4 billion in assets under
its management for clients as of December 31, 1999.
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, 2000, Neuberger
Berman received advisory fees of $84,927.
The Neuberger Berman Sub-Advisory Agreement provides that it will remain
in effect for an initial term of two years and will continue in effect from year
to year thereafter as to the Bond Series, provided that such continuance is
specifically approved at least annually by the Board of Trustees (at a meeting
called for that purpose), or by vote of a majority of the outstanding shares of
each Series. In either case, renewal of the Neuberger Berman Sub-Advisory
Agreement must be approved by a majority of the Trust's independent Trustees.
The Neuberger Berman Sub-Advisory Agreement provides that it will terminate
automatically if assigned and that it may be terminated without penalty by
either party or by a Series of the Trust upon 60 days prior written notice to
the other party, provided that termination by a Series of the Trust must be
authorized by a resolution of a majority of the Board of Trustees or by a vote
of a majority of the outstanding shares of the Series of the Trust.
BLACKROCK AND THE BLACKROCK SUB-ADVISORY AGREEMENT
BlackRock serves as sub-adviser to Met Investors 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 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, Edinburgh and Tokyo. BlackRock, Inc. is a fully
integrated money management firm with global fixed income, equity and cash
management capabilities. As of December 31, 1999, BlackRock, Inc. And its
subsidiaries managed or administered approximately $165 billion in assets.
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<PAGE>
As compensation for providing services under the BlackRock Sub-Advisory
Agreements, BlackRock receives from Met Investors 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.
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.
During the fiscal year ended July 31, 2000, BlackRock earned a
sub-advisor fee of $329,031 from the Equity Series. During the same period,
BlackRock earned a sub-advisor fee of $129,811 from the U.S. Government Income
Series.
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
Security First Life Separate Account A, the depositor of which is the
Security First Life Insurance Company, has entered into a participation
agreement with the Trust for the purchase of Series shares at net asset value.
As of July 31, 2000, Security First Life Separate Account A was the owner of
99.51% of the outstanding shares of Bond Series, 99.51% 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, and the depositor, Security First Life
Insurance Company, is 11365 West Olympic Boulevard, Los Angeles, California
90064.
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MANAGEMENT OF THE TRUST
The Trustees are responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Trustee is provided below and includes each person's
name, address, age, present position(s) held with the Trust, principal
occupations for the past five years and positions held prior to the past five
years, total compensation received as a Trustee from the Trust for its most
recent fiscal year
<TABLE>
<CAPTION>
------------------------------------- -------------------- --------------------------- ----------------------------
NAME, ADDRESS, AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) AGGREGATE COMPENSATION
WITH TRUST DURING PAST 5 YEARS FROM TRUST
------------------------------------- -------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Jack R. Borsting Trustee Current - Executive $11,000
3415 South Figueroa, DCC 217 Director, Center for
Los Angeles, CA 90089-0871 Telecommunications
Age 71 Management, University of
Southern California
Prior to 1995 - Dean, USC
School of Business, Dept.
of Information &
Operations Management
------------------------------------- -------------------- --------------------------- ----------------------------
Katherine L. Hensley Trustee Retired. $11,000
400 South Hope Street Formerly - Partner in the
Los Angeles, CA 90071-2899 law firm of O'Melveny &
Age 63 Myers
------------------------------------- -------------------- --------------------------- ----------------------------
Howard H Kayton* Trustee Senior Vice President and $0
11365 West Olympic Boulevard Chief Actuary of Security
Los Angeles, CA 90064 First Group, Inc.
Age 64
------------------------------------- -------------------- --------------------------- ----------------------------
Lawrence E. Marcus Trustee Retired. $11,000
4616 Dorset Formerly - Executive
Dallas, Texas 75229 Vice President of
Age 82 Neiman-Marcus Company, a
general merchandise
retailer
------------------------------------- -------------------- --------------------------- ----------------------------
Richard C. Pearson President President of Security $0
11365 West Olympic Boulevard First Group, Inc. and an
Los Angeles, CA 90064 officer of its
Age 57 subsidiaries
------------------------------------- -------------------- --------------------------- ----------------------------
Jane F. Eagle Senior Vice Senior Vice President of $0
11365 West Olympic Boulevard President and Security First Group,
Los Angeles, CA 90064 Chief Financial Inc. and an officer of
Age 35 Officer its subsidiaries.
------------------------------------- -------------------- --------------------------- ----------------------------
Cheryl M. MacGregor Senior Vice Senior Vice President, $0
11365 West Olympic Boulevard President, Administration of
Los Angeles, CA 90064 Administration Security First Group,
Age 53 Inc. and an officer of
its subsidiaries.
------------------------------------- -------------------- --------------------------- ----------------------------
James C. Turner Vice President, Vice President, Taxation $0
11365 West Olympic Boulevard Taxation of Security First Group,
Los Angeles, CA 90064 Inc.
Age 55
------------------------------------- -------------------- --------------------------- ----------------------------
Cheryl J. Finney Vice President and Associate General Counsel $0
11365 West Olympic Boulevard Assistant Secretary of Security First Group,
Los Angeles, CA 90064 Inc. and an officer of
Age 46 its subsidiaries.
------------------------------------- -------------------- --------------------------- ----------------------------
</TABLE>
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 Met Investors. Mr.
Pearson is also President of Met Investors. Mr. Turner is also Vice President,
Taxation and Assistant Secretary of Met Investors. Ms. Finney is also Vice
President, and Assistant Secretary of Met Investors.
* Interested Trustee
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BROKERAGE
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Trust are made by Met Investors 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 Met Investors may be dealing. Met Investors 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 Met
Investors'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 Met
Investors, Price Associates, Neuberger Berman, BlackRock or the Series.
Met Investors, 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 Met Investors, 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 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. Met Investors, 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 Met Investors'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.
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Each year Met Investors, 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.
Met Investors, 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, Met Investors 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 Met Investors, Price Associates, Neuberger Berman and BlackRock in
serving their other clients, but they can also be useful in serving the Trust.
Met Investors, 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 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, 2000, of
$162,871. The Equity Series paid brokerage commissions to securities dealers
during that fiscal year of $97,806. The Bond Series and U.S. Government Income
Series did not pay any brokerage commissions or discounts to securities dealers
in that fiscal year.
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, 2000, was
16%. The portfolio turnover rate for the Bond Series for the fiscal year ended
July 31, 2000, was 177%. The portfolio turnover rate during said period for the
Equity Series was 83%. The portfolio turnover rate for the U.S. Government
Income Series for said period was 159%.
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,
23
<PAGE>
which would normally affect the taxable income of the Series' shareholders.
Where the shareholder is an insurance company separate account funding variable
annuity contracts, qualified as such under the Internal Revenue Code ("Code"),
however, the contract owners are not currently charged with such income or
losses except to the extent provided under the Code (normally when distributions
under the contracts are made).
PRICING AND REDEMPTION OF SECURITIES BEING OFFERED
DETERMINING NET ASSET VALUE
The net asset value per share of each Series is determined by dividing
the value of the Series' securities, plus any cash and other assets (including
dividends and interest accrued and not collected), less all liabilities
(including accrued expenses), by the number of shares outstanding.
T. ROWE PRICE GROWTH AND INCOME AND BOND SERIES
Debt securities other than convertible securities and short-term
obligations are valued at prices obtained for the day of valuation from a bond
pricing service of a major dealer in bonds, when such prices are available.
However, when such prices are not available and where Met Investors 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:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o 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
o for all other securities, at fair value as determined in good faith by
the Board of Trustees.
The Series will value future contracts, options, put options on futures
and financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Board determines in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
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<PAGE>
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 provided the qualification requirements of Subchapter M are
otherwise met. As a regulated investment company, a Series will not be subject
to federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable year
is distributed.
In order to qualify as a regulated investment company under the Code, a
Series must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks or securities, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
and (b) diversify its holdings so that, at the end of each fiscal quarter, (i)
at least 50% of the market value of the Series' assets is represented by cash,
Government securities and other securities limited in respect of any one issuer
to 5% of the Series' assets and to not more than 10% of the voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than Government securities).
In addition to the diversification requirements contained in the Trust's
investment restrictions, the Trust is also subject to diversification
requirements applicable to variable annuities under Section 817(h) of the Code.
Under this section, a variable annuity will not receive the tax treatment
afforded annuities if its underlying investments are not adequately diversified.
Under applicable regulations, no more than 55% of total assets can be invested
in one investment, 70% in two investments, 80% in three investments and 90% in
four investments. Investments are generally defined as securities issued by any
one issuer. U.S. Government agencies or instrumentalities are considered
separate issuers.
Unlike public shareholders, under the Code a life insurance company
separate account will not incur any federal income tax liability on dividends
and capital gains distributions received from a regulated investment company by
a separate account funding variable annuity contracts as defined in section
817(d) of the Code.
To the extent that there is in excess of $250,000 invested in a Series
other than through variable contract premium payment, the Code imposes a 4%
nondeductible excise tax on the undistributed income of such Series to the
extent the Series does not distribute at least 98% of its net investment income
and its net capital gains (both long- and short-term) for each taxable year by
the end of such year. For purposes of the 4% excise tax, dividends and
distributions will be treated as paid when actually distributed, except that
dividends declared in December payable to shareholders of record on a specified
date in December, and paid before February 1 of the following year, will be
treated as having been (i) paid by the Series on the record date and (ii)
received by 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.
25
<PAGE>
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION
Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal, and 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
26
<PAGE>
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 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 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
27
<PAGE>
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, 1999, and
July 31, 2000, and for the periods indicated in this report appearing in this
Statement of Additional Information and Registration Statement have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
appearing elsewhere in the registration statement, and is included in reliance
upon their report of such firm given upon their authority as experts in
accounting and auditing. The consolidated financials statements and the related
financial statements schedules of Security First Trust at July 31, 1998, 1997
and 1996 included elsewhere in the registration statement have been audited by
Ernst & Young LLP, independent auditors, as stated in their reports appearing
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
FEDERAL REGISTRATION OF SHARES
The Trust's shares are registered for sale under the Securities Act of
1933.
LEGAL COUNSEL
Sullivan & Worcester LLP, whose address is 1025 Connecticut Avenue N.W.,
Washington, D.C. 20036, is legal counsel to the Trust.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Trustees
of the Security First Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the Security First Trust comprised of the Bond
Series, the T. Rowe Price Growth and Income Series, the Equity Series, and the
U.S. Government Income Series (collectively, the "Trust") as of July 31, 2000
and the related statements of operations for the year then ended and the
statements of changes in net assets and the financial highlights for each of the
two years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the three years ended July 31,
1998, were audited by other auditors whose report, dated September 14, 1998,
expressed an unqualified opinion on those financial highlights for each of the
three years.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2000, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security First Trust's Bond Series, T. Rowe Price Growth and Income Series,
Equity Series, and U.S. Government Income Series as of July 31, 2000, the
results of their operations for the year then ended, and the changes in their
net assets and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
-------------------------
September 1, 2000
Los Angeles, California
<PAGE>
================================================================================
SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments at market - Note A and Schedule I:
Investment securities (cost:
Bond Series - $22,623,192; Growth
and Income Series - $279,333,808;
Equity Series - $44,935,123;
U.S. Government Income Series - $32,553,278) $ 22,203,630 $323,981,404 $58,124,170 $ 32,011,805
Cash 606,373 720,133 1,098,402 63,714
Interest receivable 219,885 2,936 4,478 467,431
Dividends receivable 436,244 26,446
Receivable for securities sold 1,846,756 1,218,552 2,102,505
------------- ------------ ----------- ------------
24,876,644 325,140,717 60,472,048 34,645,455
LIABILITIES
Payable for securities purchased 1,614,601 1,411,012 2,099,625
Accrued expenses 14,023 51,269 15,642 14,198
Payable for capital shares redeemed 19,729 33,871 882 304
Payable to investment adviser - Note B 6,947 97,241 28,309 10,653
Payable for directors' fees 305 4,332 776 626
Unrealized depreciation on foreign
currency contracts 1,349
------------- ------------ ----------- ------------
1,656,954 186,713 1,456,621 2,125,406
NET ASSETS
Capital shares (authorized 100,000,000
shares of $.01 par value for each series) 24,156,181 261,640,068 41,153,313 32,937,994
Undistributed net investment income 876,932 3,412,895 35,302 1,113,498
Undistributed net realized gain (loss) (1,392,512) 15,253,445 4,637,765 (989,970)
Net unrealized appreciation (depreciation)
of investments (420,911) 44,647,596 13,189,047 (541,473)
------------- ------------ ----------- ------------
NET ASSETS $ 23,219,690 $324,954,004 $59,015,427 $ 32,520,049
============= ============ =========== ============
Capital shares outstanding 6,052,985 20,789,263 6,610,048 6,379,108
Net asset value per share $ 3.84 $ 15.63 $ 8.93 $ 5.10
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 6,810,679 $ 607,061
Interest $ 1,685,659 1,273,872 52,216 $ 2,121,312
----------- ------------ ----------- -----------
1,685,659 8,084,551 659,277 2,121,312
EXPENSES
Custodian fees 16,947 50,938 22,847 18,950
Adviser fees - Note B 84,927 1,199,868 329,031 129,811
Management fees - Note B 36,397 514,229 89,736 48,679
Printing expenses 16,391 31,743 13,490 14,542
Insurance expenses 1,064 15,631 2,744 1,487
Audit fees 5,132 7,676 6,397 5,116
Directors' fees and expenses 1,781 26,514 4,468 2,079
Miscellaneous expenses 859 6,914 5,708 8,128
----------- ------------ ----------- -----------
163,498 1,853,513 474,421 228,792
----------- ------------ ----------- -----------
NET INVESTMENT INCOME 1,522,161 6,231,038 184,856 1,892,520
NET REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS - Notes A and C
Net realized gain (loss) on sale of investments (1,106,001) 20,126,873 5,002,057 (464,991)
Net unrealized appreciation (depreciation) of:
Investments during the period 334,147 (55,204,755) (545,090) 454,161
Assets denominated in foreign currencies (1,349)
----------- ------------ ----------- -----------
Net gain (loss) on investments (773,203) (35,077,882) 4,456,967 (10,830)
----------- ------------ ----------- -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 748,958 $(28,846,844) $ 4,641,823 $ 1,881,690
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,522,161 $ 6,231,038 $ 184,856 $ 1,892,520
Net realized gain (loss) on sale
of investments (1,106,001) 20,126,873 5,002,057 (464,991)
Net unrealized appreciation (depreciation)
during the period 332,798 (55,204,755) (545,090) 454,161
------------ ------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 748,958 (28,846,844) 4,641,823 1,881,690
------------ ------------- ------------ ------------
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (1,410,330) (6,182,728) (360,159) (1,836,952)
Net realized gains (16,135,169) (1,714,979)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 1,410,330 6,182,728 360,159 1,836,952
Reinvestment of net realized gains 16,135,169 1,714,979
Sales of capital shares 3,319,764 19,704,012 1,705,091 2,282,843
Redemptions of capital shares (5,566,736) (35,014,349) (5,644,649) (3,957,033)
------------ ------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL SHARE
TRANSACTIONS (836,642) 7,007,560 (1,864,420) 162,762
------------ ------------- ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS (1,498,014) (44,157,181) 702,265 207,500
NET ASSETS
BEGINNING OF YEAR 24,717,704 369,111,185 58,313,162 32,312,549
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series -$876,932;
Growth and Income Series - $3,412,895;
Equity Series - $35,302; U.S. Government
Income Series - $1,113,498) $ 23,219,690 $ 324,954,004 $ 59,015,427 $ 32,520,049
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,222,895 $ 5,764,382 $ 398,609 $ 1,803,367
Net realized gain (loss) on sale
of investments (198,084) 17,734,362 1,354,678 (13,673)
Net unrealized appreciation (depreciation)
during the period (968,222) 31,098,623 7,802,709 (1,476,045)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 56,589 54,597,367 9,555,996 313,649
------------ ------------- ------------ ------------
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (968,742) (5,234,796) (449,055) (1,847,027)
Net realized gains (207,719) (18,412,869) (8,668,236) (597,259)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 968,742 5,234,796 449,055 1,847,027
Reinvestment of net realized gains 207,719 18,412,869 8,668,236 597,259
Sales of capital shares 9,504,353 37,641,014 793,709 2,362,361
Redemptions of capital shares (2,777,630) (13,568,724) (6,839,695) (4,454,380)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS 7,903,184 47,719,955 3,071,305 352,267
------------ ------------- ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 6,783,312 78,669,657 3,510,010 (1,778,370)
NET ASSETS
BEGINNING OF YEAR 17,934,392 290,441,528 54,803,152 34,090,919
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series - $765,101;
Growth and Income Series - $3,364,585;
Equity Series - $210,605; U.S. Government
Income Series - $1,057,930) $ 24,717,704 $ 369,111,185 $ 58,313,162 $ 32,312,549
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- --------- ------
<S> <C> <C> <C>
CORPORATE NOTES 26.6%
Aerospace & Defense: 1.0%
Boeing Co., 8.75%, 08/15/21 50,000 $ 56,688
Lockheed Martin Corp., 7.75%, 05/01/26 90,000 86,063
Tyco International, Ltd., 6.375%, 06/15/05 80,000 76,100
--------
218,851
Automobiles & Related: 2.1%
Amerco., 8.80%, 02/04/05 150,000 143,813
Borg Warner Automotive, Inc., 6.5%, 02/15/09 235,000 208,269
Capital Auto Receivables Asset, 6.30%, 05/15/04 125,000 123,628
--------
475,710
Banking: 1.6%
Dime Bancorp, Inc., 6.375%, 01/30/01 250,000 248,445
HSBC Fin Nederland Bank, 7.40%, 04/15/03 100,000 99,750
--------
348,195
Chemicals and Allied Products: 0.8%
Fort James Corp., 6.875%, 09/15/07 195,000 182,325
Electric Utilities: 1.9%
CMS Energy Corp., 8.00%, 07/01/11 225,000 222,188
National Rural Utilities, 6.50%, 09/15/02 100,000 98,875
Public Service Electric & Gas Co., 6.25%, 01/01/07 100,000 92,750
--------
413,813
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- --------- ----------
<S> <C> <C> <C>
CORPORATE NOTES (Continued)
Finance & Credit: 7.5%
G.E. Capital Mortgage Svcs., Inc., 6.25%, 12/25/28 245,861 $ 169,644
G.E. Capital Mortgage Svcs., Inc., 6.50%, 04/25/29 305,696 208,240
Honda Auto Lease Trust, 6.45%, 09/16/02 325,000 322,943
Hayes Lemerz International, Inc., 8.25%, 12/15/08 50,000 43,500
Northwest Asset Corp., 6.75%, 05/25/29 246,974 178,864
Merrill Lynch Mtg. Investment, Inc., 7.56%, 09/15/09 115,000 113,850
Salomon Smith Barney, Inc., 7.375%, 05/15/07 300,000 291,750
Texaco Capital, Inc., 5.5%, 01/15/09 220,000 194,700
Valero Pass-Through Asset Trust, 6.75%, 12/15/02 140,000 135,450
----------
1,658,941
Food & Beverages: 0.4%
Archer Daniels Midland Co., 6.625%, 05/01/29 120,000 102,150
Forest Products: 0.4%
Noranda Forest, Inc., 7.50%, 07/15/03 100,000 98,625
Health Services: 0.3%
Tenet Healthcare Corp., 7.875%, 01/15/03 70,000 68,950
Insurance Carriers: 1.2%
Conseco, Inc., 6.40%, 06/15/01 200,000 169,000
Prudential Insurance Co. America, 6.875%, 04/15/03 100,000 98,125
----------
267,125
Media & Communications: 1.5%
CSC Holdings, Inc., 8.125%, 07/15/2009 25,000 24,594
Isle of Capri Casinos, Inc., 8.75%, 04/15/09 100,000 91,500
Liberty Media Corp., 7.875%, 07/15/09 150,000 145,875
Metromedia Fiber Network, Inc., 10.00%, 12/15/09 70,000 68,250
----------
330,219
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
CORPORATE NOTES (Continued)
Miscellaneous Business Services: 0.5%
Allied Waste North America, 7.875%, 01/0/09 115,000 $ 102,063
Miscellaneous Consumer Products: 2.5%
American Standard, Inc., 7.375%, 04/15/05 45,000 42,525
Jones Apparel Group, Inc., 7.875%, 06/15/06 230,000 219,937
S C International Service, Inc., 9.25%, 09/01/07 60,000 57,375
WMX Technologies, Inc., 7.125%, 06/15/01 250,000 245,625
------------
565,462
Oil and Gas Extraction: 1.6%
Apache Corp., 7.70%, 03/15/26 155,000 153,063
Quaker State Corp., 6.625%, 10/15/05 100,000 96,375
Tosco Corp., 8.125%, 02/15/2030 100,000 101,500
------------
350,938
Telephone Communication: 1.9%
Allegiance Telecom, Inc., 0.00%, 02/15/08 25,000 18,625
Charter Communications Holdings, 8.625%, 04/01/09 100,000 88,000
Crown Castle International, 0.00%, 05/15/11 75,000 47,250
GTE Corp., 6.94%, 04/15/28 100,000 90,121
Global Crossing Holdings, Ltd., 9.625%, 05/15/08 100,000 98,250
US West Communications, Inc., 7.50%, 06/15/23 80,000 73,900
------------
416,146
Transportation: 1.4%
Canadian National Railway Co., 6.90%, 07/15/28 165,000 145,200
Newport News Shipbuilding, Inc., 9.25% 12/01/06 60,000 60,600
Norfolk Southern Corp., 7.80%, 05/15/27 100,000 98,250
------------
304,050
------------
TOTAL CORPORATE NOTES
(COST $6,195,796) 5,903,563
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ----------- --------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES 58.0%
Federal Home Loan Mortgage Corp.: 0.2%
9.50%, 04/01/19 26,287 $ 27,346
9.00%, 06/01/19 13,352 13,811
------------
41,157
Federal National Mortgage Assn.: 10.8%
6.625%, 01/15/02 1,835,000 1,828,908
7.00%, 09/01/10 149,495 146,831
7.00%, 05/01/12 132,560 130,197
6.50%, 03/01/13 290,404 280,510
7.50%, 08/25/21 9,069 9,086
------------
2,395,532
Government National Mortgage Assn.: 47.0%
9.00%, 04/15/09 2,174 2,227
9.00%, 05/15/09 11,631 11,915
9.00%, 05/15/09 3,477 3,562
9.00%, 05/15/09 2,752 2,819
9.00%, 05/15/09 1,061 1,087
9.00%, 05/15/09 1,599 1,638
11.25%, 09/15/15 78,115 85,511
11.50%, 11/15/15 9,611 10,662
10.00%, 06/15/17 21,329 22,782
9.25%, 07/15/17 7,003 7,200
10.00%, 11/15/17 7,615 8,134
11.50%, 02/15/18 3,244 3,599
10.00%, 03/15/19 23,635 25,245
10.00%, 03/15/20 13,654 14,584
9.25%, 05/15/20 29,390 30,216
9.25%, 05/15/21 86,986 89,432
9.25%, 06/15/21 21,090 21,683
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES (Continued)
Government National Mortgage Assn. (Continued)
7.00%, 08/15/23 70,120 $ 68,213
7.50%, 06/15/23 79,457 78,836
7.50%, 10/15/23 117,086 116,170
7.00%, 01/15/24 113,194 110,116
7.00%, 03/15/24 78,222 76,095
7.00%, 01/15/25 350,914 341,590
9.50%, 01/15/25 10,583 10,983
9.50%, 05/15/25 7,044 7,310
7.00%, 02/15/26 462,666 450,086
7.50%, 09/15/26 163,631 162,351
8.00%, 05/15/27 196,047 197,884
6.50%, 04/15/28 731,865 694,810
7.00%, 05/15/28 339,969 330,726
7.00%, 06/15/28 298,407 290,293
6.50%, 10/15/28 1,760,691 1,671,548
6.50%, 11/15/28 504,356 478,821
6.50%, 01/15/29 233,482 221,661
6.50%, 03/15/29 261,925 248,663
6.50%, 04/15/29 245,761 233,318
6.50%, 05/15/29 937,928 891,031
6.50%, 05/15/29 272,923 259,276
6.50%, 06/15/29 149,737 142,156
6.50%, 07/15/29 653,751 620,652
8.00%, 07/15/29 157,641 159,118
7.00%, 08/15/29 988,686 961,803
7.50%, 09/15/29 543,844 539,592
8.00%, 09/15/29 246,506 248,816
8.00%, 01/15/30 252,752 255,120
8.00%, 06/15/30 229,799 231,885
---------------
10,441,219
---------------
TOTAL FEDERAL AGENCIES
(COST $13,094,895) 12,877,908
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 13.8%
U.S. Treasury Bonds: 3.4%
6.625%, 02/15/27 260,000 $ 280,067
5.25%, 02/15/29 520,000 469,622
------------
749,689
U.S. Treasury Notes: 10.4%
3.375%, 01/15/07 316,839 305,252
5.50%, 05/15/09 1,385,000 1,327,869
6.00%, 08/15/09 675,000 670,565
------------
2,303,686
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $2,969,151) 3,053,375
FOREIGN GOVERNMENT OBLIGATIONS 1.6%
Argentina Rep, 0.00%, 03/31/05 400,000 368,784
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $363,350) 368,784
------------
TOTAL INVESTMENTS
(COST $22,623,192) 100.0% 22,203,630
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Forward Foreign Currency Contracts Portfolio Principal Value
----------------------------------- ---------- --------- -----------
<S> <C> <C> <C>
CONTRACTS TO BUY
557,000 Canadian Dollars (Settlement Date 08/09/00;
Payable amount $377,627; Market value $376,922) $ (705)
25,000 Euro Dollars (Settlement Date 08/22/00;
Payable amount $23,739; Market value $23,095) (644)
------------
(1,349)
Other assets less liabilities 1,017,409
------------
NET ASSETS $23,219,690
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ---------- -------- ------------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 4.1%
Electrical Equipment: 4.1%
Black & Decker Corp. 68,200 $ 2,536,187
General Electric Co. 105,000 5,400,938
Hubbell, Inc. Class B 60,000 1,447,500
Stanley Works 150,000 3,928,125
-------------
13,312,750
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Genuine Parts Co. 80,000 1,605,000
CONSUMER NONDURABLES 20.6%
Food & Beverages: 6.4%
Anheuser-Busch Company, Inc. 50,000 4,025,000
Campbell Soup Co. 100,000 2,650,000
General Mills, Inc. 108,000 3,712,500
Hershey Foods, Inc. 70,000 3,237,500
McCormick & Co. 100,000 2,931,250
Pepsico, Inc. 50,000 2,290,625
Ralston Purina Group 100,000 2,018,750
-------------
20,865,625
Health Services: 0.7%
Baxter International, Inc. 30,000 2,332,500
Miscellaneous Consumer Products: 5.5%
Colgate Palmolive Co. 60,000 3,341,250
Eastman Kodak Company 60,000 3,292,500
Fortune Brands, Inc. 120,000 2,700,000
Gillette Co. 51,300 1,497,318
</TABLE>
These accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<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 (Continued)
Int'l. Flavors & Fragrance 100,000 $ 2,675,000
Owens Corning Fiber 70,000 385,000
Philip Morris Companies, Inc. 100,000 2,525,000
UST, Inc. 100,000 1,450,000
-------------
17,866,068
Pharmaceuticals: 8.0%
Abbott Laboratories 150,000 6,243,750
American Home Products Corporation 125,000 6,632,812
Johnson & Johnson 45,000 4,187,813
Merck & Co. 27,500 1,971,406
Pharmacia Corporation 59,500 3,257,625
Schering-Plough Corp. 80,000 3,455,000
-------------
25,748,406
CONSUMER SERVICES 16.6%
Entertainment & Leisure: 3.1%
Hilton Hotels Corp. 400,000 4,100,000
Starwood Hotel & Resort Worldwide, Inc. 175,000 5,971,875
-------------
10,071,875
General Merchandise Stores: 6.6%
Albertsons, Inc. 125,000 3,773,437
May Department Stores Co. 58,000 1,377,500
Neiman-Marcus Group, Inc.* 90,000 2,970,000
Nordstrom, Inc. 67,000 1,172,500
Penney J C Co. 50,000 806,250
Target Corp. 180,000 5,220,000
Toys R Us, Inc.* 250,000 4,125,000
Tupperware Corp. 100,000 1,943,750
-------------
21,388,437
</TABLE>
* Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- ------------
<S> <C> <C> <C>
CONSUMER SERVICES (Continued)
Media & Communications: 5.5%
Walt Disney Company Holding Co. 156,300 $ 6,046,855
Knight Ridder, Inc. 60,000 3,127,500
Meredith Corp. 60,000 1,908,750
Readers Digest Assn., Inc. 35,000 1,194,375
Viacom, Inc. CL B * 81,375 5,396,180
-------------
17,673,660
Miscellaneous Business Services: 1.4%
Waste Management, Inc. 250,000 4,671,875
ENERGY 10.5%
Oil And Gas Extraction: 10.5%
Amerada Hess Corp. 65,000 3,932,500
BP Amoco PLC. 241,532 12,635,143
Baker Hughes, Inc. 131,200 4,542,800
Chevron Corp. 40,000 3,160,000
Exxon Mobil Corp. 57,122 4,569,760
Texaco, Inc. 30,600 1,512,788
Unocal Corp. 125,000 3,781,250
-------------
34,134,241
FINANCIAL 16.9%
Banking: 6.6%
Bank One Corp. 110,000 3,499,375
Chase Manhattan Corp. 45,000 2,235,938
Firstar Corp.* 175,000 3,456,250
Mellon Financial Corp. 100,000 3,768,750
National City Corp. 100,000 1,775,000
Washington Mutual, Inc. 120,000 3,855,000
</TABLE>
* Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ---------- -------- -------------
<S> <C> <C> <C>
FINANCIAL (Continued)
Banking (Continued)
Wells Fargo & Co. 66,660 $ 2,753,891
-------------
21,344,204
Federal Agencies: 0.7%
Freddie Mac 60,000 2,366,250
Financial Services: 5.2%
H&R Block, Inc. 60,000 1,920,000
Citigroup, Inc. 165,547 11,681,410
J.P. Morgan & Co. 25,000 3,337,500
-------------
16,938,910
Insurance Carriers: 4.4%
Chubb Corp. 65,000 4,810,000
Loews Corp. 30,000 1,882,500
St. Paul Companies, Inc. 105,136 4,671,981
UnumProvident Corp. 125,000 2,875,000
-------------
14,239,481
PROCESS INDUSTRIES 10.7%
Chemicals and Allied Products: 7.0%
Dow Chemical Co. 90,000 2,587,500
Dupont Co. 50,000 2,265,625
Fort James Corp. 125,000 3,820,313
Great Lakes Chemical Corp. 100,000 2,937,500
Hercules, Inc. 130,000 1,941,875
Imperial Chemical ADR 100,000 2,868,750
Minnesota Mining & Manufacturing Co. 38,300 3,449,394
Pall Corp. 125,000 2,593,750
-------------
22,464,707
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- --------- ------ -----
PROCESS INDUSTRIES (Continued)
<S> <C> <C> <C>
Forest Products: 0.4%
Weyerhaeuser Co. 30,000 $ 1,370,625
Metal Mining: 1.0%
Newmont Mining Corp. 75,000 1,331,250
Phelps Dodge Corp. 50,000 2,034,375
-------------
3,365,625
Paper And Allied Products: 2.3%
Kimberly-Clark Corp. 100,000 5,743,750
International Paper Co. 47,278 1,607,452
-------------
7,351,202
TECHNOLOGY 5.5%
Computer and Office Equipment: 5.5%
America Online, Inc.* 40,000 2,132,500
BMC Software, Inc.* 100,000 1,887,500
Computer Associates International, Inc. 75,000 1,860,938
First Data Corp. 125,000 5,757,813
Microsoft Corp. 40,000 2,792,500
Motorola, Inc. 50,000 1,653,125
Xerox Corp. 120,000 1,785,000
-------------
17,869,376
TRANSPORTATION 5.9%
Aerospace and Defense: 3.8%
Boeing Company 100,000 4,900,000
Lockheed Martin Corp. 100,000 2,812,500
Raytheon Co. CL B 100,000 2,425,000
Rockwell International Corp. 60,000 2,103,750
-------------
12,241,250
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- --------- ------ -----
<S> <C> <C> <C>
TRANSPORTATION (Continued)
Railroad Transportation: 2.1%
Norfolk Southern Corp. 200,000 $ 3,725,000
Union Pacific Corp. 70,000 3,023,125
------------
6,748,125
UTILITIES 5.3%
Telephone Communication: 2.4%
AT&T Co. 30,000 928,125
SBC Communications, Inc. 104,865 4,463,317
Verizon Communications, Inc. 48,800 2,293,600
------------
7,685,042
Utility Holding Companies: 2.9%
Edison International 50,000 984,375
Niagara Mohawk Holdings, Inc.* 137,500 1,830,468
Peco Energy Co. 50,000 2,134,375
Scottish Power PLC* 40,600 1,344,875
Unicom Corp. 75,000 3,079,688
------------
9,373,781
============
TOTAL EQUITY SECURITIES
(COST $268,381,419) 313,029,015
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Short-Term Investments Portfolio Principal Value
---------------------- ----------- ---------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 3.4%
Commercial Paper: 3.4%
Ciesco L.P, 6.55%, 08/17/2000 5,000,000 $ 4,985,340
Knight Ridder Inc., 6.54%, 08/31/2000 6,000,000 5,967,049
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $10,952,389) 10,952,389
------------
TOTAL INVESTMENTS
(COST $279,333,808) 100.0% 323,981,404
Other assets less liabilities 972,600
------------
NET ASSETS $ 324,954,004
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- -----------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 6.3%
Aerospace & Defense: 1.1%
Boeing Company 4,400 $ 215,600
Tyco International, Ltd. 8,100 433,350
-----------
648,950
Electrical Equipment: 4.2%
General Electric Co. 47,600 2,448,425
Machinery: 1.0%
Illinois Tool Works, Inc. 9,600 549,600
CONSUMER NONDURABLES 14.9%
Food & Beverages: 3.4%
Anheuser-Busch Company, Inc. 9,700 780,850
Coca Cola 13,800 846,112
Pepsico, Inc. 7,400 339,013
-----------
1,965,975
Health Services: 0.7%
Medtronic, Inc. 7,900 403,394
Miscellaneous Consumer Products: 1.3%
McDonalds Corp. 10,300 324,450
Proctor & Gamble Co. 7,200 409,500
-----------
733,950
Pharmaceuticals: 9.5%
American Home Products Co. 12,000 636,750
Amgen, Inc.* 6,000 389,625
Johnson & Johnson 10,300 958,544
Lilly Eli & Co. 7,800 810,225
Merck & Co. 15,100 1,082,481
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ------------ ------- ------------
<S> <C> <C> <C>
CONSUMER NONDURABLES (Continued)
Pharmaceuticals (Continued)
Pfizer, Inc. 24,475 $ 1,055,484
Schering Plough Corp. 13,800 595,988
------------
5,529,097
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Ford Motor Co. 6,400 298,000
CONSUMER SERVICES 10.2%
General Merchandise Stores: 5.2%
Costco Wholesale Corp.* 14,300 465,644
Gap, Inc. 8,300 297,244
Home Depot, Inc. 16,450 851,288
Walmart Stores 26,000 1,428,375
------------
3,042,551
Media & Communications: 5.0%
A T & T Corp Liberty Media Group 15,400 342,650
Clear Channel Communication, Inc.* 10,500 799,969
Walt Disney Company Holding Co. 14,000 541,625
Time Warner, Inc. 7,600 582,825
Viacom, Inc. CL B * 9,154 607,025
------------
2,874,094
ENERGY 5.6%
Oil And Gas Extraction: 5.6%
Exxon Mobil Corp. 20,528 1,642,240
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- ------------
<S> <C> <C> <C>
ENERGY (Continued)
Oil And Gas Extraction (Continued)
Royal Dutch Petroleum Co. ADR 17,700 $ 1,031,025
Schlumberger Limited 8,200 606,288
Transocean Sedco Forex, Inc. 26 1,287
------------
3,280,840
FINANCIAL 18.1%
Banking: 1.8%
Chase Manhattan Corp. 12,800 636,000
Mellon Financial Corp. 11,500 433,406
------------
1,069,406
Federal Agencies: 1.3%
Federal National Mortgage Assn. 18,700 737,481
Financial Services: 12.0%
American Express Co. 6,400 362,800
Citigroup, Inc. 33,475 2,362,080
MBNA Corp. 13,700 457,238
Morgan Stanley Dean Witter 9,870 900,638
Northern Trust Corp. 6,500 486,688
Charles Schwab Corp. 12,100 437,113
SPDR Trust 13,800 1,972,535
------------
6,979,092
Insurance Carriers: 3.0%
Ace Limited 2,400 86,400
American International Group 18,880 1,655,540
------------
1,741,940
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ------------ ------ -----------
<S> <C> <C> <C>
PROCESS INDUSTRIES 1.9%
Chemicals and Allied Products: 0.6%
Dow Chemical Co. 11,100 $ 319,125
Metal Mining: 0.7%
Alcoa, Inc. 14,300 432,575
Paper And Allied Products: 0.6%
International Paper Co. 10,700 363,800
TECHNOLOGY 34.3%
Communication Equipment: 8.3%
Arcatel Sponsored ADRS 4,100 299,813
Corning, Inc. 2,000 467,875
Lucent Technologies, Inc. 16,300 713,125
Motorola, Inc. 27,000 892,688
Nextel Communication, Inc.* 9,800 548,188
Nortel Networks Corp. 20,900 1,554,436
Vodafone Airtouch PLC ADR 8,000 340,000
-----------
4,816,125
Computer & Office Equipment: 26.0%
America Online, Inc.* 18,100 964,956
Applied Materials, Inc.* 4,000 303,500
Cisco Systems Inc.* 42,600 2,787,638
Dell Computer Corp.* 24,000 1,054,500
EMC Mass Corp.* 13,100 1,115,138
Electronic Data System Corp. 10,500 451,500
Hewlett Packard Co. 5,200 567,775
Intel Corp. 36,600 2,443,050
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<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)
International Business Machines Corp. 8,800 $ 989,450
Microsoft Corp. 26,800 1,870,975
Oracle Corp.* 13,500 1,015,031
Sun Microsystems, Inc.* 7,900 832,956
Texas Instruments, Inc. 12,700 745,331
-------------
15,141,800
UTILITIES 8.2%
Telephone Communication: 5.9%
AT&T Co. 12,000 371,250
Qwest Communications International, Inc. 11,936 560,246
SBC Communications, Inc. 19,000 808,687
Verizon Communications, Inc. 19,900 935,300
Worldcom, Inc.* 19,000 742,187
-------------
3,417,670
Utility Holding Companies: 2.3%
Aes Corp.* 13,800 737,437
American Power Conversion Corp.* 6,500 165,343
Calpine Corp. 6,000 427,500
-------------
1,330,280
-------------
TOTAL INVESTMENTS
(COST $44,935,123) 100.0% 58,124,170
Other assets less liabilities 891,257
-------------
NET ASSETS $ 59,015,427
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ----------- ---------- -----------
<S> <C> <C> <C>
CORPORATE NOTES 1.9%
Finance & Credit: 1.9%
Deutsche Mortgage & Asset, 6.22%, 09/15/07 106,776 $ 102,804
GMAC Mortgage Corp., 5.94%, 07/01/13 431,651 387,757
Residential Accredit Lines, Inc., 6.75%, 05/25/28 116,248 113,822
-----------
604,383
-----------
TOTAL CORPORATE NOTES
(COST $639,117) 604,383
U.S. GOVERNMENT OBLIGATIONS 32.0%
U.S. Treasury Bonds: 30.7%
8.75%, 11/15/08 500,000 532,030
12.75%, 11/15/10 600,000 768,186
14.00%, 11/15/11 50,000 69,438
9.25%, 02/15/16 410,000 536,202
8.50%, 02/15/20 3,130,000 3,969,216
6.375%, 08/15/27 3,580,000 3,744,429
5.25%, 02/15/29 230,000 207,718
-----------
9,827,219
U.S. Treasury Notes: 1.3%
6.375%, 04/30/02 250,000 250,000
5.875%, 11/15/04 170,000 167,768
-----------
417,768
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $10,361,424) 10,244,987
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- ---------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES 59.5%
Federal Farm Credit Bank: 6.7%
6.05%, 04/21/03 550,000 $ 538,203
6.94%, 05/19/05 125,000 124,816
7.37%, 08/01/06 1,500,000 1,496,835
-----------
2,159,854
Federal Home Loan Bank: 0.8%
8.00%, 08/27/01 250,000 252,768
Federal Home Loan Mortgage Corp.: 16.1%
7.36%, 06/05/07 1,500,000 1,476,150
7.00%, 07/01/07 54,479 53,236
7.00%, 09/01/10 159,137 156,500
6.50%, 04/01/11 942,803 911,568
6.00%, 05/11/11 999,667 949,054
5.50%, 05/01/14 465,156 432,595
6.918%, 07/01/27 6,176 6,183
6.50%, 04/01/29 487,194 461,158
6.50%, 05/01/29 715,730 677,481
6.50%, 06/01/29 35,025 33,154
-----------
5,157,079
Federal National Mortgage Assn.: 22.1%
6.125%, 11/25/03 130,144 128,787
5.125%, 02/13/04 175,000 165,120
6.14%, 09/10/08 225,000 208,861
6.09%, 10/01/08 513,030 475,168
6.00%, 11/01/08 270,526 259,705
6.50%, 03/01/09 71,587 70,693
7.00%, 04/01/11 775,935 762,108
7.00%, 05/01/11 370,525 363,922
5.50%, 07/01/13 428,017 396,985
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES (Continued)
Federal National Mortgage Assn. (Continued)
8.00%, 11/01/13 523,443 $ 525,406
5.50%, 01/01/14 462,803 429,249
5.50%, 02/01/14 458,187 424,968
6.00%, 03/01/14 61,348 58,127
8.00%, 08/01/14 246,977 249,677
6.50%, 05/17/15 700,000 662,816
6.32%, 10/01/23 691,946 633,131
8.00%, 10/01/25 144,592 145,134
6.00%, 06/01/29 487,442 447,681
6.50%, 06/01/29 495,016 467,944
6.50%, 09/01/29 194,289 183,663
-----------
7,059,145
Government National Mortgage Assn.: 12.9%
8.25%, 02/15/09 199,930 203,179
6.00%, 04/15/14 453,313 431,780
7.00%, 10/15/23 480,979 467,901
7.50%, 01/15/26 689,529 684,135
6.50%, 03/15/29 214,265 203,417
6.50%, 04/15/29 176,935 167,977
6.50%, 05/15/29 230,708 219,028
6.50%, 06/15/29 216,195 205,249
6.50%, 07/15/29 537,122 509,927
6.50%, 07/15/29 498,364 473,132
6.50%, 08/15/29 602,089 571,605
-----------
4,137,330
Other Federal Agencies: 0.9%
Small Business Admin., 5.50%, 10/01/18 334,152 296,259
-----------
TOTAL FEDERAL AGENCIES
(COST $19,452,737) 19,062,435
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST SCHEDULE I
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Short-Term Investments Portfolio Principal Value
---------------------- --------- ---------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 6.6%
Federal Home Loan Bank, 5.72%, 08/01/00
(COST $2,100,000) 2,100,000 $ 2,100,000
-------------
TOTAL INVESTMENTS
(COST $32,553,278) 100.0% 32,011,805
Other assets less liabilities 508,244
-------------
NET ASSETS $ 32,520,049
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
Security First Trust (the Trust) was established under Massachusetts law
pursuant to a Declaration of Trust dated February 13, 1987, as an unincorporated
business trust, a form of organization that is commonly called a Massachusetts
Business Trust. The Trust is registered with the Securities and Exchange
Commission as a diversified open-end management investment company (mutual fund)
under the Investment Company Act of 1940 (1940 Act).
On June 17, 1987, the shareowners of Security First Legal Reserve Fund, Inc. and
Security First Variable Life Fund, Inc. (the Funds), each of which was a
Maryland corporation registered as an investment company under the 1940 Act,
approved Plans of Reorganization and Liquidation and on July 24, 1987, the Funds
became Series of the Trust and their shareowners became shareowners of the Bond
Series and the 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 Equity Series and the U.S. Government
Income Series on July 11, 1993, which commenced operations May 19, 1993.
The following is a summary of significant accounting policies followed by the
Trust:
FEDERAL INCOME TAXES -- Each series of the Trust has elected to qualify as a
"Regulated Investment Company." No provision for federal income taxes is
necessary because each series intends to maintain its qualification as a
"Regulated Investment Company" under the Internal Revenue Code and distribute
each year substantially all of its net income and realized capital gains to its
shareowners. Income and gains to be distributed are determined annually as of
December 31.
As of 12/31/1999 the Bond Series and U.S. Government Income Series had capital
loss carryforwards of $657,021 and $857,344, respectively. The loss
carryforwards expire on 12/31/2009.
PORTFOLIO VALUATION -- Investments are carried at market value. The market value
of equity securities is determined as follows: securities traded on a national
securities exchange are valued at the last sale price; securities not traded on
a national securities exchange are valued at the bid price for such securities
as reported by security dealers. Fixed maturities are valued at prices obtained
from a major dealer in bonds.
Short-term investments that 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.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 and to sell foreign currency generally are used to minimize the
effect of currency fluctuation on the portfolios. Also, a contract to buy or to
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. Net realized gain or loss on sale of investments is determined by the
specific identification method.
ESTIMATES -- Certain amounts reported in the accompanying financial statements
are based on management's best estimates and judgements. Actual results could
differ from those estimates.
NOTE B -- REMUNERATION OF MANAGER AND OTHERS
Bond Series and T. Rowe Price Growth and Income Series:
Met Investors Advisory Corp. ("Met Investors"), formerly known as 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 and T. Rowe Price
Associates, respectively. 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, 2000, Met Investors has
also agreed to reimburse the Bond Series for any remaining expenses exceeding a
limitation
SECURITY FIRST TRUST
================================================================================
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
equivalent annually to 1.5%. Met Investors 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 Met Investors for excess expense reimbursements
since the conditions required for such accrual have not, in the opinion of
management, been met.
T. Rowe Price Associates provides investment advice and makes investment
decisions for the Growth and Income Series, while Neuberger & Berman, LLC
provides the same for the Bond Series. T. Rowe Price Associates and Neuberger &
Berman, LLC are each paid an annual fee of .35% of the average daily net assets
of the series for which they respectively provide investment advice less any
compensation payable to Met Investors acting as adviser on certain assets in
which a series may invest.
Equity Series and U.S. Government Income Series:
Met Investors 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-adviser,
Blackrock, Inc. (Blackrock). 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 Met Investors and
Blackrock waive their fees.
Blackrock provides investment advice and makes investment decisions for the U.S.
Government Income Series and 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 an annual fee of .55% of the average daily net assets of the Equity Series.
SECURITY FIRST TRUST
================================================================================
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the year ended
July 31, 2000 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 $ 27,262,380 $ 50,241,251
Sales 28,207,320 51,138,844
Other Investment Securities:
Purchases 15,323,341 $ 77,736,240 $ 48,945,616 256,172
Sales 16,089,569 50,617,104 48,275,745 1,597,940
</TABLE>
The cost of investments at July 31, 2000 was the same for both financial
statement and federal income tax purposes. At July 31, 2000, 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 $ 151,839 $ (572,750) $ (420,911)
T. Rowe Price Growth and Income Series 87,812,518 (43,164,922) 44,647,596
Equity Series 15,042,867 (1,853,820) 13,189,047
U.S. Government Income Series 235,733 (777,206) (541,473)
</TABLE>
================================================================================
<PAGE>
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, 2000
Bond Series 860,594 379,121 (1,471,680) (231,965)
T. Rowe Price Growth and Income Series 1,176,075 385,000 1,004,682 (2,272,433) 293,324
Equity Series 191,684 39,195 186,614 (634,942) (217,449)
U.S. Government Income Series 453,683 380,323 (790,971) 43,035
YEAR ENDED JULY 31, 1999
Bond Series 2,312,332 240,383 51,543 (682,801) 1,921,457
T. Rowe Price Growth and Income Series 2,272,424 331,107 1,164,634 (812,020) 2,956,145
Equity Series 94,561 56,914 1,098,636 (814,089) 436,022
U.S. Government Income Series 441,277 351,815 113,764 (828,203) 78,653
</TABLE>
================================================================================
<PAGE>
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS
The per share information for each respective series' capital stock outstanding
throughout the period is as follows:
<TABLE>
<CAPTION>
NET REALIZED TOTAL
AND UNREALIZED INCOME
NET ASSET GAINS (LOSS) DIVIDENDS
VALUE AT NET (LOSSES) ON FROM FROM NET
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT
OF YEAR INCOME OPERATIONS INCOME
-------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 $ 3.92 $ .24 $ (.04) $ .20 $ (.24)
1997 3.88 .24 .14 .38 (.24)
1998 4.02 .19 .11 .30 (.21)
1999 4.11 .18 (.14) .04 (.18)
2000 3.93 .24 (.11) .13 (.22)
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
1996 $ 10.58 $ .30 $ 1.56 $ 1.86 $ (.30)
1997 12.10 .30 4.69 4.99 (.29)
1998 16.26 .28 1.27 1.55 (.30)
1999 16.56 .29 2.45 2.74 (.29)
2000 18.01 .29 (1.61) (1.32) (.29)
EQUITY SERIES
Year ended July 31,
1996 $ 5.70 $ .10 $ .46 $ .56 $ (.05)
1997 6.05 .09 2.60 2.69 (.11)
1998 8.18 .07 1.04 1.11 (.08)
1999 8.57 .06 1.42 1.48 (.07)
2000 8.54 .02 .68 .70 (.05)
U.S. GOVERNMENT
INCOME SERIES
Year ended July 31,
1996 $ 5.13 $ .18 $ .04 $ .22 $ (.19)
1997 5.15 .23 .20 .43 (.22)
1998 5.36 .27 .06 .33 (.24)
1999 5.45 .30 (.24) .06 (.31)
2000 5.10 .30 (.01) .29 (.29)
<CAPTION>
DISTRIBUTIONS
FROM NET ASSET
REALIZED VALUE AT
CAPITAL END OF TOTAL
GAINS YEAR RETURN(1)
--------------- ------------- --------------
<S> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 $ 3.88 5.10%
1997 4.02 9.79
1998 4.11 7.46
1999 $ (.04) 3.93 0.97
2000 3.84 3.31
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
1996 $ (.04) $ 12.10 17.58%
1997 (.54) 16.26 41.24
1998 (.95) 16.56 9.53
1999 (1.00) 18.01 16.55
2000 (.77) 15.63 (7.33)
EQUITY SERIES
Year ended July 31,
1996 $ (.16) $ 6.05 9.82%
1997 (.45) 8.18 44.46
1998 (.64) 8.57 13.57
1999 (1.44) 8.54 17.27
2000 (.26) 8.93 8.20
U.S. GOVERNMENT
INCOME SERIES
Year ended July 31,
1996 $ (.01) $ 5 .15 4.29%
1997 5.36 8.35
1998 5.45 6.16
1999 (.10) 5.10 1.10
2000 5.10 5.69
</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.
================================================================================
<PAGE>
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Ratio of
Ratio of Net
Operating Investment
Expenses Income Portfolio Net Assets
to Average to Average Turnover End of
Net Assets Net Assets Rate Year
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 .90% 6.32% 34% $ 8,981,365
1997 .75 6.41 54 10,634,720
1998 .73 5.78 125 17,934,392
1999 .66 5.46 147 24,717,704
2000 .68 6.30 177 23,219,690
T. ROWE PRICE
GROWTH AND INCOME SERIES
Year ended July 31,
1996 .64% 2.73% 8% $ 112,552,893
1997 .57 2.44 14 204,703,098
1998 .57 1.92 11 290,441,528
1999 .59 1.83 15 369,111,185
2000 .55 1.83 16 324,954,004
EQUITY SERIES
Year ended July 31,
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
1999 .81 .72 23 58,313,162
2000 .80 .31 83 59,015,427
U.S. GOVERNMENT INCOME SERIES
Year ended July 31,
1996 .70% 5.38% 148% $ 14,888,824
1997 .70** 5.68** 62 28,889,460
1998 .66** 5.53** 103 34,090,919
1999 .71 5.37 307 32,312,549
2000 .71 5.85 159 32,520,049
</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.
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F PROPOSED TRUST REORGANIZATION
Proposed Trust Reorganization
The Board of Trustees of the Trust has approved a proposed reorganization of the
Series of the Trust into portfolios of Met Investors Series Trust ("Met Trust"),
a recently organized Delaware business trust. The reorganization of a Series of
the Trust is subject to prior approval by shareholders of the Series, and the
Board of Trustees has authorized a special meeting of shareholders of the each
Series for the purpose of seeking such approvals.
If approved, all of the assets of each of the Series of the Trust will be
acquired by a portfolio of the Met Trust in exchange for Class A shares of such
portfolio and the assumption by such portfolio of identical liabilities of the
Series of the Trust. The reorganization is intended to be tax-free for federal
income tax purposes.
Subject to approvals by shareholders of each Series:
1. The Growth and Income Series would be merged into the Lord Abbett Growth
and Income Portfolio of the Met Trust. This portfolio has an investment
objective substantially similar to that of the Series. The investment
adviser to the portfolio would be Security Management, and the sub-adviser
would be Lord Abbett & Co.
2. The Bond Series will be merged into the J.P. Morgan Quality Bond Portfolio
of the Met Trust. This portfolio has an investment objective substantially
similar to that of the Bond Series. The investment adviser to the portfolio
would be Security Management, and the sub-adviser would be J.P. Morgan
Investment Management, Inc.
3. The Equity Series will be merged into the BlackRock Equity Portfolio of the
Met Trust, and the U.S. Government Income Series would be merged into the
BlackRock U.S. Government Income Portfolio of the Met Trust. The investment
objective of each of the portfolios would be exactly the same as the
Series. The investment adviser and sub-adviser for each portfolio would be
the same as for the Series, Security Management and BlackRock,
respectively.
A Prospectus/Proxy statement describing the proposed reorganizations in detail
will be furnished to shareholders of record as of November 27, 2000 or such
later date as shall be determined by the Board of Trustees.
In connection with this reorganization, Security Management, the investment
adviser to each of the Series of the Trust will be changing its name to Met
Investors Advisory Corp., and Security First Financial, Inc., the underwriter of
the Series of the Trust, will be changing its name to MetLife Distributors, Inc.
================================================================================
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) Financial Statements
--------------------
(1) Prospectus/Statement of Additional Information Describing BlackRock
Equity Series and BlackRock U.S. Government Income Series:
o Condensed Financial Information (Per Share Income and
Capital Changes Table) is included in Part A of the
Registration Statement
o Financial statements for the above-referenced Series
of Security First Trust are included in Part B of the
Registration Statement
(2) Prospectus/Statement of Additional Information Describing T. Rowe
Price Growth and Income Series:
o Condensed Financial Information (Per Share Income and
Capital Changes Table) is included in Part A of the
Registration Statement
o Financial statements for the above-referenced Series
of Security First Trust are included in Part B of the
Registration Statement
(3) Prospectus/Statement of Additional Information Describing Neuberger
Berman Bond Series:
o Condensed Financial Information (Per Share Income and
Capital Changes Table) is included in Part A of the
Registration Statement
o 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. 36)
and Advisory Agreement, dated October 30, 1997
b. Sub-Advisory Agreement, October 30, 1997 (PEA No. 36)
c. Sub-Advisory Agreement, October 30, 1997 (PEA No. 36)
d. Sub-Advisory Agreement, March 27, 1998 (PEA No. 37)
(11) Consent of Independent Auditors herewith
(16) Powers of Attorney (PEA No. 26)
<PAGE>
Item 24. Persons Controlled by or Under Common Control with the Fund
Previously filed with the Securities and Exchange Commission as part of
the Registration Statement of Security First Trust and incorporated
herein by reference.
Item 25. Indemnification
Previously filed as part of the registration statement of Security
First Trust and incorporated herein by reference.
Item 26. Business and Other Connections of Investment Adviser
Security First Investment Management Corporation is also investment
adviser to an affiliated life insurance company.
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 27. Principal Underwriters
Not applicable.
Item 28. 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 29. Management Services
Registrant asserts that all material management related services
contract provisions have been discussed in the Prospectus and Statement of
Additional Information.
Item 30. 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>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has duly caused
this amended Registration Statement to be signed on its behalf in the City of
Los Angeles and State of California on this 30th day of November 2000.
SECURITY FIRST TRUST
(Registrant)
By: /s/ Richard C. Pearson
----------------------
Richard C. Pearson, President
As required by the Securities Act of 1933, this amended 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 30, 2000
-----------------------------
Richard C. Pearson
/s/ Jane F. Eagle Senior Vice President & November 30, 2000
----------------------------- Chief Financial Officer
Jane F. Eagle
Jack R. Borsting* Trustee November 30, 2000
-----------------------------
Jack R. Borsting
Katherine L. Hensley* Trustee November 30, 2000
-----------------------------
Katherine L. Hensley
/s/ Howard H Kayton Trustee November 30, 2000
-----------------------------
Howard H (nmn) Kayton
Lawrence E. Marcus* Trustee November 30, 2000
-----------------------------
Lawrence E. Marcus
/s/ Richard C. Pearson
-----------------------------
*(Richard C. Pearson as
Attorney-in-Fact for each
of the persons indicated)
</TABLE>
