PAGE 1
Combined Variable Annuity Prospectus, dated May 1, 1996, should
be inserted here.
T. Rowe Price Fixed Income Series, Inc.
Limited-Term Bond Portfolio
T. Rowe Price Equity Series, Inc.
Personal Strategy Balanced Portfolio
Equity Income Portfolio
New America Growth Portfolio
T. Rowe Price International Series, Inc.
International Stock Portfolio
May 1, 1996
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING. PLEASE
KEEP IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE
FUNDS, DATED MAY 1, 1996, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS. TO OBTAIN A
FREE COPY, CONTACT 1-800-469-6587.
Facts at a Glance
Investment Goal
Tax-deferred growth of capital over time through portfolios representing a
broad range of investment approaches from conservative to aggressive. There is
no assurance the portfolios will achieve their goals.
Strategy
Limited-Term Bond Portfolio
Invests primarily in investment-grade, corporate bonds. Risk/Reward: Moderate
income level and share price fluctuation.
Personal Strategy Balanced Portfolio
To pursue both capital appreciation and income, the fund will invest
approximately 50% to 70% of assets in stocks with the remainder invested in
bonds and money market securities. Risk/Reward: Higher risk and return than a
bond fund but lower risk and return than a stock fund. The fund's share price
may decline, causing a loss.
Equity Income Portfolio
To invest primarily in dividend-paying common stocks, particularly of
established companies, with favorable prospects for both increasing dividends
and capital appreciation.
Risk/Reward: Conservative stock fund. Lower risk than a fund focusing on
growth stocks but greater risk than a bond fund. The fund's share price may
decline, causing a loss.
New America Growth Portfolio
To invest in the stocks of large and small service companies expected by T.
Rowe Price to show superior earnings growth. The fund may also invest up to
25% of total assets in nonservice-related growth companies. Total return will
consist primarily of capital appreciation or depreciation. Risk/Reward: The
potential to provide significant growth of capital over time with
above-average volatility. The fund's share price may decline, causing a loss.
International Stock Portfolio
Invests worldwide primarily in well-established, non-U.S. companies.
Risk/Reward: The fund's share price will fluctuate with changes in market,
economic, and foreign currency exchange conditions. High potential risk and
reward.The fund's share price may decline, causing a loss.
Investor Profile
Those seeking the tax advantages and insurance benefits of the T. Rowe Price
No-Load Variable Annuity, whose risk tolerance and investment goals are suited
to one or more of the five portfolios.
Facts at a Glance (continued)
Investment Manager
The Limited-Term Bond, Personal Strategy Balanced, Equity Income, and New
America Growth Portfolios are managed by T. Rowe Price Associates, Inc. ("T.
Rowe Price"). The International Stock Portfolio is managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), a joint venture
established in 1979 between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Limited.
Table of Contents
T. Rowe Price
Fixed Income Series, Inc.
Equity Series, Inc.
International Series, Inc.
May 1, 1996
Prospectus
About the Funds
Financial Highlights 4
Fund, Market, and
Risk Characteristics 5
Limited-Term Bond Portfolio 5
Personal Strategy
Balanced Portfolio 8
Equity Income Portfolio 10
New America Growth Portfolio 12
International Stock Portfolio 14
About Your Account
Pricing Shares and Receiving
Sale Proceeds 19
Dividends and Distributions 20
More About the Funds
Organization and Management 20
Understanding Performance
Information 24
Investment Policies and Practices 25
Limited-Term Bond Portfolio 26
Personal Strategy Balanced
Portfolio 32
Equity Income Portfolio 39
New America Growth Portfolio 42
International Stock Portfolio 45
About the Funds
Financial Highlights
The following table provides information about each fund's financial history.
It is based on a single share outstanding throughout each fiscal year. The
respective table is part of each fund's financial statements which are
included in each fund's annual report and are incorporated by reference into
the Statement of Additional Information. This document is available to
shareholders upon request. The financial statements in the annual report have
been audited by Price Waterhouse LLP, independent accountants, whose
respective unqualified report covers the periods shown.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Investment Activities Distributions End of Period
Net Ratio
Realized of Net
and Total Ratio Invest-
Net Unreal- Return of Ex- ment
Pe- Asset Net ized Total Net Net (Incl- penses Income
riod Value, Invest- Gain From Invest- Net Asset udes to to Port-
Ended Begin- ment (Loss) Invest- ment Real- Value, Rein- Aver- Aver- folio
Dece- ning In- on ment In- ized Total End vested age age Turn-
mber of come Invest- Activi- come Gain Distri- of Divi- Net Net Net over
31 Period ments ties (Loss) (Loss) butions Period dends) Assets Assets Assets Rate
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Limited-Term
Bond Portfolio
1994a$5.00 $0.21 $(0.08) $0.13 $(0.21) - $(0.21) $4.92 2.62% $2,080,752 0.70%e 6.63%e 146.0%e
1995 4.92 0.33 0.14 0.47 (0.33) - (0.33) 5.06 9.88% 3,966,030 0.70% 6.60% 73.7%
Equity Income
Portfolio
1994b$10.00 $0.30 $0.41 $0.71 $(0.29) - $(0.29) $10.42 7.2% $2,191,356 0.85%e 3.88%e 21.3%e
1995 10.42 0.44 3.05 3.49 (0.44) $(0.26) (0.70) 13.21 34.8% 14,657,555 0.85% 3.61% 10.1%
New America
Growth Portfolio
1994b$10.00 $0.01 $0.09 $0.10 - - - $10.10 1.0% $2,028,373 0.85%e 0.15%e 81.0%e
1995 10.10 0.03 5.12 5.15 $(0.02) - $(0.02) 15.23 51.1% 12,303,927 0.85% 0.23% 54.5%
Personal Strategy
Balanced Portfolio
1995c$10.00 $0.42 $2.41 $2.83 $(0.40) - $(0.40) $12.43 28.7% $5,624,875 0.90%e 3.69%e 39.3%e
International
Stock Portfolio
1994b$10.00 $0.06 $0.12d $0.18 - - - $10.18 1.8% $9,094,960 1.05%e 1.50%e 4.6%e
1995 10.18 0.07 1.06 1.13 $(0.05) - $(0.05) 11.26 11.2% 51,660,700 1.05% 1.47% 17.4%
<FN>
a From May 31, 1994 (commencement of operations) to December 31, 1994.
b From March 31, 1994 (commencement of operations) to December 31, 1994.
c From December 30, 1994 (commencement of operations) to December 31, 1995.
d The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange
Commission for a share outstanding throughout the period. This amount is inconsistent with the fund's
aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to
fluctuating market values for the investment portfolio.
e Annualized.
Note: Total returns do not include charges imposed by your insurance company's separate account. If these
were included, performance would have been lower.
</FN>
Table 1
</TABLE>
Fund, Market, and Risk Characteristics: What to Expect
To help you decide how to allocate your investments within the T. Rowe Price
No-Load Variable Annuity, this section takes a closer look at each portfolio
and the markets in which each invests. Your investment in any of the
portfolios should not represent your complete investment program, nor be used
to play short-term market swings. The share prices of all the portfolios may
decline, causing a loss.
Limited-Term Bond Portfolio
What is the fund's objective and investment program?
The fund's objective is to provide a high level of income consistent with
moderate fluctuation in principal value. The fund will invest at least 65% of
total assets in short- and intermediate-term, investment-grade bonds. There
are no maturity limitations on individual securities purchased, but the fund's
dollar-weighted average effective maturity will not exceed five years.
Targeting effective maturity provides additional flexibility in portfolio
management but, all else being equal, could result in higher volatility than
would be true of a fund targeting a stated maturity or maturity range.
At least 90% of the fund portfolio will be invested in securities rated in the
four highest credit categories (investment-grade securities) by a nationally
recognized rating agency, or, if unrated, of equivalent quality as determined
by T. Rowe Price. Investment-grade securities include a range of securities
from the highest rated to medium quality (BBB). Securities in the BBB category
may be more susceptible to adverse economic conditions or changing
circumstances and securities at the lower end of the BBB category have certain
speculative characteristics. In an effort to enhance yield, up to 10% of
assets can be invested in below-investment-grade securities, commonly referred
to as "junk" bonds in the taxable market, including those with the lowest
rating. The fund's income level should be higher than a money market fund's,
but its share price will vary.
How does the fund's credit quality relate to its investment objective?
To secure a higher income with moderate principal fluctuation, the fund
invests at least 90% of assets in investment-grade securities, which provides
a wider range of income opportunities with some additional credit risk. The
balance may consist of securities rated below investment grade, including
those with the lowest rating. Like all portfolio holdings, these securities
are subject to rigorous credit research conducted by T. Rowe Price analysts.
(For further discussion, please see "Investment Policies and
Practices-High-Yield/High-Risk Investing.")
_____________________________________________________________________________
THE SHARE PRICE AND YIELD OF THE FUND WILL FLUCTUATE WITH CHANGING MARKET
CONDITIONS AND INTEREST RATE LEVELS. WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
What are the main risks of investing in the fund?
o Interest rate or market risk: the decline in the prices of fixed income
securities and funds that may accompany a rise in the overall level of
interest rates (please see Table 2).
o Credit risk: the chance that any of the fund's holdings will have its
credit rating downgraded or will default (fail to make scheduled
interest and principal payments), potentially reducing the fund's income
level and share price.
o Currency risk: the possibility that the fund's foreign holdings will be
adversely affected by fluctuations in currency markets.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager actively seeks to
reduce risk and increase total return. Risk management tools include:
o Diversification of assets to reduce the impact of a single holding or
asset class on the fund's share price.
o Thorough credit research by our own analysts.
o Adjustment of a fund's duration to try to reduce the negative impact of
rising interest rates or to take advantage of the benefits of falling
rates.
What are derivatives and can the fund invest in them?
The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella-from conventional instruments such as callable bonds,
futures and options, to more exotic investments such as stripped mortgage
securities and structured notes. While it was only recently that the term
derivative has become widely known among the investing public, derivatives
have in fact been employed by investment managers for many years.
The fund will invest in derivatives only if the expected risks and rewards are
consistent with its objective, policies, and overall risk profile as described
in this prospectus. The fund will only use derivatives in an effort to:
increase yield or total return; hedge against a decline in principal value;
invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment; or to adjust portfolio duration. The
fund will not invest in any high-risk, highly leveraged derivative instrument
that is expected to cause the price volatility of the portfolio to be
meaningfully different from that of an intermediate-term investment-grade
bond.
_____________________________________________________________________________
BEFORE CHOOSING THE FUND, YOU MAY FIND IT HELPFUL TO REVIEW SOME FUNDAMENTALS
OF FIXED INCOME INVESTING.
Is the fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
Is the fund's "yield" the same thing as the "total return"?
Not for bond funds. The total return reported for a fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Income is always a positive contributor to
total return and can enhance a rise in share price or serve as an offset to a
drop in share price.
What is "credit quality" and how does it affect the fund's yield?
Credit quality refers to a bond issuer's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than less
creditworthy issuers. Therefore, a fund investing in high credit-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower credit-quality securities.
What is meant by a bond fund's "maturity"?
Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. Some types of bonds may also have an
"effective maturity" that is shorter than the stated date. The effective
maturity of mortgage-backed bonds is determined by the rate at which
homeowners pay down the principal on the underlying mortgages. Many corporate
and municipal bonds are "callable," meaning their principal can be repaid
before their stated maturity dates on (or after) specified call dates. Bonds
are most likely to be called when interest rates are falling, because the
issuer wants to refinance at a lower rate. In such an environment, a bond's
"effective maturity" is usually its nearest call date.
A bond mutual fund has no maturity in the strict sense of the word, but does
have an average maturity and an average effective maturity. This number is an
average of the stated or effective maturities of the underlying bonds, with
each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.
What is a bond fund's "duration"?
Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes more accurately than maturity because it
takes into account the time value of cash flows generated over the bond's
life. Future interest and principal payments are discounted to reflect their
present value and then are multiplied by the number of years they will be
received to produce a value that is expressed in years, i.e., the duration.
Effective duration takes into account call features and sinking fund payments
that may shorten a bond's life.
Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a fund's share price. Simply multiply the fund's
duration (available for T. Rowe Price bond funds in our shareholder reports)
by an expected change in interest rates. For example, the price of a bond fund
with a duration of five years would be expected to fall approximately 5% if
rates rose by one percentage point.
How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa.
_____________________________________________________________________________
IN GENERAL, THE LONGER A BOND'S MATURITY, THE GREATER THE PRICE INCREASE OR
DECREASE IN RESPONSE TO A GIVEN CHANGE IN INTEREST RATES, AS SHOWN IN THE
TABLE AT RIGHT.
________________________________________________________________________
How Interest Rates Affect Bond Prices
Bond Coupon Price of a $1,000
Maturity Bond if Interest Rates:
_____________________________________________________________________________
Increase Decrease
1% 2% 1% 2%
________________________________________________________________________
1 Year 5.40% $990 $981 $1,010 $1,020
5 Years 6.10 959 919 1,044 1,090
10 Years 6.34 930 866 1,077 1,161
30 Years 6.69 883 788 1,143 1,320
Table 2 Coupons reflect yields on Treasury securities as of March 31,
1996. This is an illustration and does not represent expected
yields or share price changes of any T. Rowe Price fund.
Since the average effective maturity of bonds held by the fund is expected to
be approximately five years, the fund's share price, like the value of the
underlying bonds in its portfolio, should fluctuate less than a fund which
holds bonds with longer average effective maturities.
How can I decide if the fund is appropriate for me?
Review your own financial objectives, time horizon, and risk tolerance to
choose a fund (or funds) suitable for your particular needs. For example, the
fund is expected to be a good choice for investors seeking more income than
provided by very short-term investments, such as money market funds and CDs,
with less principal risk than longer-term investments. Keep in mind that the
share price of any bond fund will fluctuate and, unlike a CD, the fund is not
guaranteed by the U.S. government. If you are investing for principal safety
and liquidity, you should consider a money market fund.
Is there other information I need to review before making a decision?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (bonds, asset-backed
securities, mortgage-backed securities, hybrid instruments,
high-yield/high-risk investing, private placements, and foreign securities);
and Types of Management Practices (cash position, borrowing money and
transferring assets, futures and options, interest rate swaps, managing
foreign currency risk, lending of portfolio securities, when-issued securities
and forward commitment contracts, portfolio turnover, bond ratings and
high-yield bonds).
Personal Strategy Balanced Portfolio
What is the fund's objective?
The fund's objective is to seek the highest total return over time consistent
with an emphasis on both capital appreciation and income.
What is the fund's investment program?
The fund pursues its objective by investing in a diversified portfolio
typically consisting of approximately 60% stocks, 30% bonds, and 10% money
market securities. Under normal conditions, allocations can vary by 10% above
or below these ranges, based on the fund manager's outlook for the economy and
the financial markets.
What are the general characteristics and risk factors of these major asset
classes?
For a more detailed discussion of the fund's investments and their risk
factors, please see "Investment Policies and Practices."
o Stocks represent ownership in a corporation. Common stock prices
fluctuate with changes in a company's current earnings and future
prospects and with overall stock market conditions. Stocks of many
well-established corporations offer the potential for appreciation and
rising dividends. While smaller companies usually reinvest earnings in
their own growth and, therefore, pay minimal or no dividends, they offer
the possibility of even greater appreciation if their businesses prosper
and grow.
Historically, stocks have provided higher returns over time than bonds
or money market securities and, therefore, offer a way to invest for
long-term growth of capital. In addition, stock investments have
provided the greatest protection against the erosion of purchasing power
caused by inflation.
Share prices of even the best managed, most profitable corporations are
subject to market risk, which means their stock prices can decline. In
addition, swings in investor psychology and/or significant trading by
large institutional investors can result in price fluctuations. For this
reason, equity investors should have a long-term investment horizon and
be willing to wait out bear markets.
o Bonds have two main sources of risk. Credit risk refers to the
possibility that a bond's price may fall due to a credit downgrade or
"default," i.e., the issuer failing to make an interest or principal
payment. Interest rate risk refers to a bond's price movement in
response to changes in interest rates. When rates rise, bond prices
fall, and vice versa. Generally, the longer a bond's maturity, the
greater its potential price fluctuation.
The fund expects to invest primarily in bonds with investment-grade
credit ratings. However, the fund may also make investments in more
volatile below-investment-grade (or "junk") bonds, including bonds with
the lowest rating. Investment-grade securities include a range of
securities from the highest rated (AAA) to medium quality (BBB).
Securities in the BBB category may be more susceptible to price declines
arising from adverse economic conditions or changing circumstances. The
securities at the lower end of the BBB category have certain speculative
characteristics. Prices of junk bonds are usually more affected by
adverse economic conditions or a deterioration in the issuer's financial
circumstances than by overall changes in interest rates. To compensate
investors for higher credit risk exposure, such bonds usually provide
higher income. Please see "High-Yield/High-Risk Investing" for further
information on these investments.
o Money market securities are debt obligations issued primarily by the
U.S. government, government agencies, and corporations. The high credit
ratings, short maturities, and high liquidity of the fund's money market
securities should minimize its credit and market risk. The fund's low
risk is usually accompanied by low potential returns relative to other
investments.
_____________________________________________________________________________
THE FUND MANAGER REGULARLY REVIEWS THE ASSET ALLOCATION AND MAY MAKE GRADUAL
CHANGES, WITHIN THE DEFINED RANGES, BASED ON THE OUTLOOK FOR THE ECONOMY,
INTEREST RATES, AND THE FINANCIAL MARKETS. THE FUNDS WILL NOT ATTEMPT TO TIME
SHORT-TERM MARKET MOVES.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager actively seeks to
reduce risk and increase total return. Risk management tools include:
o Broad diversification of assets to reduce the impact of a single holding
or asset class on the fund's share price.
o Gradual allocation changes among and within asset classes (stocks,
bonds, etc.) to take advantage of market opportunities and changing
economic conditions.
o Thorough research of stocks, bonds, and other securities by our analysts
to find the most favorable investment opportunities.
What are the advantages of diversifying across stocks, bonds, and money market
securities?
Diversification is the investment equivalent of not putting all your eggs in
one basket. While there is no guarantee, the fund's overall volatility could
be reduced by spreading investments across several types of assets. Since
prices of stocks and bonds may respond differently to changes in economic
conditions and interest rate levels, a rise in bond prices, for example, could
help offset a fall in stock prices. Money market securities have a stabilizing
influence, since their price fluctuations are very small. In addition, the
steady income provided by bonds and money market securities contributes
positively to a portfolio's total return, cushioning the impact of any price
declines or enhancing price increases.
Diversification among asset classes is intended to reduce the risk associated
with investing in a single asset category; however, there is no guarantee the
strategy will always result in lower overall volatility for the fund.
_____________________________________________________________________________
FOR A DISCUSSION OF THE EFFECTS OF CURRENCY EXCHANGE RATE FLUCTUATIONS AND
OTHER SPECIAL RISKS OF FOREIGN INVESTING, PLEASE SEE "INVESTMENT POLICIES AND
PRACTICES."
Why include foreign securities?
The fund may invest up to 35% of its total assets in foreign securities.
Foreign stocks and bonds offer advantages to the portfolio but also represent
additional risk. The potential advantages are extra diversification and
enhanced returns. Since foreign stock and bond markets may move somewhat
independently from their U.S. counterparts, such investments could reduce the
portfolio's short-term price fluctuations while offering a way to participate
in markets that may generate attractive returns. Of course, if U.S. and
foreign markets move in the same direction, the positive or negative effect on
the fund's share price could be magnified. In addition, a significant decline
in foreign securities' prices would reduce the fund's return.
How can I decide if the fund is appropriate for me?
Review your own financial objectives, investment time horizon, and risk
tolerance. Generally, the fund is intended for those seeking a
middle-of-the-road approach that emphasizes stocks for their higher capital
appreciation potential but retains a significant income component to temper
principal volatility. The fund will invest at least 25% of its total assets in
senior fixed income securities.
If you are investing for principal safety and liquidity, you should consider a
money market fund.
Is there other information I need to review before making a decision?
Yes. Although the fund will invest primarily in common stocks, bonds, and
money market securities, it can also make other investments which have
additional and different risks. Be sure to review "Investment Policies and
Practices" in Section 3, which discusses the following: Types of Portfolio
Securities (bonds, common and preferred stocks, convertible securities and
warrants, foreign securities, asset-backed securities, mortgage-backed
securities, hybrid instruments, investment funds, zero coupon bonds and
pay-in-kind bonds, private placements, and high-yield/high-risk investing);
and Types of Management Practices (cash position, borrowing money and
transferring assets, futures and options, interest rate transactions, managing
foreign currency risk, lending of portfolio securities, when-issued securities
and forward commitment contracts, portfolio turnover, and credit-quality
considerations).
Equity Income Portfolio
What is the fund's objective?
The fund's objective is to provide substantial dividend income as well as
long-term capital appreciation through investments in common stocks of
established companies.
_____________________________________________________________________________
MOST OF THE FUND'S ASSETS WILL BE INVESTED IN U.S. COMMON STOCKS.
What is the fund's investment program?
Under normal circumstances, the fund will invest at least 65% of total assets
in the common stocks of established companies paying above-average dividends.
These companies are expected to have favorable prospects for dividend growth
and capital appreciation, as determined by T. Rowe Price.
The fund may also purchase other types of securities, for example, foreign
securities, convertible stocks and bonds, and warrants, when considered
consistent with the fund's investment objective and program. The portfolio
manager may also engage in a variety of investment management practices, such
as buying and selling futures and options.
What are the fund's major characteristics?
T. Rowe Price believes that income can be a significant contributor to total
return over time and expects the fund's yield to be above that of the Standard
& Poor's 500 Stock Index. The fund will tend to take a "value" approach and
invest in stocks and other securities that appear to be temporarily
undervalued by various measures, such as price/earnings ratios.
How does the fund select stocks for the portfolio?
The fund will generally consider companies with the following characteristics:
o Established operating histories.
o Above-average current dividend yield relative to the average yield of
the S&P 500.
o Low price/earnings ratios relative to the S&P 500.
o Sound balance sheets and other financial characteristics.
o Low stock price relative to a company's underlying value as measured by
assets, earnings, cash flow, or business franchises.
What is meant by a "value" investment approach?
_____________________________________________________________________________
VALUE INVESTORS LOOK FOR UNDERVALUED ASSETS.
Value investors seek to buy a stock (or other security) when its price is low
in relation to what they believe to be its real worth or future prospects. By
identifying companies whose stocks are currently out of favor, value investors
hope to realize significant appreciation as other investors recognize the
stock's intrinsic value and the price rises accordingly.
Finding undervalued stocks requires considerable research to identify the
particular stock, to analyze the company's underlying financial condition and
prospects, and to assess the likelihood that the stock's underlying value will
be recognized by the market and reflected in its price.
Some of the principal measures used to identify such stocks are:
o Price/earnings ratio. Dividing a stock's price by its earnings per share
generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
o Price/book value ratio. This ratio, calculated by dividing a stock's
price by its book value per share, indicates how a stock is priced
relative to the accounting (i.e., book) value of the company's assets. A
ratio below the market, that of its competitors, or its own historic
norm could indicate an undervalued situation.
_____________________________________________________________________________
A STOCK SELLING AT $10 WITH A DIVIDEND OF $0.50 HAS A 5% YIELD.
o Dividend yield. A stock's dividend yield is found by dividing its annual
dividend by its share price. A yield significantly above a stock's own
historic norm or that of its peers may suggest an investment
opportunity.
o Price/cash flow. This is found by dividing a stock's price by the amount
of cash flow per share generated by the company. A ratio below that of
the market or of its peers suggests the market may be incorrectly
valuing the company's cash flow for reasons that may be temporary.
o Undervalued assets. This analysis compares a company's stock price with
its underlying asset values, its projected value in the private (as
opposed to public) market, or its expected value if the company or parts
of it were sold or liquidated.
o Restructuring opportunities. The market can react favorably to the
announcement or the successful implementation of a corporate
restructuring, financial engineering, or asset redeployment. Such events
can result in an increase in a company's stock price. A value investor
may try to anticipate these actions and invest before the market places
an appropriate value on any actual or expected changes.
_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE; WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
What are some of the fund's potential risks?
The fund's emphasis on stocks of established, high dividend-paying companies,
as well as its possible exposure to fixed income securities, could limit its
potential for capital appreciation. Sharply rising interest rates could also
decrease the appeal of stocks purchased by the fund, further restraining total
return.
What are some of the fund's potential rewards?
Dividends are normally a more stable and predictable component of total return
than capital appreciation. While the price of a company's stock can go up or
down in response to earnings or to fluctuations in the general market,
dividends are usually more reliable. Stocks paying a high level of dividend
income tend to be less volatile than those with below-average dividends.
_____________________________________________________________________________
EQUITY INVESTORS SHOULD HAVE A LONG-TERM INVESTMENT HORIZON AND BE WILLING TO
WAIT OUT BEAR MARKETS.
What are some potential risks and rewards of investing in the stock market?
Common stocks in general offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Economic growth has been punctuated by periodic
declines. Share prices of even the best managed, most profitable corporations
are subject to market risk, which means their stock prices can decline. In
addition, swings in investor psychology or significant trading by large
institutional investors can result in price fluctuations.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and your
tolerance for risk. If you can accept the price fluctuations inherent in stock
investing in an effort to achieve income and capital appreciation, the fund
could be an appropriate part of your overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, foreign securities, fixed income
securities, high-yield/high-risk investing, hybrid instruments, and private
placements); and Types of Management Practices (cash position, borrowing money
and transferring assets, futures and options, managing foreign currency risk,
lending of portfolio securities, and portfolio turnover).
New America Growth Portfolio
What is the fund's objective?
The fund's objective is to provide long-term growth of capital by investing
primarily in the common stocks of U.S. growth companies operating in service
industries.
What is the fund's investment program?
The fund will invest most of its assets in service companies, regardless of
size, that are believed by T. Rowe Price to be above-average performers in
their fields. Companies in the portfolio will range from larger blue chip
firms to small, rapidly growing companies. The fund may also invest up to 25%
of its assets in growth companies outside the service sector. Total return
will consist primarily of capital appreciation or depreciation.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible securities and warrants, when consistent with the fund's
investment objective and program. The fund may also engage in a variety of
investment management practices, such as buying and selling futures and
options.
_____________________________________________________________________________
THE FUND ALSO INCLUDES COMPANIES WHOSE PROSPECTS ARE CLOSELY TIED TO SERVICE
INDUSTRIES.
What types of service companies will the fund invest in?
The fund will emphasize companies that derive a majority of their revenues or
operating earnings from such activities as consumer services (retailing,
entertainment and leisure, media and communications, restaurants and food
distribution), business services (health care, computer services), and
financial services (insurance, investment services).
T. Rowe Price analysts will attempt to identify service companies that are
expected to show superior earnings growth. In addition to their growth
prospects, companies will be judged according to their fundamental strength
and the relative valuations of their stock prices.
Why does the fund emphasize the service sector?
If service companies, which represent over 50% of the U.S. economy, outpace
overall economic growth, their stocks could generate above-average returns.
Share prices generally rise with earnings over time, so companies with
superior earnings growth can provide investors with the opportunity for
attractive capital appreciation. In addition, service-oriented companies in
general may be more resistant to economic downturns because they have lower
fixed costs, are less capital intensive, and maintain smaller physical
inventories than manufacturing companies.
While service-related companies will dominate, the fund will take advantage of
its ability to invest in promising nonservice growth companies as
opportunities occur.
_____________________________________________________________________________
GROWTH INVESTORS LOOK FOR COMPANIES WITH ABOVE-AVERAGE EARNINGS GAINS.
What is meant by a "growth" investment approach?
More than 50 years ago, Thomas Rowe Price pioneered the growth stock theory of
investing. It is based on the premise that inflation represents a more serious
long-term threat to an investor's portfolio than stock market fluctuations or
recessions. Mr. Price believed that when a company's earnings grow faster than
both inflation and the economy in general, the market will eventually reward
its long-term earnings growth with a higher stock price. In addition, the
company should be able to raise its dividend in line with its growth in
earnings. However, investors should be aware that, during periods of adverse
economic and market conditions, stock prices may fall despite favorable
earnings trends.
_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE; WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
What are some of the fund's potential risks?
The fund may entail above-average risk since rapidly growing companies paying
few dividends are generally more volatile than companies with slower growth
rates and higher dividends. In addition, the portfolio may contain the stocks
of small companies, that often have limited product lines, markets, or
financial resources. These stocks may have limited marketability and may be
subject to more volatile price movements than securities of larger companies.
What are some of the fund's potential rewards?
The fund offers the opportunity for significant, long-term capital
appreciation by participating in the growth of dynamic service-related
companies. In addition, the fund has the flexibility to seek appreciation
opportunities through growth stock investments outside the service sector.
_____________________________________________________________________________
EQUITY INVESTORS SHOULD HAVE A LONG-TERM INVESTMENT HORIZON AND BE WILLING TO
WAIT OUT BEAR MARKETS.
What are some potential risks and rewards of investing in the stock market?
Common stocks in general offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Economic growth has been punctuated by periodic
declines. Share prices of even the best managed, most profitable corporations
are subject to market risk, which means their stock prices can decline. In
addition, swings in investor psychology or significant trading by large
institutional investors can result in price fluctuations.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and your
tolerance for risk. If you can accept the risk of price declines in an effort
to achieve superior capital appreciation, the fund may be an appropriate part
of your overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, foreign securities, hybrid
instruments, and private placements); and Types of Management Practices (cash
position, borrowing money and transferring assets, futures and options,
managing foreign currency risk, lending of portfolio securities, and portfolio
turnover).
International Stock Portfolio
Why invest in an international fund?
There are three main reasons:
o Expanded investment opportunities. More than half of the world's total
stock market capitalization and two-thirds of global GNP consists of
non-U.S. stocks and companies.
o The potential for higher long-term returns. For example, foreign stocks
represented by the Morgan Stanley EAFE Index (Europe, Australia, Far
East) outperformed U.S. stocks measured by the S&P 500 Stock Index in
all but two rolling 10-year periods from 1981 through 1995. Of course,
during this time there were shorter periods when U.S. stocks
outperformed.
o Potentially reduced overall volatility for an all-U.S. stock portfolio.
Since foreign stock markets tend to move independently of the U.S.
market and each other, spreading investments across a number of markets
can help smooth out fluctuations in the returns of your total equity
holdings.
What is the fund's objective and investment program?
The fund's objective is long-term growth of capital through investments
primarily in common stocks of established, non-U.S. companies. The fund
expects to invest substantially all of its assets outside the U.S. and to
diversify broadly among countries throughout the world-developed, newly
industrialized, and emerging.
What securities can the fund invest in other than common stocks?
The fund expects to invest substantially all of its assets in common stocks.
However, the fund may also invest in a variety of other equity-related
securities, such as preferred stocks, warrants and convertible securities, as
well as corporate and governmental debt securities, when considered consistent
with the fund's investment objective and program. The fund may also engage in
a variety of investment management practices, such as buying and selling
futures and options. Under normal market conditions, the fund's investment in
securities other than common stocks is limited to no more than 35% of total
assets. However, for temporary defensive purposes, the fund may invest all or
a significant portion of its assets in U.S. government and corporate debt
obligations. The fund will not purchase any debt security which at the time of
purchase is rated below investment grade. This would not prevent the fund from
retaining a security downgraded to below investment grade after purchase.
How does the portfolio manager select stocks?
Rowe Price-Fleming uses a "bottom-up" approach to stock selection based on
fundamental research. A company's prospects for achieving and sustaining
above-average, long-term earnings growth is generally the manager's primary
focus. However, valuation factors, such as price/earnings, price/cash flow,
and price/book are also important considerations. In conjunction with
identifying potential stocks for investment, external factors are also
reviewed. For example, a country's or region's political, economic, and
financial status help shape the outlook for individual stocks and also affect
decisions regarding the prudent level of overall exposure to particular areas.
_____________________________________________________________________________
EXCHANGE RATE MOVEMENTS CAN BE LARGE AND CAN LAST FOR EXTENDED PERIODS.
What are the major risks associated with international investing and this
fund?
Stock prices of foreign and U.S. companies are subject to many of the same
influences, such as general economic conditions, company and industry earnings
prospects, and investor psychology. However, investing in foreign securities
also involves additional risks which can increase the potential for the losses
in the fund. These risks can be significantly magnified for investments in
emerging markets.
o Currency fluctuations. Transactions in foreign securities are conducted
in local currencies, so dollars must often be exchanged for another
currency when a stock is bought or sold or a dividend is paid. Likewise,
share price quotations and total return information reflect conversion
into dollars. Fluctuations in foreign exchange rates can significantly
increase or decrease the dollar value of a foreign investment, boosting
or offsetting its local market return. For example, if a French stock
rose 10% in price during a year, but the U.S. dollar gained 5% against
the French franc during that time, the U.S. investor's return would be
reduced to 5%. This is because the franc would "buy" fewer dollars at
the end of the year than at the beginning, or, conversely, a dollar
would buy more francs.
o Costs. It is more expensive for U.S. investors to trade in foreign
markets than in the U.S. Mutual funds offer a very efficient way for
individuals to invest abroad, but the overall expense ratios of
international funds are usually somewhat higher than those of typical
domestic stock funds.
_____________________________________________________________________________
WHILE CERTAIN COUNTRIES HAVE MADE PROGRESS IN ECONOMIC GROWTH, LIBERALIZATION,
FISCAL DISCIPLINE, AND POLITICAL AND SOCIAL STABILITY, THERE IS NO ASSURANCE
THESE TRENDS WILL CONTINUE.
o Political and economic factors. The economies, markets, and political
structures of a number of the countries in which the fund can invest do
not compare favorably with the U.S. and other mature economies in terms
of wealth and stability. Therefore, investments in these countries will
be riskier and more subject to erratic and abrupt price movements. This
is especially true for emerging markets such as those found in Latin
America, China, and certain Asian countries, Eastern Europe, and Africa.
However, even investments in countries with highly developed economies
are subject to risk. For example, the Japanese stock market historically
has experienced wide swings in value.
Some economies are less well developed (for example, those in Latin
America, Eastern Europe, Africa, and certain Asian countries), overly
reliant on particular industries, and more vulnerable to the ebb and
flow of international trade, trade barriers, and other protectionist or
retaliatory measures (for example, Japan, Southeast Asia, Latin America,
Eastern Europe, and Africa). This makes investment in such markets
significantly riskier than in other countries. Some countries,
particularly in Latin America and Africa, are grappling with severe
inflation and high levels of national debt. Investments in countries
that have recently begun moving away from central planning and
state-owned industries toward free markets, such as Eastern Europe,
China, and Africa, should be regarded as speculative.
_____________________________________________________________________________
FOR MORE DETAILS ON POTENTIAL RISKS OF FOREIGN INVESTMENTS, PLEASE SEE
"INVESTMENT POLICIES AND PRACTICES."
Certain countries have histories of instability and upheaval (for
example, Latin America and Africa) with respect to their internal
politics that could cause their governments to act in a detrimental or
hostile manner toward private enterprise or foreign investment. Actions
such as nationalizing a company or industry, expropriating assets, or
imposing punitive taxes could have a severe effect on security prices
and impair a fund's ability to repatriate capital or income. Significant
external risks, including war, currently affect some countries.
Governments in many emerging market countries participate to a
significant degree in their economies and securities markets.
o Legal, regulatory, and operational. Certain countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not
honor legal rights enjoyed in the U.S., and have settlement practices,
such as delays, which could subject a fund to risks not customary in the
U.S. In addition, securities markets in these countries have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than in the U.S.
o Pricing. Portfolio securities may be listed on foreign exchanges that
are open days (such as Saturdays) when the fund does not compute its
price. As a result, the fund's net asset value may change significantly
on days when shareholders cannot make transactions.
_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE; WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
What can I expect in terms of price volatility?
Like U.S. stock investments, common stocks of foreign companies offer
investors a way to build capital over time. Nevertheless, the long-term rise
of foreign stock prices as a group has been punctuated by periodic declines.
Share prices of even the best managed, most profitable corporations, whether
U.S. or foreign, are subject to market risk, which means they can fluctuate
widely.
In less well-developed stock markets, such as those in Latin America, Eastern
Europe, Africa, and certain Asian countries, volatility may be heightened by
actions of a few major investors. For example, substantial increases or
decreases in cash flows of mutual funds investing in these markets could
significantly affect local stock prices and, therefore, fund share prices.
How does the portfolio manager try to reduce risk?
The principal tools are intensive research and diversification; currency
hedging techniques are used from time to time.
o In addition to conducting on-site research in portfolio countries and
companies, Price-Fleming has close ties with investment analysts based
throughout the world.
o Diversification significantly reduces but does not eliminate risk. The
impact on the fund's share price from a drop in the price of a
particular stock is reduced substantially by investing in a portfolio
with dozens of different companies. Likewise, the impact of unfavorable
developments in a particular country is reduced because investments are
spread among many countries.
Portfolio managers keep close watch on individual investments as well as
on political and economic trends in each country and region. Holdings
are adjusted according to the manager's analysis and outlook.
o While currency translation does affect the shorter-run returns provided
by foreign stocks, its influence on longer-term results generally has
been outweighed by price trends on local stock exchanges. Therefore,
under normal conditions, the fund does not engage in extensive hedging
programs. However, when foreign exchange rates are expected to be
unfavorable for U.S. investors, fund managers can hedge the risk through
use of currency forwards and options. In a general sense, these tools
allow a manager to exchange currencies in the future at a rate specified
in the present. (For more details, please see "Foreign Currency
Transactions" under "Investment Policies and Practices.") If the
manager's forecast is wrong, the hedge may cause a loss. Also, it may be
difficult or not practical to hedge currency risk in many emerging
countries.
What are some of the opportunities represented by major overseas markets?
o Europe: Market deregulation, privatization, and lower trade barriers
have expanded the range of investment opportunities. The emergence of
capitalist economics in Eastern Europe could, over the long term, open
previously inaccessible markets and also provide a lower-cost, skilled
labor pool, which may further stimulate European economies.
o Asia: No longer solely dependent on the Japanese "engine" for growth,
the newly industrialized countries of the Pacific Rim are powered by
worldwide exports and, increasingly, by strong regional demand. In
addition, China's move toward a more capitalistic economy has positive
implications for the entire region's future.
o Japan: Although its growth rate has slowed, the longer-term outlook for
Japan's economy is positive. In addition to its productive labor force,
technological expertise, and commitment to capital investment, Japan's
shift to a more domestic-oriented economy could promote future growth
and create new investment opportunities.
o Latin America: After years of stagnation, some countries here are
experiencing rising growth rates that reflect lower trade barriers,
privatization of industry, progress on reducing inflation, and
restructuring of national debt burdens.
o Emerging markets: A number of countries in Latin America, Eastern
Europe, Asia, and Africa are emerging from periods of economic
stagnation and offer the potential for growth exceeding that of the U.S.
and other developed countries. The countries initiating market-based
economic reforms could benefit from significant amounts of capital
inflows.
How can I decide if the fund may be appropriate for me?
First, be sure that your investment objective is the same as the fund's:
capital appreciation over time. If you will need the money you plan to invest
in the near future, the fund is not suitable.
Second, your decision should take into account whether you have any other
foreign stock investments.
Third, consider your risk tolerance and the risk profile of the fund.
Is there other information I need to review before making a decision?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, fixed income securities, hybrid
instruments, passive foreign investment companies, and private placements);
and Types of Management Practices (cash position, borrowing money and
transferring assets, foreign currency transactions, futures and options, tax
consequences of hedging, and portfolio turnover).
Consider your investment goals, your time horizon for achieving them, and your
tolerance for risk. Compare these to the description of the funds. You may
find the chart set forth below helpful in this process.
_____________________________________________________________________________
YOU CAN PURCHASE SHARES IN THESE FUNDS FOR VARIABLE ANNUITY CONTRACTS.
Comparison of Variable Annuity Portfolios
Portfolio Investment Portfolio
Emphasis Risk/Reward Profile
_____________________________________________________________________________
Limited- Short- and intermediate-term Moderate income level
Term Bond investment-grade bonds and share price fluctuations.
____________________________________________________________________________
Personal Approximately 60% stocks, Middle-of-the-road approach.
Strategy 30% bonds, 10% money Higher risk and return
Balanced markets. potential than a bond fund,
but lower than a stock fund.
_____________________________________________________________________________
Equity Stocks of established companies Relatively conservative stock
Income with above average dividends fund. Greater risk and return
potential than a bond fund,
but lower than a stock fund.
_____________________________________________________________________________
New Stocks of rapidly growing U.S. Aggressive domestic stock
America companies operating in the fund. High potential risk
Growth service sector and reward.
_____________________________________________________________________________
International Stocks of established Aggressive international stock
Stock non-U.S. companies fund. High potential risk and
reward; subject to risks
unique to foreign investing.
_____________________________________________________________________________
Table 3
About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a fund. For
instructions on how to purchase a T. Rowe Price No-Load Variable Annuity
Contract, read the attached separate account prospectus for the T. Rowe Price
No-Load Variable Annuity.
Shares of each fund will be offered to insurance company separate accounts
(including the T. Rowe Price Variable Annuity Account, a separate account of
Security Benefit Life Insurance Company ("Security Benefit")) established for
the purpose of funding variable annuity contracts. They may also be offered to
insurance company separate accounts established for the purpose of funding
variable life contracts. Variable annuity and variable life Contract Holders
or Participants (including individuals purchasing the T. Rowe Price No-Load
Variable Annuity) are not the shareholders of a fund. Rather, the separate
account is the shareholder. The T. Rowe Price No-Load Variable Annuity and
Variable Life Contracts are issued by Security Benefit and described in the
attached prospectus. The funds assume no responsibility for any insurance
company prospectuses, or variable annuity or life contracts.
Shares of the funds are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain other charges may apply to
annuity or life contracts. Those charges are disclosed in the accompanying
prospectus for the T. Rowe Price No-Load Variable Annuity.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for each fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, a fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
_____________________________________________________________________________
ADDITIONAL INFORMATION REGARDING PRICING FOR THE INTERNATIONAL STOCK PORTFOLIO
ONLY IS DISCUSSED AT RIGHT.
The calculation of the International Stock Portfolio's net asset value
normally will not take place contemporaneously with the determination of the
value of the fund's portfolio securities. Events affecting the values of
portfolio securities that occur between the time their prices are determined
and the time the fund's net asset value is calculated will not be reflected in
the fund's net asset value unless Price-Fleming, under the supervision of the
fund's Board of Directors, determines that the particular event should be
taken into account in computing the fund's net asset value.
How your purchase, sale, or exchange price is determined
Purchases. Security Benefit purchases shares of a fund for the T. Rowe Price
Variable Annuity or Variable Life Account, using premiums allocated by the
Contract Holders or Participants. Shares are purchased at the NAV next
determined after Security Benefit receives the premium payment in acceptable
form. Initial and subsequent payments allocated to a fund are subject to the
limits stated in the attached separate account prospectus.
Redemptions. Security Benefit redeems shares of a fund to make benefit or
surrender payments under the terms of its Contracts. Redemptions are processed
on any day on which the New York Stock Exchange is open and are priced at a
fund's NAV next determined after the insurance company receives a surrender
request in acceptable form.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the New
York Stock Exchange closes at a time other than 4 p.m. ET.
How Security Benefit receives the proceeds from a sale
Payment for redeemed shares will be made promptly, but in no event later than
seven days. However, the right of redemption may be suspended or the date of
payment postponed in accordance with the Investment Company Act of 1940. The
amount received upon redemption of the shares of the fund may be more or less
than the amount paid for the shares, depending on the fluctuations in the
market value of the assets owned by a fund.
Dividends and Other Distributions
For a discussion of the tax status of your variable annuity or life contract,
please refer to the attached separate account prospectus.
Dividends and other distributions. The policy of each fund is to distribute
all of its net investment income and net capital gains each year to its
shareholders, which are the separate accounts established by the various
insurance companies in connection with their issuance of variable annuity and
life contracts. Dividends from net investment income for the Limited-Term Bond
Portfolio are declared daily and paid monthly. Dividends for the Personal
Strategy Balanced and Equity Income Portfolios are declared and paid
quarterly. Dividends (if any) for the other funds are declared and paid
annually. All fund distributions made to a separate account will be reinvested
automatically in additional fund shares, unless a shareholder (separate
account) elects to receive distributions in cash. Under current law, dividends
and distributions made by a fund to separate accounts, generally, are not
taxable to the separate accounts, the insurance company or the Contract
Holder, provided that the separate account meets the diversification
requirements of Section 817(h) of the Internal Revenue Code of 1986, as
amended, and other tax-related requirements are satisfied. The funds intend to
diversify their investments in the manner required under Code Section 817(h).
Foreign Transactions. If a fund pays nonrefundable taxes to foreign
governments during the year, the taxes will reduce a fund's dividends.
More About the Funds
Organization and Management
How are the funds organized?
T. Rowe Price Fixed Income Series, Inc. ("Income Corporation"), T. Rowe Price
Equity Series, Inc. ("Equity Corporation") and T. Rowe Price International
Series, Inc. ("International Corporation") are each Maryland corporations
organized in 1994 and registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as a diversified, open-end investment
companies, commonly known as "mutual funds." Mutual funds pool money received
from shareholders and invest it to try to achieve specific objectives. Each
Corporation is a series fund and has the authority to issue other series in
addition to those currently in existence.
Currently, the Fixed Income Corporation has one series, the Limited-Term Bond
Portfolio; the Equity Corporation has three series, the Personal Strategy
Balanced, Equity Income, and New America Growth Portfolios; and the
International Corporation has one series, the International Stock Portfolio,
all established in 1994, and each representing a separate class of shares
having different objectives and investment policies.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in a fund's income and capital gain
distributions.
o Cast one vote per share on certain fund matters, including the election
of fund directors, changes in fundamental policies, or approval of
changes in the fund's management contract.
The shares of the fund have equal voting rights. The various insurance
companies own the outstanding shares of the fund in their separate accounts.
These separate accounts are registered under the 1940 Act or are excluded from
registration thereunder. Under current law, the insurance companies must vote
the shares held in registered separate accounts in accordance with voting
instructions received from variable Contract Holders or Participants having
the right to give such instructions.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least
10% of all eligible votes of a fund may call a special meeting if they wish
for the purpose of voting on the removal of any fund director.
Who runs the funds?
General Oversight. The funds are governed by a Board of Directors that meets
regularly to review the funds' investments, performance, expenses, and other
business affairs. The Board elects the funds' officers. The policy of the
funds is that a majority of Board members will be independent of their
investment manager.
Limited-Term Bond Portfolio
Equity Income Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Investment Manager. T. Rowe Price is responsible for selection and management
of the funds' portfolio investments. T. Rowe Price serves as investment
manager to a variety of individual and institutional investors, including
limited and real estate partnerships and other mutual funds.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. As of December 31, 1995, T. Rowe Price and its affiliates managed over
$75 billion of assets for over three and a half million individual and
institutional investor accounts.
International Stock Portfolio
Investment Manager. Price-Fleming is responsible for selection and management
of the fund's portfolio investments. Price-Fleming's U.S. office is located at
100 East Pratt Street, Baltimore, Maryland 21202. Price-Fleming has offices in
Baltimore, London, Tokyo, and Hong Kong.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited (Flemings).
_____________________________________________________________________________
FLEMINGS IS A DIVERSIFIED INVESTMENT ORGANIZATION WHICH PARTICIPATES IN A
GLOBAL NETWORK OF REGIONAL INVESTMENT OFFICES IN NEW YORK, LONDON, ZURICH,
GENEVA, TOKYO, HONG KONG, MANILA, KUALA LUMPUR, SEOUL, TAIPEI, BOMBAY,
JAKARTA, SINGAPORE, BANGKOK, AND JOHANNESBURG.
T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming. The
common stock of Price-Fleming is 50% owned by a wholly owned subsidiary of T.
Rowe Price, 25% by a subsidiary of Flemings, and 25% by Jardine Fleming Group
Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and
half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to
elect a majority of the Board of Directors of Price-Fleming, and Flemings has
the right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.
Research and Administration. Certain administrative support is provided by T.
Rowe Price, which receives from Price-Fleming a fee of .15% of the market
value of all assets in equity accounts, .15% of the market value of all assets
in active fixed income accounts, and .035% of the market value of all assets
in passive fixed income accounts under Price-Fleming's management. Additional
investment research and administrative support for equity investments is
provided to Price-Fleming by Fleming Investment Management Limited (FIM) and
Jardine Fleming Investment Holdings Limited (JFIH), for which each receives
from Price-Fleming a fee of .075% of the market value of all assets in equity
accounts under Price-Fleming's management. JFIH and FIM each receive a fee of
.075% of the market value of all assets in active fixed income accounts and
.0175% of such market value in passive fixed income accounts under
Price-Fleming's management. FIM and JFIH are wholly owned subsidiaries of
Flemings and Jardine Fleming, respectively.
Portfolio Management.
The Limited-Term Bond Portfolio has an Investment Advisory Committee composed
of the following members: Edward A. Wiese, Chairman, Robert P. Campbell,
Christy M. DiPietro, Thomas E. Tewksbury, and Mark J. Vaselkiv. The committee
chairman has day-to-day responsibility for managing the fund and works with
the committee in developing and executing the fund's investment program. Mr.
Wiese has been chairman of the fund's committee since 1995. Mr. Wiese joined
T. Rowe Price in 1984 and has been managing investments since 1985.
The Equity Income Portfolio has an Investment Advisory Committee composed of
the following members: Brian C. Rogers, Chairman, Thomas H. Broadus Jr.,
Richard P. Howard, William J. Stromberg, and Daniel Theriault. The committee
chairman has day-to-day responsibility for managing the fund and works with
the committee in developing and executing the fund's investment program. Mr.
Rogers has been chairman of the committee since its inception in 1994. He
joined T. Rowe Price in 1982 and has been managing investments since 1983.
The New America Growth Portfolio has an Investment Advisory Committee composed
of the following members: John H. Laporte, Chairman, Brian W. H. Berghuis, and
John F. Wakeman. The committee chairman has day-to-day responsibility for
managing the portfolio and works with the committee in developing and
executing the fund's investment program. Mr. Laporte has been chairman of the
fund's committee since 1988. Mr. Laporte joined T. Rowe Price in 1976 and has
been managing investments since 1984.
The Personal Strategy Balanced Portfolio's investments are guided by two
committees. An Asset Allocation Committee meets regularly to determine the
asset allocation of the fund among stocks, bonds, and money market securities.
Committee members include Peter Van Dyke, Chairman, Stephen W. Boesel, Edmund
M. Notzon, William T. Reynolds, James S. Riepe, Charles P. Smith, and M. David
Testa.
Day-to-day responsibility for managing the fund's investments lies with an
Investment Advisory Committee which includes Chairman Van Dyke, Messrs.
Boesel, Gillespie, Notzon, Donald J. Peters, Reynolds, Testa, Judith B. Ward,
and Richard T. Whitney.
The Asset Allocation Committee has been acting in this role for T. Rowe Price
since 1990, and its members bring a wide range of investment experience to
this task. Members of the Investment Advisory Committee responsible for making
day-to-day portfolio decisions for the fund are each experienced investment
managers. Mr. Van Dyke has been managing investments since joining T. Rowe
Price in 1985.
The International Stock Portfolio has an Investment Advisory Group composed of
the following members: Martin G. Wade, Christopher D. Alderson, Peter B.
Askew, Richard J. Bruce, Mark J. T. Edwards, John R. Ford, Robert C. Howe,
James B. M. Seddon, Benedict R. F. Thomas, and David J. L. Warren. This group
has day-to-day responsibility for managing the portfolio and developing and
executing the fund's investment program.
Martin Wade joined Price-Fleming in 1979 and has 26 years of experience with
the Fleming Group in research, client service, and investment management.
(Fleming Group includes Robert Fleming and/or Jardine Fleming.) Christopher
Alderson joined Price-Fleming in 1988, and has nine years of experience with
the Fleming Group in research and portfolio management. Peter Askew joined
Price-Fleming in 1988 and has 20 years of experience managing multi-currency
fixed income portfolios. Richard Bruce joined Price-Fleming in 1991 and has
seven years of experience in investment management with the Fleming Group in
Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 14 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 15 years of experience with the Fleming Group in research and portfolio
management. Robert Howe joined Price-Fleming in 1986 and has 14 years of
experience in economic research, company research, and portfolio management.
James Seddon joined Price-Fleming in 1987 and has nine years of portfolio
management experience. Benedict Thomas joined Price-Fleming in 1988 and has
six years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 15 years of experience in equity research, fixed
income research, and portfolio management.
Portfolio Transactions. Decisions with respect to the purchase and sale of a
fund's portfolio securities on behalf of the fund are made by T. Rowe Price or
Price-Fleming, as the case may be. Each fund's Board of Directors has
authorized T. Rowe Price or Price-Fleming to utilize affiliates of Flemings
and Jardine Fleming in the capacity of broker in connection with the execution
of the fund's portfolio transactions. Price-Fleming would utilize these
affiliates only if it believes that doing so would result in an economic
advantage (in the form of lower execution costs or otherwise) being obtained
by the International Stock Portfolio.
Marketing. T. Rowe Price Investment Services, Inc., a wholly owned subsidiary
of T. Rowe Price, distributes (sells) shares of these and all other T. Rowe
Price funds.
Shareholder Services. T. Rowe Price Services, Inc., another wholly owned
subsidiary, acts as the fund's transfer and dividend disbursing agent and
provides shareholder and administrative services. T. Rowe Price calculates the
daily share price and maintains the portfolio and general accounting records
of the fund. The address for T. Rowe Price Services, Inc. is 100 East Pratt
St., Baltimore, MD 21202.
How are fund expenses determined?
Under the management agreement, all expenses of each fund will be paid by T.
Rowe Price (or in the case of International Stock Portfolio, Price-Fleming),
except interest, taxes, brokerage commissions, directors' fees and expenses
(including counsel fees and expenses) and extraordinary expenses. The Board of
Directors of each fund reserves the right to impose additional fees against
shareholder accounts to defray expenses which would otherwise be paid by T.
Rowe Price or Price-Fleming, under the management agreement. The Board does
not anticipate levying such charges; such a fee, if charged, may be retained
by the fund or paid to T. Rowe Price or Price-Fleming, as the case may be.
The Management Fee. Each fund pays T. Rowe Price, or for the International
Stock Portfolio, Price-Fleming, a single, all-inclusive fee based on the
fund's average daily net assets to cover investment management and operating
expenses. The all-inclusive management fee for each fund is noted below.
Limited-Term Bond Portfolio 0.70%
Personal Strategy Balanced Portfolio 0.90%
Equity Income Portfolio 0.85%
New America Growth Portfolio 0.85%
International Stock Portfolio 1.05%
From time to time, T. Rowe Price or, for the International Stock Portfolio,
Price-Fleming, may pay participating insurance companies for services provided
by such insurance companies for the fund or on behalf of contract holders.
Variable Annuity and Variable Life Charges. Variable annuity and variable life
fees and charges are in addition to those described previously and are
described in variable annuity and life prospectuses.
The funds may serve as an investment medium for both variable annuity
contracts and variable life insurance policies. Shares of the funds may be
offered to separate accounts established by any number of insurance companies.
The funds currently do not foresee any disadvantages to variable annuity
contract owners due to the fact that the funds may serve as an investment
medium for both variable life insurance policies and annuity contracts;
however, due to differences in tax treatment or other considerations, it is
theoretically possible that the interests of owners of annuity contracts and
insurance policies for which the funds serve as an investment medium might at
some time be in conflict. However, each fund's Board of Directors is required
to monitor events to identify any material conflicts between variable annuity
contract owners and variable life policy owners, and will determine what
action, if any, should be taken in the event of such a conflict. If such a
conflict were to occur, an insurance company participating in a fund might be
required to redeem the investment of one or more of its separate accounts from
the fund. This might force the fund to sell securities at disadvantageous
prices.
Understanding Performance Information
This section should help you understand the terms used to describe each fund's
performance. You will come across them in shareholder reports you receive from
us.
_____________________________________________________________________________
TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN FUND ANNUAL AND SEMIANNUAL SHAREHOLDER REPORTS AND
IN THE QUARTERLY PERFORMANCE UPDATE, WHICH ARE AVAILABLE WITHOUT CHARGE.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the
period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
Yield
The Limited-Term Bond Portfolio may advertise a yield figure derived by
dividing the fund's net investment income per share (as defined by applicable
SEC regulations) during a 30-day base period by the per share price on the
last day of the base period.
Total returns and yields quoted for the funds include the effect of deducting
each fund's expenses, but may not include charges and expenses attributable to
any particular insurance product. Since you can only purchase shares of the
funds through an insurance product, you should carefully review the prospectus
of the insurance product you have chosen for information on relevant charges
and expenses. Excluding these charges from quotations of a fund's performance
has the effect of increasing the performance quoted.
Investment Policies and Practices
This section takes a detailed look at some of the types of securities each
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. Each fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.
Shareholder approval is required to substantively change a fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. Each fund adheres to
applicable investment restrictions and policies at the time it makes an
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
A fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth herein. For instance, these
funds are not permitted to invest more than 10% of total assets in hybrid
instruments. While these restrictions provide a useful level of detail about a
fund's investment program, investors should not view them as an accurate gauge
of the potential risk of such investments. For example, in a given period, a
5% investment in hybrid instruments could have significantly more than a 5%
impact on a fund's share price. The net effect of a particular investment
depends on its volatility and the size of its overall return in relation to
the performance of all the funds' other investments.
Changes in each fund's holdings, each fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
Limited-Term Bond Portfolio
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Bonds. A bond is an interest-bearing security-an IOU-issued by companies or
governmental units. The issuer has a contractual obligation to pay interest at
a stated rate on specific dates and to repay principal (the bond's face value)
on a specified date. An issuer may have the right to redeem or "call" a bond
before maturity, and the investor may have to reinvest the proceeds at lower
market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates that are adjusted periodically, which tend
to minimize fluctuations in their principal value. The maturity of those
securities may be shortened under certain specified conditions.
Bonds may be designated as senior or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before subordinated debt.
Asset-Backed Securities. An underlying pool of assets, such as credit card or
automobile trade receivables or corporate loans or bonds, backs these bonds
and provides the interest and principal payments to investors. Credit quality
depends primarily on the quality of the underlying assets and the level of
credit support, if any, provided by the issuer. The underlying assets (i.e.,
loans) are subject to prepayments which can shorten the securities' weighted
average life and may lower their return. The value of these securities also
may change because of actual or perceived changes in the creditworthiness of
the originator, servicing agent, or of the financial institution providing the
credit support. There is no limit on the portion of the fund's fixed income
investments in these securities.
Mortgage-Backed Securities. The fund may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is sold to
investors such as the fund. Interest and principal payments generated by the
underlying mortgages are passed through to the investors. The "big three"
issuers are the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). GNMA certificates are backed by the full faith and
credit of the U.S. government, while others, such as Fannie Mae and Freddie
Mac certificates, are only supported by the ability to borrow from the U.S.
Treasury or supported only by the credit of the agency. Private mortgage
bankers and other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the pace of mortgage prepayments picks up. These
refinanced mortgages are paid off at face value (par), causing a loss for any
investor who may have purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation of these
securities and can negatively affect the fund's net asset value. When rates
rise, the prices of mortgage-backed securities can be expected to decline,
although historically these securities have experienced smaller price declines
than comparable quality bonds. There is no limit on the portion of the fund's
fixed income investments in these securities.
Additional mortgage-backed securities in which the fund may invest include:
o Collateralized Mortgage Obligations (CMOs). CMOs are debt securities
that are fully collateralized by a portfolio of mortgages or
mortgage-backed securities. All interest and principal payments from the
underlying mortgages are passed through to the CMOs in such a way as to
create more definite maturities than is the case with the underlying
mortgages. CMOs may pay fixed or variable rates of interest, and certain
CMOs have priority over others with respect to the receipt of
prepayments.
o Stripped Mortgage Securities. Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest
and principal payments generated by a pool of mortgage-backed securities
or a CMO to create additional classes of securities. Generally, one
class receives only interest payments (IOs) and one principal payments
(POs). Unlike other mortgage-backed securities and POs, the value of IOs
tends to move in the same direction as interest rates. The fund could
use IOs as a hedge against falling prepayment rates (interest rates are
rising) and/or a bear market environment. POs can be used as a hedge
against rising prepayment rates (interest rates are falling) and/or a
bull market environment. IOs and POs are acutely sensitive to interest
rate changes and to the rate of principal prepayments. A rapid or
unexpected increase in prepayments can severely depress the price of
IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. These securities are very volatile in price and may
have lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially those
that pay variable rates of interest that adjust inversely with and more
rapidly than short-term interest rates. There is no guarantee the fund's
investment in CMOs, IOs, or POs will be successful, and the fund's total
return could be adversely affected as a result.
Operating policy: The fund may invest up to 10% of its total assets in
stripped mortgage-backed securities.
_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE
FUND MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and
options. For example, the principal amount or interest rate of a hybrid could
be tied (positively or negatively) to the price of some commodity, currency,
or securities index or another interest rate (each a "benchmark"). Hybrids can
be used as an efficient means of pursuing a variety of investment goals,
including currency hedging, duration management, and increased total return.
Hybrids may not bear interest or pay dividends. The value of a hybrid or its
interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as
commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid
may entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the fund to the credit risk of the issuer of
the hybrid. These risks may cause significant fluctuations in the net asset
value of the fund.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
High-Yield/High-Risk Investing. The total return and yield of lower-quality
(high-yield/high-risk) bonds, commonly referred to as "junk" bonds, can be
expected to fluctuate more than the total return and yield of higher-quality
bonds. Junk bonds (those rated below BBB or in default) are regarded as
predominantly speculative with respect to the issuer's ability to meet
principal and interest payments. Successful investment in lower-medium- and
low-quality bonds involves greater investment risk and is highly dependent on
T. Rowe Price's credit analysis. A real or perceived economic downturn or
rising interest rates could cause a decline in high-yield bond prices by
lessening the ability of issuers to make principal and interest payments.
These bonds are often thinly traded and can be more difficult to sell and
value accurately than high-quality bonds. Because objective pricing data may
be less available, judgment may play a greater role in the valuation process.
Operating policy: The fund will not purchase a noninvestment-grade debt
security (or junk bond) if immediately after such purchase the fund would have
more than 10% of its total assets invested in such securities.
Private Placements. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be
readily sold, for example, under Rule 144A, others may be illiquid and their
sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities.
Foreign Securities. The fund may invest in foreign securities, including
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers. Such investments increase a
portfolio's diversification and may enhance return, but they also involve some
special risks such as exposure to potentially adverse local political and
economic developments; nationalization and exchange controls; potentially
lower liquidity and higher volatility; possible problems arising from
accounting, disclosure, settlement, and regulatory practices that differ from
U.S. standards; and the chance that fluctuations in foreign exchange rates
will decrease the investment's value (favorable changes can increase its
value). To the extent the fund invests in developing countries, these risks
are increased.
Operating policy: The fund may invest without limitation in U.S.
dollar-denominated debt securities of foreign issuers, foreign branches of
U.S. banks, and U.S. branches of foreign banks and may invest up to 10% of its
total assets (excluding reserves) in non-U.S. dollar-denominated fixed income
securities principally traded in financial markets outside the U.S.
Types of Management Practices
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as
a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 331/3% of total fund assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 331/3% of the fund's total
assets. The fund may not purchase additional securities when borrowings exceed
5% of total assets.
In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund may
not borrow more than 25% of net asset value when borrowing as a temporary
measure to facilitate redemptions. Net asset value of a portfolio is the
market value of all investments or assets owned less outstanding liabilities
of the portfolio at the time that any new or additional borrowing is
undertaken.
_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage or hedge risk, because they enable the investor to buy or
sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in interest rates, stock
and bond prices, and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets; in an effort to enhance income; to
protect the value of portfolio securities; and to adjust the portfolio's
duration. The fund may purchase, sell, or write call and put options on
securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total return,
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Interest Rate Swaps. The fund may enter into various interest rate
transactions (a type of potentially high-risk derivative investment) such as
interest rate swaps and the purchase or sale of interest rate caps, collars,
and floors, to preserve a return or spread on a particular investment or
portion of its portfolio, to create synthetic securities, or to structure
transactions designed for other purposes.
Operating policy: The fund will not invest more than 10% of its total assets
in interest rate swaps.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." The fund may also use these contracts to
create a synthetic bond-issued by a U.S. company, for example, but with the
dollar component transformed into a foreign currency. Although foreign
currency transactions will be used primarily to protect the fund's foreign
securities from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not occur and the
fund's total return could be reduced.
Operating policy: The fund will not commit more than 10% of its total assets
to forward currency contracts.
Lending of Portfolio Securities. Like other mutual funds, the fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of
the fund's total assets.
When-Issued Securities and Forward Commitment Contracts. The fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. There is no limit on the fund's
fixed income investments in these securities. The price of these securities is
fixed at the time of the commitment to buy, but delivery and payment can take
place a month or more later. During the interim period, the market value of
the securities can fluctuate, and no interest accrues to the purchaser. At the
time of delivery, the value of the securities may be more or less than the
purchase or sale price. To the extent the fund remains fully or almost fully
invested (in securities with a remaining maturity of more than one year) at
the same time it purchases these securities, there will be greater
fluctuations in the fund's net asset value than if the fund did not purchase
them.
Portfolio Turnover. The fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The fund's
portfolio turnover rate for the fiscal year ended December 31, 1995, was
73.7%. For the fiscal period ended December 31, 1994, the fund's annualized
portfolio turnover rate was 146.0%.
Bond Ratings and High-Yield Bonds. Larger bond issues are evaluated by rating
agencies such as Moody's and Standard & Poor's on the basis of the issuer's
ability to meet all required interest and principal payments. T. Rowe Price
research analysts also evaluate all portfolio holdings, including those rated
by an outside agency. Other things being equal, lower-rated bonds have higher
yields due to greater risk. High-yield bonds, also called "junk" bonds, are
those rated below BBB (see Table 3).
Ratings of Corporate Debt Securities
_____________________________________________________________________________
Moody's Standard & Fitch
Investors Poor's Investors Definition
Service, Inc. Corporation Service, Inc.
_____________________________________________________________________________
Long-Term Aaa AAA AAA Highest
quality
Aa AA AA High
quality
A A A Upper
medium
grade
Baa BBB BBB Medium
grade
Ba BB BB Speculative
B B B Highly
speculative
Caa CCC, CC CCC, CC Vulnerable
to default
Ca C C Default is
imminent
C D DDD, DD, D Probably in
default
_____________________________________________________________________________
Commercial P-1 Superior A-1+ Extremely F-1+ Exceptionally
Paper quality strong quality strong quality
A-1 Strong F-1 Very strong
quality quality
P-2 Strong A-2 Satisfactory F-2 Good
quality quality credit quality
P-3 Acceptable A-3 Adequate F-3 Fair
quality quality credit quality
B Speculative F-S Weak
quality credit quality
C Doubtful
quality
Table 3
Personal Strategy Balanced Portfolio
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Bonds. A bond is an interest-bearing security-an IOU-issued by companies or
governmental units. The issuer has a contractual obligation to pay interest at
a stated rate on specific dates and to repay principal (the bond's face value)
on a specified date. An issuer may have the right to redeem or "call" a bond
before maturity, and the investor may have to reinvest the proceeds at lower
market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates that are adjusted periodically, which tend
to minimize fluctuations in their principal value. The maturity of those
securities may be shortened under certain specified conditions.
Bonds may be designated as senior or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before subordinated debt.
Operating policy: At least 25% of the fund's total assets must be senior fixed
income securities.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life
of the warrants (generally, two or more years).
Foreign Securities. The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may enhance
return, but they also involve some special risks such as exposure to
potentially adverse local political and economic developments; nationalization
and exchange controls; potentially lower liquidity and higher volatility;
possible problems arising from accounting, disclosure, settlement, and
regulatory practices that differ from U.S. standards; and the chance that
fluctuations in foreign exchange rates will decrease the investment's value
(favorable changes can increase its value). These risks are heightened for
investments in developing countries and there is no limit on the amount of the
fund's foreign investments which may be made in such countries.
Operating policy: The fund may invest up to 35% of its total assets (excluding
reserves) in foreign securities.
Asset-Backed Securities. An underlying pool of assets, such as credit card or
automobile trade receivables or corporate loans or bonds, backs these bonds
and provides the interest and principal payments to investors. Credit quality
depends primarily on the quality of the underlying assets and the level of
credit support, if any, provided by the issuer. The underlying assets (i.e.,
loans) are subject to prepayments which can shorten the securities' weighted
average life and may lower their return. The value of these securities also
may change because of actual or perceived changes in the creditworthiness of
the originator, servicing agent, or of the financial institution providing the
credit support. There is no limit on the portion of the fund's fixed income
investments in these securities.
Mortgage-Backed Securities. The fund may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is sold to
investors such as the fund. Interest and principal payments generated by the
underlying mortgages are passed through to the investors. The "big three"
issuers are the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). GNMA certificates are backed by the full faith and
credit of the U.S. government, while others, such as Fannie Mae and Freddie
Mac certificates, are only supported by the ability to borrow from the U.S.
Treasury or supported only by the credit of the agency. Private mortgage
bankers and other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the pace of mortgage prepayments picks up. These
refinanced mortgages are paid off at face value (par), causing a loss for any
investor who may have purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation of these
securities and can negatively affect the fund's net asset value. When rates
rise, the prices of mortgage-backed securities can be expected to decline,
although historically these securities have experienced smaller price declines
than comparable quality bonds. There is no limit on the portion of the fund's
fixed income investments in these securities.
Additional mortgage-backed securities in which the fund may invest include:
o Collateralized Mortgage Obligations (CMOs). CMOs are debt securities
that are fully collateralized by a portfolio of mortgages or
mortgage-backed securities. All interest and principal payments from the
underlying mortgages are passed through to the CMOs in such a way as to
create more definite maturities than is the case with the underlying
mortgages. CMOs may pay fixed or variable rates of interest, and certain
CMOs have priority over others with respect to the receipt of
prepayments.
o Stripped Mortgage Securities. Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest
and principal payments generated by a pool of mortgage-backed securities
or a CMO to create additional classes of securities. Generally, one
class receives only interest payments (IOs) and one principal payments
(POs). Unlike other mortgage-backed securities and POs, the value of IOs
tends to move in the same direction as interest rates. The fund could
use IOs as a hedge against falling prepayment rates (interest rates are
rising) and/or a bear market environment. POs can be used as a hedge
against rising prepayment rates (interest rates are falling) and/or a
bull market environment. IOs and POs are acutely sensitive to interest
rate changes and to the rate of principal prepayments. A rapid or
unexpected increase in prepayments can severely depress the price of
IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. These securities are very volatile in price and may
have lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially those
that pay variable rates of interest that adjust inversely with and more
rapidly than short-term interest rates. There is no guarantee the fund's
investment in CMOs, IOs, or POs will be successful, and the fund's total
return could be adversely affected as a result.
Operating policy: The fund may invest up to 10% of its total assets in
stripped mortgage securities.
High-Yield/High-Risk Investing. The total return and yield of lower-quality
(high-yield/high-risk) bonds, commonly referred to as "junk" bonds, can be
expected to fluctuate more than the total return and yield of higher-quality
bonds. Junk bonds (those related below BBB or in default) are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Successful investment in lower-medium-
and low-quality bonds involves greater investment risk and is highly dependent
on T. Rowe Price's credit analysis. A real or perceived economic downturn or
higher interest rates could cause a decline in high-yield bond prices by
lessening the ability of issuers to make principal and interest payments.
These bonds are often thinly traded and can be more difficult to sell and
value accurately than high-quality bonds. Because objective pricing data may
be less available, judgment may play a greater role in the valuation process.
In addition, the entire junk bond market can experience sudden and sharp price
swings due to a variety of factors, including changes in economic forecasts,
stock market activity, large or sustained sales by major investors, a
high-profile default, or just a change in the market's psychology. This type
of volatility is usually associated more with stocks than bonds, but junk bond
investors should be prepared for it.
Operating policy: The fund may invest up to 20% of its total assets in
below-investment-grade or junk bonds.
_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE
FUND MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and
options. For example, the principal amount or interest rate of a hybrid could
be tied (positively or negatively) to the price of some commodity, currency,
or securities index or another interest rate (each a "benchmark"). Hybrids can
be used as an efficient means of pursuing a variety of investment goals,
including currency hedging, duration management, and increased total return.
Hybrids may not bear interest or pay dividends. The value of a hybrid or its
interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as
commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid
may entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the fund to the credit risk of the issuer of
the hybrid. These risks may cause significant fluctuations in the net asset
value of the fund.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
Investment Funds. The fund may invest in other investment funds or companies,
primarily where such investments would be the only practical means of
investing in certain foreign countries. Such investments would result in the
fund paying additional or duplicative fees and expenses. The risks of such
investments would reflect the risks of investing in the types of securities in
which the investment fund or companies invest.
Operating policy: The fund may invest up to 10% of its assets in other
investment funds and companies.
Zero Coupon Bonds and Pay-in-Kind Bonds. A zero coupon bond does not make cash
interest payments during the life of the bond. Instead, it is sold at a deep
discount to face value, and the interest consists of the gradual appreciation
in price as the bond approaches maturity. "Zeros" can be an attractive
financing method for issuers with near-term cash-flow problems. Pay-in-kind
(PIK) bonds pay interest in cash or additional securities, at the issuer's
option, for a specified period. Like zeros, they may help a corporation
economize on cash. PIK prices reflect the market value of the underlying debt
plus any accrued interest. Zeros and PIKS can be higher- or lower-quality
debt, and both are more volatile than coupon bonds.
The fund is required to distribute to shareholders income imputed to any zero
or PIK investments. Such distributions could reduce the fund's reserve
position.
Operating policy: The fund may invest up to 10% of its total assets in zero
coupon and pay-in-kind bonds.
Private Placements. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be
readily sold, for example, under Rule 144A, others may be illiquid and their
sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities. As part of this limit, the fund will not invest more than
10% in certain restricted securities.
Types of Management Practices
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as
a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 331/3% of total fund assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 331/3% of the fund's total
assets. The fund may not purchase additional securities when borrowings exceed
5% of total assets.
In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund may
not borrow more than 25% of net asset value when borrowing as a temporary
measure to facilitate redemptions. Net asset value of a portfolio is the
market value of all investments or assets owned less outstanding liabilities
of the portfolio at the time that any new or additional borrowing is
undertaken.
_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage or hedge risk, because they enable the investor to buy or
sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in interest rates, stock
and bond prices, and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets; in an effort to enhance income; to
protect the value of portfolio securities; and to adjust the portfolio's
duration. The fund may purchase, sell, or write call and put options on
securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total return,
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Interest Rate Transactions. The fund may enter into various interest rate
transactions (a type of potentially high-risk derivative investment) such as
interest rate swaps and the purchase or sale of interest rate caps, collars,
and floors, to preserve a return or spread on a particular investment or
portion of its portfolio, to create synthetic securities, or to structure
transactions designed for other purposes.
Operating policies: The fund will not invest more than 10% of its total assets
in interest rate transactions.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions
will be used primarily to protect the fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the fund's total return
could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of
the fund's total assets.
When-Issued Securities and Forward Commitment Contracts. The fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. There is no limit on the fund's
fixed income investments in these securities. The price of these securities is
fixed at the time of the commitment to buy, but delivery and payment can take
place a month or more later. During the interim period, the market value of
the securities can fluctuate, and no interest accrues to the purchaser. At the
time of delivery, the value of the securities may be more or less than the
purchase or sale price. To the extent the fund remains fully or almost fully
invested (in securities with a remaining maturity of more than one year)
at the same time it purchases these securities, there will be greater
fluctuations in the fund's net asset value than if the fund did not purchase
them.
Portfolio Turnover. The fund will not generally trade in securities (either
common stocks or bonds) for short-term profits, but when circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. A high turnover rate may increase transaction costs and result in
additional taxable gains. The fund's annualized portfolio turnover rate for
the fiscal period ended December 31, 1995, was 39.3%.
Credit-Quality Considerations. The credit quality of most bond issues is
evaluated by rating agencies such as Moody's and Standard & Poor's. Credit
quality refers to the issuer's ability to meet all required interest and
principal payments. The highest ratings are assigned to issuers perceived to
be the best credit risks. T. Rowe Price research analysts also evaluate all
portfolio holdings of the fund, including those rated by outside agencies. The
lower the rating on a bond, the higher the yield, other things being equal.
Table 4 shows the rating scale used by the major rating agencies. T. Rowe
Price considers publicly available ratings, but emphasizes its own credit
analysis when selecting investments.
Ratings of Corporate Debt Securities
_____________________________________________________________________________
Moody's Standard & Fitch
Investors Poor's Investors Definition
Service, Inc. Corporation Service, Inc.
_____________________________________________________________________________
Long-Term Aaa AAA AAA Highest
quality
Aa AA AA High
quality
A A A Upper
medium
grade
Baa BBB BBB Medium
grade
Ba BB BB Speculative
B B B Highly
speculative
Caa CCC, CC CCC, CC Vulnerable
to default
Ca C C Default is
imminent
C D DDD, DD, D Probably in
default
_____________________________________________________________________________
Commercial P-1 Superior A-1+ Extremely F-1+ Exceptionally
Paper quality strong quality strong quality
A-1 Strong F-1 Very strong
quality quality
P-2 Strong A-2 Satisfactory F-2 Good
quality quality credit quality
P-3 Acceptable A-3 Adequate F-3 Fair
quality quality credit quality
B Speculative F-S Weak
quality credit quality
C Doubtful
quality
Table 4
Equity Income Portfolio
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life
of the warrants (generally, two or more years).
Foreign Securities. The fund may invest in foreign securities, including
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers. Such investments increase a
portfolio's diversification and may enhance return, but they also involve some
special risks such as exposure to potentially adverse local political and
economic developments; nationalization and exchange controls; potentially
lower liquidity and higher volatility; possible problems arising from
accounting, disclosure, settlement, and regulatory practices that differ from
U.S. standards; and the chance that fluctuations in foreign exchange rates
will decrease the investment's value (favorable changes can increase its
value). To the extent the fund invests in developing countries, these risks
are increased.
Operating policy: The fund may invest up to 25% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities. The fund may invest in debt securities of any type
including municipal securities without regard to quality or rating. Such
securities would be purchased in companies, or municipalities, or entities
which meet the investment criteria for the fund. The price of a bond
fluctuates with changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
High-Yield/High-Risk Investing. The total return and yield of lower-quality
(high-yield/ high-risk) bonds, commonly referred to as "junk" bonds, can be
expected to fluctuate more than the total return and yield of higher-quality,
shorter-term bonds, but not as much as common stocks. Junk bonds (those rated
below BBB or in default) are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments.
Operating policy: The fund will not purchase a noninvestment-grade debt
security (or junk bond) if immediately after such purchase the fund would have
more than 10% of its total assets invested in such securities.
_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE
FUND MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and
options. For example, the principal amount, redemption, or conversion terms of
a security could be related to the market price of some commodity, currency,
or securities index. Such securities may bear interest or pay dividends at
below market (or even relatively nominal) rates. Under certain conditions, the
redemption value of such an investment could be zero.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be
readily sold, for example, under Rule 144A, others may be illiquid and their
sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities. As part of this limit, the fund will not invest more than
10% in certain restricted securities.
Types of Management Practices
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as
a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 331/3% of total fund assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 331/3% of the fund's total
assets. The fund may not purchase additional securities when borrowings exceed
5% of total assets.
In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund may
not borrow more than 25% of net asset value when borrowing as a temporary
measure to facilitate redemptions. Net asset value of a portfolio is the
market value of all investments or assets owned less outstanding liabilities
of the portfolio at the time that any new or additional borrowing is
undertaken.
_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage or hedge risk, because they enable the investor to buy or
sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices and
foreign currencies; as an efficient means of adjusting its overall exposure to
certain markets; in an effort to enhance income; and to protect the value of
portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total return,
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate.
In certain circumstances, a "proxy currency" may be substituted for the
currency in which the investment is denominated, a strategy known as "proxy
hedging." Although foreign currency transactions will be used primarily to
protect the fund's foreign securities from adverse currency movements relative
to the dollar, they involve the risk that anticipated currency movements will
not occur and the fund's total return could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of
the fund's total assets.
Portfolio Turnover. The fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The fund's
portfolio turnover rate for the fiscal year ended December 31, 1995, was
10.1%. For the fiscal period ended December 31, 1994, the fund's annualized
portfolio turnover rate was 21.3%.
New America Growth Portfolio
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life
of the warrants (generally, two or more years).
Foreign Securities. The fund may invest in foreign securities, including
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers. Such investments increase a
portfolio's diversification and may enhance return, but they also involve some
special risks such as exposure to potentially adverse local political and
economic developments; nationalization and exchange controls; potentially
lower liquidity and higher volatility; possible problems arising from
accounting, disclosure, settlement, and regulatory practices that differ from
U.S. standards; and the chance that fluctuations in foreign exchange rates
will decrease the investment's value (favorable changes can increase its
value). To the extent the fund invests in developing countries, these risks
are increased.
Operating policy: The fund may invest up to 15% of its total assets (excluding
reserves)
in foreign securities.
_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE
FUND MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and
options. For example, the principal amount, redemption, or conversion terms of
a security could be related to the market price of some commodity, currency,
or securities index. Such securities may bear interest or pay dividends at
below market (or even relatively nominal) rates. Under certain conditions, the
redemption value of such an investment could be zero.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be
readily sold, for example, under Rule 144A, others may be illiquid and their
sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities. As part of this limit, the fund will not invest more than
10% in certain restricted securities.
Types of Management Practices
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as
a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 331/3% of total fund assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 331/3% of the fund's total
assets. The fund may not purchase additional securities when borrowings exceed
5% of total assets.
In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund may
not borrow more than 25% of net asset value when borrowing as a temporary
measure to facilitate redemptions. Net asset value of a portfolio is the
market value of all investments or assets owned less outstanding liabilities
of the portfolio at the time that any new or additional borrowing is
undertaken.
_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage or hedge risk, because they enable the investor to buy or
sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons including: to manage its exposure to changes in securities prices and
foreign currencies; as an efficient means of adjusting its overall exposure to
certain markets; in an effort to enhance income; and to protect the value of
portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total return,
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions
will be used primarily to protect the fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the fund's total return
could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of
the fund's total assets.
Portfolio Turnover. The fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The fund's
portfolio turnover rate for the fiscal year ended December 31, 1995, was
54.5%. For the fiscal period ended December 31, 1994, the fund's annualized
portfolio turnover rate was 81.0%.
International Stock Portfolio
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life
of the warrants (generally, two or more years).
Fixed Income Securities. The fund may invest in any type of investment-grade
security. Such securities would be purchased in companies which meet the
investment criteria for the fund. The price of a bond fluctuates with changes
in interest rates, rising when interest rates fall and falling when interest
rates rise.
_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE
FUND MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and
options. For example, the principal amount, redemption, or conversion terms of
a security could be related to the market price of some commodity, currency,
or securities index. Such securities may bear interest or pay dividends at
below market (or even relatively nominal) rates. Under certain conditions, the
redemption value of such an investment could be zero.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
Passive Foreign Investment Companies. The fund may purchase the securities of
certain foreign investment funds or trusts called passive foreign investment
companies. Such trusts have been the only or primary way to invest in certain
countries. In addition to bearing their proportionate share of the trust's
expenses (management fees and operating expenses), shareholders will also
indirectly bear similar expenses of such trusts. Capital gains on the sale of
such holdings are considered ordinary income regardless of how long the fund
held its investment. In addition, the fund may be subject to corporate income
tax and an interest charge on certain dividends and capital gains earned from
these investments, regardless of whether such income and gains are distributed
to shareholders.
To avoid such tax and interest, each Price-Fleming fund intends to treat these
securities as sold on the last day of its fiscal year and recognize any gains
for tax purposes at that time; losses will not be recognized. Such gains will
be considered ordinary income, which the fund will be required to distribute
even though it has not sold the security.
Private Placements. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be
readily sold, for example, under Rule 144A, others may be illiquid and their
sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities. As part of this limit, the fund will not invest more than
10% in certain restricted securities.
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Types of Management Practices
Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as
a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 331/3% of total fund assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 331/3% of the fund's total
assets. The fund may not purchase additional securities when borrowings exceed
5% of total assets.
In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund may
not borrow more than 25% of net asset value when borrowing as a temporary
measure to facilitate redemptions. Net asset value of a portfolio is the
market value of all investments or assets owned less outstanding liabilities
of the portfolio at the time that any new or additional borrowing is
undertaken.
Foreign Currency Transactions. The fund will normally conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies. The fund will
generally not enter into a forward contract with a term greater than one year.
The fund will generally enter into forward foreign currency exchange contracts
only under two circumstances. First, when the fund enters into a contract for
the purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. Second, when
Price-Fleming believes that the currency of a particular foreign country may
suffer or enjoy a substantial movement against another currency, it may enter
into a forward contract to sell or buy the former foreign currency (or another
currency which acts as a proxy for that currency), approximating the value of
some or all of the fund's portfolio securities denominated in such foreign
currency. Under certain circumstances, the fund may commit a substantial
portion or the entire value of its portfolio to the consummation of these
contracts. Price-Fleming will consider the effect such a commitment of its
portfolio to forward contracts would have on the investment program of the
fund and the flexibility of the fund to purchase additional securities.
Although forward contracts will be used primarily to protect the fund from
adverse currency movements, they also involve the risk that anticipated
currency movements will not be accurately predicted and the fund's total
return could be adversely affected as a result.
There are certain markets where it is not possible to engage in effective
foreign currency hedging. This may be true, for example, for the currencies of
various Latin American countries and other emerging markets where the foreign
exchange markets are not sufficiently developed to permit hedging activity to
take place.
_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage risk, because they enable the investor to buy or sell an
asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for a number
of reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting overall exposure to
certain markets; in an effort to enhance income; and to protect the value of
portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total return,
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Tax Consequences of Hedging. Under applicable tax law, the fund may be
required to limit its gains from hedging in foreign currency forwards,
futures, and options. Although the fund is expected to comply with such
limits, the extent to which these limits apply is subject to tax regulations
as yet unissued. Hedging may also result in the application of the
mark-to-market and straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the amount of taxable
dividends paid by the fund and could affect whether dividends paid by the fund
are classified as capital gains or ordinary income.
Lending of Portfolio Securities. Like other mutual funds, the fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of
the fund's total assets.
Portfolio Turnover. The fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The fund's
portfolio turnover rate for the fiscal year ended December 31, 1995, was
17.4%. For the fiscal period ended December 31, 1994, the fund's annualized
portfolio turnover rate was 4.6%.
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open an Account
T. Rowe Price
Investor Services
1-800-496-5304
For Existing Accounts
T. Rowe Price Variable
Annuity Service Center
1-800-469-6587
For Yields and Prices
Tele*Access(registered trademark)
1-800-638-2587
1-410-625-7676
24 hours, 7 days
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
________________________________________________________________________
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING
AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
Combined Variable Annuity Statement of Additional Information,
dated May 1, 1996, should be inserted here.
T. ROWE PRICE VARIABLE ANNUITY STATEMENT OF ADDITIONAL INFORMATION
Date: May 1, 1996
Individual Flexible Premium Deferred Variable Annuity Contract
Issued By:
Security Benefit Life Insurance Company
700 SW Harrison Street
Topeka, Kansas 66636-0001
1-800-888-2461
Mailing Address:
T. Rowe Price Variable Annuity Service Center
PO Box 750440
Topeka, Kansas 66675-0440
1-800-469-6587
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current Prospectus for the T. Rowe Price Variable
Annuity dated May 1, 1996. A copy of the Prospectus may be obtained from the
T. Rowe Price Variable Annuity Service Center by calling 1-800-469-6587 or by
writing P.O. Box 750440, Topeka, Kansas 66675-0440.
Contents
1 General Information and History
1 Distribution of the Contract
1 Limits on Premiums Paid Under Tax-Qualified Retirement Plans
2 Independent Auditors
2 Performance Information
4 Financial Statements
General Information and History
For a description of the Individual Flexible Premium Deferred Variable Annuity
Contract (the "Contract"), Security Benefit Life Insurance Company ("the
Company"), and the T. Rowe Price Variable Annuity Account (the "Separate
Account"), see the Prospectus. This Statement of Additional Information
contains information that supplements the information in the Prospectus.
Defined terms used in this Statement of Additional Information have the same
meaning as terms defined in the section entitled "Definitions" in the
Prospectus.
Safekeeping of Assets
The Company is responsible for the safekeeping of the assets of the
Subaccounts. These assets, which consist of shares of the Portfolios of the
Funds in non-certificated form, are held separate and apart from the assets of
the Company's General Account and its other separate accounts.
Distribution of the Contract
T. Rowe Price Investment Services, Inc. ("Investment Services"), a Maryland
corporation formed in 1980 as a wholly owned subsidiary of T. Rowe Price
Associates, Inc., is Principal Underwriter of the Contract. Investment
Services is registered as a broker/dealer with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. ("NASD"). The offering
of the Contracts is continuous.
Investment Services serves as Principal Underwriter under a Distribution
Agreement with the Company. Investment Services' registered representatives
are required to be authorized under applicable state regulations to make the
Contract available to its customers. Investment Services is not compensated
under its Distribution Agreement with the Company.
Limits on Premiums Paid Under Tax-Qualified Retirement Plans
Section 408
Premiums paid under a Contract used in connection with an individual
retirement annuity (IRA) that is described in Section 408 of the Internal
Revenue Code are subject to the limits on contributions to IRA's under Section
219(b) of the Internal Revenue Code. Under Section 219(b) of the Code,
contributions to an IRA are limited to the lesser of $2,000 per year or the
Owner's annual compensation. An additional $250 may be contributed if the
Owner has a spouse with little or no compensation for the year, provided
distinct accounts are maintained for the Owner and his or her spouse, and no
more than $2,000 is contributed to either account in any one year. The extent
to which an Owner may deduct contributions to an IRA depends on the gross
income of the Owner and his or her spouse for the year and whether either
participates in another employer-sponsored retirement plan.
Premiums under a Contract used in connection with a simplified employee
pension plan described in Section 408 of the Internal Revenue Code are subject
to limits under Section 402(h) of the Internal Revenue Code. Section 402(h)
currently limits employer contributions and salary reduction contributions (if
permitted) under a simplified employee pension plan to the lesser of (a) 15%
of the compensation of the participant in the Plan, or (b) $30,000. Salary
reduction contributions, if any, are subject to additional annual limits.
Independent Auditors
Ernst & Young LLP, independent accountants, perform certain accounting and
auditing services for the Company and the Separate Account. The financial
statements for the Company at December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, and the financial
statements of the Separate Account for the period from May 1, 1995 to December
31, 1995, included in this Statement of Additional Information have been
audited by Ernst & Young LLP, as set forth in their report thereon appearing
on page 6 herein.
Performance Information
Performance information for the Subaccounts of the Separate Account, including
the yield and total return of all Subaccounts, may appear in advertisements,
reports, and promotional literature provided to current or prospective Owners.
Quotations of yield for the Subaccounts will be based on all investment income
per Accumulation Unit earned during a particular 30-day period, less expenses
accrued during the period ("net investment income"), and will be computed by
dividing net investment income by the value of the Accumulation Unit on the
last day of the period, according to the following formula:
YIELD =2[(a - b + 1)6 - 1]
_____
cd
where
a = net investment income earned during the period by the
Portfolio attributable to shares owned by the Subaccount,
b = expenses accrued for the period (net of any reimbursements),
c = the average daily number of Accumulation Units outstanding
during the period that were entitled to receive dividends, and
d = the maximum offering price per Accumulation Unit on the last
day of the period.
For the 30-day period ended December 31, 1995, the yield of the Limited-Term
Bond Subaccount was 5.66%.
Quotations of average annual total return for any Subaccount will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in a Contract over a period of one, five, and ten years (or, if
less, up to the life of the Subaccount), calculated pursuant to the following
formula: P(1 + T)n = ERV (where P = a hypothetical initial payment of $1,000,
T = the average annual total return, n = the number of years, and ERV = the
ending redeemable value of a hypothetical $1,000 payment made at the beginning
of the period). All total return figures reflect the deduction of the
mortality and expense risk charge. Quotations of total return may
simultaneously be shown for other periods.
For the period between April 1, 1995 (date of inception) and December 31,
1995, the total return for New America Growth Subaccount, International Stock
Subaccount, Equity Income Subaccount, Personal Strategy Balanced Subaccount,
and Limited-Term Bond Subaccount was 34.00%, 11.90%, 23.60%, 19.00%, and
6.40%, respectively.
For the period between April 1, 1995 (date of inception) and December 31,
1995, the average annual total return for New America Growth Subaccount,
International Stock Subaccount, Equity Income Subaccount, Personal Strategy
Balanced Subaccount, and Limited-Term Bond Subaccount was 47.73%, 16.17%,
32.65%, 26.10%, and 8.62%, respectively.
Although the Contract was not available for purchase until April 1, 1995, the
underlying investment vehicles of the Contract, the Portfolios, have been in
existence prior to that date. Performance information for the Contract may
also include quotations of average annual total return and total return for
periods, beginning prior to the availability of the Contract, that incorporate
the performance of the Portfolios.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Morgan Stanley Capital International's EAFE Index, or other indices that
measure performance of a pertinent group of securities so that investors may
compare a Subaccount's results with those of a group of securities widely
regarded by investors as representative of the securities markets in general
or representative of a particular type of security; (ii) other variable
annuity separate accounts, mutual funds, or other investment products tracked
by Lipper Analytical Services, a widely used independent research firm which
ranks mutual funds and other investment companies by overall performance,
investment objectives, and assets, or tracked by The Variable Annuity Research
and Data Service ("VARDS"), an independent service which monitors and ranks
the performance of variable annuity issues by investment objectives on an
industry-wide basis or tracked by Morningstar, Inc., a widely used independent
research firm which rates mutual funds and variable annuities by overall
performance, investment objectives and assets, or tracked by other services,
companies, publications or persons who rank such investment companies on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment
in the Contract. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management
costs and expenses.
Performance information for any Subaccount reflects only the performance of a
hypothetical Contract under which an Owner's Contract Value is allocated to a
Subaccount during a particular time period on which the calculations are
based. Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the Portfolio of the
Funds in which the Subaccount invests, and the market conditions during the
given time period, and should not be considered as a representation of what
may be achieved in the future.
Reports and promotional literature may also contain other information
including: (i) the ranking of any Subaccount derived from rankings of variable
annuity separate accounts, insurance products funds, or other investment
products tracked by Lipper Analytical Services, Morningstar, Inc., or by other
rating services, companies, publications, or other persons who rank separate
accounts or other investment products on overall performance or other
criteria, and (ii) the effect of a tax-deferred compounding on a Subaccount's
investment returns, or returns in general, which may be illustrated by graphs,
charts, or otherwise, and which may include a comparison, at various points in
time, of the return from an investment in a Contract (or returns in general)
on a tax-deferred basis (assuming one or more tax rates) with the return on a
taxable basis.
Financial Statements
The financial statements of the Company at December 31, 1995 and 1994, and for
each of the three years in the period ended December 31, 1995, and the
financial statements of the Separate Account for the period from May 1, 1995
to December 31, 1995, are set forth herein, starting on page 6.
The financial statements of the Company, which are included in this Statement
of Additional Information, should be considered only as bearing on the ability
of the Company to meet its obligations under the Contracts. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account.
Financial Statements
T. Rowe Price Variable Annuity
Period from May 1, 1995 (inception) to December 31, 1995 with Report of
Independent Auditors
Contents
5 Report of Independent Auditors - Separate Account
Audited Financial Statements - Separate Account
6 Balance Sheets
7 Statements of Operations and Changes in Net Assets
8 Notes to Financial Statements
Report of Independent Auditors
The Contract Owners of T. Rowe Price Variable Annuity and The Board of
Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of T. Rowe Price Variable
Annuity (the Company) as of December 31, 1995, and the related statement of
operations and changes in net assets for the period from May 1, 1995
(inception) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 1995,
by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of T. Rowe Price Variable
Annuity at December 31, 1995, and the results of its operations and changes in
its net assets for the period from May 1, 1995 (inception) to December 31,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
February 2, 1996
T. Rowe Price Variable Annuity
_____________________________________________________________________________
Balance Sheets
_____________________________________________________________________________
December 31, 1995
(Dollars In Thousands)
_____________________________________________________________________________
Assets
Investments:
T. Rowe Price Portfolios:
New America Growth Portfolio - 293,778 shares at
net asset value of $15.23 per share (cost, $4,294)$ 4,474
International Stock Portfolio - 217,083 shares at
net asset value of $11.26 per share (cost, $2,367) 2,444
Equity Income Portfolio - 342,348 shares at
net asset value of $13.21 per share (cost, $4,346) 4,522
Personal Strategy Balanced Portfolio - 141,994 shares at
net asset value of $12.43 per share (cost, $1,724) 1,765
Limited-Term Bond Portfolio - 182,590 shares at
net asset value of $5.06 per share (cost, $917) 924
Actuarial risk fees receivable 1
_____________________________________________________________________________
Total assets $14,130
Net assets
Net assets are represented by (Note 3):
Number Unit
of Units Value
_____________________________________________________________________________
New America Growth Subaccount:
Accumulation units 333,934 $13.40 $ 4,474
International Stock Subaccount:
Accumulation units 218,427 11.19 2,444
Equity Income Subaccount:
Accumulation units 365,712 12.37 4,522
Personal Strategy Balanced Subaccount:
Accumulation units 148,349 11.90 1,765
Limited-Term Bond Subaccount:
Accumulation units 86,891 10.64 925
_____________________________________________________________________________
Total net assets $14,130
See accompanying notes.
T. Rowe Price Variable Annuity
_____________________________________________________________________________
Statement of Operations and Changes in Net Assets
_____________________________________________________________________________
Period from May 1, 1995 (inception) to December 31, 1995
(In Thousands)
_____________________________________________________________________________
New Inter PersonalLimited
America national Equity Strategy Term
Growth Stock Income Balanced Bond
Sub- Sub- Sub- Sub- Sub-
account account account accountaccount
_____________________________________________________________________________
Dividend distributions $- $- $44 $16 $8
Expenses (Note 2):
Mortality and expense
risk fee (4) (3) (4) (1) (1)
Net investment income (loss)(4) (3) 40 15 7
Realized gain (loss) on
investments 48 (8) 41 7 1
Unrealized appreciation on
investments 180 77 176 41 7
Net realized and unrealized
gain on investments 228 69 217 48 8
Net increase in net assets
resulting from
operations 224 66 257 63 15
Net assets at beginning of
period - - - - -
Variable annuity deposits
(Notes 2 and 3) 4,279 2,410 4,348 1,714 1,182
Terminations and withdrawals
(Notes 2 and 3) (29) (32) (83) (12) (272)
_____________________________________________________________________________
Net assets at
end of period $4,474 $2,444 $4,522 $1,765 $925
See accompanying notes.
Notes to Financial Statements
December 31, 1995
1. Organization and Significant Accounting Policies
Organization
T. Rowe Price Variable Annuity (the Account) is a separate account of Security
Benefit Life Insurance Company (SBL). The Account is registered as a unit
investment trust under the Investment Company Act of 1940, as amended. All
deposits received by the Account have been invested in one of the portfolios
of either T. Rowe Price Equity Series, Inc., T. Rowe Price Fixed Income
Series, Inc. or T. Rowe Price International Series, Inc., mutual funds not
otherwise available to the public. As directed by the owners, amounts
deposited are invested in shares of New America Growth Portfolio-emphasis on
long-term capital growth through investments in common stocks of domestic
companies, International Stock Portfolio-emphasis on long-term capital growth
through investments in common stocks of established foreign companies, Equity
Income Portfolio-emphasis on substantial dividend income and capital
appreciation by investing primarily in dividend-paying common stocks, Personal
Strategy Balanced Portfolio-emphasis on both capital appreciation and income,
and Limited-Term Bond Portfolio-emphasis on income with moderate price
fluctuation by investing in short- and intermediate-term securities.
Under the terms of the investment advisory contracts, portfolio investments of
the mutual fund are made by T. Rowe Price Associates, Inc. for each portfolio
except the T. Rowe Price International Stock Portfolio, which is advised by
Rowe Price-Fleming International, Inc., an affiliate of T. Rowe Price
Associates, Inc.
Investment Valuation
Investments in mutual fund shares are carried in the balance sheet at market
value (net asset value of the underlying mutual fund). The first-in, first-out
cost method is used to determine gains and losses. Security transactions are
accounted for on the trade date.
The cost of investments purchased and proceeds from investments sold during
the period from May 1, 1995 (inception) to December 31,1995 were as follows:
Cost of Proceeds
Purchases From Sales
_____________________________________________________________________________
(In Thousands)
New America Growth Portfolio $4,685 $439
International Stock Portfolio 2,698 323
Equity Income Portfolio 4,967 662
Personal Strategy Balanced Portfolio 1,952 235
Limited-Term Bond Portfolio 1,237 321
Annuity Reserves
As of December 31, 1995, annuity reserves have not been established because
there are no contracts which have matured and are in the payout stage. Such
reserves would be computed on the basis of published mortality tables using
assumed interest rates that will provide reserves as prescribed by law. In
cases where the payout option selected is life contingent, SBL periodically
recalculates the required annuity reserves, and any resulting adjustment is
either charged or credited to SBL and not to the Account.
Reinvestment of Dividends
Dividend and capital gains distributions paid by the mutual fund to the
Account are reinvested in additional shares of each respective Fund. Dividend
income and capital gains distributions are recorded as income on the
ex-dividend date.
Federal Income Taxes
Under current law, no federal income taxes are payable with respect to the
Account.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
2. Variable Annuity Contract Charges
Mortality and expense risks assumed by SBL are compensated for by a fee
equivalent to an annual rate of .55% of the average daily net assets of each
account.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law, either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
3. Summary of Unit Transactions
Unit transactions during the period from May 1, 1995 (inception) to December
31, 1995 were as follows (in thousands):
New America Growth Subaccount:
Variable annuity deposits $336
Terminations and withdrawals 2
International Stock Subaccount:
Variable annuity deposits 221
Terminations and withdrawals 3
Equity Income Subaccount:
Variable annuity deposits 373
Terminations and withdrawals 7
Personal Strategy Balanced Subaccount:
Variable annuity deposits 149
Terminations and withdrawals 1
Limited-Term Bond Subaccount:
Variable annuity deposits 113
Terminations and withdrawals 26
Financial Statements
Security Benefit Life Insurance Company
Years ended December 31, 1995, 1994 and 1993
with Report of Independent Auditors
Contents
12 Report of Independent Auditors - Company
Audited Financial Statements - Company
13 Balance Sheets
15 Statements of Operation
16 Statements of Surplus
17 Statements of Cash Flows
18 Notes to Financial Statements
Report of Independent Auditors
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying balance sheets of Security Benefit Life
Insurance Company (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, surplus and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Benefit Life
Insurance Company at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles
and with reporting practices prescribed or permitted by the Kansas Insurance
Department.
ERNST & YOUNG LLP
Kansas City, Missouri
February 2, 1996
Security Benefit Life Insurance Company
_____________________________________________________________________________
Balance Sheets
_____________________________________________________________________________
December 31
1995 1994
(In Thousands)
_____________________________________________________________________________
Assets
Investments (Notes 2 and 5):
Fixed maturities, at amortized cost
(fair value: 1995 - $2,340,910;
1994 - $1,987,040) $2,294,802 $2,160,550
Equity securities:
Preferred stock, at cost
(fair value: 1995 - $4,490; 1994 - $6,423) 4,044 5,979
Common stock, at fair value
(cost: 1995 - $8,309; 1994 - $2,509) 8,346 3,071
_____________________________________________________________________________
12,390 9,050
Affiliated entities 29,590 21,028
Mortgage loans 70,777 90,509
Real estate, less accumulated depreciation
(1995 - $10,864; 1994 - $10,821):
Home office properties 10,027 9,953
Investment properties 11,591 14,576
_____________________________________________________________________________
21,618 24,529
Policy loans 100,452 92,130
Short-term investments 992 50,406
Other invested assets 40,309 27,402
_____________________________________________________________________________
Total investments 2,570,930 2,475,604
Cash and certificates of deposit 12,059 10,820
Premiums deferred and uncollected 856 9,101
Investment income due and accrued 30,577 25,857
Other assets 16,894 14,088
Separate account assets (Note 3) 2,065,306 1,517,627
_____________________________________________________________________________
$4,696,622 $4,053,097
Security Benefit Life Insurance Company
_____________________________________________________________________________
Balance Sheets
_____________________________________________________________________________
December 31
1995 1994
(In Thousands)
_____________________________________________________________________________
Liabilities and surplus
Policy reserves (Note 6):
Life $ 337,289 $ 355,338
Annuity 2,006,799 1,963,066
Accident and health 1,067 1,204
Policy proceeds left at interest 17,849 19,600
_____________________________________________________________________________
2,363,004 2,339,208
Policy and contract claims 9,602 8,058
Other policyholders' funds:
Dividend accumulations 19,525 19,697
Dividends payable in subsequent year 2,604 2,787
Premium deposit funds and other 1,331 2,446
_____________________________________________________________________________
23,460 24,930
Other liabilities, including income taxes of
$9,851 in 1995 and $3,111 in 1994 19,275 17,762
Net transfers due from separate accounts (Note 3)(38,615) (40,034)
Asset valuation reserve 33,478 27,834
Interest maintenance reserve 13,443 6,986
Separate account liabilities (Note 3) 2,065,306 1,517,627
_____________________________________________________________________________
Total liabilities 4,488,953 3,902,371
Commitments and contingencies (Notes 6 and 9)
Surplus:
Contingency surplus 900 900
Unassigned surplus 206,769 149,826
_____________________________________________________________________________
Total surplus 207,669 150,726
_____________________________________________________________________________
$4,696,622 $4,053,097
See accompanying notes.
Security Benefit Life Insurance Company
_____________________________________________________________________________
Statements of Operations
_____________________________________________________________________________
Year ended December 31
1995 1994 1993
(In Thousands)
______________________________________________________________________________
Revenues:
Annuity considerations and deposits $484,907 $530,530 $467,396
Individual life premiums (Note 6) (15,177) 49,837 59,373
Group life and health premiums 18,936 18,435 15,632
Reinsurance premiums 694 944 988
Amortization of interest maintenance reserve1,394 1,077 804
Net investment income (Note 2) 185,605 173,391 172,879
Other income 32,722 27,972 26,431
_____________________________________________________________________________
Total revenues 709,081 802,186 743,503
Benefits and expenses:
Death benefits 32,164 29,368 34,990
Annuity benefits 36,902 36,587 41,743
Accident and health and disability benefits2,053 2,177 2,912
Surrender benefits 352,206 275,283 229,554
Increase in reserves and funds
for all policies 164,517 333,749 319,457
Other benefits 13,811 12,126 13,407
Commissions 34,979 39,059 41,116
Other insurance operating expenses 32,699 31,994 29,226
_____________________________________________________________________________
Total benefits and expenses 669,331 760,343 712,405
Gain from operations before dividends to
policyholders, federal income taxes and net
realized losses 39,750 41,843 31,098
Dividends to policyholders 2,391 2,689 2,725
_____________________________________________________________________________
Gain from operations before federal income
taxes and net realized losses 37,359 39,154 28,373
Federal income taxes (Note 7) 7,520 10,678 4,569
_____________________________________________________________________________
Gain from operations before net realized
losses 29,839 28,476 23,804
Net realized losses (Note 2) (1,083) (1,122) (3,280)
_____________________________________________________________________________
Net income $ 28,756$ 27,354 $ 20,524
See accompanying notes.
Security Benefit Life Insurance Company
_____________________________________________________________________________
Statements of Surplus
_____________________________________________________________________________
Year ended December 31
1995 1994 1993
(In Thousands)
_____________________________________________________________________________
Balance at beginning of year $150,726 $128,785 $106,000
Add (deduct):
Net income 28,756 27,354 20,524
Increase in asset valuation (5,644) (2,958) (4,854)
Unrealized gain on investments 2,571 546 6,027
Reinsurance transaction,
net of tax (Note 6) 33,270 - -
Other (2,010) (3,001) 1,088
_____________________________________________________________________________
56,943 21,941 22,785
_____________________________________________________________________________
Balance at end of year $207,669 $150,726 $128,785
See accompanying notes
Security Benefit Life Insurance Company
_____________________________________________________________________________
Statements of Cash Flows
_____________________________________________________________________________
Year ended December 31
1995 1994 1993
(In Thousands)
_____________________________________________________________________________
Operating activities
Net income $ 28,756 $ 27,354 $ 20,524
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in investment income due and
accrued (4,720) (577) (4,147)
Increase in policy reserves 23,796 163,700 138,931
Accretion of discount on investments (3,400) (3,580) (5,135)
Amortization of premium on investments 9,725 15,623 16,440
Reinsurance transaction, net of tax 33,270 - -
Other 8,399 1,529 (16,820)
_____________________________________________________________________________
Net cash provided by operating activities95,826 204,049 149,793
Investing activities
Investments sold or matured:
Fixed maturities 566,887 460,070 1,251,398
Equity securities 10,242 3,830 2,103
Mortgage loans 22,953 20,432 16,969
Real estate 3,173 2,782 1,293
Short-term investments 229,871 834,082 2,416,685
Other invested assets 22,053 3,602 2,458
_____________________________________________________________________________
855,1791,324,798 3,690,906
Acquisition of investments:
Fixed maturities 706,581 606,368 1,403,541
Equity securities 19,500 4,627 741
Mortgage loans 2,939 33,516 12,021
Real estate 1,511 554 448
Short-term investments 180,259 854,833 2,426,336
Other invested assets 30,654 17,036 875
_____________________________________________________________________________
941,4441,516,934 3,843,962
Net increase in policy loans (8,322) (5,579) (2,212)
_____________________________________________________________________________
Net cash used in investing activities (94,587)(197,715) (155,268)
Increase (decrease) in cash and
certificates of deposit 1,239 6,334 (5,475)
_____________________________________________________________________________
Cash and certificates of deposit
at beginning of year 10,820 4,486 9,961
Cash and certificates of deposit
at end of year $ 12,059 $ 10,820 $ 4,486
_____________________________________________________________________________
Supplemental disclosures of
cash flow information
Cash paid for federal income taxes $ 9,055 $ 8,851 $ 6,284
_____________________________________________________________________________
Supplemental schedule of noncash
investing and financing activities
Conversion of mortgage loans to
real estate owned $ - $ 2,350 $ 673
See accompanying notes.
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Organization
Security Benefit Life Insurance Company (the Company) is a Kansas-domiciled
mutual life insurance company licensed to sell insurance products in 49
states. The Company offers a diversified portfolio of individual and group
annuities, ordinary life, and mutual fund products through multiple
distribution channels. In recent years, the Company's new business activities
have increasingly been concentrated in the individual flexible premium
variable annuity markets.
Basis of Presentation
The financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the National Association of Insurance
Commissioners (NAIC) and the Kansas Insurance Department. "Prescribed"
statutory accounting practices include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future.
The NAIC is currently in the process of recodifying statutory accounting
practices, the result of which is expected to constitute the only source of
prescribed statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1997, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory financial
statements. Statutory accounting practices presently are regarded as generally
accepted accounting principles for mutual life insurance companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises." Under this
Interpretation, financial statements of mutual life insurance companies
prepared on the basis of statutory accounting principles no longer will be
considered to be prepared in conformity with generally accepted accounting
principles. In January 1995, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 120, "Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts," and the American Institute of Certified Public
Accountants issued its Statement of Position No. 95-1, "Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises," which define
generally accepted accounting principles for mutual life insurance
enterprises. Interpretation No. 40, SFAS No. 120 and Statement of Position No.
95-1 are concurrently effective for fiscal years beginning after December 15,
1995.
The Company has not yet determined whether it will continue to file statutory
financial statements with the Securities and Exchange Commission as currently
permitted by Regulation S-X, Rule 7-02(b) or file financial statements
prepared in accordance with all applicable authoritative accounting
pronouncements that define generally accepted accounting principles for all
enterprises. The Company has assessed the impact of FASB Interpretation No.
40, SFAS No. 120 and Statement of Position No. 95-1, and estimates the
adoption will result in an increase to surplus of approximately $100 million.
Investments
Investments are valued as prescribed by the NAIC.
Fixed maturities are reported at cost, adjusted for amortization of discount
or premium using the effective interest method. For mortgage-backed fixed
maturities, anticipated prepayments are considered using market consensus
prepayment speeds when determining the amortization of discount or premium.
Adjustments to discount or premium resulting when actual prepayments differ
substantially from estimates are determined using the retrospective method.
Preferred stocks in good standing are carried at cost. Bonds and preferred
stocks not in good standing are carried at market value. Common stocks are
valued at market except investments in stocks of unconsolidated subsidiaries,
which are carried at cost adjusted to reflect subsequent operating results.
Home office property (including the portion reported as investment real
estate) is reported at 1989 appraised value less accumulated depreciation as
permitted by the Kansas Insurance Department. Investment real estate or
property acquired in satisfaction of debt is reported at the lower of
depreciated cost, less encumbrances, or estimated market value. Other
investments are reported on the equity basis. Policy loans are stated at the
aggregate unpaid balance. Mortgage loans on real estate are carried at the
aggregate unpaid balance adjusted for any unamortized discount or premium.
The Asset Valuation Reserve (AVR) is computed in accordance with the formula
prescribed by the NAIC and represents a provision for possible fluctuations in
the value of bonds, equity securities, mortgage loans, and other invested
assets. Changes to the AVR are charged or credited directly to unassigned
surplus.
Realized gains and losses are determined on a specific identification basis
and are reported in income net of related federal income tax. Under a formula
prescribed by the NAIC, the Company reports an Interest Maintenance Reserve
(IMR) that represents the net accumulated unamortized realized capital gains
and losses on sales of fixed income investments, principally bonds and
mortgage loans, attributable to changes in the general level of interest
rates. Such gains or losses are amortized into income on a straight-line basis
over the remaining period to maturity based on groupings of individual
securities sold in five-year bands.
The investment in Security Benefit Group, Inc. (SBG), a wholly-owned
subsidiary, is reported on an equity basis, as permitted by the Kansas
Insurance Department. Changes in SBG's equity are reflected as unrealized
gains (losses) on investments and are accounted for through surplus and
investment reserves as described above. Dividends received from SBG are
recorded as investment income when received.
Reserves for Life and Annuity Policies
The reserves for life and annuity policies are developed by actuarial methods,
and the life reserves are established and maintained on the basis of published
mortality tables. Life and annuity reserves are computed using assumed
interest rates and valuation methods that will provide, in the aggregate,
reserves that are greater than the minimum valuation required by law and
greater than the guaranteed policy cash values.
For life policies, the 1941, 1958 and 1980 CSO mortality tables have been used
principally, and interest assumptions range from 2% to 51_2%. For annuity
contracts, the PAT, 1971 IAM, 1983a, and 1980 CSO mortality tables have been
used principally, and interest assumptions range from 21_2% to 111_2%.
Recognition of Premium Revenues and Acquisition Costs
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and certificates of deposits, short-term investments: The carrying
amounts reported in the balance sheet for these instruments approximate their
fair values.
Investment securities: The fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality and
maturity of the investments. The fair values for equity securities are based
on quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans and policy
loans are estimated using discounted cash flow analyses, using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of the
calculations.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using the assumption
reinsurance method, whereby the amount of statutory profit the assuming
company would realize from the business is calculated. Those amounts are then
discounted at a rate of return commensurate with the rate presently offered by
the Company on similar contracts.
Use of Estimates
The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform to the 1995 presentation.
2. Investments
Information as to the amortized cost, gross unrealized gains and losses and
fair values of the Company's portfolio of fixed maturities at December 31,
1995 and 1994 is as follows:
December 31, 1995
_____________________________________________________________________________
Gross Gross
AmortizedUnrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $1,192 $206 $ - $1,398
Obligations of states
and political subdivisions 90,353 1,725 140 91,938
Corporate securities 1,044,051 36,090 13,189 1,066,952
Mortgage-backed securities1,159,206 23,299 1,883 1,180,622
_____________________________________________________________________________
Totals $2,294,802 $61,320 $15,212$2,340,910
December 31, 1994
Gross Gross
AmortizedUnrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
U.S. Treasury securities and
obligations of U.S. government
corporations
and agencies $10,490 $55 $622 $9,923
Obligations of states and
political subdivisions 21,147 - 2,615 18,532
Corporate securities 773,714 1,809 64,494 711,029
Mortgage-backed securities1,355,199 200 107,843 1,247,556
_____________________________________________________________________________
Totals $2,160,550 $2,064 $175,574$1,987,040
The amortized cost and fair value of debt securities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Due in one year or less $12,575 $12,716
Due after one year through five years 239,718 244,165
Due after five years through 10 years 292,943 301,247
Due after 10 years 590,360 602,160
_____________________________________________________________________________
1,135,596 1,160,288
Mortgage-backed securities 1,159,206 1,180,622
_____________________________________________________________________________
$2,294,802 $2,340,910
The cost and the fair values of the Company's equity securities at December
31, 1995 and 1994 are as follows:
December 31, 1995
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Preferred stock $4,044 $446 $- $4,490
_____________________________________________________________________________
Common stock 8,309 123 86 8,346
_____________________________________________________________________________
$12,353 $569 $86 $12,836
December 31, 1994
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Preferred stock $5,979 $568 $124 $6,423
_____________________________________________________________________________
Common stock 2,509 599 37 3,071
_____________________________________________________________________________
$8,488 $1,167 $161 $9,494
Proceeds from sales of fixed maturities and related realized gains and losses,
including valuation adjustments, are as follows:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Proceeds from sales $293,864 $119,773 $891,044
_____________________________________________________________________________
Gross realized gains 4,294 4,966 35,955
_____________________________________________________________________________
Gross realized losses 2,971 4,813 21,375
The composition of the Company's portfolio of fixed maturity securities by
quality rating at December 31, 1995 is as follows:
Quality Rating Amount %
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
AAA $1,248,468 54.4%
_____________________________________________________________________________
AA 119,533 5.2
_____________________________________________________________________________
A 314,283 13.7
_____________________________________________________________________________
BBB 431,147 18.8
_____________________________________________________________________________
Noninvestment grade 181,371 7.9
_____________________________________________________________________________
$2,294,802 100.0%
The Company has a diversified portfolio of commercial and residential mortgage
loans outstanding in 26 states. The loans are somewhat geographically
concentrated in the midwestern and southwestern United States with the largest
outstanding balances at December 31, 1995 being in the states of Kansas (36%)
and Texas (13%).
Major categories of net investment income are summarized as follows:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Interest on fixed maturities $165,742 $151,688 $150,930
Interest on mortgage loans 7,656 7,552 7,835
Real estate income 3,524 3,563 3,451
Interest on policy loans 5,934 5,446 5,174
Dividends from subsidiary (Note 5) 4,200 5,200 8,300
Other 4,749 5,857 2,705
_____________________________________________________________________________
Total investment income 191,805 179,306 178,395
Investment expenses 6,200 5,915 5,516
_____________________________________________________________________________
Net investment income $185,605 $173,391 $172,879
The Company did not hold any investments that individually exceeded 10% of
surplus at December 31, 1995 except for securities guaranteed by the U.S.
government or an agency of the U.S. government.
Net realized losses consist of the following:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Fixed maturities $ 1,323 $ 153 $14,580
Equity securities 607 (62) (5,179)
Other 566 (2,401) (1,934)
_____________________________________________________________________________
Total realized gains (losses) 2,496 (2,310) 7,467
Income tax expense (benefit) (4,272) (3,593) 1,937
_____________________________________________________________________________
6,768 1,283 5,530
Transferred to interest maintenance
reserve, net of tax 7,851 (2,405) (8,810)
_____________________________________________________________________________
$(1,083) $(1,122) $(3,280)
The Company's principal objective in holding derivatives for purposes other
than trading is asset-liability management. The operations of the Company are
subject to risk of interest rate fluctuations to the extent that there is a
difference between the amount of the Company's interest-earning assets and
interest-bearing liabilities that mature in specified periods. The principal
objective of the Company's asset-liability management activities is to provide
maximum levels of net interest income while maintaining acceptable levels of
interest rate and liquidity risk and facilitating the funding needs of the
Company. To achieve that objective, the Company uses financial futures
instruments and interest rate exchange agreements. Financial futures contracts
are commitments to either purchase or sell a financial instrument at a
specific future date for a specified price and may be settled in cash or
through delivery of the financial instrument. Interest rate exchange
agreements generally involve the exchange of fixed and floating rate interest
payments, without an exchange of the underlying principal.
If a financial futures contract that is used to manage interest rate risk is
terminated early or results in a single payment based on the change in value
of an underlying asset, any resulting gain or loss is deferred and amortized
as an adjustment to yield of the designated asset over its remaining life.
Deferred losses totaling $3.9 million and deferred gains totaling $1.8 million
at December 31, 1995 and 1994, respectively, resulting from terminated and
expired futures contracts are included in fixed maturities and will be
amortized as an adjustment to interest income. The notional amount of
outstanding agreements to sell securities was $79 million and $51 million at
December 31, 1995 and 1994, respectively.
For interest rate exchange agreements, the differential of interest to be paid
or received is accrued as interest rates change and recognized as an
adjustment to interest income. The related amount payable to or receivable
from counterparties is included in investment income due and accrued. These
amounts were insignificant to the Company. There were no closed or terminated
agreements during 1995 or 1994. The fair values of the interest rate exchange
agreements are not recognized in the financial statements. The notional amount
of outstanding agreements was $50 million at December 31, 1995. Also, as of
December 31, 1995, these agreements have maturities ranging from March 1997 to
June 2005. Under these agreements, the Company receives variable rates based
on the one- and three-month LIBOR and pays fixed rates ranging from 6.430% to
7.215%.
3. Separate Account Transactions
The separate accounts are established in conformity with Kansas Insurance Laws
and are not chargeable with liabilities that arise from any other business of
the Company. Premiums designated for investment in the separate accounts are
included in income with corresponding liability increases included in
benefits. Separate account surplus created through the use of Commissioners'
Annuity Reserve Valuation Method is reported as an unsettled transfer from the
separate account to the general account. Assets and liabilities of the
separate accounts, representing net deposits and accumulated net investment
earnings held primarily for the benefit of contract holders, are shown as
separate captions in the balance sheet. Assets held in the separate accounts
are carried at quoted market values, or where quoted market values are not
available, at fair market value as determined by the fund investment managers.
Security Management Company, a wholly-owned subsidiary of SBG, serves as the
investment manager for the SBL fund separate account assets. T. Rowe Price
separate account assets are managed by T. Rowe Price Associates, Inc. (or an
affiliated company) and the Parkstone separate account assets are managed by
First of America Investment Corporation. The Company receives administrative
and risk fees relating to amounts invested in the separate accounts.
The statement of operations includes the following separate account
transactions, which have no effect on net income:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Annuity considerations
and deposits $275,257 $256,061 $235,624
_____________________________________________________________________________
Benefits:
Benefits and other charges $127,205 $83,933 $52,283
Net transfers to
separate accounts 148,052 172,128 183,341
_____________________________________________________________________________
$275,257 $256,061 $235,624
4. Employee Benefit Plans
Substantially all Company employees are covered by a qualified,
noncontributory defined benefit pension plan sponsored by the Company and
certain of its affiliates. Benefits are based on years of service and an
employee's average compensation during the last five years of service. The
Company's policy has been to contribute funds to the plan in amounts required
to maintain sufficient plan assets to provide for accrued benefits. In
applying this general policy, the Company considers, among other factors, the
recommendations of its independent consulting actuaries, the requirements of
federal pension law and the limitations on deductibility imposed by federal
income tax law.
The Company records pension cost in accordance with the provisions of SFAS No.
87, "Employers' Accounting for Pensions." Pension cost for the year is
allocated to each sponsoring company based on the ratio of salary costs for
each company to total salary cost. Pension cost allocated to the Company for
1995, 1994 and 1993 was $151,000, $218,000, and $139,000, respectively.
Separate information disaggregated by sponsoring employer company is not
available on the components of the net pension cost or on the funded status of
the plan. Pension cost for the total plan for 1995, 1994 and 1993 is
summarized as follows:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Service cost $528 $679 $571
Interest cost 508 535 483
Actual return on plan assets (1,568) 310 (966)
Net amortization and deferral 900 (949) 277
_____________________________________________________________________________
Net pension cost $368 $575 $365
The funded status of the total plan as of December 31, 1995 and 1994 was as
follows:
December 31
_____________________________________________________________________________
1995 1994
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Actuarial present value of
benefit obligations:
Vested benefit obligation $(5,243) $(4,589)
Non-vested benefit obligation (165) (157)
_____________________________________________________________________________
Accumulated benefit obligation (5,408) (4,746)
Excess of projected benefit obligation
over accumulated benefit obligation (2,865) (2,405)
_____________________________________________________________________________
Projected benefit obligation (8,273) (7,151)
Plan assets at fair market value 8,342 6,514
_____________________________________________________________________________
Plan assets greater than (less than)
projected benefit obligation 69 (637)
Unrecognized net loss 1,560 1,971
Unrecognized prior service cost 758 815
Unrecognized net asset established at
the date of initial application (2,025) (2,209)
_____________________________________________________________________________
Net prepaid (accrued) pension expense $362 $(60)
Assumptions were as follows:
1995 1994 1993
_____________________________________________________________________________
Weighted average discount rate 7.5% 8.5% 7.5%
_____________________________________________________________________________
Weighted average compensation rate
for participants age 45 and older 4.5 4.5 4.5
_____________________________________________________________________________
Weighted average expected
long-term return on plan assets 9.0 9.0 9.0
Compensation rates that vary by age for participants under age 45 were used in
determining the actuarial present value of the projected benefit obligation in
1995. Plan assets are invested in a diversified portfolio of affiliated mutual
funds that invest in equity and debt securities.
In addition to the Company's defined benefit pension plan, the Company and
certain of its affiliates provide certain medical and life insurance benefits
to full-time employees who have retired after the age of 55 with five years of
service. The plan is contributory, with retiree contributions adjusted
annually, and contains other cost-sharing features, such as deductibles and
coinsurance. Contributions vary based on the employee's years of service
earned after age 40. The Company and its affiliates' portion of the costs is
frozen after 1996 with all future cost increases passed on to the retirees.
Retirees in the plan prior to July 1, 1993 are covered 100% by the Company.
The Company records net periodic cost for non-pension postretirement benefits
in accordance with the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The net periodic cost is
allocated among the Company and its affiliates based on the number of eligible
employees. The net periodic cost allocated to the Company was $198,000,
$171,000 and $166,000 for 1995, 1994 and 1993, respectively.
Separate information disaggregated by sponsoring employer company is not
available on the components of the net retiree medical care and life insurance
costs or on the funded status of the plan. Retiree medical care and life
insurance costs for the total plan for 1995, 1994 and 1993 are summarized as
follows:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Service cost $151 $116 $118
Interest cost 305 275 233
_____________________________________________________________________________
$456 $391 $351
The funded status of the total plan as of December 31, 1995 and 1994 was as
follows:
December 31
1995 1994
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Accumulated postretirement benefit obligation:
Retirees $(2,514) $(2,418)
Active participants:
Retirement eligible (632) (620)
Others (1,035) (706)
_____________________________________________________________________________
(4,181) (3,744)
Unrecognized net (gain) loss 67 (30)
_____________________________________________________________________________
Accrued postretirement benefit cost $(4,114) $(3,774)
The annual assumed rate of increase in the per capita cost of covered benefits
is 11% for 1995 and is assumed to decrease gradually to 5% for 2001 and remain
at that level thereafter. The health care cost trend rate has a significant
effect on the amount reported. For example, increasing the assumed health care
cost trend rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December 31, 1995 by
$233,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1995 by $60,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5%, 8.5% and 7.5% at December 31, 1995, 1994 and 1993,
respectively.
The Company has a profit-sharing and savings plan for which substantially all
employees are eligible after one year of employment with the Company.
Contributions for profit sharing are based on a formula established by the
Board of Directors with pro rata allocation among employees based on salaries.
The savings plan is a tax-deferred 401(k) retirement plan. Employees may
contribute up to 10% of their eligible compensation. The Company matches 50%
of the first 6% of the employee contributions. Employee contributions are
fully vested, and Company contributions are vested over a five-year period.
Company contributions to the profit-sharing and savings plan charged to
operations were $721,000, $371,000 and $463,000 for 1995 1994 and 1993,
respectively.
5. Related-Party Transactions
SBG provides certain management and administrative services to the Company.
During 1995, 1994 and 1993, the Company incurred $18,654,000, $16,852,000 and
$14,729,000, respectively, for such services. The Company leases certain
office space to SBG for which annual rent income of $1,133,000 was recorded in
1995, 1994 and 1993. Additionally, in 1995, 1994 and 1993, the Company paid
commissions of $2,546,000, $2,700,000, $2,985,000, respectively, to Security
Distributors, Inc., a wholly-owned subsidiary of SBG.
Effective January 2, 1995, the Company acquired, pursuant to an assumption
reinsurance agreement from Pioneer National Life Insurance Company (PNL), then
a wholly-owned subsidiary of SBG, substantially all of PNL's life insurance
business. Concurrent with the assumption reinsurance agreement, the Company
entered into a 100% coinsurance agreement with PNL reinsuring the remaining
business. The Company did not recognize any gain or loss on the above
transactions. The Company received $2.9 million of assets as consideration for
the liabilities assumed by the Company in the assumption reinsurance and
coinsurance agreement. Assumed premiums and claims related to this business
were not significant to the Company during 1995. PNL was subsequently merged
with First Security Benefit Life Insurance and Annuity Company of New York
(FSBL), a newly formed wholly-owned subsidiary of SBG.
During 1995, the Company purchased an SBG note for the principal amount of $17
million. The note is due May 24, 2000 and provides for semiannual interest
payments at 7.35% per annum commencing on November 24, 1995. The note has been
registered with the NAIC and is included in fixed maturities in the
accompanying balance sheet. SBG used $12 million of the proceeds to purchase
Company-issued annuity contracts for the purpose of funding new investment
options within the Company's separate account. The account balance of these
contracts totaled $13,005,000 at December 31, 1995. The remaining $5 million
of proceeds were used to purchase shares in new mutual funds managed by
Security Management Company, a wholly-owned subsidiary of SBG. The net asset
value of these shares totaled $5,364,000 at December 31, 1995.
At December 31, 1995 and 1994, the Company's investment in SBG was $29,590,000
and $21,028,000, respectively. The Company recorded cash dividends of
$4,200,000, $5,200,000 and $8,300,000 from SBG during 1995, 1994 and 1993,
respectively.
Condensed financial information related to SBG is as follows:
Balance Sheets: 1995 1994
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Cash and investments $45,221 $19,456
Property and equipment 8,138 8,736
Other assets 7,594 7,910
_____________________________________________________________________________
$60,953 $36,102
Accounts payable and other liabilities $14,363 $15,074
Note payable to parent 17,000 -
Stockholder's equity 29,590 21,028
_____________________________________________________________________________
$60,953 $36,102
Statements of Operations: 1994 1993 1992
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Revenues:
Management fees $18,654 $16,852 $14,729
Mutual fund fees 24,266 22,058 21,352
Other 3,226 2,373 7,287
_____________________________________________________________________________
46,146 41,283 43,368
General, administrative and
other expenses 36,488 32,390 30,080
Income taxes 3,927 3,430 5,233
Cumulative effect of SFAS No. 106 - - 1,735
_____________________________________________________________________________
Net income $5,731 $5,463 $6,320
6. Reinsurance
The Company is involved in both the cession and assumption of reinsurance with
other companies. The Company's maximum retention on any one life is $500,000.
Risks are reinsured with other companies to permit recovery of a portion of
direct losses.
Principal reinsurance transactions are summarized as follows:
1995 1994 1993
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Reinsurance assumed:
Premiums received $866 $1,276 $1,359
Commissions paid $144 $239 $96
Claims paid $1,597 $1,469 $7,290
Reinsurance ceded:
Premiums paid $73,916 $12,018 $4,194
Commissions received $230 $1,443 $148
Claims recoveries $3,089 $2,485 $2,231
Reinsurance in force (at December 31):
Assumed policies $25,438 $30,814 $39,730
Ceded policies $3,932,146 $1,150,828 $1,081,591
The liabilities for policy reserves and policy and contract claims include the
following amounts for reinsurance assumed: $354,000 and $2,790,000 at December
31, 1995 and $120,000 and $3,187,000 at December 31, 1994.
The ceding of insurance through reinsurance agreements does not discharge the
primary liability of the original underwriters to the insured. However,
statutory accounting practices treat risks that have been reinsured, to the
extent of reinsurance, as though they were not risks for which the original
insurer is liable. Therefore, in financial statement presentations, policy
reserves and policy and contract claim liabilities are presented net of that
portion of risk reinsured. Accordingly, policy reserves and policy and
contract claim liabilities have been shown net of reinsurance credits of
$77,908,000 and $968,000 at December 31, 1995 and $11,048,000 and $459,000 at
December 31, 1994.
In 1995, the Company transferred, through a 100% coinsurance agreement, $66.9
million in policy reserves and claim liabilities. The agreement related to a
block of whole life and decreasing term life insurance business. The Company
recorded a pretax gain of $42.6 million which represented the initial ceding
commission. This gain, net of tax, was recorded as an increase to unassigned
surplus.
In prior years, the Company was involved in litigation arising out of its
participation from 1986 to 1990 in a reinsurance pool. The litigation related
to the pool manager and a reinsurance intermediary placing major medical
business in the pool without authorization. During 1993, the Company settled
the major medical portion of the pool's activity with no significantly adverse
effect on the Company. The nonmajor medical business placed in the pool has
experienced significant losses. At December 31, 1995, the Company believes
adequate provision has been made for such losses.
7. Income Taxes
The Company files a life/nonlife consolidated federal income tax return with
SBG. Income taxes are allocated to the Company on the basis of its filing a
separate tax return. The Company is taxed at usual corporate rates as defined
by the applicable income tax laws for mutual life insurance companies. These
laws provide for differences in the recognition of certain income and
expenses, and provide for deductions that may result in a provision for income
taxes that does not have the customary relationship of taxes to income. The
provision for income taxes differs from the amount computed at the statutory
federal rate due primarily to the dividends received deduction and tax
credits.
During the year ended December 31, 1993, the Company began establishing
deferred income taxes on its tax-basis deferred policy acquisition costs.
Prior to this time, no deferred income taxes had been established on any
difference between the financial statement and income tax bases of assets and
liabilities, and, at December 31, 1995, this remains the only item to which
deferred income tax accounting has been applied. The Company's policy is to
nonadmit any resulting deferred tax asset; accordingly, this practice has no
impact on surplus. The cumulative effect of adopting this change as of January
1, 1993 amounted to $3,464,000 and was reflected as a nonadmitted asset at
that time. The effect of the new method increased income tax expense by
$115,000 for 1995 and decreased income tax expense by $927,000 and $1,444,000
for 1994 and 1993, respectively.
8. Condensed Fair Value Information
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether recognized or not recognized in a company's balance sheet, for which
it is practicable to estimate that value. The methods and assumptions used by
the Company to estimate the following fair value disclosures for financial
instruments are set forth in Note 1.
SFAS No. 107 excludes certain insurance liabilities and other nonfinancial
instruments from its disclosure requirements. However, the liabilities under
all insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing
interest rates through the matching of investment maturities with amounts due
under insurance contracts. The fair value amounts presented herein do not
include an amount for the value associated with customer or agent
relationships, the expected interest margin (interest earnings over interest
credited) to be earned in the future on investment-type products, or other
intangible items. Accordingly, the aggregate fair value amounts presented
herein do not necessarily represent the underlying value of the Company;
likewise, care should be exercised in deriving conclusions about the Company's
business or financial condition based on the fair value information presented
herein.
December 31, 1995 December 31, 1994
_____________________________________________________________________________
Carrying Fair Carrying Fair
Amount Value Amount Value
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Fixed maturities
(Note 2) $2,294,802 $2,340,910 $2,160,550 $1,987,040
Equity securities
(Note 2) 12,390 12,836 9,050 9,494
Mortgage loans 70,777 76,610 90,509 88,894
Policy loans 100,452 104,077 92,130 91,492
Short-term investments 992 992 50,406 50,406
Cash and certificates
of deposit 12,059 12,059 10,820 10,820
Investment income due
and accrued 30,577 30,577 25,857 25,857
Futures contracts - (737) - 240
Interest rate exchange
agreements - (2,291) - -
Supplementary contracts
without life
contingencies 34,363 35,387 41,239 39,771
Individual and
group annuities 1,922,901 1,774,642 1,828,753 1,690,693
_____________________________________________________________________________
$4,479,313 $4,385,062 $4,309,314 $3,994,707
9. Commitments and Contingencies
The Company has a $75.5 million line of credit facility from the Federal Home
Loan Bank of Topeka. Any borrowings in connection with this facility bear
interest at .1% over the Federal Funds rate. At December 31, 1995, there were
no borrowings outstanding under this facility.
The economy and other factors have caused an increase in the number of
insurance companies that have required regulatory supervision. This
circumstance is expected to result in an increase in assessments by state
guaranty funds, or voluntary payments by solvent insurance companies, to cover
losses to policyholders of insolvent or rehabilitated companies. Mandatory
assessments can be partially recovered through a reduction in future premium
taxes in some states. The Company records these assessments on a cash basis
and has paid $2,014,000, $2,270,000 and $2,077,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. The ultimate amounts or the
ultimate effect of any such increased assessments or voluntary payments on the
Company's financial position and results of operations are not currently
determinable. The accompanying financial statements do not include any
provision for any such potential assessments.
10. Annuity and Deposit Liabilities
The withdrawal characteristics of the liability for future policy benefits for
annuities and supplementary contracts and deposits as of December 31, 1995
were as follows:
General Separate
Account Account Total Percent
_____________________________________________________________________________
(In Thousands)
_____________________________________________________________________________
Subject to discretionary
withdrawal:
With market value
adjustment $557 $- $557 -%
At book value less
current surrender
charge of 5% or more 572,902 652,843 1,225,745 30
_____________________________________________________________________________
Total with adjustment 573,459 652,843 1,226,302 30
Subject to discretionary
withdrawal at book value
with minimal or no
charge or adjustment 1,394,680 1,360,750 2,755,430 67
Not subject to
discretionary
withdrawal 112,382 12,070 124,452 3
_____________________________________________________________________________
$2,080,521 $2,025,663 $4,106,184 100%
